Apart from RBI, this is another quasi-central bank in India: State Bank of Sikkim!

I had no idea about this and really excited to read this piece by Sunil Pradhan. The piece is how demonetisation led to breach of unique autonomy granted by Govt of India to State of Sikkim.

In the process, he informs us about how the monetary relations between Union Government and Sikkim are so very different compared to other states. The State of Sikkim enjoys far more monetary autonomy compared to other States and has its own quasi-central ban: State Bank of Sikkim. Barring printing notes, it does central banking functions like managing the Treasury operations of the State of Sikkim. It is also a commercial bank which has branches in the State. Having said that, it is the only commercial bank which is not regulated by the RBI.

The aforementioned aspect of relations between Sikkim and the centre is premised on autonomy (cultural, economical and political) granted to numerous cultural communities within the respective zones of habitation in parts of the north-eastern states of India. One example of such concessions relates to fiscal concessions provided to cultural communities in remote areas of the country. For example, the Government of India has extended Income Tax (IT) exemption facilities to those categories of people who are qualified as “Sikkimese” as per the Sikkim Subject Regulation Act, 1961. This fiscal concession is granted on income generated within the territory of Sikkim and returns from surplus on securities generated elsewhere.

In addition, the State Bank of Sikkim’s (SBS) functional operation, independent of Reserve Bank of India (RBI) regulations, drew political contestations because of its autonomy, including income generated by SBS. It is alleged that the fiscal concessions extended to Sikkimese cultural communities and the fiscal autonomy of SBS together provided a path to turn undisclosed earnings as legitimate. This argument was used by opposition parties which rallied to target the ruling Sikkim Democratic Front (SDF) government. Even more surprising is the audacious story aired by some mainstream Bengali electronic media house based in Kolkata drawing parallels of Sikkim with Switzerland and SBS with Swiss Bank as a haven for black money.

Instead, the SDF government chose to respond by invoking Sikkim’s special provisions under the “old law” clause, thereby projecting imageries truly of Sikkimese “nationalists” and spelling Sikkim’s unique history in the nation state as entirely different from Bengal and other regions in India.

However, in order to comprehend Sikkim’s fiscal autonomy and the shape of states’ financial health, understanding the temperament of banking operations of SBS is extremely important. SBS is a state-owned network of banking systems with several branches in many parts of the state with its headquarters at Gangtok. The bank was established by the Royal Proclamation Order of the Chogyal in 1968 and receives constitutional protection under Article 371-F of the “old law” which upon absorption in the Union in 1975. The banking services and its operations are confined within the territory of Sikkim. Its functions in Sikkim—other than banking services—include the role of treasury to the Government of Sikkim.

SBS is the only banking institution in India which functions independent of RBI regulations. 

…..So far, for the Government of Sikkim to have its own state bank as its lender epitomises the state’s financial and fiscal autonomy. It symbolises Sikkim’s quasi-independent position of possessing its own central bank in semblance with Government of India having the RBI as its central bank. The importance of SBS is that it has functioned as a quasi-sovereign financial institution with similar functions of a central bank except printing its own currency for circulation.

Though both RBI and GOvernment have been trying to breach this monetary autonomy:

 In more recent times, RBI has begun contesting the status of SBS on the hypothesis that financial and operational issues of the SBS do not come under its jurisdiction, RBI as a regulatory authority is apprehensive about the interests of Sikkimese depositors. The RBI has also reiterated that its nomenclature is misleading depositors as it appears like an affiliate of forming loans. In addition, it was highlighted that the Non-Performing Assets (NPAs) used by SBS as a financial institution was high and severe. RBI has quoted that, absence of banking regulations deprives SBS of Deposit Insurance and Credit Guarantee Corporation (DIGCC) cover in case of financial emergencies, etc. It is ironic that an RBI dictum was served after 42 years of SBS’s functional operation independent of the RBI regulations.

This “specious ground” around which RBI sought to destabilise Sikkim’s financial autonomy led to freezing of individual accounts of Sikkimese populace. Despite freezing of SBS accounts, people came forward and deposited old currency notes at nearby SBS branches without any doubts. To add to the confusion, opposition parties in Sikkim rallied a sentiment, a projectile that was a direct threat to SBS autonomy. This is not the first time in India that political parties have engaged in politicising autonomy of financial institution such as that of banking operations.

…..

SBS releases funds for Government of Sikkim related projects and state government employees draw salaries, pensions and arrears without delay, etc. The interest rates it provides to its depositors are mutually agreed upon by the bank and the state government.

Infact J&K Bank also enjoyed similar privileges till 2011 when it finally surrendered its autonomy. Wow. Did not know this either.

So in context of demonetisation:

During the height of demonetisation drive, Sikkimese people faced a shortage of currency due to the unavailability of new denominations due to RBI restrictions. For the Government of Sikkim, this step constituted a major breach of special provisions and a step towards the “nationalisation” of its most important banking institution with its legacy from the erstwhile Kingdom of Sikkim. The weak public memory of Sikkimese people to echo on such sentimental issues following RBI diktat obliged the Government of Sikkim to evoke institutional memory by reinforcing and reminding the centre of Sikkim’s late and unusual entry as a constituent part in the Indian nation state as its reference point for negotiations.

The Union Minster of Home Affairs, Rajnath Singh sensing trouble in his official communiqué dated 8 December, 2016, directed the Ministry of Finance under Arun Jaitley to oversee successful implementation of demonetisation programme. The communiqué appraised the finance ministry to clear such road blocks that would invite condemnation both for demonetisation programme and GOI under the BJP a bad name in Sikkim. Further, it stressed that Sikkim was a politically sensitive region in India and that its people be allowed to withdraw from SBS as other people had been doing from their respective banks in other parts of the country. The most important aspect of the official communiqué lists that Sikkimese people are in fact a special category of Indian population are at not par with other Indian citizen. 

Hmm..

Here is a CAG report which gives some more details on SBS and its operations & financials as well.

We know so little of the way this country functions!

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4 Responses to “Apart from RBI, this is another quasi-central bank in India: State Bank of Sikkim!”

  1. Anil Says:

    This is totally a news

  2. Pratik Datta Says:

    Wow! This is truly amazing!

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