Archive for the ‘Indian Economy/Financial Markets’ Category

Offshore to onshore forex market: Review of RBI Committee on offshore forex markets

August 14, 2019

My column in moneycontrol on the topic.


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

August 13, 2019

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.


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?

GIFT City gets a second life after SGX deal

August 9, 2019

My new article in

I reflect on this new development of National Stock Exchange (NSE) partnering with Singapore Stock Exchange (SGX) to offer NIfty products in GIFT city, international financial centre in Gujarat.

10 great twitter accounts for investors to follow..

August 9, 2019

Valueresearch has prepared this list of 10 twitter accounts which investors could/should follow.


Amidst digitisation, Bandhan Bank opens its 1000th branch

August 7, 2019

Quite a few banks are either shutting down branches or going slow on new branches.

Bandhan Bank which got a banking licence in 2014 is thinking otherwise. It started with 500 branches and has doubled the number of branches in just 4 years.

Private sector lender Bandhan Bank on Saturday opened a new branch at Haltu in Kolkata. With this,  the bank has now a total of 1,000 branches.

The announcement of the 1,000th branch coincided with the inauguration of the bank’s new head office in Salt Lake City, Kolkata.

With a network of 3,014 Doorstep Service Centres that the bank already has, the total number of banking outlets now stands at 4,014 across 34 of the 36 states and union territories in India.

Chandra Shekhar Ghosh, MD and CEO, said, “This is a big milestone for Bandhan Bank. We started the bank with 501 bank branches in August of 2015. In just about four years, we have doubled that count to 1,000. We have always aimed at making banking accessible to all, and this landmark of 1,000 branches is another step in that direction.”

Some banks continue to believe that branches still matter…

RBI cuts policy rate by 35 bps!

August 7, 2019

RBI Governor Shaktikanta Das had earlier argued why should be change policy rates in multiples of 25 bps. RBI’s Monetary Policy Committee has gone ahead and changed the status quo and lowered the policy repo rate by 35 bps to 5.4%.

Four members agreed to cut the rate by 35 bps and 2 for 25 bps:

All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy.

Four members (Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Shri Bibhu Prasad Kanungo and Shri Shaktikanta Das) voted to reduce the policy repo rate by 35 basis points, while two members (Dr. Chetan Ghate and Dr. Pami Dua) voted to reduce the policy repo rate by 25 basis points.



Government opens applications for RBI Deputy Governor (Viral Acharya’s replacement)

August 2, 2019

This application should have come much earlier given Viral Acharya had indicated in June that he will not be able to serve beyond 23 July 2019.

Anyways, Government has put up the job advertisement:


Obituary: Subir Gokarn, the RBI deputy governor when economy was in doldrums

August 1, 2019

My obituary for Subir Gokarn, former DG of RBI (2009-12). Haseeb Drabu writes a piece as well.

This week has been quite tragic. One person quit from life (VG Siddhartha of Cafe Coffee Day) and another fought for life (Subir Gokarn who was ailing).


Night-time Luminosity: Does it Brighten Understanding of Economic Activity in India?

July 31, 2019

RBI released its Occasional Paper Series Vol. 40.  It has this paper by Anupam Prakash, Avdhesh Kumar Shukla, Chaitali Bhowmick and Robert Carl Michael Beyer on using night-time luminosity as an economic variable:

In view of the growing popularity of night-time luminosity as a measure of economic activity, this study explores the scope for using such data as a supplement
for gross domestic product (GDP) in the Indian context. We found that night-light data exhibit reasonably robust correlataion with GDP and other important
macroeconomic indicators like industrial production and credit growth at the national level.

Quarter-on-quarter growth of night lights tracks growth of GDP reasonably well. Even after controlling for seasonal factors, the relationship of night lights with value-added in agriculture and private consumption expenditure turns out to be statistically significant.

In addition, night lights are strongly correlated with gross state domestic product (GSDP). The elasticity of night lights with respect to GSDP (i.e., the so-called inverse Henderson elasticity) is found to be statistically significant, though relatively smaller in magnitude than similar estimates available at the global level.


Notwithstanding the presence of a statistically significant relationship between night lights and GDP, there are certain limitations of using nightlight data for economic measurement. First, given that it is just a rough approximation of economic activity, it should be considered at best as an
additional indicator and not a substitute.

Second, although night lights correlate strongly with GDP, the correlation weakens substantially when growth rates are considered, which suggests that one needs to be careful while using night-light data for analysing short-term events. The existing literature finds similar result for other countries as well (World Bank, 2017).

Third, night lights as a proxy for economic activity do not distinguish between value added in different sectors.



How Heera Gold scammed 1.75 lakh people and Rs 3000 crore using faith and web of deception

July 30, 2019

Story of another Ponzi scheme in Hyderabad..

Odisha rasagola gets own ‘Geographical Indication’ tag

July 30, 2019

Last year we saw a bitter battle between West Bengal and Odisha over who first discovered rasogulla. WB walked away with the honors getting the Geographical indications.

Odisha not willing to give up filed its own GI and has the tag as well.

Happy ending?



115th Birth Anniversary of JRD Tata

July 29, 2019

Madras Courier pays a tribute to Mr JRD Tata on hos 115th Birth Anniversary.

Private crypto ban: Has India gone overboard?

July 24, 2019

My new article in Moneycontrol.

23 July 2019: New India Assurance completes 100 years

July 23, 2019

Established by Tatas in 1919 and nationalised in 1973, New India Assurance completes 100 years today. Tatas wanted to name it Tata Prudential Assurance but then went for New India Assurance. Important to note that idea of “New India” is hardly anything new! Even in 1919, they were talking about New India even before independence.

The company has put up a video of the 100 years journey whose quality is much to be desired. It starts really slowly. At the start where a woman appears to be screaming at you rather than greeting you. They also put up picture of Jamsetji Tata while talking about JRD Tata!


50 years of bank nationalisation: Linkfest

July 22, 2019

Lots of articles have been written on 50 years of bank nationalisation. Here are some of them:

50 Years Of Bank Nationalisation: The Banks That Were

July 17, 2019

This is the second part on bank nationalisation in Bloomberg Quint. The first part looked at the political economy around bank nationalisation.

The second one looks specifically at the banks that were nationalised.

Niranjan in Cafe Economics argues that Bank Nationalization did more harm than good.

Demographic changes and their macroeconomic ramifications in India

July 16, 2019

Nice short paper in RBI’s Monthly Bulletin of July-2019. It is written by Atri Mukherjee, Priyanka Bajaj and Sarthak Gulati:

This study examines the influence of demographic changes on macroeconomic outcomes in India using generalized method of moments. The estimation results show that population growth and age dependency ratio have inverse relation with the growth in real GDP and
per capita income, and positive relation with inflation. Increase in working age population, on the other hand, contributes to higher economic growth. An aging population is deflationary in nature though improves the current account balance. While the declining age dependency ratio offers a demographic dividend for India, the realisation of the same would require an environment empowering the labour force with right skills and enabling their gainful employment in productive uses.



Corporate Governance in Banks in India: Designing a new benchmark index

July 16, 2019

Rekha Mishra and Anwesha Das of RBI in this new EPW paper:

While several committees have examined and suggested ways to improve corporate governance in banks in India, this study makes an attempt to prepare a benchmark index for the board composition aspect of corporate governance. A comparison between the indices for public sector banks with private sector banks reveals that differences in governance structures cannot be explained fully in terms of ownership only. This is a welcome feature, as with some efforts on the part of the majority shareholder, corporate governance in all the banks can be brought on par with the best-performing bank, by ensuring greater compliance with corporate governance benchmarks.

50 years of Bank Nationalisaton: Why Indira Gandhi Nationalised India’s Banks

July 12, 2019

It was 50 years ago on July 19, 1969 that then PM Indira Gandhi nationalised 14 of the largest private sector banks.

Bloomberg Quint is doing a series on 50 years of bank nationalisation. Mr DN Ghosh, one of the main persons who wrote the nationalisation legislation wrote the first piece saying: Bank Nationalisation the original sin?

In the second article,  yours truly explores the political economy of several factors which led to nationalisation.


SEBI employees oppose government’s involvement in its finances

July 10, 2019

I wrote about how the Budget has proposed that SEBI should transfer 75% of its surplus each year to the Government.

Hindu Business Line reports that SEBI’s employees are opposing the move:

SEBI employees are up in the arms against Finance Minister Nirmala Sitharaman. In a strongly worded letter to FM, the association of SEBI employees have opposed a proposal in the Budget that seeks to transfer 75 per cent of the regulator’s surplus funds to government coffers by terming it as additional tax on market participants.

Also, the letter calls FM’s proposal to subject Securities and Exchange Board of India (SEBI) to seek government approval for its annual expenditure as regressive. BusinessLine has the copy of the letter.


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