Should banks accept Mallya's Rs 4,000-cr offer?

The repayment/settlement plan offered by Vijay Mallya seems to be a sigh of relief for banks struggling to recover Rs 9,000-plus crore dues from the NRI businessman. Estimates peg the principal loan outstanding at about Rs 7,000 crore at the end of February 2014 with the rest being interest accrued thereafter and penalties for the default.

Mallya has offered Rs 4,000 crore as full-and-final settlement, whereas so far, banks have recovered about Rs 2,500 crore from the UB Group chairman.

So, should banks seize the opportunity?

If the offer is accepted, banks will have to take a haircut of about 30 per cent or Rs 2,500 crore of the total receivables of over Rs 9,000 crore.

Religare Institutional Research analysts led by Parag Jariwala said in a report, "We believe, this isn't a bad deal for banks as it will curb their actual losses to Rs 500 crore (considering principal of Rs 7,000 crore)."

Since banks have already provided for most of the dues receivable from Mallya, any recovery will add to their profits, thereby boosting their earnings and capital.

But the flip side is that banks will lose out over Rs 2,500 crore of dues receivables from Mallya who has the resources but is seeking a bargain from banks.

Mallya along with other UB Group entities holds stakes in seven listed companies. Though share trading in two of them has been suspended since June 22, 2015, these anyways are insignificant in terms of market cap, the most valuable are United Breweries and United Spirits. Mallya and UB Group entities hold shares worth Rs 8,555 crore in these liquor and beer companies based on Wednesday's closing prices; the total value of the UB Group's holdings in the seven listed companies is Rs 8,740 crore. These are based on the latest shareholding data available with BSE and CapitaLine. Even after considering that nearly Rs 4,170 crore of these shares are pledged, the value of rest of the holdings works out to Rs 4,570 crore. If all lenders collectively decide to encash these holdings, they would still get more than the Rs 4,000 crore offered by Mallya. Thirdly, Mallya's other assets like Kingfisher Airlines brand, Kingfisher offices in Mumbai's Andheri suburbs and a villa in Goa, which have been put to auction, are together worth about Rs 600 crore based on their reserve price. Then there is the Kingfisher Towers, whose value is estimated at over Rs 900 crore. Sale of these alone can help banks recover Rs 6,000 crore, and we're not considering many of the valuable assets that Mallya would be holding in his name/group companies abroad.

Also, Mallya will be receiving a total of $75 million (Rs 500 crore) over five years arising from a severance deal with Diageo.

The big issue though is that the recovery process will involve many legal hurdles and time, which could delay the receipts. The question is should they let an entity capable of paying the dues settle for a lesser amount? If they do, other wealthy promoters will more likely follow suit and get away by paying lesser than what they owe to banks. And, if banks don't, it will send a strong message to "wilful defaulters" that they have no recourse but to pay. Either ways, the decision will set a precedent for the country. That's a call lenders have to take collectively.