Jammu & Kashmir Bank sprung a pleasant surprise last week when it reported a 129% growth in the bank’s net profit for 2018-19, compared to fiscal 2017-18. In an environment where the banking sector in India today is generally struggling for sustainable profits, Jammu & Kashmir’s high growth in profits sounds remarkable.

This week Ziraat Times set out to look at the broader situation in the banking sector in the country, the challenges that banks are facing and put J&K Bank’s performance in perspective. We also looked at the efficacy of the new reforms agenda in the banking sector being ushered in the country and the global situation post-2008 financial crisis.

2008 Financial Crisis Lessons: 

How globally banks are devising new ways of doing business

Post-GFC financial sector reforms are set to reshape banking practices, leveraging on technology advances in financial services and spurred by competitive disintermediation by non-banks, capital markets, electronic trading platforms, and changing demographics and customer profiles.

Ziraat Times teams looked at the key standard-setting benchmarks that have evolved over this period and how they have influenced banking practices in India. Full information was not available to analyze these benchmarks with the strategic and operational initiatives taken by J&K Bank that helped in reinforcing the profit growth.

The initial analysis conducted in the below-mentioned benchmarks suggests that J&K Bank is on track in ushering reforms and improve its competitiveness and general banking services.

  • Creating Capital Buffers and Liquidity Buffers
  • Strategic Risk Management
  • New  initiatives taken in cybersecurity
  • Wide-based measures taken by the bank in the areas of Financial Inclusion, Financial Literacy and Consumer Protection
  • Recent measures taken in Strengthening Corporate Governance and Accounting Standards

How other major banks in India are faring?

State Bank of India, the country’s largest lender, has reported a loss for the third straight quarter. The public sector bank’s loss stood at Rs 4,875.8 crore in the quarter ended June (2018-19), according to its exchange filing. SBI had reported its largest ever quarterly loss of Rs 7,718 crore in the March-ended quarter.

Among the private banks, HDFC Bank Ltd, in contrast, has been performing well too. The bank reported a record quarterly net profit of 58.85 billion rupees ($848 million) earlier this year. With these results, the bank is generally seen to have meet market expectations as the country’s biggest lender by market value raked in higher interest and fee income. The bank also said its board had approved raising up to 500 billion rupees by issuing debt over the next 12 months.

The Big Mergers

With burgeoning non-performing assets and an economic climate that it is not seen investment and profitability-friendly, major public sector banks in recent times in India are on a merger spree.

Informed sources in the banks under merger negotiations told Ziraat Times that one of the objectives of the merger negotiations is to undercut the unnecessary competition that banks are posing to each other. 

In recent days there are reports of that Punjab National Bank, Union Bank and Bank of India are in talks for a merger. On April 1, 2019, Vijaya Bank and Dena Bank were merged into Bank of Baroda to form the third-largest bank in the country.

A senior official at the Punjab National Bank told Ziraat Times that the Finance Ministry has already invited some of their senior executives for discussions regarding the second round of mergers in the banking space. 

What is the outlook for J&K Bank in the coming years?

Even as the momentum of global growth has slowed in 2018 and diverged across jurisdictions, regulatory reforms have strengthened bank balance sheets across the world. In India, even as economic growth continues to be robust, idiosyncratic factors are affecting profitability and asset quality of many banks. 

Globally speaking, intensification of post-global financial crisis reforms has lent considerable support to banks and has made them resilient, as seen in improving capital and liquidity buffers, and declining NPL ratios. Credit growth is taking hold in many jurisdictions across the world. In India, however, the overall situation remains far from satisfactory.

Demonetisation, tightening of the tax laws and introduction of GST are cascading a negative or stressed growth across several sectors.  Real estate is one sector which is bearing significant stress. The sector, with a high credit exposure, is unable to meet the demand expectations. Consequently, investments are turning bad and promoters’ ability to repay bank loans is getting highly compromised. Several other factors in the larger economic system are aggravating the banks’ NPA situation.

In this backdrop, J&K Bank’s high-profit growth in 2018-19 is indeed impressive. The bank’s strategic shift from outside state borrowers to individual and Micro Small and Medium Enterprises (MSMEs) in recent years has been a good one. It is this sector, especially in the rural primary sector, that is showing signs of stronger credit demand, profitability and repayment capacity.

As the base of private business, particularly the transformation of subsistence farming-based rural economy to high-income cash crops and fruits expands in J&K, credit needs are likely to intensify in coming years. Economic activity in real estate and tourism is likely to go up as Non-Resident Kashmiris  (NRKs) continue to pump in greater remittances. As the existing block in the Srinagar-Jammu highway is expected to go and train connectivity between Udhampur and Banihal becomes is a reality, MSME growth is J&K is poised to go up for improved market connectivity outside the state. 

Some experts that Ziraat Times spoke to point to the likely quantum increase of agriculture share in the state’s GSDP. Although in percentage terms the agriculture sector’s contribution is constantly going down – quite consistent with global trends – the quantum contribution is likely to increase. That is simply for the reason that farmers in J&K, particularly in Kashmir and Ladakh regions, are leaving low-income subsistence farming.

This trend is translating into a whole lot of new economic possibilities. Embracing high-income cash crops and hybrid fruits is necessitating using advanced seed varieties and farm equipments for increasing efficiency and productivity. High-income produce is also attracting players from secondary sectors that are interested in value addition and processing. That whole set of activities is likely to create a significant demand for credit, both in primary agriculture sector and the value-adding industrial sectors, which consume significant amounts of capital.

J&K Bank, in this situation, is likely to see a greater demand for credit because of its stronger interface in rural J&K and large infrastructure network. If the current strategic focus is reinforced with improved technology-based interface with its clientele, J&K Bank’s outlook is indeed quite positive in the future.

The global situation

The global recovery, which began in mid-2016 and gained traction in 2017 has lost some momentum in 2018 so far and financial conditions have tightened especially in emerging market economies (EMEs). For the greater part of the year, these economies experienced capital outflows and currency depreciation on the back of a strong US dollar, intensified trade tensions, country-specific factors—especially in Argentina and Turkey—and signs of a slowdown in China. On the other hand, market volatility subsided in the advanced economies (AEs) and risk appetite remained relatively strong.

After reaching a six-year high in 2017 and getting broad-based across AEs and EMEs alike, global growth appears to be shedding its momentum in 2018 so far, while becoming asynchronous and differentiated across geographies. Barring the US, growth moderated in several large AEs such as the UK and Euro area, while in EMEs, it remained almost unchanged at 2017 levels, except for some country-specific idiosyncratic developments such as in Argentina and Turkey which spread risk aversion across EMEs as an asset class.

Inflation in AEs, although still benign, inched up towards targets in response to higher oil prices, while in EMEs it was somewhat higher and differentiated. The surge in trade and investment in 2017 lost speed in the first half of 2018 due to weaker capital spending in the midst of heightened uncertainties, the large overhang of debt looming over both public and private sector balance sheets and bouts of turbulence that have stirred up risk-on-risk-off swings in investor sentiment and capital flows.

Against these macroeconomic conditions, some signs of moderation in international banking are becoming visible in 2018 after it picked up steam over most of 2017. Bank lending growth turned uneven with a noticeable slowdown in EMEs and overall cross-border bank credit contracted by $130 billion between Q1:2018 and Q2:2018.