Here’s the billion dollar question. Why do super rich Indians not pay back the money they owe to banks and investors even risking ill-repute, and chances of imprisonment?
The two recent examples are that of Sahara's Subrata Roy who has been in jail for not paying back around Rs 36,000 crore (with interest accrued) to thousands of small investors and Vijay Mallya, promoter of grounded Kingfisher airline, who owes Rs 9,000 crore to 17 banks.
In the case of Roy, even the Supreme Court is surprised seeing the kind of wealth he has why a person as wealthy as him didn't pay a fraction of wealth and opted to stay in jail for two years. "Why person with this kind of fortune shall be hesitant to make payment," the court asked.
Similarly, in Mallya’s case, he is a man who once showed Indians how a ‘King’ lives in modern times. This is a country, in his own words, which made him ‘Vijay Mallya’ and where he is credited for introducing luxury flying experience to passengers.
The tag of an ‘absconder’ or a ‘fraud’ is the last adjective a ‘King’ would want to attach to his name.
Following his default to banks and the tag of wilful defaulter given to him by two banks, Mallya had to step down as the chairman of United Spirits Ltd (USL). The billionaire, once called by some as India’s Richard Branson, is now even risking getting a jail term if the ED and the CBI prove their case and arrest Mallya through Interpol.
But, surprisingly, Mallya has chosen not to pay back the amount banks have sought from him (Rs 9,000 crore) to fight his case even at this stage. He remains defiant.
Other cases of non payment
Roy's case is a mystery. But, in Mallya's case, the whole case has grown to a level of ego battle between Mallya vs the lenders and a political issue for the government. This explains why Mallya is defiant to pay back even though he has enormous personal wealth in India and abroad. Mallya, who has given personal guarantee to banks against the loan, wants to dictate the loan settlement in his own terms, but the banks are too afraid to give in to his demands in the context of the public attention in this case.
Clearly, the Kingfisher-Vijay Mallya episode is a classic case of banks and investigating agencies acting late. Also, when it comes to large corporate default, the reason for non-repayment is clearly lack of intent. Also, the fact is that the banking system itself encouraged corporate clients to actively evergreen their loans till recently when the RBI cracked the whip.
This worked both ways--for banks to show healthier balance sheets and corporates to avoid the NPA tag. The banker-corporate lobby too worked in full swing through middlemen. But, things changed when economic recovery got delayed and stress on corporate, bank balance sheets grew bigger.
Many crony promoters then approached courts to delay the repayment on technical grounds. When the RBI set a deadline of March, 2017 for banks to clean up bank balance sheets, panic gripped banks and corporations and skeletons began to tumble out of the closet.
Even as the Mallya case is progressing, another critical question that arises is this: What is the plan of action of banks in the remaining high profile cases, where recovery is pending? Have they learned from the Kingfisher episode? If banks have indeed learned a lesson from the Mallya episode, lenders should get their act right and crack down on other defaulters.
The result of the Kingfisher case has major ramifications in the banking system, since it could encourage other lenders too to seek similar recourse to recover money from other companies, in similar cases. Besides Kingfisher, there are several other cases, where criminality might be a reason for 'stress' than genuine factors leading to bad loans.
Zoom Developers tops this list with Rs 2,411 crore loans, followed by Winsome Diamonds and Jewellery with Rs 2,266 crore loans and Forever Precious Jewellery with Rs 1,315 crore loans.
Zoom’s Rs 3,000 crore worth loan dues became a non-performing asset (NPA) for a bank consortium of 24 banks led by Punjab National Bank (PNB), in the second half of 2010. Among the lenders, PNB has an exposure of Rs 410 crore as of December 2014.
In the case of Winsome Diamonds, the CBI has begun a probe on the working of the company after it allegedly defaulted Rs 6,500 crore loan to a host of banks, making it equal in size to the principal amount in the Kingfisher case. The company claims that the default has occurred following non-payment of dues by its trading partners in the Middle East. But the banks haven't bought that excuse and have slapped legal notices against the firm.
Then there is Deccan Chronicle Holdings Ltd (DCHL), where the CBI is investigating alleged cheating and fraud. According to some of the bankers to DCHL, part of the reason the company faced the crisis was diversions of funds to expansion plans of the group, which was not stated to the lenders at the time of taking the loan.
These are only a few cases where promoters wouldn’t pay back to banks even though they have the financial ability to do so. (See below the full list of top wilful defaulters.)
While in the Sahara’s case, thousands of small investors were hit, the reluctance of rich Indians to pay back their dues are hurting India’s banks most.
Indian banks are already reeling under the pain of stressed assets.
The amount of bad debt of 40-listed banks in the country stood at Rs 4 lakh crore in the banking system as of end December 2015.
Besides the bad loans, a huge chunk is being restructured, which is estimated to be between Rs 5 lakh crore and Rs 6 lakh crore. A sizeable chunk of such loans could turn bad too in the absence of a significant economic revival.
The banking system is the backbone and a proxy to the economy. Hence damages caused to it can have serious ramifications on the overall economic stability as well.
If the banking system is determined to find the actual root cause of the bad debt pile and tackle criminality with a iron hand, a significant portion of the problems associated with bad loans can be resolved effectively. Many more Kingfishers will then fly out of the nest.
Updated Date: May 12, 2016 19:42 PM