Recasting India

by Hindol Sengupta

  To understand the J&K Bank, which has grown from 280 branches to 777 branches and whose net profit rose from Rs 1.48 crores to more than Rs 1,100 crores between 1989 and 2014 (with deposits of more than Rs 69,000 crores for the year ending in March 2014), you need to understand its unique place in a troubled valley that has seen terrorist attacks from separatists for two decades in which around 50,000 people have died according to government statistics. And yet, during the decade of the worst militant attacks, between 1989 and 1999 (the year when India and Pakistan fought a war over Kashmir in the mountains of Kargil), the bank grew its net profit to Rs 85 crores from just over one crore as 67 new branches were added. It’s an institution that grew rapidly during some of the most violent years in the Himalayan valley. It is an institution that veers between wanting to reach out into India, and even outside India, and wanting to retain monopoly business in the valley. As the main lender to most budding enterprises, it is perhaps the most vital cog in the green shoots of entrepreneurship that Kashmir has seen over the last one and a half years. It is perhaps the only bank in India that customers constantly refer to as “our bank.” In Kashmiri business, J&K Bank is the only really big success story. It has no real state-owned competitor of similar size, and even the closest private businesses have a turnover of an average of only around a couple of hundred crores.

  Analysts’ reports endorse the bank’s performance. “J&K Bank’s credit growth is expected to outpace the industry while maintaining a (higher than competitors’) NIM (net interest margin) of 4.1–4.3%. We maintain a ‘buy’ rating on the stock,” says an ICICI Securities report.

  J&K Bank’s nearest national rivals, such as Canara Bank (deposits of around Rs 71,000 crores), have NIMs of around 2.3 percent.

  Brokerage firm Anand Rathi in a recent report pointed to the fact that gross NPA of the bank grew 6.5 percent quarter on quarter with fresh slippage of only 1.2 percent of loans or “lower than that reported by most banks in 2QFY14,” and with NPA coverage of 89.1 percent or “highest of its peers,” the bank gets a “buy” rating. Says Vaibhav Agarwal, vice president, research (banking), of Angel Broking: “The stock is trading … at a higher end compared to peers, which factors in its better asset quality performance vis-à-vis peers even in a challenging macro environment.”4

  In a curious turn of events, if you look at the history of the bank, which started when Kashmir was still the princely state of Kashmir, the only Muslim majority state in British India with a Hindu ruler, it’s possible that the militancy was the best thing that could have happened to the bank. (Though of course in troubled Kashmir no one quite puts it like that.)

  Hari Singh, the ruler who dreamed up the bank in 1930 (it was finally started in 1938), wanted a financial institution of his own partly because his landlocked mountain state had little service from the big banks of the Raj—Punjab National Bank, Grindlays Bank and the Imperial Bank of India (the colonial avatar of the State Bank of India). The idea was to have a bank that was majority owned by the state of Kashmir with the rest of the equity with the people of the state.

  The first shareholders of the bank included—apart from the government of Maharaja Hari Singh—the prime minister Gopala-Swami Ayyangar, the home minister, the revenue minister, a prominent merchant, and even a student.

  Hari Singh was also the ruler who signed the famous instrument of accession to join his state with the union of independent India in 1947, though Pakistan has always claimed that as a Muslim majority region it ought to be with Pakistan. What this has meant for the bank is that it has—or at least had—always enjoyed unique privileges under Article 370, which gives special status to Jammu and Kashmir in the Indian constitution and in its own constitution. This means the state, at least on paper, has autonomy on many issues—though it is dependent on Indian money and security for almost everything. There are disputes about how this special provision works politically, but what it meant for J&K Bank was that, until 2011, it was the banker or “lender of last resort” to the state of Jammu and Kashmir. Other Indian states all bank with the central federal bank, the Reserve Bank of India (RBI). “Lender of last resort” is a term used for the bank that is the primary source of funds for any government. Because of the unique nature of political autonomy under Article 370, Jammu and Kashmir had its own banker, but in 2011 RBI took over this role as part of recent efforts by the Indian government to foster greater integration of the national financial system. Some of these efforts have been controversial, including the revival of a debate on whether Article 370 ought to exist.

  “You can say we have a sort of old fashioned relationship with our customers,” says Mushtaq Ahmad, chairman and CEO of the J&K Bank. He says the impact of our troubled times, the salary and pension accounts of all government workers and, until recently, being banker to the state has created a depth in relationship building, especially across the Kashmir Valley, that is very difficult for other banks to replicate. “We are a product of a unique combination of events.”

  There are numbers to back this depth claim. Of the 8,600,000 adult population of the state, 7,600,000 have accounts in J&K Bank. It has a branch in every single block (a district subdivision) of the state and is a near monopoly.

  What this means is that Ahmad gets stopped often on the street. “I will be in a shop buying something and suddenly someone will come up and say, sorry to bother but I am stuck with this in this branch of yours, you have to help me. Almost everyone has my mobile number,” says Ahmad, who says he often has to keep his mobile phone on silent; but everyone gets a call back from his office. He laughs that it doesn’t make his wife happy.

  Nazir Mir spent nearly 25 years taking loans of a few lakhs at a time from the bank until 2004, when, with his son Mudasir, he decided he wanted to be an electricity producer. “I was a construction and real estate man. My son had an MBA from America (Fordham University) but we had no experience in power, and yet power is what I had set my heart on,” says Mir.

  Between 2004 and 2005, the Mirs approached nearly every big bank in the valley—from Punjab National Bank to the State Bank of India—but everyone seemed skeptical. “We wanted to reach out to everyone to see what was the best deal we could get, but there was a lot of reluctance,” says Nazir Mir. Some of this reluctance continues even today. To understand the reason, you have to understand where the Kashmir Valley stands today politically. It’s a critical period for Kashmir. After an extended period of relative peace since the stone-pelting mass protests of 2010, the hanging of Afzal Guru (a Kashmiri accused of being part of the 2001 terror attack on the Indian Parliament, he was sentenced to death in 2002 and hung to death in 2013 after a final mercy plea was rejected by the Indian Parliament) marked the start of another sullen phase for the valley. A German embassy–supported concert by the renowned India-born conductor Zubin Mehta saw a security shutdown of Srinagar and four protestors shot dead in clashes with security forces.5 In May 2013, the former RBI governor Duruvuri Subbarao complained about banks in Kashmir failing to lend more locally but after the concert—and with a revival of shelling between India and Pakistan across the border—Kashmir is in a state of unrest again, with protests flaring in many areas. Such is the fear of separatists taking advantage of the situation that India’s biggest political parties, including Kashmir’s ruling Nationalist Conference, are asking the Election Commission and the courts not to extend a NOTA (None Of The Above) button, which was being unrolled in state polls in November 2013 and would be a feature in electronic voting machines in the national polls in 2014, to the Kashmir Valley. They fear that separatists will ensure waves of NOTA votes, which will be an indirect referendum on Indian control of Kashmir. (In fact, NOTA had little effect. In the national polls of 2014, barely 1 percent of voters used the NOTA option.)

  So Mir says that then, as now, he prefers to “go to the bank that understands us best.” “No one ever goes to the right counter in a J&K Bank branch”—because customers always know some people in the branch, maybe their
relative, neighbor or acquaintance, and they walk right up to them. “This relationship is their power,” says Mir, who now has loans of Rs 60 crores for his hydropower plants. It’s the relationship almost every business owner of note in the valley has with J&K Bank. This year the bank’s annual report celebrates this. Khwaja Saifuddin of Saifco, who is one of the most prominent builders in the valley and is also the owner of the Taj Vivanta Hotel? The bank has been lending to Saifco since 1955. SA Rawther Spices, one of the biggest spice exporters? First took a loan of Rs 20 lakh, now has borrowings of Rs 100 crores. India Builders, one of the biggest real estate companies? Exposure level has risen from Rs 11 crores to Rs 300 crores in 20 years.

  To understand this, I went to meet J&K Bank vice president Viqar ul-Mulk Nazki, a man so famous in Srinagar that he even has a Facebook fan page called “Mr. Viqar ul-Mulk Nazki inspires me.”

  I met Nazki, a portly, ever-smiling Santa Claus of a man, in his Srinagar city center office with a bunch of his old clients. They were berating him for various things. “Nazki saab is very influential,” says one man who builds bridges, “but he is not very pushy with the RBI. Why is the RBI not focusing enough on lending?”

  Another who is a wholesaler of shawls complains that the bank should “give a big push to the government to build better infrastructure” in Srinagar. “J&K Bank should be involved in beautifying also,” he says.

  It is almost a monopoly business, one trader tells me, “maybe not absolutely accurately on paper but in the mind—and monopoly makes people lazy.”

  Through it all, Nazki barely says anything; he just smiles a lot and passes around a nonstop stream of chocolate biscuits and kahwa, the sweet, clear tea of Kashmir that is infused with saffron and diced almonds.

  As the complaining comes to an end, someone gets a call on his mobile, and the group prepares to leave, but not before the bridge builder tells me, “Anyway, whatever it is, if anyone is putting money into any other bank in Kashmir, he is a bloody fool!”

  When they are gone, Nazki guffaws. “You see, in an Indian family people are always fighting, no? It is like that here.” But there is economic reasoning behind both their complaints and J&K Bank’s slight complacency. It is because of these unusually strong community ties that the bank has such delightfully low NPAs. Those rock-bottom NPAs mean the bank can show an ever-rising provisioning coverage ratio (the amount of money it sets aside as coverage for bad debts to the total amount of non-performing assets), which has risen from around 60 percent in 2009 to an all-time industry record-beating high of 94.01 percent this year. This naturally makes it a stock market favorite. The stock has risen 70 percent since 2011.

  The fact is that other banks have never recovered, at least psychologically, from the militancy years. They take, but they are still not sure about lending it back.

  What happened was that, basically, the Hindu Pandits were not the only ones who fled when terror came to Kashmir. Most other banks also shut down for two reasons—most of their staff was Hindu, and in many cases there were several staff members from outside Kashmir.

  That is how J&K Bank became almost a monopoly in Kashmir. Even today, the wariness shows in the lending patterns of other banks. In the last five years, the bank’s CDR, which measures how much money a bank is taking from depositors and how much it is lending back, has never dropped below 60 percent. The RBI comfort level is around 40 percent. One could argue that this is not just because of lending in Kashmir—after all, by its own admission and because of limited business lending opportunities in Kashmir, the bank collects more in Kashmir but lends more outside the state. It gets 64 percent of its deposits from Jammu and Kashmir but lends 39 percent in the state. Outside Kashmir, the numbers basically just reverse.

  But here’s the thing: J&K Bank’s lending volumes on home ground outstrip all its competitors. Take a look at the first quarter of FY14: of the total credit of Rs 2,859.24 crores given out in the state, J&K Bank alone accounted for 67 percent, with all the remaining 39 banks put together giving out the rest.

  One look at where the bank makes money explains the strategy. Even though it lends more outside the state, it gets 71 percent of its gross profits from this one state. The remaining 29 percent comes from business across India. That’s because its net interest margins in Kashmir are 6.20 percent compared to 2.58 percent outside the state.

  “Quite simply, we earn much more from the money deployed within the state than outside. It is far more expensive for us to try and earn from outside. The land here is much cheaper, labor costs are lower, NPAs are low—it makes perfect sense for us to keep diving deeper into this market,” says Banday.

  It is a depth that was built at the height of the militancy. In those years, bank employees would regularly open branches during curfews, personally deliver cash to the homes and offices of clients and even do foreign exchange deals from home and by telephone.

  For instance, there was a time in 1990 when the valley shut down for three months in one of the longest strikes. Abdul Rauf, the HR head of the bank, says employees would get calls from customers who were waiting urgently. “Those were desperate times. Often there would be no paperwork since we couldn’t go to the office. So we would go to a branch, open a side door, with someone else keeping check if anyone was watching, take out cash and rush out. We gave loans on word of mouth because we believed that this was not our money but the money of the people,” says Rauf. “Those years have never been forgotten.”

  This continued even when people were hurt. In 1993, a cashier was shot as he was trying to transfer a client’s cash to a branch. He delivered the cash to a nearby office of the bank before going to the hospital.

  In 2005, a branch manager was kidnapped by militants. It turned out he knew someone among them, the cousin of a neighbor. They politely asked him to help out in releasing some stuck loans and let him go. The bank does not reveal names of people who directly came into contact with rebels even today because there’s still a threat to their lives.

  In all this, the bank also reached out to the most far-flung areas of the Kashmir Valley, like Zanskar or Dawar in the Gurais Valley, where there was often no all-weather road, often not even electricity. As of March 31, 2014, it had 777 branches, more than 80 percent of which are in Kashmir.

  The current chairman, Mushtaq Ahmad, says that in the next five years he would like to see the business of the bank divided equally between inside and outside the state. As Ahmad likes to explain it, here’s what happened to the bank strategically: most of the lending for the bank in total and the bank inside the state is in agriculture (and it is pushing much further in this sector). The new chairman now believes that in the long run it will lend to allied businesses outside the state—for instance, if agriculture is its strength, it is looking to lend outside to food-processing companies. The final strategy to be applied is tapping into the Kashmiri diaspora, so they are trying to see if they can open in Dubai and London and open more branches in India, including in Kerala, Karnataka, Gujarat and the city of Mumbai.

  Some of this transformation began with Haseeb Drabu, who says that during his tenure as chairman of the bank from 2005 to 2010 he figured out a basic thing: Jammu and Kashmir had about 1 percent of the population, but contributed only 0.6 percent national GDP, 0.2 percent of personal credit and 0.12 percent of productive credit. The bank’s CDR was around 31 percent.

  “We went out to find entrepreneurs and give them credit,” says Drabu, who focused on opening new branches and lending to small and medium-sized businesses in Kashmir. Advances between 2005 and 2010 grew from Rs 11,500 crores to more than Rs 23,000 crores. Net profit grew five times, from Rs 115 crores to Rs 512 crores. CDR rose to an all-time high of 62 percent.

  One of the people who applauded this growth is 62-year-old award-winning carpenter Khalil Mohammad Kalwal. “People like me can only take small loans,” says Kalwal, “and apart from J&K Bank, no one has ever really considered us safe bets.” He has a current loan of Rs 26 lakhs.r />
  This philosophy, started in Drabu’s time, has now become one of the pillars of the bank—lending to more than 350,000 artisans and nearly 300,000 apple farmers. Lending to apple farmers alone has grown from Rs 100,000 crores to Rs 250,000 crores in the last three or four years.

  But in August 2010, Drabu was abruptly fired. He got word that Chief Minister Omar Abdullah, with whom he thought he shared friendly terms, wanted him to resign. The word in the valley is that by bringing NPAs down to almost zero, Drabu had pushed corruption out of the bank.

  At a time when the valley was in flames, with the army battling thousands of stone-pelting youth protesting the presence of the Indian Army in Kashmir and the killing of innocent Kashmiris who were then passed off as terrorists—what was beginning to be called the “new intifada” of Kashmir—the chief minister was put under enormous pressure. Some of the protests were politically motivated and a deal was offered, it is rumored, to Abdullah to stop the violence. A top bureaucrat told me, “The deal was let go of Drabu and the violence will stop. It was not the only criterion, but it was one of the important ones.”

  Ask Drabu whether he believes this is true, and he smiles. “The bank is a unique place. I have to say that Omar told me that he would not interfere in my working and through my entire period, he kept his word. Not once did he tell me what to do, even when I disagreed with him.