Kashmir's hero

APRIL 6, 2005. IN WHAT MAY WELL have been his last moments, Ajaz Ahmed’s thoughts were of the files. Bombs were exploding all around, and the very building he was in had been set on fire. His bosses had told him to leave the building. Yet, the 45-year-old manager of Jammu & Kashmir Bank’s Tourism Reception Centre, Srinagar branch, and four of his equally intrepid colleagues stayed inside getting all the files and records together, making sure no data was destroyed. “We couldn’t have let it burn. These were records of us, people like me, the ordinary Kashmiris,” recalls Ahmed.

By the time they escaped from the ground-floor office, laden with black plastic bags full of files and a drive full of data, much of the building was charred, and 10 other offices almost totally destroyed.

The violence had been triggered by the start of a major peace initiative between India and Pakistan: A bus service had been launched between the two nations. Evidently, some militants opposed the very idea of the two countries mending fences, and the result was the shootout in downtown Srinagar. Sitting in his office in the bank, eight years after the event, I ask Ahmed how he found the courage to stay behind that day. “I was very scared,” he confesses. “But at that time we were not so centralised [technologically] like today. If branch records were destroyed, rebuilding them would take a lot of time. My clients were not unknown people. They were my neighbours; people I knew, my father knew, his father knew—how could I let them down?”

That sense of ownership of the bank that Ahmed displays is pretty much the sense I get talking to the citizens of Jammu and Kashmir; they all call it “our bank”. From the elderly houseboat manager to the award-winning walnut wood carver to the hydroelectric plant manager, everyone has a stake in the bank—and not just because the state owns 53% in J&K Bank. (It is the only bank that is owned by a state; all other public banks are owned by the central government.)

TO UNDERSTAND J&K BANK, you need to understand its unique place in a troubled valley. During the decade of the worst militant attacks, between 1989 and 1999 (when India and Pakistan fought a war in the mountains of Kargil over Kashmir), the bank grew its net profit to Rs 85 crore from just over Rs 1 crore, and added 67 new branches. Since 1989, the bank has grown from 280 branches to 753 and net profit has risen from Rs 1.48 crore to more than Rs 1,000 crore (with deposits of more than Rs 64,000 crore for FY13).

“We are a product of a unique combination of events,” says Mushtaq Ahmad, chairman and CEO, J&K Bank. A look at the bank’s history explains this. It was founded in 1938 by Hari Singh, the Hindu ruler of the Muslim-majority princely state of Kashmir, who wanted to set up a bank owned by the state and by the people of Kashmir.

The tiny, land-locked kingdom saw little interest from the big banks of the time—Punjab National Bank, or the Imperial Bank of India (later, the State Bank of India)—so this made perfect sense. The first shareholders of the bank included the government of Hari Singh; the then prime minister of Kashmir N. Gopalaswami Ayyangar; the home minister and the revenue minister; a prominent merchant; and a student.

Nine years later, Hari Singh signed the instrument of accession by which he agreed to join his kingdom with the union of independent India. The group pushing for an independent Pakistan claimed that since Kashmir’s population was mainly Muslim, the princely state should become a part of Pakistan. The then Governor-General of India, Lord Mountbatten, accepted the instrument of accession, but said that once the dispute over Pakistan was settled, it would be left to the people of Kashmir to decide whether the state would be a part of India or Pakistan. To settle the uncertainty over the status of Kashmir, the Indian government, under Prime Minister Jawaharlal Nehru, incorporated Article 370 into the Indian Constitution. This essentially made Jammu & Kashmir an autonomous state.

There are disputes over what Article 370 means, politically. But as far as J&K Bank is concerned, till 2011, it was the ‘lender of last resort’ to the state of Jammu and Kashmir, a status that generally rests with the central bank of any country. For all other Indian states and banks, the Reserve Bank of India is the lender of last resort.

Even as it functioned as central banker, the bank’s main focus was, and continues to be, on retail business and small businesses. “You can say we have a sort of old-fashioned relationship with our customers,” says Ahmad. “The impact of our troubled times, the salary and pension accounts of all government workers and, till recently, being banker to the state, has shown a depth in relationship building across the Kashmir valley that is very difficult for other banks to replicate.”

A visit to J&K Bank vice president Viqar-ul-Mulk Nazki shows the depth of this claim. I meet Nazki, a portly, smiling Santa Claus of a man, in his Srinagar office. He’s with a bunch of his clients who are all complaining to him about the bank’s failings, and, since I’m a journalist, complaining about him to me. “Nazki saab is very influential,” says one man, who owns a company that builds bridges, “but he is not pushy with the RBI. Why is the RBI not focussing enough on lending?”

There were complaints that J&K Bank is not doing enough to “beautify” the state; that it should be giving a greater push to infrastructure projects. Nazki doesn’t say much; he smiles a lot and ensures that there’s a steady supply of chocolate biscuits and kahwa, the ubiquitous Kashmiri tea redolent with saffron and garnished with sliced almonds. He seems to know that a lot of this is mere venting; as the customers leave, the bridge-builder tells me: “Whatever it is, if anyone is putting money into any other bank in Kashmir, he is a bloody fool!”

FOR OVER 25 YEARS, Nazir Mir took small loans from J&K Bank to fund his real estate and construction business. In 2004, with his son back from the U.S. with an MBA from Fordham University, Mir decided to enter the power sector. “We had no experience in power, yet power is what I had set my heart on,” he says. It’s an expensive business, and Mir had approached almost every big bank in the state, looking for a deal. “There was a lot of reluctance, so we went to the bank we knew and who understood us best,” he says. Today, Mir has loans worth about Rs 60 crore from J&K Bank, and has a thriving hydro power-generating business.

“This relationship is their power,” says Mir, adding that it’s rare for a Kashmiri to use the counters or teller windows in any J&K Bank branch. They always know someone in the branch—relatives, friends, neighbours. It’s this relationship that drives almost every business owner in the valley to the bank. Khwaja Saifuddin of Saifco, one of the most prominent builders in the valley, and owner of the Taj Vivanta hotel, has been a customer since 1955. India Builders, one of the state’s biggest real estate companies, has been a customer for 20 years, and has taken loans of some Rs 300 crore. One of the country’s biggest spice exporters, SA Rawther Spices, is also a large borrower. The bank has reached out to the farthest areas of the Kashmir valley, like Zanskar or Dawar in the Gurais valley, where there’s no all-weather road, and often no electricity.

Despite lending to businesses of all sizes, the bank has managed to keep its gross non-performing assets (NPAs) to 1.6% of the total loan book for FY13. In a recent report, brokerage firm Anand Rathi said that gross NPAs of the bank grew 6.5% quarter-on-quarter with fresh slippage of only 1.2% of loans, “lower than that reported by most banks in the second quarter of FY14”, with an NPA coverage of 89.1%, the “highest of its peers”. Elara Securities, which provides market research data, also points out that J&K Bank has one of the industry’s lowest slippages (the first stage of a loan default).

Compare this with the 43% increase in NPAs of 40 listed banks in the last one year. Impaired assets accounted for 0.14% of the overall loan book, far lower than what its peers have declared for the same year: Allahabad Bank (3.19%), UCO Bank (3.17%), Punjab National Bank (2.35%), Indian Bank (2.26%), and Canara Bank (2.18%).

The big reason given for J&K Bank’s low NPAs is the strength of its relationship with customers. (Equally, the bank is not exposed to sectors that have pulled other banks down.) Of the 86 lakh adult population of the state, 76 lakh have accounts in J&K Bank. The bank has a branch in every single block of the state. It gets 63.4% of all bank deposits in the state, 67.5% of bank advances, 62.2% of priority sector advances (for agriculture, education, housing, and micro and small enterprises), 74.9% of non-priority sector advances, 73.5% of agricultural lending, 50.3% of education lending, and 66.8% of housing loans. What all this means is that the bank is close to 100% provisioning (the money set aside to cover bad debts); this year, it managed an industry-beating 94%. This has helped make it a stock market favourite. The stock has risen 70% since 2011 to Rs 1,297 now.

For all practical purposes, J&K Bank is a near monopoly. Its nearest competitor, State Bank of India (SBI), is a distant second with 167 branches and with one-fourth the deposits. Between June 2012 and 2013, SBI’s deposits went up from Rs 7,923.5 crore to Rs 9,295.6 crore, while its advances rose from Rs 1,985.7 crore to Rs 2,414.8 crore. In the same period, ICICI Bank took in Rs 262 crore to Rs 320 crore, but lent only Rs 80 crore to Rs 132 crore. J&K Bank’s deposits went up from Rs 34,922 crore to Rs 39,664 crore, and it lent Rs 13,526 crore to Rs 16,942 crore.

The fact is that other banks have never recovered from the militancy years. When terror came to Kashmir, the Hindu Pandits were not the only ones who fled. Most banks shut down because most of their staff was Hindu, and, in many cases, there were several staff members from outside Kashmir. In the decades after 1989, Kashmir had only one bank—J&K Bank. Even today, with other banks returning to the valley, the wariness shows in the lending patterns.

Through the worst years, J&K Bank continued business as usual. In those years, employees would open the bank during curfews, deliver cash to the homes and offices of clients, and even do foreign exchange deals from homes and on telephones. In 1990, when a three-month-long strike shut the valley down, Abdul Rauf, the HR head of the bank, says employees would get calls from customers urgently wanting cash.

“Those were desperate times. Often, there would be no paperwork since we couldn’t go to 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.”

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 branch of the bank before going to the hospital. In 2005, a branch manager was kidnapped by militants. Turned out he knew one among them. They asked him to help release some stuck loans and let him go. The bank does not reveal names of people who came into contact with militants even today because there’s still a threat to their lives.

This is a critical period for Kashmir. After an extended period of relative peace after 1999, the hanging of Afzal Guru earlier this year marked the start of a sullen phase for the valley. A German Embassy-supported concert by renowned India-born conductor Zubin Mehta saw a security shutdown of Srinagar and four men dead in firing. After the concert—and with a revival of shelling between India and Pakistan across the border—Kashmir is in a state of unrest again.

Through all this, J&K Bank has been steadily growing. In the past five years, the bank’s credit-deposit ratio, the measure of how much money a bank takes from depositors and how much it lends back, has never dropped below 60%; the RBI comfort level is around 40%. By its own admission, the bank collects more in the state, but lends more outside; it gets 68% of its deposits from Jammu and Kashmir but lends only 42% in the state. Outside, the numbers are reversed. In the state, however, the bank’s lending volumes outstrip its competitors. Take the first quarter of FY14: Of the total credit of Rs 2,859.24 crore, J&K Bank alone accounted for 67%.

One look at where the bank makes money explains the strategy. Even though it lends more outside the state, it gets 75% of its gross profits from this one state. That’s because its net interest margins in the state are nearly three times at 6.32% compared to outside the state. This also means its CASA (current account savings account) ratio, which measures the number of business customers to savings customers, has closed in on a healthy 40% as of March 2013, and it has one of the best returns on equity among Indian banks at 24.1%. Here’s where depth in the state shows: The CASA ratio is 54% in Jammu and Kashmir, compared to 11% in the rest of India.

“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 cheaper, labour costs lower, NPAs are low—it makes perfect sense for us to keep diving deeper into this market,” says Shafat Ahmad Banday, president, advances and asset planning division, J&K Bank.

TODAY, J&K BANK is an institution trying to balance two ambitions: to reach across and even outside India, and remain the largest bank in the valley. The current chairman, Ahmad, says in the next five years he would like to see the business of the bank equally divided between inside and outside the state. Over the last one and a half years, it has emerged as the main lender to most budding enterprises in the valley.

Some of this agenda took shape under Haseeb Drabu, an economist and former journalist. The bank’s chairman and chief executive from 2005 to 2010, Drabu figured that Jammu and Kashmir had about 1% of the population and contributed 0.6% of the national GDP, but accounted for only 0.2% of personal credit and 0.12% of productive credit. “We went out to find entrepreneurs and give them credit,” says Drabu, who focussed on opening new branches and lending to small and medium businesses, and grew advances from Rs 11,500 crore to more than Rs 23,000 crore. Net profit grew from Rs 115 crore to Rs 512 crore, while the cash-deposit ratio rose to an all-time high of 67%.

Khalil Mohammad Kalwal, a 62-year-old carpenter, is among those cheering for the bank: “People like me can only take small loans,” he says, “and apart from J&K Bank, no one has ever really considered us safe bets.” What started in Drabu’s time has now become one of the bank’s pillars—lending to more than 350,000 artisans and some 300,000 apple farmers. Lending to apple farmers alone has grown from a few crores to Rs 2,000 crore in the last three to four years.

But in August 2010, Drabu was abruptly fired. He got word that Chief Minister Omar Abdullah, who had come to power 18 months ago and with whom he thought he shared a good equation, wanted him to resign. Drabu had been economic advisor to the previous government (the People’s Democratic Party-led coalition), and had resigned from that position when Abdullah’s National Conference party came to power. Reports say he had offered to step down from his position at the bank as well, but was asked to stay on. A hardline section of Abdullah’s government did not want the state’s bank headed by what they thought was an “opposition” man. News reports conjecture that this old guard pressured Abdullah to remove Drabu.

Ask Drabu whether he believes this is true and he says with a smile: “Omar told me that he will not interfere in my work, and he kept his word. Not once did he tell me what to do, even when I disagreed with him. But of course there are many vested interests at play, and the chief minister is just one of them. There are many ways to create pressure.” Abdullah was not available for an interview.

Ahmad echoes Drabu: “You might not believe me, but there is no day-to-day interference from the government. When we grow businesses in Kashmir, of course, it has a political impact too.”

With business has come peace, or maybe it’s the other way around, but one thing is certain—there is an unprecedented entrepreneurial wave in Kashmir. “There is definitely a peace dividend,” says Ahmad. And he’s ensuring that the bank remains the biggest beneficiary of that dividend.