Debt and default

September 05, 2014 02:22 am | Updated November 17, 2021 04:32 am IST

The action of the United Bank of India (UBI) in declaring >Kingfisher Airlines , its promoter Vijay Mallya and three other directors as “wilful defaulters” is a significant one indeed. And it is not just because of the high-profile nature of the company and its promoter. It is significant because for the first time the banking system is sending out a clear signal to borrowers with unpaid dues that it means business. A company or person is classified as a “ >wilful defaulter ” for one or all of the following reasons: it has the means to repay but is unwilling to do so; has diverted loan funds for purposes other than what they were borrowed for and has falsified earnings. No bank will lend to a company that is either a “wilful defaulter” or has on its board someone with such a tag. The implications for Mr. Mallya are, therefore, clear. Yet, Mr. Mallya has >only himself to blame for things having come to such a pass. Not only does Kingfisher, which >shut down operations in 2012, owe more than Rs.7,000 crore to a consortium of 17 banks, it also has dues to suppliers, airports, the tax department and importantly, to employees, who have not been paid salaries for several months. It is a double whammy for the banks, that also hold equity in Kingfisher which they got when the company restructured its debt in early-2011. A little over Rs.1,300 crore was converted into shares, Rs.750 crore of it into equity at Rs.64.48 a share. The current market price of the share is Rs.2.57, which makes the equity holdings next to worthless.

It remains to be seen if the other banks in the consortium, which has notable names like the State Bank of India, IDBI Bank and Punjab National Bank, will follow suit. Mr. Mallya has tried to shift the blame on to UBI for not following due process before declaring him a “wilful defaulter”, but there is no getting away from the basic fact that Kingfisher has not repaid its loans. It can only be hoped that the process of recovery of dues does not get >bogged down in the legal system , given that Mr. Mallya has said he would go to court to contest >UBI’s action . Banks are under pressure from the Reserve Bank of India to clean up their balance sheets and go after defaulters. Gross non-performing assets of the banking system at 4 per cent may not be alarming yet, but it is a cause for concern that bad loans, including restructured ones, add up to almost 10 per cent of total loans outstanding. RBI Governor Raghuram Rajan is on record as saying that promoters do not have a divine right to continue in office even when they mismanage. Clearly, an example is being made out of Kingfisher, and it is important that banks succeed in their effort to recover their dues. For too long have promoters escaped the consequences of mismanagement and default.

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