J&K bank, Now the agent of RBI

Srinagar, Jan 23:

A fresh agreement between the Jammu and Kashmir Government and the Reserve Bank of India
on the role of the J&K Bank has put a spotlight on the National Conference’s Autonomy proposal,
which has been conceived as one of the solutions to the long-standing Kashmir dispute.
 With the RBI likely to takeover the overdraft role of the J&K Bank from April 1, political analysts
have begun to see the development as a ‘first dent’ in the NC’s autonomy proposal which
naturally makes the financial autonomy of individual institutions a must.

THE AGREEMENT 
 On Friday, the RBI came up with a press release about signing of the agreement, making the
RBI take over from the J&K Bank the role of providing overdraft facilities to the state government.
Right now the overdraft facilities are provided by the J&K Bank, which, according to sources,
would fetch the Bank revenue of Rs 300 crores annually.
 “Under the agreement, which shall be effective from April1, 2010, the RBI shall carry on the
general banking business of the Government of Jammu and Kashmir and act as the sole agent
for investment of Government’s funds,” the RBI release said. 
 It specifically mentioned that the decision has been taken “on recommendations of the state
government.” 
 The Government, in turn, acknowledged that it had “vehemently placed” before the 13th Finance
Commission for substantial grant to it as one time assistance to remove the structural debt with
the J&K Bank.
 “The Council of Ministers headed by the Chief Minister, Omar Abdullah therefore pleaded
forcefully with the 13th Finance Commission and demanded one time financial assistance of Rs
2300 crores to remove this structural deficit. In a rare exception to the request of the J&K
Government, the Commission has awarded a grant in aid of Rs 1000 crores,  with another
exception of permitting the state government to raise balance amount of Rs 1300 crores for
liquidation of loan, over and above the annual borrowing ceiling, with exclusion of this market
borrowing, while calculating the State FRL-consistent fiscal deficit,” read the press release issued
by the J&K Government.

COUNTERPOINT 
 While a columnist calls the agreement as “nationalization of the institutions”, the Peoples
Democratic Party has come out openly against the pact, saying it could be the first step towards
JKB’s “liquidation as a state-owned company.”
 A former officer in the State Finance Department vehemently opposes the pact on the grounds
that it is unhealthy for both the state government and the J&K Bank. 
 “This time you have the J&K Bank. The state government could approach it, get money and
solve its financial problem. That was the comfort level. You had readily finances available and
the Bank would in turn earn out of it. That was the win-win situation for both the parties. But the
new agreement is certainly not healthy, not desirable and could plunge the state into a kind of
financial indiscipline in next few years,” the officer, insisting not to be named, said. 
 He said the state had to go to this particular aspect in a phased manner and not in one go. “You
have to migrate to this situation by first imposing financial discipline on yourself, cutting down
expenditure and raising your resources. You have to take apolitical decisions. For instance, if you
are not able to afford anything, say you can’t afford it. And before having the pact, it is important
to strengthen our own institutions and cut down wasteful expenditure,” the officer said. “Now the
state has asked the RBI to give it Rs 2300 crores. They gave it with Rs 1000 in first instance and
asking the state to avail the remaining Rs 1300 crores from markets. It means that the state has
to move big financial institutions and raise the amount. But here the problem is of lawlessness
and non-functional institutions in the state. So how can you make it possible when you are not
able to generate your own resources and impose financial discipline?”
 So, the officer said, it is important that the state rethinks on the issue and thoroughly debates it
in concerned quarters. “There is a comfort level that the state enjoys with J&K Bank which is not
possible with the RBI,” he said.

‘NATIONALIZATION OF INSTITUTIONS’
 Columnist Arjimand Hussain Talib on Sunday wrote about the pact, linking it with the special
status that the Jammu and Kashmir enjoys. “A big majority of people see any such step as a
dilution of the state’s special status. They also see it as nationalization of the state’s key
institutions,” he wrote in his column titled “Reversing Autonomy” in Greater Kashmir (January
23). “And that is a grim message. A lot of state’s indigenous institutions have been nationalized
over the years. The problem is that this creates greater centralization, challenging JK’s quest for
political autonomy even further.”

‘FEARS ARE THERE’

 Economists don’t rule out certain fears associated with the pact. “If the mismatch between the
central flow of funds and the requirement of plan funds continues with a wide time gap, then the
state government may get into financial crisis. And if the state government manages its finances
efficiently in terms of expenditure compression measures and in terms of maximum internal
resource mobilization or in terms of tapping IRM potential, then the state government has no
problem. At least it has an advantage that it will come out of the JK Bank overdraft debt. In that
process, the state will save on an average over Rs 250 crores which is a huge sum for meeting
the other development expenditure which otherwise would go to the JK Bank as interest payment
on overdraft borrowing,” said noted economist, Prof Nisar Ali, who has also been the member of
the State Finance Commission. 
 But, Prof Ali said, there were if’s and but’s involved. “The state will have to be extremely vigilant
in resource mobilization and management of finances,” he said. “Otherwise there are fears that it
can plunge into financial crisis.”
 Giving details about the pact, Prof Ali said the issue has to be seen from the state’s overall
economic perspective, including its resource management, actual tax potential and its actual
realization.  “Since the Finance Department is the largest share holder in J&K Bank, they had
easy access to borrowing from J&K Bank in accordance with a Memorandum of Understanding
subject to a cap of Rs 1500 crores at a certain rate of interest mutually agreed upon as per the
market determined rate of interest. If the state government asked for more money, the slab of
interest would go up,” he said.
 Elaborating, he said, the state’s most of the funds comprise of central devolution. “Our total
revenue received is 22 percent on account of internal resource mobilization (IRM) including tax
and non-tax revenue. Rest 78 percent comes from three sources from centre. One is statutory
position of the states called as state share of union excise duty; then we have the grant-in-aid
and other plan assistance or special packages. So when the transfer of resources takes place, it
has its own prerequisites. It comes vide various installments and not in one go,” he said. “There
is a phase of transition from central funds flow and the need on ground. Here we would go to the
J&K Bank and meet immediate contingencies or emergency expenditures  In this way JK Bank is
a banker to the state. This mechanism has been going on for last six decades and going on well.
Now in this process, our governments (past and present) have been reluctant to raise taxes
fearing that public will agitate. This feeling is there. So last year the internal resource mobilization
has been Rs 3200 crores only. Therefore our dependence is on central transfer of resource
which comes through usual routes.  But there is a certain time lapse in getting finances from
centre. Since JK is a resource-crunch state, we can’t generate much of our own resources. To
come out of the crisis, we would lay hands on J&K Bank. This is the overdraft mechanism which
is around Rs 2300 crores. In March 2010, the overdraft debt was Rs 3100.  The centre provided
some money but still we had Rs 2200 crores as overdraft debt.”
 Later, Prof Ali said, the state government felt that it has a huge debt from the Bank for which it
has to pay annual interest of Rs 300 crores. “No government wants to have so much debt or its
liquidation. So when the 13th Finance Commission visited Kashmir, the state government put the
demand that it should be helped in coming out of J&K Bank overdraft debt. So it put up a
demand to have Rs 2300 crores for this purpose.  The Finance Commission partially acceded to
the request and awarded Rs 1000 crores on the condition that equivalent amount has to be
raised by the state government from open market borrowing. Only then Rs 1000 crores will be
released. The better course would have been for the Govt to take up the matter with the central
government and get the conditions waived off and avail Rs 1000 crores,” Prof Ali said.
 Sources, however said, if it was a special dispensation, then there should not have been any
stringent conditions attached to it. “But when you keep the eligibility conditions in place, it ceases
to be special dispensation. The negotiations took place and the Centre asked it to follow the RBI
route to come out of the OD debt. So the RBI appointed JK Bank as its agent and the RBI can
lend to the state government a maximum of Rs 350 crores for the short term borrowing through
JK Bank as an agent of RBI,” they said.
 Sources said the move is likely to hit the Bank in the short run. “The Bank was earning Rs 250
crores on an average from state government annually. So its big customer is gone to speak from
the banking point of view,” said another economist, insisting not to be named. “Now they are in a
problem in the short run on how to deploy these funds. One that they lost this amount and very
serious problem is how to deploy this huge sum when the capital market is not so brisk. In the
wake of recession, there is no demand for credit.”

THE QUESTION OF AUTONOMY 

 Noted political commentator, Prof Gul Muhamad Wani, who teaches Political Science at the
University of Kashmir said: “It is a paradoxical situation in Kashmir over the past two decades.
Ostensibly, while as the issues of Aazadi, Autonomy or Self Rule are under discussion, the
state’s politics is increasingly losing its autonomy and political parties are also losing their own
autonomy of their internal functioning.”
 He said: “What has happened over a period of time is that more and more central intervention is
visible. So any discussion of autonomy of institutions is fundamentally connected to autonomy of
politics of the state.”
 Wani said the second important issue is that in contemporary times or in times of globalization
and liberalization, it is very difficult for any state government to retain its financial or economic
autonomy unless institutions are not made accountable, transparent and unless a culture of
accountability does not develop. “Central government is operating in an economic setting in the
world of globalization where it itself has to go by certain financial discipline as far as World Bank
and IMF is concerned. The state government cannot afford to remain financially undisciplined.
This discipline is very critical to political autonomy. J&K Bank cannot be compared with other
institutions in the state as far as its growth trajectory is concerned. It was certainly moving ahead
and fast expanding. One will have necessarily to wait and watch to see whether the pact will
prove as enslaving mechanism as the PDP believes or it can result in what is being referred to as
more fiscal discipline,” he said.
 Prof Wani said another important issue is that Jammu and Kashmir is increasingly losing on
several counts. “One that its own internal institutions are not functioning properly and two, the
state is also not part of trans-border regionalism, meaning the state governments in India are
negotiating with foreign bodies on different projects. AP, Gujarat, Maharashtra are some
examples where even sometimes central government does not come in. Unfortunately J&K is no
longer part of globalization process nor is it part of trans-border regionalism. It is not also able to
maintain autonomy of internal functioning of its institutions. It is a very serious matter which
needs a lot of introspection,” Wani said, asserting it was not the opportune time to do it (the pact)
for the simple reason that autonomy, self rule and autonomy of institutions are being thought as
one of the solutions to the conflict resolution.

MORE FEARS 
 According so observers, the pact will make more idle funds available to the J&K Bank in a
market already flush with money. “That is likely to reduce profitability of the Bank which could
lead to forcing the government in a few years to sell its shares making it like any other Bank that
will have only the J&K name tag like Travancore or Hyderabad or Rajasthan. It will cease to be a
government company which employs only the state subjects,” said the former official in the
Finance Department. “Extra money will become available to markets outside J&K not where the
deposits take place. Losing the tag of being official bankers to J&K government would adversely
affect its prestige that had seen it grow as number one private bank in India.”
 Naeem Akhtar, a former bureaucrat and now the PDP’s spokesman believes that the National
Conference “has made autonomy its political merchandize, selling it in retail to the center for
political power during the night and claiming it back in wholesale through slogans and resolutions
in daylight to mislead the people.” 
 “To surrender J&K Bank it selected a time when paradoxically it is engaged in shadow boxing
over flag hoisting triviality with BJP which wants exactly what NC is delivering on ground:
surrender of state institutions. Who knows tomorrow it could be the symbols like the state flag,
the constitution and whatever has remained after handing over the economic resources. After
having surrendered water, power projects, the right to amend our own constitution and now the
Bank, J&K's iconic institution nothing is beyond this party,” he told Greater Kashmir. 

‘ALL IS WELL’ 
 But according to experts in Banking, it will be a win-win situation for the Bank and the state
government. “I think the agreement says that the JK Bank will continue to be the banker to the
state government but under the overall supervision and monitoring of the Reserve Bank of India,
as is the case with others banks across the country,” says the former J&K Bank Chairman,
Muhammad Yousuf Khan.
 He believes that it is not only the overdraft facility that makes the bank earn revenue. “If the bank
would lend the overdraft amount, which it would give to the state government, to other
institutions, it would earn more revenue,” Khan told Greater Kashmir.