As a new leader is taking over J&K’s only listed company in October, J&K Bank has Rs 10,000 crore plus stressed advances. Examining the three distinct eras of change that the bank witnessed in last two decades, Masood Hussain lists the gamut of challenges that the new CEO will face

J&K Bank headquarters.

By early October when a new leader takes over in the J&K Bank, state’s only listed company, he will have his priorities already fixed by the situation. The premier financial organization is awaiting rudimentary shifts in policy and delivery. Not profit, hope is more on repair and a process enabling the institution to rediscover its role in a fast-changing market.

An impressive growth story, J&K Bank’s rise is linked to identity of the place and huge brand loyalty. It offered an alternative at a time when windows of financial services were being closed for Kashmir. But only insiders are aware of the three distinct phases of growth and change that were dictated by three different leaders since 1996. This is despite the larger reality that the Bank faced and responded to the game-changing situation much earlier than that.

MY Khan
MY Khan

When Dr Farooq Abdullah chose his confidant Mohammad Yousuf Khan to lead the bank somewhere in December 1996, it set tongues wagging everywhere, even in RBI. Lot many people were unsure if the man who lacked any exposure to the banking sector can do anything. But the situation gave Khan a flexibility that perhaps nobody later got.

By then J&K Bank had emerged as the “only” bank in Kashmir and most of the transactions would getrouted through it. It had everything: keenness to work, enough of low cost deposits, and a massive foothold across the state, Kashmir in particular. It lacked key areas: a corporate identity and a conducive atmosphere on the home turf to deploy its funds. Khan worked enormously to get the bank out of its “rural bank” image, took it to the stock market and then gave it an identity by creating landmarks for the banks, both within and outside the state. It boosted the morale of its workforce and increased their appetite for risk-taking which proved a game-changer.

When Khan entered the bank, it was the era of banking reforms – the sector was cautiously opening up for retail. He took full advantage of it and resorted to quick decision-making without compromising the core banking, a process he was new with. As he asked the professionals to manage the banking – pure vanilla banking, he gave lot of time to branding and image-makeover.

Within his initial four years, J&K Bank was a clearly visible financial institution, both in Srinagar and in Mumbai. Not recognized at the policymaking level, the larger reality about Kashmir is that linked with strife, anything that gets associated with the name is a super-hit. It gets free publicity. Knowing this well, a number of Indian companies would prefer launching their products from Srinagar because anything that happens in Srinagar is part of the forward-movement-story. Since J&K Bank worked in the same space, it would get the best of it. When an American insurer flew to Srinagar for a tie-up, it became craze in the fiscal mass media to get spiced-up copies about Kashmir’s turmoil, threat to life and business models of the insurers.

Soon the low interest cycle took-over. Though considered to be the height of lazy banking, J&K Bank did the best of it. It was the bubble that helped financial institutions make money and J&K Bank made the best of it. There would be profits on selling the investments, the same evening they were purchased. All of a sudden, profits doubled and soured further. With profits making the best of the news, nobody cared what happened to the fundamentals. That was the tradition in many old generation banks.

But the regulators knew where the situation was leading to. That was the key factor for suggesting an Investment fluctuation reserve to manage bubble tensions. And then the bubble burst when interest cycle reversed and investment portfolios started booking the losses. It cost the sector heavily. In J&K Bank, the profits tumbled from Rs 406 crore in 2003-04 to Rs 115 crore 2004-05, the last year of Khan’s leadership. It was a clean slate, a very transparent balance sheet, for his successor to build on.

Haseeb Drabu
Haseeb Drabu

Bank had changed fundamentally to the extent that when Dr Haseeb Drabu took over, it set people talking: he is an economist but not a banker! State’s economic adviser, Drabu was already part of the bank’s board. His start was sluggish as the academicin him jumped into the forays of institutional self-discovery to tell people that the bank is not a mere money shop but is delivering lot of activities: regulator of the banking sector in state, debt manager of the government, local developmental bank and a specialized bank outside J&K. His goal was clearly distinct: a regional bank with national operations and international standards.

Working literally round the clock, his focus had two major points: how to consolidate the gains already made and what should be the futurist strategy that will reduce the consequences of fluidity that dominates the sector. Taking the bank to next level and creating its bible took most of his time. The answers were short: rediscover the strengths of home turf. Low cost and high yield, small-ticket and major spread, the home turf was also opening up. The market, all of a sudden, exhibited massive hunger for the credit. All of a sudden the bank started thinking in terms of why major investments in Mumbai are leading to lesser yield than much smaller lending offers back home. It started making sense and it worked very well.

Soon, Drabu was busy in re-structuring the bank. While zones were created on more rational basis to improve branch-attention and performance, the personnel underwent a series of trainings, changes, elevations in status in a new corporate nomenclature and even wages. Once the bank started implementing its business strategy – most of the new businesses started operating in the state in this era thus pushing the credit appetite up, the economist started creating the future strategy about expansion and growth. He was perhaps the only exception as J&K Bank CMD who was a declared miser in profit-showing. While the profit-making gives a cause of celebration, it takes away more by way of taxes. So he would prefer pushing the earnings to provisioning rather than declaring it as profit. But profit it still made.

Then came his idea of celebrating the making of a billion dollar company. Soon, he became part of the 2010 unrest’s collateral damage as he was unceremoniously removed. But the government did not only make him perhaps the only instance in which a chairman was not permitted to complete his tenure, they even unleashed a campaign to taint his competence, perhaps the sole reason for the professional to jump into politics, a few years later. As he flew to Mumbai, his second home, Drabu left a bank with strong fundamentals: it was No 1 bank in India with 95.47 percent coverage ratio (provision on lending) and again No 1 for the lowest NPA – 0.13 percent (Rs 30.91 crore).

Mushtaq Ahmad
Mushtaq Ahmad

Almost everybody was happy when Omar Abdullah chose Mushtaq Ahmad as Drabu’s successor. When an unwell Ahmad was recalled from his retirement, it was the first case of a banker heading the organization he owed his career to. Having the experience of working under two “non-bankers”, he launched a dazzling start as by implementing the growth strategy that Drabu was given no time for. All of a sudden the branch network started surging, opportunities multiplied as the bank exhibited craving for more hands, and the profits followed a steep hike. Everything was hunky-dory. He amended the look-towards-home policy that had been adopted by the bank earlier.

Not many months after his takeover, the government decided to change its debt-manager and go with the RBI. That meant paying back the entire Rs 2300 crore to the bank on outstanding as overdraft and then following the ways and means of the RBI. To opt for it, Delhi offered a Rs 1000 crore, one time grant, and Rs 1300 crore market loan to the government. As the  bank started getting the resource back from its No 1 client, tensions emergedover the parking of these funds to prevent loss in the yield. The panic deployments were made and there were alleged political interventions in making that happen.

This all happened so smoothly that bank executives were happy over the growth curve staying up without limping around. It was a major push to showcase the performance at the Platinum Jubilee with the bank having Rs 1000000 crore business and a Rs 1000 crore profit in 2013.

Everything went smoothly till 2014 when it recorded a profit of Rs 1182 crore, an NPA of 0.22 percent and a coverage ratio of 90.3 percent. Then things went off the script.  Profits and provisioning ratioshalved as the NPA reached an all time high of 2.77 percent to Rs 1236 crore, the next fiscal.

The bank bled further during fiscal 2015-16. Profits nosedived to Rs 416.04 crore and of the four quarters one was in red; operating income was down and operating expenses up; investment portfolio exhibited negative growth; yield on investments decreased; earnings per share fell down; net interest margins were down; return on assets decreased; business per employee and per branch also showed a negative shift so did the return on net worth. This situation led the net NPA reach Rs 2163.95 crore (4.31%) by the end of March 2016 as the coverage provisions were reduced to 56.15 percent.

Concerns were around within and outside the bank and pointed questions were raised in certain cases where due diligence was missing. But the bank management attributed the negative shifts to its fundamentals to bad market conditions insisting that entire sector was bleeding. Interestingly, most of the bad assets comprised the advances which were deployed in 2011.  Public anger created a situation that one top executive who retired moved his gratuity from J&K Bank to another bank within hours fearing an investigation that might block his “last earnings”.

Parvez Ahmad
Parvez Ahmad

When the new leader joins the bank early October, the March 2016 performance indicators would have already nosedived further. The net NPA of the bank as declared in june quarter is 6.19% which is Rs 3023.47 crore. If the entire gamut of assets, gone bad or getting bad, are put together, then the gloomy story gets darker. By the end of June 2016, the gross NPA of the bank were at Rs 4714.93 crore as the stressed assets were at Rs 5404.73 crore making it Rs 10119.66 crore that the new management will have to take care of. The provisioning has dwindled further to 50.12%, the lowest in last 20 years.

Then two more issues are adding up. By the end of 2016, people will have to start repaying the loans that were re-structured in wake of floods. They are parked separately with a slightly low rate of interest. At the same time, the bank will have to take care of new accounts that could get bad in wake of the crisis Kashmir is in since July 8. Bank sources indicate these could involve Rs 5000 crore plus that may require restructuring.

jk-bank-chartIn this situation, the new chairman – the board has already forwarded the name of Parvez Ahmad, the Executive President, to the RBI for approval as Ahmad’s successor, will have to get ready for a razor-edge walk.

By the time Parvez joins his new job, he will have to have three documents in his pocket, experts say. Firstly, how to cease the slide of his assets from good to stressed to bad. Secondly, how to improve the provisioning heavily diluted in last two years and manage recoveries? Thirdly, where to invest with least risk and trigger a turnaround?

Once these issues pertaining to the banks performance within are clearly settled, can the new leader take up issues within the sector to manage competition. J&K Bank’s competitions are huge, coming from diverse sources and directions.


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