Ziraat Times Business Analysis Team

Srinagar, Dec 3:

The designation of Jammu & Kashmir Bank as a formal Public Sector Undertaking (PSU) by the Governor Satya Pal Malik-led State Administrative Council (SAC) is facing intense opposition across the board in the state. 

Although as of December Ist, 2018, both RBI and J&K Bank Board of Directors were yet to receive a formal and detailed government communication about the same, political parties in J&K see the decision ‘unacceptable’. Bank employee unions have went on strikes and held protests against the move. Business, trade, industry associations and chambers have called for a roll back of the decision. At least three former chairmen of the bank have unequivocally opposed the decision. The bank investors are nervous.  

This week Ziraat Times analyses what this decision, if implemented, could mean for the bank. 

1. Distinctiveness? No more!

Jammu and Kashmir Bank Limited was incorporated on 1st October, 1938. The bank was the first one in whole of India as a State-owned bank. Although, by virtue of the extension of several company and public financial management laws to Jammu & Kashmir, the Bank was transformed into a company under the Indian Companies Act 1956, as a Scheduled Bank in 1971 and as “A” Class Bank by the Reserve Bank of India in 1976, the bank has fundamentally been classified as an Old Private Sector Bank. Most importantly, the Bank retained a distinctiveness which no other bank had in India: it is the only bank in India in which a state government holds a majority stake. In all public-sector banks in India, the majority stake is held by the Centre. 

If J&K Bank is made a PSU, it is uncertain if J&K government’s majority stake holding in the bank would eventually remain. 

2. Governance framework could alter

J&K Bank‘s corporate governance model was guided by the Companies’ Act of 1956. It is unclear whether J&K Bank will now be transformed into a statutory corporation by an act passed by the State Legislature or it would continue to remain a company. Considering that the Companies’ Act of 1956 has been superseded by the Companies’ Act, 2013, it is still unclear whether J&K‘s Bank‘s transformation would be guided by the latter. If yes, the bank’s governance framework could alter because the Companies’ Act of 2013 is different.

3. RBI’s regulatory and administrative jurisdiction could deepen

In 2011, the Reserve Bank of India entered into a Supplementary Agreement under Section 21A of the Reserve Bank of India Act, 1934 with the Government of Jammu & Kashmir.  Under the agreement, the Reserve Bank of India now  carries on the general banking business of the Government of Jammu & Kashmir and acts as the sole agent for investment of Government’s funds. 

The Reserve Bank of India has also entered into an agreement with J&K Bank Ltd. whereby J&K Bank acts as an agent of the Reserve Bank of India, for conduct of general banking business of the State Government.

Such an intermediation for J&K meant an end of the historical direct interface between the J&K Bank and J&K government.

When it comes to basic licensing, things might change as well.

In RBI’s “Report of The Committee to Review Governance of Boards of Banks in India – May 2014“, one of the recommendations has been to introduce “One License Regime” throughout the country. 

Informed sources told Ziraat Times that the committee has expressed reservations that Jammu and Kashmir Bank, despite its majority stake held by the Jammu and Kashmir Government, is classified as an old private sector bank. 

“There are clearly historical reasons for these specific forms of licensing [in case of J&K Bank], but from an ownership standpoint they appear illogical”, the said RBI report notes. 

This means that in case of J&K Bank, RBI’s preference is for a licensing regime for J&K Bank as is applicable for all other banks in the country.

4.Public Information Officers (PIOs) would have to be designated

The State Administrative Council (SAC) on November 22, 2018, approved a proposal that provisions of the J&K Right to Information Act, 2009, shall be applicable to the J&K Bank just like other state-owned undertakings. 

It means, if implemented, the general procedure for filing RTI applications, applicable to other government departments, would now be followed in the case of J&K Bank as well. J&K Bank would have to designate Public Information Officers (PIOs) and response procedures to RTI applications shall have to be notified as in other public sector undertakings.         

5. Staff recruitment procedures and processes could change

One of the biggest impacts of J&K Bank‘s transformation process could be on the procedure of the recruitment of its staff. Lately, the bank‘s management is well known to have remained under pressure from the political establishment on staff recruitments. The bank‘s change of management reporting system could make the political establishment influence the recruitment system and processes just like it normally happens with other PSUs. That could seriously undermine the bank‘s quest for engaging talented human resource.    

What could also seriously undermine the Bank‘s need for cutting edge efficiency and effectiveness is the possibility of the extension of the reservation system in recruitment and staff promotions. 

6. Transformation of the Business Model

Reserve Bank of India’s initiative in 2013 of reviewing governance of the boards of banks in India included Jammu & Kashmir Bank as well. 

The Terms of Reference of the committee included i) review of the central bank regulatory guidelines on bank ownership, ownership concentration and representation in the board. ii) To analyse the representation on bank boards to see whether the boards have the appropriate mix of capabilities and the necessary independence to govern the institution, and to investigate possible conflicts of interest in board representation, including among owner representatives and regulators. In this and review the ‘fit and proper’ criteria, for all categories of directors of banks, including tenor of directorship. 

If the recommendations made by the committee are adopted in J&K Bank‘s context, the bank‘s business model, including the upward accountability mechanisms, could alter significantly.

7. Finance Secretary would be the de-facto boss of J&K Bank

J&K Bank as a PSU would now be under the administrative control of the state’s Finance Department, headed by Principal Finance Secretary. Principal Finance Secretary would now be the de-facto boss of the bank.

All the PSUs whether under administrative control of Industries and Commerce Department or Finance Department are headed by secretaries of these departments. While as the day-to-day affairs are managed by the Managing Directors, according to the PSU Act, the real control lies with the Secretaries of the administrative departments under whose jurisdiction these PSUs fall.

8. Bank’s annual report would be placed before the State Assembly

J&K Bank in the new scheme of things would be accountable to the state legislature. That, inter alia, would mean that the Finance Department will be required to place the bank’s annual report before the State Assembly. 

9. Appointment of the Chairman/CEO

Chairman in Jammu and Kashmir Bank was lately appointed by the Reserve Bank of India on the recommendations of the Board of Directors (BODs) – which includes government-appointed BODs as well as BODs appointed during the Annual General Meeting.

With J&K Bank‘s conversion into a PSU, the chairman’s position would technically be equivalent to the Managing Director of any other public sector undertakings in J&K. Technically, therefore, the chairman/CEO could now be appointed by the state government.   

10. J&K’s state legislature could have greater say in matters than the RBI 

One of the spin-offs of making J&K Bank a PSU will be that the state will have powers over banking. According to provisions of the Banking Regulations Act, applicable to Jammu & Kashmir since 1956, J&K Bank is licensed as an old private-sector bank, and comes under the regulatory purview and supervision of the RBI. Making it a PSU and bringing it under the state legislature could mean that the J&K legislature would supercede some of the provisions of the Banking Regulations Act.

11.  Investor confidence could dampen

One of the most negative outcomes of the J&K Bank‘s conversion into a PSU would be investor confidence. As on December 31, 2017, foreign portfolio investors and foreign institutional investors held 15.98% of J&K Bank’s shares, Indian mutual funds 4.98%, Indian residents 12.69 per cent, insurance companies 2.76%, and NRIs a little less than 1%. 

Informed sources told Ziraat Times that in case the bank‘s profitability comes under doubt, private investors could make a beeline for disinvestment. That  could mean further drop in the bank share price. That prospect could open the possibility of the central government buying the shares and the conversion of J&K Bank like other banks in the country whose majority stakes are held by the central government.

12. Profitability may get affected

J&K Bank is one among the 10 PSUs of J&K, out of 30 PSUs, that earn profit. This bank‘s profits constitute the highest chunk of profits earned by any PSU in J&K. In fact the bank accounted for Rs 416 crore (50% of the total profits of all PSUs), according to the CAG report of 2016-17. 

A drastic change in management reporting, greater governmental interference, low staff morale and performance incentive could negatively impact the bank‘s reputation of a trust business partner. If investors’ and depositors’ confidence is dampened, the bottomline could be affected too.