The federal government has rejected the strict terms of commercial banks for a new Rs. 15 billion loan to Pakistan International Airlines (PIA).
The Ministry of Finance refused these terms, claiming that banks were just protecting their own interests more than called for in exchange for a loan backed by sovereign guarantees, Express Tribune reported today.
A joint committee has also been unable to develop a viable plan to keep the airline flying until it is privatized.
Banks offered the full amount at Karachi Interbank Rates + 1.5 percent, equating to around 24 percent interest, which the Finance Ministry found costly.
Six commercial banks offered Rs. 15 billion in new loans to the national flag carrier in exchange for sovereign guarantees, a letter of comfort, two aircraft as security, and a waiver from the State Bank of Pakistan (SBP). They attached the loan to an agreement on a repayment plan for Rs. 263 billion in old loans and demanded protection under UAE and English law.
Habib Bank Limited, National Bank of Pakistan, and Meezan Bank Limited made a Rs. 9 billion offer to PIA. Meanwhile, Faysal Bank Limited, The Bank of Punjab, and Askari Bank Limited offered the remaining Rs. 6 billion.
Due to available budgetary flexibility, the banks wanted half of the Rs. 15 billion to be secured by sovereign guarantees, which the Finance Ministry agreed to. But the banks also demanded a letter of comfort and two airplanes as security for the remaining Rs. 7.5 billion and interest expenses; the Ministry of Finance refused.
Banks further requested exclusive rights to PIA revenue from flights operated on UAE lines and for revenue from UAE flights directed to a new account for principal and interest payments.
Banks also sought a waiver from the central bank’s prudential requirements, as no provision would be taken against a Rs. 15 billion loan if the airline defaulted. The Ministry of Finance declined to do so, arguing that it would set a bad precedent for other loss-making enterprises.
Banks said they would agree to release the amount only if the debt restructuring plan is accepted by existing creditors.
A combined technical committee of banks and the government has failed to find common ground, and the committee’s third extension to provide recommendations on three primary terms of reference has also expired.
