The Rs 532 crore capital infusion in J&K Bank announced in the recent budget has come at the most opportune time as the bank is struggling to maintain its capital adequacy due to huge bad asset quality, short provisioning during previous periods, costs on account of restructuring of loans during turmoil and floods.
The finance minister has admitted that there have been serious lapses in the corporate governance coupled with management failures in the bank which have led it to present situation. These failures and grave irregularities came to surface only when there was change in the top management of the bank.
After assuming his charge, Parvez Ahmed, Chairman of the bank cautioned the investors, customers and other stakeholders that there will be no bottom-line growth in near future. He expressed serious concern over the deteriorating asset quality and weakening balance sheet while maintaining that NPAs and stressed assets of the bank have touched Rs 20,000 crore.
One fails to understand that if this was the position, why the bank tried to project a buoyant picture during past years. It must be noted that most of the bad advances and stressed assets are from outside state.
J&K state is the major stakeholder in the bank. Despite this, 90 per cent of bank's bad assets are from outside state. So who are the actual beneficiaries? Who should be blamed for it? Were the top executives responsible for making huge advances outside the state judicious in their financial decisions? What collateral securities were held while granting such advances? Whether the top management, board and the state government ever tried to fix responsibility? These are pertinent questions which need answers.
The bold statement by the new Chairman amid this situation has been widely hailed. Such truthful admission itself shows the transparency and working of the present Chairman. The acknowledgement of stressed assets by the new Chairman is in tune with the new RBI policy declared by the former Governor RBI Rughu Ram Rajan.
The bad loans have hit almost all banks' profitability all over country. While the profitability of some banks may be impaired in the short run, the system once cleaned will be able to support economic growth in a sustainable and profitable way. Loan classification is merely a good accounting. It reflects what the value of a loan should be; it is accompanied by provisioning which ensures the bank keep aside a buffer to absorb likely losses. If the losses do not materialize, the bank can write back the provisioning to profit.
Now it is time to act and support the bank to recover these bad assets through institutionalized recovery mechanism with all available legal remedies. There should be a follow-up action after identification of these bad accounts and this will send a strong message to the wilful corporate defaulters sitting outside state. It is high time that the staff, the state and the society supported the present Chairman to restore the lost glory of the bank.
The bold decision of finance minister to inject additional capital of Rs 532 crore in two tranches is a step in right direction which will enable J&K Bank to lend more, raise additional funding and above all to clean its balance sheet.
(The author was a senior officer in JK Bank)