Many of us have used Jet Airways to travel and many of us were satisfied with their service. To the traveler Jet Airways looked a solid organisation owning and operating so many planes, with services all over the world. Now suddenly the airline has stopped its services. Little did the travelers know that the airline they were travelling on was on the verge of closure.

Experts looked the other way

The same cannot be said of the banks. They had access to the accounts of Jet Airways, they were in a position to read and analyse them and flag early warning indicators well in advance and take suitable action for the recovery of the loans they had advanced.

The same cannot also be said of credit rating agencies. It is supposed to be their job to inform the public and lending institutions of the risk of investments in an organisation.

Risks of Jet Airways were hidden from the public

All along Jet Airways was in a high risk zone, with a debt burden they could not bear. An organisation does not overnight become sick. It reaches the stage of failure little by little. Those working with an organisation can see a failure coming. Slowly the balance sheet of a company starts showing indicators like rising debt-equity ratio, strains on the cash flow,
taking loans to meet day-to-day expenses, not paying creditors or employees on time, etc. Such indicators are visible to anyone who works closely with the company and most definitively to those tasked with the job of analysing the company’s financial strengths or weaknesses.

Jet is for sale

With Jet Airways suddenly shutting operations, and the banks negotiating with new potential investors to invest and operate the airline, the investors are bargaining hard. Mint reported (11 Jet Lenders could see a major haircut to their exposure, 22 April, 2019) that the total exposure to 11 banks is Rs. 11,261 Crores, of which it owed Indian banks Rs.7,251 crores. Etihad Airways (an Abhu Dhabi based airline) seems to be seriously in the running to invest and operate Jet Airways, along with 3 others.

Potential investors want a haircut

But what is the condition they are insisting on? Mint in the article mentioned above, reports that Ethihad has asked lenders to take an 80 % haircut. Which means they are telling the Indian banks that of the Rs.7,251 crores that Jet owes them, the banks should write off Rs. 5,800 crores. Ethihad is willing to pay only Rs. 1,450 crores!

So who pays the Rs. 5,800 crores if it is written off? The banks, of course. This write off will add to the cost of operations of the bank and the cost will be borne either entirely or in part by the depositors and/or the Government of India as a shareholder.

The risk has surfaced for the common investor

What happens if you are an investor in Jet Airways? You stand to lose money of course. But a few years earlier you would have been very confident of your investment in Jet Airways and would not have imagined that your investment would come to this level. This is what is meant by investment risk. An investment that looks solid can go up in smoke in a sudden manner, leaving no time for the layman investor to take corrective action. When large banks like the SBI sat doing nothing, (or could do nothing) with only a hope that somehow, something will improve, the layman is at the complete mercy of market forces.

Sell Risks not Returns

This is reason why Indian Households invest in low risk. With limited income and limited savings possibilities, imagine losing your money just because the managers of companies mis-manage their organisations. And the most cruel part is the owners and managers get away by not paying the price foir their mistakes and instead depositors and Government (which means you and me, since we pay taxes) pay for the haircut. The common man can only afford a haircut with a barber not on his or her investment.

Remember Risks are Certain. Returns are Uncertain.