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

The State Bank of Sikkim calls itself a “bank”, without being recognised as such under any central government acts or authority.

State Bank of Sikkim Head Office at Gangtok, Sikkim. Source: State Bank of Sikkim
State Bank of Sikkim Head Office at Gangtok, Sikkim. Source: State Bank of Sikkim

A tiny ant crawled up an elephant’s trunk and no matter how much the elephant tried, it couldn’t sneeze the ant out. Replace the elephant with the Reserve Bank of India and the ant with the State Bank of Sikkim. It's the same story.

For 53 years, this tiny mountain bank has functioned outside RBI's purview. The lender calls itself a “bank” and functions like one, even though it does not hold a banking licence. Many attempts over the years to extend the regulator’s oversight to the lender have yielded no results.

Last month, Business Standard reported that the bank was finally brought under the country’s banking regulator. However, a person familiar with the matter told BloombergQuint that the attempt to regulate SBS remains work-in-progress. The bank is yet to receive any such communication from the regulator, Phurba Wangdi Bhutia, the bank's managing director told BloombergQuint.

An emailed query to the RBI did not elicit a reply.

‘Your State, Your Bank’

This tagline of SBS aptly describes its powers. The bank has 53 branches across Sikkim and serves multiple purposes—it banks 1.25 lakh Sikkimese people and also acts as the state’s treasury.

Founded in 1968, the bank came into being seven years before Sikkim became a part of India, and is governed by the State Bank of Sikkim Proclamation 1968 that was in force before its accession to India. The act is still applicable due to the special powers guaranteed to the state under Article 371F.

As of 2019-20, the bank held Rs 3,000 crore in deposits, mostly from employees of the state government or other state-owned public sector entities, and about 40% from the state government itself, Bhutia told BloombergQuint over a call. The bank had a loan book worth Rs 2,000 crore, with credit given mainly to retail borrowers and about 30% to the commercial projects operating within the state, he said.

For comparison, RBI data shows that the formal banking system’s deposits and advances in the state of Sikkim are at Rs 11,056 crore and Rs 3,563 crore, as of Dec. 31, 2020.

Bhutia claims the bank’s bad loans are at about 15% of its total assets and its capital adequacy ratio is 5.5%. For 2019-20, the bank made a profit of Rs 25 crore, and gave close to Rs 1.5 crore in dividend to the state government. Its net worth is close to Rs 100 crore, said Bhutia.

There’s just one problem—no one has a clue what those numbers reflect since the bank is not bound to follow RBI rules on bad loan recognition, provisioning or capital adequacy.

A 2018 audit report prepared by the Comptroller and Auditor General of India that reviewed the bank's accounts for five financial years from 2012-13 to 2016-17 found its gross bad loans were nearly Rs 470 crore, at 45.75% of its total loans assets, as on March 31, 2017.

The report noted that the bank did not have any “fair lending practices code,” and had not framed “any general or specific lending policy or credit policy to regulate and safeguard the credits extended by it.” Further, it had also not created any provisions against various categories of loan assets as prescribed under the asset classification and provisioning guidelines, the report said.

A person who has closely tracked the bank’s functioning from the outside told BloombergQuint that since the RBI cannot officially access the SBS’ financials or ask the state government to disclose them without any regulations, nobody is aware of its manner of functioning, where its deposits are being directed to, or who its borrowers and depositors are.

Nobody knows anything, this person said on condition of anonymity.

A Piggy Bank For The State Government?

Sikkim is also the only state that doesn’t access the RBI’s ‘Ways And Means’ advances facility, which provides states short-term funds to tide over liquidity shortfalls.

As a result, every time the state government needs funds, it turns to SBS.

The Sikkim bank, according to the person cited earlier in the story, works like a piggy-bank for the state government that keeps drawing lines of credit via its overdraft account with the lender, as and when required.

The state government, the person said, is endangering the bank by continuously borrowing from public deposits for financing commercial projects and managing its treasury operations. This poses a potential systemic risk if the government fails to make those repayments in time.

Presently, the public deposits at SBS are not covered by the Deposit Insurance and Credit Guarantee Corporation Act, which insures deposits of up to Rs 5 lakh.
Snapshot Of The State Bank of Sikkim website.

How To Be A Bank Without Being One

The story of SBS turns truly fascinating as you go deeper into its operations. How does a bank, which is officially not part of the banking or payment systems function? How do its customers get access to cash? How do they make money transfers?

The answer is jugaad.

SBS has set up current accounts it holds with the Central Bank of India and a few other large public sector banks. The Sikkim bank, according to Bhutia, draws lines of credit or an overdraft facility like any other corporate customer from these public sector banks for all its short-term cash flow requirements. It pays interest on the same from its deposits. Pallav Mahapatra, who retired as managing director of Central Bank of India this week, confirmed the bank’s dealings with SBS.

These current accounts are also used for customer remittances.

So, if a customer wants to make a remittance to any other Indian bank, it would draw a cheque in favour of SBS that would, in turn, arrange the transfer of funds through its current accounts with other lenders. This helps SBS side-step the fact that it is not allowed to access the payments system because it is not licensed under RBI, Bhutia said.

Since, the bank does not have access to the central bank's currency chest, it also gets cash via its current accounts, the person quoted anonymously earlier in the story said.

“We do simple banking,” claimed Bhutia, confirming the manner in which the lender routes all its operations via other banks.

The system worked fine until 2016, when during the government's demonetisation drive, the bank’s cash supply was cut-off as other banks restricted withdrawals.

At the time, the central government intervened to provide funds to the bank, while the then Union Home Minister Rajnath Singh slammed the RBI for “freezing” 52,000 accounts of the State Bank of Sikkim, terming the decision “seemingly unreasonable” and based on “specious ground”, according to a Hindustan Times report dated Dec. 12, 2016.

In a letter dated Nov. 25, 2016, written to Prime Minister Narendra Modi, Sikkim's former Chief Minister Pawan Kumar Chamling acknowledged the help from the centre and the RBI.

“The RBI vide letter dated Nov.23, 2016, has allowed the currency chest of Central Bank of India, Gangtok to accommodate the reasonable treasury related requirements of the SBS.” the letter states. “I am grateful to the authorities in Government of India and RBI for having enabled this dispensation to be extended to SBS,” it added.

The non-availability of cash, wrote Chamling, was causing the Sikkimese people who banked “exclusively with SBS” to create a “panic-like situation” and were “already in an agitational frame of mind.”

In the letter, Chamling also said that the state is willing to work with the central government and the RBI to bring the bank under the banking regulations. It’s unclear whether the state has taken any proactive steps to ensure that transition.

A copy of the letter, attached as an annexure to a Public Interest Litigation filed in the Bombay High Court, was reviewed by BloombergQuint.

The incident proved that if authorities wanted to push for greater regulatory oversight of SBS, they could instruct public sector banks not to support the lender’s operations.

Why don’t they? Lack of political will, says the person quoted anonymously above.
Source: State Bank of Sikkim
Snapshot of an SBS Branch in Sikkim.

The Regulatory Jumble

For now, SBS continues to exist within a regulatory jumble.

The Banking Regulation Act was extended to Sikkim in 1976 and came into force starting Dec. 15, 1987. On Jan. 23, 1989, the Sikkim government republished the central notification on the applicability of the Banking Regulation Act.

But that didn’t change the nebulous status of State Bank of Sikkim.

The CAG report cited above said that both the State Bank of Sikkim Proclamation, 1968 as well as the Banking Regulation Act, 1949 are applicable to the lender. However, the audit observed that SBS had not complied with the provisions of the Banking Regulation Act, 1949 until November 2017.

Over this period, the RBI tried to convince the central government to back its attempts to bring State Bank of Sikkim under the regulator’s purview.

“We were persuading the government to bring it under Reserve Bank's purview, but these arrangements are all relating to diplomatic terms and we (the regulator) are not privy to that,” R Gandhi, former deputy governor at RBI told BloombergQuint over a call.

In a letter dated Dec. 19, 2014 addressed to then Finance Secretary Hasmukh Adhia, Gandhi had raised “serious regulatory concerns” over the functioning of State Bank of Sikkim and gave various options to bring it under the RBI's control. These options included:

  • Its conversion into a company under the Companies Act, 2013 that would allow for SBS to become a bank.
  • Amending the Banking Regulation Act to make it applicable to the bank.
  • Amending or repealing Article 371F.
  • Enforcing of the State Bank of Sikkim (Acquisition of Shares) and Miscellaneous Provisions Act, 1982 that provided for a repeal of Proclamation by the issue of a notification by the Central government.

A copy of the letter, attached as an annexure to the PIL cited above, was reviewed by BloombergQuint.

But, the needle has not moved in the RBI's favour yet.

To bring the bank under any central government authority may be viewed as a threat to the quasi-sovereign status of the state, said the person quoted earlier in the story. No one wants to disturb the peace in a border state, this person added.

We can only present our side of the story as to why it is important to bring the bank under RBI’s purview, but whether the government is free enough to accept that change and allow this, we do not know.
R Gandhi, Former RBI Deputy Governor

Knocking At The Courts

In 2017, Member of Parliament Sushil Kumar Singh wrote in a letter to Piyush Goyal, who was the power minister at the time, regarding instances of corruption and mismanagement at a public-sector entity, Damodar Valley Corporation. In his letter, Singh alleged that a senior official at the company had amassed wealth through corrupt practices and deposited it at the State Bank of Sikkim.

A copy of the letter was reviewed by BloombergQuint.

That prompted Ashok Kumar Jain, a Right to Information activist and a former employee at DVC, to file the above cited PIL regarding SBS with the Bombay High Court in 2017. In his petition, Jain alleged that the bank was a “safe haven for ill-gotten wealth”, which refused to disclose the identity of its depositors akin to “Swiss Bank sort of secrecy”.

Instances of misuse of the bank’s special status came to light during demonetisation as well. The CAG report noticed cash withdrawals exceeding the permissible limit during that time.

There were 40 instances of cash withdrawal from SBS beyond the prescribed weekly limits of Rs. 20,000 and Rs 24,000 respectively during the period from Nov. 9-13, 2016 and Nov. 14-20, 2016, the CAG said. The withdrawals by the individual account holders during the said periods (9-20 November 2016) ranged between Rs. 25,000 and Rs. 1,48,000, it added.

Jain’s PIL has been admitted but the case has been pending before the court for the last three years and, just like the RBI, Jain hasn’t achieved much.

“This tiny bank is a ticking time bomb that neither the centre nor the state want to diffuse as they dread its immediate consequence on their own political standing. Nevertheless, something needs to be done. Because when this bomb explodes, it will not just severely harm the Sikkim public, but also take down the state government and become a big question mark on the centre that silently kept watching it tick away,” Jain said.

But Bhutia, who has headed the bank for the last nine years, seems unperturbed by all these concerns. On being asked about the future of the bank, Bhutia said that as a commercial organisation, the bank's aspirations were no different from others and the plans for the future were “unlimited.”

"We want to grow. Let's see how things take shape and it all depends on that. It all depends on the state government's decision and the central government's decision. As of now, we are a bank in the state outside the purview of RBI," he said.