Let’s be tough on ailing airlines
The discomfort caused to air travelers on the cancellation of a spate of flights by the private carrier SpiceJet in a single day and the desperate move by the promoter, the billionaire media tycoon Mr. Kalanidhi Maran of Sun Group television channel from Chennai to line up credit from banking industry, particularly from never-say-no public sector banks (PSBs) are nothing to gawk at! Only a couple of years ago, the Kingfisher airline of the Bangalore-based liquor baron Mr. Mallya met with a similar piquant plight but it could not be salvaged despite infusion of funds from PSBs. The airline wound up its business in 2012.
In Mr. Mallya’s case his proximity to power at the Centre as also his membership in the Upper House of Parliament helped him to a great extent though at the end of the day his debt outran his luck and the barefaced pluck of his cronies from within and without! But in the extant case of SpiceJet of a Chairman who hails from his patriarch DMK’s Karunanidhi family, there was absolutely no need for the airline to tap PSBs when the owner himself wields considerable personal wealth and has a diversified business interests from which he could draw funds to shore up the ailing airline. But when easier options like PSBs support present itself, the temptation is too insistent to be set aside! So his appeal to the Ministry of Civil Aviation in the second week of this month instantly struck the sweet chord of the BJP-ally TDP Minister of Civil Aviation Mr.Ashok Gajapati Rao.
In a statement on December 16, the Ministry asked the PSBs to extend the working capital loans of Rs 600 crore on the basis of assurances from the promoter (Mr. Maran) and also the oil marketing companies to give the airline 15 days of credit for jet fuel. In a patent slap on the regulator DGCA which had barred SpiceJet from offering bookings beyond 30 days on December 5, the Ministry extended this till March, 2015 as if to pander to the proclivity of the air carrier to use long-run ticket sales at low rates to finance short-term cash flow needs, knowing full well this could be a panacea and not the bitter medicine the carrier must swallow to survive, let alone thrive. The facile reason for a bailout put up by the line Ministry goes that this is needed to “tide over the crisis and to keep SpiceJet from shutting down, as it would be a major setback to the Indian civil aviation sector” and also in “passengers’ interests”!
Meanwhile reports suggest that the original promoter Mr. Ajay Singh who exited four years ago after taking a clean sweep of his stake sale is now returning with like-minded investors to rescue the beleaguered carrier. Whether Mr. Singh succeeds in taking over after the bailout by PSBs is completed is not what matters as to why the public sector banks had to bear the cross for the travails of a private airline which in any case requires humongous investments to return to its normal operations?
It is germane to recall the weighty remarks of the Governor, Reserve Bank Dr.Raghuram Rajan on the question of propping up large promoters in ailing and failing businesses that have of late become larger in numbers to threaten the solvency of the banking industry itself by cumulative bad loans in its over- stressed kiddy. In his characteristically candid views on the subject at the Third Dr. V. Kurien Memorial Lecture at IRMA, Anand in November 25, the debonair chief of the central bank rightly stated that the current dispensation under which such bailouts are forced on the banking industry “renders the banker helpless vis-a-vis the large and influential promoter.” He raises the legitimate query as to who pays for this “one way bet large promoters enjoy” and readily answers that as “the hard-working savers and taxpayers of this country!” The lecture appropriately titled “Saving Credit” contends that the promoter who misuses the system ensures that banks then charge a premium for business loans which throttle entrepreneurial élan for risk-taking even for genuine projects.
Even as there were laws such as the Debt Recovery Tribunals (DRTs) and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act 2002, the amounts banks recover from defaulted debts is both “meager and long delayed”, Dr. Rajan bemoaned. The amount recovered from cases decided in 2013-14 under DRTs was Rs 30,590 crore while the outstanding value of debt sought to be recovered was a whopping Rs 2,36,000 crore, reflecting only 13 per cent of the amount at stake!
Illustrating the sombre state of affairs, the RBI Governor noted that the average interest rate on loans to the power sector is 13.7 per cent while the policy rate is 8 per cent. The difference, also known as the credit risk premium of 5.7 per cent is largely compensation banks demand for the risk of default and non –payment. “Since the unscrupulous promoter hides among the scrupulous ones, every businessperson is tainted by the bad eggs in the basket”, Dr. Rajan said adding that” even comparing the rate on the power sector loan with the average rate on the home loan of 10.7 per cent, it is obvious that even good power sector firms are paying much more than the average household because bank worries about whether they will recover loans”. It is small wonder that the RBI Chief voiced his vexation that “when some businessmen enjoy a privileged existence, risking other people’s money but never their own, the public and their representatives get angry”, adverting to the avalanche of outrage expressed by “numerous parliamentarians whom he has met at the current state of affairs”.
Though Dr. Rajan public lecture preceded the SpiceJet rescue saga that is still being played out, his prescient and perceptive observations on the state of banking business should set in motion deeper introspection by the authorities particularly the ruling dispensation. As the Modi Government was elected to power overwhelmingly on the motto of “minimum government and maximum governance”, the time has come now to expedite bankruptcy laws and codify the requisite rules so that the exchequer need not undertake unconscionable and costly bailouts. Even where such subventions are sought, the apex bank as the regulator of the banking industry should be given the leeway to winnow salvageable cases for credit infusion from private sector defaults after a thorough due diligence and not being goaded by either the line or the finance ministry to abide by their undeserved diktat.