Did lenders flout rules while pledging the KFA brand for loans? - Hindustan Times
close_game
close_game

Did lenders flout rules while pledging the KFA brand for loans?

Hindustan Times | ByBeena Parmar and Ramsurya Mamidenna, Mumbai
Mar 08, 2016 11:19 PM IST

The move to pledge the Kingfisher Airlines brand with IDBI Bank to raise around Rs 900 crore has raised questions since this is not a common method for lenders to extend loans, as intangible assets do not offer a clear estimate of future cash flows.

The move to pledge the Kingfisher Airlines brand with IDBI Bank to raise around Rs 900 crore has raised questions since this is not a common method for lenders to extend loans, as intangible assets do not offer a clear estimate of future cash flows.

A file photo of a Kingfisher Airlines customers waiting at a check-in queue at Mumbai's domestic airport.(REUTERS)
A file photo of a Kingfisher Airlines customers waiting at a check-in queue at Mumbai's domestic airport.(REUTERS)

The development has also fuelled suspicion that prudential norms were not followed in the pledging of the brand as collateral, prompting the CBI to include this aspect in its probe on whether norms were deliberately overlooked while extending loans to Kingfisher Airlines (KFA).

Hindustan Times - your fastest source for breaking news! Read now.

While IDBI Bank and KFA did not comment on the issue, a senior official with a public sector bank said: “Brand as a security is not regularly accepted by banks for extending loans. While sanctioning working capital loans for a functioning firm, primary security is the only pledge and collateral is only an additional security.”

Primary security is in the form of stocks and book debts, and the security requirement is based on risk perception of the official evaluator.

“There are various parameters that are followed in evaluating a brand, with its potential in determining future cash flows, being the most important,” said Darshana Kadakia, partner, valuations with Grant Thornton.

While it is reported that Grant Thornton did the valuation for Kingfisher Airlines brand, a spokesperson did not comment citing client confidentiality.

It has been reported that IDBI Bank had lent about Rs 900 crore on the Kingfisher Airlines brand, quite high compared to other such cases. Also, in 2012-13 when the loan was extended, the airline had started making losses.

“If one were to consider an example, during the sale of Wockhardt’s protein business to Danone, during the same time period, the total valuation of the deal was pegged at Rs 1,500 crore, of which the brand valuation was Rs 250 crore. Wockhardt was a profit-earning company,” said an auditor who inspected Wockhardt’s books.

Mallya owes around Rs 7,000 crore in dues to a consortium of 17 lenders led by SBI.

According to another auditor, banks take a risk by extending loans on a brand. “In a construction company, you may have a right to collect toll for 30 years. That also is an intangible asset, but at least there is a visible project on hand. Here that is not the case.”

Unlock a world of Benefits with HT! From insightful newsletters to real-time news alerts and a personalized news feed – it's all here, just a click away!- Login Now!
Stay informed on Business News along with Gold Rates Today, India News and other related updates on Hindustan Times Website and APPs
SHARE THIS ARTICLE ON
Share this article
SHARE
Story Saved
Live Score
OPEN APP
Saved Articles
Following
My Reads
Sign out
New Delhi 0C
Tuesday, March 26, 2024
Start 14 Days Free Trial Subscribe Now
Follow Us On