SBKJY State Bank Of India (PK)

MUMBAI—India's government and a consortium of mostly state-owned banks are waging an aggressive battle against high-profile businessman Vijay Mallya over hundreds of millions of dollars in unpaid loans.

This week, India's Foreign Ministry said it had canceled Mr. Mallya's passport and was seeking his extradition from the United Kingdom as authorities investigate money-laundering allegations against him.

The banks, meanwhile, are seeking repayment of loans taken by a company Mr. Mallya started, Kingfisher Airlines, which was buried in a pile of debt when it stopped operating in 2012. The banks say Mr. Mallya personally guaranteed more than $900 million in loans to Kingfisher and have asked Indian courts to help them find his assets.

Mr. Mallya, chairman of United Breweries (Holdings) Ltd., has denied any wrongdoing and disputes the banks' account of the size of the debt and the extent of his personal liability. A spokesman for Mr. Mallya declined to comment on Friday.

Mr. Mallya, who was once known as the "King of Good Times" and often photographed decked out in gold jewelry and surrounded by celebrities, recently has been excoriated by politicians as the local media offer blow-by-blow coverage. At an event organized by an Indian media company in March, Finance Minister Arun Jaitley said Mr. Mallya had "brought a huge bad name both to India's banking and also to India's private sector."

India's banks have been under pressure—partly from the country's central bank and federal government—to clean up their books, which are burdened with record bad debts that are weighing on the country's growth prospects. About 21% of all loans to large Indian companies were "stressed" as of June 2015, up from about 17% in September 2013, according to the Reserve Bank of India.

The banks, which have historically been slow in going after large borrowers, lately have stepped up their efforts to recover assets and boost their eroding capital base. But some critics have said that the name-and-shame campaign against Mr. Mallya is being used as an example to scare defaulters, which is a risky strategy.

If authorities and bankers go too far in their pursuit, India risks making entrepreneurs too risk averse to start businesses that could fail. Meanwhile, wayward borrowers would have no incentive to pay if authorities and bankers don't go far enough.

"You don't want to do so much naming and shaming that it affects the investment and lending environment," said Reshmi Khurana, managing director of South Asia for Kroll Inc., a global risk consultancy firm.

Reserve Bank of India Gov. Raghuram Rajan, who has urged Indian banks to clean up their balance sheets, has also warned against maligning honest entrepreneurs who go bust.

"Why will you take risk if there is a slightest chance of default and your name is put up in public for shame," Mr. Rajan said earlier this month.

For years, banks have been fighting several cases against Mr. Mallya, but pressure was increased in late February when it was announced that Mr. Mallya would receive a $75 million payout from U.K. spirits company Diageo PLC, which had previously acquired a controlling stake in United Spirits Ltd., an Indian distiller then owned by Mr. Mallya.

Last month, an Indian tribunal ordered a halt to Mr. Mallya's deal with Diageo. Banks say they have first right to this money.

Shortly after the payout was announced, Mr. Mallya left India, touching off a flurry of activity among banks and the government. In early March, Mr. Mallya said on Twitter that he didn't flee from the country.

In March, a consortium of banks—led by the State Bank of India and represented by Attorney General Mukul Rohatgi, among others—filed a plea in India's Supreme Court calling for Mr. Mallya to disclose all his assets, both in India and overseas. Earlier this week, Mr. Mallya submitted the list to the court.

Lawyers for the consortium allege Mr. Mallya gave an unlimited personal guarantee for the Kingfisher loans. Mr. Mallya has challenged this claim in court, saying that he was coerced by the banks into signing the guarantee, according to two lawyers familiar with the matter. Mr. Mallya also contends that any guarantee would only be backed by assets in India, one of the lawyers said.

Mr. Mallya has twice offered to settle with the banks, according to a lawyer familiar with the matter, but banks have refused them. Lawyers for the consortium said that none of Mr. Mallya's offers included any direct repayment.

Mr. Mallya has said in a previous statement that there has been a "near hysterical campaign in the media directed against me," adding that "all I can say is I hope some sobriety and sense will prevail."

Mr. Mallya inherited his company from his father in the 1980s and quickly built it into one of the world's biggest alcoholic beverage empires through acquisitions.

His expensive foray into an airline named after Kingfisher—his biggest beer brand—was as flashy as he was. It featured flight attendants in red skirts called "models of the sky." The airline's ads told people to "fly the good times." In recent years, the market value of Kingfisher's meager assets has fallen sharply. Last week, the consortium of banks failed to find any buyers at an auction of the airline's former headquarters.

At his peak, Forbes magazine estimated Mr. Mallya was worth more than $1 billion.

Eric Bellman in New Delhi contributed to this article.

Write to Shefali Anand at shefali.anand@wsj.com and Kenan Machado at kenan.machado@wsj.com

(END) Dow Jones Newswires

April 29, 2016 17:05 ET (21:05 GMT)

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