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RBI is on Test Under Das. Is It Kingfisher 2.0?

Vijay Mallya, after a great run in building a liquor business, is now the poster boy of 21st century India’s Robber Barons, though more qualified men compete for that title. If banks are to be blamed partly for the magnitude of the losses in Kingfisher Airlines default, the remaining lies at the doorsteps of the Reserve Bank of India. Sometime in 2010, being kind trumped other obligations. The regulator abandoned its role of a referee and decided to play the saviour. It extended the muchabused Corporate Debt Restructuring scheme to the services sector too as it attempted to save an airline that was about to run aground instead of flying. Despite the noble intentions, it met its fate. While the extension of that restructuring provision might be justified in the absence of a bankruptcy law then, it still exposes the regulatory weakness which let itself to be pulled in the direction that vested interests desire.
That ultimately led to bloating up of Kingfisher Airlines’ debt and default. Depositors’ money vanished in thin air and the fallout was even worse for some bankers who had to face jail, whether deserved or otherwise. Come 2019. The question is will history repeat itself ? Or, this time is different? Jet Airways, the second biggest domestic carrier, has defaulted. A few years ago, its default wouldn’t be even public. Transparency has increased and the regulator has learnt from mistakes to plug the gaps that borrowers gamed at will. At least on paper, ‘this time is different.’ The country has a functioning bankruptcy law. There is a transparent procedure instead of a few bankers and the promoter drafting an unworkable formula that was aimed at saving their skins instead of reviving an enterprise.
Yet another development has been the RBI’s February 12 circular that forces banks to treat missing payments by a day as default and begin work on ensuring that the enterprise doesn’t get into a deeper hole. For obvious reasons, that has become the lightning rod for industry. Banks waited for an account to become a bad loan to initiate resolution, which meant waiting for three more months after a default. By then the damage is more severe. The February 12 circular attempts to change the basic premise of banking in India. The assumption was defaults happen due to extraneous reasons and things would improve, which will bring businesses back to normal. 
That works if you lend money to your neighbour on goodwill. Unfortunately, the money banks lend belong to unknown millions. So, bankers should arrest it before it gets worse. Literary giant Ernest Hemingway encapsulates businesses better than economists from Harvard or MIT management gurus. ‘How did you go bankrupt? Gradually, and then suddenly,’ wrote Hemingway. Jet reported a loss of ?2,587 crores in September half year. Its accumulated losses are at ?13,500 crore, making the net worth negative. It has nearly ?6,300 crore loans coming up for repayment in about 24 months.
“Furthermore, the liquidity strain has aggravated due to delays by the company in implementation of its liquidity initiatives,” says ICRA, a rating company. “Till the company starts reporting profits on a sustained basis, the debt levels are expected to continue to remain high.’’ If a company operating at near 100% capacity is unable to meet its financial obligations, something is amiss. One can blame oil prices, airport charges and many more. But none of these matters to bank depositors. 
In the current regulatory regime, banks will have to drive the resolution in the next 180 days failing which it goes to bankruptcy courts. The solution is either the promoters bring in equity if the bankers have to sacrifice a portion of what is owed to them, or banks begin to look out for new investors to revive the firm. The already loud chorus that February 12 circular is draconian may get louder. With the man behind that rule out of the way on Mint Street, the permission to restructure SME loans by the new Governor Shaktikanta Das has lit hopes of a rollback of the one-day default rule as well. Well, if those hopes are met, it will be a throwback to the age of Robber Barons rather than entrepreneurship.

The Economic Times, 4th January 2019


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