Reserve Bank asks banks to focus on recoveries of non-performing assets

NDTV, 01 Mar 2012 | 10:55 AM

The Reserve Bank of India has asked Indian banks to focus on recoveries, bankers said after a Wednesday meeting with the central bank.

However, the consensus was that non-performing assets are at manageable levels, bankers said after the meeting which also covered implications of Basel-III norms on NPA recognition.

No individual NPA accounts were discussed, bankers said, but aviation, textile and steel sectors were part of the dialogue. Earlier, there had been speculation that the matter of Kingfisher Airlines would be brought up at the meeting.

Bankers also suggested that restructuring should be extended to smaller accounts instead of just large-ticket size accounts, said Pratip Chaudhuri, chairman of India’s largest lender State Bank of India.

Chaudhuri said that an account should exit restructuring classification after one year, and that a restructured loan should not remain classified as such for its lifetime.

Other bankers have proposed a timeline of two years to exclude an account from restructured classification

He added that banks had asked for proper guidelines on classification of restructured loans, and that the definition should include timeline, clear guideline when account has exited restructured classification.

If a restructured loan adheres to revised repayment schedule, it should be out of restructured classification, he said.

The central bank, however, may not sector-specific NPA dispensation due to a need to comply with global standards.

There were no concerns about understatement of NPAs.

Banks, however, will continue to recognise NPV loss upfront

The meeting was attended by top representatives of public and private sector banks, among them SBI, ICIC Bank, Axis Bank, Punjab National Bank, Andhra Bank, Bank of Baroda, Union Bank, Bank of India, and Indian Overseas Bank.

Bad assets will pile up, but overall situation is under control: bankers

Anup Roy :Livemint:29 Feb 2012


Airlines, textiles, iron and steel are some of the sectors that are showing strains and firms are finding it difficult to repay bank loans


Mumbai: Top bankers told India’s central bank on Wednesday that in the current economic environment they could end up piling up more bad debts but overall the situation will remain under control. Banks said bad assets may grow by Rs. 60,000-65,000 crore—about 1%.


Airlines, textiles, iron and steel are some of the sectors that are showing strains and firms are finding it difficult to repay bank loans. When they are not able to pay back for three months, banks are required to treat the accounts as sub-standard and set aside money for the same.

Rising bad assets impact banks’ profitability as they do not earn interest on such assets, and on top of that, they need to set aside money.

Bankers discussed the issue at a meeting convened by the Reserve Bank of India (RBI) at its headquarters in Mumbai.

RBI, on its part, asked the bankers to step up their recovery process and tighten their asset quality monitoring mechanism. The central bank also took stock of Indian banks’ preparedness to embrace the Basel II norms, global rules that will assess bad assets in a different way.

Banking industry’s bad debts as a percentage of total lending are now at a six-year high.

Chiefs of State Bank of India, ICICI Bank Ltd, Punjab National Bank, Bank of Baroda, and Bank of India, among others, discussed relevant issues with RBI deputy governors K.C. Chakrabarty and Anand Sinha.

The meeting did not discuss in detail restructuring of loans as an RBI-appointed committee is looking into this, a banker who attended the meeting said.

“We did an assessment of NPAs (non-performing assets). Generally, there was a feeling that we should not be complacent but it (NPA) is not something which is too scary. We said NPA and restructure definition should have a time line. If an account performs after restructuring it is not affected for life... So that account should be taken out of the categorization of restructuring,” State Bank of India chairman Pratip Chaudhuri told reporters after the meeting.

“RBI was by and large confident that we should be able to reasonably bring down NPAs in the system even as higher incremental slippages can be expected,” said another banker present at the meeting, who declined being named.

Banks have seen an increase in bad loans as economic growth slows to 7% this fiscal from 8.4% last year. After declining continuously between fiscal years 1995-96 and 2007-08, the total stock of bad loans at banks has risen sharply, RBI’s Sinha said this month.

Tuesday’s discussion focused on four key points. Apart from getting bankers’ view on bad debts, RBI sought to know banks’ preparedness for advanced approach under Basel II norms. Banks are to apply to RBI by June or September stating their readiness to move on to the new system of monitoring loans and mitigate risks of bad debts.

RBI also asked banks to improve their MIS (management information system) capabilities and build up their data warehousing capabilities so that the returns filed by banks, or regular bank activity-related statistics, are completely system driven.

One critical element discussed at the meeting was that all accounts should have a single unique identification number instead of multiple identifications for different types of loans.

RBI’s latest data shows that bank credit growth has fallen to 15.7% against 24% a year ago as on 10 February.

Segregated data released on Wednesday showed that credit to industry increased by 20.2% in January 2012 compared with 26.5% in the previous year

anup.r@livemint.com

M/s.IOCEE Exports ltd & ors V/S The Authorised officer, IOB

R.A(S.A):96/2010

1.         This appeal impugns the order dated 10.7.2009 passed by the Learned Presiding Officer, DRT-I Chennai in SA No. 158/2009.

2.         The case of the appellants may be stated as follows:

It is stated that the first appellant is a public limited company engaged in the business of marketing agriculture produce for exporting rice, maize and wheat etc., and textiles to foreign countries and that it approached the respondent bank for certain credit facilities and that the respondent bank by its sanction letter dated 29.3.2005 sanctioned credit facilities of Rs.19.8 crores, out of which Rs.13 crores was for the agriculture produce marketing business and the remaining Rs.6.8 crores was towards the textile export business.  It is stated that the respondent bank released only Rs.10 crores as against the sanctioned limits of Rs.19.8 crores.  It is stated that the respondent bank issued the notice under Section 13(2) of the SARFAESI Act on 21.4.2008 and that the appellants also sent a reply vide their letter dated 29.5.2008 pointing out the various refund claims and had also submitted an OTS proposal for a sum of Rs.150 lakhs.  It is stated that the said proposal for OTS was rejected by the respondent bank by their letter dated 26.6.2008 without considering the aspects brought out by them and that the respondent bank thereafter issued the possession notice on 31.7.2008.  The appellants have averred various irregularities on the part of the bank and they have stated that the present position of the appellants is only due to the action of the respondent bank. It is stated that the total loss incurred by the appellants is Rs.915.42 lakhs and that the said amount exceeds the demand made by the respondent bank and in fact the respondent bank has to refund the balance amount to the appellants.  It is stated that the loans availed by the appellants are for marketing of agricultural produce and therefore the respondent bank ought not to have initiated action under the SARFAESI Act.  It is stated that the account of the appellants is said to have been classified as NPA on 31.8.2006 and if that was true then the respondent bank could not have sanctioned fresh packing credit of Rs.150 lakhs during the month of January 2007.  It is stated that the respondent bank denied the OTS which the appellants were entitled to under the RBI guidelines.  It is stated that the valuation of the hypotheca itself would be more than Rs.2.5 crores and that the respondent bank cannot proceed to sell the immovable property of the appellants without taking an inventory of the movable goods and assessing their value.  It is stated that the sale notice issued in this case is contrary to law and that it has been issued with malafide intentions.  It is stated that the sole intention of the respondent bank is to bring the valuable properties of the appellants for sale for a throw away price and that the respondent bank has not valued the property correctly.  It is stated that the notices issued under Section 13(2) and 13(4) of the SARFAESI Act are not in accordance with law.  It is stated that respondent bank even after debiting the premium payable to ECGC for the pre-shipment failed to claim the amount from ECGC.  It is stated that the appellants aggrieved by the order of the Ld. Presiding Officer, DRT-I Chennai dated 10.7.2009 made in SA No.158/2009 have filed this appeal and prayed that the appeal be allowed.

3.         The Ld. Counsel for the appellants stated that the provisions of Section 13(3A) of the SARFAESI Act has not been complied with by the bank and that for this reason alone the proceedings of the Authorized Officer is liable to be set aside.  The Ld. Counsel stated that though this ground was taken in the grounds of the SA filed before the tribunal below and in the written arguments filed on behalf of the appellants the Ld. Presiding Officer has chosen not to refer to the violation of the provisions under Section 13(3A) of the Act.  The Ld. Counsel for the appellants stated that the respondent bank did not disburse the entire amount sanctioned by it, and that even after declaring the appellants’ account as a ‘NPA’ the respondent bank went ahead to sanction further loans though they did not disburse the same.  The Ld. Counsel also drew the attention of this Tribunal to paragraph 9 of the order of the Ld. Presiding Officer and stated that the Ld. Presiding Officer has failed to consider the aspect of violation of Section 13(3A) of the Act by the Authorized Officer and that the same has caused serous prejudice to the appellant and prayed that the appeal be allowed.

4.         The appellants filed their written arguments and the same forms part of the record. The appellants relied upon the judgment of the Hon’ble High Court of Madras dated 6.9.2011 made in W.P. No.6710/2011 in the case of “Industrial Finance Corporation of India Limited and Another Vs. The Debts Recovery Appellate Tribunal, Chennai and two others” and the judgment of the Hon’ble Supreme Court of India dated 4.11.2011 in the case of “J and K Housing Board and Anr. Vs. Kunwar Sanjay Krishnan Kaul and others” in support of his contentions.

5.         The Ld. Counsel for the respondent bank drew the attention of this tribunal to the notice issued under Section 13(2) of the SARFAESI Act and the communication addressed by the appellants to the Chairman and Managing Director of the bank with a copy to the Authorized Officer and stated that the receipt of the said communication by the Authorized Officer can in no way be said to be under the provisions of Section 13(3A) and added that therefore there cannot be any violation of Section 13(3A) of SARFAESI Act.  The Ld. Counsel drew the attention of this tribunal to the letter dated 29.5.2008 sent by the appellant and stated that a reading of paragraph 3 at Page of the said letter would reveal that the appellants have admitted that they have utilized the limits to the extent of Rs.10 crores out of Rs.17.26 crores. The Ld. Counsel stated that no amount was sanctioned after the issuance of notice under Section 13(2) of SARFAESI Act.  The Ld. Counsel further drew the attention of this Tribunal to the reply sent by the appellants to Section 13(2) notice at page 89 of the typed set of papers and stated that it is not a reply to Section 13(2) notice as the appellants have not raised any objections to the Section 13(2) notice and that the same can be considered only as a representation made by the appellants to the Chairman of the bank for the grant of a OTS.  The Ld. Counsel added that the appellants have not taken any ground regarding the violation of Section 13(3A) in the SA. The Ld. Counsel prayed that the appeal be dismissed.  The Ld. Counsel for the Respondent Bank relied upon the following judgments in support of his contentions:

i)                    Industrial Finance Corporation of India Limited (IFCI) Vs. DRAT, Chennai – CDJ 2011 MHC 4916.

ii)                   Kalpesh P.C. Surana Vs. Indian Bank – 2010 (3) CTC 287.

iii)                 B. Shanmugam Vs. Union Bank of India – 2008(2) CTC 249

iv)                Industrial Development Bank of India Ltd. Vs. Kamaldeep Synthetics Ltd. 2007 (2) CTC 397.

6.         The respondent bank filed its written arguments and the same forms part of the record.

7.         Heard the Ld. Counsel for the appellants and the respondent bank.

8.         It is seen that the appellants have based their case firstly on the violation of Section 13(3A) of the SARFAESI Act by the Authorized Officer and secondly on the exercise of choice of the Authorized Officer in selecting a particular secured asset for taking possession under the provisions of the SARFAESI Act.

9.         It is seen that the notice under Section 13(2) of the SARFAESI Act was issued by the Authorized Officer empowered by the Cathedral Branch of Indian Overseas Bank, 762 Anna Salai, Chennai-600002 to the appellants and the first appellant represented by its Managing Director had sent a letter to the Chairman and Managing Director, Indian Overseas Bank, Central Office, Chennai-600002 and in the said letter the first appellant has stated that the appellants are in receipt of the notice dated 21.4.2008 issued by the Cathedral Branch, Indian Overseas Bank regarding payment of the dues to the bank and the first appellant has prayed that an OTS be given to it in view of the difficult financial position of the first appellant.

10.       From a reading of the letter of the first appellant dated 29.5.2008 addressed to the Chairman and Managing Director, Indian Overseas Bank, Central Officer, Chennai-600002 the following are revealed:

i)                    The said letter is neither addressed to the Authorized Officer nor to the secured creditor in this case being the Cathedral Branch, Indian Overseas Bank, 762 Anna Salai, Chennai-600002.

ii)                   The first sentence of the letter reveals that the first appellant was aware that the payment is due to the Cathedral Branch, Indian Overseas Bank, Chennai-2 and though the first appellant is in knowledge of the fact that the objection / representation pursuant to the Section 13(2) notice has to be made only to the said branch of the bank or to the Authorized Officer of the said branch chose not to give a representation or raise an objection to the notice issued under Section 13(2) to the Authorized Officer of the said branch or to the said branch.

iii)                 The letter was addressed to the Chairman and Managing Director, Indian Overseas Bank, Central Office, Chennai and it was only a letter consisting of only pleas for grant of OTS to the first appellant and that only a copy of the same is marked to the Cathedral Branch, Indian Overseas Bank, Chennai-600002.

11.       Therefore from the above it can be seen that the appellants though were aware of the fact that the Section 13(2) notice emanated from the Authorized Officer, Indian Overseas Bank, Cathedral Branch, 762, Anna Salai, Chennai-600002 had chosen not to make the objection/ representation with respect to the said notice but chose to plead for grant of OTS before the Chairman and Managing Director. Therefore in view of the above fact the letter dated 29.5.2008 can in no way be considered as an objection or a representation made in response to the Section 13(2) notice issued by the Authorized Officer, Indian Overseas Bank, Cathedral Branch and such being the case the contention raised by the appellants that the bank had violated Section 13(3A) has to be brushed aside.

12.       In so far as the second point with respect to the choice exercised by the Authorized Officer with respect to the property that he took possession of, the same cannot be questioned by the appellants as the Authorized Officer is empowered under the provisions of the SARFAESI Act to pick and chose any of the secured assets for the purpose of enforcement of the security interest of the secured creditors under the provisions of the SARFAESI Act.

13.       Therefore from the fact that the letter dated 29.5.2008 addressed to the Chairman and Managing Director, Indian Overseas Bank, Central Office, Chennai cannot be taken to be a representation or an objection made to the Authorized Officer or to the branch in response to Section 13(2) notice, from the fact that the Authorized Officer is well within his powers to pick and chose any of the secured assets for the recovery of public money under the provisions of the SARFAESI Act and from the fact that no contravention of the provisions of the SARFAESI Act or the Rules made thereunder have been countenanced in this case and from the fact that that the Ld. Presiding Officer has considered in detail and has arrived at a proper conclusion that the SA has to be dismissed this tribunal is driven to conclude that the order of the Ld. Presiding Officer does not suffer from any infirmity and proceed to dismiss the appeal.

14.       Accordingly the appeal is dismissed.  No costs

The above order was delivered by the Honble Chair person of DRAT Chennai on 29th Feb 2012

Kingfisher's nosedive poses dilemma for government

  Reuters : Sun, Feb 26, 2012 at 08:12 : 

As Kingfisher Airlines careens toward collapse, the central government finds itself between a rock and a hard place.

The government, already weakened by a string of corruption scandals over the past year, will face further political heat if it tries to rescue a money-losing private carrier - especially one owned by a flamboyant liquor baron.

If it lets Vijay Mallya's airline fail, however, the government will hurt state-run banks, which own about a fifth of Kingfisher's shares and three-quarters of its $1.3 billion debt.

Kingfisher is struggling with fewer flights and pilots, staff demoralised by unpaid salaries, and outstanding dues to aircraft lessors, oil companies, airports and tax authorities.

It needs at least $400 million quickly to keep flying, figures Centre for Asia Pacific Aviation (CAPA), a consultancy . Mallya's plans to raise funds through a share sale have been stalled and he has been lobbying the government to get state-run banks to lend more.

The fast clip at which the government has moved to change regulations in the past two months - airlines can now directly import fuel, lowering their costs, and private carriers can fly overseas more - has lifted expectations that Mallya may eventually win the help he needs from the government.

"India: Kingfisher's national carrier," one Tweeter quipped last week.

A government bailout for a private carrier would not go down well with the public in India, where airlines are still not the common man's preferred mode of travel. Conscious of that, the government insists it is not looking to bail Kingfisher out.

Mallya avoids the bailout word too and, instead, says he is only asking for more working capital, which Aviation Minister Ajit Singh says is up to the banks to decide on.

However, late last year Prime Minister Manmohan Singh spoke of finding ways to help Kingfisher, which has led many to believe that in the end the government will come to its rescue.

"Is the government being duplicitous about its stand on the increasingly distressed Kingfisher Airlines?" the daily Business Standard wrote in an editorial, advocating no more funds from state banks for a carrier that wasn't 'too big to fail'.

Saving a private airline would be risky for Singh's government, which has faced pressure from allies, political opponents and civil activists for more than a year over graft.

"After all the charges of crony capitalism ... if the government rolls out the red carpet for Kingfisher, it will once again come under attack," said Paranjoy Guha Thakurta, a political analyst.

Mallya, whose liquor business clout helped win him a seat in the upper house of parliament two years ago, could use his political ties to save the carrier he started in 2005.

Allowing foreign carriers to buy a stake in Indian carriers is probably the key policy step Kingfisher desperately wants the government to take. Unlike in 2007, when ailing airlines were bought over by Kingfisher and Jet Airways , there are no domestic carriers circling to buy up rivals today.

"In the short term, it is in urgent need of money. If they get about 10 billion rupees now, that will last them about three to six months; and after that we will definitely have FDI (approval for foreign direct investment)," said Sharan Lillaney, an aviation analyst at Angel Broking.

However, foreign carriers have shown little interest so far in investing in the Indian airline sector, which has grown by 17 percent in 2011 but intense competition has driven five out of six local carriers to massive losses.

Indian carriers are on course to post cumulative losses of up to $3 billlion for financial 2011/12, CAPA estimates.

"I don't think FDI is the answer to all the problems. Indian carriers need to resolve the fundamental issues of excess capacity, high cost structures and unviable pricing strategies," said Kapil Arora, a partner with Ernst & Young.

DREAMS TURN SOUR

After India embraced economic reforms two decades ago, a slew of private carriers rose in the Indian skies and then ran into the ground.

Modiluft, East West, NEPC Airlines and several others shut down operations within a few years of their launch for reasons ranging from inability to manage cost to funding concerns.

Mallya, who had so far run a very successful liquor empire - turning it into the world's second-largest by volume through acquisitions - probably chose to ignore past lessons.

He took pride in getting a five-star rating for his airline, making it the first Indian carrier to provide passengers with a personal video screen, offered a superior level of service and even hand-picked air hostesses himself.

For Mallya, who owns several yachts as well as cricket and Formula One teams, an airline was an extension of his persona.

"For sure, there was ego and vanity at play because even when he started the airline it was not a secret worldwide that the airline business doesn't bring in easy money," said Santosh Desai, a brand strategist and columnist.

In a rush to expand, Mallya acquired Air Deccan in 2007 for $220 million, a deal that saved the tottering low-cost carrier but over-leveraged Kingfisher.

Soon after, a global downturn hit Indian carriers hard, choking access to the equity market. Most airlines survived the crisis, but a debt mountain built up at Kingfisher and the top carrier, Jet Airways . Equity markets recovered, but Kingfisher failed to raise fresh funds.

This, along with operational losses partly due to high fuel costs - Kingfisher has never reported a profit - were crippling.

Questions have also been raised about its business model.

"India is a very price-sensitive market. In transportation, it is a volumes game; many of the frills do not matter in a short two-hour flight," said Amber Dubey, director of aviation at global consultancy firm KPMG.

"What passengers really want is on-time performance (OTP), clean and safe aircraft, efficient service and low fares."

Kingfisher now flies only 175 daily flights from a peak of 400 six months ago, with only 28 of its fleet of 64 operational. Lessors have started cancelling leases for planes, and the aircraft Kingfisher owns are mostly pledged with lenders.

An uncertain future and delayed salaries have driven away about 300 pilots and a few hundred other staff to rivals.

The carrier is also losing prime slots at key airports, which, along with a staff crunch, may prevent a quick return to normal operations even if it does survive this debt tsunami.

About nine-tenths of Mallya's 58.61 percent stake in Kingfisher is pledged. Even the brand 'Kingfisher' has been used as collateral, according to media reports.

The company is now seeking to restructure its $1.3 billion debt, which may force lenders to take a writedown, extend fresh loans and make Mallya plough in fresh equity.

This has been in the works for six months, however, and it is unlikely an agreement can be reached in a hurry.

In a deal done early last year, lenders converted debt into a stake of just over 23 percent in the carrier at about 65 rupees a share. But the stock has lost about 60 percent since the beginning of 2011, closing down 4.35 percent at 24.20 rupees on Friday.

THE FALLOUT

Kingfisher's end, if it happens, would be the biggest failure in Indian aviation history and would impact the sector in the short term.

"If you see such a substantial number of seats being removed from the market suddenly, it will have a very adverse impact on the fares," said E.K. Bharat Bhushan, chief of India's aviation regulator.

A collapse could also lead to thousands of job cuts and the withdrawal of flights on some loss-making routes that Kingfisher flies exclusively or shares with state-run Air India.

Kingfisher's market share in domestic skies, which has halved to about one-tenth in recent months, will get divided among rivals, with the low-cost carriers benefitting most.

Ever since Air India and Kingfisher flew into turbulence, budget carriers' market shares have increased dramatically.

If Mallya can keep moving levers in Delhi, as he has in the past, Kingfisher could remain more than a brand of beer. If he falters and the government withdraws the life support, Kingfisher could run into the ground quickly.

The failure would also dent Mallya's image, crafted through the years with massive display of wealth, wine and women.

"Mallya represented the extreme of an exuberance that India has seen lately," said Santosh Desai. 

"But business cycles can be cruel and those traditional values of caution and prudence take precedence over unfettered ambition."

“Banks have to do a balancing act during debts recovery”

G.S.Hegde, Principal Legal Advisor to Reserve Bank of India speaking at a workshop on SARFAESI in Madurai on Saturday. Photo: G. Moorthy

The Hindu : Madurai:26 feb 2012

Banks have to do a great balancing act when it comes to the subject of debts recovery. They have to ensure that the bank recovers the debts and protects its liquidity and at the same time it should not put the borrower in embarrassing situation said, G.S.Hegde, Principal Legal Advisor to Reserve Bank of India.

Delivering the inaugural address at the two-day workshop on SARFAESI Act (The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002,), titled ‘Is SARFAESI a complete code for recovery,' here on Saturday, Mr. Hegde talked about the days of debts recovery prior to the days of Debts Recovery Tribunal Act and the transitions and also cited how the Delhi High Court had mentioned that the DRT Act as unconstitutional.

SARFAESI Act allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. It enables banks to reduce their non-performing assets (NPAs) by adopting measures for recovery or reconstruction.

Mr. Hegde mentioned that the banks should have only trained recovery agents and every bank shall have a grievance redressal forum with regard to debt recovery. He also spoke on how important it is to deal with humaneness and cited Justice A.R.Lakshmanan's observations in a case where he says how recovery agents have become modern day Shylocks in his words “A man's self-respect, stature in society are all immaterial to the agent who is only primed at recovery. This is the modernised version of Shylock's pound of flesh.”

Speaking earlier, D. Stanley David, presiding officer, DRT, Madurai said that bank officers should not have a closed mind and drive out the borrower but have to help him at the maximum to see whether he could avail loan.

A seminar book was released by N. P. Rajan, Deputy General Manager, Indian Bank, Madurai Zone and the first copy was received by K. Lakshmipathikumar, DGM, Canara Bank, Madurai circle.

The workshop among others deals with topics on, What is fair valuation of secured interest, Priority of charges, Agricultural Land and The Companies Bill-2011. Pala Ramasamy, Advocate, L. Balaji, Valuer were the convenors of the workshop.

Kingfisher's management rejig won't solve crisis: Experts

Moneycontrol : Sat, Feb 25, 2012 at 14:59 : : CNBC-TV18

Kingfisher is fast becoming India's version of too big to fail. The company hasn't been able to pay its staff, taxes and now can't pay for fuel. But it's not just Vijay Mallya's money that's going down. Banks have lent over nearly Rs 7,000 crore in loans and hold a chunk of the company shares.

CNBC-TV18's special show Indianomics discusses if is it time banks walk into the boardroom and force a new management? Panelists include Former SBI Chairman, AK Purwar, Ashvin Parekh, partner of E&Y, and B D Narang, Former Chairman and Managing Director of Oriental Bank. But before that an outline of the problem from Gopika

Critics and columnists are writing Kingfisher's obituary. The company seems to be hurtling towards its end.  Lenders are not ready to put in good money. Already Rs 7,000 crore of banks' money is stuck with Kingfisher. 8 out of 18 lenders have classified the account as non-performing loan in the third quarter.

Lenders are now insisting that the company clear off all the interest dues before they even consider disbursing fresh loans. Vijay Mallya may have committed to repay all over dues by March end, but how will Mallya raise this money? According to Veritas investment research firm, Mallya has very few options available both within Kingfisher and outside.

The cash starved airline company reported a loss of Rs 1700 crore for the 9 month period as against Rs 1006 crore in the same period last year. In Q3 alone, the losses amounted to Rs 444 crores.

The company does not have any assets to raise funds as it is already pledged with banks. Among group companies, Mallya could look at selling the remaining 55 lakh treasury shares in United Spirits. But that again will be difficult as it will dilute the promoter shareholding in the company which currently stands only at 28%.

Vijay Mallya is desperately looking for equity and is in serious talks with some big investors, meanwhile lenders who have not classified Kingfisher as non performing assets could also throw in a lifeline.

Here is an edited transcript interview. Also watch the accompanying videos.

Q: First let me get the legal issue out of the way. Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and other DRT notifications is it legally possible for the bankers to walk into the boardroom and say, I want another manager?

Parekh: There are two parts to this; when the MS Verma Committee was constituted which in fact created some kind of a blueprint for SARFAESI Act, at that point in time five methods of asset reconstruction were actually evaluated and different methods under which asset reconstruction can be carried out by the lenders, by banking companies was envisaged.

When the SARFAESI Act was enacted it very clearly gave the authority to the regulator that is the RBI to work out the regulations associated with each method of asset reconstruction.

Now change of management according to both the SARFAESI Act was envisaged and later on when RBI clarified on this position, has several other legal connotations. There can be recourse available to the management, judiciary intervention and a forced change in the management.

After keeping that into consideration the RBI has actually formed regulations with other methods of asset reconstruction but there is no clear regulation associated with the change of management.

If the management participates in such a programme with the lender, if the management agrees to work with the lender then of course you have a way out and it is not exactly legal. Then it is more business approach in which case the borrower readily agrees that if someone else were to run that business on his behalf there is a better chance, some order of governance can be put out but legally that's a position at this point in time.

Q: You are apprised of the problem itself since it hitting us in the form of daily headlines. Can a banker just walk into the boardroom and say I want a change in management; this is not working assuming of course options are available but can he do it?

Purwar: Actually I have not seen such a single case. We had a very well experience in the banking sector. Some of the section of accounts were sick but then unless and until management is with you and is agreeable to go long with you it represents the scheme of the things becomes extremely difficult.

Let me go back little to the sickness side of it, in the existing scheme of things we have SARFAESI but there is sick units, Board for Industrial and Financial Reconstruction (BIFR), as an institution. This corporate debt restructuring mechanism which is run by IDBI and my assessment has been that CDR mechanism by way of rehabilitation of sick units has worked far better and much more effectively and fruitfully then the system which is run by IDBI.

These existing institutions, their efficacy also needs to be seen but the present scheme of things its just corporation of existing management is vital for any tough decisions to be taken in respect of sick terms.

Q: I have spoken to bankers on the matter, they refuse to come of record because it is an ongoing problem and they do not want to aggravate by shooting their mouth as they put it but the airline sector itself is in quite a mess. None of the players are really working at a profit. Some of them are making minimal losses and maybe in some quarters they are making profit but otherwise it is quite a huge mess. Do you think in a situation like this the government itself has to intervene. Are we looking like a Satyam kind of a situation here where the government or CLB or the ministry of company affairs sits in with the bankers?

Narang: First I will address your first question legal position. Under the SARFESI Act RBI was supposed to have issued rules to change the management but they never finalised the rules so far. There were in fact consultations when the management can be changed, in those consultations we did make it clear that there should be a provision to change the management particularly under certain known conditions. My comments are only pertaining to large corporates not to SMEs. That is if there is a serious diversion of funds.

Secondly, at times promoters themselves are fighting with each other and not allowing the company to function. Three, there are serious cases of inside trading for which the company has come to trouble. But if it is a normal routine but RBI has so far not made up their mind. They have not come out with clear rules for the change of management. In one of the cases where we were 100% lenders and we have taken the physical possession we did move for the change of management but the promoter got stay from the Chandigarh High Court.

I have a clear example, that this particular case, industry they have been fighting with each other. In fact they have been trying to under price their products to win over the customer base. All such activities they cannot be funded by bankers itself.

Funds for acquisition of customers in a loss making activity have to necessarily come from equity. All such people have been primarily funded by the equity and to small extent by the lenders. Unless they change the very business model and the overhead structure cost, overhead structure tax, overhead structure change they can never make serious money.

At least in half a dozen occasions on various public forum I have found all the promoters admitting that they don't hope to make money for a considerably long time to come.

I don't know why the bankers didn't pick it up. This money had it come from the private equity by now the problem would have been reduced to one third. I felt that at this stage you change a management it does not bring results because the promoter himself as a credibility. If he goes to the market he can still use his contacts and bring in some equity.

I must say that I don't think Mallya is a wrong face to call for equity, in fact he is the right face. In this particular case you do not built up a good case to forcibly to change the management. Maybe if the contacts were that of Satyam one could argue that change of management will bring equity player but not in this particular case.

Q: Do you think that the law needs to be fashioned or at least the bankers needs to be empowered in such a manner that change of management is more effective. What is the process for change of management, is it just a 90 day notice or is it much worse?

Parekh: No, it is much worse. The first thing that will happen as Narang said is the borrower will immediately obtain a stake for example from the court. If he is got convinced to begin with that there will be any value addition on account of that change how will the bank be able to run it.

So unless the bank puts up a convincing story to say that this is a programme on part of the lender to really work out a management programme or a change in management programme he has the judicial system available to him basically.

Q: What is the option in the existing case only by way of example bankers or public money, depositor's money is Rs 7,000 crore and 58% of what it be say Rs 500 crore capital. Mallya's money is about less than Rs 300 crore. There is no justice that bankers should not effect the management when they have put in so much money, but what is the hurdle then?

Purwar: First of all let us look at the industry and then the management side. If we think of changing the management, first do we have the legal tools to do so, I have my own serious doubts about it, we do not have legal tools to do so. The second question is even if you have legal tools to do so is it correct to do it.

I think that in itself will be debatable in the context to what Mr. Narang said, but the basic point remain that is it necessary as a tool for the bankers to have it, I absolutely think rocess should be laid down that the money has been diverted or the industry has become irrevocably sick for whatever reasons.

Bankers and lenders as a community should have powers to effect changes. Let me give you a simple example that when the steel sector was in a very bad shape and there were certain players who were very good and they were very keen to acquire these companies to scale up the capability and they had necessary capability to make it happen.

However, they just couldn't affect this change, but the laws of the land were such that we were not having any option to do so.

Q: Any specific change you would suggest Mr. Narang, assuming you are agreeing with what Mr. Purwar says?

Narang: I do not know a single businessman on the earth who has not come to bad times. I do not know a single business on the earth, which has not come to bad times. And in difficult situations I find the companies are leveraged as many 20 times than their net worth.

Why should the management not be changed? There could be an argument that this was of no fault of the entrepreneur, this was extraneous considerations.

I will say that let the RBI or let the Ministry of Corporate Affairs lay down the clear rules that wherever the grounds of difficult situation are fraud, are based on dispute or inside trading or any other such objectionable.

After fulfilling following conditions the banks, maybe 75% of them if they vote together they should be able to change the management. Why should there not be rules, there must be rules for change of management. This itself will curb adventurism.

Q: What is the way out now? Is it that you should have the government step in?

Purwar: The point is that maybe I maybe wrongly believing it, but what I believe in is that government should try to keep away from business as much as possible. Secondly let us look at present structure of restructuring and rehabilitation, which are available in the system.

I had a very great experience in curbing debt restructuring mechanism, which is run by IDBI and I have seen it's success in very large number of cases.

Q: He has gone through CDR, I mean not exactly CDR but a debt revamp is over and done.

Purwar: There is the difference between a debt revamp and a compressive corporate debt restruction mechanism which imposes a lot of discipline on lenders, a huge amount of discipline on the part of the promoters.

Most importantly in my view Kingfisher today requires huge amount of equity infusion. Equity infusion whether its government, private sector, private equity or foreign airlines would like to do it. I think these questions need to be thoroughly examined enabling legal mechanism or enabling mechanism need to be put in place.

Q: I take Mr. Purwar's point that government should stay off as much as possible but in the extra ordinary circumstances where the government has intervened through some technocrat like in the case of Satyam where they got in Mr. Achuthan and Deepak Parekh and Karnik, it worked very well. So in this specific case since there is no fraud involved but probably wrong pricing and wrongly run company. Wouldn't you say that bankers are not empowered to take certain decisions. Some extra ordinarily legal munificence has to be shown that can be shown only by government. I am only asking you for options out of this mess.

Narang: There are three options available. 20 years ago when I used to travel from Delhi to Mumbai the ticket was Rs 5300. Today again the ticket is available for Rs 6000. Something wrong has gone somewhere; meanwhile petrol prices are gone up by almost 60 times, labour prices have gone up double and now we have landing charges which are troubling.

This is across the board, now to that extent the problems can be identified across the board; some sort of government intervention could be helpful. You can't kill the whole industry.

Second part is the under pricing part still, why should the government expect the ticket to be available at Rs 5300 and why should it not be made available at a market price. So they should be first, I know I am working with 8 or 10 private equity people and I know the rigorous scrutiny they do.

This is a clear case that there has to be some check on the management on various pricing issues. If bankers have to put in money, I'll say they should insist equity participation by the private equity before they put in their further money. Because if they can't step in at least other professionally trained people can step in who can keep a control on the various operating efficiencies of the company.