Saturday, 12 March 2016

'Mallya's and Banks

On 2nd March, Vijay Mallya left the country and all hell broke loose. What happened exactly? Why did it happen? Why is there so much fuss about it? What should we know?

What happened?
Vijay Mallya had borrowed over Rs.7000 crore from the banks. But he had left the country without paying a single rupee out of that. In simple terms, banks have been robbed of Rs.7000 crore by a single man.

Why happened?
The source of revenue for the banks is its loans (if they are repaid). So banks try to give as much loan as possible. But before giving loans, they make sure that borrower can repay the loan or if he cannot repay the loan, then he has enough assets(mortgage) from which loan amount can be recovered. For a commonn man, banks have stringent rules for lending the money as well as recovering. But their chief cash cow is big borrowers (businessmen like Mallya) because they borrow more and in turn repay a huge sum as interest. The only caveat here is they don't always have enough mortgage at the time of taking a loan. Banks envisage that his business will ultimately be profitable and banks will get their money back. In fact, banks try to pursue such big borrowers. But what if the business goes into a loss?

This is what happened. Kingfisher Airlines, which was setup in 2003, had been consistently reporting loss since 2009. In 2011, it had already accumulated a debt of around Rs.6500 crore. And still some banks lent money to already bankrupted the company. The worst part is that many of these banks were state-owned banks, where common people invest their earnings with a full trust. In the end, it was crystal clear that Mallya can't pay back the loans and so banks demanded to arrest him. But even before that, Mallya flew out of India.

Why is there so much fuss?
Mallya is one such example. In fact, Indian banks are in bad shapes because of a large number of such bad loans. Governor of RBI has already warned banks to recover these bad loans. If banks can't recover the loans, then it will create a situation similar to the great depression of 2008.

Why bad loans are offered?
We have already discussed the one reason that banks want to earn a profit. Sometimes the business doesn't work out and loans become bad loans. But other reasons are worrisome. Sometimes there is  political pressure on the banks to offer the loan even against their will. Whereas sometimes it is because of corrupt bank officials. Even though bank official know that the loan will turn out to be the bad one, he grants such loan in exchange for the bribe.

What should we know?
From where do banks get money to lend? It is the money we invest in banks to earn small interest on our modest income. So effectively we lend money to these businessmen. In simple terms, Mallya has robbed us of Rs.7000 crore.

Here is a Kingfisher Airlines crisis timeline:

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