Over the last two-three years, the banking industry has been in the news for all the wrong reasons, like enormous increase of bad loans (or NPAs as called in banking parlance), frauds and loan fund diversions committed upon the banks by corporate borrowers likes of Nirav Modi, and the resultant huge losses posted by the banks particularly the public sector banks (PSBs) wiping out their capital and entailing use of tax-payers money towards augmentation of the eroded capital.
The gross NPA of Indian banking sector has increased from 2.5 lakh crore in the financial year (FA)-14 to over 12 lakh crore in FY-2018 registering a whopping growth rate of almost 400 percent. Gross NPAs of PSBs stood at Rs 10.7 lakh crore as on March 2018 while Rs 1.29 lakh crore resided in private sector banks.
The current financial year also witnessed bank frauds that were unprecedented in the banking industry. The unprecedented banking frauds like that of diamantaires Nirav Modi and Mehul Choski, the sudden plunge of IL&FS conglomerate from AAA category to that of default in a matter of days took the whole banking industry unawares.
The J&K Bank being a part of the larger ecosystem cannot remain insulated from the changes that affect the overall Indian financial system. Same stands true for the global factors that keep defining the influences that confront the banking system globally. However, it does not mean that such reasons can be used to take refuge in. Especially in the light of the looming issues of IL&FS that is about to hit the banking industry with its tidal wave of 90,000 crore plus exposure that the corporate entity has.
Though the bank has already undertaken a number of initiatives aimed at cleaning up its balance sheet, there are certain issues that need to be brought to the fore. First, we need to understand the position of the bank in respect of its business model and mode of its operation. The formidable fortitude that J&K Bank has built over the time has its roots deep in its home turf i.e. Jammu and Kashmir. The deposit base of the bank is centered in the state with around 85 percent of its deposit portfolio concentrated here which gives a strategic leverage to the bank being low cost deposits (lendable resources) with a high a CASA proportion while as the rest of India contributes to the remaining 15 percent, which mostly comprise of corporate or wholesale deposits with relatively higher cost. On the other hand, historically the loan book of the bank has been equally distributed between the J&K and the rest of India.
However, in terms of bad debts, there is a staggering contrast. NPA figures for the J&K are around 4 percent while as for the rest of India the same hovers at 16 percent plus. The GNPA of just 4 percent in the J&K state gains more significance given the uncertainties associated with operating in this fragile environment like the deluge of 2014 and prolonged unrest of 2016. In terms of composition, the loans in the J&K are mostly retail while as for the rest of India the loan book is dominated by corporate lending exceeding 90 percent of the portfolio with major exposures to non-PSU corporates through consortia and multiple banking arrangements. Such an incommensurate distribution of loans across the financial landscape of the country does not seem to have done with defensible logic. The retail lending in the state is a high yielding asset with least tendency to slip and even a better recovery rate of the NPAs while as the corporate loans outside the state have to be advanced with least margins coupled with high risks.
The financial parameters of the bank for FY-2014 – a post-tax profit of Rs 1182 crores, ROA of 1.74 percent, ROE of 23 percent, gross NPA of Rs 783 crores (1.66%), net NPA ratio of just 0.2%, capital adequacy of around 13 percent and a dividend of 500 percent – give a rosy picture. But it was not really so.
In a press conference in October 2016 (reported by the author), bank to everybody’s shock revealed that the NPAs and stressed assets have crossed more than Rs 20,000 crore. The new dispensation took some tough calls and unleashed a slew of curative measures to stem the rot without further delay, started with recognition of stressed assets and classifying them accordingly as NPAs as required under regulatory norms and making adequate provisions to reinforce the financial soundness of the bank. These measures were complemented with initiatives to effect recoveries on a war footing, augment capital to support growth and to suffice the regulatory requirement and to revamp the organization for reinstalling vibrancy and efficiency in operations. It worked to a larger extent but there are still some pain points in the portfolio of the bank like the IL&FS exposure. Till very recently, the exposure, per se, was not a bad asset and its sudden downgrade from a ‘AAA’ rated entity to ‘Default’ category in August 2018 came as a big shock to the whole industry. However, the level of exposure of the bank to the group is disproportionate to the size of J&K Bank, which constitutes just 0.70% of the overall banking industry in India.
The build-up of bad loans or NPAs in J&K Bank can be traced back to an earlier period as it typically started with adjustment of the overdraft extended to the state government by the bank owing to switching to Ways-and-Means finance by the state in 2011. The repayment of the overdraft, about Rs 3000 crore, pushed the Bank to redeploy the amount so as to avoid de-growth of its loan book. The easiest and quick deployment avenue available was big-ticket corporate lending outside J&K. Again the bank resorted to what can be termed as a mindless pursuit of growth numbers by inflating its loan book through such corporate loans outside J&K. Most of the corporate loans extended by the bank over these years are through consortia or multiple banking arrangements with minimal or no independent analysis and placing excessive reliance on appraisals made by the consortium leader or investment banker. This phenomenon of irrational exuberance resulted in low-quality asset book of highly leveraged B-rated corporate borrowers.
It is evident that the advantages and gains made by the bank in its home-turf have been spoiled by its pursuits outside J&K. Again an unreasonably huge exposure to the tune of approximately 2 percent of the total loan book of the bank to a single entity IL&FS seems to have been an imprudent decision. The move may well be termed as a misadventure. The bank needs to have a greater focus on its own territory rather than trying to ape the larger players in the market. This can be achieved by further deepening financial intermediation and improving credit absorption capacity of the local enterprise through capacity building initiatives. It is true that in order to mitigate (geographical) concentration risk, the bank needs to expand beyond the J&K but the money cannot and should not be thrown away. The bank should be selective with regard to the markets, products and borrowers outside J&K to avoid repeating previous gaffes. The bank should take due cognizance of its core competencies while extending loans outside J&K and look for retail, MSME and low-ticket good quality corporate loans only.
It is time to ask some acrid questions to the bank regarding its decisions including its policy on lending prudence and going overboard on non-PSU corporate exposures without reckoning its own realistic risk-bearing capacity or the risk-reward ratio of such credit decisions which as per empirical evidence have badly bled the bank in the recent years. As per recent information by the Union finance ministry, over 6,000 officers of nationalised banks have been held responsible on account of staff delinquency in NPA accounts. Had J&K Bank done any post-mortem of the NPA quandary and fixed responsibilities? Not all the NPAs in its books are the outcome of malfeasance but a thorough diagnosis is necessitated to plug the loopholes in systems and procedures and also to hold accountable the officers who have been responsible for creating the mess. The stakeholders would also like to know as to what preventive measures have been put in place by the bank to avoid any such build-up in future.
Although while looking at the NPA figures for the last few years including the first half of 2018-19, they clearly depict results of the recovery and resolution efforts being undertaken by the bank through a focused approach, the NPA levels have begun to stabilize despite total slippages of over Rs 12,000 crore since 2015.
The IL&FS imbroglio may, however, mar the efforts done on the recovery front and put the bank in a tight spot again. What remain to be seen is how the macroeconomic factors define the overall banking scenario at the national level and how much ready J&K Bank is to insulate itself from such developments. Already the bank tops the private banks in terms of GNPA ratio. It definitely needs to introspect and review its lending decisions and policies to ensure its survival in the longer run. The people of Jammu and Kashmir have a sentimental attachment with this bank and they wish to see this institution remain a glorious institution.
Author is Business Editor, Greater Kashmir
sinamulhaq@gmail.com