When a bank loses a state

The tag “Bankers to the government of Jammu & Kashmir” has set J&K Bank apart from any other bank in India since the last six decades. “The slogan is gone. Tonnes of stationary that proudly displayed this tag will now go down the drain,” says Rafiq Hussein. Hussein has been working as a senior officer for J&K Bank for the last twelve years. The “divorce” between the J&K government and J&K Bank, he says, is something that will have serious repercussions not just for the bank but even the state. For, beginning with April, J&K Bank has seized to be the banker to the government of the state of J&K. It was the only bank with such a position – roughly being to J&K what the RBI is to India – something that J&K enjoyed as a state with a special status in the Indian Union. The state government will now do its banking with the Reserve Bank of India, like any other state would.


Hussein’s colleague, Imran Malik, has a slightly different opinion. “More than the bank, it’s for the state to worry,” says Malik. He explains: “The bank has a total credit portfolio of around Rs 29,000 crore. This is the total amount of money that the bank has given as credit to its clients, big and small. For not being the lender to the state government now, this amount will now be reduced by around Rs 2,300 crore. It’s a marginal difference and cannot have any major implications for the bank. The bank may in fact find better sectors and avenues for its investment.” The Rs 2,300 crore is the overdraft that the government needs to correct the mismatch between its revenue and expenditure and has been acquiring from J&K Bank.


More than the financial implications of the development, however, what has bothered analysts is its political significance. What has been most scathing is a latest statement by the former chairman of J&K Bank, Haseeb Drabu, who was unceremoniously removed from his post late last year. In a recent essay published in a magazine, he writes: “…the manner and motivation in which the new arrangement has been carried out represents the microcosmic reality of how the Indian State handles the Kashmir issue. Even as the interlocutors were “talking” and soaking up the autonomist sentiment among the people before advocating it, the government of India was working to pull out the only substantive pillar from under the edifice of autonomy.”
The Opposition PDP too had attacked the National Conference soon after the decision was announced in late January. PDP president Mehbooba Mufti said, “Exclusion of J&K Bank as bankers to the state government… and conceding debt management of the state to the RBI is the latest and the most lethal nail in the coffin of the state’s autonomy by the National Conference.”


The state government and J&K Bank itself have long defended the decision as a “win-win” situation. The state finance minister, Abdul Rahim Rather, had told a press conference that financial indiscipline in the past had forced the state government to allow the RBI to take over J&K Bank’s role in providing overdraft facility to the state. “The overdraft facility with J&K Bank was meant to be used to meet a temporary mismatch between the availability of cash and expenditures for only a few days. But due to its continued non-liquidation, the overdraft had become a permanent structural liability deficit in the state finances.” He further claimed that the move was beneficial to the government as well as the bank as it would improve the financial position of the state in the coming years. J&K Bank, on the other hand, noted that the revised banking arrangement was in fact the continuation of the existing arrangement.


Malik doesn’t agree with the government statements. “Where, from now on, is the government going to get this (Rs 2,300 overdraft) cash from? How can it meet this requirement when RBI is willing to give it only Rs 600 crore as overdraft? If the government actually pulls it off, and saves itself from the interest burden on a debt of up to Rs 2,300 crore, that would be great. But you need a miracle to do that.” For the sake of reference, he adds, the government needs nearly Rs 400 crore just to meet its salary expenses which it is not able to meet on its own, hence the doubt on the wisdom behind the decision.


Being the regulator of all banks in India including J&K Bank, the RBI had been taking exception to the fact that J&K Bank’s overdraft to the state government was way beyond its prescribed limits. As a result, J&K Bank was not meeting the regulation guidelines of the RBI. “Now, since the overdraft to the state government doesn’t exist, J&K Bank will have a better rating from the RBI for meeting its requirements,” adds Malik.


He says further: “The RBI is now going to provide around Rs 600 crore to the J&K government as overdraft. However, this money will have to be returned by the government within 15 days. How will the government be able to do that?” The doubt is not unfounded. The J&K government has been in overdraft continuously for the last two decades.


Drabu, however, gives a different perspective in his essay. “Rs 2,300 crore of decline in the credit portfolio is not such an issue as J&K Bank can deploy it elsewhere. [But] it is unlikely that this amount will be deployed in J&K as there are no large borrowers.” In other words, J&K is bound to lose this money to outside states.


Nisar Ali, a prominent Kashmiri economist and advisor to the state government, does not share such anxiety. “There is no [political] connection,” he says. It’s just that the state government needs to be vigilant and maintain fiscal discipline, he adds. “The relationship between these institutions remains the same. But, now the J&K Bank will be dealing with the state government on behalf of the RBI rather than on its own as it used do earlier,” he says.


How do the rest of the states of India deal with such situations? Ali says the other states are self sufficient and they don’t need any such help from the RBI, some of the north eastern states being the only exception. So the question doesn’t really arise, he says. In other words, the J&K government is simply not able to meet its own expenses. But how does this new arrangement change that basic situation? In Nisar Ali’s words, “The government actually needs to raise taxes. But it is hesitant as it fears a public backlash.”


The repercussions are already there to see, Hussein says. “The recent attempt by the government to impose Property Tax is nothing but a desperate effort by the state to extract money from the people by any means possible,” he says. The government recently attempted to impose a tax on all kinds of properties within municipal limits. The move witnessed huge uproar in the Assembly while the public reaction was one of anger and mistrust. The government soon buckled under pressure and deferred the Bill.


ON ITS PART, the state government has maintained that it had pleaded with New Delhi for a grant of Rs 2,300 crore to clear in one go the structural debt that the government was reeling under in the form of the overdraft. Consequently, the 13th Finance Commission, the government said, awarded the state government a one-time grant of Rs 1,000 crore and allowed it to raise the remaining Rs 1,300 crore through market borrowing. The argument doesn’t really impress since the state government itself owns more than half of the total stake in J&K Bank. The interest that it pays to the J&K Bank on its overdraft is partly its own profit. For the Rs 1,300 crore that it will raise from the markets, it could have continued to do so with its own bank.


Moreover, Hussein asks, what is the guarantee that government won’t consider alternative banks for its dealings at some point in future? He says: “Earlier, the government was viewed to be bound to go with J&K Bank. Now that trust has gone. The government disburses its entire salaries, for example, through the various branches of J&K Bank. The state government may prefer bigger banks like State Bank of India and Punjab National Bank someday. SBI boasts of the lowest cost of deposits among all banks and that can be an attraction for the government.”


Najeeb Saraf, a highly placed J&K Bank official, says, “There is a view that the government is trying to grasp the management core of the bank. With a compromised management at the helm, it will be easier for the government to use the bank for its own vendetta, political or otherwise. There are certain welfare schemes that have been pushed by the government when actually the risk falls on J&K Bank. With a strong management, such approaches of the government would have easily been spurned.”


Saraf is talking about programmes like the “seed capital scheme” for “entrepreneurship development” started by the government where J&K Bank is supposed to offer loans of up to around Rs 21 lakh to unemployed youth without receiving any guarantee or a mortgage. Though it is for J&K Bank to approve each such individual case, it seems to be under influence of the government to go soft on its regular guidelines. Saraf says: “With a genuinely strong management, such a scheme would never have seen the light of the day. But since the government has asked the management in J&K Bank to do it, the bank is doing it. In other words the bank ceases to be a genuine financial company that, ideally, would purely go by its self-interest.” Worse still, the scheme was pushed through J&K Bank when Drabu had been forced to resign and an acting chairman was at the helm, he notes.


Hussein says that government interference will also lead to dubious appointments. “A weak CEO will certainly buckle under government pressure,” he says.


Malik has doubts, however. “Drabu’s exit may or may not be related to this issue. But the efforts for bringing in the RBI were under way since many years. It’s just that it has finally happened now. The RBI was also interested in seeing this happen since it wanted the bank to fully comply with its norms. Compliance, in turn, would be beneficial for J&K Bank.”


“But the chain of events leaves one with enough suspicion,” says Hussein. Drabu was a far stronger top man to come under any adverse influence from the government, he says. The unceremonious exit of Drabu in any case is going to be detrimental for not just the bank but even the entire state, he adds. “The question also is what happens to the status of the bank – its brand value – once it is no longer the lender to the state government.”


“Being the banker to the state had a positive effect on the public confidence in the bank,” says Hussein. He elaborates: “This in turn made it possible that J&K Bank enjoyed some kind of a monopoly in the state. Now if you want the bank to no longer be the banker to the state, let the government give up part or the whole of its stake in the bank and let the bank itself be the majority stake holder. The element of government interference has to go so that the bank can be in control of itself. This has happened when the government doesn’t seem to be working in favour of the bank. Why after all would a government that has its own independent bank give up such priviledge? Why should financial indiscipline suddenly lead to such a drastic step when things have been pretty much the same for decades?”


Mubeen Shah, formerly president of the Kashmir Chamber of Commerce and Industry, says, “So far the issue of the RBI is concerned, I feel the independence of J&K Bank is certainly important for the independence of the state economy. This will be compromised, and eventually lost, if the government goes ahead with its decision. In that context, the decision needs to be resisted by all the political parties as well as the people of the state.”


He adds: “But J&K Bank has been working as per the RBI norms. For a common businessman, there will be no difference either way. J&K Bank did not make any changes in their credit policy considering the prevailing situation in Kashmir. In fact, they are lagging behind even in following the RBI policies like in the credit guarantee scheme, something that could have genuinely changed Kashmir’s economy in trying times, particularly the fund-deprived artisans, small-scale industry and MSMEs.”


But Drabu grimly states: “A trader or businessman is never going to be assured of a government payment. At any point, if the government stays in overdraft for 14 working days (they have been in overdraft for every single day in the last twenty years), the RBI will stop making the payments and the cheques of the government will be dishonoured till the overdraft is cleared.” He adds: “The unknown impersonal monolith of the RBI will decide to stop the payments and the familiar face of J&K Bank will enforce it on the ground.” So far, Drabu says, the RBI had only regulatory oversight. Now they have the operational control.


Saraf raises an alarm, too: “The future suddenly looks bleak. We are not sure who is running the bank now – the centre or the state. It is certainly not being run by the management of the bank itself. In a situation such as Kashmir’s, you need a supportive government for an institution like J&K Bank. Considering the developments, that doesn’t seem to be so. Maybe it’s a matter of time that the only listed company that Kashmir boasts of will no longer be so. Maybe it will be forced to merge with a larger bank.” The concern has reason. J&K Bank is among the top one hundred companies in India, and the only such that belongs to the state.


Saraf adds: “Despite the disastrous two decades that the valley has seen, businesses incredibly have managed to survive. Economic pundits say this has to a huge extent been due to the easy access to small credit made possible by J&K Bank. So much so that the bank has relaxed the general guidelines nearly as a norm to let people have access to capital. Any weakening of this institution will certainly affect the economic independence of the state.”
“The Hurriyat raised a cry over the issue of Property Tax and the Dogra Certificate. But an issue of a far more existential threat to the state has met criminal inaction from them,” says Saraf.


It is difficult to predict which side the financial implications of this decision will ultimately fall. But it needs no great wisdom to say that both the state government and J&K Bank can meet any financial challenge if it follows a basic discipline. Looking at the fiscal “discipline” the government is known for, however, a disaster in the not-so-distant future is very likely. Moreover, in a time when decentralization and devolution of power is the catchphrase of state governments in India, the J&K government has taken a regressive step in surrendering what was in effect its central bank.


That “financial indiscipline” forced the government to do this is more of a disgrace, let alone an excuse. Rather than seriously ponder over its expenditure and resource utilization, the state government has yet again preferred a dole from New Delhi. As Ali says, “The government doesn’t have any issues for the near future.” But the problems will arise as and when the doles are either exhausted or simply siphoned off! The government would do well to realise that J&K is the most corrupt state in India (since Bihar, the only more corrupt state, must be fairing better now during Nitish Kumar’s impressive tenure). The so called fiscal indiscipline might as well turn out to be a smokescreen for such outrageous levels of corruption. Finally, while fingers remain crossed for a peaceful summer ahead, the ruling coalition has only further strengthened the economic dimensions of occupation by deliberately throwing the state under the clutches of New Delhi. Sadly, such inept economics make for reckless politics, too.
Names of all the J&K Bank officials mentioned have been changed.