Everything Vijay Mallya does is larger than life, which is why his current tribulations occupy as much media space as his flamboyant lifestyle and extravagant acquisitions did in the past. A Debt Recovery Tribunal has blocked his $75 million sweetheart deal with Diageo for exiting United Spirits, the Mallya company that the global alcohol major acquired in 2012. He is currently facing money laundering charges and State Bank of India, the lead lender to the now defunct Kingfisher Airlines, which declared him a ‘wilful defaulter’, has now moved court asking for his passport to be impounded. It is finally the courts that will have to decide on the validity of these charges — the question is whether Mallya is cynically avoiding coughing up or whether his defaults were an “unfortunate commercial failure” caused by external factors and government policies. Mallya has much to answer for, but the developments also draw attention to a problem that can no longer be either ignored or wished away: the contribution of the governance failure in public sector banks which led to, or at least aggravated, the bad loans crisis.
It is true that Mallya, as he claimed in an open letter, is not the only corporate defaulter in town. According to research by Credit Suisse, NPAs are estimated to rise to 6.6 per cent of all loans by the end of the current fiscal. Future prospects are no better — the average Debt/Ebitda ratio (which measures the ability of a company to repay loans from earnings) is over 8 for India’s 17 most indebted companies, according to Credit Suisse analysts. In a stressed sector such as steel, debt outstrips annual gross earnings more than 20 times. While non-performing assets dog all banks, it is the PSBs that suffer the most, being saddled with over 86 per cent of all NPAs.
Not all of these bad loans are because of bad banking. At the peak of the commodity supercycle, no one had envisioned the global financial meltdown or the steady slowdown of the Chinese economy. Even the India Growth Story was intact, which probably explains why some of the bets placed during that time were risky gambles in hindsight. But Mallya’s current travails are a result of reckless excess, something that may not have been possible without ‘help’ from PSBs. The creation of a Banking Boards Bureau is a start for reforming PSBs, but the problem goes much deeper than merely professionalising the selection of bank chiefs and improving governance on bank boards. There needs to be a comprehensive revamp of systems and processes, capacity building in risk assessment, and if necessary, consolidation. All these require, as a first step, a dilution of the Centre’s stake, and effective empowerment of bank managements. The roadmap for this has already been laid out in the PJ Nayak Committee’s report on financial sector reforms and governance in state-owned banks. The Centre now needs the political will to walk down this path.