India's State Owned Banks come under Scrutiny over Huge Loans to loss making Airlines

India has a massive state owned Financial sector where the largest banks like SBI,Mutual Funds like UTI and Insurers like LIC are controlled by the government.While these companies have been performing well in India’s super fast growing economy,their state control leads  their stock prices to trade at a discount from their private peers.While their growth and margins are comparable to the private and foreign owned banks in India,the P/E multiple is much lower despite lower risks.The cause of this discount become apparent when you consider some of the loans these banks make.India’s state owned UTI had come under a cloud in nineties for making investments and loans to favored companies.Now a new controversy has been generated by India’s public banks making massive loans to the loss making airline sector

The UTI Scam- Rediff

Former UTI chairman P S Subramanyam and two executive directors — M M Kapur and S K Basu — and a stockbroker Rakesh G Mehta, were arrested in connection with the ‘UTI scam’.UTI had purchased 40,000 shares of Cyberspace between September 25, 2000, and September 25, 2000 for about Rs 3.33 crore (Rs 33.3 million) from Rakesh Mehta when there were no buyers for the scrip. The market price was around Rs 830.The CBI said it was the conspiracy of these four people which resulted in the loss of Rs 32 crore (Rs 320 million). Subramanyam, Kapur and Basu had changed their stance on an investment advice of the equities research cell of UTI.

Banks make Questionable Loans to Loss Marking Airlines

India’s Airline Sector has been characterized by overcapacity,low occupancy,high fuel costs and over competition.This has led to huge losses for these companies.A number of these airlines have huge payables on their Balance Sheet as they constantly face cash and funding problems.In this scenario,large loans to such risky firms naturally raises pointed questions.Some of the banks like IDBI have seen management changes as a result of the scandal this has created.Note the airline sector has seen a turnaround with the economy firing on all cylinders,however it will take some time for the sector to see boom times.

IDBI lent Rs 900 cr to Kingfisher against rating panel’s views – FE

In what might further muddy the recent controversy over banks’ exposure to airline companies, state-owned IDBI had lent Rs 900 crore to Vijay Mallya-owned Kingfisher Airlines in 2009.Sources say the bank financed the airline against the recommendation of its own internal rating committee. Interestingly, S Ananthakrishnan, the then ED, and in charge large corporations, has been transferred to the training department.Anathakrishna has been replaced by Vinay Kumar. The reshuffle was initiated by Yogesh Aggarwal, the then CMD.