Tata group-owned Air India has refinanced short-term loans with the State Bank of India (SBI) and Bank of Baroda (BoB) for a three-year loan at an attractive rate, thanks to the conglomerate’s strong credit profile.

The new Rs 19,000 crore loan will be used to finance the carrier’s working capital needs and upgrade its aircraft fleet, people familiar with the details said.

The loan has replaced the short-term Rs 18,000 crore bridge loan Air India had availed from SBI and BoB to complete the Tata group’s takeover of the erstwhile national carrier in January 2022. It was subsequently renewed for a year in 2023.

“The term loan is slightly higher than the initial short-term loan taken by the airline. SBI has a major share in the loan at about Rs 13,300 crore while BoB’s share is Rs 5,700 crore. This loan now replaces the bridge loan facility. The company will use this money to manage day-to-day costs and upgrade existing planes,” said one of the persons cited above.

The deal, which was in the works for a few months, was completed last quarter. Air India was seeking to refinance its short-term loan facilities with local banks with a longer tenure term loan, ET reported in April last year.

“Air India finally chose to go along with both the existing banks which are amongst the largest in the country. The loan was priced at 7.5% and is linked to short-term government treasury bills with a reset clause every year,” a second person said.

At 7.5%, the loan was priced at a very thin margin as the six-month treasury bill was hovering around 7.10% last quarter, while the three-month treasury bill was around 6.90%.

“There are very few banks which can price the loan at such a thin margin. The rate is even lower than SBI’s benchmark margin cost of funds-based lending rate (MCLR). But the Tatas are a AAA marquee client, and both the banks didn’t want to cede any of the loans to competition,” said the second person cited above.

SBI raised its six-month MCLR to 8.55% and its one-year MCLR to 8.65% in December. Hence, the rate on this loan was below the benchmark MCLR.

SBI and BoB did not reply to separate emails seeking comment. A spokesperson for Air India declined to comment on the airline’s funding plans.

The diversified Tata Group, which acquired the national carrier in 2022, is undertaking a consolidation of its aviation businesses. Last year, the group renamed its joint venture with AirAsia to AIX Connect ahead of its merger with Air India Express, the low-cost subsidiary of Air India. That merger is expected to be completed later this year. Separately, the group’s full-service carrier Vistara is also being merged with Air India.

Last month, Vistara CEO Vinod Kannan said he expects to complete the airline’s merger with Air India by mid-2025. As part of the merger, Singapore Airlines (SIA), which has a 49% stake in Vistara, will hold 25.1% of the post-merged Air India.

“The domestic loans taken by Air India are to ensure their operations continue. To increase their fleet and buy planes they will depend on foreign banks for financing which is ongoing,” said the first person cited above.

In December, Air India borrowed $120 million from Japanese lender SMBC to purchase a wide-body aircraft from Airbus. Earlier in September, it completed the acquisition of its first A350-900 aircraft through a lease transaction from HSBC. In June, it signed purchase agreements with Airbus and Boeing for 470 planes.

Tata’s strong credit profile and financial muscle have allowed Air India to access funding even though the carrier is still finding its feet. In the fiscal ended March 2023, the latest available, the airline reported a 19% widening of net loss to Rs 11,381 crore after accounting for write-offs and exceptional items, though revenues from operations nearly doubled to Rs 31,377 crore from Rs 16,763 crore in FY22.