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Banks Too Have Social Obligations

By Bilal Hussain

23 November, 2010

Since June this year, Kashmir on political front witnessed curfews, protests, and civilian killings while on economical side there was a decrease in imports, migratory labor outflows and livelihood of daily wagers got hit. Despite several odds banks—financial intermediary that accepts deposits and channels those deposits into lending activities— in Kashmir could manage some profits.

The banks here are making profits during unrest but at what cost? I believe social, which is not fine. By taxing denizens of the valley, who are already financially strained, due to continued market closures barring few days is an act of profiteering.

Besides, focusing profit banks in Kashmir both public and private sector have social obligation to meet, as they are bestowed with several privileges, especially of seeking public deposits. The banks operational in the valley are well aware of the fact that the small business, daily wagers are the worst sufferers in the recent unrest. This segment of the society should be given interest relief, if not full debt waiver.

However, instead banks have started calling businessmen and traders here asking for Equated Monthly Installments (EMI): fixed payment amount made by a borrower to a lender at a specified date each calendar month, it is used to pay off both interest and principal each month. While, traders here maintain that due to the prevailing unrest their cash flow has got hit and demand interest waiver.

The Jammu and Kashmir Bank, the premier financial institution of the state, is seeking business chambers, traders and industrialists view on the same. While, public banks here have already started process for interest waivers. Senior Official, in State Bank of India, Kashmir recently told me that the bank is considering advance cases for interest waiver. “We are in progress of considering the waivers depend up on case to case,” he said, “Branch managers have been given power of deciding about the case and sending same to the controlling authorities for necessary actions.”

Other small private players in the state like HDFC Bank, YES Bank, Axis Bank, ICICI Bank and many more too should take a cue and look for possibilities of interest waivers.

The decision on the waiver is not something, which the banking regulator, Reserve Bank of India, would allow, in fact there are well laid down guidelines for it. The Reserve Bank of India has clearly laid down guidelines for the banks on loan waiver during civil unrest. The RBI master circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances the principle for utilisation of floating provisions by banks are well laid down.

According to the RBI master circular, “The floating provisions should not be used for making specific provisions as per the extant prudential guidelines in respect of non performing assets or for making regulatory provisions for standard assets. The floating provisions can be used only for contingencies under extraordinary circumstances for making specific provisions in impaired accounts after obtaining board’s approval and with prior permission of RBI. The boards of the banks should lay down an approved policy as to what circumstances would be considered extraordinary.”

To facilitate banks' boards to evolve suitable policies in this regard, it is clarified that the extra-ordinary circumstances refer to losses which do not arise in the normal course of business and are exceptional and non-recurring in nature. These extra-ordinary circumstances could broadly fall under three categories viz. General, Market and Credit. Under general category, there can be situations where bank is put unexpectedly to loss due to events such as civil unrest or collapse of currency in a country. Natural calamities and pandemics may also be included in the general category. Market category would include events such as a general melt down in the markets, which affects the entire financial system. Among the credit category, only exceptional credit losses would be considered as an extra-ordinary circumstance, circular mentions.

To mention, the Valley has been witnessing protests since June, which left 112 people dead in the police and para military firings.

[Bilal Hussain is a journalist, and writer. In 2009 he attended the McGraw-Hill Personal Finance Reporting Program Courses, supported by The International Center for Journalists. He is associated with the premier English Daily, Kashmir Times. His principal interests are capital markets, developmental sector and ecological economics. He can be reached at ibilalhussain@gmail.com]