"If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem," quipped J Paul Getty, the billionaire American industrialist and founder of the famous Paul Getty Museum in Los Angeles. Substitute rupees for dollars and the statement could well come from Kingfisher's Vijay Mallya who, like Getty, is known for his fondness of the good life.
Not that Mallya is likely to make such a statement, not now when he is in the eye of the storm! Indeed, he is on record that he does not intend to seek any bailout. "We've not asked the government to dip into the taxpayers' coffers to bail out Kingfisher. We've never done that; we will never do that," he reportedly said.
He was being economical with the truth. The major exposure to Kingfisher is of public sector banks. So, any loss they suffer when Kingfisher Airlines fails to pay its dues or even delays repayment is taxpayer loss, no less. Having lent around Rs 7,000 crore to the airline, the 13-member consortium of lending banks now faces the unenviable task of deciding whether to provide yet more funds to the airline or call up their loans. The former could be an option but only if banks could be sure Kingfisher would not end up as a basket case; that it would not be a case of throwing good money after bad. Can they?
That is the real dilemma. Getty's remark sums up neatly the plight of banks when they lend to companies that are both too-big-to-fail and too-big-to-save. Failure has serious consequences as it means large write-offs while any effort to save entails giving yet more bank credit without any certainty about repayment. It also explains Mallya's insouciance during the past few months when it was apparent to all and sundry that his airline was flying deeper and deeper into trouble.
The fact is Kingfisher's promoters have got banks where they want them, locked in a fatal embrace where they can neither pull out (not without paying a high price) nor continue as before. Yet, it is not as though the promoters cannot bring in more funds. Kingfisher is part of the UB Group, which owns United Spirits, the country's biggest liquor company, and prime real estate in Bangalore, and has access to deep pockets. Mr Mallya has interests in IPL and in Formula 1 and, according to reports, is among the richest of our MPs. He can raise enough money if he wishes to. Question is, does he?
The fundamental question before banks is, is the airline viable? If not, what are the structural and other managerial changes needed to make it viable. Are the promoters willing and able to make the sacrifices needed to get the company out of its present rut? Are the present cash problems only a problem of liquidity or reflect deeper underlying problems of insolvency? If it is the latter then no amount of additional funding will help. It will only buy time before they are forced to provide a fresh round of funding. And with each progressive round, they will only end up digging themselves deeper and deeper into the hole.
Not that Mallya is likely to make such a statement, not now when he is in the eye of the storm! Indeed, he is on record that he does not intend to seek any bailout. "We've not asked the government to dip into the taxpayers' coffers to bail out Kingfisher. We've never done that; we will never do that," he reportedly said.
He was being economical with the truth. The major exposure to Kingfisher is of public sector banks. So, any loss they suffer when Kingfisher Airlines fails to pay its dues or even delays repayment is taxpayer loss, no less. Having lent around Rs 7,000 crore to the airline, the 13-member consortium of lending banks now faces the unenviable task of deciding whether to provide yet more funds to the airline or call up their loans. The former could be an option but only if banks could be sure Kingfisher would not end up as a basket case; that it would not be a case of throwing good money after bad. Can they?
That is the real dilemma. Getty's remark sums up neatly the plight of banks when they lend to companies that are both too-big-to-fail and too-big-to-save. Failure has serious consequences as it means large write-offs while any effort to save entails giving yet more bank credit without any certainty about repayment. It also explains Mallya's insouciance during the past few months when it was apparent to all and sundry that his airline was flying deeper and deeper into trouble.
The fact is Kingfisher's promoters have got banks where they want them, locked in a fatal embrace where they can neither pull out (not without paying a high price) nor continue as before. Yet, it is not as though the promoters cannot bring in more funds. Kingfisher is part of the UB Group, which owns United Spirits, the country's biggest liquor company, and prime real estate in Bangalore, and has access to deep pockets. Mr Mallya has interests in IPL and in Formula 1 and, according to reports, is among the richest of our MPs. He can raise enough money if he wishes to. Question is, does he?
The fundamental question before banks is, is the airline viable? If not, what are the structural and other managerial changes needed to make it viable. Are the promoters willing and able to make the sacrifices needed to get the company out of its present rut? Are the present cash problems only a problem of liquidity or reflect deeper underlying problems of insolvency? If it is the latter then no amount of additional funding will help. It will only buy time before they are forced to provide a fresh round of funding. And with each progressive round, they will only end up digging themselves deeper and deeper into the hole.
The restructuring in April this year saw banks convert some of their loans into equity (and a premium!). But banks are not in the business of running airlines, or indeed any business, as past experience during the heydays of socialism, when it was common practice to convert loans to equity, has shown. So, while it is good that banks have decided to refuse fresh support until and unless the promoters show their commitment to the airline by bringing in more money, in truth, their options are limited.
In such a scenario, it is best if banks are allowed to decide on purely commercial grounds without any interference from the government. Unfortunately, that seems a tall order. Witness the Prime Minister's statement, "the government will explore ways and means to help Kingfisher", and the civil aviation minister Vayalar Ravi's call to banks to support Kingfisher.
The contrast with industry could not be starker. Corporate India seems to have accepted that successful business is about survival of the fittest. Bajaj Group chairman Rahul Bajaj's statement, "I don't see any logic of bailing out any private sector company for the sake of employees and customers", is a far cry both from the pre-reform days when industry routinely sought, and obtained, generous rehabilitation packages under the guise that they needed to be nursed back to health.
Under the aegis of the Board for Industrial and Financial Reconstruction - set up primarily with a view to resuscitating sick industries - banks were compelled to provide extensive sops to companies that had often been run to the ground by unscrupulous/indifferent promoters. The underlying philosophy was, we need to rescue scarce capital locked up in industry, regardless of the cost. So, we saw groups like the Modis and companies like Spic, to mention just two, being repeatedly bailed out by banks and at considerable taxpayer cost.
Corporate India has moved on since then. But the government seems unable to shake off its socialist past. And that's the real problem.
In such a scenario, it is best if banks are allowed to decide on purely commercial grounds without any interference from the government. Unfortunately, that seems a tall order. Witness the Prime Minister's statement, "the government will explore ways and means to help Kingfisher", and the civil aviation minister Vayalar Ravi's call to banks to support Kingfisher.
The contrast with industry could not be starker. Corporate India seems to have accepted that successful business is about survival of the fittest. Bajaj Group chairman Rahul Bajaj's statement, "I don't see any logic of bailing out any private sector company for the sake of employees and customers", is a far cry both from the pre-reform days when industry routinely sought, and obtained, generous rehabilitation packages under the guise that they needed to be nursed back to health.
Under the aegis of the Board for Industrial and Financial Reconstruction - set up primarily with a view to resuscitating sick industries - banks were compelled to provide extensive sops to companies that had often been run to the ground by unscrupulous/indifferent promoters. The underlying philosophy was, we need to rescue scarce capital locked up in industry, regardless of the cost. So, we saw groups like the Modis and companies like Spic, to mention just two, being repeatedly bailed out by banks and at considerable taxpayer cost.
Corporate India has moved on since then. But the government seems unable to shake off its socialist past. And that's the real problem.
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