Fayaz Rasool Sinking J&K Bank
The Jammu & Kashmir Bank, in which the state government holds the majority stake, is in the throes of deep crises. Its profit margins have taken a hit, despite the increase in the advances and the deposits, primarily due to the mismanagement on the part of the company board which has done no good by resorting to the spree of appointments without following any prudent norms.
The bank expenses have bulged, as have its non performing assets, and the results have been depressing for the shareholders. Earlier the bank reported a net loss of Rs 56.02 crore in the quarter ended March 31, due to rise in bad loans.
As per the disclosures of the bank, it had posted a net profit of Rs 101.61 crore in the January-March quarter of 2014-15 fiscal. As of March 2016, the bank’s gross non-performing assets (NPAs) reached Rs 4,368.62 crore (8.32 per cent of gross advances) in comparison to Rs 3,339.45 crore, which was reported a year back.
The bank disclosed that the provisioning for bad loans and contingencies rose to Rs 397.11 crore during the fourth quarter as against Rs 239.67 crore in the year-ago period.
For the 2015-16 fiscal year, the bank posted a net profit of Rs 416.04 crore, down 18.2 per cent, from Rs 508.60 crore in the preceding fiscal and the total income of the bank declined to Rs 7,347.60 crore as against Rs 7,655.10 crore in 2014-15 fiscal.
Concerned over the rise in the bad debts including the NPAs and restructured portfolio, Riyaz Bhat, President of J&K Bank Officers Association (JKBOA) says that this has been due to the governance issues at the bank.
“The Government of India (GoI) has been proactive enough to visualize the need of Public Sector Banks (PSB) so that sudden need may not jeopardise the state owned character of these banks in future. Sensing that present crisis is a result of contributory factor of governance issue of these banks, GoI has also constituted a banking regulation authority to look after the governance issues in these banks so as to insulate them against political interference and professionalize their Board of Directors (BOD) by adding men of competence”, Riyaz says.
“State government has not awakened up to the problem of capital infusion need of its owned financial institutions including J&K Bank which may arise in near future. The government should start making provisions in annual budgets so that a corpus is created to meet the recapitalisation needs in its owned FIs in future.’’
`The elected public representatives of the state shall lend support to our voice raising these important issues before the Government to safeguard the interests of the subjects of State in general and staff of financial institutions like J&K Bank in particular,’’ he adds.
Finance Minister Haseeb Drabu says that the state government has taken note of the increase in the non performing assets (NPA) of the JK Bank. “We have taken note of the concerns related to the NPAs as promoters of the bank. The NPAs may rise more in the next quarter,” Drabu told reporters, on the sidelines of a press conference in Srinagar to present highlights of the budget 2016-17.
The JK Bank which was incorporated in the year 1938, is a mid cap company with the market capitalisation of Rs 3,318 crore, with the state government owning a majority stake of 53 percent in the bank. By virtue of this, majority of the directors on the bank board are nominated by the government. The bank’s business on account of interest and discount on advances and bills contributed Rs 5161 crore to interest income, 73.09% of total interest Income, while income from investment contributed Rs 1843 crore to interest income, interest on balances with RBI and other inter-bank funds contributed Rs 56.74 crore to interest Income for the year ending 31-Mar-2015. The bank has reported a gross non performing asset gross NPA of Rs 4368 crore, and net non performing asset of Rs 2163 crore. For the quarter ended 31-Mar-2016, the company reported a standalone interest income of Rs. 1224.65 crore which was down by 3.47% from last quarter Interest Income of Rs 1268.63 crore and down by 4.23 percent from last year same quarter Interest Income of Rs. 1278.74 crore.
However, the Bank chairman, Mushtaq Ahmad, deceptively made everyone believe that the bank was doing well. In a conference call earlier this year he noted that the bank had done well. The profit of the bank for the year has been 416 crores as against 508 crores last year but during the year you should also appreciate that we have created floating provision over and above the requirement to the extent of 330 crores and otherwise this result would have been that profit would have been say around 746 Crores against 508 crores.
So we can very safely conclude that in fact there is a jump of 50 percent in the overall net profit but we saw that there is some stress in some of the assets even for the future so we have additionally secured and created a cushion to the extent of 350 Crores and I think that should give us some amount of convenience and some comfort.
Nevertheless the admission by the banks top management that the profit margins have declined has hit the investor sentiments hard. The shares of the bank have tanked as it had been repeatedly showing a poor performance on the key benchmark indexes including the net interest margin. Earlier due to the consistently poor performance of the bank the rating agency CRISIL has downgraded Jammu & Kashmir (J&K) Bank’s fixed deposits from ‘AA+/stable’ to ‘AA/negative’. The move reflected the stress on the bank’s asset quality and the expected impact on its profitability, the CRISIL states.
“The share of low-cost current account and savings account deposits in the bank’s overall deposits stood at 41 per cent as of June 30, significantly higher than the sector average of 32 per cent. The strengths, however, are partially offset by the bank’s average asset quality and the small scale and high geographical concentration of its operations. In recent months, there have been material slippages in the bank’s large corporate book.
The weak asset quality in the corporate advances segment was due to exposure to high-risk sectors and borrowers,’’ CRISIL says. The bank’s overall gross non-performing assets increased from 1.7 per cent at the end of March 2014 to 4.2 per cent as of June 30, primarily due to slippages in two large corporate accounts. At the end of March 2014 the bank’s total assets stood at Rs 78,620 crore, against Rs 71,740 crore as of March 31, 2013,’’ it adds.
The distressing situation has been even as the deposits and the advances of the bank have increased. As per the financial statement of the bank, the advances have registered a growth of 12.58 percent for the fiscal year 2015-16 from Rs 44,585 crore and have reached Rs 50,193 crore and the business has also registered 8.38 growth and the deposits have grown by 5.53% from 65,756 Crores to 69390 crores.
The bank has nevertheless patted itself on the back on a stable current account saving account (CASA) ratio, even as it had been the primarily the consumer choices that have lead to the increase in the ratio. Better CASA rating nevertheless means that the cost to income of the bank has seen some sort of stability.
The CASA ratio that was last year 42 percent has reached 44 percent, a reason that despite all the adverse factors the net interest margin has increased. The yield on advances has gone down from 11.52% to 10.90% which is the decline as 62 basis points but at the same time the cost of deposits which are 6.72% has gone down to 6.34% so on the whole it is 38 basis points,’’Mushtaq noted in the conference call.
Due to the bad loans the return on the assets (ROA) as well as the return on equity (ROE) has taken a significant dip. The ROA which was 0.70% in 2014-15 has reached 0.57 in 2015-16 fiscal and the ROE has tumbled from 8.60% to 6.65%. The net interest margin which was last year 3.81% has reached 3.85%.
The banks restructured book which at the beginning of the financial year was Rs 2500 crore has increased to Rs 3200 crores which have turned the investors jittery who have shed the bank shares.
The stressed assets of the bank have also bulged increasing its NPAS. The bank stock has lost over 40 percent value in the last 52 weeks. The increase in bad loans has been due to slippages in many loan accounts including the REI Agro (₹700 crore) and HDIL (₹290 crore), as well as the companies that work in the steel sector.
But, despite the fact that bank has leverage in terms of the branch network and the staff facilities that have been created over the years, it has however continued to remain invested in the markets outside the state. Outside J&K, the bank’s lending is predominantly to high-rated corporate even as the bank earns a highest net interest margin (NIM) in the state than elsewhere. The bank continues to remain the dominant player in the state, with market share of 62-67 per cent in deposits and loan.
The JK bank would do well by increasing the lending base in the state rather than concentrate in the markets outside the state. But the bank needs to deploy its resources judiciously and it can’t throw away the money without following any proper business strategies’’
Since there is no public resentment against the premier financial institution of the state given to its might, the top bureaucrat, Asgar Samoon in march this year criticized the bank authorities for pleasing only the ‘powerful and political’ class of state and doing no good for the general public.
“JK Bank distributed loans to blue-eyed boys of politicians despite knowing that they would never be returned and the accounts would become non-performing assets,” Samoon was quoted by a Delhi-based daily in March this year.
He categorically said that the bank lacks the vision for investment and “Here subsidies are given to blue-eyed people and then they are rescued by declaring the account as NPA. J&K Bank does this.”
Samoon said that instead J&K Bank should have been able to create incubation centres for budding entrepreneurs to inspire and instil confidence among the next generation of businessmen.
With the soaring loss of whopping Rs 4000 crores during the recent release of quarterly report in May by the bank, the concerning employees had decided to reach to the states chief minister and governor to bail out the bank from growing financial crisis.
Note: The story first appeared in the print edition of June 22, 2016.
