In an Ocean of Corporate Defaulters, Vijay Mallya is a Small Fish

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The process of extraditing Vijay Mallya started on April 18, 2017. As a part of the process he was arrested and then later released on bail.

Newsreports suggest that the Indian government has taken up this issue with the British government at the highest level. What this suggests that there is a political will to get Mallya back to India and prosecute him. Indeed, that is a very good thing.

Having said that, in an ocean of corporate defaulters and bad loans of banks, Mallya is a very small fish. A newsreport on Moneycontrol points out that Mallya owes banks and the service tax department around Rs 9,000 crore. This includes the principal loan amount, interest on the loans as well as penalties.

Now compare this to the total gross non-performing assets(NPAs) or bad loans of Indian banks. These are loans which borrowers have defaulted on and stopped their repayment. As of December 31, 2016, the gross NPAs of banks stood at Rs 7,23,323 crore. The gross NPAs of public sector banks, to whom Mallya mainly owes money, stood at Rs 6,46,199 crore.

This comparison clearly tells us that Mallya is a small fry in the overall NPA pie. Let’s now look specifically at the corporate NPAs. As of March 31, 2016, the total corporate gross NPAs of public sector banks stood at Rs 3,36,124 crore or 11.95 per cent of the total loans given out to corporates. This is the latest number I could find. There is enough evidence to suggest that the situation has worsened since then. Compare this to what Mallya owes to banks and you know why Mallya is a small fish in the ocean of corporate defaulters.

While the government needs to put all its effort into getting Mallya back to India, it also needs to go after other defaulters sitting peacefully in India. This is something that hasn’t really happened up until now.

Let’s take a look at Table 1. It shows the non-performing assets recovered by the public sector banks over the years.

Table 1: NPAs of PSBs recovered through various channelsTable 1 does not make for a happy picture. The rate of recovery of non-performing assets or bad loans has fallen dramatically over the years. In 2013-2014, the total bad loans involved were Rs 1,49,149 crore. Of this Rs 28,052 crore was recovered. The rate of recovery worked out to 18.8 per cent.

In 2014-2015, the total bad loans involved were at Rs 2,26,529 crore. Of this Rs 27,849 crore was recovered. The rate of recovery worked out to 12.3 per cent. In 2015-2016, the rate of recovery fell further. The total bad loans involved were Rs 1,91,464 crore. Of this Rs 19,757 crore was recovered. The rate of recovery worked out to 10.3 per cent.

Hence, the rate of recovery of loans has fallen on the whole. How does the scenario look if we ignore Lok Adalats as a channel of recovery, given that the amounts involved there are on the smaller side. The rate of recovery improves but only a little.

In 2013-2014, 2014-2015 and 2015-2016, the rate of recovery works out to 20.2 per cent, 13.5 per cent and 13.6 per cent, respectively. Hence, the rate of recovery goes up a little if
we ignore Lok Adalats as a channel of recovery, but the difference is not much to change the overall conclusion.

If the government really wants to clean up the mess that prevails at public sector banks, it should be looking to improve the rate of recovery of bad loans. And that will only be possible if banks go after large defaulters with a lot of vigour, something that has not happened up until now.

This will happen only if there is political will for the same because ultimately public sector banks are owned by the government, and if the government wants something to happen it will happen. No bank employee is going to risk his career by going after a loan which has been defaulted on by a large corporate, only to find out that the corporate is friends with a politician.

In fact, the Economic Survey had some interesting data on corporates which had taken
on a lot of bank loans and are now finding it difficult to repay them. Many corporates to which banks lent money now have an interest coverage ratio of less than one. These companies are referred to as stressed companies. This basically means that the operating profit (earnings before interest and taxes) of these firms is lower than the interest that they need to pay on their outstanding debt, during a given period. Hence, these companies are simply not earning enough to pay the interest on the loans they had taken on.

The stressed companies with an interest coverage ratio of less than one, owe a little more than 40 per cent of the loans given out by Indian banks. It is these companies which are essentially holding Indian banks back.

In fact, even within stressed companies (i.e. companies with an interest coverage ratio of less than one) the problem is concentrated among a few borrowers. A mere 50 companies account for 71 per cent of the loans owed by the stressed companies. On an average these companies owe Rs 20,000 crore each to the banking system. The top 10 companies on an average owe Rs 40,000 crore apiece.

This is where the real problem of Indian banking lies. Only if the public sector banks  along with the government can clean this up, will the mess get cleaned up. Whether the government will show the same vigour as it has to get Mallya back to India, on this front, on that your guess remains as good as mine.

The column originally appeared on April 20, 2017, on Equitymaster

The Moral Hazard of Settling with Vijay Mallya

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I’m gonna make him an offer he can’t refuse. Okay? I want you to leave it all to me. Go on, go back to the party. – Don Corleone in The Godfather

Vijay Mallya has made an offer to banks to settle the Rs 9,091 crore that he owes them. He has promised to pay Rs 4000 crore by September 2016. He has also promised to pay Rs 2,000 crore if wins a case against a company, which allegedly supplied defective engines to the now defunct Kingfisher Airlines.

Has Mallya made an offer which the banks should not refuse? Many analysts and experts seem to be of the opinion that banks should take on this offer and in the process limit their losses.  Parag Jariwala, vice-president at Religare Capital Markets told the Mint newspaper thatMallya’s settlement offer to banks is not too bad…The actual loss if banks accept Mallya’s proposal will be just 7% on principal.”

Over the last couple of days many people on Twitter have told me that “something is better than nothing’’ and given this banks should accept Mallya’s proposal and limit their losses. Honestly, this is a very simplistic way of looking at things. It would have perhaps made some sense if Mallya was the only or perhaps one of the few defaulters in town. But that is not the case.

Mallya owes Indian banks around Rs 9,091 crore. This is a very small amount when we look at the total amount of money owed by various corporates to Indian banks. The minister of state for finance Jayant Sinha shared some interesting data in a written reply to a question in the Lok Sabha, on March 11, 2016.

The accompanying table shows us how big the problem of banks’ lending to corporates actually is.

Rs. in Crore
Corporate Lending
YearGross AdvancesGross NPAsGNPA Ratio
2012-1331,11,7611,00,1183.22
2013-1434,06,0251,54,9554.55
2014-1536,15,1331,93,1235.34
2015-16 (till Dec. 15)38,41,8362,60,6536.78

 

The gross non-performing ratio has more than doubled between 2012-2013 and December 15, 2015. It has jumped from 3.22% to 6.78%. The gross non-performing ratio is essentially obtained by dividing gross non-performing assets by gross advances or total loans given by the banks, in this case to corporates.
And how do we define gross non-performing assets? As the per the Reserve Bank of India: “An asset…becomes non performing when it ceases to generate income for the bank.” When the corporate borrower stops paying interest and repaying the principal on a loan (a loan is an asset for a bank), the bank typically allows for a grace period of 90 days. After this grace period is over, the bank categorises the loans as a non-performing asset and starts setting aside money (or making provisions) for it. The total sum of such loans forms the gross-non-performing assets or bad loans.

If we look at total bad loans of Rs 2,60,653 crore, Mallya’s loans of Rs 9,091 crore form only 3.5% of the total bad loans. If the banks decide to settle with Mallya, they will end up setting a precedent. Then other defaulters will also want to settle and not pay up what they owe to the banks. Do they banks really want to end up in such a situation?

While settling with Mallya may not hurt banks financially much, the same cannot be said of a scenario where they were to start settling the Rs 2,60,553 crore corporate bad loans in total.

Also, any such settlement will build in “moral hazard” into the financial system. And what is moral hazard? As Mohamed A El-Erian writes in The Only Game in Town: “[It] is the inclination to take more risk because of the perceived backing of an effective and decisive insurance mechanism.”

If the banks start settling with corporates what is the signal that they are sending to the future corporate borrowers? That it is okay to take on a lot of risk with the money that they borrow from the bank or simply siphon it off. And if things go wrong, they can always settle with the bank for a lower amount.

Hence, it is very important that such a wrong precedent is not set.

On a different note, Mallya’s offer raises several other questions. If he is in a position to pay Rs 4,000 crore to banks why did he leave the country? Or why did he not pay the salaries of the employees of Kingfisher Airlines and leave them in a lurch?

Or does all this tell us that the former king of good times is simply buying time? On that your guess is as good as mine.

The column originally appeared in the Vivek Kaul Diary on April 4, 2016

The Former King of Good Times

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Vijay Mallya must be currently one of the most hated and most discussed people in the country. He has defaulted on bank loans of around Rs 9,000 crore and left the country. At least, that is the way most people who know who he is, look at him. He has come to be associated with everything bad that is currently happening to the banks in India.

Nevertheless, he has become a victim of what is called the availability bias. Leonard Mlodinow explains this in his book The Drunkard’s Walk—How Randomness Rules Our Lives through an example.

As he writes: “Which is greater: the number of six-letter English words having n as their fifth letter or the number of six-letter English words ending in ing? Most people choose the group of words ending in ing.

Why is that? As Mlodinow explains: “Because words ending in ing are easier to think of than generic letter words having n as their fifth letter. But you don’t have to survey the Oxford English Dictionary—or even know how to count—to prove that guess wrong: the group of six-letter words having n as their fifth letter words includes all six-letter word ending in ing.

This type of mental mistake is referred to as the availability bias. As Mldowinow writes: “In reconstructing the past, we give unwarranted importance to memories that are most vivid and hence most available for retrieval.”

Mallya has become the victim of this availability bias. Whenever the topic of corporates and businessmen who have taken loans from banks and not paid them comes up, Mallya’s name comes first. Nobody talks about other businessmen who haven’t paid their loans as well.

Why is that the case? Other than being a businessman, Mallya is also a sports enthusiast and a page 3 regular, who gets regularly covered in the media. Over and above his businesses, from airlines to liquor to real estate, Mallya has also owned an IPL cricket team and a Formula One racing team. Hence, he gets regularly covered in the media and has top of the mind recall among people.

And given that he has a top of the mind recall, the media has covered his loan shenanigans more extensively than other businessmen. Hence, he has become associated with the corporates defaulting on banks loans, more than anyone else.

As Daniel Kahneman writes in Thinking, Fast and Slow: “People tend to assess the relative importance of issues by the ease with which they are retrieved from memory—and this is largely determined by the extent of coverage in the media. Frequently mentioned topics populate the mind even as others slip away from awareness. In turn, what the media chooses to report corresponds to their view of what is currently in public’s mind.”

It’s a little bit of a chicken and egg story here. Because Mallya has top of the mind recall, the media writes about him. And because the media writes about him he has top of the mind recall among people.

Vijay Mallya owes banks around Rs 9,000 crore. As on December 15, 2015, the total gross non-performing assets (or bad loans) of banks of the loans they have given to corporates, stood at around Rs 2.59 lakh crore. Mallya’s contribution to the total corporate bad loans is only around 3.5%. Hence, there are bigger defaulters out there, who the banking system and the government need to deal with, and the media need to write about. But that doesn’t seem to be happening.

This is not to suggest that Mallya is god’s gift to mankind and is being needlessly victimised. At the same time, he is nowhere the villain he is being made out to be. As Mlodinow writes: “By distorting our view of the past, the availability bias complicates any attempt to make sense of it.”

Mallya’s king of good times image, in the minds of people, is now working against him. This is not helping the former King of good times in his bad times.

The column originally appeared in Bangalore Mirror on March 23, 2016

Vijay Mallya Is Just A Small Part Of The Big Banking Problem

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If media coverage were to be a reflection of the scale of any problem, then it can safely be said that Vijay Mallya has all alone been responsible for the crisis in the Indian banking sector.

But that is clearly not the case.

Mallya owes Indian banks around Rs 9,000 crore. This is a very small amount when we look at the total amount of money owed by various corporates to Indian banks. The minister of state for finance Jayant Sinha shared some interesting data in a written reply to a question in the Lok Sabha, on March 11, 2016.

The accompanying table shows us how big the problem of banks’ lending to corporates actually is.

Rs. in Crore
Corporate Lending
YearGross AdvancesGross NPAsGNPA Ratio
2012-1331,11,7611,00,1183.22
2013-1434,06,0251,54,9554.55
2014-1536,15,1331,93,1235.34
2015-16 (till Dec. 15)38,41,8362,60,6536.78

 

The gross non-performing ratio has more than doubled between 2012-2013 and December 15, 2015. It has jumped from 3.22% to 6.78%. The gross non-performing ratio is essentially obtained by dividing gross non-performing assets by gross advances or total loans given by the banks, in this case to corporates.

And how do we define gross non-performing assets? As the per the Reserve Bank of India: “An asset…becomes non performing when it ceases to generate income for the bank.” When the corporate borrower stops paying interest and repaying the principal on a loan(a loan is an asset for a bank), the bank typically allows for a grace period of 90 days. After this grace period is over, the bank categorises the loans as a non-performing asset and starts setting aside money (or making provisions) for it. The total sum of such loans forms the gross-non-performing assets.

It is worth remembering here that a loan being categorised as a gross non-performing asset does not mean that all is lost for the bank when it comes to that particular loan. The bank can recover money from the asset that has been offered as a collateral against the loan. Of course this is not as straightforward as it sounds.

In Mallya’s case, he has also given personal guarantees to banks while taking loans for Kingfisher Airlines. Mallya owes around Rs 9000 crore to banks. This is a very small amount if one compares it to the gross-non-performing assets of corporate lending carried out by banks.

As on December 15, 2015, it was at Rs 2,60,653 crore. Mallya’s Rs 9,000 crore works out to around 3.5% of the total corporate gross non-performing assets. The percentage would be even more lower if we compare it to the total gross non-performing assets.

Also, Credit Suisse in a report released in October 2015 identifies some of the biggest corporates who are having a tough time repaying the money they have borrowed from banks. The Credit Suisse analysts (Ashish Gupta, Kush Shah and Prashant Kumar): “Going through the annual reports available for ‘House of Debt’ companies, we find instances where auditors have highlighted that the company has been in default for a period of up to 360 days. According to their auditors report, eight of the ten ‘House of Debt’ groups were in default last year. Total debt with these companies in default was at US$53 billion (~48% of total debt with the groups) of which US$37 billion were reported to be in default for 0-90 days by the auditors.

The corporates which form the House of Debt group are as follows—Adani Group, Essar Group, GVK group, GMR group, Jaypee Group, JSW Group, Lanco Group, Reliance ADAG, Vedanta Group and Videocon Group.

Hence, the point is that the mess in the Indian banking sector is substantially bigger than just Vijay Mallya. It’s just that Mallya with his flashy lifestyle has become the poster boy for these corporates who have borrowed from banks and are now not in a position to repay.

The finance minister Arun Jaitley has been very vociferous about Mallya and has said: “The facts are very clear: Every government agency will take strong action against him. Banks will go all out to recover every single penny.”

Indeed, that is great. Nevertheless, the question is why just Mallya? What about the other corporates who have borrowed from banks and are now not repaying their loans? They owe the banks close to Rs 2,51,000 crore. Mallya owes just Rs 9,000 crore.

Why is the same aggression missing when it comes to the other borrowers?

The nation wants to know.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Swarajya Mag on March 22, 2016

माल्या को पकड़ना मुश्किल ही नही…नामुम्किन भी है

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A WhatsApp forward I received today morning went something like this: “Mallya ka intezar to 17 bank kar rahe hain…Mallya ko pakadna mushkil hi nahi namumkin bhi hai.” The forward was obviously a play on the dialogue that Amitabh Bachchan made famous in his 1978 movie Don.

Meanwhile Vijay Mallya who owes seventeen Indian banks Rs 9,000 crore(or Rs 7000 crore depending on which newsreport you want to believe) seems to have left the country. The attorney general Mukul Rohatgi told this to the Supreme Court today. Mallya left the country on March 2, 2016, the day the banks moved the Debt Recovery Tribunal(DRT) against him.

The banks had approached the DRT in order to stop the severance payment of $75 million (or a little over Rs 500 crore) that Diageo Plc was supposed to make to Mallya, in lieu of him stepping down as Chairman of United Spirits Ltd. Mallya has also entered into a five-year non-compete clause with Diageo. This payment is supposed to be made over a period of five years.

The DRT directed Diageo not to make any payments to Mallya until the case is disposed of. It has set the next hearing date for March 28, 2016. A report in The Times of India seems to suggest that Mallya may have already been paid $40 million out of the $75 million that he had been promised.

The newspaper quotes the fine print of the agreement that Mallia inked with Diageo on February 25, last month: “Diageo will pay $40 million of this amount immediately with the balance being payable in equal instalments over five years. Diageo’s payment obligations are subject to Mallya’s ongoing compliance with the terms of the agreement.”

The question is why are the banks going after Mallya? In India, the banks going after a corporate defaulter is something unheard of. But this time they seem to have the blessings of the RBI governor Raghuram Rajan.

Also, typically when banks lend a big amount, they lend it against a collateral. The idea is that if the borrower defaults, the banks can sell the collateral and recover their money.

So why are the banks going after Mallya instead of just selling the collateral and recovering their money? This is precisely the question that Justice Kurian asked the Attorney General in the Supreme Court today. “How did you give these loans. Was there no secured assets on these loans?” he asked.

It turns out that the banks had lent against the brand value of Kingfisher Airlines, which at that point of time was worth some thousand crores. After the airline shut down the value of the brand crashed, and the banks ended up with nothing. “We had some assets (as security) for the loans advanced,” Rohatgi said.

The Indian Express cites the 2012-2013 annual report of Kingfisher Airlines and writes that the Kingfisher Airlines brand was worth $550 million. The airline’s brand had been valued by the consultancy firm Grant Thorton. Further, it had been registered separately from the Kingfisher beer brand.

The newspaper further quotes CBI sources as saying: “Lending on the brand value of Kingfisher Airlines is a major concern. We have questioned the banks. It is basically an intangible asset. We are digging into the issue.”

A report in The Hindustan Times points out that IDBI Bank lent Rs 900 crore to Kingfisher Airlines against its brand in 2012-2013. By this time, the airline had already started making losses.

The question that crops up here is that do banks normally lend such a huge amount of money against the brand value of a company, which is clearly an intangible asset. Further, do banks lend money against an intangible asset, to a company which is making losses?

Another important point that needs to be made here is that an intangible asset like a brand normally tends to be overvalued. It is precisely because of this reason companies cannot have the value of their brands on their balance sheets unless they have bought it from someone else.

Given this, why lend so much money against a brand? Interestingly, the Kingfisher Airlines brand name was pledged to 14 lenders. As a report in The Indian Express points out: “The airlines brand name was pledged to 14 lenders, including State Bank of India (SBI), IDBI Bank, Punjab National Bank, Bank of India and Bank of Baroda under a debt recast agreement in which loans valuing Rs 6,500 crore were restructured and converted into equity.”

There is a lot of talk in the media about how could banks lend such a huge amount of money against the Kingfisher Airlines brand. The answer is very simple. The lending happened during the go go years of Indian banking when crony capitalists close to the government of the day, got loans way beyond their repayment capacity. Mallya is not the only such businessman, there are many more.

This explains why the Congress party which is quick to seize-in on any issue which would embarrass the government has been quiet on this issue, up until now. And how about the Bhartiya Janata Party, which is the governing party? The party had supported Mallya’s election to the Rajya Sabha in 2010.

Mallya in his defence wrote an open letter to the media a few days back. In this letter he said: “In fact, banks have NPAs of Rs 11 trillion and have borrowers who owe much more than the amount allegedly owed by Kingfisher Airlines to the banks—a fact never alluded to or widely reported by the media as in my case…None of these large borrowers (whose debt is significantly more than Kingfisher Airlines debt) have been declared wilful defaulters, but unfortunately, United Breweries Holdings and I have been declared wilful defaulters by certain banks on technical grounds. I have legally challenged these declarations.”

This is true. As of December 2015, the total gross non-performing assets(NPAs) of the Indian banking system stood at Rs 3.9 lakh crore. The loans Mallya and his companies have defaulted on form a small part of the total NPAs of the banking system. But that doesn’t mean Mallya should be allowed to get away with it.

In fact, if the government wants the other bid defaulters to pay up, it is very important that it ensures that Mallya is made to pay up. The way things go with Mallya will act as a benchmark for the other big defaulters.

The trouble with Mallya is that he has a very flashy lifestyle. And it is very evident that he continues to flaunt his money despite having defaulted on the loans. As Raghuram Rajan, governor of RBI recently, put it: “If you are in trouble you should show that you care by cutting down your expenses and not flaunting more spending in public.”

Further, the employees of Kingfisher Airlines continue to remain unpaid. Also, the fact that Mallya gobbled up their provident fund payments as well, did not do any good to his image.

The point being that if Mallya had had a less flashy lifestyle like some other big defaulters have, the banks would have probably not gone after him. There wouldn’t have been a public outcry and all the hungama in the media, either.

To conclude, Mallya’s fall is an excellent example of a businessmen going beyond his core area and ending up in huge trouble. Mallya ran a successful liquor business until he thought up of running an airline. And that is precisely where all his troubles started.

Airlines continue to remain a difficult business to run. Only if, Mallya had happened to read what legendary investor Warren Buffett had to say on airlines: The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.

But then Mallya was busy…with his IPL team…with his Formula One team…with his Kingfisher models…with his calendar…

When making a calendar becomes as important as running multiple businesses…guess this is how it ends!

(Vivek Kaul is the author of the Easy Money trilogy. He tweets at @kaul_vivek)

The column appeared originally on Huffington Post India on March 9, 2016