Shaping Paradigms



Since 2003 economist Dr Haseeb A Drabu is directly involved with the fiscal management and economic reconstruction of J&K, initially as economic adviser and later as chairman of the J&K Bank. As Finance Minister, Dr Drabu flags the key issues in banking sector and offers solutions as part of the new credit management set-up he is keen to create

Haseeb Drabu

In the state of Jammu and Kashmir, banking broadly has been run as a financing institution and not as a funding institution. There is a critical difference between funding and financing. There is, as such, a need to look at banking from a slightly more innovative perspective. What we need to do is to first assess the funding requirements of businesses in J&K and participate at different levels in the process of building up industries. This would mean that banks should participate as financial intermediaries on both the debt side and the equity side.

Banking in J&K today needs to be redefined as what happened in rest of the country in 1960s wherein institutions like IDBI and ICICI were not only funding debt but equity and promoters as well. These institutions were into venture capital, term loans, trade finance, working capital funding, everything. As a matter of fact every single company among the top 500 in India has been financed by banks. Equity has not played a large role in growth of industries as debt has played. We need that kind of a mindset. We need to change banking and the way bankers think about J&K. This is one.

Second, we have been internally arguing for a long time, post the changes in fiscal federalism, that there should be sub-national fiscal architecture for states in India and particularly for J&K. There is a need to look at how banking and monetary policy roles can be given to state governments in one way or the other.

Today, we have different kinds of financial institutions in the state which were brought up in a certain controlled regime. Apart from commercial banks, we have State Financial Corporation, Cooperative banks, and Regional Rural banks: but all of them have somehow lost their relevance. Earlier an Agriculture Cooperative Bank would provide seeds, instruments, implemental finance etc. That is over. Every bank is now lending to any sector. There is, as such, need to reorganize the entire institutions of banking. They need to be re-invented in the new economic regime and that is the most important point.

There is thinking at the central government level that we can’t be both owners and regulators. We should reduce the ownership. Here also, for example, Central and State Government holding in RRBs should be reduced. In some way, we need to reorganize ownership, management and roles at various levels in the institutions and give a new fiscal and banking architecture whereby they complement each other. This would provide a role to every institution in evolving a new system.

Thirdly, J&K has a different case. It is run on a monopolistic banking situation. J&K Bank does everything and rest of the banks operating in the state, don’t play a role. What role they can play is not just about lending, it is about best practices. It is about how they can work with all other institutions to provide credit in J&K. So far, the biggest problem has been that they have not lended here.

Everybody talks about lower credit-deposit ratio in the state, which to me, is not a problem but symptom of the issue. The real problem is that all banks have over the time become corporate banks and are lending only in corporate manner. They are not lending in a manner whereby they would finance craft, plantations, knowledge economy etc. None of this is happening anywhere. Our economy is export oriented, craft determined and plantation dependent. That means different instrumentalities of banking and ticket size are very small here. An effort must be, therefore, made at the initial stages to allow these enterprises to grow.

Similarly we don’t even do Warehouse receipt financing in J&K. J&K must be the only economy in country with the highest inventory to SDP ratio. If out of a 100 rupee GDP, 60 rupee is inventory then it means 60 percent of capital is locked in it. Who is funding that? Has anybody done equity financing in J&K.

As J&K Bank Chairman, I tried very hard to do equity financing. We did some bit of it, but it must be done at a scale where it would release capital for people to grow. Similarly lots of new instruments, like PO financing, have come up which need to be adopted. I would imagine one of the biggest roles of banks, in current situation of poor economic growth and lower demand, is to release the money that is locked up in inventories. Be it in shawls, handicrafts, carpets or real estate. That would be new area one could explore in terms of very specific suggestions.

Otherwise I would want a completely different banking architecture in J&K which is not based on asset financing, but on turn-over financing. We need not to do Balance Sheet based lending; we need to do business based lending.

Also, a certain amount of support in terms of lower rates of interests is required, especially now. For instance, J&K Bank would make the maximum profits in J&K because the cost of deposits is low and the Net Interest margins are very high. In case of other banks it may not be necessarily, so, but if one bank is operating with interest margin of 2 to 3 percent, why not then stick to those rates even in J&K. Similarly there has to be a relook at priority sector lending in J&K because everything you lend in J&K is priority sector.

Likewise, there is need for collaborative effort between banks to do a portfolio seasoning. Let us assume J&K Bank takes the lead and seasons a portfolio and then sells it to other banks. Once that happens for 3 to 4 years it will have a competency in lending. Then there is a slightly different role that only J&K Bank can play. It can go aggressively lending in J&K, season a portfolio of three years and once it stabilizes give it to other banks and book some upfront money. That will increase its stake and also build competencies.

It is also important for a bank like J&K Bank to build credit history of customers. All told, we have a total population of 1.4 crores which is not probably the population held by a three or four branches of SBI in Bihar and UP. You can do credit rating of every single individual. Let us look it in this perspective; out of total population of 1.25 crore, 35 per cent shall be elderly and children. Then you are probably left with less than one crore of people, of which 50 per cent will do business. So at the end of the day you have around 50 lakh accounts, every one of which should be rated.

That rating can be used by other banks to lend. By doing so you can create parallel set ups. Conceivably J&K Bank could set up a Credit Rating agency and can credit rate not just individuals but even agriculture orchards, or even regions like South Kashmir, North Kashmir and identify suitable people, businesses and places for comfort lending and difficult lending. Ladakh, for instance, would be a great place to lend since it has no NPAs. Banks need to know their domains and then specialize.


And finally, banks are linking poor credit dispensation to SARFAESI Act, which is not the case. One needs to know how much of recovery has happened under SARFAESI in rest of country. What used to happen before the act? Was there no lending happening here then? SARFAESI issue can be dealt with easily. We can have our own SARFAESI law; local ARCs can be setup and banks could statutorily then sell their distressed assets to ARCs which are incorporated in the state. But in any case, one would also like to know for record, that how much of SARFAESI has been applied in agriculture and plantation in rest of the country. It is prohibited by Supreme Court to take recourse to agriculture or horticulture land. So what is this noise about SARFAESI? There are no big corporates here and the law would apply only to apple and peaches, plums and carpets. You can’t even invoke that.

The larger issue which must be faced here is the “politics of banking”. There is a certain sense among the bankers that this state has a restricted accession to India and that it has a special position and so on and so forth. I think that also needs to be clarified whether it impinges on business. To my mind, it doesn’t. Land laws are the same in North-East also yet they have a better form of lending than J&K. It is good that RBI governor has decided to come along with five top bankers and to have a heart to heart chat with them and see if lending can be improved here.

Besides this, I hope to restructure J&K State Finance Corporation into an Asset Reconstruction Company (ARC). I already attended one board meeting of the SFC and indicated to them that they should look at this business proposition. So if SFC is converted into an ARC, I can sign a MoU with all these banks and say if you run into a distress then this ARC will pick it up. We are also bringing our own SARFAESI act into the state and we will provide them the legislative framework and a company that actually can buy the distressed assets of them. I think that is their biggest concern.

The post flood situation for us is a huge opportunity to rebuild and reconstruct. And the whole theory of ‘Build Back Better’ works only on these principles. In next couple of years, there will be public investment of almost Rs 30,000 to 40,000 crores. On the back of that there will be rise on demand of cements and steel etc. So there will be an opportunity for businesses to scale up. It won’t be a surprise if a few more cement plants come up in Kashmir, for instance, of a much higher scale. One may also see Indian investors tying up with local capital to put up larger plants. This shall happen because there will be an obvious demand of at least 30,000 to 40,000 crores over next 2 or 3 years. 

For improving Horticulture yields and for getting into high density farming, we need to have a Public Private Partnership. We have already provided for orchard financing in the budget. For now, nobody finances orchards in Kashmir. They were self financed. So, once a success story of high density farming, higher yield crops and better income levels is established, one will find private players coming to those sectors. What the banks need to do is to provide top-up on that and give the orchardists credit for a certain period when there is orchard restructuring. It should be more of livelihood financing than anything else because capital expenditure will not be that much. Government will also take part in that as it is already provided for in the budget. It will not happen overnight though.

The “one lakh per kanal” will happen in next 5 to 7 years. So it is not that one day, all of a sudden, you will require Rs 50,000 crore. Also, it will be done over the next 7 to 10 years whereby the financing can even be done by J&K Bank. It is not that large a number on incremental basis. We should probably shift our portfolios entirely from corporate sector to these sectors and push in money.

For the next 3 or 4 years, I see J&K Bank more in the role of a developmental Bank than a commercial bank.


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