After the Reserve Bank of India (RBI) rejected the proposal to provide an 'SLR' status to bonds, lenders have now agreed to convert Air India's loan into non-convertible debentures (NCDs).
But, there is an important caveat: the government must guarantee the entire loan and the interest rate, so that there is no additional provisioning requirement.
According to bankers, a fresh proposal has been forwarded to SBI Caps - the merchant banker for the debt recast exercise - which will meet the Air India management and the government to discuss the proposal.
An instrument guaranteed by a sovereign carries zero risk. Hence, higher provisioning is not required. However, if converted into NCDs, mark-to-market risk will still be there, since banks will not be able to put it in the hold-to-maturity category.
According to RBI norms, standard asset provisioning of 0.4 per cent will still be applicable to the loans, even after restructuring.
If any standard asset is restructured, though it continues to remain standard, the provisioning requirement increases to two per cent from 0.4 per cent. If the government guarantees the Air India loan, banks can continue with standard asset provisioning and higher provisioning due to restructuring will not be required.
The coupon rate the NCDs will carry is likely to emerge as the critical point in finalising the deal. Bankers are still taking a tough stand, saying they will not take any hit.
While restructuring a debt, banks have to make provision for the sacrifice made if the net present value comes down. Such a situation can only be avoided if interest rates are kept at a high level.
"If the loan is converted into NCDs with a maturity of 10 years, then the interest rate may be say, 10 per cent. However, if the NCD maturity period is 15 years, then the coupon rate will also go up to say 14 per cent," said a top official from a public sector bank with significant exposure in the troubled airline.
Earlier, banks had agreed to convert the debt into bonds which could be used for calculating statutory liquidity ratio. However, for bonds to have 'SLR status' would require RBI's approval, which the regulator rejected.
Banks are looking for an early resolution to the Air India debt recast, as the Air India management has told them it would not be able to service the interest rate after December.
Bankers said they want to settle the issue by March-end. If Air India does not pay interest from January, then the account will become non-performing from April.
Of the Rs 43,000-crore (Rs 430 billion) debt of Air India, restructuring for Rs 22,500 crore (Rs 225 billion) is proposed.
A consortium of 26 lenders, with State Bank of India as the lead bank, has exposure to the troubled airline. If the entire amount becomes an NPA, then banks may face the grim possibility of a rating downgrade.
In October last year, Moody's Investors Service downgraded SBI's financial strength rating, based on the banking entity's capital situation and deteriorating asset quality.
