RBI’s takeover of J&K Bank’s overdraft role raises many questions
Arjimand Hussain Talib
A new wave of anxiety has suddenly engulfed Jammu & Kashmir. The news that the Reserve Bank of India (RBI) has taken over from J&K Bank some of the jobs the latter would do for this state is official now. To most Kashmiris, this step constitutes ‘nationalization’ of their most important institution. And the message that they see in this is not financial but significantly political.
On Friday, all speculations about this matter were put on rest when RBI came up with an official press release mentioning the signing of the agreement between J&K government and itself, making RBI take over from J&K Bank the role of providing overdraft facilities to J&K state.
The official RBI press statement reads, “The Reserve Bank of India has entered into a Supplementary Agreement under Section 21A of the Reserve Bank of India Act, 1934 with the Government of Jammu & Kashmir. Under the agreement, which shall be effective from April 1, 2011, the Reserve Bank of India shall carry on the general banking business of the Government of Jammu & Kashmir and act as the sole agent for investment of Government’s funds.”
It further reads, “On the recommendation of the State Government, the Reserve Bank of India has entered into an agreement with J&K Bank Ltd. whereby J&K Bank would act as an agent of the Reserve Bank of India, for conduct of general banking business of the State Government.”
This statement leaves hardly anything to speculation. In practical terms, it, among other things, means that from April 1 onwards this year, Jammu & Kashmir Bank will not be permitted to provide overdraft to J&K government.
It also means that J&K state will use RBI`s ‘ways and means advances’ for overdrafts to meet cash flow mismatches just like any other state in the country would do.
Jammu & Kashmir government has its own take on the matter. Its argument is that it had itself pleaded before the 13th Finance Commission to give a one-time Rs 2300 crore grant to the state to clear its overdraft with J&K Bank.
In a statement issued by the Finance Department from Jammu a couple of days ago, the government said, “The State Government had vehemently placed before the 13th Finance Commission for substantial grant to the State Government as one time assistance to remove structural debt with the J&K Bank. At present, under an MoU, State Government has overdraft arrangements with J&K Bank for Rs. 1700 crore.”
What makes the earlier argument unconvincing is the point of ‘poor internal resource generation’ that the government raised in its explanatory note. It further said, “However, in view of the poor resource generation from within the State and despite liberal Central assistance, overdraft generally hovered around Rs. 2300 crore on an average.”
The government has emphasised that it was the council of ministers who took this decision rather than an individual or a party. It says, “The Council of the Ministers headed by the Chief Minister of Jammu & Kashmir, therefore, pleaded forcefully with the 13th Finance Commission during their visit to the State and demanded for one-time financial assistance of Rs. 2300 crore to remove this structural deficit. In a rare exception to the request of the J&K Government, the Commission has awarded a grant in aid of Rs. 1000 crore, with another exception of permitting the State Government to raise the balance amount of Rs. 1300 crore for liquidation of loan, over and above the annual borrowing ceiling, with exclusion of this market borrowing, while calculating the State FRL-consistent fiscal deficit.”
That, in effect, means that while the “structural deficit” of Rs 2300 crore will not be entirely liquidated, J&K state will be doing the same for the balance Rs 1300 crore what it used to do with J&K Bank.
Both RBI and J&K government in their press statements have taken pains to emphasise that this arrangement is not something radically new. Both have mentioned the agreement that J&K Government and the RBI have in place since September 1972 for the state’s debt management.
What is also interesting to note is that both RBI and J&K government have emphasised that this new arrangement has not come from the RBI, but rather on J&K government’s “insistence.”
On appointing J&K Bank as Agency Bank by the RBI for J&K State, the official statement says, “Moreover, in the supplementary arrangements with RBI, on insistence of the State Government, RBI has appointed J&K Bank as the Agency Bank for J&K Government to manage all cash operations of the State Government and therefore State Government will continue to discharge all its financial obligations with J&K Bank under the agency Bank Scheme.”
J&K government’s argument is also that this is not a novel development which will impact the state’s financial autonomy. Its point is that RBI remains the sole regulator of all banking institutions, including J&K Bank. That much is fine.
However, its argument that this new system “will entail substantial interest saving for the public exchequer while J&K Bank would benefit by way of the surplus to over Rs. 2300 crore to be injected into various developmental projects” is highly unconvincing. There are hardly any obvious linkages.
The official spokesperson has further said that the government had thoroughly weighed all advantages and ‘perceived disadvantages’ of implementing the “recommendations of the 13th Finance Commission” before giving its nod to this decision. So the question is: was this step taken at J&K government’s insistence or 13th Finance Commission’s recommendations?
A big majority of J&K’s people see any such step a dilution of the state’s special status. They also see it as ‘nationalization’ of the state’s key institutions. And that is a grim message. A lot of state’s indigenous institutions have been ‘nationalized’ over the years. The problem is that such ‘nationalization’ creates greater centralization, challenging J&K’s quest for political autonomy even further.
At the end of the day, Jammu & Kashmir’s case for restoration of political autonomy in practical terms is not about a political luxury, it is about need. Centralisation of powers is always bad for people’s welfare. In J&K’s case it is a recipe for long term instability and political chaos, rather than political reconciliation. This latest step has even the potential of putting spikes in the ongoing peace process being steered by the special interlocutors.
No matter the merits of ‘financial discipline’, steps like these will not help in bridging the trust deficit between Srinagar and New Delhi. These steps also raise serious questions over National Conference’s ability to safeguard the state’s special status, howsoever symbolic that might be.
