CHENNAI, MAY 22: In a major volte face, the Reserve Bank of India (RBI) has decided not to issue fresh norms for loans to the aviation industry.Earlier, the apex bank had assured airlines that it would formulate new guidelines for more flexibility to commercial banks to grant loans.

The airlines expected the guidelines would bring the industry under the purview of the ``directed sector''. Under this, RBI fixes the rate of interest and the percentage of bank investment which is to go into the industry.

However, banks have generally been seen to fight shy of lending to the ``high risk'' aviation industry especially after ModiLuft and East West Airlines had to make a forced landing and stayed grounded since.

The Reserve Bank's backing off from issuing lending guidelines for aviation has come as a shock to the industry since the issue had been deliberated upon for the past two months at several meetings organised by the Federation of Indian and Foreign (scheduled) Airlines and Air Taxi Operators.

Since the aviation industry does not fall under the infrastructure category, it can avail of bank credit up to a maximum Rs 550 crore. But, RBI said the monetary and credit policy for the first half of 1997-98 had given banks the freedom to extend credit to non-infrastructure sectors also without any limit. Therefore, there was no need for new norms exclusively for the aviation industry, it pointed out.

Now, with the limit withdrawn, the bank has only to scrutinise issues such as risk perception, the rate of interest payable, promoters' credibility etc.The quantum of the term loan and the interest payable by the airline depend entirely on the bank and RBI will have no say in the matter.

RBI said the monetary and credit policy for the first half of 1997-98 expands the lendable resources of banks and they are at liberty to lend to the aviation industry after making a detailed study of the project.

Aviation industry sources said RBI will be preparing a detailed report for the union civil aviation ministry indicating that the monetary policy has provided enough flexibility to Indian commercial banks to lend more than the previous limit to the non-infrastructure sectors.

The sources said the industry would have better exposure to foreign funding if the aviation sector is accorded infrastructure status. The industry has been lobbying for this with the ministry of civil aviation and finance for quite some time. Indian banks will then be able to easily source funds from abroad through the external commercial borrowings (ECB) route, the source said.

The sources said if the aviation industry was able to get infrastructure status, the ministry would be liberal in deciding issues such as interest rate structure and maturity period.

After several foreign banks evinced keen interest in funding aviation projects, airlines are learnt to be queuing up to avail these loans. ABN Amro, ANZ Grindlays and Chase Manhattan have already been approached by some airlines. The foreign banks have decided to lend to the airline companies at Libor + a few points which will not exceed 10 per cent.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.