JK Bank Recapitalized?

JK Bank Recapitalized?

Finance Minister, Haseeb Drabu, while presenting Budget 2017-18, referred to the state’s premier bank, the Jammu and Kashmir bank, and briefly laid out its woes. These, in the main,  pertain to the huge number of Non Performing Assets(NPA’s)  which are stressing the bank’s balance sheet. The quantum of these NPA’s in Rupee terms is Rs. 6000 crores.( Incidentally, when the new Chairman took over the reins of the bank, he candidly laid bare the extent of NPA’s on the bank’s balance sheet). Finance Minister Drabu stated that the Government would inject an equity infusion of Rupees 530 crores into the bank. Even though the quantum of equity to be injected into JK Bank is not that much given the bank’s deep woes but the equity infusion almost appears to be a quasi and weak form of recapitalization. Bank recapitalization is a method to improve the condition of the financial sector-broadly speaking. Given the nature of the Jammu and Kashmir Bank and its centrality to the state’s economy, restoring it to health should be priority. The quantum of NPA’s affects the Capital Adequacy of banking institutions or systems which in turn impacts negatively the core activity of banking: lending. Lending means credit flows and a robust flow of credit in the economy is the sine qua non of a healthy economy.  A healthy Capital Adequacy Ratio(CAR) means that the bank can take risks in lending and then enhance credit flows in the process. But the question is, is Bank recap – which carries its own pitfalls – the only remedy to improve the health of the JK bank? While the effect might be to attain an ‘optimal capital structure”- prudent mix of debt and equity, the  issue that arises that banks then usually pay dividends to the Government over shareholders. While the quasi recap , conceived by Drabu may or may not help the s premier banking institution, it , in the parlance of strategic management amounts to a tactic or perhaps prosaically, a  technique that might serve as a prop to the bank but would not entirely resolve its woes.  The bank needs to rejigg its Corporate Governance, operational management and last but not the least, institute a vigorous Risk Management structure. All three are related. Prudent Corporate Governance, would naturally affect positively the bank’s operations and vigorous Risk Management would bounce back to good Corporate Governance.  Incidentally, these themes have been touched upon by Drabu but it is one thing to analyze and diagnose institution’s problems but an entirely different matter when it comes to executing and implementing the desired changes? Will the state’s pivotal institution be cleansed and new forms instituted, given legacy issues and path dependence of structures, is the big question that hovers over it?

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