Corporate Office of J&K Bank. Pic: Bilal Bahadur
Corporate Office of J&K Bank. Pic: Bilal Bahadur

The situation of the private banks other than J&K Bank is slightly better. They have a cumulative CDR of more than 38%. HDFC Bank, for instance, that is expanding within the state quite fast as compared to others, was in possession of Rs 1045 crore deposits and its advances within the state are at Rs 442.05 crore – a CDR of 42.27%.

The Regional Rural Banks and the highly mismanaged Cooperative banks are doing much better than the public sector banks across J&K. Regional Rural banks – the J&K Grameen Bank and Elaquai Dehati Bank jointly hold Rs 2845 crore and have advanced Rs 1172.38 crore, making a CDR of Rs 38.71%. Ten Cooperative Banks have Rs 2756 crore in their vault against an advance of Rs 920 crore, making a respectable CDR of 33.41%. This is despite the fact that the human resource problems, political interventions and exposure to better banking systems is limited in case of all the cooperative banks across the state.

Though the overall credit advanced to a market should have been the benchmark for the functioning of the banks, J&K at the policy level has consistently been insisting on the priority sector, making it the main focus of the lending.

Banks under the prevailing norms are supposed to offer 40% of the overall credit to the priority sector – agriculture, industry, services sector, education, housing, micro credit and export credit. Agriculture must get 18% of the overall credit at all costs.

There is punishment to the banks if they fail to meet the priority sector lending, especially the part that has to go to agriculture. State owned J&K Bank did witness this problem for a situation that was apparently not its making. Because of security situation and lack of appetite in the agriculture sector for credit, it failed to match the targets for priority sector in general and agriculture in particular during militancy for many years. Though it would religiously keep the RBI informed about it, it could not help. One fine day when the regulator started probing the loan book, the bank was asked to offer the cumulative default in agriculture credit to the NABARD at an interest rate of around 4%. In fact, systems help NABARD raise the demand suo moto.

NABARD seeks these low cost funds for its Rural Infrastructure Development Fund (RIDF) series which is deployed in the states at a much larger rate of interest for creating priority sector infrastructure. For a commercial bank, it is as good as bleeding through nose. It happened in 2004 when the cumulative demand was upward of Rs 1200 crore.

With MY Khan as its CEO, the then government’s two key players, Finance Minister Muzaffar Hussain Beigh and Economic Adviser Dr Haseeb Drabu came with a way out. They suggested to central government that J&K Bank should be listed as an alternative financial donor institution at par with HUDCO, REC and NABARD for implementing various priority sector schemes. It was economics that was at play in the idea. The state government that owns the J&K Bank said part of the funds of the banks is to be given to NABARD at 3% and the same amount will be further loan to state government at more than 10%. It essentially means that the bank and the state are losing a huge amount by changing hands of the money it already possesses. The alternative, they said, would help reduce the loss. The bank will lend the same amount to the state for priority sector schemes, to be monitored and supervised by NABARD, at around 6.5% which will reduce its losses and help state pay less.

The entire scheme took place in an environment in which the former state government led by Dr Farooq Abdullah was increasingly accused of “mortgaging the state” to NABARD. Then, the loan component of the overall state budget had reached nearly fifty percent. The new government that Mufti Sayeed led wanted to address this issue to score a point. They initially stopped and later reduced taking loans from the NABARD. And then they devised the plan. After the union finance ministry did not object to the plan, state government did lift Rs 200 crore from J&K Bank. But once RBI got the details, it strongly objected to the idea. An embarrassed government admitted it as “technically improper” and re-adjusted the loan.

As the main plan failed, the bank started efforts to get a waiver. It took many years to convince the RBI that their system of measuring priority sector credit is not so efficient; especially in case of J&K.

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