State Bank of India chasing Mallya is only a first step
The morning after Vijay Mallya and Diageo Plc signed
a deal securing his exit from United Spirits Ltd, Twitter was abuzz with whether this meant that he would get away scot-free while banks were left counting their losses.
The deal had handed Mallya a cheque of $75 million along with immunity against charges of irregularities at United Spirits in return for his exit from the company. Mallya said he would take the deal and move to London. Essentially, this suggested that the probability of banks recovering any more of the Rs.7,800 crore that Mallya and the now defunct Kingfisher Airlines owed to the banks, would come down to near zero.
Mallya had outplayed the system once again. Not so quick, seemed to be the reaction from Arundhati Bhattacharya-led State Bank of India (SBI).
The Diageo-Mallya deal was announced on Thursday, 25 February. By Sunday, PTI reported that the SBI-led lenders consortium will move the debt recovery tribunal (DRT) to stake claim to the $75 million since pending loans were backed by Mallya's personal guarantee. On Wednesday, Mint reported that SBI had actually gone much further. The bank has sought an arrest warrant against Mallya and asked that his passport be impounded.
Whether SBI actually has a strong enough case against Mallya is yet to be determined. But its willingness to do whatever it takes to bring a person and an entity labelled as a wilful defaulter to book deserves a salute.
"There have been enough large defaulters over time that the banking sector has seen but no one who has abused the system so blatantly," said a senior retired public sector banker.
"In the past, banks have always tried to resolve issues behind closed doors, but right now they are under so much pressure to clean their own balance sheets that they are using all tools at their disposal," said this person, adding that banks also need to restore their trust in banking institutions and a zero tolerance approach towards wilful defaulters sends a strong message.
The provisions that banks can use to deal with wilful defaulters have been strengthened considerably since Raghuram Rajan took charge.
Firstly, anyone labelled a wilful defaulter cannot access fresh finance from the banking system. Entrepreneurs and promoters of companies where diversion of funds and fraudulent activities have been found cannot float new ventures for five years.
"The legal process, wherever warranted, against the borrowers/guarantors and foreclosure of recovery of dues should be initiated expeditiously. The lenders may initiate criminal proceedings against wilful defaulters, wherever necessary," adds the Reserve Bank of India (RBI) master circular on wilful defaulters.
The Securities and Exchange Board of India (Sebi) had also started the process to tighten wilful defaulter rules in discussion with the RBI. In a January 2015 discussion paper, Sebi had said that wilful defaulters won't be able to sell shares, debt securities and non-convertible preference redeemable shares to the public. The paper also said that wilful defaulters can't take control of another listed entity. The rules, however, have not yet been finalised or notified. And the reasons for the delay are not known.
Still, the banks are well-equipped with options to take action against wilful defaulters. At least in the case of Kingfisher Airlines and Vijay Mallya, it seems like they are.
Unfortunately, that still doesn't assure a happy ending for the banks. To ensure meaningful change, the banks must look inwards and investigate how these loans were granted. While bringing the defaulters to book, banks, in this case SBI, must equally take its own bankers to task if there was foul play in the loan approval process.
At the same time, the debt recovery system, in particular, DRTs, must be strengthened. The government, which also wants banks to get tough on wilful defaulters, is well aware of this major bottleneck.
"For speedier resolution of stressed assets, the Debt Recovery Tribunals will be strengthened with focus on improving the existing infrastructure, including computerised processing of court cases, to support reduction in the number of hearings and faster disposal of cases," said Arun Jaitley in his Budget speech, reiterating the government's promise to strengthen infrastructure for debt recovery.
The track record of DRTs, however, has only worsened over the years as banks have moved the legal system to speed up recoveries.
The Economic Survey, released last week, showed that more than Rs.4 trillion in cases were pending with DRTs at the end of fiscal 2015. This number was at just about Rs.1 trillion a decade ago. Over the years, the cases have piled up, but the amounts disposed and recovered have not increased.
The Survey cited this as an example of the difficulties in exits in the Indian economy in a chapter titled The Chakravyuha Challenge of the Indian Economy. "The delay in debt recovery creates dynamic efficiency cost on the economy since it prevents the cleaning up of balance sheets of banks and the corporate sector," acknowledged the Survey.
