Free Reports

The Moral Hazard of Settling with Vijay Mallya

Apr 4, 2016


I'm gonna make him an offer he can't refuse. Okay? I want you to leave it all to me. Go on, go back to the party.
- Don Corleone in The Godfather

Vijay Mallya has made an offer to banks to settle the Rs 9,091 crore that he owes them. He has promised to pay Rs 4000 crore by September 2016. He has also promised to pay Rs 2,000 crore if wins a case against a company, which allegedly supplied defective engines to the now defunct Kingfisher Airlines.

Has Mallya made an offer which the banks should not refuse? Many analysts and experts seem to be of the opinion that banks should take on this offer and in the process limit their losses. Parag Jariwala, vice-president at Religare Capital Markets told the Mint newspaper that "Mallya's settlement offer to banks is not too bad...The actual loss if banks accept Mallya's proposal will be just 7% on principal."

Over the last couple of days many people on Twitter have told me that "something is better than nothing'' and given this banks should accept Mallya's proposal and limit their losses. Honestly, this is a very simplistic way of looking at things. It would have perhaps made some sense if Mallya was the only or perhaps one of the few defaulters in town. But that is not the case.

Mallya owes Indian banks around Rs 9,091 crore. This is a very small amount when we look at the total amount of money owed by various corporates to Indian banks. The minister of state for finance Jayant Sinha shared some interesting data in a written reply to a question in the Lok Sabha, on March 11, 2016.

The accompanying table shows us how big the problem of banks' lending to corporates actually is.

Corporate Lending
Year Gross Advances
(Rs Crore)
Gross NPAs
(Rs Crore)
GNPA Ratio
(s Crore)
2012-13 31,11,761 1,00,118 3.22
2013-14 34,06,025 1,54,955 4.55
2014-15 36,15,133 1,93,123 5.34
2015-16 (till Dec. 15) 38,41,836 2,60,653 6.78

The gross non-performing ratio has more than doubled between 2012-2013 and December 15, 2015. It has jumped from 3.22% to 6.78%. The gross non-performing ratio is essentially obtained by dividing gross non-performing assets by gross advances or total loans given by the banks, in this case to corporates.

And how do we define gross non-performing assets? As the per the Reserve Bank of India: "An asset...becomes non performing when it ceases to generate income for the bank." When the corporate borrower stops paying interest and repaying the principal on a loan (a loan is an asset for a bank), the bank typically allows for a grace period of 90 days. After this grace period is over, the bank categorises the loans as a non-performing asset and starts setting aside money (or making provisions) for it. The total sum of such loans forms the gross-non-performing assets or bad loans.

If we look at total bad loans of Rs 2,60,653 crore, Mallya's loans of Rs 9,091 crore form only 3.5% of the total bad loans. If the banks decide to settle with Mallya, they will end up setting a precedent. Then other defaulters will also want to settle and not pay up what they owe to the banks. Do they banks really want to end up in such a situation?

While settling with Mallya may not hurt banks financially much, the same cannot be said of a scenario where they were to start settling the Rs 2,60,553 crore corporate bad loans in total.

Also, any such settlement will build in "moral hazard" into the financial system. And what is moral hazard? As Mohamed A El-Erian writes in The Only Game in Town: "[It] is the inclination to take more risk because of the perceived backing of an effective and decisive insurance mechanism."

If the banks start settling with corporates what is the signal that they are sending to the future corporate borrowers? That it is okay to take on a lot of risk with the money that they borrow from the bank or simply siphon it off. And if things go wrong, they can always settle with the bank for a lower amount.

Hence, it is very important that such a wrong precedent is not set.

On a different note, Mallya's offer raises several other questions. If he is in a position to pay Rs 4,000 crore to banks why did he leave the country? Or why did he not pay the salaries of the employees of Kingfisher Airlines and leave them in a lurch?

Or does all this tell us that the former king of good times is simply buying time? On that your guess is as good as mine.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "The Moral Hazard of Settling with Vijay Mallya". Click here!

13 Responses to "The Moral Hazard of Settling with Vijay Mallya"

Vipin Chandok

Apr 5, 2016

Vivek, I totally agree with you. A settlement with deep losses should be the last resort; only when the defaulter has no means to repay. Mallaya seems to have the capacity as discerns from his buying an overseas cricket team recently. Additionally, in his case, it is not the 100% case of business going sour. There appears to be an element of malfeasance since some banks have labelled him as Wilful Defaulter (which can be done by following an elaborate process laid down by RBI, with checks and balances),obtaining additional loans against assets against fictitious valuation (getting brand valued at over 4000 crores, which seemingly would have been based on DCF valuations, which, in turn, would have been based on unrealistic loafted financial projections provided by Kingfisher to Grant Thornton),providing illegal consideration for getting 900 odd crore loan from IDBI in 20 days with junk external credit rating (a typical 100 crore loan from IDBI would take upwards of 3 months with credible financials and credit rating)


raj rangnekar

Apr 4, 2016

I totally agree with u. Also, if they do compromise, on moral grounds will they waive off the farmers debts, which is more essential for the survival of the farmers than the delinquent industrialists.


Jayant Gharpure

Apr 4, 2016

Before accepting such offer it should be investigated as to reason for such crisis. If the default has occurred due situation of the Industry then such offer makes sense but the source also should be verified.

It should be immaterial if he is jailed or not as long as loans are recovered. Of course his business interests should be choked of Finances

If mr Malaya has increased his personal wealth during this period -the increase also should be added to,offer


Dr HA!

Apr 4, 2016

Mr Vivek Kaul, you have said it right. The point that why he did not settle the salary dues of former KFA employees should be given a thought and go deep into Mallya's "PHILOSOPHY". First let him clear employees' dues and after that the other lenders should seek to get their dues in full at one go.


Rajanikanta Verma

Apr 4, 2016

Mallya's case is different from the others because he has been allowed to escape from India and we would be lucky to get any part of what he owes the banks. After all the Sahara chief is in jail and is being made to pay his debts.

We should accept whatever we can get from Mallya or we may get nothing at all. Simultaneously, we should tighten our laws on the subject to ensure that those who run up such debts (or have already run up such debts) do not escape from India without paying their dues. The Mallya settlement should be treated as a special case and not as a precedent. If necessary our laws should be amended to clarify this.


manmohan khetan

Apr 4, 2016

Fully agree with Vivek on mentality of such borrowers. Borrowers know very well banking system and exploit this for their advantage. Once disbursement of loan is done, they always thin it as their capital which not to be returned at any point of time.
Instead of compromising banks should recover cost of legal proceedings & time cost of senior people engaged in pursuing recovery with penalty so that it becomes a real DETERRENT for future willful defaulters.
Why are we talking of compromise in the first place ??


Praveen Godbole

Apr 4, 2016

In Mallya's case, what is important to note is that he can pay all the liabilities that he owes. His total assets, within India and outside, far outweigh his liabilities. Inspite of this, if he is talking of one time settlement, it is pure dishonesty and arm twisting.

Like (1)


Apr 4, 2016

Sri Vivek Kaul, you write as if it is the first time such a compromise is taking place. Since time immemorial such write downs have been practiced by the Banks all over the world. I am not condoning Vijay Mallya, yet if the Banks don't accept the money he has offered, they won't get anything at all, while the Banks run from pillar to post till cows come home, he will enjoy whatever the money he is left with and bringing him to India is quite impossible owing his clout with the politicians of this country (I bet he has accounts of all the money and liquor he has supplied for the elections) and jailing him will not bring any money nor teach a lesson to other defaulters!

Like (1)

Balakrishnan R

Apr 4, 2016

Dear Mr. Vivek,
I agree with you that the banks should not settle for lower amount. I also understand that he has siphoned a lot of money from United Spirits Ltd and has been reusing to step down with minority share holding in the company and after an settlement agreement, he is getting a lot of money for stepping down. (This means that he has a lot of (siphoned) money some where.) In an analogous manner, the banks can demand more money i.e. including fine for leaving him. I understand that Mr. Mallya is NRI. Can NRI become MP of Rajya Sabha?

Like (1)


Apr 4, 2016

1. If one makes an impartial analysis Kingfisher(KFA) brought in a lot of improvement in airline industry. KFA had set a very high standard.
2. The biggest blunder could be taking over Air Deccan. Huge money seems to have been lost.
3. Fuel costs were very high.
4. No other airline was making any descent profit at that time.Airline industry was not doing that well then.
5.Banks have also their own method of verification, due diligence of any proposal and making assessments.
6. Banks which have written off the dues from KFA should take a haircut which do not seem to be something on which no further offers/discussions can be held. Dragging the matter may be counterproductive.
7. However, if some real wrongdoing is noticed by the promoters appropriate action should be taken.But all steps should be taken keeping in mind today's economic scenario and the Government's policy of ease of doing business.
Thanks and regards

Like (1)
Equitymaster requests your view! Post a comment on "The Moral Hazard of Settling with Vijay Mallya". Click here!