Kingfisher a lost battle but no action against Mallya will send wrong signal to other defaulters

Using the powerful weapon of wilful defaulter tag against Mallya can and should send a strong signal to other defaulters. As of now, the emerging signals from the state-run banks are that of laxity and fear. Clearly something is amiss.

Dinesh Unnikrishnan March 26, 2015 15:42:30 IST
Kingfisher a lost battle but no action against Mallya will send wrong signal to other defaulters

Liquor baron Vijay Mallya must thank his stars for keeping him safe  from the wrath of state-run banks, even the lenders and regulators are convinced about the charges against him amounting to wilful default.

Mallya owes Rs 7,000 crore to a clutch of banks including State Bank of India (SBI) and Kolkata-based United Bank of India (UBI), but  lenders are unable to classify him as a wilful defaulter yet for reasons unknown.

Once a company is tagged as a wilful defaulter, it cannot borrow from any other financial institution, nor can its promoters take up managerial roles in any other entity. In short, the firm and its promoters gets virtually ostracized from the financial system.

Indeed, wilful defaulter tag is a powerful weapon for banks to take on wily promoters. But the weapon seems to have lost power. What else can explain banks soft approach to Mallya?

Take this example: United Bank of India, one of the lenders to the company with about Rs350 crore exposure, had classified Mallya as a wilful defaulter in September last year. But the action was nullified by a Kolkata high court two months later on technical grounds. Mallya managed to shed the wilful defaulter tag on the grounds that the grievance redressal committee of United Bank, which declares a borrower wilful defaulter – was not constituted as per regulatory guidelines set by the Reserve Bank of India (RBI).

Instead of having three members, the grievance redressal committee had four members, thereby, leading to the ruling of the court in favour of Mallya. This was arguably yet another instance, where loan defaulters drag banks to court rooms to seek legal recourse.

But soon after this, United Bank had said Mallya will be tagged back as wilful defaulter within a fortnight or so after reconstituting the committee in compliance with the RBI’s rules. The bank has indeed reconstituted the committee since then but Mallya has not been classified as wilful defaulter yet.

But, here is the more interesting part. UBI seems to be in no hurry to tag Mallya as wilful defaulter again, even after reconstituting the committee and three months after the court ruling.

A senior official at the bank, on condition of anonymity told Firstpost that the bank would again consider classifying Mallya as a wilful defaulter in a period of two months after getting a consensus from other banks as well. This seems to be a softer stance compared to the earlier approach.

“For now, as far as Kingfisher is concerned, we are lying a bit low,” said the official. “Any action can be expected only in a period of two months. That means, technically, Mallya is now not a willful defaulter and is free to borrow from other institutions. He can also take up leadership roles in other institutions.

Last year when United Bank classified Mallya as a wilful defaulter, the lender was quite convinced about the charges against the airline and its promoter, which included diverting funds borrowed for a stated purpose for other activities and defaulting on payments even when the promoters did have the financial capacity to pay back.

None of these assessments have been changed but still the bank is unable or unwilling to tag Mallya as a wilful defaulter.

Interestingly, none of the other lenders including SBI, which have burned their hands by lending to Kingfisher, has come forward to tag Mallya as a wilful defaulter. The only instance where lenders headed by SBI have taken any material action against Kingfisher is when they took possession of Kingfisher House.

This is indeed a positive effort from the banks’ side.

Kingfisher is one of the top bad loan accounts in the balance sheets of Indian banks. Going soft on Mallya, even with the backing of RBI to act tough against willful defaulters, would send a wrong signal to other defaulters and raise questions about possible interventions in the business decisions of banks by interested parties.

Kingfisher a lost battle but no action against Mallya will send wrong signal to other defaulters

Kingfisher is just one among the many wilful defaulters in the industry.

According to a September clarifications from the RBI, even the guarantors of a company, which have been tagged as wilful defaulter will be classified with the same tag if the guarantor fails to pay  the bank if the principal borrower defaults.

“As such, where a banker has made a claim on the guarantor on account of the default made by the principal debtor, the liability of the guarantor is immediate. In case the said guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a wilful defaulter,” RBI had said.

In Kingfisher's case, banks had also served a wilful defaulter notice to United Spirits.

What is more worrying is Kingfisher is just one among the many wilful defaulters in the industry. There are several other entities, which too have been tagged as wilful defaulters by other banks, These  include Winsome Diamonds and Jewellery, Zoom Developers, Koutons Retail, Tayal Group-promoted KSL & Industries, to name a few. These firms can also take cues from the Kingfisher case and move courts to challenge banks.

As Firstpost has noted before, one of the major reasons for the piling up of bad loans is the infamous nexus between politicians and cronies using middlemen to influence credit decisions of state-run banks, which are prone to such practices.

What the RBI has facilitated is a strong regulatory framework for banks to act against clever defaulters and clean up the banking system, which is neck-deep in bad debt.

For banks, recovery of the Rs7,000 crore form Kingfisher appears to be nearly impossible, with hardly any adequate assets to compensate lenders for the loss. Even the shares of the company pledged to banks won’t come handy since Kingfisher is now trading as a penny stock.

Using the powerful weapon of wilful defaulter tag against Mallya can and should send a strong signal to other defaulters. As of now, the emerging signals from the state-run banks are that of laxity and fear. Clearly something is amiss.

Updated Date:

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