"If you owe the bank Rs 100 that's your problem. If you owe the bank Rs 100 m, that's the bank's problem". This quote has been immortalized by scores of defaulting companies in India over the past two years. Only a few like Kingfisher Airlines grabbed media attention for holding India's top banks at ransom. Even the largest bank in India, State Bank of India (SBI), has been a victim of the wayward and financially sick aviation company's inability to repay debt.
After being in the aviation business for 7 years, the company amassed Rs 70 bn in debt. Vijay Mallya, the promoter of parent company United Breweries (Holdings), made no attempt to stem the steady decline in the company's fortunes. First the jet fuel suppliers stopped giving the airline fuel credit. The unpaid fees to airport operators and other agencies deprived it of licenses. And finally, pilots and cabin crew were forced to leave the cash strapped airline for non-payment of salaries. But instead of holding the promoter responsible, the aviation ministry was at one point considering bailing out the defunct airline. Lack of bankruptcy laws left little recourse for the bankers, who until recently could not even seize the airlines' immovable properties. The promoter meanwhile used the promise of stake sale and FDI in aviation to his advantage. What was most shocking was that the company's CEO took home a salary of Rs 39.9 m in FY13! (as per annual report). Thus the bankers waiting for repayment of crores of rupees in dues were left to look like jokers.
While the government is yet to bring the promoter of Kingfisher to book, at least it has learnt some lessons. The deluge of bad loans in the corporate debt restructuring (CDR) cell has left the government convinced that many are cases of willful default by promoters. Hence the Finance Ministry is setting up a new CDR committee. One that can allow banks to enforce management change in case of willful default. The committee will also scrutinize cases of debt restructuring. In such cases banks will have to outline steps to turn around the companies.
In a country where both availability and cost of capital are constraints for entrepreneurs, wastage of the same by undeserving people is nothing short of a crime. Most importantly, willful default by entrepreneurs can lead to a systemic problem in the banking sector. The PSU banks, in particular, have become a victim of this malaise. With investor confidence shaken, the government will have to ensure that the CDR cell does not indulge more 'Mallya's for 'Kingfisher's.
Do you think the possibility of change in management in financially sick companies will act as a deterrent for willful defaulters?
After being in the aviation business for 7 years, the company amassed Rs 70 bn in debt. Vijay Mallya, the promoter of parent company United Breweries (Holdings), made no attempt to stem the steady decline in the company's fortunes. First the jet fuel suppliers stopped giving the airline fuel credit. The unpaid fees to airport operators and other agencies deprived it of licenses. And finally, pilots and cabin crew were forced to leave the cash strapped airline for non-payment of salaries. But instead of holding the promoter responsible, the aviation ministry was at one point considering bailing out the defunct airline. Lack of bankruptcy laws left little recourse for the bankers, who until recently could not even seize the airlines' immovable properties. The promoter meanwhile used the promise of stake sale and FDI in aviation to his advantage. What was most shocking was that the company's CEO took home a salary of Rs 39.9 m in FY13! (as per annual report). Thus the bankers waiting for repayment of crores of rupees in dues were left to look like jokers.
While the government is yet to bring the promoter of Kingfisher to book, at least it has learnt some lessons. The deluge of bad loans in the corporate debt restructuring (CDR) cell has left the government convinced that many are cases of willful default by promoters. Hence the Finance Ministry is setting up a new CDR committee. One that can allow banks to enforce management change in case of willful default. The committee will also scrutinize cases of debt restructuring. In such cases banks will have to outline steps to turn around the companies.
In a country where both availability and cost of capital are constraints for entrepreneurs, wastage of the same by undeserving people is nothing short of a crime. Most importantly, willful default by entrepreneurs can lead to a systemic problem in the banking sector. The PSU banks, in particular, have become a victim of this malaise. With investor confidence shaken, the government will have to ensure that the CDR cell does not indulge more 'Mallya's for 'Kingfisher's.
Do you think the possibility of change in management in financially sick companies will act as a deterrent for willful defaulters?
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