Let it fail

More bank loans to Kingfisher will be illogical

Is the government being duplicitous about its stand on the increasingly distressed Kingfisher Airlines? There have been several statements from various members of the government and State Bank of India (SBI) that no bailout is planned. These reflect sound economic logic. Government bailouts should be restricted to entities that have grown “too big to fail”, which have made, in the course of their growth, connections so complex and so extensive across sectors that their sudden collapse will gravely affect the real economy. Kingfisher Airlines has a fraction of the civil aviation market — which itself is restricted to serving the creamiest layer of Indians. By no means, therefore, is it too big to fail. If the market decides it should fail, it should be allowed to. No pressure must be applied on state-owned banks to step in to provide additional guarantees and working capital loans to help the airline hobble on.

Concerns have correctly been aired on the subject, given that the trend towards taking on problematic commitments on the part of state-owned banks has become deeply disturbing. A few months ago, SBI declared its Rs 1,500-crore loan to Kingfisher a non-performing asset (NPA). It is difficult for outside observers to comprehend why SBI should deepen its commitment to the troubled company. Standard practice will be to do so only if it is the considered opinion of the bank’s management that the company can turn itself around, and that a clear and practicable business plan has been decided in consultation with the management. This does not appear to be the case with Kingfisher. No state-owned bank, including SBI, should throw good money after bad. Market observers have been justifiably worried about the scale of bad lending in the banking sector. This February, numbers from SBI itself showed that its gross NPAs were at a record high, at 4.61 per cent of its total advances — spurred by, especially, lending to Kingfisher. Indeed, SBI’s stock price fell sharply yesterday after reports that it may have offered fresh loans to Kingfisher. Whether or not banks step in any further, it is definitely true that they are now part-owners of Kingfisher Airlines, having swapped debt for equity earlier. The question of why such an ill-advised move was undertaken continues to be pertinent. Why did banks, especially state-owned banks, invest heavily in an underperforming company in a risky sector?

Civil Aviation Minister Ajit Singh has said that the government cannot tell banks what to do, and that if the banks are satisfied with the company’s business plan, they can lend the hopeful company more money. That seems eminently sensible. However, not all signals from the government have been as clear. Prime Minister Manmohan Singh himself famously said that ways should be found to help Kingfisher get out of trouble. The government needs to unequivocally restate its commitment to allowing unprofitable companies to exit crowded sectors. And state-owned banks, if under even the slightest pressure to lend further to well-connected underperformers, need to stand up and say “no”.