Vijay Mallya affair has exposed the rot in banking sector

Circa 2006: Vijay Mallya, chairman of the erstwhile Kingfisher Airlines, had called a select gathering of journalists at a plush south Mumbai hotel.

The occasion?

To announce an advisory board for the airline, then hardly a year old. But why did Mallya want to make such a show of a mere advisory board? He had good enough reason. There were eminent personalities from the aviation field worldwide. On board was Sir Ralph Robins, former chairman of Rolls-Royce, Sir Colin Terry, former chief engineer and head of logistics, Royal Air Force, Stewart John, OBE, former engineering director of Cathay Pacific Airways, Karel H Ledeboe, former EVP (Operations) of KLM Royal Dutch Airlines and COO of Swiss International Airline and David Turnbull, former Chairman of Swire Pacific Ltd and Cathay Pacific Airways.

Mallya, smoking a thin cigar and sipping his drink, hardly talked about his airline, and let the gentlemen gathered there do the talking. Some said they were excited about coming on board an airline as young as Kingfisher, as India’s potential in air travel was just unravelling.

Others likened him to the maverick British entrepreneur Richard Branson, owner of Virgin Atlantic, who used fun ways to promote his airline, posing with bikini-clad models and racing cars or performing other such stunts.

There was another reason why Mallya was bullish about an advisory board as international as this one. He was toying with the idea of buying one of the most talked about airline at that time in the low-cost space – Air Deccan, which he subsequently bought, and which had by then completed five years of operations and was eligible to fly abroad. Buying Air Deccan would give him teeth to challenge the domination of Jet Airways and Air India on international routes.

Cut to 2016. Mallya escapes the country in a Jet Airways flight, reportedly, from the New Delhi airport, to London. He is a top defaulter, owing as much as Rs 7,000 crore to 17 public sector banks, led by the State Bank of India.

He had just been handed over Rs 515 crore by British liquor giant Diageo, which had taken control of Mallya’s United Sprits in 2014 and wanted to ease him out of his position as chairman. But he can’t get this since banks have stalled the money from reaching him through a court order.

They also, ironically, appealed to the apex court to prevent him from leaving the country, although he had already taken flight, as revealed by attorney general Mukul Rohatgi before the court.

Mallya could have been just another failed entrepreneur, especially since he placed his bets in the highly risky aviation industry. But his case was different. He was spreading himself thin across businesses – acquiring Scottish bulk liquor maker Whyte and Mackay, owning a newspaper, fashion and movie magazine, a cricket franchise, a football team, a Formula One team – even when his airline business grounded after consecutive years of failure.

Perhaps the one biggest factor that pulled down his business would have been Air Deccan, which he had big plans for. Renamed as the low-cost Kingfisher Red, the airline cannibalised on the premium brand, at a time of intense competition in the Indian skies. Finally, with accumulated losses of Rs 8,200 crore, salaries and airport dues unpaid, the airline was grounded in 2012.

While one could have accepted him as a failed entrepreneur, his subsequent demeanour that seemingly mocked the entire system was unacceptable to many. How could a defaulter lead such a flamboyant life, going around in a private jet attending parties, or owning F1 teams when thousands of his staff were rendered jobless and unpaid? But the questions are not just to the promoter.

How did these banks lend to Mallya in 2010, despite knowing that the money was going down the drain? Was it because they were still optimistic? The realisation came late in late 2011-2012, when banks started declaring Kingfisher as a non-performing asset. Even an attempt by some banks to convert some of the debt into equity backfired, as Kingfisher's shares crashed on the bourses.

The Mallya episode has exposed the rot in the banking sector, which is straddled with bad loans of Rs 2.11 lakh crore for the decade to 2015 alone.

In the high growth phase of the Indian economy, public sector banks were in a high lending mode, disbursing loans to big projects, but in many cases without considering all the pros and cons of these businesses. These banks neither had the manpower nor the inclination to adequately appraise such projects, resulting in several loans turning bad.

Add to this a legal system, which while tough on retail borrowers, but seemed to allow large corporates go scot-free. In Kingfisher’s case, the banks may never get to recover their money, unfortunately, as there are hardly any assets left in the company that can fetch them such high valuations. The other option is to gun for Mallya’s personal assets, but that can get caught in legal tangles and will be time-consuming.

Perhaps, Mallya has had the last laugh in this episode. But his case is just the tip of the iceberg. Will banks show a similar rigour, albeit late, in bringing the rest of India Inc’s defaulters to book? That will determine if the government and state-owned banks are really keen to clean up a messy system marred by crony capitalism and favouritism.