There is a reason Kingfisher founder Vijay Mallya is particularly disliked, by banks and the public at large, and it isn’t all because of his flamboyance. It’s because Mallya has been named a wilful defaulter – a technical term that underlines the wasteful callousness that has come to be associated with Mallya and his brand.

What is a wilful defaulter? People run out of money in trying to pay back loans all the time. It comes with the territory, since not all businesses will be successful, especially not in tricky industries like aviation. Occasionally, though, there are businessmen who have the means to pay off their debts and yet default on their loans. These people are officially marked out as wilfully defaulting, allowing their companies to run into the ground, even when they could have done something to stop it. And Mallya is the poster boy of wilful defaulters.

Mallya is now among the top five willful defaulters in the country, alongside Winsome Diamonds and Jewellery, Zoom Developers, Surya Vinayak Industries and Deccan Chronicle Holdings, according to a recent Indian Express report.

A Parliamentary standing committee report tabled last month said that wilful defaulters owe state banks at least Rs 64,335 crore. If all loans to wilful defaulters were to be recovered, public sector banks’ Non Performing Assets would come down by almost 21%.

Mallya’s Kingfisher airlines owes at least Rs 9,000 crores to a consortium of 17 banks led by the State Bank of India which lent to the airline in return for its trademarks and goodwills – valued at over Rs 3500 crore in 2010.

This is the major loan default which presumably prompted Mallya to leave the country even as the enforcement directorate, the debt recovery tribunal and several other arms of the executive machinery have served him summons and notices.

Because of the limited liability of most companies, there is often very little that banks and the government can actually do about wilful defaulters, besides naming and shaming them. Mallya’s case is a little different, because he gave a personal guarantee, which makes him personally liable for some of the loans. This is the opening that banks have seized on in addition to the various cases of alleged cheating that agencies are investigating.

Change in mindset

Reserve Bank of India Governor Raghuram Rajan, delivering the Dr Verghese Kurien Memorial Lecture in 2014, covered just this ground.

“A defaulting banker in Barcelona in mediaeval times was given time to repay his debts, during which he was put on a diet of bread and water. At the end of the period, if he could not pay he was beheaded. Punishments became less harsh over time,” he said.

“We need a change in mindset, where the wilful or non-cooperative defaulter is not lionised as a captain of industry, but justly chastised as a freeloader on the hard working people of this country.”

Although Rajan argued against draconian punishments to go after defaulters, he called for better risk sharing, by making banks a part of the process.

What I am warning against is the uneven sharing of risk and returns in enterprise, against all contractual norms established the world over – where promoters have a class of “super” equity which retains all the upside in good times and very little of the downside in bad times, while creditors, typically public sector banks, hold “junior” debt and get none of the fat returns in good times while absorbing much of the losses in bad times.

Rajan said that the system needs to deal with wilful defaulters “sternly” even as it protects the large borrowers’ “divine right” to stay in control of their businesses, no matter how turbulent the times.

The promoter enjoys riskless capitalism – even in these times of very slow growth, how many large promoters have lost their homes or have had to curb their lifestyles despite offering personal guarantees to lenders?

Rajan suggested that instead of raising hue and cry about the “freeloaders” of the economy, reforms should happen in structuring loans better and more equitable sharing of risks, implying that banks should get to make decisions for firms if they are not able to recover a bare minimum amount of money and large borrowers should bear more risk on their capital than small borrowers.

What we need is a more balanced system, one that forces the large borrower to share more pain, while being a little more friendly to the small borrower. The system should shut down businesses that have no hope of creating value, while reviving and preserving those that can add value.