J&K Bank: A Shareholders Nightmare

6 mins read

Fayaz Rasool

File Photo
File Photo

Jammu and Kashmir Bank shares have taken a drastic hit on the bourses as the shareholders have sold off the scrip after the bank’s losses multiplied. The share value has declined by over 40 percent in last 52-weeks and trades at Rs 65. The price to earnings (P/E) ratio of the shares has been low and the bank which is a mid cap company has its market capitalisation at Rs 3,272 crore.

There has been a consistent bad news coming in from the bank concerning its financials resulting into people shedding the scrip. The non performing assets (NPAs) have seen a steep rise. It has lent too many companies outside particularly those operating in the steel sector that has led to the greatest stress on its assets and the decline in the share prices has been consistent.

On 24 June the JK bank share opened at Rs 65 and closed at 65.65 and the traded quantity was 287440. It has taken a hit earlier as well. In the bank the state government holds the majority stake of 53 percent and the total number of scrip held by the state government in the bank is 257752660. The Indian Mutual funds have the total share strength of 29674658 which accounts for 6.12 percent shareholding in the bank, while the insurance companies own 15374694 shares which turns out to be 3.17 percent shareholding in it, other banks have 217441 number of shares that account of 0.04 per cent share, non resident Indians have 3428576 lakh shares accounting for 0.71 percent of value. Also the foreign institutional investors (FIIs) have the share strength of 59923637 in the bank that marks 12.36 percent holding in the bank, foreign portfolio investors have 7.72 percent share holding numbering 34983766 shares. The Corporate share holding in the bank is 19912770 making a contribution of 4.11 percent, the resident individual contribution is 62942610 which makes a share holding of 12.98 percent.

The total shares held by different categories in the bank are 484778020. The reason bank shares witnessed a downward spiral has been due to the wrong management policies of the bank and the returns on the business that it has done is even lesser than what it offers as interest rate on the deposits. Given the scenario the shareholders are cautious about investing in the bank. It has been due to the fact that the bank management has not been able to take a prudent decision on the investment of money that it lifts from the market which has resulted into the profit margins taking a hit. Infact the Jammu & Kashmir Bank reported a net loss of Rs 56.02 crore in the quarter ended March 31 while as it had posted a net profit of Rs 101.61 crore in the January-March quarter of 2014-15 fiscal. The total income of the bank decreased to Rs 1,805.33 crore in the three-month period as against Rs 2,023.50 crore in the year-ago period.

The bank management should have ideally fixed the responsibility for the NPAs when it had crossed the Rs 3,500 mark, but it has not done so. So while its shares plummet, the banks NPAs have only increased. As per the officials as on March 2016, the bank’s gross non-performing assets (NPAs) soared to Rs 4,368.62 crore as against Rs 3,339.45 crore. This represents a whopping 8.5 percent of the advances made by the bank, which is simply the loss of the shareholders money. Among the major players who are believed to have failed in paying back the money to the bank include the fugitive industrialist Vijay Mallya, who has allegedly escaped from the country and is amongst the top defaulters of Jammu and Kashmir Bank. In late 1990s, with the help of some politicians in the state, Mallya was successfully granted Rs 100 crore loan from J&K Bank. He has however not yet returned that money to the Bank due to which the bank has to sold its shares to recover Rs 70 crore and the sale had started in 2013, further bringing their value down at the stock exchange.

The increase in the NPA is a major concern for the investors. It was only 1.62 per cent of advances in 2013. The banks performance in comparison to some other ones in the country on the NPA front is worrisome. The gross NPA of the scheduled commercial banks was only 5.14 per cent at the end of September 2015 and is expected to rise to 5.4 per cent by September 2016. At the maximum, if the economic conditions in the country deteriorate, the NPA could further rise to 6.9 per cent by March 2017. The JK Bank has however already crossed those limits by over 1.5 percent.

“The management should have been worried over the NPA position, but it seems they are not. They could have done well by carrying out the thorough credit assessment, before disbursal of a loan. But they have not done so and the loans have remained unsecured leading to huge NPAs. The bank accounts have turned into NPA due to the non payment of interest. The bank management could do good by taking measures to enhance the recovery by making employees accountable for the purpose,’’ said a bank official.

Officials said that the bank is facing the huge losses due to rise in bad loans. “ Besides the NPAs the stress on the bank is due to the restructured assets. Many of the borrowers are unable to pay back and the bank has made the loan more flexible to be paid back over a longer period of time and the restructured assets are putting heavy pressure on a bank’s profitability. Such stressed assets make a sizeable portion of the loans in the system. There is an increasing number of debt accounts which are turning risky,’’ added the official.

According to officials the unsecured advances of the bank have increased many folds. “ The unsecured advances of the bank particularly of the credit card advances have also increased substantially. The risk of default has stayed on and the unsecured advances have posed a great risk to business. Some of the sectors which are high risk like the capital and real estate’s sector should have been watched for. The exposure of the bank towards the high risk sector has enhanced greatly.’’

It has been due to the increase in the unsecured loans due to which the bank has to set aside a particular sum of money as provisioning that raising the capital for advancing the loans had become more cost intensive. “ To ensure that it is protected from bad loans the bank has set aside the money as a ‘provision due to which it has very less capital available to use for its various operations. The bank is using depositors’ money to lend which increases the risk of the lending as the deposits particularly those in the saving bank and current account bank don’t remain static. There is a need to shore up the capital base.’’ The banks financial position for the last fiscal year however present a very grim scenario. For the full 2015-16 fiscal, the bank posted a net profit of Rs 416.04 crore which was down by a whopping 18.2 per cent compared to the previous year that was Rs 508.60 crore. “ Where are we going, our increased investments are leading to increased losses which makes a case for corrections,’’ added an official, citing that the figures of the bank which show its dismal scenario. “ The bank management is not concerned when the total income has declined to Rs 7,347.60 crore as against Rs 7,655.10 crore in 2014-15 fiscal year. The interest expenses have increased from Rs 4082.52 crore to 4410.22 crore during the year. The net Interest income stood at Rs 2650.91 crore for financial year 2014-15. The operating expenses have registered an increase of Rs 234.06 core during the financial year 2014-15 and stood at Rs 1409.05 Crore as compared to ` 1174.99 Crore in 2013-14,’’ added officials.

Bank officials have stressed that increasing the branches was not a solution; rather the proper risk assessment before advancing the loans and the prudent deployment of the money could be a solution. “ The bank would do well by carrying out the automation. The bank should evolve a proper mechanism to deal with the problem of high risk assets and it must be done on priority basis. There is a need to evolve rating criteria that could be employed to reduce risk. Particularly while dealing with the small businesses like the small and medium enterprise, the project appraisal is a must to see whether the unit could generate profits and be in a position to pay back the loans. There is a need for evolving a proper mechanism to gauge the risk for the SME business as the risk perception associated with lending to small enterprises is generally very high,’’ said an official.

He said that if an internal mechanism is garnered in which the risk assessment is done properly the bank could avoid future shocks and loss of money that it has faced due to the NPAs. “There are universally adopted scales that could be evolved to minimise the risks,’’ he said.

Officials said that the earning per employee has also shown a decline for the bank as it has not cared much about automation. “ Paperless banking could be a norm. The bank should ensure that the footfall is reduced and online delivery of services is promoted to check the expense. The operating expenses of the bank have only bulged,’’ added officials. According to officials the office automation could help reduce the cost to income figures thereby adding to the banks profit margins.

“Increasing the online access platforms will help the supervisors, who should however maintain no laxity on the prudent risk management set up. There is indeed a need to strengthen the existing system and in the wake of recent global financial market turmoil it has been now strongly felt and the bank should focus on improving the transparency in disclosure standards.’’

The story first appeared in print edition of July 6 to 13, 2016.

Latest from Archives