IDBI Bank’s Kingfisher Cup Of Woes Spilleth Over

A loan granted in 2009 may not be out of the ordinary unless CBI has specific evidence of wrongdoing.

Vijay Mallya. (Photo: The Quint)

Late on Monday evening, news emerged that the Central Bureau of Investigation (CBI) has arrested at least four senior officials of IDBI Bank in connection with a Rs 950 crore loan sanctioned by the bank to the now defunct Kingfisher Airlines.

According to a report by news agency PTI, former chairman and managing director Yogesh Agarwal and former deputy managing director BK Batra are among those arrested. The news report quotes unnamed officials at the CBI office.

The arrests have shocked many in the public sector banking community.

It's nonsense, said a senior banker who has worked closely with the officials who have been arrested. I am shocked, said another former colleague. Both declined to speak on record.

The CBI is yet to issue an official statement on the arrests making it tough to gauge what prompted them. It would, however, be important to revisit the timing and importance of IDBI Bank’s loan to Kingfisher Airlines.

What Did IDBI Bank Do?

Kingfisher Airlines owes a little over Rs 9,000 crore to banks, which includes principal and interest. Of all the lenders, State Bank of India (SBI) has the largest exposure at an estimated Rs 1,600 crore.

The CBI case, however, does not seem to be related to the money that is owed by the airline. That issue continues to be litigated in court between the lenders and the promoter of the airline – Vijay Mallya. What the investigating agency seems to be pursuing is a particular loan tranche of Rs 950 crore that IDBI Bank sanctioned in 2009.

That investigation has been on for more than two years now.

A preliminary inquiry in the matter was registered in August 2014. According to a Business Standard report at the time, the CBI was looking into why the bank sanctioned an additional loan to the airline at a time when it was already making heavy losses and had a negative net worth.

The bank’s then Chairman and Managing Director, MS Raghavan, was quoted in a news report as saying the loan had been approved by the credit committee and sanctioned when the airline was in good condition.

The Backdrop In 2009

Kingfisher Airlines, which was launched in 2005, was still operational in 2009 and very much a going concern, albeit a loss-making one.

For the quarter ended October 2009, the airline reported a loss of Rs 418 crore.

Two events had put financial pressure on the airline at the time – a recent takeover of Air Deccan and a drop in demand due to the global financial crisis. But 2009 was not the peak of the crisis at Kingfisher.

At that point, there was no indication that the airline would soon be grounded. In fact, as late as 2012, the year that the airline finally shut down, lenders, including SBI, were looking for ways to rescue it.

As such, a loan granted in 2009 may not be out of the ordinary unless the CBI has specific evidence of wrongdoing or corruption in the sanction of that loan.

Was The Bank Being Foolhardy?

Still, it can be questioned why IDBI Bank sanctioned such a large amount in one go? Was it foolhardy to approve such a loan to a loss-making enterprise?

If it was, then IDBI Bank was not the only one.

Most banks erred in assessing Kingfisher Airlines’ ability to repay its dues. Some accepted unrealisable collateral.

According to a 15 March 2016 report in Mint newspaper, Grant Thornton attached a value of Rs 4,100 crore to the Kingfisher Airlines brand alone as late as 2011.

So far there is no disclosure on the collateral backing the IDBI Bank loan to Kingfisher Airlines.

Kingfisher Not The Biggest Defaulter

While Mallya’s Kingfisher Airlines has become the poster child of the bad asset problem, it is far from being the biggest defaulters to the banking sector.

Indian banks had gross bad loans of over Rs 6.7 lakh crore as of September 2016. Large borrowers accounted for 88 percent of those bad loans, according to the Reserve Bank of India Financial Stability Report released in December. 

Among the well known defaulters are large business groups such as the Anil Ambani-led Reliance Group, the Essar Group and the Jaypee group. Each of them individually owe banks far more than Kingfisher Airlines.

(This story was originally published in BloombergQuint)