Skip to main content

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


Popular posts from this blog

SC order on RBI circular: More options for banks to tackle defaulting firms

Lenders also have the option of restructuring the loans Lenders to companies which are under stress could now have three options to deal with them if they default on loans: take a haircut as part of a one-time settlement, restructure the loans for a longer tenure as they did when corporate debt restructuring schemes were allowed, or go to the Insolvency and Bankruptcy Code (IBC) for redress. These changes in the options available to lenders come, according to PE funds and bank lawyers who are involved in the IBC process, in the wake of the Supreme Court on Tuesday setting aside the 12 February RBI circular, which allowed a 180-day window to banks to resolve a company default.But they can still find a resolution. According to a Reserve Bank of India circular, a loan becomes a non-performing asset when banks cannot find a way of recovering their money in 90 days. In short, banks still have a window to resolve the default. Lenders can take a haircut as part of a one -time settlement of du…

April GST collections at new high despite rate rationalisation in December

Goods and services tax (GST) collection touched a record high in April, exceeding Rs 1 trillion for the third time in four months. The mop-up was 10 per cent higher over the previous year. Gross collection for the month was Rs 1.13 trillion, said the finance ministry. Despite the recent rate rationalisation in December, a rise in collection was reported. Of the total collected, the CGST (central GST) contributed Rs 21,163 crore, the SGST (state GST) Rs 28,801 crore, the IGST (integrated GST) Rs 54,733 crore (including Rs 23,289 crore on import) and cess Rs 9,168 crore (including Rs 1,053 crore on import). After settlement of the IGST and the balance IGST in a 50:50 ratio between the Centre and states on a provisional basis, the CGST stood at Rs 47,533 crore and SGST at Rs 50,776 crore. The CGST target in the Union Budget for 2019-20 is Rs 6.1 trillion. “The April collection indicates the tax base is increasing gradually, with GST getting stabilised with measures such as e-way bills and…

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…