Govt should keep off SpiceJet; forcing banks to bail out is a repeat of UPA's mistake

The NDA government is using its good offices to rescue Kalanithi Maran promoted budget carrier Spicejet, which is flying through turbulent skies on account of accumulated losses, mounting repayment dues and absence of sufficient fresh cash flows.

The civil aviation ministry is preparing the contours of what could be termed as nothing short of a bailout plan to save the airline by asking banks and financial institutions to offer short-tem loan up to Rs 600 crore to the beleaguered airline.

This can set a bad precedent and wouldn’t certainly augur well for the banking industry, which is already neck-deep in bad debt. Logically, the onus of offering the additional funds will fall upon the government banks. Given the current uncertainty at Spicejet, private banks are unlikely to come forward and put good money after what could be possibly bad money already gone into the company.

As for pubic banks, none of them will dare to turn down a ‘request’ from the government, which is the majority stakeholder in these banks.

The government has also provided a breather to the airline by asking the Airport Authority of India (AAI) and oil companies to give a fortnight more to the airline to pay back its dues, besides pushing the aviation regulator to relax the curbs on advance bookings beyond a month, until March.

The temporary assistance in the form of repayment holidays and operational freedom can be justified given that Spicejet’s failure, beyond causing distress to passengers, can also have bigger ramifications in the aviation sector, denting investor confidence in the ability of Indian air-carriers to turn around, especially after the Kingfisher-shocker.

But, if indeed the government intends to push state-run banks to bail out the airline, even through a short-term loan backed by a personal guarantee of Marans, the Modi government will be committing the same mistake the UPA did - micromanaging public banks by intervening in their business decisions.

Neither the civil aviation ministry, nor the finance ministry has any business to direct state-run banks to lend to a company, whose fate still hangs in balance since there is no certainty until this moment that the airline will succeed to attract a long-term investor and repay the money back to banks.

On the contrary, the signals emerging from the airline are discouraging. The airline management has already indicated that the company would not hesitate to take any drastic steps, including a possible closure of the carrier, if it fails to wriggle out of the current financial mess.

With about Rs2,000 crore hole on its balance sheet including dues to state-run oil companies and AAI, Spicejet’s balance sheet appears worryingly weak at this stage. Any further funding from the banks to the airline will be nothing but a gamble.

Remember, in the latest round of impasse at Spicejet, the promoters (Marans) have so far remained non-committal in offering any solid plans for further capital infusion from their side to save the company. On the other hand, banks already have about Rs 1,500 crore exposure to Spicejet and any further lending to the troubled company should be left to the lenders to decide based on the credit worthiness of the borrower.

Until now, banks have not expressed concerns about the fate of their exposure, hoping that SpiceJet will manage a recovery. But, that may not be the case going ahead.

During the UPA’s regime, the government has frequently engaged in micromanagement of state-run banks, by intervening in their business decisions, including some form of directed lending to certain sectors, loan pricing and restructuring of certain category of loans. Part of the reasons for the current stress in the banking system can be attributed to absence of full autonomy for public banks and forced business decisions.

Already, with a substantial chunk of the burden of funding the high-risk agriculture and SMEs on their books, state-run banks are reeling under the pressure of bad loans. The total amount of stressed assets in the banking system, which include bad loans and restructured loans, is about 14 percent of the total loans given by banks and over 90 percent of this is on the books of state-run banks.

There is noting wrong in rescuing an airline, for that matter any private or public company, in the larger interest of public and also industries. Indian companies are striving for an image-make over under the Modi government at the Centre and thus attract foreign investments.

But if the government uses the banking system, especially public banks, to bail out a private airline, this can very well send a bad signal to investors and rating agencies, besides setting a bad precedent for other companies. The problems faced by airlines do not confine to Spicejet alone and there can be more in the queue.

Remember, banks have already burned their hands lending about Rs 6,000 crore to Vijay Mallya promoted Kingfisher, which is a bad loan for banks now. The current crisis at Spicejet predominantly highlights the flaws in the running of the airline in the past and failure to recognise early warning signals of stress on its balance sheet. The onus of saving the Spicejet is largely a problem of its management and cash-rich promoters.

The government has no business to be in the business of public banks or any private company. It must stay away from the Spicejet episode.