Is the game over for Rich Men of Poor Companies?

The Finance Minister’s take on NPAs

It seems the year 2013 will be marked as the golden year in the era for the non performing assets. During the recent quarterly review meeting with the banking officials, Finance Minister P Chidambram clearly mentioned his intention that Rich promoters of sick companies will not be tolerated any more. While talking to the bank officials, Chidambram discussed about the increasing NPA or the Non Performing Assets and issues pertaining to its recovery. With the overseas market showing signs of weakness, a poor performance by the Gems and Jewellery sector was identified as one of the key reasons for the rising bad debt. It was well countered by FM saying that the business men after such businesses are the big movers of cash and indulged in ostentatious display of wealth.

Debt in Aviation Sector

Talking about the debt ridden aviation sector, it was found that Kingfisher airlines topped the list with over 7500 Crore of debt from a consortium of 18 banks. In order to recover the money, the FM mentioned that affluent promoters of such companies wont be tolerated by the government, and in months to come such businessmen will lose their mansions, private jets, yachts, luxury cars, paintings etc. in a move to recover the loan lent by the banks.

Effect of Such NPAs on the Economy

In a move to safeguard government from bailing out these business empire or the banks who are suffering losses due to huge debt, it was decided that the government cant be seen soft on errant businessmen, as at the end it’s the PSU banks or the government which suffers the loss making a negative impact on the growth of the economy. PSU banks have been ordered to prepare the list of the Top 50 “willful” defaulters who have not paid loans, despite having sufficient cash flows and high personal networth. The year 2012 saw a steep rise in defaulters. As many as 7370 cases were registered (including the private banks) for the defaulters involving a sum of over INR 58,556 Crore. This very well indicates the NPAs have been rising and eroding the prospective profit from the bank’s balance sheet. As a result of such default, a poor performance on the banking sector stocks is seen.

As far as the state owned banks are concerned the defaulters are dealt with very calmly and the banks suffers losses due to compromise plan with the defaulters done only to reduce the NPAs. In a research it was found that the loans given to the corporates are given on the shares as collateral, if all the shares of the companies are sold, banks will not be able to raise the amount of loan disbursed. The valuation of shares are well below the liabilities and at the ends its just the state owned banks who suffer the most either due to compromise plan or due to the bad debt.

Debt Restructuring

In case of Kingfisher airlines too, the debt restructuring of Nov 2010 done on equity was not successful and by the year 2012 it was clear the company will not be able to repay the loans as it reduced servicing the interest. Upon checking with the assets of Chairman Dr. Vijay Mallya it was found that many of the assets kept as collateral were not actually his, but borrowed from places across the world. This includes a royal 95 meter yacht rented on a 30 day per year basis from Qatari Sheikh.

Read on GWI Kingfisher – the King of Good Times is facing a Tough Time!

In the year 2008 during the Lehman Crisis, RBI the apex bank allowed the banks to recast the debt of viable business facing liquidity crunch. As a result of which, in order to improve the business, the window was misused and over 15% of such re-casted loans turned bad. (In some cases the numbers is as high as 20%). However to check the future shortcomings in the banking industry, RBI asked banks to make provisions pertaining to the promoters contribution in restructuring. The current 15% contribution is likely to be changed to a quarter, which will in some manner help the banks in future while disbursing loans which are safe enough.

Thus at last, it seems that the Indian banking industry despite showing improved business is failing badly when it comes to NPA and a strict policy from the Finance Minister and the RBI needs to be formulated to recover the loans from the rich businessmen who are willfully defaulting the loans.