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The Winter Rose
Let us do a quick word association test. What comes to your mind when someone says "Jammu and Kashmir Bank"? Militancy, bankruptcy, bad news, right? Well, think again. j&k Bank chairman M.Y. Khan wears a perpetual smile on his face. To know why, take a look at the bank's balance sheet and you'll see that he has a problem anyone would envy: having too much money and not knowing what to do with it.
Most banks suffer from huge non-performing assets (npas); j&k Bank is expected to close this fiscal with npas of less than 3 per cent (the industry average is 7.3 per cent). Most Indian banks struggle to meet capital adequacy norms; j&k Bank has a capital adequacy ratio of over 18 per cent, double the rbi-mandated 9 per cent. Most Indian banks are striving to reduce cost of funds; j&k Bank raises money dirt-cheap at 6.75 per cent. Its net profit in 2000-01 is expected to touch Rs 160-170 crore, up from Rs 120 crore last year. Last fiscal, deposits were Rs 9,422 crore, but it lent only Rs 3,518 crore. The rest was parked in government securities, rbi bonds and short-term commercial paper. Amazing, won't you say?
So, where's the problem? Well, parking money with the government and a capital adequacy ratio of 18 per cent isn't exactly good banking, since the government gives you the lowest return on your funds. Given the bank's low cost of funds, it has the ability to lend to blue-chip borrowers at rates lower than other banks and increase its returns.
But the bank's history tells us why it's difficult to do so. The j&k Bank is the only bank in the country that is the sole banker to the state government. All central government funds to the state government flow through the bank and salaries of the state government's 1,50,000 employees are deposited in the bank. This gives it a huge deposit base at an extremely low cost. The problem is that militancy has put paid to industrial activity in j&k. So, there's no one to lend to within the state. In fact, of the Rs 3,500 crore lent last year, only about 40 per cent was given out in j&k. Till four years ago, the bank had no corporate clients and very rarely did it lend outside the state.
But now j&k Bank is getting into aggressive expansion mode. "To begin with, we shall be lending about Rs 5,000 crore this year," says Khan. That's being made possible by opening an increasing number of branches outside the state. Out of 411 branches currently, 84 are outside j&k. Most new branches shall cater to corporate customers. And given the bank's low cost of funds, it becomes easy for it to undercut other banks and ensure that it lends to blue-chip companies. For instance, this year its clients includes companies like il&fs, nhpc, Reliance and ntpc. On the retail side, within the state, its scheme for personal loans without a guarantee (for account holders) has already seen an offtake of Rs 110 crore in the first six months. The bank is also getting aggressive in auto-finance and consumer loans.
Khan has appointed consultancy firm PriceWaterhouseCoopers to chart a blueprint for the firm and advise it on asset-liability management. That report will be presented to the board on December 8 and envisages the segregation of the bank's corporate and retail banking segments and the appointment of corporate relationship managers, a la multinational banks.
Moving quickly into what are expected to be four high-growth areas for banks, it has launched a co-branded credit card with American Express, the first time the US bank has done so with another bank. Second, insurance, both life and non-life. "lic has shown a 40 per cent growth over the last six months, and 70 per cent of the growth has come from rural areas. Our strong penetration in rural areas will help," says Khan. The bank is getting into a joint venture with Metlife of the US for life insurance, where it will hold 25 per cent, Metlife 26 per cent, Shapoorji Pallonji Mistry another 25 per cent, while Arthur Andersen has identified four to five partners who will share the rest of the equity. In general insurance, the bank will only distribute the policies.
The bank will also distribute a co-branded mutual fund and offer depository services to its account holders. "We want to increase our fee-based income and these services will allow us to do that," says Khan.
With such strong financials, j&k Bank is an undervalued stock with a price-earnings multiple of 1.3, one-third of the industry average. "The bank suffers from a perception problem and despite its strong numbers, gets lumped with other government-owned banks," says Manish Karwa, analyst at Pranav Securities. Partnerships with brands like Amex and Metlife and the speed with which Khan is getting the bank into them should help solve the perception problems. And the problems of plenty, the paradox that j&k Bank finds itself in. n