M.Y. Khan, Chairman, The Jammu & Kashmir Bank : Expecting profit to top Rs 300 crore this year

On the face of it, M.Y. Khan, Chairman of The Jammu & Kashmir Bank, has no reason to be sweaty around his collars as he poses for the camera, his back more than adequately covered by the imposing pentagonal structure that serves as the bank's headquarters on Srinagar's arterial Maulana Azad Road. The performance of the bank (2001-02 assets of Rs 14,699 crore) has been exemplary, landing it at No 5 on the recent Business today-KPMG chart of India's best banks. Net profit for the first three quarters of 2002-03, cumulative, stands at Rs 236 crore (up 35 per cent) on income of Rs 1,293 crore.

Is it for real? The building's interior, with its see-through lift and wood-panelling, has no clues to offer. It feels more like an insulation chamber after all the rows of trees and camouflage-attired soldiers en route from the airport.

This is no ordinary bank. It is not a private nor public sector bank. It is, instead, something of an autonomous unit. "What is unique about The J&K Bank is that it is the only bank in the country with state government equity," says Khan, "and moreover, it acts as a banker to the state government." The J&K government has 53.2 per cent of its equity, after a Rs 70-crore IPO in 1998 diluted the holding from 84 per cent, and all its funds are routed through it. Otherwise, it functions under RBI regulations as any other private bank (a financial intermediary that operates, yes, on interest). And it seems to be doing quite a job of it too-under Khan, a 58-year-old civil officer who tries as hard to be a hardnosed banker as a ghazal-turned-Adnan-Sami-fan can.

Transparent Elevation

The bank's yearning for safety is apparent in the numbers. It scores rather well on asset-liability management. The bigger source of pride is asset quality. The rotten loans on its 2001-02 balance sheet stand at just 1.9 per cent of its net advances, down from over 5 per cent (also the current national average) when Khan took over in December 1996. And the figure is projected to drop to 1.5 per cent by March 31, 2003. For part of this, the bank has to thank the state government, which cleared bad debts to the tune of Rs 70 crore at one go. "After Khan's arrival on the scene," recounts Ashvin Parekh, Executive Director, Deloitte Touche Tohmatsu, and one-time consultant to the bank, "the bank underwent a major cleanup to the extent that NPAs were knocked off the bank's balance sheet.'' However, adds Parekh: ''Khan never allowed the government to interfere after that.''

The bank has continued to operate with caution, evidently, crushing costs while keeping a sharp eye on fund deployment. If its capital cushion, at 15.5 per cent of risk-weighted assets, is nice and fluffy, it's largely because a large portion of its funds have been parked in Indian government securities (70 per cent of about Rs 7,000 crore in 2002-03 investments). The bond portfolio's value has risen this year by a neat Rs 450 crore, claims Khan, with pride.

J&K residents owe their loyalty to the bank, it claims, because it stayed open during the worst phase of militancy in the state

What about corporate lending? Opportunities for safe lending are low within J&K, so the bank's risk-bearing assets are typically loans to corporates outside the state. Portfolio diversification keeps risk levels low, says Khan. Sure, lending rates have been declining, but The J&K Bank still manages a decent spread-it claims an average of 3.3 per cent-because it has access to reasonably low-cost funds. "The cost of funds or deposits is about 6.7 per cent, but by March, it will come down to 6.5 per cent," says Khan. Just recently, some high-cost deposits were terminated on maturity.

That, the bank claims, gives it an edge. While regular banks find their financial intermediation role under threat, J&K's peculiar circumstances have left a vast gulf between the many who save money and the few who need it for business. The result: a vast base of depositors from within J&K, accounting for some 60 per cent of the bank's entire deposit pie. These depositors could be termed 'captive', in a sense, for lack of choice-but the truth, claims Khan, is that the bank has their backing. They owe their loyalty to the bank for the simple favour of keeping its shutters up even during the worst phase of militancy. Some 280 of the bank's 450-odd branches (over half of them computerised) are in J&K, and their reach is deep.

The network of ATMs and other modern facilities ensure that many of the half-million-odd Indian soldiers in j&k also opt for its services. On the whole, however, the bank's fee-based income remains a paltry 3.4 per cent of the total-much below the double-digits that India's top banks have attained. While there may be no immediate disintermediation pressure, Khan knows this figure must rise. And for that, the bank must expand its presence in other parts of the country. Go national in a big way, that is.

Some efforts have begun. Branches in Delhi have risen from 9 to 22 in four years. The focus: retail banking. "That is our thrust," says Khan, outlining the retail loan schemes the bank offers. "We are converting most of our branches into financial supermarkets," he adds. The J&K Bank has recently tied up with MetLife and Bajaj Allianz to distribute insurance policies. Asset management and a mutual fund are being planned, too. Otherwise, the scope for offering fee-earning retail solutions is rather limited; Srinagar is not exactly the place to catch finance-savvy customers. What sort of special services would anyone around here want?

Some three-fourths of the bank's branches are in J&K; and all-India expansion could help generate national level brand equity for it

Facing The Music

Stupid question, that. For many people in the valley, The J&K Bank brand is special in itself, not just for its autonomy, but also for showing such a keen interest in the modernisation of this strife-torn state. But how, really, does the bank ensure that all its deposits are 'clean', so to speak?

"We are a people's bank," begins Khan, with a preamble while he frames the rest of his response, "and have depositors from all walks of life... so whether a militant keeps money with us, is not really our concern-since it is not written on anyone's forehead if he is a militant or not.'' Verification procedures for new account holders, he adds, are as stiff as any.

Yet, Dalal Street remains sceptical about the bank. The J&K Bank's stock trades at a multiple of just 1.5 times its earnings for the 12-month period ended September 2002. This, despite a dividend yield above 5 per cent. How come?

According to Punit Srivastava, banking analyst, Enam Research, that's because of the bank's "regional perception" and the "'J&K' name that adds a bit of uncertainty".

Could it also be the bank's blurred status? While autonomy from the Union government might be a fact, and J&K state residents might back it with all their hearts and savings, the question is how well is it backed by the state government. Khan claims complete independence, but civil officers do get arbitrarily transferred, as Parekh points out. Khan, who retires in 2004, has still to get a succession plan in place. "The grooming process should start now," he admits, though he still has plenty on his agenda. Raising fresh capital, for instance? Says Khan: "We will have to consult the state government to bring in some more strategic investors who are knocking at our doorstep ready to pick up 5-10 per cent equity.'' Whether this would divest the J&K government of majority control, he doesn't say.

The bank's relationship with the state government, Khan says, is plainly business. The bank lends it ''secured advances'' -and that too, within a Rs 1,000-crore annual limit.

Raising capital is an issue the bank must face up to straightaway. This is critical to its all-India expansion plans. Three in every four branches are in J&K, and balancing this ratio out (a target of, say 1:1) would help generate national level brand equity.