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Kingfisher Doesn’t Need A Bailout

Too many articles have been talking about the situation at Kingfisher, with the assumption that:

a) Kingfisher is a private carrier and can’t be bailed out.

b) But if it dies, it will impair, very seriously, many state owned banks, so it must be rescued as a necessary evil.

This is not correct. Let me explain.

Firstly, let me say that if the banks do get into trouble, the better mechanism is to bail out the banks by adding equity to them. This will hurt the banks’ shareholders (since more equity means more shares to distribute profits to) but that’s the risk taken by shareholders – a public-sector bank may not go bust, but the shares can go to zero.

Kingfisher, as a private entity, must be allowed to fail. The total loans it has taken come close to 8,000 cr. which is significant in the sense that it is about 1.5% of total bank capital, obviously, concentrated in a few banks. That 8,000 cr. is not a hit the banks will have to take immediately – RBI has even mentioned earlier that they can take the hit amortized over time if they like. Plus, about 25% of the hit has already been provisioned, so what’s left to be taken is about 5,000 cr.

Assume the hit is spread over 3 years – 12 quarters, meaning Rs. 400 cr. per quarter, which is not very difficult for the system. It may require that a few banks merge and raise some capital; some from the government, some from the public. It may need banking profits to be down substantially to account for the hit, which is all right. The “bail out” will then have to just add capital to banks appropriately, if required.

And the fall won’t be sudden. In India, companies don’t just go bankrupt. They take years to die. They won’t pay back their loans, perhaps, but they’ll go through a long round of negotiations about assets and brands and so on, and if they do die, may take five years or so. By that time, everything will be forgotten and banks would have moved on.

The airline sector will lose some jobs, and some routes will see price rises. That is also all right, since we need to see the profits in this industry return, even if briefly until some other joker decides to put his money into the pie and cut fares like crazy.

Many other articles call for Mallya to put his personal money or sell UB shares or such, to save the airline. Now unless he has siphoned off money from KFA, this doesn’t make any sense. He is a shareholder and stands to lose what he’s invested – just because banks gave the entity a lot of money doesn’t mean they have recourse to his personal funds. (In some cases, they might take promoter collateral, and some banks have, but by and large Mallya has no personal liability) 

The need for a bailout is not for Kingfisher, and is unlikely to be needed for the banks as well.

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