How J&K Bank Can Restore Itself To Financial Health?

Newly appointed CEO and Chairman Jammu & Kashmir Bank, Parvez Ahmed, held an interactive press meet on the 10th October, 2016 at the Corporate Headquarters of the bank. The new Chairman, making no bones about the deep problems that the bank is facing stated that, “the bank’s focus henceforth will be on “consolidation” and  “stability”. “The problems that the bank faced emanated from a high number of Non Performing Assets (NPA’s) and low coverage ratios. “Given these conditions, the focus of the J&K Bank will be on consolidation and cleaning up of balance sheets. The immediate strategy will be to reduce loan exposures, take legal recourse for loan recovery, settlements between parties and hand over the NPA’s to Asset Reconstruction Companies,"  stated Parvez Ahmad.

That the CEO cum Chairman of the J&K Bank held a frank and candid discussion about the nature of the bank’s problems and his palliatives for these is in itself commendable. Hopefully, this interaction would be in the nature of a prelude to more such public discussions and scrutiny of the bank. However, all said and done, the palliatives offered by the Chairman are more or less conventional. Whilst these might improve the condition of the bank over a period of time, but given the nature of the problem, more needs to be done.

KO, in lieu of this, offers an outsiders perspective on what the new Chairman can do to both improve the bank’s standing and forestall problems of the nature that the bank is facing.

The new Chairman has laid the onus of blame squarely on the Non Performing Assets (NPA’s) that the bank has accumulated over time. This, according to the Chairman, accrues from external or exogenous factors like the economic conditions obtaining in the country and political unrest in Kashmir. KO has no quibble with this but we would argue that there is more to the story than the Chairman has postulated. NPA’s, both Gross and Net and the scope, size and magnitude can decimate a bank’s profits, net worth and Return on Assets (RoA). While NPA’s happen due to a number of reasons, we will isolate three major factors that lead to these. These are a compendium of credit risks, market risks and operational risks.  Other reasons could be the nature and structure of industry (fragmented in Kashmir).

While market risks accruing from the nature and drift of macro economic conditions are exogenous ones beyond the control of a particular bank, credit and operational risks fall within the remit and domain of a bank.  These are generic reasons that apply cross culturally and across countries. In India, NPA’s may also happen because of directives of priority sector lending and lending to “micro- enterprises. We will, for the purpose of the analysis focus on operational and credit risks. This is not to denigrate the traditional and conventional quantitative focus employed usually by banks and alluded to by the Chairman of JK Bank. Quantitative indicators are used to assess the loan portfolio quality, liquidity and capital adequacy, balance sheet structure but these do not constitute robust indicators of risks that a bank faces.

What is needed is prudent and vigorous risk management systems. The management systems must not be merely curative- that is, post facto systems designed to maximize recoveries but also preventative or pre-emptive. These should be system as well as organization wide. In the absence of credit rating agencies in Jammu and Kashmir and a reliance on judgmental assessment of risk, wherein a credit asessee relies merely on judgment and experience to arrive at a decision, system and organization wide risk management systems are critical to ensure mitigation of credit risk.

Operational risk is constitutive and inheres in banking processes, systems, activities and products. The amelioration of credit and operational risk besides by instituting robust risk management systems can be attained by an ethical and a vigorous Corporate Governance framework. 

The beauty of an effective and efficient Corporate Governance framework lies in its safeguarding the interests of various stakeholders and the public interest. Given that the J&K bank is partly owned by the Government and partly by the investing class, effective and resilient Corporate Governance which combines ethics with prudential oversight , transparency and risk management would hold the key to a robust, profitable J&K Bank defined by efficiency and effectiveness.

Banking systems, across the world provide the vital function of intermediation- channeling of funds from investors to savers. The vibrancy of this function determines, among other things financial stability, growth and perhaps even development. J&K Bank is no different. It is the state’s premier financial, monopolistic and to some extent monopsonistic institution which discharges this function of intermediation among other things. It is essential and vital that this institution works well.

A focus on financial indicators along with curative management techniques is not enough to restore the bank to financial glory. What is required is a robust management approach- especially system and organization wide risk management- complemented by able and effective Corporate Governance. It is this paradigm along with the traditional and conventional measures of mitigating NPA’s that the new CEO cum Chairman should bear in mind. A lot more than NPA’s is at stake here. Let the holistic policy and management paradigm be commenced now.

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