Airlines to get extra credit support under key scheme | The Financial Express

Airlines to get extra credit support under key scheme

SpiceJet, Go First likely gainers as finmin raises ceiling

Airlines to get extra credit support under key scheme
Earlier, eligible borrowers from the civil aviation sector were allowed to get up to 50% of their total outstanding credit, subject to a cap of Rs 400 crore per borrower.

The finance ministry has relaxed the norms under the Emergency Credit Line Guarantee Scheme (ECLGS) to facilitate collateral-free loans to civil aviation firms at reasonable rates to cope with their cash flow issues, a move that could benefit smaller airlines like SpiceJet and Go First.

The department of financial services has raised the maximum loan amount for airlines under the ECLGS 3.0 to 100% of their highest outstanding advances as on the reference dates, or Rs 1,500 crore, whichever is lower. Of this amount, loans of Rs 500 crore will be considered, based on the equity contribution by the owners, according to the revised norms.

Earlier, eligible borrowers from the civil aviation sector were allowed to get up to 50% of their total outstanding credit, subject to a cap of Rs 400 crore per borrower.

Airlines can refer to their highest credit outstanding on any of the three reference dates — February 29, 2020; March 31, 2021; or January 31, 2022 — to get loans. Since the loans are backed by sovereign guarantee, they attract lower than the usual interest rates.

Also Read: HUL stands out with its robust performance in a volatile market

The relief came after elevated jet fuel prices, coupled with a weak rupee, inflated the operating costs of airlines just when they were hoping to take advantage of the civil aviation sector returning to normalcy and make up for huge losses caused by the pandemic.

Given the losses, banks, too, had turned cautious in lending to airlines. Civil aviation secretary Rajiv Bansal had written to the finance ministry, seeking a breather for airlines in the form of higher ECLGS loans.

Eight companies in the aviation sector, including SpiceJet and Go First, have reportedly received loans under the ECLGS, although larger airlines such as IndiGo or even Air India have been able to get loans from banks, given their relatively strong balance sheets. According to an Edelweiss report, the aviation sector is flying into a duopoly of IndiGo and Air India, who have a combined market share of 80%. This means smaller players with limited financial heft will continue to require support to stay afloat in difficult times.

According to the Edelweiss report, while overall losses of airlines before tax are expected to narrow to `12,600 crore in FY23, aided by recovery in traffic and the removal of fare caps in the first half, the gains “would be largely offset by high ATF prices and a weak rupee”. ATF prices make up more than 40% of an airline’s total operating expenditure. Although crude oil prices have eased in recent weeks from as much as $112 per barrel in Q1FY23, a sharp depreciation of the rupee would blunt potential gains.

The ECLGS 1.0 was announced as part of the government’s Rs 21 trillion relief package in May 2020. The loans were meant to support borrowers in meeting their operational liabilities and restarting their businesses following pandemic-induced disruptions. In the Budget for FY23, finance minister Nirmala Sitharaman had proposed to widen the ECLGS coverage by Rs 50,000 crore to Rs 5 trillion and also extend the validity of the scheme by a year through March 2023.

Under the scheme, the government had pledged full guarantee for up to 20% extra, collateral-free working capital loans, subject to the Rs 3 trillion limit. While this scheme was originally meant for only MSMEs, the government has periodically broadened its scope to enable a large number of businesses and professionals to benefit from it.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.