Jet Airways and Sensible Banking: Will Public Sector Bankers Ever Pass the Test?
One sentence, in an article published in LiveMint
, indicates why there are no suitors for Jet Airways, leading to bankers, mainly unaccountable public sector banks (PSBs), finally, opting for bankruptcy proceedings on 17th June. It says, “A senior banker involved in the discussions said one or two parties have indicated their interest in Jet Airways, once it reaches the bankruptcy court…”
You don't need to know anything more to understand why the badly botched, non-bankruptcy resolution of Jet Airways led by State Bank of India (SBI) failed so miserably.
On 18th May, a majority of bank lenders accepted a massive 99% haircut on a loan of Rs 20,000 crore to Aircel by accepting an upfront offer of Rs150 crore by UV Asset Reconstruction Company (UVARC). This is on a loan that is more than twice what Jet Airways owes them.
Moreover, a Dutch court has already started bankruptcy proceedings and appointed administrators, after two vendors confiscated an aircraft in The Netherlands to recover their dues. These creditors are also before the National Company Law Tribunal (NCLT) which means that any potential buyer doing a direct deal with our banks would, probably, have inherited the legal mess.
If you are a potential buyer, what will you do? Would you pay more money for Jet Airways, when it is clear that banks haven’t quite cut their links with Naresh Goyal, and Jet Airways is fast losing the best staff, flying routes and parking slots, so much so that anything that remains can be picked up at rock-bottom prices during the resolution process? Many believe that banks will get less than they did in Aircel after the Jet bankruptcy proceedings.
It was abundantly clear to anyone in the airline business that banks had very little security against their big lending to Jet Airways. Not only are airlines a high-cost, low-asset business, but aircrafts that were leased by this company were also mortgaged to international lenders. Astonishingly, banks did not demand a personal guarantee from Naresh Goyal, like they had with Vijay Mallya; nor did they bother to convert his loan into equity. He continued to hold a 51% right until the airline went down like a pack of cards. In fact, the shady deal, structured by SBI in April this year, allowed Mr Goyal to retain a 25% stake and kept a backdoor open for him to make a comeback, if he could find a partner.
Recent events make the series of self-congratulatory media interviews by the SBI chairman, Rajnish Kumar, at the end of March, look ridiculous today. Mr Kumar told a newspaper that he would write a book on the tough Jet Airways resolution after his retirement. What we really need is a detailed exposé on why PSBs learnt no lessons from the series of private airline failures since the 1990s, failed to secure their loans and rein-in flamboyant and hyper-manipulative promoters.
A 19th June editorial in The Economic Times
says that Jet Airways will become a “test case for how banks must deal with companies that employ plenty of capital, mostly debt, and have very few tangible assets. The airline business, which is highly capital-intensive, is risky to lend to, especially when the share of equity in the airline’s total capital employed is low. It calls for a non-standard lending framework.”
The article goes on to advise: “Lenders should lessen the risk, with provisions for conversion of debt into equity and takeover the airline for sale (as a going concern) to another operator before the company’s assets—including operating routes, slots, trained crew and brand name—deteriorate in value.”
All very true; but how many times should a student be allowed to fail before he or she is rusticated? Indian banks have had plenty of opportunity to learn from the frequent airline failures of the past 25 years. The total cost of these failures runs into thousands of crores of rupees and hardly any banker has been held accountable (barring the action against a few in Kingfisher Airlines).
When India opened up its skies to private airlines in the 1990s, we witnessed the worst of crony capitalism. Everything—from banks, to power projects or disinvestment—was done in a dubious manner by the then Congress-led government. Airline licences went to questionable promoters, while policy was twisted to keep the most eligible and deserving Tata group out of the fray.
One licence went to a poultry farmer. Another was a non-resident Indian (NRI) whose link to gangster Dawood Ibrahim was a matter of open speculation; he was eventually shot down. A third licence went to a group with a string of defaults across businesses. Even after the first airline folded up, a ponzi king and others, like Naresh Goyal, with a shadowy background, entered the fray. There was also Deccan Air, which made a big deal of its rock-bottom prices without worrying about survival, since banks took the hit. Others names, like Skyline NEPC, failed without their brands even registering in the public mind.
The banks that lent to all the failed airlines are almost always the same as those who lent to Jet Airways—our leading PSBs –SBI, Punjab National Bank, Canara Bank, Bank of India, Syndicate Bank and IDBI Bank, among others. There is a sprinkling of private and foreign banks who, invariably, have a significantly lower exposure (or would have sold their loans to an asset reconstruction company well before things reach a point of no return).
But our PSBs, with SBI again having the largest exposure, did nothing when Jet Airways ran an expensive operation with low fares, and there were plenty of reports in the public domain about its family-run operation and money being paid to private companies of the promoters. Why didn't they ask tough questions? It is strange that allegations of tax evasion and money laundering also crop up only after the Airline is completely dead!
While it is easy to blame things on political interference, we have heard plenty of stories of endless goodies and holidays for families, meetings with celebrities and lavish entertainment doled out by the failed airlines. The cost of this corruption is eventually transferred to the people, in the form of increasing charges levied on customers, and to the exchequer, in the form of frequent re-capitalisation of PSBs.
The government seems committed to another Rs30,000-crore re-capitalisation of PSBs in the forthcoming Budget, even while lobbyists are clamouring for a bigger bailout of banks. Is it any wonder that the shrewd Hinduja group was unwilling to negotiate a deal before bankruptcy proceedings?
Until banks are forced to become more aggressive about protecting their loans and made more accountable for their decisions, we will continue to pay for repeated failures of banking prudence and judgement. Will we ever be able to say: ‘Pappu pass ho gaya’, where Indian banks, especially PSBs, are concerned? Maybe Rajnish Kumar will write a book and tell us about the real inside story of PSBs.