The “King of Good Times” is under fire from the nation’s banks. Liquor baron, Vijay Mallya, is under legal proceedings for allegedly defaulting loans of over Rs 9,000 crores from various banks. Earlier this week, the court had issued a notice to Mallya and sought his response within two weeks on pleas filed by a consortium of banks seeking to freeze his passport. The State Bank of India has dragged the “wilful defaulter” Mallya to the Debt Recovery Tribunal in an attempt to recover more money by seizing his assets. Of the Rs 7,000 crore owed by the now-defunct Kingfisher Airlines to 17 banks, the SBI faces an exposure of approximately Rs 1,600 crore. Suffice to say, the public sector bank is now trying everything to recover that money. On Monday, the Tribunal froze Rs 515 crore severance pay package that Mallya was to get from Diageo, the company which bought his UB Spirits last month. In an open letter written on Sunday, Mallya argued that it would be unfair to blame only him for the mess that has unfolded in the banking sector. For all his ills, Mallya does indeed have a point that he is being made the “poster boy” of bank defaults. “In fact, banks have NPAs (non-performing assets) of Rs 11 trillion and have borrowers who owe much more than the amount allegedly owed by Kingfisher Airlines to the banks,” he wrote. “None of these large borrowers (whose debt is significantly more than the Kingfisher Airlines debt) have been declared wilful defaulters.”
The list of major defaulters includes Reliance ADA, Vedanta, Essar, Adani and the Jaypee Group, among other serious players in Corporate India. Some of these firms have close ties with the political class on both sides of the ideological divide. He also went on to argue that the likes of SBI and IDBI are as culpable for the current crisis. Despite knowing of his company’s financial position, these banks went along and lent large sums. Suffice to say, the liquor baron’s commercial airline venture, Kingfisher Airlines, was doomed from the very start. Despite clear warning signs that the airlines would not make good on its loans, public sector banks were under political pressure to keep on lending. Private sector bank ICICI, however, saw the writing on the wall and sold off its entire debt of Rs 430 crore to a Kolkata-based debt-fund way back in 2012. Meanwhile, public sector banks carried his debts, as he worked the courts. When the United Bank of India, a public sector entity, finally gathered the courage to declare Mallya and three of his former directors as “willful” defaulters, the Calcutta High Court let him get away on a mere technicality. By using their political connections and working the overburdened judicial system, these large corporate entities continue to default on their loans, without paying the price for it. Not anymore for the likes of Mallya, though. But as stated earlier, Mallya’s activities are only representative of the way in which large corporate houses get away with defaulting on massive loans. More than the money lost, the problem is systemic.
Deposing before the Parliamentary committee, which was constituted to look into the matter, Reserve Bank of India Governor Rajan said that banks had failed to fully predict the profitability and viability of infrastructure projects before providing them loans. “There was inadequate project evaluation of assessment of promoter or management capacity or even financial capacity,” he said about projects which got shelved or stopped generating funds and hence, their promoters defaulted. “We did not do a good job. Therefore, some of these projects have got into trouble.” In other words, these banks did bother to conduct due diligence due to pressure from above. Although the RBI and the NDA government have reportedly been on top of this crisis for some time, little has been done until now. The government has gone after the likes of Mallya while kick-starting the lending process by instituting some structural changes to our public sector banks. According to a recent column in Mint, “Indradhanush, the NDA plan to revamp PSU banks launched recently provides the blueprint (to revamp India’s public sector banks). The core of this strategy is to delink governance of banks from political influence emanating from Delhi by strengthening the bank management. Once in place, the management will have the confidence, especially with the authorities cracking down on wilful defaulters, to tell off influence peddlers.” In addition to strengthening the management of these banks, the government must go after other major corporate defaulters involved in the crisis.