State’s only listed company, the J&K Bank declared a profit of Rs 409.84 crores for 2008-09. This is the highest ever profit that the company has made in its history and incidentally the earnings came in a year when the agitation across the state in 2008 summer was followed by a recession throughout the world. By the end of March 31 last year, bank’s business turnover stood at Rs 53934.51 crore as its loan book and advances were at Rs 20930.41 crores and Rs 33004 crores respectively. The bank would be paying a dividend of Rs 81.97 croes at the rate of 169 percent (Rs 16.90 per share). Bank’s Chairman and Chief Executive Dr Haseeb Drabu shared with Kashmir Life the magic of making money when others were actually losing it.
Kashmir Life: At a time when banks world over are struggling to maintain the bottom line, J&K Bank has posted the highest profits ever in its history. What are the reasons?
Dr Haseeb Drabu: Indian banks have weathered the global crisis much better than American and European banks. This is in large measure due to the strong prudential norm and regulatory framework within which Indian banks operate. Even some banks have some under bottom-line pressure while others have been able to show profits because of treasury incomes. This is because credit growth has been much slower than in the past. The credit growth has been a mere 15 per cent compared to 35 per cent in the past.
As far as J&K Bank is concerned, the profitability has been high because of our increased lending operations in the J&K state. For the last three years we have been focused on lending within the state with the result that now J&K accounts for almost 50 per cent of our total lending. Even in the year of slow down our rate of growth of credit in the valley and in Jammu has been more than 30 per cent. There are pockets like Jammu north and Kashmir north, the most backward areas, our credit growth has been 40 per cent even there.
KL: You made some tax savings?
Dr Drabu: Yes, in the last quarter, we have. This is largely because of the composition of our advances portfolio. The more we lend to sectors under the priority sector and to the smaller enterprises, the less capital it consumes and we also get some tax exemptions.
KL: You are bankers of the state government and it must be giving you huge profits?
Dr Drabu: The facts are as follows. On an average, the government borrows around Rs 1800 to Rs 2000 crore from us. This is 8 per cent of our total lending which is Rs 22,000 crore. The interest income we get on it is around Rs 150 crore which is around 10 per cent of our total interest income of Rs 1400 crore. The rate that we change the government for its overdraft facility is related to the market rate, the bank charges them 250 to 300 basis points less than the market rate. So it is not a question of huge profits. .
KL: What are your arrangements with the J&K government that incidentally has bank’s 53 percent shareholding?
Dr Drabu: The Government of J&K has two facets to its relationship with the J&K bank. First, as a promoter as it holds 53 per cent of the equity of the Bank. The second is as the largest customer of the Bank. The success of the bank has depended on the fact that the ownership facet has been kept separate from the management function of the bank. As such, there is a MOU between the bank and the government that governs the business relations. The MOU is in line with the prudential and regulatory norms of the RBI. On a daily basis we find that the overdraft has remained in the range of Rs 1800 crores.
KL: Which are the best belts that fetch you most of the profits? There were reports that Mumbai does not give you as much profit as Kupwara gives? Is it because you have monopoly in Kashmir and not being competitive in Mumbai?
Dr Drabu: This is a fact that we pointed out three years back and was the lynchpin of our new strategy. Despite the fact that at that time, Mumbai accounted for 30 per cent of advances, it was not giving more than 5 to 7 per cent of the profits! So we reversed the strategy and did what was logical and common sense: lend in J&K. In addition to making business sense, it was also appropriative that the bank of J&K should lend in the state. For us, Jammu and Kashmir is the most profitable. We have now introduced a system of transfer pricing within the bank that is now making the outside zones pay for the resources that they consume.
KL: Last summer was consumed by agitation. And then there were claims that Kashmir is a very small economy that lacks any significant consumption capacity of credit. What is the reality?
Dr Drabu: Kashmir is a very under financed economy. Our entire credit strategy is based on one simple fact – J&K accounts for 1 per cent of India’s population, yet it consumes only 0.20 per cent of India’s personal credit. With per capita income being in same range, what it means is that we can increase our personal credit five folds. In terms of productive credit, J&K accounts for 0.63 per cent of India’s GDP yet it absorbs only 0.16 per cent of India’s productive credit. So there is huge under servicing of credit.
KL: Is J&K a market where NPAs are more than other states? How better or worse debt services are the typical customers in Kashmir?
Dr Drabu: This is yet another myth. NPAs in J&K are not any higher than other regions in any significant and sustained manner. From an impairment point of view, it is safer to lend in J&K than elsewhere because here the ticket size of a loan is small. So the chances of one large account going bad are small. Even if and when they are, over recovery is much better in J&K than else where. Within J&K, the NPA in Ladakh are the lowest, followed by Jammu and then the valley.
KL: What could be the impact of the recession in Kashmir and what has your bank done to manage it?
Dr Drabu: Recession will and has principally affected two areas – exports and tourism. And in second order impacts will have a bearing on trade. We are the only institution in and of the state that did two packages to counter recession. First was for SMEs in Jammu and then for crafts segment in the valley. We have cut the interest rate by almost 200 to 300 basis points.
KL: Your bank has an association with the Bajaj Allianz and MetLife. What are the relations and what about reports that you are not going ahead with MetLife in coming days?
Dr Drabu: For Bajaj Allianz we are distributors. For Metlife we are promoters as well as distributors. J&K Bank invested in Metlife in 2003 and got a stake of 25 per cent. Insurance is a capital intensive long term business. From time to time, Metlife India has been requiring capital to run its business and we as JV partners have had to invest to maintain our stake. However, RBI has a norm that no bank can invest more than 10 per cent of its net worth in insurance. We have stayed within that ceiling. As a result, our stake has come down to about 15 per cent.
KL: Are you going ahead with your new initiative of having a separate company for financial services? What is it and how will it work and when?
Dr Drabu: We have already set up another company called the JKB Financial services limited. It has been incorporated already and we hope to ramp up its operations this year. We will provide world class financial solutions to our clients and give them more than vanilla banking of deposits and advances. We intend to give financial advisory, do wealth management, provide stock broking services, do debt management and investment banking.