Its time banks show the boot to rogue tycoons who loot and scoot; virtually rape the economy in broad-day light and get more money in the name of re-structuring. Its time these rapists are also sent to jail.
Some time back, driving down a road in Mumbai’s Parel, I stopped by to take a close look at a curious sight. It was an array of fancy vintage cars, including, if I remember correctly, the legendary Rolls Royce Silver Ghost. They were all parked behind glass walls. It was a Sunday morning and there was no signboard on the building. At last I found the security fellow who informed me that the owner of these beauties, mostly vintage (produced before 1929) but some classic (before 1965), was none other than Vijay Mallya.
How much does this “king of good times” owe his lenders on account of his grounded Kingfisher Airlines? In 2010 it narrowly escaped going belly up due to restructuring of its debt worth Rs 7,700 crore. Two years later, Mallya was back to the table with creditors, with a further debt of nearly Rs 1,000 crore. Meanwhile even the restructured debt had doubled. The airline is not operational and the staff is not paid for ten months now. Its license has been revoked and no savior is in sight to buy out the airline with all its loans. But Mallya’s listed liquor firm, UB Spirits, has been allowed to carry out business as usual. And none of his creditors would dare take a bailiff to his museum of vintage cars, crank up the beauties on a container truck, and line them up, including the Silver Ghost, if it is there, at Azad Maidan to be auctioned off forthwith. Instead, the country is watching the spectacle of this abominable businessman making gifts of gold bricks to the god at Tirupathi!
Why can’t creditors lay their hands on Mallya’s assets other than in his damned airline? It is because of a stupid law which was in place till the other day. In popular imagination, India is a land of wicked lenders—all Shylocks—whereas borrowers are hapless victims of circumstances.
This mythology probably played a role when the Recovery of Debts Due to Banks and Financial Institutions Act was passed in 1993. It was Manmohan Singh who, as Finance Minister, piloted the Bill. But it was a toothless law that had no provision to securitize assets. In banking jargon, securitization means facilitating buying of the borrower’s loans for its subsequent sale by the buyer in the securities market. In the West, the market in securities became vibrant since the 18th century. But it was different in India. In the 1990’s, big ticket defaulters like Escorts, GTC, Modis and some of the Birla companies had a lot of clout, and even more powerful were the politicians who patronized scores of habitually defaulter firms, perhaps for a part of the bank loan to siphon back.
It was the beginning of a disaster. In the 1990’s, when India was hoping to catch up with the more successful economies, and companies were awash with bank finance, the banks’ NPA (Non Performing Assets) too was ticking on like time bomb. By 2002, the banking industry was groaning under dud loans that accounted for 14 per cent of their advances in gross terms and 7 per cent of the net. The NDA government of the time enacted a new law, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), and thought it had done a good job. But the NDA’s law gave the creditor recourse only to the defaulter’s assets, not its equity, which, in other words, means ownership. The 2002 SARFAESI proved good enough for retail lenders who could recourse the car or the flat for which EMI hadn’t been paid. But it falls flat to rein in the corporate defaulter as it can’t convert the unpaid debt into equity. And that’s the moot point. How can Mallya’s creditors show him the door of Kingfisher Airlines if they are unable to turn their debt into equity of United Breweries, the company that owns Kingfisher Airlines?
The recent amendments to SARFAESI, passed by both Houses of Parliament on the last day of the Winter session, will give to Asset Reconstruction Companies (ARC) unimpeded access to the equities of defaulter companies. This initiative by Finance Minister P. Chidambaram could not have been timelier as the volume of restructured loans is rising without a pause. About 8 per cent of banks’ loans today have been restructured or are downright NPA. Restructured debt was just about 15 per cent of this total in 2008 but it is 70 per cent now.
It means that creditors have become over-lenient; instead of writing down doubtful loans they’re offering sops of all description. The Economist magazine recently described India’s tolerance of rogue borrowers as the “Spanish disease”, as that country’s bankers “cheerfully dismiss” unpaid installments until it is too late. The magazine has pointed finger at the public sector banks where sits 93 per cent of the restructured loans. Many of these have been restructured not once but twice, if not thrice. If a study by Crisil comes true, the volume of restructured loans may jump up from Rs 120,000 crore last year to Rs 205,000 crore in March this year. Crisil is the Indian arm of Standard & Poor’s, which has in the past been keen to downgrade India. The deteriorating quality of bank assets can push it back again towards its decision.
This is the background to Chidambaram’s amendment. The slowdown has led many companies to come forward afresh for debt restructuring—like Hotel Leelaventures, Hindustan Construction Company, 3I Infotech, Jindal Stainless Limited and KS Oils and many in the power and mining sector too. Who knows how many of them will end up like Mallya, who goes laughing to his private yacht and aircraft and IPL company but looks like a tragic hero only when he calls on his banker.
The ARCs, with their new ability to access equities of defaulters, have the potential to develop, for the first time in the country’s economic history, a robust market for stressed assets. They will no longer require to strip the defaulter companies’ asset. On the contrary, they can take over the business from a failed management and run it profitably. This is what economic reform and level playing field are all about. If a ‘promoter’ fancies being the king of good times, and brings his firm down to the gutter, this law will make his highness take a walk.
