Paramount Airways Compares Well with East West Airlines

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Airlines companies are in trouble

Banks pump in more and more money into troubled airlines and lose their credibility
Banks pump in more and more money into troubled airlines and lose their credibility

Indian Bank stands foremost in granting bad loans

Indian Bank was the only bank whose entire net worth was wiped out

Central Bureau of Investigations (CBI) is probing into the case of Paramount Airways in India. Part of the probe relates to the credit insurance cover amounting to around Rs.400 crore extended to the airlines by Oriental Insurance Company. These credit insurance covers were utilised by the company as guarantees to avail loans from important public sector banks like Indian Bank, Bank of India and State Bank of India. It is interesting to note that whenever bad loans are given, Indian Bank is mostly involved in the past and the present. In the past, Indian Bank was the only public sector bank whose entire net worth was wiped out because of the bad loans under the leadership of Gopalakrishnan.

Banks cannot shift the blame to Oriental Insurance Company

The banks who lent to Paramount Airways are now telling that their exposure was to Oriental Insurance Company and not to the airline alone. That brings the question of accountability. If a bank is lending to A, who is untrustworthy and has no means to repay, but is backed by a strong person B, can the banker justify lending to A? As a bank manager with more than twenty five years of experience, I feel it is a totally wrong concept. A bank should look into the credibility of the person or the company to whom it is lending. Guarantor’s credibility is also important, but it only comes second. Therefore the banks that have lent to Paramount Airways have committed a prima facie mistake and should not shift the blame to the Oriental Insurance Company now. It is a different sort of matter whether Oriental Insurance Company was in order in extending the credit insurance coverage to Paramount Airways.

IRDA should probe

Paramount Airways failed to repay the debt it availed. Its aircrafts were grounded. Banks issued notices to the company to repay their debt. Following this, the insurance authority in India IRDA barred companies from selling credit insurance to banks as it is a clear misuse of insurance facilities. It also brings a question of bad underwriting decisions in public sector insurance companies. If Oriental Insurance has done this mistake, the other insurance companies operating in the public sector like New India Assurance Company, United India Insurance Company and National Insurance Company would have also done so many mistakes. This should be probed by IRDA and exposed. Their managements should be revamped to avoid committing costly mistakes in future. Their motives in making these bad decisions should also be probed and punishment meted out wherever it deserves.

New India Assurance has more international business

Like banks, insurance companies have also to make provisions towards bad policies that they issued. Oriental Insurance Company has witnessed a decline in its solvency margin requirement, following exposure of this credit cover to Paramount Airways. Non-life insurance industry is not in its happiest times now. Claims from motor accident victims have proved to be higher than the initially estimated amount. New India Assurance Company had to bear the brunt of losses among the insurance companies due to tsunami and earthquake claims from Japan and New Zealand. New India has more international business than other insurance companies in India.

New India Assurance lacks management credibility

When an insurance company extends its business overseas, the risk factors multiply. Was New India Assurance equipped with a skilful management to take right decisions and assess qualitatively the risk factors involved in extending insurance cover to Japan and New Zealand? Or was it interested only in building its topline and failed to assess the factors positively? Even a ninth standard student knows that Japan is an earthquake-prone nation and it has been ravaged by tsunami in the past. Was the New India Assurance Company management less knowledgeable than a ninth standard student? Of course, one could excuse New India Assurance Company for spreading its policies in New Zealand as New Zealand has not had a history of too many earthquakes.

Government infused fresh capital into Indian Bank and hushed up the matter

The authorities should thoroughly probe into the affairs of Indian Bank. Indian Bank enjoys tremendous clout with the Central Government, RBI, CBI, Finance Ministry and Department of Banking. Because of this influence, it escapes every time something happens that questions the integrity of the bank. The case against Gopalakrishnan is not over yet and he has not been awarded any punishment. When its entire net worth was wiped out because of bad loans in the late nineties, the political parties from Tamil Nadu came to its rescue. The government infused fresh capital into the bank and the matter was hushed up. No probe of any serious nature was made into the affairs of the bank at that time. Had it been done, it would have exposed many skeletons in its cupboard.

Indian Bank lent more than rupees hundred crores to East West Airlines

Just like Oriental Insurance Company is involved in the affairs of Paramount Airways, Indian Bank was involved with East West Airlines. East West Airlines was eligible for only Rupees five or six crores of finance. But the Indian Bank CMD Gopalakrishnan pumped in more than hundred crore rupees into the East West Airlines, which turned into NPA (Non Performing Asset). Gopalakrishnan justified his decision by stating that the Airline was run by ‘Islamic brothers’. By this he introduced a new principle in banking that a bank can sanction as much amount to an ineligible company if its management has Muslims. When the Indian Bank’s Board took this decision, the RBI representative was also very much present. In other words, a daylight robbery was made before the very presence of the RBI which was supposed to act as a watchdog to prevent such affairs.

Merge Indian Bank with Punjab National Bank

Even after the bank was infused with fresh capital, there were many questionable decisions taken by the bank. For example the bank’s General Manager who was also in charge of the Madras Zone wrote off the debt of several companies under the ‘compromise proposal’ scheme. If a probe is made into this, it will reveal many things. The government is arresting Raja, Kanimozhi and other people and denying them bail. Why not probe deeper into the affairs of Indian Bank? Already Indian Bank had to beat back after announcing a $1 billion issue. It toned down the issue to $300 million subsequently and even this proved to be a failure as the bank had to take a hasty retreat. The bank is postponing its follow on issue also. Indian Bank has a low credibility among the general public and the investors. It is about time that the government of India should consider merging the bank with some other bigger banks. Indian Bank has large number of branches in the southern region. A North-based bank like Punjab National Bank will find it ideal to take over the bank. Punjab National Bank is already performing well and in fact has more credibility than even the State Bank of India, India’s largest bank in terms of branch network. If Punjab National Bank takes over Indian Bank, then the members of Tamil Nadu political parties cannot go all the way to North India and influence the management in getting loans sanctioned to their cronies, which turn into NPAs later.

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