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06.04.2016 | Indian tycoon’s debts reveal banking weaknesses

Indian banks’ struggle to recoup debts owed by drinks baron Vijay Mallya has exposed the country’s weak banking laws.

He was nicknamed India’s Richard Branson, but Vijay Mallya’s entrepreneurial acumen appears to have eluded him of late as banks chase him for unpaid loans. 

The billionaire, who built his fortune on the back of a beverage business best known for producing Kingfisher beer, took a hit when he ventured into the travel sector in 2005.  Kingfisher Airlines was plagued by problems, eventually collapsing in 2012, with debts exceeding $2.5 billion.  Banks have been pursuing him ever since, with mixed results.

Most recently a consortium of 17 banks, led by the State Bank of India, appealed to the Debt Recovery Tribunal in Bengaluru (DRT) for Mallya’s arrest, the seizure of his passport and the confiscation of a $75 million severance package agreed between Mallya and Diageo Plc on his resignation from the chairmanship of United Spirits, the company he sold to the world-famous drinks brand in 2012.  But by the time the DRT began pursuing the requests, Mallya had left the country for the UK.  

Separately, the Central Bureau of Investigation and Serious Fraud Investigation Office have launched money-laundering and fraud investigations into both Mallya and bank officials who approved loans to him.  These investigations are ongoing and Mallya has been summoned to return to India for questioning on 9 April by the Enforcement Directorate, a body responsible for fighting economic crime.  He failed to turn up for an initial summons on 2 April. 

Mallya has consistently defended his actions.  He presents himself as a victim of a malicious media campaign and continues to claim that he has done nothing wrong. The banks’ case has now been taken up by India’s Supreme Court, with Mallya’s counsel in India indicating that his client was prepared to pay just under half the money he owes by September 2016.  The court has given the banks until 7 April to respond to this proposal.  However, Mallya has not specified if it constitutes a one-time settlement or whether he intends to pay the remainder of his debts at a later date.

Accepting the former would set a dangerous precedent for the banks as it would reinforce the perception that corporate debtors can get away with loan default.  If Mallya’s offer turns out to be the latter, the case could drag on and on unless he commits to a repayment deadline.

India’s banking system has long faced international criticism for failing to retrieve large corporate debts, due mainly to weak bankruptcy laws.  Powerful business figures have in the past resisted reforms, p seemingly out of concern that they may come under pressure if more robust legislation is introduced.

The public outcry over Mallya’s case has prompted one of the most concerted efforts by the banks to recoup the money they are owed, and the evident challenges they have faced will put pressure on the authorities to address the issue.  Moreover, introducing structured bankruptcy laws in India would help instil greater international confidence in the Indian banking system and thereby present the country as a more attractive destination for foreign investment.

But banks will also have to start asking themselves difficult questions.  Their pursuit of Mallya’s debts demonstrates a desire to improve their credibility and international reputation.  But Indians will want to know why banks were happy to grant him such large loans, secured against the ailing Kingfisher Airlines, in the first place?