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. 
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COMMENTS

Mahesh S Bhatt

3 weeks ago

Is Indian Banking System heading for Liquidity Crises never seen before?

What investors should do?

HDFC AMC has renewed the FMP by 12 months. Kotak AMC is facing the payment issues for its FMP due to exposure to ZEE and other companies.

SBI has taken over JET.

LIC has taken over IDBI BANK.

Many PSU banks have been merged.

Where are we heading looking at these incidents? If you look at the govt. statistics, everything is the best.

They have given the first installment of Rs.2000 to the farmers and things like that. But if you just go little deep you will find that ………

1. Banks are doing businesses other than banking – SBI is flying planes of JET!!

2. Insurance companies are running BANKS!!

3. Mutual fund investors are getting a promise to get their money as and when the lenders give money back to mutual funds.

4. Your customers are promising you that they will send money for their overdue payments. In short, the above is an illusion that everything is OKAY.

Banks are feeling safe now, but the end results will be more negative than what it appears today. What does it MEAN for BANKING and NBFC stocks?

Long back BUFFETT had said he would never invest in BANKS. Today 61% of BUFFETT portfolio is into 5 banks or financial companies!!

Buffett has a problem of plenty of money and he would have got these companies by force or by choice. His plus point is that he is in the USA, where the Helicopter BEN printed new money and recapitalised all banks.

In India – those who had invested in now-defunct UTI guaranteed schemes – had not got a single penny as per the promise. US – 64, the star performing fund, had lost lakhs and crores of the small and HNI investors.

We have seen what happened to GLOBAL TRUST BANK – now taken over by Oriental Bank of Commerce. There is a small bank in Mumbai – KAPOL Co-Op Bank. The bank is closed by RBI and now the deposit holders are not getting their full money.

Today LIC money is considered 100% safe as it is guaranteed by parliament law. I am unable to see how LIC will pay to all the policyholders – the way it is being asked to invest by CENTRAL Govt in PSU dis-investments or taking over sick banks. Private insurers are chasing return in the form of Unit Linked plans.

The way Mutual Fund guys have lost in DEBT funds, I am seeing the same thing would be happening in Private Insurer’s investments also. So, banks, mutual funds, and insurance companies are going to face the heat of BANKRUPTCY going forward.

The FUNNY aspect of solving Bankruptcy? Most of the companies are being sold at 20-40% of the loan amount. Now, to pay that 20-40%, the taking over companies are taking new loans to pay to the banks. Let us say Tata Steel took over Bhushan steel.

Now, the banks got 40% from the Tata Steel. But Tata Steel didn’t have the cash to pay that. So, banks gave a loan to TATA STEEL. Technically, what happened is BANKS lost 100% of the BHUSHAN and paid another 40% to TATA to take over BHUSHAN. (one may argue that TATA STEEL will return the capital some day and pay the interests regularly – but today BANKs had to top up the loan by 40% !!)

My Marwari friend used to say a very good saying in their language on this scenario. He says “Sau(100) ke HUE SAATH(60).

Aadhe gaye NAATH. 10 de denge. 10 dilwa denge or 10 me kya lena or dena.

Meaning of this is – from Rs.100, they decided to give Rs.60.

Now they say they can give only Rs.30. From that Rs.30, He will give Rs.10, he will ask somebody to pay Rs.10 and now don’t cry for Rs.10 which is the balance.

It means all Rs.100 gone. This by accounting standards is a perfect deal and makes the balance-sheets of banks looks strong. In this kind of deals – the deal makers make the hefty commissions for finding a suitor for sick companies. This is an additional cost to the banks or financial institutions.

What NEXT? We all are sitting on a CREDIT TIME BOMB. The clock is ticking.
IN GREECE YOUNG GIRLS EXCHANGE SEX FOR 2 EUROS or sandwitch only Mahesh Bhatt

Subhash Chand Garg

3 weeks ago

Why only blame the public sector bank. What about the so called efficient private sector enterprises for which all are hail bent as messiah of all Indian problems. Actually all these private sector enterprises are parasites which are sucking blood from public in the name of libraliasation.There is not a single infrastructure enterprise which have not
been bailed out by banks and other financial institutions .

B. Yerram Raju

3 weeks ago

Indian banks proved that they lacked both skill and luck to ensure a probability of gain even amidst huge loss staring at them. It is one thing to lend to a sector that the Banks hardly know and it is the other to sit in a pilot seat to negotiate a resolution. It's time RBI reviews its universal banking mode to give it a safe burial and encourage setting up Development Finance Institutions where they raise resources long and lend long.

Harish

4 weeks ago

Is this the same person who was talking about burying the demon of NPA about a year back?

Pankaj Malhotra

4 weeks ago

People are talking about Jet Airways, which is already dead; but nobody is talking about Spicejet. Spicejet has overnight taken deliveries of around 40-50 aircrafts from jet. Can someone explain how did they fund these leases? It's a listed company, so if they had raised equity, it would have been in news. Neither are their cash accruals like indigo. So only way they funded would be debt through our PSBs. God save our hard earned money lying in banks!!

Hudaf Shaikh

4 weeks ago

It is misleading to convey that the banks will recover just 150 cr -

They are also entitled to all the proceeds from sale of Aircel's spectrum which should fetch around 10,000 cr. As spectrum is a perishable commodity with a limited term, PSU banks should approach the Government to expedite all approvals so that they maximize their recovery here.

Mohan Krishnan

4 weeks ago

Why should PSB Management take any initiative only to be hounded by Government agencies for any lapses or losses caused during retirement. Most of the decision taken on VIP accounts are directed from top. Accordingly financial papers/ justifications are prepared to give legitimacy to the directive. Then it is checked by compromised audits and people's money looted. No one will be held responsible by any enquiry committees. At best some slaps on the wrist on account of error in judgement.
This is the most optimum action tested and tried.
So why should we expect any changes at the top?

Ramesh Poapt

4 weeks ago

very well said!

Ravindra Shetye

4 weeks ago

Has anyone in Finance Ministry to whom the Public Sector banks report, or RBI or Aviation dept thought of examining the status of the Security of the borrowings by other Private Airlines like Spicejet or Indigo et al. Afterall before Jet also there was East West, Damania and other air lines which have gone Bankrupt without General Public knowing how much of their money has gone to dogs the same way.
In fact it is a good opportunity for MoneyLife to investigate these cases also.
Or for a Right of Information stalwart to ask the concerned authorities.

HDFC Buys 51.2% Stake in Apollo Munich Health for Rs1,350 crore, to Merge it with HDFC ERGO
Housing Development Finance Corporation Ltd (HDFC) has decided to buy majority stake in Apollo Munich Health Insurance Co Ltd for about Rs1,350 crore. 
 
"Post-acquisition of the shares by HDFC, Apollo Munich shall be merged with its general insurance subsidiary, HDFC ERGO General Insurance Co Ltd (HDFC ERGO), subject to all regulatory, shareholders and other approvals. To support the transaction with its material benefits for Apollo Munich, Munich Health will pay Rs294 crore to Apollo Hospitals Enterprise Ltd and Apollo Energy Ltd in connection with the termination of their joint venture," HDFC said in a regulatory filing.
 
HDFC will buy 50.8% stake in Apollo Munich Health Insurance for Rs1,336 crore from Apollo Hospitals Group and 0.4% stake held by a few employees for Rs10.84 crore.
 
Deepak Parekh, chairman of HDFC and HDFC ERGO General Insurance said, “Health  insurance  penetration  in  India  is  still  at  a very nascent  stage  compared  to the global average, but is expected to drive growth of the general insurance industry in the times  to  come. This transaction will strengthen the HDFC group’s commitment to the growing health insurance segment. The combined expertise of HDFC ERGO and Apollo Munich will result in greater product innovation, wider distribution and enhanced servicing capabilities, benefiting their 1.2 crore policyholders.”
 
The merged insurance entity on a pro-forma basis has a combined market share of 6.4% of non-life insurance industry, with 308 branches across the country. This also makes the combined entity the second largest private insurer in the accident and health segment with a market share of 8.2%.
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Chennai water crisis hits construction sector
The water crisis in Chennai and in several other places in Tamil Nadu has affected the construction sector severely, said realty players.
 
"We are not able to get good water fulfilling quality parameters from the ground hence we are forced to buy tanker water which is very costly and increases the cost of construction," Varun Manian, Managing Director, Radiance Realty Developers India Ltd, told IANS.
 
The shortfall in supply delays construction timelines and the handing over of the properties, he said.
 
Queried about how Radiance Realty is managing, Manian said: "We started using self-curing concrete and plaster to reduce the consumption of water. We started constructing storm water collection system and rain water harvesting wells during the course of construction and this will increase the quality and yield of the ground water within two seasons."
 
He does not see any fall in property sales due to the water crisis.
 
"The water crisis has affected the construction sector. The normal pace of activity during this period is not happening in Tamil Nadu," R.Thayumanavan, former state head of the Federation of All Civil Engineers Association of Tamil Nadu and Puduchery, told IANS over phone from Cuddalore.
 
Queried about retaining the workers from outside Tamil Nadu, Thayumanavan, also a Managing Partner of Alfa Building Construction, said: "We have not sent them back till now. We are adopting a wait and watch policy."
 
The realty players said they were adopting a wait and watch policy to decide whether to send back the construction workers to their native states like Bihar and West Bengal.
 
The reservoirs -- Cholavaram (full capacity 1,081 mcft) and Redhills (3,300 mcft) -- which cater to Chennai's water needs are dry while the storage at Poondi reservoir is 24 mcft as against the full capacity of 3,231 mcft, according to the Chennai Metropolitan Water Supply and Sewerage Board (Chennai Metro).
 
The Chembarambakkam lake (full capacity 3,645 mcft) has a water level of a mere 1 mcft.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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