Mallya’s Offer to Banks: Discretion is the Better Part of Valour

Recovery of loans & not teaching the defaulter a lesson should be banks’ goal in Mallya’s case, writes Hetal Dalal.

Banks have rejected Vijay Mallya’s offer of Rs 4,000 crore by way of partial settlement for dues worth Rs 9,000 crore. But should banks have actually settled for this amount?

Mallya has been categorised as a wilful defaulter in his personal capacity. On the one hand, there is evidence that he has the assets to pay more. The Enforcement Directorate (ED) appears to have evidence that suggests Mallya had siphoned part of an IDBI Bank loan to procure assets abroad.

There are several other violations being talked about – big and small. Mallya’s attitude isn’t helping matters either. His perceived arrogance, despite the defaults, has led even the RBI Governor to make a veiled reference to him when talking about defaulters. While all of this is true, lenders need to decide what is the final goal in pursuing Mallya – to recover their loans, or to teach him a lesson, or both.

Saga of Bad Loans

• April 7: Consortium of banks led by State Bank of India reject Vijay Mallya’s proposal to repay Rs 4,000 crore of the Rs 9,000 crore due for payment.
  
• Banks demand Mallya’s physical presence for negotiations; SC asks him to disclose his personal as well as family assets.
  
• Mallya’s case brings back focus on non-performing assets of banks; low recovery levels hint towards weak loan recovery process.
  
• Slow pace of legal system is another reason why it’s prudent for banks to accept the offer in hand.
  
• Due to its high-profile nature, Mallya may have garnered limelight but banks need to go after other wilful defaulters as well.
  

Prudent Approach to Settle the Matter

Making Mallya an example is important – it creates the fear of repercussions that hitherto were not as obvious. But how far should banks go? I suspect Mallya has learnt a lesson or two already. Besides having lost his airline and seeing a significant depreciation of the Kingfisher brand, he has also been pushed out of United Spirits and United Breweries. Shareholders compelled him to resign from Mangalore Chemicals and Fertilizers. Some of his assets have been attached and sold. His wings have been clipped, if not to the extent that lenders would have liked.

Pursuing this to the last possible extent is an effort to seek justice but it is not a practical decision. There is a cost to the pursuit – in terms of time, effort, manpower and legal fees.

Moreover, the legal system is slow (India ranks 178th in Enforcing Contracts in the World Bank’s Doing Business Report 2016), and getting a little bit more money after a decade is not a better resolution.

The weak loan recovery process is also reflected in the banking sector’s 18.4 percent loan recovery level in 2014-15, which is low and has declined from 21.9 percent in 2012-13. Mallya’s offer of Rs 4,000 crore is significantly higher than the average recovery level. Possibly, there is room to negotiate for a bit more, but in the end, I believe settling is a prudent approach.

Nabbing Defaulters Bigger than Mallya

‘Cut your losses before they cut you’ is a phrase that the equity market lives by. Perhaps the banking sector should consider a version of the same. Sure, banks must focus on recovery, but they need to be prudent in deciding when to stop.

Perhaps the sharp media scrutiny of the Kingfisher loan recovery process is also responsible for banks rejecting the deal – they don’t want to appear to be soft. But, there are bigger defaults and bigger wilful defaulters than Mallya – pursuing those recoveries is more important than continuing the discourse with him.

(The writer is chief operating officer of proxy advisory and research firm Institutional Investor Advisory Services. She can be reached at @hetal_dalal)

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