Mr. Vijay Mallya got away with Rs. 9000 crores he owes to 3.5% tax payers of the total Indian population. He has become so important that news agencies gave hundreds of hours on debating whom to blame which helped advertisers more than lenders. He has become a case study among private bankers and nightmare for many current and ex-bankers of PSU banks. Even our PM, Mr. Modi, had to mention him indirectly in his address to NRIs in Brussels. Banks, RBI, ED, CBI and our proactive news channels are behaving as if they will hunt down Mr. Mallya like Mossad hunted Munich attackers. Economists, industry experts, socialist think tanks, etc. are deducing on news channels the signs and reasons of this LoanGate and lenders are finding themselves floundering in dozens of cases in Debt Recovery Tribunal(DRT) and courts. Had there been so much of pondering before gifting loans to Mr. Mallya, he wouldn't have been awarded by Diageo Plc. with $75 million to step down as Chairman of United Spirits Limited, although Bengaluru DRT stopped Deagio from doing that.Well, I have no interest in lecturing on what went wrong with Kingfisher Airlines(KFA) or whom to blame for this disaster. Rather there is something more important that has come out of this incidence which relates to the initial stage of loan disbursement.
Suppose you want a loan of above Rs. One Crore for a Small and Medium Enterprise (SME). It is very likely that you'll have to hypothecate your machinery that will be purchased with the loan amount and give a personal guarantee. Bank will also demand charge over all current assets and a third party guarantee. But KFA was very lucky indeed. Banks gave the loan to loss making KFA on brands as collateral whose promoter had no past experience in aviation industry. Remember, these fictitious assets (Brands) was not made over years of doing business and gaining trust and loyalty from customers, as has happened in the case of Patanjali, rather spending hefty amounts on advertisement and promotion. Even Nokia, with enormous brand value and twenty years presence in mobile phone market, got swept away by Samsung due to lack of demanding product portfolio and future ready strategy. So the question arises as to whether bankers took cognizance of this brand value and KFA's future? One has to think about the viability of a business before giving hundreds of crores.
Moreover, a brand is something which is nothing in itself. Brand value and loan repayment capacity of a company is directly proportional to the market presence and profitability. The point is if the company incurs losses in eight consecutive quarters without capturing significant market share then it goes without saying that its paying capacity and brand value are bound to deteriorate over the period of time. In a case of non repayment of loans, collaterals are considered to be recovery instruments. Whereas in the case of KFA, the value of collaterals (Brands) was bound to yield nothing in case severe financial crisis resulting in the grounding of aircraft.
The worst strategical mistake done by KFA was to buy Deccan Airlines. Have you ever heard of a loss making company acquiring another loss making a company in the aviation industry? The losses of KFA and Deccan for FY 2005-06 were Rs. 239.59 crores and Rs.340.55 crores respectively.This was against the rule of this sector with cut-throat competition and high operating cost. A news report by The Times of India says that every hoax call costs an airline Rs.2 crores. That article is enough to make you understand how much important is time and efficient operation in the aviation sector.
Profit and loss are part of every industry. Every bank has Non Performing Assets (NPAs). NPAs and losses are unavoidable. Banks can't stop the business of their clients from becoming unprofitable. What they can do is to take adequate measures to secure their loans. Banks should understand that what is available now as a security may not be available later. The way of doing business has changed rapidly during past one decade and banks specially PSUs should change their policies as well. PSU banks need to be more proactive. If they keep on doing such drastic mistakes and getting involved in suits and litigation they will loose focus on their core areas and somebody else, e.g. digital wallet companies like Paytm, will eat their share of business.
Suppose you want a loan of above Rs. One Crore for a Small and Medium Enterprise (SME). It is very likely that you'll have to hypothecate your machinery that will be purchased with the loan amount and give a personal guarantee. Bank will also demand charge over all current assets and a third party guarantee. But KFA was very lucky indeed. Banks gave the loan to loss making KFA on brands as collateral whose promoter had no past experience in aviation industry. Remember, these fictitious assets (Brands) was not made over years of doing business and gaining trust and loyalty from customers, as has happened in the case of Patanjali, rather spending hefty amounts on advertisement and promotion. Even Nokia, with enormous brand value and twenty years presence in mobile phone market, got swept away by Samsung due to lack of demanding product portfolio and future ready strategy. So the question arises as to whether bankers took cognizance of this brand value and KFA's future? One has to think about the viability of a business before giving hundreds of crores.
Moreover, a brand is something which is nothing in itself. Brand value and loan repayment capacity of a company is directly proportional to the market presence and profitability. The point is if the company incurs losses in eight consecutive quarters without capturing significant market share then it goes without saying that its paying capacity and brand value are bound to deteriorate over the period of time. In a case of non repayment of loans, collaterals are considered to be recovery instruments. Whereas in the case of KFA, the value of collaterals (Brands) was bound to yield nothing in case severe financial crisis resulting in the grounding of aircraft.
The worst strategical mistake done by KFA was to buy Deccan Airlines. Have you ever heard of a loss making company acquiring another loss making a company in the aviation industry? The losses of KFA and Deccan for FY 2005-06 were Rs. 239.59 crores and Rs.340.55 crores respectively.This was against the rule of this sector with cut-throat competition and high operating cost. A news report by The Times of India says that every hoax call costs an airline Rs.2 crores. That article is enough to make you understand how much important is time and efficient operation in the aviation sector.
Profit and loss are part of every industry. Every bank has Non Performing Assets (NPAs). NPAs and losses are unavoidable. Banks can't stop the business of their clients from becoming unprofitable. What they can do is to take adequate measures to secure their loans. Banks should understand that what is available now as a security may not be available later. The way of doing business has changed rapidly during past one decade and banks specially PSUs should change their policies as well. PSU banks need to be more proactive. If they keep on doing such drastic mistakes and getting involved in suits and litigation they will loose focus on their core areas and somebody else, e.g. digital wallet companies like Paytm, will eat their share of business.
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