Delayed hard landing

Recalling loans to Kingfisher took too long

At long last, the 18-bank consortium led by State Bank of India has decided to recall all its loans, totalling Rs 7,500 crore, to Kingfisher Airlines. As the management of the grounded airline has no means to repay the loans, the banks can sell the assets pledged to them. The list includes promoter Vijay Mallya’s fancy villa in Goa, Kingfisher House in suburban Mumbai, helicopters and shares of United Spirits. The banks have said the collateral is enough to cover the dues, though many doubt this claim, and with good reason. This action is the logical closure of the airline’s flight to bankruptcy — but it should have happened a long time ago. Instead, the bank consortium inexplicably gave more and more time to the airline and Mr Mallya, in the apparent expectation that repayment would somehow be made. The airline still claims that all wages will be cleared and it will restart operations soon; but it has failed to produce a tangible financial plan. In this situation, a loan recall is the best option. But that doesn’t mean that questions should not be asked about how long it took, and why good money was thrown after bad.

There were enough signals for the banks to realise that all wasn’t well with the airline. The first round of restructuring of Kingfisher Airlines’ debt was carried out way back in November 2010. In April 2011, the banks converted part of the debt into equity. (This was done at almost Rs 65 a share, which was a 60 per cent premium to the market price; the current share price of Kingfisher Airlines is around Rs 10.) But that didn’t help either. The airline continued to bleed. By the end of the year, the airline had become irregular in repayment of its debts. As a result, some of the banks classified the loans as non-performing assets, or NPAs. And then, for over a year nothing happened. It is only now that the banks have finally decided to bite the bullet and recall their loans to the bankrupt airline. It is difficult to see this as anything but a classic example of how banks can provide too long a rope to influential businessmen. As a result of this tendency, badly managed but well-connected ventures drag on for much longer than they should, tying up and risking depositors’ money. Banks need to take corrective steps at the first sign of mismanagement.

The government, too, was excessively accommodative of Mr Mallya. In September last year, it allowed foreign airlines to own up to 49 per cent of Indian carriers like Kingfisher Airlines. This would have gladdened Mr Mallya’s heart; the decision, it was hoped, would help re-capitalise his airline. It’s been five months since then, but Kingfisher is yet to find a strategic partner. It wasn’t till October 2012 that the Director General of Civil Aviation suspended Kingfisher Airlines’ licence over safety concerns. In December, the licence lapsed as the airline did nothing to address the issues. Mr Mallya, who is a sitting Rajya Sabha MP, has received more chances and cash to revive an airline with a failed business plan than, perhaps, a less influential and visible entrepreneur would have. Banks’ boards should demand accountability of management if depositors’ money is not recovered; and special treatment for Kingfisher should not persist through the process of recovering pledged assets.