Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

The injustice inherent in India's bad loan problem was on trial recently at a magistrate's court in Mumbai when a 44-year-old mother arrested for ticket-less train travel refused to pay a $4 fine as long as Vijay Mallya didn't clear $1 billion in unpaid bank loans.

That story of simmering public anger against the failed Kingfisher Airlines' flashy founder, who went overseas just as banks were asking for his movements to be restrained, has gone viral. But the implications of how l'affaire Mallya will get resolved go deeper. Whether a group of 17 lenders, led by government-controlled State Bank of India, accepts an offer of 40 billion rupees ($604 million) as a final settlement may determine how many other tycoons try to avoid the stigma of being branded as ``wilful defaulters," getting booted out of company boards, and being hounded for offences that carry jail time.

What a Mess
Nonperforming, restructured and written off loans in India's banking system as percentage of total
Source: Reserve Bank of India

In India, the well-heeled sit atop a $167 billion bad loan mess. Cases in which banks have filed lawsuits against companies that didn't pay despite having the capacity to do so add up to more than $10 billion, according to Credit Information Bureau Ltd., or Cibil. And this could be just the tip of India's crony lending problem.

Cream of the Crop
Indian banks have filed suits to recover billions of dollars in what they say are deliberate nonpayments
Sources: Cibil data on "wilful" defaulters as of 12/31/2015, exchange rate of 4/1/2016

Mallya's offer to settle might just prompt banks to turn up the heat on other errant borrowers whom they've so far treated with kid gloves. The fate of the former beer-and-spirits billionaire is now the litmus test for the ``tough action" Prime Minister Narendra Modi claims his government and the central bank are taking to recover dues from large corporate defaulters. If Mallya gets a deal from banks, so might several others, which may be the beginning of the end of Indian lenders' misery. 

On face value, Mallya's offer is quite decent. After taking into account the money that banks have managed to recover from collateral, brokerage Religare estimates lenders' haircut -- given that a default has already occurred -- at a little over 7 percent. That's a fabulous recovery rate, considering that according to Elara Securities, the top three Indian state-run banks manage to salvage no more than 11 percent on written-off loans.  

The Reserve Bank of India recently gave the top court a confidential list of large borrowers who have defaulted. The RBI has requested the supreme court keep the list confidential, but those on it must be squirming. With Mallya's offer on the table, they also know very well how much they'll need to pay up to escape prosecution. Speaking at a gathering of industrialists in February, a senior central bank official made it quite plain that the regulator was aware of the creative tricks being used to hide bad debt, such as taking short-term overdrafts to repay loans, and then taking fresh loans to clear the overdrafts; or selling assets within the group at inflated values, with the buyer taking loans from the same banks the seller is under pressure to repay.

The public's patience with the chicanery has run out. With the government, courts and the monetary authority going after the tycoons, paying up may be the only option for them. That's great news for India's banks, which have written off nearly 3 percent of their $1 trillion loan portfolio. Even if an additional 5 percent of this $30 billion is recovered from big defaulters, the $1.5 billion windfall will lower taxpayers' bill for recapitalizing the lenders. That should go some way to countering citizens' sense of injustice.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Katrina Nicholas at