At Davos, Switzerland, RBI governor Raghuram Rajan’s battle cry on politically connected crony capitalists, who have taken Indian banks for a ride for long, was precise on the target.
“If you flaunt your birthday bashes even while owing the system a lot of money, it does seem to suggest to the public that you don't care. I think that is the wrong message to send,” Rajan said in an interview to a TV channel on the sidelines of the just concluded World Economic Forum.
His words, an obvious reference to India’s flamboyant liquor baron, Vijay Mallya, defied the winter chills of Davos and found their way back to the home land, where a clutch of 17 Indian banks is nearing the end of a losing a battle to Mallya to recover not less than Rs 7,000 crore (plus interest overdue) of their dues lent to the now defunct Kingfisher airlines.
Since 2012, banks have been trying out all possible options from court battles to friendly persuasions to tagging Mallya as wilful defaulter to get back their money but without luck. It is very unlikely that they ever will.
But Rajan seems to be fighting a lonely battle as he repeated his warnings to Mallya. “If you are in trouble, you should be cutting down your expenses". “The system has been geared to favouring those who have the ability to work the courts. The policy that you (large businessmen) follow is that during good times you take the upside but in bad times you go to banks and ask how much of a haircut are you going to take,” Rajan said.
Not too long ago, in his New Year message to his colleagues at RBI, the economist turned central banker, had expressed his displeasure at the RBI’s and banking systems’ inability to take on large corporate defaulters and sought a difference in their attitude. “No one wants to go after the rich and well-connected wrongdoer, which means they get away with even more. If we are to have strong sustainable growth, this culture of impunity should stop,” Rajan had said.
King of good (and bad) times
Mallya has been flaunting his wealth and lavish lifestyle as if openly challenging the banking system. His Rs 7,000 crore loan is a non-performing asset (NPA) on the books of banks since January 2012. He has dragged banks to courtrooms shielding himself with an army of top corporate lawyers. Mallya is not someone who is not repaying banks because he is a penniless pauper. He is still one of the richest men in India.
Mallya’s 60th birthday party was celebrated at Kingfisher Villa in Candolim in Goa on December 18 with fireworks, celebrity shows and almost converting the villa to a palace with around 500-600 guests all coordinated by an event management agency.
This is when some of his Kingfisher employees have still unpaid dues, the shareholders have lost most of their wealth invested in Kingfisher shares, 17 large banks of the country, tax authorities and investigating sleuths are chasing him for non-repayment of funds and alleged irregularities in the end use of the money borrowed from banks.
Mallya managed to use the legal system to his advantage to such extent that one of the lenders in the consortium — United Bank of India — had to reverse its decision to classify Mallya as a wilful defaulter in late 2014 just two months after it classified him with that tag. After a prolonged legal battle, the State Bank of India (SBI) in November 2015 tagged him wilful defaulter.
A wilful defaulter is typically ostracized from the financial system with no power to borrow money from elsewhere. Such promoters cannot be part of any of the listed companies. But, Mallya and his holding company United Breweries have moved court challenging this decision on the grounds of violation of natural justice.
What is worth to note here is that whether Mallya is a wilful defaulter or not, banks have failed to recover even a fraction of the Rs 7,000 crore due to them, nor put the man in Jail despite this being one of the top corporate defaults in the country. It is to be remembered that Mallya’s personal wealth and real estate holdings sprawl across multiple countries.
There are many cases such as Kingfisher, where banks are running from pillar to post to get their dues. According to the RBI data, standard assets among large borrowers declined from 86.2 percent of total gross advances as of March 2015 to 84.5 percent as of September 2015. This constitutes a large part of the Rs 3.5 lakh crore gross NPAs of Indian banking system. Rajan has reasons to get worried.
Not just Rajan’s battle
More than Rajan, Prime Minister Narendra Modi should be worried about the mounting bad loans of Indian banking system (of which over 90 percent is on the books of state-run banks). This is because it can potentially derail the fiscal arithmetic of his government, which is walking a tight rope to fulfil its commitment of fiscal consolidation.
Bad loans have significantly increased the capital burden of banks since they need to set aside more money to cover their doubtful assets. Indian banks would require Rs 2.5 lakh core funds to meet their Basel-III norms (which is a moving target depending on multiple factors), while the government has so far committed only Rs 70,000 crore (with a promise to increase it in the budget).
The government wants banks to fend for themselves with respect to the remaining amount but this will be difficult since there won’t be enough investor-interest for these banks in the market. The NDA government hasn’t so far performed poorly on handling the baking sector. It is going to be even bigger challenge now.
The sad truth is beyond venting his anger on cronies through public interactions, Rajan clearly lacks the power to tackle wily corporate defaulters. The RBI arguably delivered its most powerful salvo to take on cronies when it allowed banks to use wilful defaulter tag on crony promoters.
But, as seen in the Mallya episode, this powerful weapon has turned out to be no more effective than kid gloves in big battles. A change can happen only if the Modi government throws its weight behind the banking system to deal with large corporate defaulters such as Mallya, which is absent until now.
True, the proposed bankruptcy code could make banks’ lives better to deal with future cases of default. But there is a large, ticking time bomb of existing bad loans in the country’s banking system. The government could do more than being a mute spectator in RBI’s battle with crony promoters.
Data contributed by Kishor Kadam