Banks seek 16.6% interest on PIA loan

Privatisation efforts stall as finance minister counteroffers 10% interest

ISLAMABAD:

Commercial banks have demanded a fixed annual interest rate of 16.6% for deferring recoveries of their Rs281 billion loans to Pakistan International Airlines for five years, a demand Finance Minister Dr Shamshad Akhtar has refused to accept.

Akhtar has made a counterproposal to give around 10% interest on the Rs281 billion loans, based on the banks’ actual cost of borrowing, according to sources in the Ministry of Privatisation.

They said that due to this disagreement, along with some other contentious points, the banks were reluctant to give no-objection certificates for transferring their debt into a new holding company. The company has to be carved out of PIA, which is not possible without reaching an agreement with all the creditors.

The discussions seem to have reached a deadlock, which has halted progress on the PIA privatisation.

Privatisation ministry sources said that a final push was now expected in the next couple of days, as Privatisation Minister Fawad Hasan Fawad has also returned from Davos over the weekend. Only 18 days are left in the extended tenure of the interim government, which is now trying to leave behind a mark by further pushing the PIA privatisation agenda.

On Wednesday, the finance minister also said that it has been decided to transfer the entire PIA debt of Rs825 billion into a holding company. “I do not know what to do with this debt,” remarked the finance minister while speaking at a seminar on the economic issues of the country.

As of the end of last month, PIA owed Rs281 billion to the commercial banks and is paying around a 23.5% interest rate on these loans.

The sources said that the commercial banks have demanded that the government should give them a 16.6% fixed interest cost in return for extending the repayments for five years. The fixed cost is being worked on the basis of five-year Pakistan Investment Bond prevailing rates plus a 2.5% charge.

However, in response to the banks’ demand, the finance minister has offered to pay interest equal to the cost of the funds of the banks plus 2.5%, which translates into 10.2%, said the sources. The finance ministry has also floated an option that the banks might be offered a floating interest rate linked to the remaining maturity days and be paid annually.

At a 16.6% cost, the banks would earn roughly Rs233 billion interest over a period of five years, without the compounding of the interest. The finance minister’s offer would give them roughly Rs143 billion less – and would save about Rs90 billion.

Read Deadlines on PIA sell-off end

The government was expecting that the interest rates would soon start going down due to some ease in the inflation rate in the coming months. However, in case Pakistan opts for another long-term IMF bailout package, it would be difficult to get any significant breathing space.

A Scheme of Arrangement for segregating PIA into core and non-core entities couldn’t be filed with the Securities and Exchange Commission of Pakistan (SECP) due to the absence of statutory audited accounts of PIA until September 2023 and no-objection certificates from creditors, as per government officials.

The Privatisation Commission board had approved the transaction structure to sell a minimum of 51% stake after cleansing its balance sheet by transferring almost three-fourths of the Rs825 billion to a new company. The board also approved setting up a new holding company in which a majority of the airline’s debt could be parked to sell it with a clean balance sheet.

Financial advisors had given a half-baked report to the board of the Privatisation Commission, having no valuation of the assets.

It was proposed that the interests and the principal amount of the Rs281 billion debts of the banks would be serviced by selling the assets of PIA and out of the privatisation proceeds. However, without having the value of the assets, it would be a gamble for the finance ministry to accept this arrangement.

The Ernst & Young-led consortium was supposed to give its evaluation report by the third week of January. It is not clear whether the financial advisors, who have charged hefty fees, have given the report or not. The Privatisation Ministry has already missed the Special Investment Facilitation Council deadline to secure no-objection certificates by January 11th.

The federal government was also reluctant to accept some other demands of the banks. The banks have also demanded that the PIA debt should be eligible for the Capital Requirement Regulations (CRR). But the finance ministry was not willing to offer the dual benefits to the banks. The federal government cannot offer any such relaxation, which is the domain of the central bank.

There was also a disagreement on delaying the tax payments on the profits that the banks would earn. The banks were demanding that they would pay taxes to the Federal Board of Revenue only when they would receive the payments. However, the finance ministry was not willing to give this benefit to the banks.

The ministry has agreed that it would provide cover to the debt parked in the holding company through sovereign guarantees.

Published in The Express Tribune, January 23^rd, 2024.

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