Quashing a Premature Judgment
India had no patience in denouncing Dr. Vijay Mallya, promoter and CMD of erstwhile company Kingfisher Airlines. There was immense hue and cry to bring him back from the UK. What India must understand is that he is still on trial. The default on the Rs 9,000 crore loan is an economic issue, not a moral one. As the RBI Governor, Dr. Raghuram Rajan, puts it, “moral judgment should be kept out of the NPA question.” Dr Vijay Mallya has been made a scapegoat and will remain so until his trial is concluded. This is because the Indian banking system is rife with issues and he happened to be the easiest face that could be used on the bad loans poster.
The argument is made on the basis of three primary reasons. First, there is a fundamental flaw in the Indian banking system. India is the only democracy where the state owns commercial banks. There are 27 public sector banks (PSBs) in India, which is a high number as compared across the globe. The complication with bankers from the public sector is that they are expected to be civil servants and commercial bankers, all at once. This is a hindrance because the two entities have completely contradictory operational mechanisms. On occasion, bankers from the public sector can be coerced to take unacceptably high levels of risk, resulting in more non-performing assets (NPAs). This may have been one such case. Mallya gave a personal guarantee to obtain further credit in 2010 despite Kingfisher’s consecutive losses for eight years and dark times for the entire aviation industry. Among the medium-sized banks, Bank of India is owed Rs 650 crore. How a bank could lend over Rs 600 crore after being pledged office stationery remains a mystery.
Second, the NPA problem is more unique to PSBs than to privately owned banks. The consequences of rising provisions for bad loans are not unknown. They hurt bank profits and curb credit growth. An amount of eight trillion rupees, 11.2 per cent of India’s total debt, is under the stress of bad loans. 85 per cent of the eight trillion is owed to public sector banks. The gross NPAs of public sector banks increased from 5.43 per cent as on March 2015 to 7.30 per cent as on December 2015. The total losses of nine out of 18 public sector banks that have declared their March earnings till May 17 now stand at Rs 14,808 crore.
Third, the motive of the banks in this particular case seems unclear. The consortium of 17 banks refused to accept a settlement offer of Rs 4,500 crore that Mallya was offering. This makes one wonder if the banks are after the money owed to them or Mallya himself.
In conclusion, the Indian banking system has a long road ahead of it. Here is hoping that it won’t look for more businessmen to sensationally deflect their systemic issues on.
Arushi Kotecha is a student of NMIMS, Mumbai. She won second place and INR 2500 in the May edition of the Essay Writing Competition Conducted by Meghnad Desai Academy of Economics.