Step towards state of dependence

BILAL HUSSAIN

What should be concern for one and all in Kashmir is how New Delhi actively perpetuate a state of dependence by using various means. This influence is multifaceted, involving economics, media control, politics, banking and finance, education, culture, sport, and all aspects of human resource development. The JK government and RBI pact is latest tool that would ensure more economic dependence on New Delhi.

It is not that the pact would bring any kind of fiscal discipline in the state but it is all how J&K is forced to integrate into the New Delhi system. It is doesn't hold any logic as well why the state needs RBI to police them for bringing in fiscal discipline, as is being argued by the state government.

The other argument the state gives for the pact is under the cash management agreement with RBI, the interest rate on Rs 315 crore Ways and Means Advance [WMA] would be only 6 per cent against an interest rate of 10 per cent on an over draft of Rs 950 crore from the J&K Bank. Similarly, under the new cash arrangement, the government has to pay only 8 per cent interest rate above Rs 315 crore WAP and 11 per cent for Rs 630 crore whereas JKB was charging 10 per cent rate of interest for Over Draft [OD] of Rs 950 to Rs 1500 crore and 17.25 per cent for OD above Rs 2000 crores. According to the Finance minister of the state, Abdul Rahim Rather, the government had to pay an interest of Rs 202.40 crore to JKB on over draft in 2006-07, Rs 220.97 crore in 2007-08, Rs 218.86 crore in 2008-09 and Rs 235.17 crore in 2009-10 and Rs 176.10 crore up to ending December 2010-2011. He also claims that under new cash management, the state would be in a position to save upto Rs 3000 crore upto 2015. In short now the government would manage its debt at cheaper rates. However, the cheaper debt to the state is coming at a cost of profitability of its premier financial institution, JKB, wherein JK government is a major stakeholder.

The financial repercussion of the agreement would not only cast shadows on the profitability of JKB alone but it will have implications on the state as well. See how: Few months back the present Chairman and CEO J&K Bank Mushtaq Ahmad presented Dividend cheque for an amount of Rs 56.70 crores to its largest shareholder, state government, the amount was paid as dividend for the year 2009-10. With this payment the state government, which owns over 53 per cent of bank’s stock, has earned a total dividend income of Rs 284.44 crores on its investments. While, in the year 2007, then CEO JKB, Dr Haseeb A Drabu, presented a dividend cheques for Rs 29.64 crores to the state government. As the profitability of JKB is expected to shrinks by the recent move, it would have a corresponding effect on the divident inflow to the state government.

As per the current market price, the investment amount of Rs 53 crore in the JK Bank by the government has appreciated to Rs 2005 crore, which is almost 40 folds increase. To my knowledge, none of the state's investment has yielded as much returns as investment in JKB has achieved. Now, any kind of move that would affect financial health of JKB would in turn mean loss to the state's investment. So, I believe in short run it could mean cheaper debt to state however, the pact in long run is net loss to both state and JKB.

We should not forget significant aspect that the bank is also partnering with the JK government’s economic initiatives for peoples empowerment which includes promotion of entrepreneurship, skill development and employment generation programmes. JKB is also playing a pivotal role in strengthening the economy of the state. The pact could possibly have daunting effect on its economic role here.

Now as far as the JKB's is concerned they say that the state government continues to be the main stakeholder with 53 per cent equity holding. The arrangement between the state government and the central government or between JKB and RBI or the state government in no way dilutes the status of state government or JKB. It must be added that JKB has strong national presence and global recognition as 23 per cent of its equity is held by Foreign Institutional Investors (FIIs). This is could be a step towards dilution of the state's share in the bank, which should be a concern for the top JKB management.

As per the JKB the revised banking arrangement entrusted by RBI to JKB to manage the general banking business of the central government and the state government is in fact the continuation of the existing arrangement. A direct consequence of the revision in the arrangement, all state departments, constituents of the state government shall necessarily have to maintain their official accounts with the bank only, JKB claims. Through this arrangement RBI has, in a way, expanded the role of Bank in managing the banking business of the state government exclusively with the J&K bank and has entrusted the bank with more responsibility, which I doubt. Why should JKB act as agent of someone else while they were doing it well of their own.

The move could also mean outflow of government deposits from JKB in subsequent years that would be a real tough challenge for the bank to live without government support. I think the bank has to re-strategies now and think of a situation where the management has to foresee bank's financial minus government business that would present a true picture of the bank. To mention, as on September 30, 2010 the deposits of JK Bank were Rs 39687.93 crores and advance stood at Rs 23183.34, which would include government advances and deposits as well, which needs to be taken care of.

I would like to conclude it by saying that the pact is not in favor of JKB nor does it provide any long term relief to the state government, the state should rethink over it and then take a call.