11 MARCH 2016
A flight shows up the system
Vijay Mallya’s quiet departure, a week before the Supreme Court heard a plea from a consortium of lenders to his defunct Kingfisher Airlines seeking an order restraining the businessman from leaving the country, glaringly exposes the loopholes in the system that prevails in India. The court was informed by the government that the liquor baron flew out on March 2, the same day the banks had moved the Debt Recovery Tribunal to have Mr. Mallya arrested and his passport frozen. The failure on the part of the tribunal and subsequently the Karnataka High Court to act immediately to ensure that Mr. Mallya remained within the country to face judicial proceedings prompted the lenders to petition the Supreme Court. The Kingfisher Airlines promoter faces cases for the recovery of about Rs.9,000 crore the airline owes the banks — for which he had stood personal guarantee. That a consortium of 13 banks, which includes the country’s largest lender, the State Bank of India, and the might of the government were unable to restrain a person declared a “wilful defaulter” from evading due process and flying abroad right under the nose of the authorities, reflects poorly on the justice and law enforcement systems. Timely judicial orders protect the parties’ interests, but in this case even the DRT order stopping a payment of $75 million from Diageo to Mr. Mallya appears to have come too late as the British company had already paid him a significant part of the amount. Even a look-out notice issued to all airports had no effect, according to the Central Bureau of Investigation.
Mr. Mallya has sought to project the corporate loan default as a case of business failure due to macroeconomic factors and adverse government policies. The banks, however, say he is a wilful defaulter. The CBI also alleges corruption in a Rs.900-crore loan sanctioned by top officials of IDBI Bank despite the airline’s poor credit rating. And the Enforcement Directorate has registered a money-laundering case against him in connection with the same transaction. Mr. Mallya has sought to portray himself as a wronged man, singled out for multiple proceedings while those who owe much bigger sums have not been designated as defaulters or investigated. He has also claimed that banks had recovered Rs.1,244 crore through the sale of pledged shares and that another sum of Rs.1,250 crore deposited in the High Court is available for recovery. These charges and claims can only be judicgally settled, for which Mr. Mallya’s presence and availability are vital. He would do well to return to the country if he wishes to establish his innocence and bona fides. For the banks and their recovery processes, it is a question of credibility, as they can ill-afford to give the impression to the average borrower that a high-flying debtor can get away with brazen default. For Mr. Mallya, the lesson from this episode is that flaunting his wealth may give a man an appearance of flamboyance in good times, but it ill-serves his reputation in circumstances of adversity, especially when he is perceived to be flouting the law.
Action plan to fix public sector banks
The bloated levels of stressed assets in India’s state-owned banks have been a big cause for concern for quite some time now. With the Reserve Bank of India keeping up the pressure on them to identify, recognise and make provision for bad loans, a better picture can be had of the magnitude of the stress in the banking system. The RBI is convinced that banks should clean up their books so that legacy issues are dealt with once and for all to enable them to move forward with a clean slate. This has, predictably, caused a scare across different layers of the economy. Given this somewhat grim background, there were legitimate expectations that the Centre, being a majority owner of public sector banks, would step in to provide increased fund assistance. In the end, Finance Minister Arun Jaitley has stuck to what he had promised earlier, and committed in his Budget speech capital infusion into these banks of just Rs.25,000 crore for the coming year. Mr. Jaitley’s offer is inadequate given the magnitude of the fund needs of these banks. Asserting that “we are solidly behind these banks’’, he did indicate that the government would find fresh funds should a requirement arise. Capital need is just a subset, or consequence, of the larger malaise of inefficiency that has been hurting these public sector banks for a long while now. Indeed, as Mr. Jaitley suggested in the Budget speech, the strength of the financial sector is dependent on a strong and well-functioning banking system. Viewed in this context, the decision to set up a Banks Board Bureau, headed by former Comptroller and Auditor General Vinod Rai, is a significant move forward. The board could yet be an effective mechanism to end political interference in business procedures and decision-making in banks. An empowered independent bureau such as this could help reset the concept of an arm’s-length relationship in public sector banking. Once ownership is delinked from management, fixing accountability becomes that much easier. This can foster a decision-making framework that privileges business sense. It is, however, important to ensure that systems are in place to make the autonomous functioning of this bureau sustainable.
Mr. Jaitley has done well to take a holistic approach to the bad loans problem. Letting the sponsor of an asset reconstruction company to hold up to 100 per cent stake in it should spur foreign entities to look at the Indian “bad asset” market as an opportunity. A bankruptcy code is long overdue, and it would help banks pursue recovery action purposefully. A tough regulator and a stingy government appear to have combined forces tacitly to lay the groundwork for possible M&A (mergers and acquisitions) activity in the Indian banking space. It is commendable that there is a concerted effort to clean up the ecosystem to ensure fair play in the banking field.