Why there is a need to put an end to 'Banana Banking'

PSU banks face strong backlash against burgeoning NPAs

Between November 2010 and February 2013 a consortium of public sector banks led by the State Bank of India claimed they did ‘all they could’ to recover over Rs 7000 cr due to them from the beleaguered Kingfisher Airlines(KFA). “We are blazing all guns and taking all steps to recovery” SBI Chief Pratip Chaudhury is reported to have said. Kingfisher was put under the Corporate Debt Restructuring (CDR) scheme of the RBI enabling it to avail of various concessions while repaying its debt.

Deep in the middle of the crisis, when a turnaround seemed impossible lenders also agreed to release Rs 60 crore from an escrow account to keep the airline afloat. In return, they took collateral from Vijay Mallya which included two properties, shares in his companies, a corporate guarantee from United Breweries, a personal guarantee and the Kingfisher brand valued at Rs. 4000 Cr – all of which added up to around Rs 6,000 Cr. 

 

But as the health of the airline deteriorated, with KFA’s operations grounding to a halt in October 2012 and Mallya’s plans of revival failing to convince banks and the regulators, lenders had no option but to recall Kingfisher’s loans. Today they have managed to recover only about Rs. 800-1000 Cr and estimates of how much more will be recovered range from 15% at worst to 25% at best. Lenders 23% equity in the airline, brought at a 60% premium in 2011 is now virtually worth junk with the share price plummeting around 400% since. And staking claims on Mallya’s properties without litigation will be difficult as has been witnessed with him getting an injunction restraining banks from making any move on the Goa villa. 
 

All of this has meant KFA which was generously cosseted under CDR for over 2 years has now turned into the worst category NPA for banks – 1/4th of the slippages reported by SBI in Q4FY13 were on account of Mallya’s airline. 

Kingfisher is a classic case of what banks did for years together to hide bad loans – restructure scores of unviable loans out of the belief that a promoter would eventually come around, or under pressure from certain quarters to keep the asset from going bad.

In Kingfisher’s case they justified their actions by saying they were hoping Mallya would recapitalize the airline after selling his stake in United Spirits to Diageo or raising money from foreign partner by selling through the FDI route. It didn’t need rocket science to figure that no foreign airline would want to absorb the large debt Kingfisher had on its books, or that Mallya wouldn’t ‘sell family sliver’ (by his own admission) to rescue his sinking airline. The banks amazingly thought otherwise. 
 

As of June this year, lenders approved CDR packages for 415 companies with an aggregate of Rs 2.5 lakh crores. A sharp increase from 184 cases worth about Rs 85,000 crores that were reported to the cell in 2009. NPAs of PSU banks also soared to Rs 1.76 lakh crore or 4.2% by the end of June and could jump to 5% by March 2014 according to ICRA. 

Evidently, with the problem getting out of hand, the backlash against defaulters and public sector banks is growing. 

Last month the CBI said it was scrutinizing rising defaults in the banking system

 

The Planning Commission has also upped the ante. Media reports suggest Gajendra Haldea, Principal Adviser (Infrastructure) at the Planning Commission has written a scathing letter to bankers slamming them for inadequate due diligence, reckless lending and ‘gold plating’ of sub-prime infrastructure projects. He described banks’ enthusiasm to lend to problematic projects in the power sector as ‘banana banking’. 

But the latest to fire a salvo has been the banking regulator itself. 

First, the newly appointed Reserve Bank Governor Raghuram Rajan declared war against NPAs saying "Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise…”

And now, RBI Deputy Governor KC Chakrabarty who’s been given charge of managing the restructuring and recovery process had this to say in the central bank’s September bulletin. “For the umpteenth time, I reiterate that the reason for NPA is non-performing administration…What is really puzzling is why this affects the Public sector banks the most… In our assessment, the project appraisal and the decision making in public sector banks has been more impressionistic rather than being information based. How else does one defend the eagerness of some banks to fund power distribution companies with negative net worth!."
 

The RBI continues to maintain that NPAs are not a systemic issue yet. But with a crackdown on reining in bad assets, it looks like neither banks nor defaulters are going have it easy any longer. The Indian Express quoting a Finance Ministry note lists out a number of stringent actions the government has advised PSBs to take to recover dues. This includes making use of debt recovery tribunals and the SARFAESI Act which empowers them to recover NPAs without court intervention. 

Clearly the noose is tightening with rapid pace around both defaulters and banks. And one only hopes the momentum continues so we no longer have ‘affluent promoters with sick companies’ as the Finance Minister calls them, eating away at public money.