The Rs 7,000 cr riddle: What is the invisible force that protects Vijay Mallya and Kingfisher?

Liquor-baron Vijay Mallya continues to be the biggest mystery-word for Indian banks. Consider this: It’s almost four years since lenders declared loans given to Kingfisher as non-performing assets (NPAs). It is over a year since one of the banks to Mallya, United Bank of India (UBI) classified Mallya as a wilful defaulter (promoters who have the capacity to pay back but wouldn’t do so deliberately, typically an action banks take when fund diversion and financial irregularities are detected), but only to revoke a little later following a court intervention. [caption id=“attachment_2290814” align=“alignleft” width=“380”]  Vijay Mallya. Reuters[/caption] Mallya’s exposure to a clutch of 17 banks including State Bank of India (SBI) is now over Rs 7,000 crore with interest overdue. In the latest development, the Central Bureau of Investigation (CBI) has found that Mallya even diverted part of the loan amount to tax haven countries. But, in spite of all this, banks have miserably failed to make any major recovery from the promoter (Mallya) or the now-defunct Kingfisher. So far, all efforts to recover funds from Kingfisher by banks have miserably failed. In an attempt take control of Kingfisher and push for a distress sale, banks at one stage, converted a large part of their debt into equity, but with the Kingfisher share turning a penny stock and a defunct airline in hand, even this move was proved to be a bad idea. The result: Banks are today sitting ducks with their Rs7,000 core unpaid dues. Mallya and Kingfisher, thus, continue to be the largest mystery word for the whole of banking sector. The Kingfisher case also raised several serious questions: One, why, in the first place, were banks overenthusiastic to lend to Mallya? His airline never made even a single quarterly profit in its seven-year-old life? What happened to the credit appraisal process and due diligence banks need to strictly follow in the Kingfisher case. Banks were clearly generous to Mallya in extending loans and have equally clearly failed to monitor the end-use of money in the initial stage. Further, banks have failed to move against Mallya at least when the default came to public light. Even SBI, the largest lender in the country, has been unable to act. Notably, banks continued to lend to Kingfisher, when the company’s health was deteriorating? The CBI is now investigating the role of IDBI Bank with respect to the Rs 900 crore loan given to the company. “There was no need for the bank to take the exposure outside the consortium when already other loans were getting stressed," the PTI quoted a senior CBI official, probing the matter. A senior IDBI bank official, who spoke to Firstpost, said the bank has followed all rules while lending to Kingfisher and is cooperating with CBI on the investigation. Secondly, the very effectiveness of ‘wilful defaulter tag’, once described by RBI governor Raghuram Rajan as the ‘powerful weapon’ in the hands of creditors, has been questioned with the Kingfisher episode. A wilful defaulter tag is indeed a powerful weapon by definition. Once a promoter is tagged with it, he wouldn’t be able to borrow from any financial institutions in that country. Also, the particular promoter cannot be on the board of any listed companies. But in the Kingfisher case, banks’ ability to enforce the wilful defaulter tag is severely constrained, partly due to judicial intervention. It is interesting to note the reason Kolkata High Court cited in December, 2014 for nullifying UBI’s wilful defaulter tag on Mallya. The court said the bank’s identification committee, the forum that identifies wilful defaulters, consisted of four members (an executive chairman, a chief general manager and two general managers), as against the three members stipulated in RBI guidelines. Though UBI had said it will reconstitute the committee and reclassify Mallya as wilful defaulter, the bank hasn’t been unable to do that so far. Even the larger lenders, like SBI, too have been unsuccessful to do this. Tagging Mallya a wilful defaulter doesn’t assure loan recovery, but will be a major negative for Mallya in credit circles. In the Kingfisher case at least, the powerful weapon is reduced to a toy stick. Thirdly, Kingfisher case shows the influence of crony promoters in the Indian financial system. The banking system remains highly vulnerable to influential promoters and do not have the tools to tackle such defaulters. Large corporate defaulters form a significant chunk of the Rs 3,00,000 crore NPAs of the banking system. Mallya, a politician himself, is known to have influential connections in both political and financial circles. The bottomline is this: Nailing Mallya is even more critical for banks now for two reasons. This can reinstate the confidence in the banking system itself and send a message to other wilful defaulters. After all, the Rs 7,000 crore at stake is all public money.