Is J&K Bank poised for a major transformation soon?

2 September 2024

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Srinagar, Sept 2: The Union Government is reportedly planning to bring J&K Bank under the full regulatory purview of the Reserve Bank of India (RBI) soon to bring it at par with other public sector banks in the country.

Highly placed sources have informed Ziraat Times that a proposal is under serious consideration to amend Section 12 (2) of the Indian Banking Regulation Act, 1949, specifically concerning J&K Bank. This amendment would effectively cap the voting rights of all shareholders, including the J&K government, which is the bank’s majority shareholder, at just 26%.

The proposed change to Section 12 (2) is expected to bring J&K Bank fully under the RBI’s regulatory framework, aligning it with other public sector banks in the country. This would entail stricter compliance requirements, enhanced governance norms, and increased scrutiny of the bank’s operations by the RBI.

“The intent behind this move seems to be to limit the J&K government’s influence over the bank’s Board, despite being the majority shareholder. This would pave the way for an RBI-appointed management to assume control over all key management decisions, effectively sidelining the J&K government and other private shareholders in the bank’s decision-making process,” a former Chairman of the bank told Ziraat Times.

However, a senior official familiar with the matter described the proposed measure as a routine administrative change to bring J&K Bank in line with other banks across the country. “There is nothing particularly significant about this plan; it is part of the government’s broader efforts to strengthen regulatory framework for all banks aimed at preventing monopolistic control of banks. There is nothing specific to J&K Bank in this,” the official said.

The official, while playing down the significance of the move, said that the proposal was still under consideration and that all pros and cons of the bank’s interests will be considered before taking any final decision and that the government was committed to improving the bank’s financial health and make it grow to its full potential.

According to banking experts, the proposed changes, if approved, including capping the voting rights of the J&K government and other shareholders at 26%, are likely to fundamentally alter the bank’s structure, management, and operational aspects.

Meanwhile, private shareholders, customers, and business stakeholders of the bank have expressed concern over the potential move, arguing that it may send a negative signal to investors and could impact the bank’s business growth and investor sentiment.

“We urge the bank’s management to issue a clarification on this matter to address shareholders’ concerns,” a private shareholder stated, requesting anonymity.

J&K Bank, established in 1938, has long operated under a unique hybrid model as both a “government company” and an “old private-sector bank.” This distinct status has allowed the bank a degree of operational autonomy, even as the Jammu & Kashmir government has remained its majority shareholder.

Official sources, who are familiar with the matter, suggest that if implemented, the measure would safeguard the bank from political interference, particularly concerning loan waivers that certain political parties have promised in their election manifestos.

“This is a necessary step, although I cannot confirm if the decision has been finalized. Imagine the financial implications for the bank if a new government, with a controlling stake in the bank’s management, decided to announce a waiver of multiple loans,” the official explained.

Capping the voting rights of the bank’s shareholders at 26% could also bring in external management expertise, potentially forming the majority in the bank’s Board of Directors.
Financially, J&K Bank has been on a path to recovery lately after facing significant challenges in the past, including high non-performing assets (NPAs) and operational inefficiencies. The recent capital infusion by the J&K government has provided the bank with much-needed liquidity, helping to stabilize its balance sheet and meet regulatory capital requirements.

The proposed changes could also effectively curtail the J&K government’s ability to leverage short-term overdraft funds from J&K Bank to meet its day-to-day financial needs, experts believe.