Fraudster or fall guy?

VIJAY MALLYA: It is not clear how banks determined Mallya alone as 'wilful defaulter' when 10 industrial groups have debts up to Rs 1,25,000 crore eac

We are witnessing the spectacular show of liquor baron and Rajya Sabha Member Vijay Mallya being chased like a thief by the might of the State, the CBI and ED, after he was declared a ‘wilful defaulter’ by some of the banks in the consortium which had lent about Rs 9,000 crore to Kingfisher Airlines (KFA), which is now defunct. 

Confusingly, the CBI had issued a ‘look out’ notice, but not a ‘detention order’ we are told, as an explanation as to why he was not detained at the airport. All the TV channels are repeatedly relaying old canned movements of his, his photographs with the KFA’s young air hostesses, as if that was the crime. The CBI is investigating the ‘criminal conspiracy with IDBI and siphoning off the resultant borrowed funds of about Rs 800 crore’.  

To put things in perspective, the total Non Performing Assets of Public Sector Banks as of October 2016 is about Rs 4 lakh crore, which, incidentally, is 1.5 times the market value of these PSB lenders! KFA’s loan amount is Rs 9,000 crore, of which Mallya says he has returned Rs 2,500 crore through asset sale and another equal amount as deposit in courts which can be used to clear the loan.

It is not clear how banks determined Mallya alone as ‘wilful defaulter’ when 10 industrial groups – listed by Credit Suisse in its report House of Debt – including  GVK, Videocon, Lanco, GMR, JSW, Jaypee, Adani, Essar Vedanta and Reliance all have debts ranging from Rs 35,000 crore to Rs 1,25,000 crore each.    

Out of this debt, about Rs 1.17 lakh crore debt by Jaypee, Essar, GMR and Lanco, are rated as default debt by Credit Suisse. However, none of these company barons are declared as ‘wilful defaulters’ by the banking system. So, the crime of Mallya seems to be his transparent flamboyance and epicurean lifestyle.

On the other hand, the TV media has not highlighted enough the more important issues – why is there such a huge difference between the NPAs of PSB and private sector banks?  Similarly why are PSBs so less profitable compared to private sector banks?  We will be told “it is the financial inclusion”, though farmer suicides go to show how little they have penetrated rural areas where the nimble money lender still has the sway. 

It is common grapevine that about three quarters of bad loans are made under political diktat and another quarter induced by bribe, such as the IDBI’s case for KFA. The only way to be rid of this is through privatisation of PSBs, because public sector in general – whether it be banks, Air India, BSNL or BEML –  is afflicted by the syndrome of ‘Agent without a Principal’, that is, they act as agents with no principal, because the principal – the government – is handicapped by various factors to extract accountability from them. Parliament’s Public Accounts Committees visit them only for being pampered but have least idea of their business. 

Also the information asymmetry of the manager (CEO) and the boss, who is the government secretary, is so huge that the former can pull wool over the eyes of the latter.  In contrast, in the private sector, if a firm is doing badly, the shareholders can exit, bring the market price down and even replace the management.

In short, the public sector is for public sector employees first, and then for politicians and bureaucrats and last of all, to the public. The idea of making public sector efficient by good governance is simplistic and has not worked. We have wasted enormous amounts of money in restructuring Air India, HMT, HAL, etc only to see that money is spent but disease remains. 

Political diktat

Let us not forget, in the shortest possible time, Kingfisher was the numero uno in Indian skies. Then you had 5/20 rule: 5 years domestic flying experience and 20 aircraft – an entry barrier created for Air India and by Air India for its own survival, just like TRAI and Telecom Department disallowed 3G spectrum sharing, because it would affect BSNL adversely – and Air Deccan became the ‘vanishing deer’ of Ramayana for KFA. So, KFA’s inability to pay the loan was just a bad business decision; nothing criminal about it. For 5 times bigger losses, the government is propping up Air India for ever.  

It seems the system is so rotten that anyone can be arbitrarily criminalised by putting on him the label ‘wilful defaulter’ which is highly subjective;  if not, why others who have borrowed much more not enlisted similarly, when an independent agency, Credit Suisse has indicated much bigger magnitude of potential default? What has the Bank regulator, RBI done to reduce NPAs and the truant banks?

One thing is puzzling.  The whole idea of limited liability in company form is to insulate the individual from the firm and limit the liabilities to the firm. Accordingly it would appear that if KFA defaults on its loan, it should be wound down, its assets sold and distributed to lenders. Mallya being involved personally, pledging his personal assets as collateral in his eagerness to save the company looks like what has made his actions criminal.

We Indians seem to publicly glorify poverty and suffering and publicly show a distaste for enjoying good times. We prefer complexity over simplicity – we will give a look out notice but for the officer to act there is a different ‘detention order’. We prefer inefficient public sector over a wily private sector made efficient by good competition such as in telecom. This is certainly not the way to be business-friendly. 

(The writer is former RBI Chair Professor, IIMB and former Member, TRAI)