Banks are staring at a possible Rs 6,000-crore writeoff on loans to Kingfisher Airlines, the biggest writeoff in Indian corporate history, as the continuing delay in resumption of services means even vulture funds are unlikely to invest in the airline.
Lenders, which have been expecting promoter Vijay Mallya to bring in equity funds for more than a year now, are beginning to reconcile to the fact that chances of an equity investor coming forward is remote while the airline’s troubles are compounding.
Almost all banks have classified KFA as a bad loan and made provisions for some losses, but now they are preparing to write off these debtas unrecoverable losses, three bankers familiar with the thinking at KFA’s creditors said on condition of anonymity.
The absence of collateral to back even a third of the total 7,500-crore loans makes it nearly impossible to recover the debt. It is not clear whether the potential writeoff will mean that the banks concerned will record losses in their September quarter earnings. State Bank of India (SBI) has set aside 65% of its 1,400-crore loan.
“It is at a stage where it is doubtful that any reconstruction companies, or even vulture funds, would consider acquiring this portfolio from lenders,” said Siby Antony, managing director and chief executive at Edelweiss ARC, a company that buys distressed assets and makes a profit by reviving their operations.
Banks, including SBI, Punjab National Bank and IDBI, have lent about 7,500 crore to KFA over the past few years as working capital, even as the airline floundered. Its inability to raise equity prompted lenders to turn off the loan tap as well.
Guarantees Difficult to Exercise
Mounting losses led to it defaulting on payments to airports and even salaries to staff. The airport regulator on Saturday suspended Kingfisher Airlines’ licence, citing safety issues.
Mallya had put up shares of United Breweries valued at about Rs 180 crore and a Goa Villa valued at less than Rs 100 crore as collateral, said two of the bankers. That leaves his personal guarantee now.
Bankers believe that some of the guarantees given are so complicated in structure that banks may find it difficult to extract substantial sums while exercising them.
The recent relaxation of government guidelines to allow FDI up to 49% in the aviation sector was seen as a sign of support by the government, but it seems even that support is waning. Civil Aviation Minister Ajit Singh said Mallya would find it “very difficult” to revive the carrier, Bloomberg News reported. “Everybody hoped and presumed, because it’s Vijay Mallya, he’d be able to marshal resources. Everyone is disappointed,” the report said.
Bankers have written off loans to airlines in the past, losing more than four-fifths of their loans to aviation companies like ModiLuft, Damania, East-West Airlines, Paramount and Archana Airways when they failed. But those losses, at about Rs 300-400 crore pale before what Kingfisher owes.
Experts fault banks for not having learnt lessons from the past. Indeed, many believe that banks, by converting a portion of their loans into equity in 2010 at a premium, may have committed a cardinal sin by not getting enough equity from the promoters. “There are lessons to be learnt on how to structure a loan to the airline industry,” said Jitender Balakrishnan, former DMD of IDBI Bank.
“While lenders could be excused for their failure in ModiLuft, Damania, and East-West Airlines since they started operations just when the industry was nascent, the experience they gained from these failures does not seem to have been put to use in dealing with KFA. Therefore, lenders have not been cautious enough in lending,” he added.
Source – Economic Times