Vijay Mallya in his deposition before the CBI feels that the reasons his loans went bad is the fact that the UPA Government backed Jet and Air India. This is far from the truth, if you had gone to the departure terminal at the old airport in Goa, you would have found the King Fisher ticket counter to be a large window, accommodating the entire word “King Fisher" On the side a smaller window was the ticketing office of Air India, with space just enough to write “AI”. At most airports the story was the same, one could easily see who was being favoured.
Assuming what Mallya says is true, it does not justify not paying the loans back or misusing the funds. This case has one advantage for the banking sector as far as accountability towards public money is concerned. If it is taken to its logical conclusion, it will surely reduce the NPA’s of public sector banks.
The CBI is investigating if 900 crores given as loan to King Fisher followed the existing norms. The key reason for filing the case is the fact that despite adverse remarks, erosion of net worth, loss making etc, someone decided to give the loan using the King Fisher brand as collateral. Profit or loss is part of doing business. It is also possible that in a similar situation a loan given to a good management could have led to a turn around. Spice jet faced a similar cash crunch, there was an infusion of funds, a new management and voila they were back in business. Bankers have to take such calls and should not be penalized for such decisions in the long run. Every loan that turns bad need not necessarily be a reason to view the decision with suspicion.
In the case of KF the financial statements, specifically the balance sheet would have made interesting reading. This document was available to the bank nominee’s on the Kingfisher Board, the bank officials reviewing the loan request. King Fisher borrowed heavily to cover its increasing cash requirements, because the UPA was not favouring it, the fuel prices had shot up drastically, etc. The loan being currently investigated is only a part of the entire borrowing of 7000 crores plus interest. SBI is a major donor with 1500 crores outstanding.
Surprisingly what did not raise eyebrows was the fact that the balance sheet clearly showed that King Fisher was giving loans to other entities. This is called “diversion of funds” in banking terminology and generally a huge red flag. Why did the banks not act? Why did they not question this diversion which is now believed to have been sent to tax havens or sister companies?
In the US, companies can file for bankruptcy easily. Failure, is a normal part of doing business. A product could be too early for the market or competition too intense or overtaken by technology, eg B&W TV’s. But be sure that after you file for bankruptcy you do not drive home in the bankrupt companies Cadillac. Woe to you if it is found that the company went bankrupt because funds were misused or diverted. The person responsible will be looking at a hefty jail term.
This brings us to the two areas that need strengthening and this case will surely be a step in that direction. One, if there was diversion of funds, it is basically robbery and therefore a criminal act and needs to be punished like any other robbery. Two, if bank managers overlooked this robbery and continued to give loans then they should be considered as accomplices and treated accordingly.
Usually in such high profile cases, there is a lot of pressure on the banking system and especially the dealing hand to look the other way. If these officer’s have not put their objections down they are going to find it hard to pass the buck now that an investigation is on. Surely this will be a lesson for future cases, if and only if punishment is meted out to those responsible. If they get away scot free, you can be sure the public banks NPA’s will continue to increase.
Sectoral cap may not be applicable in the case of King Fisher but it would be applicable closer home. The banks, especially the cooperative banks exposure or over exposure to truck and barge loans may call for some introspection. It is a basic principle; you do not put all your eggs in one basket. Think about it, the banks are expecting the borrowers to perform while funding more and more competition.
Last but not the least is collateral security that all banks want. In the case of KF and the barge and truck loans, this seems to be absent or not sufficient. KF Villa in Candolim was not sufficient to cover a day’s interest.
There is something wrong in the banking sector, and someone is and should be held accountable. Will the KF case open the proverbial pandora’s box and clean the banking system? Or will it go like the Salman case, no one borrowed? Time will tell.
Blaise Costabir is an alumnus of the Asian Institute of Management and a first generation entrepreneur
