History of Jammu and Kashmir Bank: 80 years of Hope and Crisis

J&K Bank is a unique bank as unlike other public sector banks, it is owned by the J&K State and not central government, yet is classified as a private bank. The Bank has played a pivotal role in financial development of the State.

With J&K to become a Union Territory, the future ownership of J&K Bank is in question. The central government has promised to restore J&K to full statehood. Thus, it is unclear whether the central government will use this opportunity to transfer the ownership of the bank to itself or allow it to continue as a State government bank, under some special circumstances.

For time being, the bank is under investigation for frauds and illegal recruitments.  It is also reeling under NPA crisis as all banks (explained below).

This post tracks the history of J&K Bank showcasing its importance to the region.

Origins of the Bank

Most banks in India emerged due to presence of indigenous banks which charged high interest rates. This story applies to J&K as well. Though, before advent of J&K Bank, few banks opened branches in towns of Jammu, Srinagar and Gulmarg. In particular, Lloyd Bank (an exchange bank) and Imperial Bank had branches in both Gulmarg and Srinagar. Lahore based banks, Punjab and Kashmir Bank and Punjab National Bank had opened branches in both Jammu and Srinagar. However, the presence of formal banking was not enough.

This led Maharaja Hari Singh to think of opening a local bank. The sources suggest that Maharaja had requested Lala Harikshekn Lal, founder Punjab National Bank who called the idea as unpractical.  Later, Sir Sorabji Pochkanwala, founder, Central Bank of India guided on establishing the bank. After deliberating options of whether it should be a fully-State of Private bank, they settled for ownership of both State and public in the bank. They perhaps drew inspiration from other Princely States such as Baroda, Patiala, Indore etc which had already established State-sponsored banks.

The J&K Bank was registered on 1-Oct-1938 and commenced operations from Jul-1939 onwards. Its head office was in Srinagar and had eminent persons as shareholders and provided employment to local people.

The opening of J&K Bank led to establishment of another local bank: Federal Bank of Srinagar which started in 1945. It also had 7 branches and reached out to smaller locations such as Shopian, Sopore and Udhampur. The bank started with capital of Rs 1.67 lakhs and had deposits of Rs 23 lakhs in 1946. The deposits declined to 9 lakhs as it faced withdrawal of deposits due to Partition and political turmoil in Kashmir. The bank disappears from RBI records from 1950 inwards and it is unclear whether the bank was merged with some bank or liquidated. The region also saw Cooperative Banks opening in places such as: Baramulla, Jammu and Srinagar.

J&K Bank and Partition

By 1947, several other banks had opened branches in Srinagar and Jammu: Traders Bank, Oriental Bank of Commerce, National Bank of Lahore, New Bank of India etc. Some of these banks started in Pakistan but then moved to India during Partition.

RBI started registering financial data of J&K Bank from 1942 onwards. The bank had capital and reserves worth Rs 7.9 lakh in 1942, deposits worth 72 lakh and loans worth 33 lakh. It also had branches in 7 locations of the region (Anantnag, Baramulla, Jammu, Muzaffarabad and Srinagar). RBI registered it as an A2 bank which was working in Indian States and having no branches in British India and therefore not eligible for inclusion in the Second Schedule.

By 1947, J&K Bank had deposits worth Rs 2.64 crore and 12 branches. In 1948, the deposits of the bank decline sharply to 1.24 crore due to political turmoil in the State. J&K Bank also faced financial trouble as two of its branches viz. Muzaffarabad and Mirpur, fell to Pakistan administered Kashmir along with cash and other assets. Further, Punjab and Kashmir Bank which had major presence in the State shifted operations from Lahore to Ludhiana which must have created problems for the people as well. This is a phase of Indian financial history which needs to be studied.

RBI tries to restore normalcy

The Banking Regulation Act enacted in 1949 applied to all of India barring J&K. There were two legislative changes in 1956 which bought J&K Bank under purview of RBI. First, the Companies Act (1956) which did not apply to J&K State made an exemption if business is “related to the incorporation, regulation and winding up of banking, insurance and financial corporations”. Second, following the first change, the RBI Act (1934) and Banking Regulation Act (1949) also started applying to J&K and thereby to J&K Bank.

In 1950s, RBI began reviewing the status of Princely State Banks including J&K Bank. RBI noted that nearly two-thirds of its paid-up capital was contributed by the Jammu and Kashmir government. The Government had three nominees on the bank’s Board, one of whom was its Chairman. The Government had not just entrusted the bank with treasury work but the government and its institutions contributed substantial deposits and took loans on a large scale.

In 1959, RBI inspections revealed that the financial position of the J&K Bank was extremely unsatisfactory. Its capital had been wiped out, had major defects in the bank’s investment and advances portfolio, earning capacity, and head office supervision and control over its branches. It was ineligible for a bank licence. Despite RBI directions, the bank took ‘no concrete steps’. Unlike other banks where RBI could push stricter measures, this approach was not possible in case of J&K Bank as it was owned by the State Government.

By then, the stronger princely State Banks were made associates of State Bank of India. The possibility of the SBI taking over the J&K Bank was discussed by RBI Governor H.V.R. Iyengar and SBI Chairperson P.C. Bhattacharyya (later RBI Governor from 1962-67) in October 1961. RBI opined that this required answering two questions: First, whether RBI should agree to become banker to the state government. Second, whether RBI should appoint the J&K Bank as its own agent in the State. If RBI became the banker to the State government, this would imply J&K Bank would become RBI’s agent bank and would have access to currency chest. The RBI Governor said there was “so much trouble with State Governments regarding misuse of the currency chests that it is undesirable to add one more State to our list if we could possibly avoid doing so.”

Thus, it was decided to go slow on the integration of SBI with J&K Bank. This approach was also favored by the J&K Government as its own report showed that a local bank was needed to finance the businesses in the State. The report also suggested that the State should continue to conduct its business through the J&K Bank. Later, the J&K Bank became RBI’s agent for carrying out banking business for Government of J&K.

Bank Nationalisation opened gates

Despite these intentions, J&K state remained one of the most unbanked state. The average population per branch fell from about 87,000 in 1951 to about 73,000 in 1967 in India. Within India, the State of Madras had the lowest population of 39,000 per branch followed by Gujarat at 41,000 and Mysore at 43,000 people per office. The most under-banked areas of the country were Bihar (2,18,000), Assam (1,99,000), and Jammu and Kashmir (1,26,000).

This was partly due to inability of J&K Bank to expand in the State. In 1969, at the time of first bank nationalisation, there were just 48 branches in the State of which 22 were those of J&K Bank (all branches in home state). J&K Bank’s capital was Rs 8 lakh at time of formation which had barely increased to touch Rs 11.3 lakh in 1969. Its deposits were placed at Rs 8 crore making it the 38th largest bank in a list of 72 banks.

Post- bank nationalization in 1969, the Government encouraged and pushed banks into reaching out to unbanked regions. Under the Lead Bank Scheme, J&K Bank was made incharge of the State and was allocated 14 Districts.  The Bank was included in the Second Schedule of RBI in 1971, which was an important landmark in the history of the bank. This push reflected in the numbers as well. At the time of second nationalization in 1980, the State had 426 branches of which 180 branches were those of J&K Bank. J&K Bank had 200 branches which showed the bank had opened branches in other States such as Punjab, Haryana, Gujarat, Himachal Pradesh etc. The Bank had deposits of Rs 192 crore, making it the 29th largest bank in a list of 64 banks.

1991 reforms and 75 years of Bank: Glorious Days

On the eve of reforms in 1991, the bank had capital and deposits worth Rs 4.57 crore and Rs 1550 crore respectively. By 1991, there were either Public Sector Banks or Private Banks. J&K Bank was the lone State Bank. As RBI allowed new private sector banks, J&K Bank along with older private banks was reclassified as Old Private Sector Bank. It was really odd for a State bank to be classified as a Private Bank.

The financial sector reforms of 1991 pushed banks to list shares on stock exchange. The Bank listed on 4-August-1998 with staring price at Rs 35 per share. The State government continues to hold nearly 2/3rd share (59.23%) in the bank. Through its IPO, the bank popularised share ownership in the State.

The bank completed its 75 years in 2013. In its Annual Report 2013-14, Chairperson Mushtaq Ahmed said the bank is “at the cusp of a momentous event in our journey” and “it is such moments that enable us to understand our contribution to the socio-economic landscape of Jammu & Kashmir and nation as a whole”. He also proudly announced that the Bank had achieved Rs 100,000 crore of business and Rs 1000 crore of profit in its Platinum year. It had deposits of Rs 65000 crore and given loans worth nearly Rs. 40,000 crore. It had highest Return on Equity and lowest Cost to Income ration. The bank began to advertise itself as a private bank in terms of earnings and public sector bank in terms of cost structure.

The bank has aggressively tried to spread financial inclusion through Business Correspondents, Common Service Centres and branches.
 

Engulfed in crisis again

However, the bank has slipped since then. Its share price which had increased to above Rs 1000 levels in 2007 and is currently at Rs 44-45 levels which is nearly similar to its listing price. The bank generated losses in 2017 due to higher provisions on account of rising NPAs. The Gross NPAs rose from 5.97% in 2015 to 11.3% in 2017.

Apart from slipping finances which is common for most Indian banks, the bank has got involved in political turmoil as well. We have to wait and watch how and whether the bank is able to return to normalcy in future. In a way J&K Bank’s fortunes have mirrored those of the State. The State and its bank have gone through numerous cycles of hope and crisis. Hopefully, they are able to get out of this crisis as well.

Post-Script

Trivia: State of J&K has interesting connections with RBI as latter’s initial Deputy Governors came from the State. The first on the list was Mr. Wajahat Hussain, Minister in the Jammu and Kashmir State replaced C.D. Deshmukh in 1943, who was appointed as the RBI Governor. In 1945, Mr. MG Mekhri at that time Development Minister in the Jammu and Kashmir Government replaced Mr Hussain. The idea was to stick to the prevailing convention of appointing a Muslim as one of the DGs. Will RBI get a Governor from the State?

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