In an Ocean of Corporate Defaulters, Vijay Mallya is a Small Fish - Vivek Kaul's Diary
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In an Ocean of Corporate Defaulters, Vijay Mallya is a Small Fish

Apr 20, 2017

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The process of extraditing Vijay Mallya started on April 18, 2017. As a part of the process he was arrested and then later released on bail.

Newsreports suggest that the Indian government has taken up this issue with the British government at the highest level. What this suggests that there is a political will to get Mallya back to India and prosecute him. Indeed, that is a very good thing.

Having said that, in an ocean of corporate defaulters and bad loans of banks, Mallya is a very small fish. A newsreport on Moneycontrol points out that Mallya owes banks and the service tax department around Rs 9,000 crore. This includes the principal loan amount, interest on the loans as well as penalties.

Now compare this to the total gross non-performing assets(NPAs) or bad loans of Indian banks. These are loans which borrowers have defaulted on and stopped their repayment. As of December 31, 2016, the gross NPAs of banks stood at Rs 7,23,323 crore. The gross NPAs of public sector banks, to whom Mallya mainly owes money, stood at Rs 6,46,199 crore.

This comparison clearly tells us that Mallya is a small fry in the overall NPA pie. Let's now look specifically at the corporate NPAs. As of March 31, 2016, the total corporate gross NPAs of public sector banks stood at Rs 3,36,124 crore or 11.95 per cent of the total loans given out to corporates. This is the latest number I could find. There is enough evidence to suggest that the situation has worsened since then. Compare this to what Mallya owes to banks and you know why Mallya is a small fish in the ocean of corporate defaulters.

While the government needs to put all its effort into getting Mallya back to India, it also needs to go after other defaulters sitting peacefully in India. This is something that hasn't really happened up until now.

Let's take a look at Table 1. It shows the non-performing assets recovered by the public sector banks over the years.

Table 1: NPAs of PSBs recovered through various channels

Table 1 does not make for a happy picture. The rate of recovery of non-performing assets or bad loans has fallen dramatically over the years. In 2013-2014, the total bad loans involved were Rs 1,49,149 crore. Of this Rs 28,052 crore was recovered. The rate of recovery worked out to 18.8 per cent.

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In 2014-2015, the total bad loans involved were at Rs 2,26,529 crore. Of this Rs 27,849 crore was recovered. The rate of recovery worked out to 12.3 per cent. In 2015-2016, the rate of recovery fell further. The total bad loans involved were Rs 1,91,464 crore. Of this Rs 19,757 crore was recovered. The rate of recovery worked out to 10.3 per cent.

Hence, the rate of recovery of loans has fallen on the whole. How does the scenario look if we ignore Lok Adalats as a channel of recovery, given that the amounts involved there are on the smaller side. The rate of recovery improves but only a little.

In 2013-2014, 2014-2015 and 2015-2016, the rate of recovery works out to 20.2 per cent, 13.5 per cent and 13.6 per cent, respectively. Hence, the rate of recovery goes up a little if we ignore Lok Adalats as a channel of recovery, but the difference is not much to change the overall conclusion.

If the government really wants to clean up the mess that prevails at public sector banks, it should be looking to improve the rate of recovery of bad loans. And that will only be possible if banks go after large defaulters with a lot of vigour, something that has not happened up until now.

This will happen only if there is political will for the same because ultimately public sector banks are owned by the government, and if the government wants something to happen it will happen. No bank employee is going to risk his career by going after a loan which has been defaulted on by a large corporate, only to find out that the corporate is friends with a politician.

In fact, the Economic Survey had some interesting data on corporates which had taken on a lot of bank loans and are now finding it difficult to repay them. Many corporates to which banks lent money now have an interest coverage ratio of less than one. These companies are referred to as stressed companies. This basically means that the operating profit (earnings before interest and taxes) of these firms is lower than the interest that they need to pay on their outstanding debt, during a given period. Hence, these companies are simply not earning enough to pay the interest on the loans they had taken on.

The stressed companies with an interest coverage ratio of less than one, owe a little more than 40 per cent of the loans given out by Indian banks. It is these companies which are essentially holding Indian banks back.

In fact, even within stressed companies (i.e. companies with an interest coverage ratio of less than one) the problem is concentrated among a few borrowers. A mere 50 companies account for 71 per cent of the loans owed by the stressed companies. On an average these companies owe Rs 20,000 crore each to the banking system. The top 10 companies on an average owe Rs 40,000 crore apiece.

This is where the real problem of Indian banking lies. Only if the public sector banks along with the government can clean this up, will the mess get cleaned up. Whether the government will show the same vigour as it has to get Mallya back to India, on this front, on that your guess remains as good as mine.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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.

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12 Responses to "In an Ocean of Corporate Defaulters, Vijay Mallya is a Small Fish"

Sarat Palat

Jun 28, 2017

What is happening is all a ball game. For how many years we are hearing and reading this script. If Mr. Vijay Mallya is a willful defaulter and is a known factor how can he travel to UK and running after the whole drama of extraditing him ? How much time and money had already spent on this nasty issue? So please stop writing on these sort of issues wasting your valuable time as well as of readers. The whole country knows what has happened and what is happening. Nothing will happen. Nothing will change. Whether it is UPA or NDA, people had lost faith and hope, but the drama is going on.

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Pravin Tewari

Apr 22, 2017

The views given above are good and quite comprehensive about the various angles to the problem.However nothing is being talked about the bankers who doled out such big amounts without using their prowess on the recovery angle,of course their eagerness to lend huge amount shows that some portion of NPA may have found way to the banker's home,strict action should be taken against the erring officials after making a thorough inquiry on their connivance angle, this shall make them and other members of their flock to take judicious decisions in future.

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SAROJA RANJAN PARIDA

Apr 21, 2017

"Many corporates to which banks lent money now have an interest coverage ratio of less than one.". I think this is a mistake in your write up. It should ideally be more than one in case of sick companies.

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Narayanasamy

Apr 20, 2017

Mallaya a small fish - thank you for enlightening the readers about the NPAS and the enormity of the problem. But though the article is innocuous one get the feeling that Mallaya is witch hunted which the readers have not expected from the author.

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Parimal Shah

Apr 20, 2017

Yes. Vijay Mallya may be a small fish but the moment he is extradited the signal to willful defaulters will be clear that the government means business.

May be I am wrong, but my guess is that soon after actual extradition the number of such willful defaulters and the quantum of total debt will reduce significantly. Today they are all watching as to - up to what length the government will go if it decides to.

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Arjun

Apr 20, 2017

Agreed. But how to make the government go after today's big defaulters so that we are not penalised for government inefficiency. Publish present defaulters lists along with the names of their political sponsor s so that media experts exert pressure.

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Prem S Khamesra

Apr 20, 2017

How very simplistic! Wish tough stances could result in recovery of bad loans! The roots of bad loans lie in lending not in recovery. It's liberal lending that provides easy liquidity in the hands of corporate entrepreneurs and fuels their megalomaniac ambitions of growth. And when their wild gambles at growth fail, we have bad loans at hand. What will tough stances do then. Recover from the scraps.

Once bad and crony lending decisions have been taken, the seeds of bad loans have been sown. The worst is, one of the many such crony entrepreneurs would actually succeed and justify this indiscriminate lending.

If a bad lending decision has been made, the right action is to make the best possible recoveries, locate any criminal diversion of funds to build personal assets and institute recoveries of the same through negotiated settlements if the entrepreneur is co-operating and through tough statutorily enforced recovery measures if the entrepreneur is not co-operating and move on with life.

Throwing a fig leaf to a defaulting failed entrepreneur may involve moral hazard but is not a bad idea commercially.

The blood lust seen right now in the public domain is regrettable and counter-productive.

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Emil

Apr 20, 2017

Mallya is a celebrity. Going after him is good publicity for all involved. Splashing this news in the media makes us all believe that the govt. is serious about going after rich defaulters.
This is exactly the same as the Salman Khan hit-n-run case. When an unknown person does it, the cops collect money and quietly close the case. They cannot do it when a celebrity is involved because of the media glare.

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K V RAO

Apr 20, 2017

Mallya's dues may be a drop in the ocean. But comparing dues with NPAs of the banking system is incorrect. What do you want to say?Is it incorrect to extradite Mallya? Perhaps the govt wants to send a message to
wilful defaulters that the govt means business.Please do not view govt's efforts negatively.On the other hand set in a trend to recognise govt's efforts and publicise.

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manoj

Apr 20, 2017

Hi Vivek,

Why we are all not giving the name of those defaulter except Vijay Mallya. All the media I am reading only talking about Mallya but let them expose all other big defaulter. Let us say biggest 10 or 20.

Manoj

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