A Mallya case study: Judiciary shouldn't play spoilsport when banks deal with crony-raj

On 5 January 2012, Pratip Chaudhary, then chairman of State Bank of India told reporters in Delhi something that was long-rumoured in banking industry circles – Kingfisher Airlines has defaulted loan repayments to several banks. “The account is now a non-performing asset,” Chaudhary said. In the 17-bank consortium, SBI has the largest exposure to Kingfisher Airlines, the company promoted by liquor baron Vijay Mallya. The banks altogether has an exposure of about Rs 7,000 crore to the airline, of which SBI’s alone stands at Rs 2,000 crore. The airline’s loans to SBI had become an NPA (after 90 days non-payment of interest) as on 31 December 2011. In the next one month, at least five more lenders in the consortium classified Kingfisher as NPA too. That was the end of banks’ love-affair with Mallya and the now-grounded airline. Until then, banks were competing with each other to lend to the company. Interestingly, even when its financials were deteriorating sharply, the banks sounded hopeful of a revival story. But the end came too fast, leaving a huge bad loan pile of Rs 7,000 crore to banks. (To put the amount in perspective, that’s almost half of what state-run banks used to get from the government as annual capital infusion). The reasons for banks’ liking for Kingfisher, an airline that never made any profit since its launch in 2005, is unknown even today. Was it Mallya’s political influence or business muscle that prompted banks to forget the basic rules of the game? Were the collateral sufficient against lending such a large amount? Did banks have a clear idea about how the money would come back from a loss-making airline? There are questions still unanswered. But one thing for sure: banks were always unusually kind to Mallya. After rushing to lend thousands of crores, the airline received a massive loan recast facility too from its debtors in November 2010, that too when it was on the verge of a crisis. Four years later, banks that lent to Kingfisher are still groping in the dark. They are the ‘subjects’ of bad times, desperately looking for any asset registered in the name ‘the King of Good Times’ to recover their money (Kingfisher House to begin with). But banks haven’t had any success yet on this. [caption id=“attachment_2290814” align=“alignleft” width=“380”]  Vijay Mallya[/caption] Mallya still is the flamboyant businessman he always was, even though the Kingfisher brand, one of the major collaterals to banks against loan, is reduced to scrap value. As of March 2013, Kingfisher had a cumulative loss of about Rs 16,000 crore. According to reports, SBI even resorted to employing a detective agency to check if there are any properties in Mallya’s name to acquire, but the spies returned saying they could find none. Such is the pathetic state India’s largest bank has landed itself in to get its money back. The situation of other banks in the consortium is no different. Courts turn saviours The only major instance, when banks at least made a serious effort to clamp down on Mallya was when United Bank — one of the 17 lenders — classified him as a wilful defaulter. But, even there the bank had to withdraw the tag after a Kolkata court verdict that followed soon. Court freed Mallya purely on technical grounds. The court observed that the grievance redressal committee - the panel that declares a borrower defaulter - of the bank was not constituted as per regulatory guidelines set by the RBI. It had four members, while it should have had only three. Kingfisher is just one example, where courts have come to the rescue of loan defaulters. There are many similar cases where promoters have fooled banks (by diverting funds from end-use, or siphoning off the cash, for personal gains), but managed to get reprieve from courts to delay the recovery process. Theoretically, there is no reason why financial frauds by wily promoters should be treated different from other types of criminal activities but instances of a company promoter being brought before law and punished for wilful default is a rarity. “We feel as frustrated that our efforts yield results so slowly,” said Arundhati Bahattacharya, chairman of SBI to Firstpost. “Our only aim is to do the best we can within the constraints of the ecosystem we work in,” said Bhattacharya. Even the regulators have been desperately trying to address the problem of crony promoters by framing rules. A sizeable chunk of the bad loans in the banking system (over Rs 3 lakh crore bad loans and much larger chunk of restructured loans) can be attributed to cronies and other wilful defaulters. Realising the growing threat, the Reserve Bank of India (RBI) and the market regulator, Securities and Exchange Board of India (Sebi) have been initiating regulations to tackle wilful defaulters. The two major tools the regulators have introduced so far are wilful defaulter tag and most recently the provision for Strategic Debt Restructuring (SDR) power for banks to acquire controlling stake in the companies, which fail to revive. But even if banks apply these provisions on loan defaulters, court’s intervention prevents or delays any swift action by banks, diminishing lenders’ ability to act. Wilful defaulter tag A wilful defaulter tag by a bank on a company and its promoters can block all other funding channels to them in the world of formal finance. This is indeed a powerful weapon in theory. The RBI introduced this concept to take on promoters, who have the ability to pay back but wouldn’t do so. The promoters will be barred from borrowing from any financial institution or be part of a new set-up. But again, due to the intervention of Kolkata High Court, Mallya is a free man now even though United Bank presented cases why he has indeed diverted funds for purposes other than the originally stated end-use. After the order, the bank, which has about Rs 350 crore exposure to Mallya, has reconstituted the committee. However, it has not taken any further steps on due recovery, let alone reclassify him as a wilful defaulter. Tagging Mallya in this category wouldn’t have, perhaps, meant banks are getting their money back, but would have put more pressure on him to do something about it. SBI is silent on the matter too. The end result? Despite the huge loan due, not a single lender has classified Mallya as a wilful defaulter, even though they have the RBI’s backing. They are awaiting further clarity from courts on the matter before moving further. Company take over The RBI’s latest norms of debt react has to be read in this context. The new guidelines allow banks to acquire a controlling stake in companies, which fail debt restructuring under the corporate debt restructuring (CDR) mechanism. The joint lenders forum can take over 51 percent stake in such companies by converting debt into equity. Both the Sebi and RBI have made the process easier for banks by exempting them from open offer requirements or additional provision burden. But will this help them in the Kingfisher case or similar ones? As Firstpost has noted , equity conversion may not do much help in actual recovery of money unless banks manage to pull off a quick sale of the distressed assets, which is difficult in normal scenario. Take the case of Kingfisher: SBI and ICICI Bank had converted Kingfisher shares at Rs 64.48 each, which was at a 60 percent premium to then prevailing market price. The prices crashed to become a penny stock within 16 months. Now, the stock quotes around Rs 1.4 on the NSE. Clearly, the banks wouldn’t earn anything selling these shares. Neither can they think of reviving the company for the simple reason that they know nothing about the business of aviation. So if they were to recover any loans, they should have sold the shares quickly. In the case of Kingfisher, the judiciary has played spoilsport by restricting banks from taking strict action against Kingfisher and its promoter, Vijay Mallya. The fact is that despite defaulting and allegedly defrauding banks, the long arm of the law has not yet caught Mallya. Perhaps, it is high time judiciary exercised a bit more caution while dealing with such cases and stopped playing spoilsport. This will impart more courage to banks in dealing with crony promoters.