Give People Credit

In an afflicted economy, J&K Bank must rise to the occasion. Here’s how

JAMMU and Kashmir Bank is perhaps the backbone of our economy. In fact, it underwrites the economy of J&K. Amidst a lockdown that has been extended (right or wrong I am not debating that), the bank has a special role to play to rescue both the livelihoods of people and keep businesses-MSMEs and SMEs afloat. The question is how? Whilst I plead guilty to the charge of neither being an economist nor a banker, I would proffer a set of suggestions that might salvage our economy which has incurred losses in thousands of crores since the past year and even longer.

The bank can and must, against the backdrop of almost non-existent fiscal space in J&K, must keep credit flows open. Admittedly, this poses a risk in terms of profitability for the bank and a possible overshooting of Non-Performing Assets (NPA’s) and the distinct possibility that the loans and their interest repayment will create leverage on companies’ balance sheets and not investment. This would assume salience against the backdrop of a dwindling net interest margin (NIM) of and for banks (Net interest margin is the difference between the interest income of banks and the interest paid to lenders). The decrease, accruing from a poor macro and micro economic environment, presupposes a decrease in both net and operating profits of the bank. Against this condition, increasing or enhancing credit flows would sound irrational but there is no other way out.

Enhanced credit flows can be offset against loan loss provisioning and perhaps increasing the capital adequacy ratio (CAR) of the bank and prudential regulations thereof. Obiter dictum, the present conditions and increasing the CAR – both tier one and tier II capital – might warrant increasing the deposit share of J&K bank by taking the bank, so to speak, to what are traditionally called the non-bankable segments of the population. The bank can even go on a deposit taking binge. In terms of enhanced credit flows, at this critical juncture, these can lead to a positive spiral of investment and consumption that J&K is in dire need of. This, in the least, is the assumption and the theory with empirical evidence to back up with.

While credit must be extended to all kinds and forms of businesses, but if the businesses in contention have scale that qualifies them to be either a start-up or an MSME, then what the bank must ensure as a stipulation is develop a criterion that should be coeval with or as important as collateral: the requirement of robust and sound business model and plan. (In Kashmir, often times, what is in vogue is the ‘project report’ which has a rough equivalency with the business plan but there’s hardly a demand for business models. This lacuna must be redressed. If one properly, it will make new businesses more efficient and effective and after uncertainty in Kashmir is accounted for perhaps even more prudential.

The problem and the major uncertainty are and remain the future economic outlook and the nature of the recession induced by the Covid 19 pandemic. No one now can know its form and nature. Would then increasing credit flows at this point constitute shooting itself in the foot by J&K bank? Not necessarily. JK’s economy, is not necessarily aligned to economic developments elsewhere even though it is affected by these in a convoluted way. The region’s economy is decoupled from that of the world; the nature and form of the recession while it would have an impact will not necessarily be the same as elsewhere. This means that even if there is a rebound and uptick in economic activity in other parts of the world, the same might not happen in J&K.

This makes J&K Bank’s role more salient and its activism, for want of a better word, important. If the overall profitability of the bank will suffer and take a hit, what can the bank alternatively do to boost income and profitability. There can be two ways for this. One is to eke out cost savings from operations. It amounts to stating the obvious that there exist large inefficiencies in the operational side of the bank. If and when these are weeded out, cost savings can accrue without cost cuttings (read without layoffs) in the bank. The most pedestrian of techniques to weed out operational efficiencies would be business process re-engineering (BPR) and allied techniques. And to boost the overall income and profit of the bank along with operational efficiency of the bank would be to engage in trading activities, bonds, derivatives, stocks and so on. If there is an extant trading department of the bank, it needs to be more robust and effective. If done well, it can enhance the bank’s profitability and cushion it against economic issues that might emerge. In the developed world, well known banks, have made a killing by trading activities which has offset their loan losses.

J&K’s economy is in crisis but crisis can also be touchstone for opportunities. If the suggestions made here are taken up by the bank, it should also set the institution thinking on its future direction and nature. What I have in mind is for the bank to become a financial conglomerate with a diverse and diversified set of activities that not only validates its historical role as the underwriter of J&K’s economy but also take the region’s economy to a new level.

All in all, before the liquidity crisis in Kashmir morphs into a full-fledged insolvency crisis, J&K bank must rise to the occasion and create conditions for the economic uplift of our society. This is not charity. Besides inhering in the bank’s charter and remit, this particular institution has a duty to perform. But this need not, as demonstrated here, undercut its income and profitability. Let the bank then do a serious rethink and approach both the Covid 19 and post Covid 19 world in a way that is both dexterous, efficient, effective and moral.

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