Kingfisher case shows why it’s important for banks to act in time
Nov 16 2012, 2053
Liquor magnate Vijay Mallya controlled Kingfisher Airlines has missed yet another deadline to pay overdue salaries for May 2012 even as Diwali has come and gone. Its much bandied revival plan is still to make it to the desk of the aviation regulator, the directorate general of civil aviation (DGCA). Banks that had funded the private carrier in a case of hoping against hope have been forced to bite the bullet and write off their dues. The company’s flying permit has been suspended by DGCA as it is yet to come up with a credible revival plan that has the backing of all stakeholders, such as the Airports Authority of India; employees, whether pilots, engineers, ground staff or cabin crew; fuel suppliers and other vendors. The airline was already in trouble with revenue authorities for nonpayment of service tax recovered from passengers as well as nonpayment of tax deducted at source on employee salaries. It was also put on cash-n-carry basis for fuel sales after repeatedly failing to meet preagreed credit terms with oil marketers. The case of Kingfisher is a living example of the ostrich like attitude of its bankers who continued to believe that the carrier, which had never made a profit, had a future, despite its chairman being noncommittal on infusing fresh funds as equity to bankroll its accumulated losses. Thanks to the bravado of Mallya and the backing of bankers, many employees who ought to have looked for more reliable jobs, instead ended up staying back only to see salaries delayed for more than six months and little hope of the airline flying, along with some gullible partner willing to invest money in getting the grounded carrier on air again. By delaying the encashment of collaterals, such as corporate and personal guarantees, given by Mallya and the promoter entities, the banks have allowed the promoter to get away with willful default, while taxpayers through public sector banks, have been left holding the can. Putting taxpayers on the line for bad business judgment by a promoter who has previously benefited from a debt restructuring is criminal neglect on the part of the lenders. By encouraging such behaviour, state-owned banks encourage the nationalisation of losses and incentivise private enterprise to take unreasonable risk by betting other people’s capital. We need to allow the death of inefficient firms so that they do not become a cancer infecting the entire system. By keeping badly managed firms alive, we do not allow the free hand of the market to operate, and in the process, waste scarce resources in a country that is severely resource constrained and capital scarce.