The final call on Kingfisher Airlines would be an important development for the economy and the banking sector. Banks have an exposure of Rs 7,800 crore to KFA. From the bankers' perspective, with an exposure of Rs 6000 crore in as early as 2010, which subsequently jumped to Rs 7800 crore, it was not an easy call to make as an account of this magnitude would be classified as non-performing assets (NPAs).
In an interview to CNBC-TV18 two banking stalwarts, AK Purwar, former chairman of State Bank of India (SBI) and RK Bakshi, retired executive director, Bank of Baroda share their view on the steps taken by banks and the Indian banking norms.
Below is the verbatim transcript of the discussion on CNBC-TV18
Q: Should bankers have taken this decision in 2010? Is it necessary that bankers should be more strict when a rescheduling is given because it does look like even the Reserve Bank of India (RBI) thinks that banks are happy rescheduling it?
Purwar: What was the total exposure of the banking system on Kingfisher? It was Rs 6000 crore plus. If one account of this magnitude goes into non-performing assets (NPAs) and going down the drain, banking system would take all possible steps to see to that this account gets restructured and may be revived. Unless they see that there is no chance of its revival, they would continue to feed it, continue to give oxygen to it, continue to see it revive.
Q: Can bankers, and that too 17 banks take an exposure of Rs 6000 crore and not go deeply into an industry which has not performed very well globally? Many bankers have told me that the group itself had some problems of repayment or some problems regarding the way it managed its finances, are Indian bankers less diligent?
Purwar: I would be the last person to agree to this statement. I believe that Indian bankers including public sector and private sector banks are as diligent as any other world class banks could be. We are very strict on diligence side.
Q: Most foreigners who look at this case tell me that in any other country he would have died long ago. Is this true?
Purwar: I have worked abroad. I have seen what has happened throughout the world. In many countries such big exposes are not allowed to languish. Kingfisher is the third big airline of the country, after going out in the market and the impact it had on the customers, consumers is different and therefore every economy, every society, every country and those bankers who have told you, they have told you wrong. Every country tries to make sure that such companies survive unless they find there is just no way they can survive.
Q: This case went to rescheduling as it did not go through the corporate debt restructuring schemes (CDR) scheme. Was that a mistake?
Bakshi: Not necessarily. CDR is only a mechanism where various bankers if more than two bankers are involved they can sit together and CDR has a structured mechanism of evaluating as well as monitoring the accounts but it does not mean that bankers per se cannot have that mechanism within their fold also. So, there are certain financial parameters which CDR generally follows.
Q: Is the CDR mechanism better than a non-CDR mechanism and if not, why not? Should you not ask him why you are not getting into more economy class kind of ventures? Why are you expensive in the way you recruit your air hostesses, in the way in which you give gifts or the way in which you advertise? Should they not have asked minute questions, got into every single decision making so that their money was saved?
Purwar: Any restructuring done under CDR mechanism is superior to the restructuring done directly because there is a huge amount of monitoring done as a part of the system. Many banks try to do it whenever they do the restructuring and I am sure Bank of Baroda, State Bank of India also do it, whenever they do restructuring.
Decided restructuring done under CDR mechanism is far superior for the system as a whole because it puts lot of responsibilities for monitoring on certain banks and certain institutions and follow-up, control, supervision, monitoring of the cash flows is definitely better.
There should have been systems and control that when first restructuring was done there should have been lot more control on this account to cut the flab, to control the extravagant expensive, if they were any. I am sure there must have been and to see to it that the company starts following sound economic policies to review perhaps there was some.
Q: Now the CDR and the restructuring mechanism is going to get tighter and the RBI is not going to allow this lower provisioning for new accounts from April 2013 itself. From April 2015, it is going to be a 15 percent provisioning even if you reschedule. If this existed in 2010, maybe things would have been better or even if this was there in 2005 when the first loan was sanctioned, bankers would have been more alert while giving you loans?
Bakshi: While I partly agree that stricter restructuring norms would benefit but not this provisioning part alone. The other part, the monitoring mechanism, the promoter contribution, the financial guarantee but ultimately account can come to the stage of restructuring or NPA on internal factors or external factors or a combination of both.
In many cases we see there is a lot of restructuring happening purely because of external factors, environmental clearances not available, iron ore is not available, coal is not available, gas is not available, nothing to do with the promoter. In certain cases it maybe a case of business model going wrong like it happened in the case being discussed.
Financial restructuring, done by banks under pain of stopping it from being NPA or otherwise cannot succeed unless there is a business restructuring in these cases. Business restructuring is where the focus should have been put and that is my main point.
In future, more focus should be placed not only on the financial projections but what is the credibility, what is changing, is he cutting expenditure, is he doing business restructuring, is he bringing consultant to see that his business model is getting more right. Leave aside those which are affected by external factors.
Q: Could banks under the current dispensation have done it or should do it? For instance, in Ispat case it was ensured that it went to a stronger hand like Jindal, they took 10 years and they had a strong player. In aviation at that time, everybody was bleeding but was there a case for bankers to just move into the boardroom when there was repeated red on the balance sheet and on the P&L in 2010? Just go on with Mallya, speak to private equity investors , tell him that you don’t make the decisions anymore, would that have been possible or is that not something which we can even contemplate in the current banking system?
Purwar: No, that is very much possible. In fact, wherever we do the restructuring, it gives lots of rights to the banking system. It is a question of exercising those rights. I would take what Bakshi said that financial restructuring is not the answer, what is much more important is that business restructuring.
Business should go in proper direction and there should be some economic exercise in case you don’t have sufficient money in the pocket. The business has to be put in a way which starts generating surpluses and here is where banking system could have played a bigger role. This is where a restructuring done in the CDR mechanism is to put a lot of things in the hands of bankers to put monitoring system properly, to put the system of checks and balances properly in a company where accounts have been restructured.
Q: In the form of CDR, maybe the banking division in the ministry and the RBI can keep a body of private sector experts who can draw to ensure that there is actual business restructuring. Could that be a step forward before we wait for these big companies build to give us another liquidation process?
Bakshi: I definitely made the point that we should have experts who should be engaged whether government keeps a roster of that or CDR keeps that is a matter of discussion. So restructuring does help, in this case a lot of hopes are build on the economy continuing to do well and so many external factors have come in. In some cases internal factors have come in.
Q: Bankers until a year ago thought that it was still better to bet on Mallya than to bet on something else. Is it something in which maybe the majority went wrong?
Bakshi: Bankers should never become venture capitalist. When we start getting into domain where you are lending with proper equity and a good business model, fine but where you are putting hopes on the customers dreams and his confidence, whether you don’t have and you are giving him even debt which is either camouflaged or directly converted into equity that is where more circumspection is required.
Purwar: I would like to add that Kingfisher is only one side problem. Look at the whole infra space. There is a huge amount of sickness around and some of the companies which are sick today are very good companies. They have provided huge amount of services to the society. They can’t be allowed to go under. So, CDR mechanism has to be further strengthened to ensure that such good companies are protected.