Vijay Mallya case: Banks say they followed RBI signal

MUMBAI: Some of India’s biggest banks say they aren’t solely to blame for not cracking down in time on Vijay Mallya, instead providing more credit to Kingfisher Airlines.

A surprise decision by Reserve Bank (RBI) in 2010 to widen the corporate debt restructuring scheme to include the aviation industry acted as a signal to lenders that they should extend more loans to shore up Mallya’s ailing carrier, said three people, one of whom is a former bank chief. This generous attitude was followed with regard to other industries such as steel, roads and power, they pointed out.


“Banks restructured loans based on two factors — RBI permitted to do so and second, based on an assessment from an independent agency, SBI Caps, which endorsed that restructuring of Kingfisher Airlines loans would revive the company,” said Pradeep Ramnath, former chairman of Corporation Bank, part of the 17-lender group that has filed cases against Mallya in Supreme Court and elsewhere.

However, the central bank’s move needs to be put in context, said an expert. The government was trying its best to ensure the survival of an industry under threat from rising fuel prices and a slump in passengers in the aftermath of the global financial crisis. The banking regulator was trying to do its bit to help.

“RBI can’t be faulted because loan restructuring was one of the steps taken over a span of couple of years to revive the airline sector,” said an analyst with a domestic brokerage. “In Budget 2012, the government also allowed airlines to raise external commercial borrowings up to $1 billion. Later it relaxed foreign direct investment norms for the sector.

The government and RBI did what they could to save the industry. All airlines were bleeding then.” In an email response, an RBI spokesperson said, “As you know, as a matter of principle, we do not comment on individual cases.”

Lenders such as IDBI Bank are currently being examined by the CBI and the Enforcement Directorate for lending to Kingfisher Airlines, which stopped flying in 2012.

While banks have been fighting more than 20 cases in different courts with more than 500 hearings and 180 adjournments, they are being criticised for being slow to seek Mallya’s detention.

Despite a 2010 debt-restructuring package that offered Rs 1,600 crore in debt relief to the airline, lowering the total to nearly Rs 6,000 crore following the recast, by the time Kingfisher was grounded, this had shot up to Rs 7,500 crore.

While RBI initially did not allow restructuring of loans to the aviation business, sometime in August-September it allowed banks to reduce the interest rates and extend repayment dates. “RBI has allowed, in the case of aviation sector, a special concession," OP Bhatt, then chairman of State Bank of India, said in September 2010. “Banking industry could on a case-by-case basis, subject to the guidelines and parameters given by RBI, look to see how this industry could be helped by rescheduling, restructuring.”

Following this, SBI’s investment banking arm SBI Capital Markets advised the group of 17 lenders on restructuring Rs 8,000 crore of debt. This involved a reduction in interest rates and conversion of Rs 1,400 crore of debt into equity. “If the banks were not allowed by RBI to restructure the loans, banks would have initiated the process of recover immediate and the losses would have been limited,” said a banker who did not want to be identified.

The conversion into equity at a premium of 60%, which had come in for criticism at the time, was based on the market regulator’s formula that required banks to subscribe to stock at the average price of the past six months. They ended up holding 23% of the carrier. Bankers cited above said RBI, which is on the boards of banks and inspects them regularly, did not find anything amiss and encouraged them to work with the then government’s agenda to push economic growth amid global slowdown.

“Following the restructuring of Kingfisher Airlines, the RBI inspected the books of banks and found no deviation in the process followed by banks,” Ramnath said. At the time, there was still hope that the airline could be saved, said the expert cited above.