The money being lent to the erstwhile kingfisher airlines
repeatedly by certain banks and the recovery of which has now become a long and
drawn out battle between the banks and the airlines is a classic case of one
suffering from sunk cost fallacy and the other making full use of it in his favor knowingly and fully understanding this fallacy.
Let me explain what I mean by this fallacy. The other day I
met a friend who has just seen a very popular movie. When I inquired as to how
the movies was and whether to go and spend about Rs.1000/= in watching the movie in a multiplex. He just
said the he hopes I do not fall victim to the sunk cost fallacy. He also has
spent about Rs.900/= in purchasing the tickets and went to the multiplex to
watch the movies after paying a parking and bearing the brunt of the unruly
crowd. A short while after the movie started he found the picture to be so bad
that he wanted to leave he hall but his wife insisted that since they have
already spent a small fortune for the tickets hence they should watch the movie
in full so as to have the satisfaction of having realized the money’s worth. He
not only had to endure the financial loss of going to see the useless movie but
was forced to suffer for the next three hours in the hall. This he explained
was the sunk cost fallacy. Compounding of the mistake instead of just accepting
the initial loss and withdrawing and thus cutting out on the further cost and
thus limiting your loss.
The banks realizing that he airlines was not in the profit
and was unable to pay salary and the airport fee to the government gave even
more loan to the airline for the payment of the airport charges, which was
promptly diverted by the airlines to not only false non existing companies but
also in purchasing real estate assets abroad and maintain the life style of its
owner. It is the same dilemma which a gambler faces when he has already lost a
lot of money in gambling and hopes that tide will turn and he will make money
and thus not only recover his initial loss but also make a profit rather than
accepting his loss for that day instead waiting for lady luck to smile on him.
But alas it does not happen. He is victim of the sunk cost fallacy and so are
our Public Sector Undertaking (PSU) banks who kept on giving the airline loan after loan and even going to
the extent of converting some of these loans into equity of the airline. Had
they studied the fallacy they would have been able to limit their loan to a
small proportion and also may have been able to recover all of it or a major
part of it against the assets pledged with them. Now they have reached a stage
where the loan amount is not matched by the assets pledged and a recent sale of
a property by them yielded no result as there was no buyer at that reserve
price of the property which was much less than the loan. The owner very conveniently
is abroad as a Non Resident Indian(NRI) and is visiting various countries and the banks can do nothing
except to approach the court for required orders which may take years
considering the backlog and the slow pace of Indian Judicial System which moves
very fast on complaints by VIP’s but is amazingly very slow when it comes to common
man and on recovering its hard earned taxes paid and the money being diverted
by the greedy bank managers to fictitious loans and more loans on the same
property thus resulting in a huge Non Performing Assets (NPA) for the PSU banks. The system works very
well when it has to recover a lac loan from a poor farmer where his assets are
seized by the banks, recovery agents are sent to harass his family and in cases
driving the poor person to suicide for a lac or so rupees but these same banks
and the government is powerless when it comes to big companies and VIP
defaulters. A simple search will shown as to how many of our elected
representatives are still holding their government houses in prime Delhi even
after losing the election and have not paid even the water, electricity and telephone
charges for months and years and some have forced the cooperative banks to
bankruptcy or even closure due to their greed and vote bank politics. Can a common man do this, sadly no?
The owner of the airlines understood the sunk cost fallacy
perfectly and knew that the banks suffering from the same fallacy will keep on
lending him more money hoping against hope that one day their luck would turn
like the gambler and lady luck will shine on them so they will make a profit
out of this loan. He played this fallacy to the hilt and thus was able to get
loan against his assets which were pledged repeatedly and to several banks at
the same time. He is now abroad and enjoying a life style which he is used to
without any remorse to the fraud committed by him and the banks are left with
holding worthless papers and assets. If bringing back Mr Lalit Modi of the famous IPL case is
any indication then we can forget bringing him back to India for punishment at
least in our lifetimes. Even if we manage to punish him then what about
recovering the loans given to him and the act of giving loan to him by the PSU
banks using the public money. What about their public accountability?
