Kingfisher Debt

How banks could have handled it better…

With Punjab National Bank declaring Kingfisher and Vijay Mallya as willful defaulters it has created a new problem for Vijay Mallya. The outcome is unlikely to be anything exciting. That is because there is not much that these banks can actually fall back upon. Out of the total outstanding debt of Rs.7000 crore, the value of all the assets pledged together may not even touch Rs.200 crore. That means the banks will surely end up with a huge hole on their balance sheets. What could banks have done better, even while accepting that the legal system in India is too convoluted and long-drawn…

Have an early warning system…

Most private banks have managed to cut their exposures on time to the Kingfisher group. That was largely due to an intelligent early warning system based on rigorous financial analysis and market intelligence. The action of many PSU banks really betrayed certain diffidence in addressing this problem head on. Remember, the airline was making losses from day one and the problems had started surfacing even to the casual observer as early as in 2010. What was ironic in the case of Kingfisher was that certain banks continued to lend to the airline even after the airline had lost its flying license in early 2012 and eventually also wound up its operations. If the PSU banks had put in place a proper early warning system, this embarrassment was avoidable.

What assets are pledged?

The big problem that the Kingfisher lenders are facing today is the quality of the collateral that has been offered by the borrower. Apart from aircraft and real estate, there is a huge pledge created against the brand and trademarks of Kingfisher. The problem of lending against such intangible collateral is that the value diminishes rapidly when the company goes under. For example, the brand, logo and trademark of Kingfisher which was valued at a princely sum, must be nearly worthless today. Also assets like aircraft have a very limited resale value. More so if the market is likely to be flooded by assets of a defaulter, the value automatically goes down.

Look at the collateral ratio…

This is a problem not only with the Kingfisher group but also with many other problems. Take the case of the Jaypee group. The group has an outstanding debt of nearly Rs.75,000 crore. Against this debt, the current market capitalization of the entire group is round Rs.6500 crore. It is anybody’s guess how big a risk the banks are running. In the heydays of 2007 most Indian companies managed to raise large sums on inflated projections and inflated valuations. That is coming back to roost but that is history. At least, the PSU banks can make a start by covering their downside risk better! ©

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