When a bank becomes a PSU

Headline : When a bank becomes a PSU

About J&K Bank

  • It was incorporated on October 1, 1938 as a limited liability company to offer banking facilities in the state.
  • The bank is licensed as an “old private-sector bank” under Section 22 of the Banking Regulation Act, 1949.
  • Classified as a state government company, it is registered with Registrar of Companies, Jammu.
  • It launched a public issue in 1998 and is listed on both the Bombay and National stock exchanges.

What is unique about J&K Bank?

  • It is the only bank in India in which a state government holds a majority stake. In all public-sector banks, the majority stake is held by the Centre.
  • As per the Banking Companies (Acquisition & Transfer of Undertakings) Act, the central government holding in public-sector banks cannot drop below 51%.
  • Thought the state government holds 59.3% in J&K Bank, it is not considered a public-sector bank.
  • This unique status needs to be seen in the context of Article 370 of the Constitution, which gives special autonomous status to the state of Jammu & Kashmir.
  • Till 2011, J&K Bank was the sole banker to the state government. In fact, akin to RBI for all other states and the Centre, J&K Bank was the lender of last resort in the state. It provided overdraft facility to the state when required.
  • It lost some of this status in April 2011, when then Chief Minister gave RBI the mandate to carry out general banking business of the state and be the sole agent for investment of state funds. However, it is still the only private-sector bank designated as RBI’s agent for carrying out banking business for the state government. It is the state’s collection agent for direct taxes, utility payments, and now GST.
  • The Sarfaesi Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) of 2002, which lets banks confiscate commercial and residential properties for recovering loans, was not applicable to J&K Bank for almost 15 years until the Supreme Court finally extended its applicability to the state in December 2016. The mortgaged property could, however, be sold only to state subjects under the Sarfaesi Act.

 What does the Reserve Bank of India consider J&K Bank to be?

  • While RBI as the regulator supervises J&K Bank, the Comptroller and Auditor General (CAG) audits the books of banks.
  • RBI has been in communication with CAG stating that as the banking regulator, it is RBI’s prerogative to audit the bank, not CAG’s. CAG may stop auditing J&K Bank, it has argued.

What has changed at J&K Bank?

  • On 22 November 2018 a day after Governor dissolved the Assembly, the State Administrative Council under his chairmanship approved a proposal for treating Jammu and Kashmir Bank (J&K Bank) Ltd as a public-sector undertaking.
  • It will hence be accountable to the state legislature, and the Finance Department will be required to place the bank’s annual report before the Assembly.
  • The State Administrative Council (SAC) approved a proposal that provisions of the J&K Right to Information Act, 2009, shall be applicable to the bank just like other state-owned undertakings.
  • It will have to follow guidelines of the Central Vigilance Commission.
  • The department has been asked to issue directions to the bank to follow the decisions of the SAC.
  • The bank is yet to receive these directions.

What is the reason for the move?

  • The state government holds a majority stake of 59.3% in J&K Bank.
  • A need was felt that it should have the character of a PSU, which is subject to general supervision and access for enhanced transparency in transaction of business to promote public trust.
  • Extension of the RTI Act and CVC guidelines is only aimed at promoting good governance and transparency in the functioning of the bank.
  • The purpose of the SAC decision is not to question the day-to-day activities of the bank management but a step towards strengthening better corporate governance.

Is the new move legally tenable?

  • According to Article 246 of the Seventh Schedule, banking as a subject comes under the Union list.
  • Changing its character to that of a J&K PSU will be akin to empowering the state to have powers over banking.
  • According to provisions of the Banking Regulations Act, applicable to Jammu & Kashmir since 1956, J&K Bank is licensed as an old private-sector bank and comes under the regulatory purview and supervision of RBI. Making it a PSU and bringing it under state legislature could be seen as being in contravention to these provisions.
Section : Economics