What really ails the state finance?
The State is said to be in serious financial troubles and urgently needs infusion of over Rs 2200 crore to tide over this problem. As an interim measure, the Government is planning to raise market borrowings of Rs 300 crore to handle pressure conditions.
This would be in addition to market borrowings of Rs 1500 crore already resorted to early this year.
Some important voices from the Valley hold J&K Bank’s “shifting” to RBI as one of the reasons for State’s financial ills but for which, they believe, the crisis could have been averted. How correct, let’s fairly and objectively analyse the stand point in this column.
On State’s Financial Crisis, the Greater Kashmir on Business Page (28 January) carried the lead news: “Experts say [shifting] to RBI was a mistake”. Mr. Mukeet Akmali has constructed this article on inputs gathered from some official in the Finance Department besides from Shakeel Qalandar, the former president of the Federation Chamber of Commerce. He also takes a reference to what has been said by the PDP Member of Parliament and a former State Finance Minister, Tariq Hameed Qara in the recent past.
My first objection is to the very usage of the word “shifting” which tends to indicate as if the J&K Bank was ever operating independent of the Reserve Bank of India. That notion is wrong. It has to be understood that the Bank is constituted under the Indian Companies Act, 1956 which is a Central legislation and that the banking falls in the Central List of the Constitution of India. So, the States have no jurisdiction over the subject. RBI is the regulator for all banks in the country, including the J&K Bank. To this extent no change has taken place which could be termed as having impinged on the autonomy of the Bank. Such a sweeping assumption is, therefore, completely misplaced. Now what has actually been done needs to be put before the general public objectively and sincerely without, needlessly, attempting to bias their minds.
As a regulator, the Reserve Bank was very intensely concerned over the loose kind of financial arrangement between the J&K Bank and the State Government. It was not happy with the way the bank was accommodating the requests of the State Government for frequent over drafts beyond stipulated limits to help it overcome its financial shortfalls. This “loose” relationship had put the State Government in a state of complacency in the sense that it would always look to J&K Bank for overdraft facilities as and when need for funds arose. The Bank would readily accommodate requests and, at times, even at a mere phone call! Thus, the regulator’s instructions in this regard were, so to say, rampantly brushed aside. In the long run, such a system worked to the disadvantage of the State Government which had to bear high rate of interest on excess drawals. Beyond Rs 1500 crore, the rate of interest would be as whopping as over 20%. As State’s fund position would always be a matter of concern, frequent recourse to such overdrafts entailed added burden of high interest. As the overdrafts would always remain in the vicinity of Rs 2000 to 2500 crore__ higher than the outer limit of Rs 1500 crore set by the RBI__ one can imagine the quantum of interest burden that the State was, almost regularly, bearing as a result. It was playing havoc with the State’s own meagre resources as the bank would regularly recover the accrued interest from the funds available in its W&M account. The outstanding balances in the Ways and Means account would thus dwindle progressively requiring more infusions by way of overdrafts. This vicious circle brought the State to a level of dependence on the J&K Bank without bringing the much needed changes and improvements in its working to build its resource base.
The bank no doubt would indeed benefit from this sort of practice earning high margins and boosting its bottom line, but the State Government was surely and steadily walking into a debt trap.
It was in 2010 that the RBI effectively intervened and restricted O.D facilities to a limit after paying off the outstanding balance to J&K Bank as one time exception. This arrangement came into force from 1/3/2011 and has since then been strictly adhered. It has served interests of the bank as well as the Government. The later saved as high as Rs 500 cr by way interest-outgo in first two years of the new arrangement and the bank was more focussed on its usual business and continued to surge in profits without any dependence on easy earnings as overdrawing would enable it.
Thus the crisis have nothing to do with the RBI regulations and what has been stated by the unidentified official of the Finance Department is incorrect. The State’s problems are substantially arising because of poor governance. Fiddling with the institutions and systems are the root causes for State’s financial crisis. These crisis will not be resolved as long as the State does not follow systems and allow institutions the much needed autonomy and an apolitical handling by the Government.
Mr. Karra, as State’s former finance minister, should have understood the rationale behind the RBI regulation and abstained from making remarks that have the effect of whipping up public sentiments needlessly. Let all of us allow the J&K Bank to stay as an autonomous financial institution and not fiddle with it or politicize it. It has a diverse list of stake holders besides the State Govt. and needs to operate in a free and competitive environs to serve everyone’s interest. In case Mr. Karra still holds that it has taken away the autonomy of the bank, the PDP should then, in right earnest, list the matter as one of priority to be “set right” with BJP in their emerging bonhomie.
I would sincerely reckon the arrangement with RBI as one of few good steps of Omar Government.
(The author has been the former Special Secretary in the State Finance Department)