It?s just as well that lenders to Kingfisher Airlines (KFA) have decided to start recovering some of their dues from the bankrupt airline; given that the consortium holds shares of United Spirits Ltd, it should get some Rs 6,500 crore against dues of R7,000 crore. Indeed, it would seem the consortium gave the KFA management way too much time to come up with an equity contribution. The trick in banking is to be able to assess the credibility of a promoter, as much as it is important to gauge his creditworthiness. In the case of Vijay Mallya, it never seemed like the liquor tycoon would be able to raise equity in KFA and the banks could have pulled the plug?ICICI Bank did get out by selling its exposure?much earlier. But bankers in India tend to be liberal with their customers?as seen from the large amounts of loan restructuring?not always cutting off credit lines in time. Moreover, they?re unable to get promoters to toe their line; for instance, despite sitting on large sums of restructured assets of real estate developers, after the global financial meltdown, bankers were unable to get even one property player to sell any significant amount of inventory. One reason for this, of course, is that banks have been allowed to get away with not classifying restructured loans as non-performing assets (NPAs) and also with very liberal provisioning requirements. It was only a few months ago that RBI upped the provisioning for restructured assets to 2.75% and it now proposes to increase this to 5% by FY15; more important, after 2015, any restructured loan will be automatically downgraded to a sub-standard one. But the damage has been done. In short, banks appear to be taking the easy way out wherever they can; after all, nothing prevented them from setting aside larger amounts as provisions for restructured loans or from classifying them as NPAs.
Given this, it might help if RBI was to also tighten the exposure norms that allow a bank to lend up to 15% of its capital funds to a company and up to 40% to a group. While this is an enabling provision, too many bankers tend to view this as a norm. A study by Credit Suisse reveals that the aggregate debt of 10 large corporate groups has jumped five-fold in the past five years and now comprises 13% of bank loans and 98% of the banking system?s net worth. Stricter norms for loan exposure will not only help banks lend more prudently, they will also ensure that the government cannot pressurise public sector banks to add to risky exposure. RBI may also want to disallow multiple lending, which bankers admit, has hurt them.
