The liquor baron, who wilfully defaulted on several crores of public loans, is merely a symptom of a rotting banking and regulatory system that allows crony capitalists to borrow taxpayer money without accountability
It is a riches to rags story. No, this is not about liquor baron Vijay Mallya who virtually received unsecured loans of Rs 9,000 from a consortium of banks. He has flown to foreign shores, smiling all the way. Government banks are biting the dust as they squander away public money, threatening the economy. Mallya is now in the UK and, Arundhati Bhattacharya, the chairperson of State Bank of India, is crying that the businessman had not told her of his assets!
Today, many public sector banks have net losses (couched as non-performing assets) that amount to Rs 4.4 lakh crore. Till 2009, this figure was around Rs 1.4 lakh crore and even at that time, considered to be bad for the health of the banks. At least Rs 1.5 lakh crore in bad loans have been written-off during the last two years.
Banks had tried to cover up the bad loan issue by postponing the problem but the Reserve Bank of India put a deadline of March 2017 for banks to clean up their balance sheets. The RBI’s role as a regulator too needs a re-look.
A joint parliamentary committee must be set up to find out how over 100 large companies have emerged as ‘defaulters’ in these few years. The committee must look into the functioning of the banks as well as into corporate books.
The JPC should expose not just tycoons like Mallya, but also other corporate defaulters who are looting bank funds, apparently with the connivance of bank officers and some political leaders. In a way, the nation should be thankful to Mallya for exposing the chinks. Most bank lending to corporates are suspicious. The nation needs to go deeper to fix the responsibilities of the banks and impose exemplarily punishment on those who aided the lending process.
In the last eight years, the Government has infused Rs 90,000 crore in India’s 27 public sector banks. In the 2015-16 fiscal, it infused Rs 20,000 crore out of the promised Rs 25,000 crore. For 2016-17, the Government plans to put in Rs 30,000 crore.
If the Government does not simultaneously initiate action on large corporate defaulters, to recover the thousands of crores of money they owe to the banks, it will mean that the taxpayers’ money is being used to bail out banks, looted by large borrowers.
It is the poor depositor who is at a loss at every step — his deposits are unsafe, he gets measly interest rates and the taxes that he pays are utilised to recapitalise malfunctioning banks. The depositor is also levied higher charges and lower interest rates.
Mallya is just one of the flashy borrowers. There are many others who have larger exposure. A real estate firm which is also into building expressways, is earning a large sum every day and has defaulted Rs 95,000 crore since 2008. No action is known to have been taken against the firm.
Meanwhile, the alarm bell is ringing for another firm which has failed to pay interest on convertible bonds. This means that the bond buyers have to be cautious. Those advocating the bond and equity route for corporates to raise funds, as is the norm in the West, need to re-think.
Another big name from the steel and power sector has also faltered and is unable to repay $550 million to a consortium of foreign banks. This is a cause of grave concern as it affects the overall credit worthiness of the Indian corporate.
Many banks had converted their loans into equity in the grounded Kingfisher Airlines, hoping that Mallya would bring in his share of funds, but it never came. It is a virtual ‘gift’ to a defaulter as such shares yield nothing — a common practice. If the assets were put on sale, their losses could have been curbed.
Banks have also been considering intangible assets like brand value as security. Promoters should be told to give personal guarantee and firm collateral. The banks never objected to Mallya, a willful defaulter on the board of United Breweries since 2005, when Kingfisher Airlines started nose-diving till 2012 when the Directorate General Of Civil Aviation suspended its flying licence.
Banks are more at default than the flamboyant Mallya. Banks never seem to understand corporate business methods. The RBI Deputy Governor said, “There is a need for additional technical capabilities to undertake evaluation and restructuring needs”.
Banks also have to know the business they are financing and not be afraid of stopping incremental loans if something goes wrong. This requires day-to-day monitoring. The banks are rarely known to do this. It is also no secret that if some individual officials try stringent monitoring methods, they are reprimanded.
Willful default is a banking term. It has little legal backing. It needs to be made a criminal offence. At present, for civil offences, no extradition move can be made but the issue is not just about Mallya, who merely symptomises an ailing system.