After Go Air Bump banks are playing safe on giving loans

The latest bankruptcy of go Air is leaving a lot of banks restless. Existing airlines admit that bank lending has become tougher for airline companies. In the last 4 years we first had Jet go bankrupt and then we had Go Air also seeking voluntary liquidation. Banks have substantial exposure to airlines and in most cases the recoveries are almost nil since the aircraft lessors tend to repossess most of the aircraft leaving little scope for the banks to recover any money from the airline. Already, such airlines are under operational stress as they would already be buying fuel on cash and carry basis. So, what have banks done?

According to recent reports, banks are just getting a lot more wary about lending to airline companies. For instance, increasingly airlines are seeing credit lines either being refused or cut down to limit exposure. Alternatively, banks are insisting on personal clean guarantees from the promoters to give such loans. The third option is for promoters to pledge other assets, other than the share of the airline stocks as collateral so that banks can be assured of some recovery at the very least. Above all, banks are also known to raise rates for airline companies considering the higher risk that these loans entail.

Lenders to Go First in a tough spot

The wariness of the banks to airlines is not surprising. If you look at the lenders to Go First, several big names are in a soup. There is Central Bank of India, Bank of Baroda, Axis Bank, IDBI Bank, and Deutsche Bank. While the insolvency is likely to be a long drawn process, it is going to be stuck funds for the banks till then and even then the hopes of recovering any meaningful amount of money is quite low. It may be recollected that the Wadia group owned Go First has already been grounded since 03rds May and it looks unlikely that they will commence flying on 24th May, as the management of Go First has been claiming. The Directorate General of Civil Aviation (DGCA) has already issued a show cause notice to the airline regarding the state of its financial health and their approval will be hard to come.

There is a way these problems precipitate and the immediate reaction is in the credit rating. For instance, Go First debt is already in speculative grade since early this year and this would almost make the credit rating meaningless. The ratings downgrade by Acuite and CRISIL was for bank facilities worth ₹5,600 crore of Go First. The outlook remains negative, and rating agencies were of the view that Go First would continue to incur losses well into the foreseeable future. Go First has been reporting losses for the last 4 fiscal year in a row and falling market share will only make things worse. We saw how Jet Airways struggled to recover after the airline was summarily shut down in 2019.

Some of the Indian banks have substantial exposure to the GO First group. For instance, Central Bank of India has an exposure of ₹1,562 crore to Go First Airlines while Bank of Baroda has an exposure of ₹1,430 crore. Deutsche Bank has a rather high exposure of ₹1,320 crore to Go First while IDBI Bank and Axis Bank have smaller exposure to the airline in double digits only. But that is clearly a story that is hard to absorb and enough to make the banks wary.