The Loan Battle

Despite its special status and separate constitution, in one respect Jammu and Kashmir is distressingly similar to the rest of India - banking non-performing assets (NPAs). As of end-December 2016, NPAs (as a percentage of advances) of 46 public and private sector banks in the state were somewhat lower than the national average - 6.93 per cent as against 9.1 per cent - but that is hardly a consolation considering the rate at which they are growing. In end-March 2015, bad loans had stood at Rs1,699 crore or 5 per cent of advances of Rs33,687 crore. By end-December 2016, they had risen to Rs2,677 crore of total advances of Rs38,662 crore or 6.93 per cent. For public sector banks, NPA percentages are comparable - in J&K, 10.81 per cent of advances had turned NPAs by end-2016, when the all-India figure was 11 per cent.

The amount outstanding of PSU banks in end December was Rs7,659 crore. Of this, NPAs were Rs827 crore. The state's private sector banks had lent much more and had higher NPAs too in absolute terms - Rs27,459 crore and Rs1,235 crore, respectively - though their NPA percentage was lower at 4.5 per cent. Regional rural banks and cooperative banks were in a far worse shape - with NPAs of 19.76 per cent and16.02 per cent, respectively.

Some top national banks have been badly affected, including Punjab National Bank, whose NPAs in the state amounted to 15.38 per cent (Rs159 crore) of total advances of Rs1,037 crore. So are local banks such as J&K Grameen Bank, with NPAs of Rs229 crore, 17.18 per cent of total outstanding of Rs1,336 crore. Of State Bank of India's Rs4,325 crore loans, Rs167 crore, or 3.87 per cent, had turned bad, while the state's leading bank, J&K Bank, had outstanding loans of Rs25,455 crore, of which Rs1,002 crore, or 3.94 per cent, were NPAs in December-end 2016.

J&K Bank has engaged global consulting firm Deloitte as advisor to find a way out of the mess. It reported losses for two consecutive quarters. In the second quarter of 2016/17, it had a net loss of Rs602 crore, with total income falling to Rs1,816 crore from Rs 1,847 crore in the same period the previous year; in the third quarter, it reported a net loss of Rs498 crore, with income falling to Rs1,770 crore from Rs1,806 crore in the same quarter in 2015/16. For 2016/17, it declared a net loss of Rs1,632 crore, mainly due to Rs2,115 crore provisioning for bad debts. "The losses appear high because no provisioning for bad debts was done earlier," says Mohammad Ashraf Mir, Director, J&K Bank. "We're trying to clean up the balance sheet. As far as NPAs go, we're in a better position than other banks."

SARFAESI Act

One reason NPAs have grown in is the inability - until recently - of banks to move against defaulters using the Securitisation and Reconstruction of Financial Assetsand Enforcement of Security Interest (SARFAESI) Act, which allows them to seize defaulters' assets and auction these outside any court process. The Act was passed in 2002, but when banks sought to use it, many defaulters challenged it in court, as Article 370 governing the special status of J&K debars most Central laws from being enforced in the state unless they have been endorsed by the state government too. "We issued recovery notices and filed legal suits against those who had defaulted, but in many cases recoveries couldn't be made as the defaulters went to court," says a top official of J&K Bank who does not want to be named. "Due to the stay granted by the court, since the SARFAESI Act issue was then sub judice, action could not be taken against defaulters and the money remained held up."

The SARFAESI Act was not passed by the assembly for fear it might lead to contravening of J&K's Transfer of Property Act, which allows only permanent residents to acquire property in J&K - in case of default and seizure, the lending Indian bank would have become the owner of the defaulter's property, and could have sold it to another outsider. In August 2015, the J&K High Court upheld the petitioners' view and stayed the implementation of the SARFAESI Act. But in December 2016, the Supreme Court, responding to an appeal by State Bank of India, said the Act did not need the state government's concurrence to be enforced. Since then, the state government and J&K Bank have set up an asset reconstruction company, with the former holding 51 per cent stake, which will buy the stressed assets of defaulters from banks, thereby ensuring that the ownership remains within the state.

But it is not delayed implementation of the SARFAESI Act alone that is responsible for the perilous state of J&K's banks. The 2016 report of the Comptroller and Auditor General (CAG) noted that some J&K banks had blatantly violated the 'Know Your Customer' (KYC) guidelines of the Reserve Bank of India (RBI) while sanctioning loans. One instance cited in the report was a loan of Rs88.90 lakh by J&K Bank to a customer against mortgage of a piece of land, unaware that this land had been attached by the state's Vigilance Department. The customer sought the land ostensibly to buy building material for his construction business, but in fact, according to the report, "diverted the loan amount by transferring cash credit from one account to another and did not utilise it for the intended purpose". Not surprisingly, the entire loan turned into an NPA.

Extra Cautious

Struggling with NPAs, banks in J&K have become extra cautious in extending fresh loans, even to priority sectors like agriculture, education, housing and industry. Though J&K accounts for 1 per cent of India's total population, its share of national credit is only 0.2 per cent. Against a lending target of Rs23,605 crore to 1.06 million beneficiaries in 2015/16 under the annual credit plan, private and public sector banks disbursed Rs15,753 crore to 487,736 people - meeting only 67 per cent financial target and 46 per cent beneficiary target. Of this, the priority sector lending target was Rs14,804 crore to 816,524 beneficiaries - in practice, only Rs8,754 crore was given to 305,308 beneficiaries (meeting 59 per cent and 37 per cent targets, respectively). The record with the remaining Rs8,800 crore meant for the non-priority sector is somewhat better, with Rs6,998 crore being disbursed to 182,428 borrowers - this means meeting of 80 per cent and 76 per cent targets, respectively. The story is similar for the first nine months of 2016/17: J&K banks had achieved only 31 per cent of the annual disbursement target of Rs27,649.47 crore by end-December 2016, given to 22 per cent of their 12.4 lakh intended beneficiaries.

Banks are even wary of lending to Central government sponsored schemes in J&K. Under three well known Central schemes, the National Rural Livelihood Mission (NRLM), the National Urban Livelihood Mission (NULM), the Prime Minister's Employment Guarantee Scheme (PMEGP) as well as the schemes to provide scheduled castes, scheduled tribes and other backward classes (SC/ST/OBC) with loans, the target for J&K in 2016/17 was disbursal of Rs218.69 crore to 13,426 beneficiaries. In practice, in the first nine months till end December 2016, only Rs43.01 crore of loans had been given to 3,562 beneficiaries - this means just 20 per cent financial and 27 per cent beneficiary targets have been met. Indeed, at a meeting of the state level bankers' committee (SLBC) on March 17, Parvez Ahmad, convener of the SLBC as also Chairman of J&K Bank, chastised those present for their poor performance in reaching credit targets and sought an explanation. "The performance of banks has not improved at all," he said. "Indeed, it has worsened."

"Nationalised banks are not lending to industrialists to set up manufacturing units even in priority sectors," says Mushtaq Ahmad Wani, President, Kashmir Chamber of Commerce and Industry. "They make excuses for rejecting loan proposals, which have badly stunted our economic growth." He maintains he raised the issue at a March meeting with the RBI's Empowered Committee on Micro, Small and Medium Enterprises. But he understands the bankers' dilemma too. "Conditions in Kashmir remain disturbed," he says. "They were disturbed all through last year, because of which many loans turned into NPAs. Before that, in 2015, there were the floods, which also led to months of industrial shutdown and addition of NPAs."

J&K is a well-banked state by Indian standards - it has one bank branch per 6,000 people, while the all India average is one per 10,000. But that is of little consolation as caught between the pincers of political unrest, credit squeeze and growing NPAs, J&K's development is suffering badly.