On successful extradition of the fugitive Vijay Mallya, the promoter of the grounded Kingfisher Airlines, hangs the successful unraveling of the festering problem of non-performing assets (NPA) of banks and financial institutions in India.
It is widely known that post-bank nationalisation, public sector banks (PSBs) have lent themselves to two abuses---behest lending, i.e. loans and evergreening of loans to the high and mighty with strong political connections with the ruling dispensation and loan melas i.e. mindless disbursement of loans for social causes often on altruistic considerations, casting prudential bank lending norms to winds in the process. The first one harks back to bank nationalization but the second is attributed to Janardhan Pujari, the Congress minister of state for finance in the Indira Gandhi government. Both have wrought havoc to the fortunes of the PSBs in the country though their relative contribution to the NPA problem is unknown.
The nation’s attention is riveted on two judicial proceedings---the first one being the contempt of court proceedings going on in the Supreme Court against Subratra Roy the feisty promoter of Sahara group of companies, suspected to be more in money laundering business for corrupt politicians and industrialists and the second being the extradition proceedings against Vijay Mallya. The two cases epitomise two festering financial problems the nation faces---black money and NPA respectively.
The Narendra Modi government which is spearheading the extradition process in the London court would be waiting with bated breath the results to be pronounced early 2018 because should the extradition request be turned down, it would be left red-faced with the Opposition conveniently baying for its blood for having allowed the flamboyant tycoon flee the country. That loans were sanctioned by the banking system to Kingfisher Airlines during the UPA regime would be the Modi government’s counter but the nation would not be amused by this blame game.
The Rs 9,000 crore outstanding from Kingfisher raises a number of troubling questions answers to which might result in a paradigm change in the lending norms in the country. Chief among them are:
a) How could loans be sanctioned by banks practically without collaterals with aircrafts offered as collaterals themselves being procured/leased on credit?
b) How could loans be sanctioned on the basis of brand value produced out of thin air, so to speak, when prudential accounting norms mandate that such self-generated goodwill should be banished from a company’s balance sheet?
c) How could personal guarantee of Vijay Mallya have given comfort to the banks when they too were sans collaterals offered by him?
d) How could a borrower be allowed to pull wool over the lenders’ eyes by presenting rosy projections in the loan application while internal communications, reflecting realities, screamed gloom and doom?
e) How could banks naively convert a part of the outstandings into shares of a nose-diving airline at a premium with reference to the then prevailing market quotations?
Raising eyebrows more are the allegations of diversion of funds. As recently as on 9 May 2017, the Supreme Court was constrained to pull up Vijay Mallya on contempt charges for merrily transferring $40 million from out of the money received from Diageo of the UK to his children in violation of its order. The fugitive has been thumbing his nose at the Supreme Court as well by not presenting himself before it as ordered. There are allegations of diversion of funds to motor racing teams and foreign affiliates ostensibly for formula one logo design.
It is widely known that diversion of funds has been the bane of the banks in India. Even if loans are strictly sanctioned on merits and with adequate collaterals, there is no guarantee that they would be used for the stated purposes despite the much-vaunted utilization report demanded from the banks from time to time.
One wonders if in the wake of the revelations of the Kingfisher case, the rule book for sanctioning of loans is formally codified and publicized because at the end of the day prevention is better than cure. True, the Insolvency and Bankruptcy Code 2015 has empowered the lenders but its prolific invocation soon after its legislation shows that the sanctioning process itself was often to blame. Nipping the mischief in the bud is also possible by banks jettisoning general purpose loans and embracing asset-based financing, the cornerstone of Islamic banking. Home loans by and large have been a happy experience for home loan financiers precisely because of this reason---the loan amount is released to the builder. One wonders if asset-based financing would be mandated if only to prevent diversion of funds.
One also wonders if political accountability would also be fixed because loans to Kingfisher Airlines is a classic case of behest lending with bank officials’ hands being tied. Ironically, so far only heads in banks have rolled. When will political heads roll?
