Bankers forgot the golden rules before the flamboyant liquor baron and lent to an airline that never made profits in its eight years of existence.
Four years ago, Indian liquor baron Vijay Mallya left for the UK on March 2, 2016. This was just hours before a consortium of banks rushed to the Supreme Court seeking his detention and the immediate repayment of outstanding dues on loans. Mallya owed Rs 9,000 crore to banks—an amount he had borrowed in multiple installments to keep his failing airline, Kingfisher, alive.
Since his flight to the UK, the baron has been waging a legal war against his lenders, investigators and the Ministry of External Affairs (MEA) by disputing charges of financial fraud and wilful default leveled against him. The MEA, in April, 2016, revoked his passport. Several rounds of hearings in British and Indian courts have happened since then, which would lead to Mallya being arrested and released within hours multiple times. While the court room drama continues, the banks have become sitting ducks as no money has come back to them yet.
Good money turned bad
Till now, banks have not recovered even a fraction of what Mallya owes to them. Bankers said the original Rs 9,000 crore that was lent to Mallya has now grown to Rs 10,000 crore at least, which includes the accrued interest amount. The Narendra Modi government, which initially, followed up actively on Mallya’s extradition case, seems to be in a waiting mode now. It can't do much since the ball has now landed is in the Britisher's courts.
An immediate extradition of the billionaire looks unlikely. Mallya has an army of influential lawyers who can make things endlessly tough for the Indian side in court rooms. On February 18, the Supreme Court adjourned a plea by Mallya that was seeking a stay on the proceedings initiated by the Enforcement Directorate (ED) to declare him a fugitive economic offender and confiscate his assets. The matter will now be heard in March after the Holi break of the court. To cut a long story court, in the long legal battle, the flamboyant son of Vittal Mallya has so far managed to have a clear upper hand over his legal opponents.
How the cookie crumbled for banks
There was a time when Banks queued up before Mallya's office to gift him loans, with or without collateral. For them, Mallya's name was enough to sign the disbursal forms. There were 17 banks headed by country’s largest lender State Bank of India (SBI), which lent money to Kingfisher over a period of few years (both fund based and non-fund) and issued fresh funding lines when Mallya’s company was struggling to stay afloat.
Close to Rs 1,700 crore was lent by SBI, the lead bank of the group, while IDBI Bank gave Rs 900 crore. Other banks, a mix of state-run and private lenders, contributed a few hundred crore each. Much of the loans was given based on a personal guarantee of Mallya. The other collateral included the Kingfisher brand— one of the rarest cases when a huge sum was lent to a corporate just against the brand name.These banks later converted a sizable chunk of loans into equity. SBI and ICICI Bank had converted Kingfisher's shares at Rs 64.48 each, which was at a 60 percent premium to then prevailing market price. The prices crashed to reach penny stock values within 16 months. Kingfisher has since been de-listed from the exchanges. Clearly, banks wouldn’t earn anything by selling these shares. Neither can they think of reviving the company for the simple reason that they know nothing about the business of aviation. So if they were to recover any loans, they should have sold the shares quickly. This didn’t happen.
What's next for banks?
There is no clarity at this stage on whether these banks will get their money back from Mallya. The Rs 10,000 crore, according to bankers, is a conservative estimate. The actual figure could be more. They can at the best monetize his assets and sell his shareholding in companies. Since Mallya's real estate assets, which include a Mumbai office property, his cars and other personal belongings, wouldn’t fetch much value, banks are pinning their hopes on acquiring Mallya’s stake holding in United Spirits and United Breweries.
Mallya's holding in United Breweries is 11.04 percent which has a value Rs 3,765 crore and that of United Spirits (1.52 percent) at Rs 805 crore. In total, if banks manage to sell these share holdings on February 20, banks would get Rs 4,570 crore— not even half of what Mallya owes them. But even selling this isn’t easy. There are multiple cases in various Indian courts filed by banks and the ED. “Both the ED and banks want a share of these assets. There is no clarity,” said a former chairman of a state-run bank that was part of the Kingfisher loan consortium. But another banker said lender indeed had the first right on the proceeds from the sale of assets, and the ED can claim only those assets where financial fraud is involved.
Last week, Mallya repeated his offer to banks to pay back the principal amount to banks. “I request the banks with folded hands, take 100 percent of your principal back, immediately," Mallya said outside the Royal Courts of Justice in London. But banks, who have dealt with him in the past, don’t attach too much importance to this offer. “These are just statements. Don’t read too much into it. Where is the money?” asked one of the senior bankers on condition of anonymity.
A defiant man
Mallya has never conceded defeat to banks or investigative agencies at any point of the long legal battle of four years. The loans to Kingfisher turned bad in 2012. Since then, no repayment has happened; instead, Mallya has engaged in a war of words with lenders to prove his point that the bad loan happened due to his business failure, not financial fraud. Indian banks and investigators have not been able to make a watertight case against Mallya yet in UK. The liquor baron, who lives in his UK mansion with his family, once made it clear that, “By taking my passport or arresting me, they are not getting any money”. During his good days, Mallya used to be called as the 'King of Good Times'. He still is.
Banks are not too hopeful of any major recovery now. Most of the bankers who had initially negotiated with Mallya on the loans given to Kingfisher, have retired from service. They secretly admit that they have gone wrong in the credit evaluation process. Bankers forgot the golden rules before the flamboyant liquor baron and lent to an airline that never made profits in its eight years of existence.
Even after the red signals were flashing, banks acted too late on recovery, and paid a heavy price for that. The Kingfisher episode has acted an eye opener to their successors in office. New generation bankers are now more cautious on similar cases and are not leaving anything to chance. The Jet Airways, DHFL cases are example. But, Kingfisher will remain as an unhealed wound for Indian lenders. Four years after his exit, the liquor baron who loves sports cars and luxury yachts, still remains elusive, and the Rs 10,000 crore he owes to the banks: a distant, fading hope.
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