Monday, October 10, 2011

Government rejects letter of comfort to Air India

New Delhi: The finance ministry has turned down Air India’s request seeking letter of comfort (LoC) for increasing the buyers’ credit limit to $288 million from Standard Chartered Bank. This is a major setback for the cash-strapped airline which is finding it difficult to pay its vendors for spare parts and maintenance.

Buyers’ credit is a financial arrangement wherein a bank or a financial institution extends a loan directly to a foreign buyer for the purchase of goods and services from the exporting country.

“The finance ministry has communicated to aviation ministry that it will wait for the report of committee of officers on Air India’s turnaround and the financial restructuring plans before considering its demand for the LoC,” government sources told FE. A group of ministers (GoM) headed by finance minister Pranab Mukherjee is currently monitoring the public sector Air India’s performance periodically. The ministerial panel has asked senior secretary-level officers to vet the airline’s revival plan before recommending any financial assistance in the form of soft loan or equity.

The government has so far extended a financial support of R3,200 crore to Air India since January 2010 and has attached several cost-cutting and revenue enhancement riders for any further cash assistance. The GoM is likely to meet this week to consider Air India’s turnaround plan prepared by consultancy firm Deloitte. Air India has placed before the government its case for an equity infusion of R6,600 crore in the current financial year to stay afloat.

The airline has in the recent past defaulted on salary, interest and vendor payments and is faced with the challenge to meet its working capital requirements from operations. The airline has a debt of around R40,000 crore out of which R22,000 crore is the working capital loans raised from public sector banks. It is ridden with an accumulated loss of over R23,000 crore.

http://www.financialexpress.com

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