Banks May Lose ₹4,300 crore on Loans to Kingfisher Airlines

SBI expected to go over ₹900 crore in the red from loans to Mallya's grounded airline.

A consortium of 14 banks is expected to lose nearly ₹4,300 crore on account of loans given to the grounded Kingfisher Airlines that was headed by Vijay Mallya who is currently a fugitive from law in the United Kingdom. This has been disclosed in an internal document prepared by the country's biggest bank, the State Bank of India, which alone stands to lose ₹900 crore. The actual losses may well be even higher than these estimates.

The author wishes to acknowledge the anonymous whistle-blower who provided the internal assessment report used in this article to the editor of the Economic and Political Weekly.
Credit: Kurush Pawar, via CC BY S.A- 2.0, Flickr 

Fourteen banks, 13 of which are public sector banks, stand to lose nearly ₹4,300 crore on account of the loans they have advanced to the grounded Kingfisher Airlines (KFA). Of this amount, the State Bank of India (SBI), India's largest bank and the biggest lender to the KFA, expects to make a loss of over ₹900 crore. This was revealed in an internal assessment prepared by a senior SBI official in December 2016. The assessment, which was not put out in the public domain, was recently shared with the Economic and Political Weekly by a whistle-blower.

The assessment of loss was prepared on 7 December 2016 by Govind Subbanna, chief general manager of the SBI's Mumbai-based "mid corporate group" and submitted as a memorandum to the bank's "Special Committee of the Board for Monitoring Large Value Frauds (₹5 crore and above)" for its meeting that was scheduled and held nearly two months later on 17 February 2017.

Analysing various assets pledged by the KFA as security against loans, the memorandum concludes that not only does the market value of these assets amount to just ₹1,565 crore, but the recoverable value works out to only ₹1,071.64 crore against an exposure of around ₹4,457 crore. The total loss to the SBI and the other banks is calculated as the difference between their individual exposures and their share in this recoverable value. SBI, which has the largest exposure to the KFA amounting to ₹1,202 crore, declared the loan as a non-performing asset in 2011 and classified it as a "fraud" in September 2016. The memorandum pegs the bank's recoverables at arund ₹200 crore. This assessment offers a first peek into the losses that Indian banks stand to incur on loans disbursed to the beleaguered airline, which was grounded in 2012 by India's aviation regulator, the Directorate General of Civil Aviation.

A detailed questionnaire was sent to the SBI chairperson Arundhati Bhattacharya by email and also by regular post on 17 May 2017. On 8 June, a spokesperson of the SBI responded to the questionnaire sent by the EPW through email stating that, "It is a policy of the Bank not to comment upon Individual accounts and it's treatment [sic]."

Large Exposure
As many as 17 banks had extended term loans to KFA between 2009 and 2012, a period when the airline's business steadily deteriorated and it found itself unable to repay its dues. In 2010, 14 of these banks formed a consortium to pursue these loans together. On 21 December that year, the consortium of banks signed a Master Debt Recast Agreement (MDRA) with KFA. The MDRA merged all the loans into a single term loan. Various assets that KFA had pledged to the banks as security were also pooled together. To this the MDRA added a personal guarantee offered by Vijay Mallya and a corporate guarantee by United Breweries (UB) (Holdings), a listed company which is a parent to the KFA.

In the case of a recovery, banks agreed to share the proceeds proportionate to their respective share in the total exposure. The SBI memorandum in the possession of the EPW uses the total outstanding exposure as on 31 January 2014 to calculate banks' respective shares. As on that date, the airline owed ₹6,955 crore to the banks, including interest. Thirteen of these are public sector banks, facing 99% of the total exposure, led by the SBI (26.9% share), followed by IDBI Bank (12.7% share), and Punjab National Bank (11.7%) (see Table 1 for all the banks' exposures). Axis Bank, the only private lender, has a mere 0.8% share in exposure.


For the purpose of loss calculation, the memorandum considers SBI's exposure to be ₹1,201.19 crore and not ₹1,874.66 crore due on 31 January 2014. The SBI spokesperson did not clarify how and why this reduction came to be. Assuming that this was on account of some recoveries the banks made in the intervening period, and further assuming that these recoveries were shared with other banks in terms of the MDRA, we have adjusted the consortium's total exposure based on the fall in SBI's exposure. Accordingly, the total exposure is assumed to have reduced from ₹6,955.97 crore to ₹4,457.11 crore.

Many Assets Deemed Worthless
The memorandum's calculation of losses is based on its analysis of how much value can be recovered from KFA's assets that were pooled under the MDRA. Interestingly, it does not consider recoverable value of the guarantees made by Mallya and UB (Holdings), even though these were also a part of the MDRA. We will come to that later.

The total market value of all current and fixed assets of KFA are shown to have a write-down value (WDV) of ₹395 crore as on 31 March 2013. But this entire asset base is worthless, according to the memorandum. While the WDV of current assets of the company, including spares, consumables and book debts, was ₹186.12 crore on 31 March 2013, their realisable value is considered zero. According to the memorandum, this is because "the spares are spread across various airports and the value, quantity and quality of the same is unascertainable as on date."

Similarly, while the WDV of KFA's fixed assets, such as ground support equipment, was ₹131.09 crore as on 31 March 2013, the memorandum finds them worthless because "these are not easily identifiable and spread over at various airports, as the company is defunct since December 2012." The third set of assets deemed worthless are two helicopters owned by the airline, whose WDV was ₹78 crore on 31 March 2013. The "DGCA … informed that these two helicopters are stationed at Juhu Aerodrome, Mumbai. These are in unserviceable condition. Hence realisable value is considered 'nil,'" the memorandum states.

Kingfisher Airlines Properties
Two real estate properties of the airline were pledged to the banks: Kingfisher House, the airline's erstwhile headquarters near the Mumbai airport, and the Kingfisher Villa in Goa. The Goa villa was sold in March 2017 to Sachiin Joshi, a businessman, for ₹73 crore, after three auctions failed to find buyers (PTI 2017b). These were held in October 2016, December 2016 and March 2017 at reserve prices of ₹85.29 crore, ₹81 crore and ₹73.1 crore respectively.

Joshi's purchase, which has been described as a "private transaction," was not reflected in the memorandum since it was prepared three months earlier, in December 2016. The price Joshi paid is slightly higher than the memorandum's recovery estimate of ₹68.23 crore, but lower than the true market value of ₹85.29 crore, which it attributed to a July 2016 valuation by P C Gupta, a valuer.

Kingfisher House in Mumbai still has no takers. The memorandum states that its market value is ₹106.95 crore based on a June 2016 report by Bhide Associates, a consultancy firm. It estimates the recovery value to be ₹85.56 crore. In the last auction held in March 2017, the House failed to find bidders for a reserve price of ₹103.5 crore (PTI 2017a).

Kingfisher Brand Worth ₹266 Crore?
Despite its pessimism about KFA's physical assets, the SBI memorandum is strangely upbeat about the airline's brand value. KFA owns nine trademarks such as the 'KFA's trademark, logo, and taglines like "Fly Kingfisher" and "Fly the good times." Their patent registration restricts their use to the airlines business only, and not to beer or water. The SBI memorandum reports that the market value of these nine trademarks is between ₹6.37 crore and ₹313.8 crore based on valuation conducted in 15 different business scenarios by RBSA Valuation Advisors LLP, which submitted its report on 28 February 2015. The memorandum states a very wide range of the recoverable value of these trademarks: between ₹5.4 crore and ₹266.7 crore.

This is surprising. The realisable value of these trademarks is what a buyer would be expected to pay to use these trademarks on another airline. Obviously, the buyer would expect to recover this expenditure by gaining advantage of the "Kingfisher Airlines" brand. This seems improbable, as has been evident from the consortium's failure to sell these trademarks. In April 2014, the consortium of banks led by SBI invited expressions of interest from the public for purchasing the nine trademarks. "The response to the public notice was not evident," according to the SBI memorandum.

Then, the consortium tried to sell the trademarks at two auctions: the first, held on 30 April 2016, had a reserve price of ₹366.7 crore, while the second was held on 25 August 2016 at a reserve price of ₹330.03 crore. Both failed. After the first auction failed, a Press Trust of India (PTI) report quoted an anonymous banker saying, "It is better to start a new airline company than to buy this brand and revive it." After the second auction failed, an anonymous intellectual property rights expert told the PTI: "[The] value of trademark [sic] of the entire group has gone down to almost nothing and nobody will like to buy it."

Yet, the SBI memorandum seems upbeat about selling the trademarks, and proposes now to value and auction the nine trademarks separately. It is not clear if this excercise has begun.

Trademark Attraction
The SBI does not seem to have learnt from banks' earlier encounters with Kingfisher's brand values. In 2011, a year before it was grounded, the KFA brand was valued at nearly ₹4,100 crore by consultancy firm Grant Thornton. This valuation, which the consultancy had said was only for "internal purposes" and not an investment advice, was nevertheless used by the airline as collateral to borrow more money from banks such as IDBI Bank, which, as a charge-sheet prepared by the Central Bureau of Investigation (CBI) has revealed, preferred the brand valuation as a collateral over tangible assets such as shares of United Spirits, a well-to-do sister concern which is under the UB Group. The CBI later arrested former IDBI Bank chairperson and other senior officers.
In 2016, the Serious Fraud Investigation Office of the Ministry of Corporate Affairs sent a notice to Grant Thornton for its brand valuation, according to a report in Mint newspaper (Sanjai and Upadhyay 2016). The consultancy clarified to the publication that it stood by its valuation which was "appropriate in the context of when it was done and the purpose for which it was done" (Upadhyay 2016). Going by this, the question arises as to whether the SBI should be pinning hopes on a brand valuation of KFA prepared in 2015. After all, between then and when the memorandum was signed, the airline and its founder have arguably become national icons of corporate defaulters to public sector banks (even though they are nowhere the largest). Several warrants have been served on Mallya, who has since resigned his membership of the Rajya Sabha or the upper house of Parliament and moved to the United Kingdom in an apparent self-exile, and from where he now faces extradition.

Shares of United Spirits
ICICI Bank, which had lent ₹450 crore to the airline, sold its entire exposure to SREI Venture Capital's Indian Global Competitive Fund in July 2012. ICICI's loan was backed by shares of United Spirits. In 2014, when its share price increased following news of its partial sell-out to Diageo Plc, IGCF sold all its pledged shares of KFA and earned ₹1,341 crore. After adjusting ₹690 crore against its exposure in KFA, it deposited the remaining ₹651.15 crore in the Karnataka High Court.

The banks now want this balance amount. They filed a suit in a civil court in Bengaluru to this effect, but this plaint was dismissed on 16 July 2016. The banks have challenged this verdict before the Karnataka High Court (SBICap Trustee Company Ltd v IDBI Trusteeship Services Ltd and others, 2016). Their petition had not been admitted at the time of writing this article on 11 June. Yet, an amount of ₹651.15 crore has been included in the SBI memorandum as a "receivable," and forms a substantial chunk of the total ₹1071.64 estimated recovery of the bank.

Likely Losses
This is the reason we argue that SBI has overstated its recoveries. Excluding the amount pending before the Karnataka High Court, the consortium's recoveries fall to ₹420 crore and their losses work out to ₹4,037 crore, with SBI losing ₹1,160 crore out of its exposure of ₹1,201 crore. Additionally, assuming that KFA's trademarks are worthless gives us the worst-case scenario, under which the bank consortium's losses are ₹4,303 crore as their recoveries fall to ₹153 crore, which is the value of both the real estate properties (see Table 2).

Other Recovery Cases
As we mentioned, the memorandum surprisingly does not analyse recoveries from the guarantees offered by Mallya and UB (Holdings). In fact, after it was prepared, the consortium initiated two court cases that can tilt all these calculations.

In 2013, after the loan to KFA was classified as an NPA by most banks, the consortium had filed an application before the Debt Recovery Tribunal (DRT), Bengaluru (SBI and Ors v Kingfisher Airlines Ltd and Ors, 2017) demanding a recovery of ₹6,203.35 crore invoking these two guarantees and additionally dragging Kingfisher Finvest (India) Ltd, a 100% subsidiary of UB (Holdings), for recovery. The demanded amount was based on KFA's dues as on 31 May 2013. In its application, the consortium sought payment of interest at 15.2% per annum from 1 June 2013 until the date of payment. On 19 January 2017, the DRT ruled in favour of the banks ordering Mallya, KFA, UB (Holdings) and Kingfisher Finvest Ltd to "jointly and severally" pay the demanded sum to the banks.
The other legal victory against KFA was in a suit that the consortium along with engine and oil suppliers (who had also claimed unpaid dues of about ₹524 crore) filed before the Karnataka High Court to "wind up" UB (Holdings) for failing to discharge its obligations as a corporate guarantor. On 7 February 2017, the high court ruled in favour of the petitioners and ordered an official liquidator to take charge of the company's assets and proceed with their sale.
It is not clear why the SBI memorandum did not take into account the probablity of winning these cases, even as it considered ₹651 crore as a receivable when their claim over the amount has not even been admitted by the high court. Both these court victories came after the memorandum was prepared but well before it was presented to the Special Committee of SBI's board on 17 February 2017. The documents made available to the EPW suggest that the memorandum was not updated to reflect recoveries resulting from these victories.

This is surprising. After all, the consortium spent considerable resources and several years fighting these legal battles. Instead, the SBI memorandum only mentions the DRT case as part of a timeline of developments in the KFA account. The timeline does not mention the winding up petition at all. In the questionnaire sent to SBI chairperson Bhattacharya, we asked why this was so. We had also asked if the memorandum had been updated, or if the committee took cognisance of the court victories and ordered a fresh study. Since SBI has a policy to not discuss individual accounts, we do not know the present position.

To speculate, it is possible that the banks are pessimistic about any actual recovery from these assets. For instance, the assets of UB (Holdings) may not be sufficient for banks to recover their dues. As the high court judgment remarks on its winding up petition, the quantum of the consortium's claims renders UB (Holdings) "commercially insolvent and a mere skeleton (with) … some assets and liquidity" (IAE International Aero Engines AG and others v United Breweries (Holdings), 2017).

Hoping for a One-time Settlement?
Perhaps this is why the consortium of banks has never closed their doors on a one-time settlement with KFA and Mallya. In March 2016, Mallya, on behalf of Kingfisher Airlines, UB (Holdings) and Kingfisher Finvest offered a settlement amounting to ₹4,000 crore, which consisted less of actual cash and more of an array of receivables such as a recall of pre-delivery payments to Airbus, and some financial claims the company has made in court against an engines supplier. These offers were made after the banks had reached the Supreme Court with a request for Mallya to declare, on oath, all his financial interest in India and abroad, including those of his family. (The banks had landed at the Court's doors after this request was not considered by the DRT and subsequently the Karnataka High Court.)

This offer was rejected by the banks for lacking bonafide intentions, a claim that the Karnataka High Court judgment (on UB Holdings' winding up petition) supported by saying that Mallya's proposal showed "lack of bona fides" as it was "hedged" with conditions that were "practically impossible of compliance." The court judgment mentioned that Mallya made a second offer, which was also rejected by the banks (IAE International Aero Engines AG and others v United Breweries (Holdings), 2017). Yet, the consortium has reiterated that it is still open for a settlement, but that they require a proof of bonafide intention from Mallya. Before the Supreme Court, the consortium has demanded that Mallya can prove this by declaring all his assets on oath and making a "substantial" deposit before the Court (State Bank of India and others v Kingfisher Airlines Ltd and others, 2016).

On 9 May 2017, the Supreme Court found Mallya guilty of contempt of court for not declaring these assets, but ordered him to be present before the Court on 10 July 2017 for contempt proceedings. Interestingly, the guarantees offered by Mallya and UB (Holdings) are themselves under legal challenge. In 2013, before the banks had approached the DRT, Mallya and UB (Holdings) filed a civil suit in the Bombay High Court claiming that they were coerced into offering their guarantees, and appealed that these guarantees be termed invalid. They have additionally appealed for a decree that the liability under the guarantees is limited to ₹1,601.43 crore "based on admissions by the consortium of lenders" (UB (Holdings) 2016).

This is unlikely to go through. The Karnataka High Court referred to the coercion claim as "sham and moonshine" remarking that it was more likely that the banks were the ones being coerced (IAE International Aero Engines AG and others v United Breweries (Holdings), 2017). Still, according to its status on the Bombay High Court website, the suit is still is at a "pre-admission" status even though four years have passed; the last hearing in the case was in June 2015 (United Breweries (Holdings) and others v State Bank of India and others, 2013).

Open Questions
The revelations of the memorandum, and the means by which it has been brought to light, raise important questions about SBI's self-confessed policy to not reveal details about its loan to KFA. As we described earlier, the memorandum records a fall in SBI's exposure to the airline from ₹1,874.66 crore in 2014 to ₹1,201 crore in December 2016. The Karnataka High Court judgment mentions that ₹544 crore were recovered from stock sales. But that does not justify the ₹673 crore reduction in KFA's liabilities to SBI alone.

In November 2016, the DNA newspaper published an "exclusive" story that the bank had transferred several bad loans, including those of KFA, to the Advance Under Collection Account or AUCA, which, as the publication described, is "a bin for toxic loans," a mechanism through which non-performing assets are taken off the bank's balance sheet without ending recovery efforts. As SBI head Bhattacharya clarified later, this does not amount to a write-off. (Rai 2016a, 2016b).

But the memorandum in our possession reveals that the KFA loan was moved to the AUCA as early as March 2014. That even two years later this information was considered "exclusive" shows that we know far less about this murky topic than the SBI is willing to disclose even in its internal documents.

IAE International Aero Engines AG and Others v United Breweries (Holdings) (2017): Company Petition No. 57/2012, Bengaluru: High Court of Karnataka.
SBICap Trustee Company Ltd v IDBI Trusteeship Services Ltd and Ors (2016): Writ Petition 42942-42943/2016, Bengaluru: High Court of Karnataka.
State Bank of India and others v Kingfisher Airlines Ltd and Others (2016): Special Leave Petition (Civil) No. 6828-6831 of 2016, New Delhi: Supreme Court of India.
State Bank of India and Others v Kingfisher Airlines Limited and Others (2017): OA No. 766/2013, Bengaluru: Debt Recovery Tribunal, Karnataka.
United Breweries (Holdings) and Others v State Bank of India and Others (2013): Suit No. 311/2013, Mumbai: High Court of Bombay.

PTI (2016): "No Takers for Brand Kingfisher, Trademarks," 30 April,….
— (2016): "Kingfisher Auction Finds No Takers Again, Trademark Is Worth 'Almost Nothing,'" 26 August,….
— (2017a): "Any Takers? Lenders to Auction Kingfisher House in Mumbai, Goa Villa Today," 6 March,….
— (2017b): "Vijay Mallya's Kingfisher Villa in Goa Finally Sold for ₹73.01 crore," 8 April,….
Rai, Dipu (2016a): "DNA Exclusive: SBI Writes Off Loans of 63 Wilful Defaulters," DNA, 16 November,….
—(2016b): "Write-off: Will SBI's Play on Words Help Recover Loans?" DNA, 17 November,….
Sanjai, PR and Jayashree P Upadhyay (2016): "Kingfisher Airlines Brand Valuer Grant Thornton Now in Dock," Livemint, 15 March,….
UB (Holdings) (2016): "Annual Report 2015–16."
Upadhyay, Jayashree P (2016): "Grant Thornton India Stands by Its Kingfisher Airlines Brand Evaluation," Livemint, 15 March,…

Nihar Gokhale ( is an independent journalist and researcher.

This article was first published on Economis & Political Weekly




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