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This article was first published 11 years ago

Banks should have acted tougher with Kingfisher

Last updated on: October 10, 2012 13:54 IST


Photographs: Reuters. BS Bureau

On October 5, the Directorate General of Civil Aviation, or DGCA, finally wrote to the troubled Kingfisher Airlines, asking it to show cause why its licence should not be revoked.

Kingfisher's employees, many of whom have not been paid for seven months, are currently on strike; the company itself has declared a lockout till October 12.

The company's share price, already low, has lost another quarter of its value. And last week Pratip Chaudhuri, chairman of State Bank of India (SBI), said there was "no more room" for bank loans to Kingfisher.

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Banks should have acted tougher with Kingfisher


Photographs: Reuters.

It certainly looks like the end of the road for the airline - but is it? Its owners and management continue to insist that a revival plan is just around the corner, and it is reported that some online portals are selling tickets on the airline from October 13 onwards.

Kingfisher is emblematic of a problem with Indian capitalism: the way companies with well-connected promoters can last much longer than they should, soaking up the system's resources in the process.

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Banks should have acted tougher with Kingfisher

Image: Vijaya Mallya.
Photographs: Reuters.

Kingfisher should probably, on purely economic grounds, have shut down two years ago.

Its business model had been shown up as unworkable well before then, and it was clear that the management and owners were incapable or unwilling to change it.

Yet banks, especially public sector banks, threw good money after bad into the airline.

Kingfisher owes Rs 7,000 crore (in principal alone) to 17 lenders; they are now non-performing assets for, in particular, SBI, Bank of Baroda, Bank of India and Punjab National Bank.

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Banks should have acted tougher with Kingfisher


Photographs: Reuters.

The banks are concerned that they will get just a fraction of this money back. If they were not scared, would they be so desperate to keep a company alive that should so obviously be shut down?

Clearly, the banks had lent too much - and, given that the company in question is owned by a member of Parliament, questions must be asked about those decisions.

Banks should be conservative with their depositors' money, and that they chose to raise their stake in a large, troubled company in a risky sector – after paying a hefty premium of 70 per cent on the share price – needs further explanation.

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Banks should have acted tougher with Kingfisher


Photographs: Reuters.

The kid gloves with which Kingfisher has been treated are visible, too, in the puzzling silence over whether its owner and management are criminally liable, under Section 405 of the Indian Penal Code, for defaulting on payments to their employees' provident funds.

Given that many of the promoters' assets are pledged, including the Kingfisher brand itself, the airline's creditors should have been able to force a result to their liking.

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Banks should have acted tougher with Kingfisher


Photographs: Reuters.

Instead, they have delayed the inevitable, at great cost to their depositors, Kingfisher's employees, the aviation sector and perhaps even the systemic stability of India's financial sector.

True, Reserve Bank of India Deputy Governor K C Chakrabarty denied on Monday that any systemic risk was posed by bank lending to Kingfisher.  

It is certain, though, that unless the lessons of this episode are learned, and banks are more ruthless even with well-connected enterprises, systemic troubles from bad debts are inevitable.

 


Source: source