The Bypass Banking

For every Rs 100 that people in J&K deposit, the banks deploy more than Rs 63 outside the state, preventing the local resource to bring about the much required economic change. RBI as well as the state government failed to convince banks to revise their strategy. Numerically, the banking sector has 42 players with Rs 64479 crore in their vaults but practically, it is the J&K’s state owned bank that is managing the show, RS Gull reports.

RBI Governor D Subbarao addressing a press conference in Srinagar.Pic Bilal Bahadur
RBI Governor D Subbarao addressing a press conference in Srinagar.Pic Bilal Bahadur

“We have limitations and we can not say banks what to lend and how to lend?” RBI governor D Subbarao told reporters on May 9 during his second visit to the state in last 15 months. “We invoke a moral authority to tell them that they should raise their (credit deposit) ratio.”

That is exactly what the regulator has been doing. Last year when Subbarao addressed banking honchos in J&K, the lending was far less than expected. So he asked them to improve it by five percent in 2012-13. They did not oblige him as the overall improvement in the CD ratio was only 2.93% in a year to reach the level of 36.51% which is slightly more than half of the industry benchmark at 60%.

So what did the regulator do? He gave them a new target for 2013-14 – improve it by 5%!

By the end of March 2013, J&K is serviced by 42 financial institutions through a network of 1638 branches with cumulative deposits of Rs 64479 crore. The overall advances in the state stand at Rs 23542 crore.

An analysis of the outstanding credit (as on March 2013) suggests that Rs 13708.74 crore falls under the priority sector which is 58.23% of the overall credit. Industry benchmark for priority sector is only 40%.

Agriculture sector has an overall outstanding of Rs 3375 crore (which makes 14.34% of overall advances and 24.62% of the priority sector advances), micro and small enterprises (industry) has Rs 7380.65 crore (31.35% of overall credit and 53.84% of PSA), micro credit accounts for Rs 813.29 crore (3.45% of overall and 5.93% of PSA), educational loans are only Rs 256.87 crore, which is slightly more than one percent of the overall credit. Housing advances were at Rs 1882.91 crore, making it eight percent of the overall outstanding advances and 13.74% of the PSA as advances to the weaker sections stands at Rs 3218.59 crore and Rs 1027.54 crore stands outstanding against women.

While the picture looks rosy, the larger reality is that out of every Rs 100 that people in J&K deposit with banks, they advance only Rs 36.51 within the state and the rest of the money goes to wherever they think it can earn better. While this may not be the literal flight of capital, it is obviously the misuse of a fundamental resource. A much larger issue is that the CDR had improved gradually from nearly 29% in 2002 to 44.76% in 2009-10. And then it started sliding again and the fall reached 34.36% in 2011-12. Now it has started improving gradually.

The credit distribution at the bank level is also an interesting story. In the entire banking sector, it is the leader J&K Bank that owns almost 40% of the overall banking network in the state and is solely responsible for more than 63% of the overall advances to the state. Despite being the industry leader in J&K, it seems to have even compromised its own record on CDR front.

Chairman J&K Bank, Mushtaq Ahmad
Chairman J&K Bank, Mushtaq Ahmad

J&K Bank has struggled hard to manage the show at a time when all the banks, especially the public sector banks, fled at the peak of strife. Despite an overwhelming situation, the state owned bank assumed the status of being the banker to the state and a sort of development bank as well. Though its volume of credit to the state is unmatchable but the reality is that it picked up fast and gradually went in a slow motion.

In 2002-03, J&K Bank’s CDR was at 37.38% which improved to a peak of 52.85% in 2007-08. And then the ratio started sliding gradually from 52.81% in 2008-09 to 35.95% in 2011-12. It was for the first time in the slide in all these years that the Bank has decided to bounce back. It improved its CDR to 38.88%, an improvement of 2.93% in one year by the end of March 2013.

At the end of the day, however, it is actual money that goes to the overall economy that matters the most. Right now, when the overall credit outstanding within the J&K state is Rs 23542 crore, J&K Bank alone has the lion’s share of Rs 15888 crore.

J&K is serviced by 22 public sector banks with access to Rs 16240 crore deposits in its 387 branches across the state. But the advances are at Rs 4929 crore only – a CDR of 30.35%. They improved their ratio by only 0.55% in a year when the RBI wanted them to improve it by 5%.


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