Shakeel Maqbool
Till 2011, J&K Bank was the banker to the Government of Jammu and Kashmir as the safe keeper of its consolidated fund. Then this role was taken over by RBI as was the case in the rest of the country except Sikkim. Pursuant to this, the J&K Government entered into an agreement with the RBI which stipulated among other things that a minimum balance of 1.14 crore will be maintained at the end of the day in the then state’s RBI account at the end of day. If the balance was breached the money will be invested in RBI’s cash balance investment account and if the balance could not be maintained then the J&K Government will borrow the necessary amount at defined rates(repo rate and overdraft rate) from RBI to meet its cash balance requirements.
However the role of the J&K bank was not completely diminished. The main treasury account of J&K Government continued to be in the J&K bank; but at the end of each day its balance was automatically recouped into the RBI account to meet the cash balance requirements. The respective balances of district treasury accounts were also recouped via the main treasury account to the RBI account. Then the reverse was done at the start of the next day i.e. the money was released back into the treasury and district treasury accounts. In effect the money was with the J&K bank treasury accounts during the day and then it was pulled into the RBI account when it mattered. This is one of methods of operationalising an International best practice known as the Treasury Single Account System. It enabled the Jammu and Kashmir Government to save interest costs and in fact earn money on its cash balance by having all its cash with the RBI at the end of day instead of having it floating in bank accounts at different levels.
As is apparent from the data (sourced from the publicly available Finance accounts of the Government of Jammu and Kashmir, this system worked well for the initial few years. The interest earned was more than the interest paid which was an indication of a generally well maintained cash balance. However, since the financial year 2015-16 ,the difference between the interest-earned and the interest-paid has gone into negative territory and has only slipped more each year. Now what explains this deteriorating cash balance situation? Simply J&K Government is not able to maintain enough cash at the end of day in the RBI account for enough days on an average and this is getting worse every year. But where is the cash going?
Around the same time that the cash balance of the J&K Government with RBI started a downward trend, certain changes were made in the architecture of many centrally sponsored schemes operating in J&K. Many of these schemes were taken off treasury which in simple terms means that separate bank accounts were opened for many major CSS schemes and the practice became such that their respective releases began to be drawn in advance to these bank accounts from the treasury bank account. Now these new bank accounts were not linked to the single treasury eco system in that their respective balances were not recouped into the RBI account via the main treasury account at the end of the day. While this deteriorated the cash balance position of the J&K Government with the RBI, it proved to be a boon to the commercial banks. However this new architecture was not meant to do this. It had actually been implemented with the good intention of bringing in transparency and just in time releases till the last mile by implementing the EAT module of Public Financial Management System. EAT module enables each higher level fund disbursing authority to see whether the funds released earlier have been utilised or not before any more releases. This reduces float in the system by enabling just in time releases. However this module was never utilised before making releases via advance withdrawal to the separate bank accounts of implementing agencies of CSS from the treasury account. On one side the cash balance position with the RBI deteriorated and on the other side a huge amount of money worth 100s of crores remained stuck as unspent balances in the separate bank accounts of implementing agencies.
Way Forward
There are two ways that this situation can be improved. One is the obvious way that the implementing agencies should be forced to return the unspent balances at the end of the year to the treasury account. This is something that the Finance Department has been trying with moderate success. But this will only be useful if further releases are made conditional to the utilisation of earlier releases.
There is also an innovative solution which can be tried. The separate bank accounts of the implementing agencies can be made part of the Treasury Single Account System in the same way as treasury bank accounts were. Treasury single account System is the next big Financial reform that has also found mention in this years Union Budget and is already being rolled out for autonomous bodies at the central level.
PS: The J&K Bank treasury system has recently been replaced by the e-Kuber system of RBI which means that now the treasury account is also run by RBI. However the above analysis and idea is equally valid and feasible in both systems.
(The author is the Assistant State Nodal Officer for rolling out PFMS, in the Union Territories of Jammu and Kashmir, and Ladakh.)
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