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State Bank of Sikkim: The Tiny Mountain Bank That Continues To Beat RBI’s Powers

Summary:
Superb piece by Riddhima Saxena of BQ on the mystery named State Bank of Sikkim. SBS was established in 1968 and has remained outside of RBI purview. There are talks that it is now being brought under RBI but there is no mention of it on websites of either RBI or SBS. Riddhima points to this interesting CAG report on Sikkim which has some details on SBS: There are three Statutory Corporations in the State, namely, State Bank of Sikkim, State Trading Corporation of Sikkim and Sikkim Mining Corporation established under the proclamation of the erstwhile Chogyal (King) of Sikkim. The accounts of these Corporations are audited by the Chartered Accountants directly appointed by the Board of Directors (BoDs) of the respective Corporation.    The SBS audit showed NPA of close to 46%: There

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Superb piece by Riddhima Saxena of BQ on the mystery named State Bank of Sikkim. SBS was established in 1968 and has remained outside of RBI purview. There are talks that it is now being brought under RBI but there is no mention of it on websites of either RBI or SBS.

Riddhima points to this interesting CAG report on Sikkim which has some details on SBS:

There are three Statutory Corporations in the State, namely, State Bank of Sikkim, State Trading Corporation of Sikkim and Sikkim Mining Corporation established under the proclamation of the erstwhile Chogyal (King) of Sikkim. The accounts of these Corporations are audited by the Chartered Accountants directly appointed by the Board of Directors (BoDs) of the respective Corporation.   

The SBS audit showed NPA of close to 46%:

There was scope for improvement in the functioning of the State Bank of Sikkim (SBS) with regards to planning, operations and internal control mechanism. SBS did not prepare any strategic plan for its operation. In the absence of a clear lending policy and detailed credit appraisal mechanism, the sanction of credit facilities was not based on objective criteria. SBS did not have any comprehensive procedure for post sanction/disbursement monitoring
and follow-up of loan assets leading to Gross NPAs to the extent of 45.75 per cent of total loans assets of SBS as on 31 March 2017.

There was room for further expansion in the number of Automated Teller Machines (ATMs) as there were only eight ATMs of SBS in the State. The internal control mechanism of SBS needed strengthening as there was no system for preparing Bank Reconciliation Statements (BRS) for inter branch/inter-bank transactions. SBS neither had a system of internal audit nor was there any formal arrangement for regulating the activities of SBS through
oversight functions or through administrative supervision by GoS. Instances of non-compliance with the provisions of the State Bank of Sikkim Proclamation, 1968 and good practices as per Reserve Bank of India (RBI) guidelines were also observed.

Despite NPAs, SBS made profits:

As per the latest finalised accounts of twelve working SPSUs as on 30 September 2017, three20 SPSUs earned profit of ₹ 8.47 crore and nine SPSUs incurred loss of ₹ 339.68 crore. The major contributor to profit was State Bank of Sikkim (₹ 6.79 crore).

The financials for 2016 (in Rs Cr). RoE stands at 37.21%!

  • Investment: 0.53
  • Turnover: 147.91
  • Equity: 18.25
    • of which Paid up capital entirely held by State Govt: 0.53 cr
  • Net Profit after Tax: 6.79
  • RoE (in %): 37.21%

Tough words:

SBS is neither a Company nor a Co-operative bank as defined in the Banking Regulation Act, 1949.

By the Constitution (Thirty-sixth Amendment) Act, 1975, Sikkim became a State of the Union of India with effect from 26 April 1975. A new article, 371F was inserted in the Constitution stipulating special provisions with respect to the State of Sikkim. As per Article 371F(k) of the Constitution of India, all laws in force immediately before the appointed day (viz. 26 April 1975) in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force therein until amended or repealed by a  competent Legislature or other competent authority. As such, the State Bank of Sikkim Proclamation 1968, being an old law of Sikkim was protected under the new Article 371F(k) of the Constitution of India.

The Banking Regulation Act, 1949 (Banking Regulations) notified (March 1949) by the Government of India (GoI) was extended (15 January 1976) to the State of Sikkim. The same was to come into force in the State from the appointed date (viz. 15 December 1987). As such, the SBS was required to comply with the provisions of the Banking  Regulations with effect from the appointed date (15 December 1987) when the said Regulations were made applicable to the State of Sikkim.

As per clause (1) of section 7 of the Banking Regulations, no company other than a banking company shall use as part of its name or in connection with its business, any of the words ‘bank’, ‘banker’ or ‘banking’ and no company shall carry on the business of banking in India unless it uses as part of its name at least one of such words. Section 22 of the Banking Regulations further stipulated that no company shall carry on banking business in India unless it holds a license issued by the Reserve Bank of India. It was, however, observed that the SBS, despite being covered (15 December 1987) under the purview of the Banking Regulations, did not comply with the provisions of the said Regulations so far (October 2017). It was noticed that SBS used the word ‘Bank’ as part
of its name for all purposes including in connection with its banking business. Further, it carries on the business of banking without holding a license issued by the RBI in violation of the provisions of the Banking Regulation Act, 1949.

Much more in the report in pages 103 to 130 in the CAG report.

Thanks Ridhima for this interesting report.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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