Skip to main content

Full text of "Modern Banking In India"

See other formats 


PAGES  MISSING 
WITHIN  THE 
BOOK  ONLY 

text  fly  and  drenched 


03 

OU   162071  >m 


OtTJ— 43—30. 1  -7 1  —  5,000 

OSMANIA  UNIVERSITY  LIBRARY 

CallNo.3>2>a»'\0C\S'ti  Accession  No. 

Author 
Title 
This  book  should  be  returned  on  or  before  the  date  last  marked  below. 


TO 
OUR  MOTHER 

DEDICATED 
ON  BEHALF  OF  HER  CHILDREN 


PREFACE 

NO  individual  bank  or  banking  system  could  be  understood 
or  judged  except  in  the  light  of  its  past  history.  This  is 
specially  true  in  a  country  like  India  where  banking  is  still 
in  the  -earlier  phases  of  its  growth  and  where  conditions 
differ  materially  from  one  part  to  another.  The  history  of 
banking  in  India  is  indeed  not  much  older  than  a  few  de- 
cades. But,  even  in  that  short  life  history,  Indian  banking 
has  confronted  one  serious  crisis,  lived  through  the  hectic 
times  of  the  greatest  war  in  history,  survived  unscathed  an 
unprecedented  world  depression  and  stands  today  on  the 
threshold  of  another  great  war.  Events  of  such  magnitude 
cannot  but  expose  a  banking  system  to  severe  tests  and  leave 
indelible  marks  behind.  The  present  volume  is  an  effort  to 
portray  banking  in  India  in  the  historical  and  contemporary 
context  of  these  events  and  circumstances. 

Recent  as  are  the  origins  of  Indian  banking,  systematic 
exposition  of  our  banking  problems  for  monographs  on  origins 
and  growth  are  more  recent  still.  Among  official  documents, 
the  Reports  of  the  Herschell  Commission,  the  Fowler  Com- 
mittee and  the  Babington-Smith  Committee  are  concerned 
exclusively  with  our  currency  problems  and  make  no  more 
than  incidental  references  to  banking  and  credit  conditions. 
The  Chamberlain  Commission  found  place  for  an  Annexe  in 
which  is  presented  an  interesting  scheme  for  a  mixed  Central 
Bank  for  India  somewhat  on  the  lines  of  the  Bank  of  France. 
Taking  its  cue  from  the  prevalent  opinion  and  sentiment  in 
post-war  Europe,  the  Hilton- Young  Commission  made  a  de- 
parture in  placing  in  the  forefront  proposals  for  a  Reserve 
Bank  of  India  arid  stressing  the  need  for  an  inquiry  into  and 
improvement  of  ordinary  commercial  banking.  Their  sug- 
gestions bore  fruit  in  the  Reports  of  Central  and  Provincial 
Banking  Enquiry  Committees  which  form,  a  voluminous  sur- 
vey of  contemporary  banking  conditions  with  suggestions  for 
improvements. 

Among  unofficial  publications,  praise  must  be  accorded 
to  a  few  monographs  on  earliest  origins  of  banking  in  India. 


VI 

The  rest  consists  very  largely  of  expositions  of  Indian  aspira- 
tions on  the  subject  unsupported  by  much  study  of  existing 
conditions  or  meticulous  synopses  of  material  and  ideas  con- 
tained in  well-known  but  bulky  documents. 

After  the  manuscript  of  the  present  volume  was.  placed 
in  the  hands  of  publishers,  the  Reserve  Bank  of  India  pub- 
lished and  circulated  its  proposals  for  a  Banking  Act.  It  was 
neither  practicable  nor  indeed  desirable  to  incorporate  the 
various  points  raised  in  the  document  into  the  text  itself. 
The  proposals  are  indicated  in  foot-notes  in  relevant  places 
with  brief  comments  on  their  tendency  and  character.  Along 
with  the  proposals,  the  Reserve  Bank  published  also  a  very 
interesting  memorandum  on  non-scheduled  banks  with  spe- 
cial reference  to  distribution  of  assets  and  liabilities.  The 
valuable  tables  on  which  the  memorandum  is  based  are 
broadly  summarised  in  the  text  with  incidental  alterations  in 
conclusions'  made  necessary  by  these  exact  figures. 

In  spite  of  generous  and  appreciative  compliance  from 
many  quarters,  much  difficulty  was  experienced  in  assem- 
bling extant  material  on  the  subject.  Close  co-operation  and 
mutual  assistance  between  "academic"  and  "practical"  people, 
which  have  strikingly  advanced  both  interests  in  nationally 
minded  countries  like  England,  Sweden,  etc.,  are  still  a  mere 
aspiration  in  this  country.  In  spite  of  every  endeavour,  no 
one  could  be  more  conscious  than  the  author  himself  of  the 
grave  deficiencies  and  perhaps  inaccuracies  of  the  material 
acquired  and  used.  Readers  who  invite  attention  to  any  faults 
will  establish  as  great  a  claim  on  the  gratitude  of  the  writer 
as  that  of  the  public  for  whom  the  book  is  meant. 

Sydenham  College,  S.  K.  MURANJAN 

1st  August  1940. 


PREFACE  TO  SECOND  EDITION 

The  first  edition  of  this  work  was  in  press  in  the  early 
months  of  World  War  II.  The  second  edition  delayed  con- 
siderably by  war  time  difficulties  should  have  seen  the  light 
of  day  in  the  closing  months  of  the  war  but  for  certain  deplo- 
rable mishaps.  The  reception  accorded  almost  without 
exception  to  the  first  edition  of  the  book  everywhere,  and  no- 
where more  emphatically  than  in  Great  Britain  and  the  United 
States,  was  as  great  a  surprise  as  encouragement.  Its  recog- 
nition by  the  University  of  London  as  meriting  the  distinction 
of  D.Sc.  was  only  the  most  conspicuous  of  many  generous 
tributes.  While  expressing  gratitude  to  them  all  and  particu- 
larly to  bankers  in  this  country,  I  should  like  to  acknowledge 
that  this  makes  the  author  all  the  more  keenly  conscious  of 
the  blemishes  and  short-comings  of  the  work. 

In  the  economic  upheaval  set  in  motion  by  a  war  of  such 
magnitude,  banking  like  other  economic  activities  had  to 
operate  amidst  a  radically  altefred  environment.  While  it 
cannot  be  doubted  that  some  features  of  this  environment 
must  continue  to  influence  banking  for  many  years  to  come 
and  new  ones  are  likely  to  be  introduced  as  a  consequence 
of  any  post-war  reconstruction,  there  are  many  influences  in 
operation  at  present  which  are  but  of  temporary  significance. 
The  original  text  of  this  work  which  carried  the  account  al- 
most to  the  oubtreak  of  the  war  has  therefore  been  left 
materially  unchanged  except  for  the  statistical  material  which 
has  been  brought  up  to  date  as  far  as  possible.  The  trends 
and  developments  of  war  time  banking  based  on  these 
statistics  are  presented  in  the  closing  chapter. 

While  there  is  in  India  still  much  cause  to  lament  the 
absence  of  close  co-operation  and  mutual  assistance  between 
"academic"  and  "practical"  people  such  as  have  advanced 
strikingly  both  interests  in  countries  like  England,  Sweden, 
etc.,  it  must  be  recorded  here  that  the  present  work  could 
hardly  have  been  undertaken  or  executed  but  for  much  gener- 
ous and  appreciative  assistance  from  many  quarters,  particu- 
larly distinguished  bankers  in  this  country.  Till  the  recent 
establishment  of  the  Reserve  Bank  of  India  with  its  means 


viii 

and  powers  to  collect  and  publish  banking  information, 
serious  study  of  banking  meant  an  approach  to  each  individual 
bank  or  banker  with  all  the  difficulties  which  such  approach 
must  entail.  The  highly  confidential  character  of  all  banking 
business  is  itself  a  legitimate  difficulty,  which  in  one  case  at 
least  was  carried  to  the  length  of  precluding  the  author  from 
the  use  of  even  printed  and  published  balance-sheets — and 
those  too,  of  the  years  before  World  War  I ! 

I  owe  a  heavy  debt  of  gratitude  to  the  Managements  of 
the  Bank  of  India,  the  Allahabad  Bank,  the  Indian  Bank,  the 
Bank  of  Behar  and  the  Union  Bank;  the  President  of  the 
Bombay  Stock  Exchange;  Mr.  H.  T.  Parekh,  B.Sc.  (Lond.), 
of  Messrs.  Harkissondass  Lukmidass  and  many  others  but 
for  whose  kindness,  much  of  the  material  contained  in  this 
book  would  have  remained  a  sealed  document.  To  the  late 
Governor  of  the  Reserve  Bank  of  India,  I  owe  thanks  for 
placing  at  my  disposal  the  library  of  the  Bank.  I  need  hardly 
add  that  none  of  them  is  in  any  way  responsible  for  any 
statements  made  in  the  book. 

As  this  work  is  to  an  extent  the  outcome  of  lectures 
delivered  in  the  Sydenham  College  during  the  academic  years 
1937-40,  I  have  profited  not  a  little  from  contacts  with  the 
restlessi  and  questioning  minds  of  my  students  from,  whom 
came  the  first  clamour  for  the  publication  of  the  material 
contained  in  this  book.  But  two  of  them,  Mr.  M.  R.  Datnle, 
B.A.,  B.Com.,  now  with  the  Reserve  Bank  of  India,  and  Mr. 
K.  T.  Mirchandani,  B.Com.,  now  A.T.S.,  Trichinopoly,  deserve 
special  thanks  for  valuable  assistance  rendered  by  them  while 
working  under  me  in  the  Sydenham  College  on  their  pres- 
cribed courses. 

It  would  be  difficult  to  express  adequately  my  deep  ap- 
preciation of  the  willingness  and  painstaking  devotion  with 
which  my  friend  Mr.  B.  G.  Murdeshwar,  then  Asst.  Legal 
Remembrancer,  Government  of  Bombay,  undertook  the 
dreary  and  interminable  task  of  correcting  the  proofs  of  the 
first  edition  of  this  work. 

Sydenham  College,  S.  K.  MURANJAN 

1st  August  1945. 


PREFACE  TO  THIRD  EDITION 

There  are  no  material  alterations  except  for  routine  revi- 
sion and  the  last  chapter  which  has  been  entirely  recast.  Post- 
war statistics  have  been  entirely  separated  from  pre-war 
statistics.  I  regret  that  in  the  Preface  to  the  Second  Edition, 
printer's  inadvertence  caused  the  omission  of  a  sentence  which 
recorded  my  high  obligations  to  the  Midland  Bank,  London, 
where  during  several  months  of  practical  training  the  officers 
at  the  Head  Office  and  branches  gave  me  every  guidance  and 
opportunity  to  acquire  insight  into  the  practical  working  of 
the  various  departments. 

Sydenham  College,  S.  K.  MURANJAN 

1st  January  1952 


BY   THE  SAME  AUTHOR 


ECONOMICS  OF  POST-WAR  INDIA  (Hind  Kitabs) 
ECONOMICS  OF  THE  CABINET  DELEGATION'S  PROPOSALS 

(Hind  Kitabs) 
FROM  HYPERINFLATION  TO  DEVALUATION  (Hind  Kitabs) 


JOINTLY  WITH  PROF.  C.  N.  VAKIL 


CURRENCY  &  PRICES  IN  INDIA  (Longmans) 


CONTENTS 

PAGE 

1.  EARLY  BEGINNINGS         1 

I.    BEFORE  1860  1 

II.    THE  INDIGENOUS  BANKING  SYSTEM  . .        8 

1.  Some  Figures  from  the  Past      . .         8 

2.  Area  of  Operations  . .        .  .  12 

3.  System   of   Intelligence       . .        . ,  12 

4.  Transfer  of  Funds  and  Hundi     . .  13 

5.  Trade         14 

6.  The  System  of  Accounts     . .        , .  14 

7.  Loans  to  Political  Powers  . .  15 

8.  Their  Place  in  High  Politics         .  .  17 

9.  Bankers  &  Revenue  Collectors  to 

Government  19 

10.  Mint-masters  and  Money-changers  19 

11.  Sanctions  of    Commercial  Obliga- 

tions    22 

III.     1860-1900        24 

2.  PRESENT  CENTURY  PROGRESS      30 

1.  Absolute     Progress     of     Banking 

Resources  30 

2.  Place  of  Banking  Funds  Relatively 

to  Other  Funds  .  .        . .  32 

3.  Constituents    of    Indian    Banking 

System :    Their    Contribution   to 

Growth  36 

4.  Nature     and     Character     of     the 

Growth  :  Geographical  Expansion  38 

5.  Branch  Expansion  as  a  Factor  in 

Growth  43 

6.  Structural  and  Financial  Implica- 

tions of  Geographical  and  Branch 

Expansion  . .        . .        .  .  47 

7.  Degree  of  Concentration  .  .  51 

8.  Causes  of  Concentration  . .  52 

9.  Diffusion    and    Regionalization    of 

Indian  Banking  Structure         . .  54 

10.  International       Comparisons       of 

Banking   Progress  .  .        . .  56 

11.  Other  Banks  57 

3.  THE  STRUCTURE  OF  INTEREST-RATES    ..  60 

I.    SOME  HISTORICAL  EPISODES  . .  . .      65 

1.     Relationship  Between  Short-Term 

and     Long-Term     Interest-Rates  61 


Xll 

2.  Episode  of  the  Nineties        . .        . .  65 

3.  World  War  I  and  the  Years  Follow- 

ing             69 

4.  The     Aftermath     of     the     Great 

Depression                  72 

II.    DIFFERENTIALS  BETWEEN  SHORT  AND  LONG 

RATES  75 

III.    RATES  PAID  ON  DEPOSITS       78 

5.  Demand  Deposits         78 

6.  Rates  on  Fixed   Deposits              . .  80 

7.  Average    Rate    on    All    Deposits  84 

8.  Regulation   of  Deposit-Rates        .  .  86 

9.  Rates  Earned  on  Investments       .  .  86 

10.  Open  Market  Rates              .  .        .  .  88 

11.  The    Gross    Rate    of    Earning    of 

Banks  Generally                .  .        . .  92 

4.  THE  IMPERIAL  BANK  OF  INDIA 95 

1.  The  Presidency  Banks          .  .         . .  95 

2.  The  Imperial  Bank  of  India  :  1921 

to   1934              97 

3.  Size  and  Power  of  Imperial  Bank  99 

4.  Conflict  of  Commercial  and  Central 

Banking  Functions             . .        .  .  102 

5.  High  Liquidity  of  Imperial  Bank 

Assets               104 

6.  Profit  and  Loss  Account               . .  105 

7.  Imperial    Bank    and    Competition 

with  other  Banks 106 

8.  Character    of    Executive,    Owner- 

ship and  Personnel            .  .        .  .  112 

9.  Seasonal  Character  of  its  Business 

and  Rate  Variations          ..        ..  113 

10.    Imperial  Bank  after  1934              ..  116 

5.  STRUCTURE  OF  ASSETS  &  LIABILITIES         . .   118 

I.    STRUCTURE  OF  LIABILITIES 118 

1.  Capital  and  Reserves           . .        . .  118 

2.  Deposits-Liabilities  of  Banks        . .  124 

II.    STRUCTURE  OF  ASSETS 129 

3.  Loans  and  Advances             . .         .  .  131 

4.  Loans  to  the  Money  Market         . .  137 

5.  Investments                  150 

6.  Cash                     154 

7.  Fixed  Assets               156 

8.  Other     Services     of     Banks     in 

India                157 

9.  Smaller  Banks            159 


Xlll 

10.  Bank  X               160 

11.  Bank  Y               162 

12.  Loan  Offices  of  Bengal       . .     "    . .  170 

13.  Nidhis   and  Chits   of   South   India  171 

III.  BANKS  AND  INDUSTRIAL  FINANCE  . .     173 

14.  Major  Industries          173 

15.  Medium-sized    and    Small    Enter- 

prises    174 

16.  Provision    of    Long-term    Capital  176 

17.  Commercial    Banks    a,nd    Industry  179 

18.  Industrial       Banks       and      Small 

Industries  188 

IV.  FINANCE  OF  FOREIGN  TRADE  AND  EXCHANGE 

BANKS          191 

19.  Foreign  Banks  Generally  . .      197 

20.  Status  of  Foreign  Banks  . .      198 

V.    FINANCE  OF  AGRICULTURE        203 

6.    THE     LEADING     INDIAN     JOINT-STOCK 

BANKS       208 


1. 

The  Bank  of  India 

..      208 

2. 

The  Central  Bank  of  India 

..      211 

3. 

The  Punjab  National  Bank 

.  .      217 

4. 

The  Allahabad  Bank 

..      220 

5. 

The  Bank  of  Baroda 

..      224 

6. 

The  Bank  of  Mysore 

..      226 

7. 

The  Indian  Bank 

..      228 

8. 

The  Union  Bank  of  India    .  . 

.  .      233 

9. 

The   Bank  of  Behar 

..      233 

10. 

The  Bharat  Bank 

..      234 

11. 

The  United  Commercial  Bank 

..      235 

7.  ECONOMY  AND  EFFICIENCY  OF  INDIAN 

BANKS       236 

1.  Gross  Profits  236 

2.  Net  Profits  238 

3.  Expenses  239 

4.  Examples    from    other    countries     240 

5.  Organization  and  Practices  . .      242 

6.  Dividends  243 

8.  THE  RESERVE  BANK  OF  INDIA 245 

1.  Constitution  248 

2.  Monopoly     and     Management     of 

Note  Issue  250 

3.  Central     Banking     Control  —  Its 

Technique   and   Relation   to   the 
Money  Market          262 

4.  The  Bank-Rate  264 


XIV 

5.  Open  Market  Operations  . .  267 

6.  Direct  Relations   with   Trade   and 

Commerce  274 

7.  The    Reserve   Bank   and   Banking 

Standards  and  Practices    . .        . ,  277 

8.  Definition     of     Scheduled     Banks  278 

9.  Reserve  Bank  as  Clearing  House  280 

10.  Reserve     Bank     and     Agriculture  281 

11.  Reserve  Bank  in  Action  .  .  283 

9,    A  BANKING  CRISIS  AND  MANY  "BANK 

FAILURES"        289 

1.  Failures  According  to  Age          . .  290 

2.  Failures     According     to     Paid-up 

Capital  293 

3.  Lax  Laws,   Public   Ignorance   and 

Bad    or    Dishonest    Management  295 

4.  Poona  Bank,  Poona  .  .        .  .  296 

5.  Amritsar  National  Bank  .  .  296 

6.  The  Pioneer  Bank  . .        .  .  297 

7.  The  Hindustan  Bank,  Multan       . .  297 

8.  Kathiawar   and   Ahmedabad   Cor- 

poration    297 

9.  The  British  India  Bank       . .        . .  298 

10.  The  Sivarama  Ayyar  Bank,  Madras  299 

11.  Bombay  Banking  Company          . .  299 

12.  The  Pioneer  Bank,  Bombay  .  .  300 

13.  The  Credit  Bank  of  India  . .  301 

14.  The  Bengal  National  Bank  .  .  301 

15.  Dangers  of  Industrial  Finance      .  .  303 

16.  The  Peoples  Bank  of  Lahore       .  .  304 

17.  The  Amritsar  Bank,  Lahore         .  .  306 

18.  The  Tata  Industrial  Bank  .  .  306 

19.  The  Bank  of  Burma  . .        .  .  308 

20.  Dangers  of  Speculation  .  .  308 

21.  The        Indian        Specie        Bank, 

March  1914  309 

22.  Victims  of  Misfortune         . .        .  .  31.3 

23.  The  Bank  of  Upper  India,  Meerut  313 

24.  The  Alliance  Bank  of  Simla        . .  314 

25.  Travancore    National    and    Quilon 

Bank  315 

10.    BANKING      REFORM      AND      BANKING 

LEGISLATION  322 

I.    BANKING  REFORM  322 

1.  Absence  of  Confidence         . .        .  .  322 

2.  Low  Level  of  Incomes       . .        . .  338 


XV 

U     BANKING  LAWS 342 

3.  Ignorance  and  Illiteracy               . .  341 

4.  Form  of  Legislation            . .        . .  343 

5.  Law   Relating   to   Balance   Sheets 

of  Banks                    343 

6.  Capital                347 

7.  Reserve  Funds            347 

8.  Debts  and  Liabilities           . .        . .  347 

9.  Property  held  by  Company          . .  349 

10.  Book-Debts                   349 

11.  Cash  and  Investments         . .        . .  352 

12.  Advances  :  Bills  of  Exchange       . .  353 

13.  Interest     Accrued    on    Investment  353 
.  14.    Profit  and  Loss  Account              . .  353 

15.  Law  relating  to  Officers  of  Banks  . .  354 

16.  Law  relating  to  Organization  and 

Management              359 

17.  Organisation                 361 

18.  Management  of  Banks         . .        . .  366 

19.  Liquidation  of  Banks           . .        . .  368 

11.    THE  LONG  TERM  CAPITAL  MARKET  ..  369 

I.    STOCK  EXCHANGES  IN  INDIA 370 

1.  Legal  Status                370 

2.  Membership    of    Stock    Exchange  371 

3.  Sub-brokers                 374 

4.  Classification  of  Members             . .  375 

5.  Listing  of  Scrips          378 

6.  Cash  and  Forward  Lists              , .  379 

7.  Period  of  Settlement  and  Specu- 

lation                  381 

8.  Budla  Charges  and  Other  Expenses  383 

9.  Margins  and  Speculation     . .        . .  384 

10.  Prices  on  Stock  Exchanges         . .  386 

11.  Level  of  Values  Generally           . .  387 

12.  Default                390 

13.  Intervention      in     the      Ordinary 

Course  of  the  Market       . .        . .  390 

14.  Selling-out  Rule          391 

15.  Buying-in  Rule                     . .        . .  393 

16.  Holidays              394 

17.  Reorganization     of     the     Capital 

Market             395 

18.  Banking    Funds    and    Stock    Ex- 

changes              396 

II.    THE  BOMBAY  BULLION  EXCHANGE  . .     399 

19.  The  Bullion  Exchange         . .        . .  402 


XVI 


III.  LIFE  INSURANCE 404 

IV.  POSTAL     SAVINGS     BANKS      AND     CASH 

CERTIFICATES  407 

V,  THE  RUPEE  DEBT  AND  GOVERNMENT 

BORROWING  POLICY  409 

VI.  AGRICULTURE  AND  LONG-TERM  CAPITAL  . .  411 


TABLES       

12     WAR  AND  POST-WAR  YEARS 

1.  The  Reserve  Bank  of  India 

2.  The  Chief  Executive 

3.  Reserve  Bank  Policies 

4.  Assets     and     Liabilities     of     the 

Bank  

5.  Legal  Powers  

6.  The    Growth    of    Deposits  —  Its 

Meaning  

7.  Notes     and     Deposits  —  Relative 

Position  

8.  Geographical  Expansion 

9.  Concentration   of  Banking  Power 

10.  Branch  Banking 

11.  Size  and  Number  of  Accounts 

12.  Profit  and  Loss  —  War  and  Post- 

war Years  

13.  Salaries  and  Percentages  of  Gross 

Profits  

14.  Net  Profit  Rate          

15.  Fixed  and  Current  Deposits 

16.  Bank  Assets  

17.  Post-war   Movements   in   Deposits 

18.  Post-war  Assets  Policy 

19.  The  Banking  Companies  Act 

20.  Balance  Sheets  

21.  Officers  of  Banks        

22.  Definition       and       Licensing      of 

Banking  

23.  Organisation  

24.  Management  of  Banks 

25.  Inspection  and  Emergency  Powers 

26.  Suspension  and  Winding-up 

27.  Conclusion 

TABLES       

CHARTS       

INDEX         


481 
484 
485 

488 
489 

489 

491 
492 
493 
494 
495 

496 

498 
499 
500 
505 
507 
508 
511 
511 
512 

512 
513 
514 
515 
515 
516 


419 
481 


519 
537 
543 


CHAPTER  I 

EARLY  BEGINNINGS 

I.    BEFORE  1860 

BANKING  ON  MODERN  LINES  began  in  this  country  with  the 
foundation  of  the  Agency  Houses  of  Calcutta  and  Bombay 
in  the  eighteenth  and  early  nineteenth  centuries. 

The  Agency  Houses  were  mainly  trading  concerns  in- 
terested in  tea  and  indigo.  Banking  was  only  an  adjunct, 
although  the  most  important  one,  to  their  business.  In  the 
course  of  their  banking  activities,  they  issued  quite  a 
volume  of  notes.1 

The  Company's  services  were  the  main  recruiting  ground 
of  these  "merchant  princes  of  India".  Many  of  them  were 
men  who  abjured  the  limited  prospects  of  the  Company's 
employment  for  the  incalculable  prizes  of  private  trade  and 
commerce.  Some  drifted  into  these  avocations  under  less 
praiseworthy  circumstances.  Indeed,  for  some  time,  men 
in  the  employment  of  the  Company  even  were  allowed  to 
engage  in  private  trade  and  finance.  The  situation  changed 
a  little  after  1813  when  entry  of  private  persons  from  abroad 
was  permitted  under  a  strict  licensing  system.  Rights  of 
residence  and  property2  were  conferred  on  foreigners  much 
later  by  the  Charter  Act  of  1833.  It  is  interesting  to  note 
that  a  witness  before  the  Select  Committee  of  1831  predicted 
that,  if  permitted  to  settle  in  India,  banking  institutions 
would  be  among  the  first  undertakings  of  Europeans  and 
would  be  extended  to  provincial  towns.3 

Although  some  of  the  later  joint-stock  banks  rose  quite 
independently  of  Agency  Houses,  these  must  be  regarded 
as  pioneers  of  this  type  of  banking  enterprise  in  this 
country.  Since  there  was  no  law  till  1860  giving  legal 

1.  Commerce,  4th  September  1926,  p.  461. 

2.  "The  Government  of  India  has  borrowed  money  for  some  time  back  at  5  per 
cent,  the  most  respectable  firms  in  Calcutta  have  borrowed  at  8  or  9  per  cent  dur- 
ing the  same  time.    The  reason  is  connected  with  the  want  of  real  property  there. 
Europeans  are  not  allowed  to  purchase  lands  and  therefore  it  is  with  private 
security  only  that  they  come  into  the  market."    Q.  143.    Select  Committee,  1831. 

3.  ibid.  Q,  2153. 


2  EARLY  BEGINNINGS 

recognition  to  limited  liability,  all  these  banks  except  one 
started  on  the  basis  of  unlimited  liability.  The  exception 
was  the  General  Bank  of  India4  which  had  a  strictly  small 
number  of  shareholders  who  limited  their  liability  to  certain 
figures. 

After  the  battle  of  Plassey,  the  currency  of  Bengal  and 
of  the  Company's  territories  generally  was  found  in  a  chao- 
tic condition.  It  was  recognized  very  early  that  introduction 
of  paper  currency  must  form  an  important  part  of  any 
permanent  and  satisfactory  scheme  of  reform.  Contrary 
to  the  advice  of  Sir  James  Stuart,  the  famous  economist 
of  the  time,  Hastings  made  a  proposal  to  have  a  Government 
note-issue.  Outbreak  of  war  and  disturbed  conditions 
generally  forced  him  to  abandon  the  scheme.  The  Govern- 
ment thereafter  changed  its  policy  and  decided  to  encourage 
private  agency.5 

The  joint-stock  banks  which  saw  now  the  light  of  day 
and  others  which  were  proposed  but  rejected  by  the 
authorities  of  the  East  India  Company  were  frequently 
inspired  by  comprehensive  ideas  of  banking  policy.  The 
inconvenience  to  trade  and  commerce  of  large,  periodic 
withdrawals  of  funds  into  Government  treasuries  at  the 
headquarters,  the  need  of  facilities  for  expeditious  transfer 
of  funds,  whether  public  or  private,  the  obvious  usefulness 
of  such  agencies  to  put  into  circulation  some  standard  coin 
like  the  sicca  rupee — these  ideas  figured  in  many  minds 
which  initiated  these  ventures.6  Even  in  these  very  early 
stages  just  as  in  the  many  long  decades  which  followed, 
people  had  a  haunting  dream  of  one  great  'State  Bank'  or 
'General  Bank*  which,  with  many  branches  in  the  country, 
should  build  up  the  banking  structure  of  India.7  The 
immediate  and  perhaps  the  most  outstanding  and  permanent 

4.  Early  European  Banking,  by  H.  Sinha,  pp.  12,  15,  22.    While  subscription  was 
open  to  all  "without  distinction  of  country  or  religion"  the  number  of  share- 
holders was  limited  to  400  and  each  share  was  of  the  value  of  Hs.  5,000. 

5.  Economic  Annals  of  Bengal,  by  J.  C.  Sinha,  pp.  110-146. 
Early  European  Banking,  by  H.  Sinha,  pp.  48-53. 

6.  Hence  Warren  Hastings'  'General  Bank  in  Bengal  and  Bihar'  established  in 
1773  and  dissolved  shortly  thereafter.    It  had  a  branch  in  every  collectorate  and 
its  two  managers  were  Indian  shroffs. 

7.  Robert  Richards,  a  member  of  Government  of  Bombay,  proposed  his  General 
Bank  in  1808.    The  proposal  was  rejected  by  the  Court  of  Directors. 


BEFORE  1860  3 

achievement  of  these  banks  was  the  introduction  of  a  note- 
circulation  in  this  country. 

The  Bank  of  Hindusthan,  established  as  early  as  1770  by 
the  Agency  House  of  Alexander  &  Co.,  led  the  way.  Its 
maximum  circulation  seems  to  have  varied  between  20  and 
25  lakhs.8  The  Bengal  Bank,  launched  into  existence  before 
1786,  had  a  circulation  of  8  lakhs  when  it  closed  its  doors 
in  1791,  owing  largely  to  the  panic  of  war  with  Tipu  Sultan. 
These  banks  competed  very  keenly  for  the  privilege  of 
having  their  notes  made  receivable  "at  all  offices  of  Govern- 
ment at  the  Presidency",  or  "in  all  payments  to  Government 
at  different  treasuries  and  public  offices  at  the  Presidency". 
In  those  days,  circulation  of  notes  depended  very  largely  on 
the  confidence  that  Government  treasuries  received  them. 
For  this  reason,  in  the  interior,  notes  were  returned  almost 
immediately  they  were  received  and  paper  circulation  hardly 
existed.  The  choice  of  the  Government  fell  at  first  on  the 
General  Bank  of  India,  which,  however,  was  dissolved  in 
1793.  The  Government  sponsored  thereafter  the  Bank  of 
Calcutta  founded  by  Palmer  &  Co.  in  1806.  In  the  descrip- 
tion of  its  objects  and  reasons,  the  development  of  paper 
currency  was  specifically  stated  as  the  most  important 
advantage  to  accrue  from  the  institution.  By  1820,  its  note 
circulation  had  reached  the  figure  of  43  lakhs.9  Naturally, 

In  1836,  merchants  in  India  proposed  the  'Great  Banking  Establishment  for 
British  India.'  The  proposal  was  rejected  by  the  Court  of  Proprietors, 

In  his  Minute  of  1859,  James  Wilson,  Finance  Member,  made  clear  that  his 
scheme  for  paper  circulation  was  not  intended  to  discourage  the  idea  of  a  great 
country-wide  bank. 

In  1862,  Samuel  Laing  wrote  a  minute  to  advocate  conversion  of  Presidency 
Banks  into  a  State  Bank. 

In  1867  Dickson,  Secretary  to  the  Bank  of  Bengal,  made  proposals  to  amal- 
gamate the  Presidency  Banks. 

In  1870,  Ellis,  a  member  of  Council,  proposed  a  State  Bank  on  lines  of  the 
Bank  of  France. 

Sir  E.  Hambro  in  his  minute  to  Fowler  Report  (1898)  suggests  a  Central  Bank 
for  India—as  also  Sir  Edward  Law  in  a  minute  in  1901. 

Sir  E.  Holden  advocated  at  the  General  Meeting  of  the  London  City  and 
Midland  Bank  in  1913  a  Central  Bank  for  India  in  order  to  draw  out  gold  into 
monetary  circulation  and  cause  a  lowering  of  interest-rates. 

Keynes  in  the  Annexe  to  Chamberlain  Commission's  Report  elaborates  a 
scheme  for  the  purpose..  See  also  pp.  357,  359,  Indian  Finance  and  Banking  by 
G.  F.  Shirras. 

8.  B.  T,  Thakur  in  Organization  of  Indian  Banking,  p.  27,  gives  50  lakhs  as  the 
maximum.  No  authority  is  quoted,  but  a  Select  Committee  of  Parliament  places 
it  at  £400  to  500  thousand  (Q.  529,  533). 


4  EARLY  BEGINNINGS 

the  notes  of  these  banks  were  not  much  in  evidence  beyond 
the  outskirts  and  environs  of  Calcutta.  A  witness  before 
the  Parliamentary  Select  Committee  of  1831  informs  us  that 
these  notes  went  as  far  as  Chandranagore  and  Serampore, 
about  25  to  30  miles  from  Calcutta,  and  that  they  were  not 
to  be  seen  in  the  villages  to  any  extent.  The  smallest  deno- 
mination of  notes  was  Rs.  4  while  the  Bank  of  Bengal  issued 
notes  ranging  between  Rs.  10  and  Rs.  20,000. 

Similar  enterprises  were  springing  up  in  other  parts  of 
India  also.  A  bank  of  deposit  and  discount  made  its  appear- 
ance in  Madras  as  early  as  1683.  Another  bank  commenced 
operations  in  Bombay  in  1724  and,  a  little  later,  was  given 
the  privilege  of  note-issue  to  the  extent  of  Rs.  8  lakhs.10 
Both  had  the  sanction  of  the  Court  of  Directors  of  the  East 
India  Company  and  were  managed  by  the  local  Governments 
in  the  interests  of  their  own  financial  needs.  Madras  had  a 
few  banks  more,  later  on,  including  a  private  joint-stock 
bank  named  the  Carnatic  Bank  and  another  Government 
Bank.  These  banks  also  rendered  valuable  service  in  mak- 


9.  Banking,  by  Cook,  p.  201. 

Early  European  Banking,  by  H.  Sinha,  pp.  38,  40,  126,  145. 

10.  The  Government  Bank  of  Bombay  was  "erected"   on  22nd  December   1720, 
after  consultation  with  "eminent  black  merchants."  The  Bank  was  placed  under 
the  immediate  direction  of  the  Governor  and  two  members  of  Council  and  was 
furnished  with  Rs.   1  lakh  as  capital  stock  out  of  the  Co.'s  cash.     Deposits  of 
Rs.   100  and  more  were  received  for  six  months  for  which  the  depositors  re- 
ceived in  exchange  promissory  notes  bearing  interest  at  one  'durgani'   a  day. 
Inhabitants  of  Bombay,  whether    native,    covenanted    or    hired    servants,    were 
allowed  to  borrow  at  a  fixed  rate  of  9  per  cent  against  security  of  goods  or  joint 
security  of  borrower  and  another  substantial  party.  Borrowers  were  'encouraged* 
by  facility  of  repayment  in  instalments  of  Rs.  100  and  more.     The  Manager  of 
the  Bank  was  paid  for  his  trouble  by  a  levy  of  1  per  cent  on  each  loan  ! 

A  Committee  which  examined  the  affairs  of  the  Bank  in  1744  throws  curious 
light  on  its  working.  The  total  outstanding  slightly  exceeded  Rs.  1  lakh,  of 
which  Rs.  43,000  was  lent  on  personal  security  of  good  quality.  Some  debts 
had  been  outstanding  for  more  than  20  years,  many  others  for  more  than  ten. 
The  Committee  advised  that  all  bonds  should  be  repaid  immediately  and  that 
in  future,  mortgages  and  bonds  should  be  repaid  in  five  years  at  the  latest — 
a  recommendation  which  was  endorsed  by  the  Government  on  the  ground  that 
bank  money  must  circulate  and  not  stagnate  "in  particular  hands".  It  was 
recorded  that  depreciation  of  values  proved  the  existing  practice  of  lending 
the  full  value  of  houses,  oarts  and  batty  grounds  to  be  wrong  and  that  margins 
of  50,  33  and  25  per  cent  respectively  should  be  maintained  against  them;  that 
when  the  borrower  died,  the  sons  and  heirs  must  repay  the  loan  or  execute  a 
fresh  security;  that  borrowers  of  less  than  Rs.  200  were  a  nuisance. 

Following  a  "great  stringency  of  flowing  cash"  in  1770,  the  treasury  repaid 
the  Bank  its  debts  of  Rs.  8  lakhs  inclusive  of  interest  in  notes  of  Rs.  40-1000 
denomination.  Days  of  grace,  limitation  of  sums,  days  of  grace  in  proportion 


BEFORE  1860  5 

ing  paper  currency  familiar  to  the  public.13* 

Calcutta,  which  according  to  a  Police  Committee  Report 
had  a  European  population  of  2£  thousand,  offered  a  more 
favourable  soil  for  germination  of  Agency  Houses  and  bank- 
ing institutions  than  Bombay.  Contemporary  evidence 
declares  Bombay  an  unsuitable  place  for  investment  of 
funds  and  indeed  informs  us  that  much  Bombay  money 
was  engaged  in  Calcutta.  At  no  time  during  the  first  quarter 
of  the  nineteenth  century  did  Bombay  boast  of  more  than 
a  dozen  Agency  Houses  and  more  often  than  not,  there  were 
to  be  found  less  than  half  a  dozen.  The  authorities  of  the 
East  India  Company  were  unwilling  to  allow  creation  of 
banks  as  they  feared  abuse  of  such  authorization  and  found 
themselves  at  their  wits'  end  to  devise  appropriate  means  of 
control.12 

A  very  large  proportion  of  the  capital  of  these  Agency 
Houses  seems  to  have  been  derived  from  the  deposits  of 
natives.  A  fair  proportion  was  claimed  as  their  own.  But 
contrary  to  the  usual  belief,  contemporary  evidence  does 
not  place  funds  derived  from  civil  and  military  employees 
of  the  Company  at  more  than  a  small  proportion. 

In  Bengal,  indigo  planters  were  the  most  important 
clientele  of  Agency  Houses.  Contemporary  witnesses  are 
unanimous  that  indigo  planters  and  other  Europeans 
brought  with  them  no  capital  when  they  arrived  in  this  land 

to  the  amount  of  withdrawal  were  suggested  to  meet  the  danger  of  sudden 
withdrawal. 

At  this  time,  one  Robert  Blachford  who  claimed  "to  be  bred  up  in  the  bank- 
ing business"  obliged  the  Company  with  an  elaborate  document  of  'hints'  but 
as  the  outstandings  had  reached  by  now  Rs.  28  lakhs  and  the  debt  to  the 
treasury  a  very  high  figure,  the  Government  decided  to  close  the  Bank  and 
start  a  new  one.  —  Gazetteer  of  Bombay  Presidency,  Vol.  26. 

11.    Present  Day  Banking  in  India,  by  R.  Rau,  pp.   168-182. 

32.  Among  the  Agency  Houses  which  existed  in  Bombay,  Forbes  &  Co.  and 
Bruce  Fawcets  &  Co.,  took  an  easy  lead.  They  took  part  in  financing  the  mili- 
tary needs  of  the  East  India  Co.,  and  we  find  the  Company  owing  them  early  in 
the  nineteenth  century  sums  as  large  as  22  lakhs  and  10-12  lakhs  respectively. 
When  pressed  hard  for  repayment,  the  Company  delivered  to  them  cotton  which 
was  exported  in  the  Co.'s  vessels.  Among  others,  we  may  mention  William 
Nicol  &  Co.  which  was  founded  by  the  Fleming  brothers  John  &  James,  which 
after  creating  harbour  facilities  and  the  Port  Trust,  went  down  with  the  Glasgow 
Bank  in  1878;  the  firm  of  James  Tate,  which  specialized  in  ship-building; 
Alexander  Mackintosh  &  Co.  which  acquired  fame  by  their  Calcutta  lotteries, 
Oriental  Life  Assurance  of  Calcutta,  etc.,  Messrs.  Grey  &  Co.  of  old  Bombay 
Bank  fame;  Stewart  &  Co.  which  went  down  with  the  Asiatic  Bank;  etc. 


6  EARLY  BEGINNINGS 

of  golden  pagodas.  The  Agency  Houses  supplied  the  bulk 
of  capital  embarked  on  indigo  plantations.  Rarely  were 
loans  given  without  security.  The  usual  practice  was  to  in- 
sure the  life  of  the  borrower  on  an  annual  basis.  Sometimes, 
the  factory  was  mortgaged  and,  very  seldom,  joint  personal 
security  was  offered  and  accepted. 

A  great  and  unusual  change  appears  to  have  come  over 
economic  conditions  about  the  twenties  of  the  last  century. 
During  the  first  decade,  it  was  usual  for  Agency  Houses  to 
charge  10  to  12  per  cent  for  their  loans  and  a  further  com- 
mission on  advances  of  2£  per  cent  and  on  sales,  of  2  per 
cent.  On  deposits,  they  paid  1  to  2  per  cent  less  than  their 
advances  rate  while  on  money  withdrawable  without  notice, 
the  rates  were  about  2£  to  3  per  cent.  In  those  years  (about 
1806)  investment  in  Government  funds  fetched  the  high 
yield  of  8  to  9  per  cent. 

About  the  end  of  the  second  decade,  there  took  place 
a  striking  fall  in  interest  rates.  Government  funds  now 
yielded  no  more  than  5  to  6  per  cent  and  Agency  Houses 
had  to  reduce  their  charges  in  the  first  instance  to  8  to  9 
per  cent  and  later  (1830)  to  6  to  8  per  cent.  The  rates  paid 
on  deposits  fell  from  8  to  6  per  cent  in  1819.  While  before 
this  time,  they  used  to  discount  bills  at  rates  varying 
between  6  and  12  per  cent,  the  discount  rates  about  the  year 
1831  no  longer  exceeded  7  per  cent.  These  low  levels  con- 
tinued well  into  the  forties. 

This  change  in  the  monetary  conditions  was  officially 
registered  in  what  was  called  the  court  rate  of  interest  at 
Calcutta.  The  maximum  of  5  per  cent  limit  on  usury  which 
prevailed  in  contemporary  England  was  never  in  force  in 
Calcutta  but  a  law  of  George  I  prohibited  Britishers  from 
taking  more  than  12  per  cent.  When  disputes  came  before 
the  Supreme  Court,  it  did  not  allow  more  than  12  per  cent 
in  any  case.  But  a  little  before  1820,  the  Court  lowered 
this  rate  to  10  and  in  1821  fixed  it  as  low  as  6  per  cent. 

While  the  successful  termination  of  the  Maratha  and 
other  wars  of  the  first  two  decades  must  not  be  overlooked, 
it  is  significant  to  note  complaints  of  a  severe  trade  depres- 
sion about  1823-24.  Local  contemporaries  complained  indeed 
of  the  arbitrary  debt  policy  of  the  East  India  Company, 


BEFORE  1860  7 

sudden  repayments  causing  sudden  ease  in  rates,  as  also 
of  failures  of  Agency  Houses  in  Madras  20  years  before 
this  time.  Bombay  recorded  also  a  continuous  export  of 
gold  to  England — an  offshoot  of  England's  return  to  the 
gold  standard  about  1819-20,  and  the  abundance  of  silver 
in  circulation. 

By  1829-30,  the  Agency  Houses  stumbled  into  their  final 
crisis.  Among  those  which  perished  were  Alexander  & 
Co.,  Colin  &  Co.,  Fergusson  &  Co.,  Mackintosh  &  Co., 
Cuttendon  &  Co.,  Palmer  &  Co.,  etc.  Seven  or  eight  of 
these  alone  are  reported  to  have  lost  15  million  pounds.13 
With  them  were  dragged  into  insolvency  the  associated 
banks  as  well.14 

After  the  crisis  and  till  1860,  banking  activity  proceeded 
with  moderate  zeal.15  Out  of  12  banks  launched  between 
1833  and  1860,  however,  about  half  failed.  Some  of  them 
were  mere  frauds  made  possible  largely  by  the  laxity  of 
law.  Others  ventured  upon  imprudent  investments  in 
industries.  Every  one  of  them  was  a  European  enterprise.16 

The  most  permanent  institutional  gain  and  achievement 
of  this  period  was  no  doubt  the  emergence  of  the  three 
Presidency  Banks  destined  to  play  a  great  part  in  the  his- 
tory of  Indian  banking.  The  Bank  of  Bengal,  established  in 
1806,  received  its  charter  in  1809.  The  Banks  of  Bombay 
and  Madras  were  founded  in  1840  and  1843  respectively. 

13.  Commerce,  4th  September  1926. 

14.  The    Bank    of    Hindusthan    perished    with    Alexander    &    Co.    in    1832.     It 
suffered  a  run  in  1819  on  account  of  extensive  forgeries  of  notes.  The  failure  of 
Palmer  and  Co.,  caused  another  run  in  1829  when  Rs.  20  lakhs  were  paid  out. 
It  met  all  demands  promptly  before  it  failed. — Evidence  of  Larpent,  House  of 
Commons  Committee  on  State  of  Manufacturers,  Commerce  and  Shipping,  1833. 

15.  For  a  list  of  the  banks  of  this  period   compiled  from  Cook's  Banking  in 
India,  see,  Indigenous  Banking  in  India,  by  L.  C.  Jain,  p.  143. 

16.  The  Unipn  Bank.    It  was  established  in  1829  with  a  capital  of  15  lakhs.     In 
1840,   frauds   by   A.   H.    Sim,    Accountant,    were   discovered.    He   had   misappro- 
priated assets  coming  into  his  hands  and  made  false  entries.  When  in  1884  this 
bank   along   with   its   rival   the   Calcutta   Bank   was   closed,    it   was   found  that 
dividends  had  been  paid  out  of  capital  and  deposits,  while  the  directors  also  had 
helped  themselves  to  the  funds.     Some  of  the  loans  amounted  to  one-fourth  to 
one-sixth  of  the  capital.    The  bank  was  also  deeply  involved  in  indigo  plantations. 

Benares  Bank  was  established  in  1844-45.  It  invested  the  whole  of  its  capital 
practically  in  the  losing  Ganges  Steam  Navigation  Co.  It  was  discovered  that 
the  directors  and  many  others  had  purchased  the  bank's  shares  with  loans  from 
the  bank  itself.  The  directors  were  all  army  men  and  were  dismissed. 


8  EARLY  BEGINNINGS 

They  were  intended  to  facilitate  the  borrowing  operations 
of  the  E.  I.  Co.  as  well  as  the  trade  of  British  merchants.17 

II.    THE  INDIGENOUS  BANKING  SYSTEM 

The  Agency  Houses  and  their  banking  ventures  were 
innovations  incidental  to  foreign  contacts.  Fateful  and 
ominous  as  they  both  were  to  prove  in  the  not  too  distant 
future,  the  contemporaries  hardly  took  any  notice  of  them. 
These  Houses  and  their  adjuncts  were  a  mere  parasitical 
growth  almost  lost  in  the  midst  of  an  indigenous  banking 
system  which,  in  its  extent,  its  historical  antiquity,  its 
delicate  and  refined  methods  and  instruments  had  no  equal 
in  any  part  of  the  world. 

It  would  be  very  difficult  indeed,  if  not  impossible,  to 
recall  to  life  the  individuals  and  their  activities  making  up 
the  totality  of  the  marvellous  financial  structure.  For,  these 
shroffs,  sowkars  or  shahus  ran  into  a  score  or  two  at  least 
in  every  centre  of  trade  and  commerce,  varied  in  their 
financial  capacity  from  a  few  thousand  rupees  to  lakhs  and 
millions  and  took  in  their  stride  not  only  their  home  towns 
but  whole  provinces  and  sometimes  indeed  the  whole  coun- 
try. It  is  hardly  possible  to  observe  the  system  at  work 
at  any  point  or  stage  of  its  history;  the  available  records 
are  mere  fragments.  And  yet,  on  the  vast  canvas  of 
history,  there  flits  across  now  and  then  a  prominent  or  out- 
standing figure  shedding  a  human  interest  out  of  an  other- 
wise impersonal  system. 

1.    Some  Figures  from  the  Past 

About  1620,  we  hear  of  "Champeseye"  or  "Chumpeshaw" 
(Champa  Shah)  of  Patna,  described  as  the  chief  banker  of 
the  City.  But  beyond  the  fact  that  he  had  a  son  at  Agra, 
presumably  as  the  agent  of  the  firm,  nothing  further  could 
be  traced  about  him.18  About  the  same  time  and  for  many 
years  afterwards,  the  E.  I.  Co.'s  correspondence  contains 
references  to  the  Paracks,  an  eminent  family  of  banyans 

17.  Q.  103-104. 

18.  Much  of  the   information  about  the  relations  between  bankers  and  E.   I. 
Co.  is  gleaned  from  English  Factories   in    India    by   Foster.     (Oxford,  13  vols.) 


THE  INDIGENOUS  BANKING  SYSTEM  9 

in  Surat.  In  1685,  the  Court  of  the  E.I.Co.  voted  to  "Bingee 
Parack,  the  companies  banyan  at  Surat"  a  gold  medal  and 
chain  of  the  value  of  £150. 

Of  all  the  banking  houses  of  India,  ancient  or  modern, 
none  has  achieved  a  place  in  history  comparable  with  the 
house  of  Jagatseths,  whose  transactions,  as  Burke  put  it, 
"were  as  extensive  as  those  of  the  Bank  of  England".19  The 
founder  of  the  house  was  Hiranand  Sahu  who  migrated 
from  Jodhpur  to  Patna  in  1652.  Even  as  late  as  1800,  it 
was  recorded  that  nine-tenths  of  the  bankers  of  India  were 
Marwaris  from  that  region.  His  son  Manikchand  wa$ 
active  in  Dacca  which  was  then  the  capital  and  place  of 
the  royal  mint,  but  went  to  Murshidabad  in  1703  when 
Murshid  Kuli  Khan  removed  the  capital  and  the  mint  to 
the  new  city  of  his  name.  Manikchand  succeeded  his  father 
in  1711,  emerged  soon  at  Benares  as  the  Nagarseth  who 
made  a  loan  of  Rs.  1  crore  in  aid  of  the  revolt  of  Farrukh- 
siyar  and  was  rewarded  by  that  grateful  emperor  of  Delhi 
with  the  title  of  Seth.  He  was  succeeded  in  1714  by  his 
nephew  and  adopted  son  Fattehchand  under  whom  the 
house  reached  the  climax  of  its  glory  and  power.  In  1722, 
the  emperor  Muhmad  Shah  conferred  on  him  the  title  of 
Jagatseth  as  a  hereditary  distinction  and  bestowed  the 
insignia  of  magnificent  robes  of  honour,  an  elephant  and  a 
pearl  ear-ring.  His  son  got  the  title  of  Seth  with  the  gift 
of  robes  of  honour  and  a  pearl  ear-ring.  On  the  death  of 
Fattehchand  in  1743,  his  elder  grandson  Mahtab  Rai  be- 
came Jagatseth  and  the  younger  grandson  got  the  title  of 
Maharaja.  These  two  lived  to  raise  the  house  still  higher 
but  paid  the  penalty  of  their  high  politics  when  Mir  Kassim 
executed  them  and  exposed  their  bodies  at  Monghyr. 
Khushalchand  the  eldest  son  of  Mahtab  Raj,  became  now 
(1766)  Jagatseth  while  Udawat  Chand  the  eldest  son  of 
Swarupchand  inherited  the  title  of  Maharaja.  The  grateful 
Clive  decreed  the  Jagatseth  as  the  Company's  banker  but 
the  house  was  on  a  rapid  decline.  Mir  Kassim's  extortions, 

19.  The  sources  for  the  history  of  Jagatseths  are  :  Wilson— Early  Annals  of  the 
English  in  India,  &  Riyatu-S-Salatin;  Hunter — Statistical  Account  of  Bengal,  & 
Seir  Mutagurein;  J,  H.  Little — Bengal— Past  and  Present]  Bengal  correspondence 
(India  Office  Records);  Scrofton's  Rejections;  Long's  Selection  from  Unpublished 
Records;  Vansittart's  Narrative;  etc. 


10  EARLY  BEGINNINGS 

the  termination  of  their  position  as  the  Company's  banker 
on  the  removal  of  the  treasury  to  Calcutta,  the  stoppage 
of  the  ministerial  allowance  formerly  paid  by  the  Nawab, 
the  abolition  of  the  system  of  revenue  farming  in  1778,  the 
famine  of  1770,  all  conspired  to  cause  a  rapid  shrinkage  in 
the  fortunes  of  Jagatseth.  But  Khushalchand,  while  ap- 
pealing to  Clive  for  special  consideration  of  their  past  ser- 
vices, continued  to  keep  in  his  employ  4,000  servants  at  his 
residence,  to  maintain  a  monthly  expenditure  of  Rs.  1  lakh 
and  appears  to  have  declined  as  insignificant  a  yearly 
pension  of  Rs.  3  lakhs  which  Clive  offered.  His  adopted 
son  Harakchand  became  Jagatseth  in  1784  by  the  decree  of 
the  Governor-General  issued  for  the  first  time  without  re- 
ference to  Delhi.  Indrachand  became  the  5th  Jagatseth 
and  the  curtain  falls  on  the  glory  of  the  house  when  Gobind 
Chand  the  6th  Jagatseth,  who  in  his  dissipated  career  was 
glad  to  accept  a  monthly  pension  of  Rs.  1,200,  passed  away 
in  1864. 

While  the  local  'Chittees'  were  as  prominent  then  In  the 
banking  activities  of  the  South  as  they  are  today,  Gujarathi 
merchants  and  bankers  are  quite  as  frequently  referred  to. 
About  1740,  the  largest  banking  house  of  South  India  was 
reputed  to  be  that  of  Bukanji  Kasidas,  a  fact  well  attested 
by  the  frequency  with  which  he  is  styled  as  "Sarkar's 
sowkar  and  the  Chief  Shroff  of  the  province". 

The  homelands  of  the  Marathas  were  a  no  less  fertile  soil 
for  the  germination  of  an  amazing  number  of  money-lenders 
and  bankers.  The  Peshwas  themselves  were  always  in  the 
market  as  most  needy  borrowers.  By  1760-61,  the  aggregate 
debt  of  the  Peshwas  exceeded  Rs.  164  lakhs.  In  a  list  of 
about  200  creditors  compiled  for  the  years  1740-41  to  1760- 
61,  the  overwhelming  bulk  is  composed  strangely  enough  of 
Brahmins,  a  class  otherwise  vowed  by  religion  and  morality 
to  poverty— a  most  amazing  proof  of  the  epigram  that  the 
distinguishing  contrast  of  pre-capitalistic  and  capitalistic 
society  is  that  while  in  the  latter  social  type,  wealth 
leads  to  power,  power  leads  to  wealth  in  the  former. 

The  sacred  city  of  Benares  was  the  original  home  of  many 
banking  houses  which  afterwards  reached  fame  and  emin- 
ence in  other  parts  of  India.  The  pre-eminent  among  them 


THE  INDIGENOUS  BANKING  SYSTEM  11 

during  the  latter  half  of  the  eighteenth  century  was  the 
house  of  Gopaldas  Sahu  and  his  son,  Manohardas.  There 
was  hardly  a  place  of  any  importance  from  South  to  North 
and  East  to  West  which  did  not  have  a  gumasta  or  accre- 
dited agent  of  the  house;  and  Gopaldas  was  the  Company's 
farmer  of  revenues  and  treasurer  at  Benares.  When  Gopal- 
das died  in  1787,  the  Governor-General  and  Governor  of 
Bombay  issued  instructions  to  the  Resident  to  offer  the 
survivors  proper  condolences  and  directed  him  and  other 
officers  elsewhere  to  continue  to  patronise  the  firm  as  for- 
merly. Khilats  and  jewels  were  bestowed  on  Manohardas 
and  the  widow  of  Gopaldas,  just  as  Hastings  had  conferred 
a  khilat  previously  on  Gopaldas  when  he  visited  Benares. 

Contemporary  with  Gopaldas  was  the  equally  eminent 
banker  in  Surat,  Trawdi  Shri  Krishna  Arjunji  Nathji,  a 
Nagar  Brahmin  hailing  originally  from  Benaras  itself.20 
Reputed  to  be  the  richest  banker  in  Gujerat,  he  is  found 
instructing  his  gumasta  at  Calcutta  in  1787  to  wait  on  the 
new  Governor-General  with  a  nazir  of  congratulations  and 
prayer  for  letters  of  commendation  to  the  Company's  offi- 
cers; and  receiving  assurances  in  return  that  the  officers 
would  exert  themselves  in  promoting  the  prosperity  of  the 
house.  His  services  to  the  Company  were  acknowledged 
shortly  afterwards  with  khilats,  medals  and  grants  and  he 
was  officially  proclaimed  as  "the  Company's  shroff  in  India". 
He  died  in  1822. 

Many,  many  years  before  Arjunji  Nathji,  there  flourished 
at  Surat  (1619-1634)  the  famous  merchant  banker  Virji 
Vora  described  in  the  Company's  correspondence  and  tra- 
vellers' notes  variously  as  "prime  merchant  of  this  town", 
"the  greatest  Bania  merchant",  "the  greatest  and  richest 
general  merchant  that  inhabiteth  the  vast  kingdom",  etc. 
Contemporaries  placed  his  resources  at  80  lakhs.  Ahmeda- 
bad  had  its  Seth  Shantidas  whose  family  has  come  down  to 
us  for  centuries  by  its  more  widely  known  title  of  Nagar 
Seth  conferred  on  it  by  the  Delhi  emperor,  Shah  Jahan  or 
Aurangzeb. 


20.    Bombay  Gazette,  3rd  September,  1881. 


12  EARLY  BEGINNINGS 

2.  Area  of  Operations 

These  banking  houses  had  their  accredited  agents  or 
gumastas  posted  all  over  the  country.  The  firm  of  Gopaldas 
with  its  headquarters  at  Benares  claimed  its  representa- 
tives at  Calcutta,  Murshidabad,  Patna,  Gaya,  Ghazipur, 
Mirzapur,  Allahabad,  Lucknow,  Bareilly,  Nagpur,  Surat, 
Bombay,  Masulipatam,  Madras,  Tanda,  Phulpur  and  Poona. 
Besides,  the  house  maintained  Maratha  army  agencies  at 
Agra,  Delhi,  Ahmedabad  and  Baroda.  Arjunji  Nathji  of 
Surat  had  ramifications  on  a  smaller  scale  at  Calcutta,  Cos- 
simbazar,  Benares  and  Delhi.  In  the  days  of  Manikchand 
who  bore  the  title  of  Seth,  the  branches  of  his  business  were 
located  at  Dacca*  Calcutta,  Patna,  Benares  and  Hugli.  Al- 
though the  Jagatseths  commanded  a  fame  which  enabled 
their  hundis  to  pass  current  in  any  part  of  India,  their 
administrative  tentacles  do  not  appear  to  have  penetrated 
much  beyond  the  borders  of  Eastern  India. 

3.  System  of  Intelligence 

Through  this  wide-spread  network  of  branches  and 
agents,  the  bankers  maintained  a  system  of  intelligence 
and  information  which  was  truly  a  marvel  for  the  age. 
The  branch  of  the  house  of  Dixit-Patwardhan  located  at 
Bombay  is  recorded  as  writing  to  its  head  office  at  Poona 
frequently,  almost  daily,  communicating  developments 
and  soliciting  instructions.  Hundi  rates  on  Poona,  Surat, 
Bhavnagar,  Calcutta,  etc.  are  carefully  recorded,  attesting 
to  the  enormous  fluctuations  of  the  money  market  in 
the  following  forceful  and  picturesque  sentence  :  "These  are 
today's  rates.  God  knows  tomorrow's  (Shake  1756)." 
Nor  is  the  state  of  monsoon  or  the  course  of  prices  including 
prices  of  gold  omitted  from  record.  The  Governments  of 
the  day  found  in  this  all-pervasive  and  ubiquitous  system 
of  intelligence  a  vital  means  of  state  policies  and  endea- 
voured in  every  way  to  attach  the  loyalty  and  interests  of 
bankers  to  themselves.  In  1742,  the  E.I.Co.'s  responsible 
officer  in  South  India  reports  it  as  "shroffs'  news"  that  the 
Marathas  had  made  peace  with  the  Nizam  and  that  the 
funds  of  the  timorous  shroffs  were  returning  to  Arcot. 
Sometimes,  the  shroff's  pattamars  were  found  by  them 


THE  INDIGENOUS  BANKING  SYSTEM  13 

useful  carriers  of  packets  from  Telichery  to  Bombay.  When 
in  1780  Arjunji  Nathji  conveyed  from  Ujjain  to  the  chief 
of  Surat  his  nazirs  of  congratulations  on  Goddard's  captur- 
ing the  fort  of  Bassein  in  a  single  day  "after  firing  70,000 
canon  balls  into  it  whereas  the  Mahrattas  had  taken  two 
days  to  obtain  possession  of  it,"  the  chief  told  Arjunji's 
gumasta  to  write  the  particulars  of  the  victory  to  Calcutta. 
It  is  equally  remarkable  to  record  that  as  late  as  1840  the 
British  disaster  in  Afghanistan  was  known  to  Calcutta 
shroffs  much  earlier  than  the  Government.  Again  in  1844, 
the  native  dak  beat  the  Government  dak  "as  usual"  by 
some  hours  in  conveying  the  news  of  the  war  fronts  in 
Gwalior  and  the  Punjab,  causing  fluctuations  in  the  tone  of 
the  money  market.  As  late  as  the  forties  of  the  last  century, 
a  knowledgeable  witness  records  before  the  Parliamentary 
Select  Committee  that  the  shroffs  corresponded  with  the 
big  places  of  Asia — even  Constantinople  not  being  outside 
their  range. 

4.    Transfer  of  Funds  and  Hundi 

The  hundi  or  Indian  bill  of  exchange  handed  down  for 
centuries  from  an  unrecorded  past  must  ever  remain  a 
singular  monument  to  the  financial  acumen  and  ingenuity 
of  these  bankers.  Foreign  observers  noted  with  wonder 
how  these  drafts  passed  unquestioned  from  "Travancore  to 
Peshawar".  With  each  adaptation  to  meet  special  circum- 
stances, a  large  variety  of  them  came  into  existence  under 
appropriate  names — Shah  Jog,  Name  Jog,  Dhani  Jog,  Jababi, 
'bandye  mudet'  (band-i-mudat  =  fixed  period  of  settlement) , 
etc.  To  avoid  ffilsification,  etc.  figures  were  expressed  as 
fractions  of  larger  sums  or  multiples  of  small  sums,  the 
number  of  lines  in  the  bill  was  scrupulously  stated  and  the 
name  of  the  scribe  of  the  hundi  appended.  Sometimes,  bills 
for  sums  as  small  as  Rs.  9  were  to  be  met  with.  They  were 
drawn  for  all  sorts  of  periods,  at  sight,  payable  the  next 
day,  4th  day,  8th  day,  17th  day,  21st  day,  45th  day,  50th  day, 
65th  day,  90th  day,  101st  day,  etc.  'Bebust'  or  'Barbast',  i.e. 
custom  or  usage  prescribed  the  period,  whether  twice  seven 
days,  etc.  A  witness  before  the  Select  Committee  of  1831 
gives  50  days  as  the  common  period.  In  1621,  a  bill  on  Agra 


14  EARLY  BEGINNINGS 

received  at  Patna  was  drawn  at  40  days'  "bandye  mudet". 
To  save  "in  the  deheig"  (dahyek  =  dah,  i.e.  10  per  cent), 
however,  we  find  the  same  shroff  requesting  hundis  to  be 
drawn  "at  twise  sevene  dayes"  and  speedy  "cassad"  (mes- 
senger) to  be  employed  so  as  to  cover  the  distance  between 
Agra  and  Patna  in  11  days.  In  1785,  we  find  Bombay  draw- 
ing bills  on  Calcutta  payable  at  91  days.  Days  of  grace 
allowed  were  6  or  9.  "Sutter  jegres"  (satta  =  bond;  jhagra 
s  quarrel)  are  rarely  met  with  in  the  E.I.Co.'s  correspond- 
ence. Apart  from  avoiding  needless  movements  of  currency, 
etc.,  the  hundi  enhanced  in  a  high  degree  the  safety  of 
financial  operations  and  investments.  How  great  this  need 
for  safety  was  is  well  reflected  in  the  request  made  in  1619 
by  the  factor  in  Surat  to  the  factor  in  Broach  not  far  away 
to  send  a  quantity  of  Mahmudi  rupees  "made  upp  in  was- 
cotes  of  duttie,  which  they  weare  underneath  theire  clothes 
for  more  ease  and  safetie,  according  to  the  manner  used  by 
sheraffes  in  like  transportacions". 

5.  Trade 

Then  as  now,  the  indigenous  bankers  combined  banking 
with  some  trade.  The  house  of  Arjunji  Nathji  had  consider- 
able trade  relations  with  Arab  merchants  in  Surat.  The 
Jagatseths  are  reported  as  supplying  piecegoods  to  English 
merchants.  The  bankers  engaged  apparently  in  the  busi- 
ness of  safe  custody  also.  When  in  1741,  an  inventory  of 
the  effects  of  the  Company's  shroff  Viswanathan  was  being 
made  in  Madras,  local  residents  claimed  the  bulk  of  the 
effects  as  given  for  safe  custody.  A  writer  on  this  subject 
has  been  able  to  produce  an  account  book  of  240  years  ago 
Which  proves  that  one-twentieth  per  cent  per  month  was  the 
charge  for  safe  custody  of  gold  and  silver  valuables,  if  kept 
open  and  one  rupee  per  item  if  kept  under  a  sealed  cover.21 
But  an  experienced  witness  before  the  Select  Committee  of 
1831  avers  that  their  main  business  was  discounting. 

6.  The  System  of  Accounts 

These  high  bankers  who  looked  down  on  money-lenders 
and  their  humble  clientele  of  cultivators  and  peasants 

21.    Indigenous  Banking  in  Ancient  and  Medieval  India,  by  &.  Bhargava,  p.  102* 


THE  INDIGENOUS  BANKING  SYSTEM  15 

evolved  an  efficient  system  of  accounts  which  without  much 
variation  except  of  names  prevailed  over  the  whole  coun- 
try. The  books  maintained  by  them  were  roj-mel  or  day 
book;  hundi-nondh  or  bill  register;  ovaro  or  journal;  malni- 
nondh  or  goods  register;  khata-vahi  or  ledger;  samadaskat 
or  account  current  book;  viraj  vahi  or  interest-book.  Even 
today,  the  system  shows  hardly  any  change. 

7.    Loans  to  Political  Powers 

It  is  a  commonplace,  though  an  amazing  one,  of  Indian 
political  history  that  the  country  was  subjugated  and  occu- 
pied by  the  British  with  the  aid  of  Indian  mercenaries  or 
rice  soldiers.  Accident  or  design  appears  to  have  conspired 
to  disguise  the  equally  important  fact  that  it  was  Indian 
money  furnished  by  Indian  bankers  which  enabled  these 
mercenary  armies  to  be  raised.  The  contemporary  foreigner, 
unable  to  appreciate  the  thorough  extent  to  which  religious- 
cum-occupational  bonds  had  supplanted  racial  or  territorial 
bonds  of  patriotism  and  destroyed  in  the  public  mind  the 
distinction  between  countrymen  and  foreigners,  records 
this  damning  verdict :  "Loyalty  and  patriotism,  those 
virtuous  incentives  to  great  and  noble  actions,  are  here 
unknown  and  when  they  cease  to  fear  they  cease  to  obey . . 
.  .Money  is  here  (if  I  may  so  express  myself)  the  essence 
of  power,  for  the  soldiers  know  no  other  attachment  than 
their  pay  and  the  richest  party  soon  becomes  the  strongest." 
Warren  Hastings  in  his  memoirs  made  some  exception  for 
the  Marathas  as  the  only  people  of  Hindusthan  in  whom 
he  found  a  bond  of  unity.  If  practice  of  soldierly  qualities 
in  any  cause  and  for  any  party  was  the  key  to  heaven  for 
the  soldier,  it  could  not  be  otherwise  for  the  practice  of 
mercantile  virtues  by  the  bankers  in  their  dealings  with 
anybody  and  everybody  ! 

No  banking  house  in  India  compared  in  the  scale  of  their 
loans  with  the  house  of  Jagatseths.  In  1722,  when  Murshid 
Kuli  Khan  fell  short  of  his  Imperial  tribute  by  35  lakhs, 
Fattehchand  came  to  his  rescue  with  a  loan.  Later  in  its 
career,  it  is  recorded  that  the  house  made  a  loan  of  30  lakhs 
to  enable  Aliwardi  Khan  to  repel  a  Maratha  invasion.  In 
1742,  Mir  Habib,  a  Quisling  instigated  by  the  Marathas, 


16  EARLY  BEGINNINGS 

looted  the  house  of  as  much  as  2  crores  of  Arcot  rupees. 
Yet,  "so  amazing  a  loss  which  would  distress  any  monarch 
in  Europe  affected  Fattehchand  so  little  that  he  continued 
to  give  government  bills  of  exchange  at  sight  of  full  one 
crore  at  a  time."  Shortly  afterwards,  the  same  misfortune 
befell  the  house  again,  the  Nawab  or  his  agents  being  the 
culprits.  The  Jagatseth  and  all  fellow  bankers  fled  from 
Murshidabad  and  Cossimbazaar.  And  yet  shortly  after- 
wards, the  English  at  Cossimbazaar  borrowed  a  lakh  of 
rupees  from  him,  "he,  not  caring  to  lend  a  less  sum". 

The  homelands  of  the  Marathas  were  never  famed  for 
wealth.  As  in  the  case  of  Prussia,  hunger  made  the  land 
of  Shivaji  great.  Maratha  banking  was  therefore  on  a  scale 
appropriate  to  the  resources  of  the  country.  In  the  list  of 
200  and  odd  creditors  adverted  to  above,  only  Raghunath 
Bhat,  Patwardhan,  Vishnu  Mahadeo,  Bhide,  Oak,  Parashram 
Naik  and  Dixit  claim  loans  of  3  lakhs  and  above  but  in  no 
case  does  the  loan  exceed  5  lakhs.  The  largest  number  of 
loans  is  for  Rs.  50  thousand  and  less  while  loans  of  8  to  10 
thousand  and  even  less  are  quite  numerous.  The  house  of 
Dixit-Patwardhan,  one  of  the  more  prominent,  was  reported 
to  have  a  working  capital  of  Rs.  15  lakhs. 

In  the  war  with  Holkar  and  Bharatpur  in  1804,  the  Com- 
pany found  itself  in  a  perilous  condition.  The  Governor 
himself  describes  the  financial  state  of  the  Company  as  piti- 
ful, which  made  the  supply  of  soldiers  and  material  preca- 
rious. The  initial  successes  of  Holkar  disinclined  other 
bankers  from  taking  the  risk  of  loans  to  a  falling  power.  At 
this  critical  juncture,  Arjunji  Nathji  came  forward  with  a 
loan  of  35  lakhs.  Tradition  has  it  that  carts  loaded  with 
bags  of  rupees  lined  the  whole  distance  between  Balaji's 
Chakla  and  Navasari  Gate.  The  surprise  and  joy  of  the 
Governor-General  and  his  staff  knew  no  bounds. 

Again  when  war  broke  out  with  Nepal  in  1813,  it  was 
the  purse  of  this  banker  from  which  flowed  the  means  for 
raising  soldiers  and  supplies.  The  fact  that  the  government 
bestowed  on  Arjunji  Nathji  a  khilat  "for  the  joy  of  the  cap- 
ture of  Nepal"  indicates  that  the  loan  must  have  been  large. 

As  noted  above,  on  the  death  of  Gopaldas,  Manohardas 
besought  the  Governor-General  for  continuation  of  old 


THE  INDIGENOUS  BANKING  SYSTEM  17 

iavours  and  patronage.  In  a  communication  of  1787,  he  re- 
calls the  services  of  the  firm  including  the  supply  of  funds 
lor  the  campaigns  of  Surat  and  Madras. 

In  1800,  the  British  raised  Rs.  25  lakhs  from  the  shroffs 
at  Baroda  to  pay  off  the  arrears  of  mutinous  mercenary 
troops  who  threatened  trouble.  Seven  districts  of  the 
Gaikawar  were  taken  possession  of  by  force  and  farmed  out 
to  the  bankers  as  repayment. 

Even  while  the  aforesaid  loans  were  being  raised,  there 
were  taking  place  improvements  destined  to  create  a  money 
market  of  wide  appeal  and  thus  release  the  Company  from 
dependence  on  individual  bankers  and  houses.  Between 
1785  and  1795,  bonds  of  unmanageable  and  variable  amounts 
like  Rs.  1  lakh  gave  place  to  bonds  and  certificates  of  fixed, 
standardized  and  convenient  face  values;  they  were  better 
protected  from  forgery,  being  made  from  engraved  blocks; 
they  were  now  registrable;  finally  they  were  henceforth 
long-dated  instead  of  short-dated  as  before.  From  1790 
arrangements  were  made  for  the  public  outside  the  metro- 
politan areas  to  receive  interest  from  Revenue  Collectors 
and  Residents  and  from  1793,  to  subscribe  to  public  loans. 
The  consequent  rapid  growth  of  a  money  market  is  well 
reflected  in  the  fact  that  while  Hicky's  Bengal  Gazette 
(1780-82)  and  Calcutta  Gazette  hardly  ever  quoted  security 
prices  till  then,  such  prices  become  a  regular  feature  of  such 
publications  from  now  on.22 

8.    Their  Place  in  High  Politics 

In  these  circumstances,  it  is  hardly  surprising  that  from 
the  earliest  times  of  which  we  have  any  record,  the  banker 
was  a  prominent  and  powerful  figure  at  the  courts  of  native 
or  foreign  courts.  The  princes  and  powers  of  India  spared 
no  pains  to  attach  their  loyalty  and  zeal  to  their  respective 
causes.  The  bankers  themselves  could  not  underestimate 
the  valuable  financial  privileges  and  the  still  more  valuable 
protection  which  political  power  alone  could  dispense.  For 
the  public  outside,  they  were  useful  intermediaries  and 

22.  No.  1792  1815  1820  1834 

Agency  Houses  16  23  31  50 

Shroffs  17  34  42  56 

Banks  4  14  15  20 

M.  B.  2 


18  EARLY  BEGINNINGS 

channels  of  supplications.  In  1622,  Tapidas,  a  shroff  at 
Baroda,  offered  his  assistance  to  obtain  permission  for  the 
English  to  continue  their  trading  there  or  else  to  supply 
secretly  the  goods  required.  But  the  shrewd  observer  at 
Surat  could  detect  the  risks  of  placing  reliance  on  shroffs 
and  their  political  influence  and  spoke  of  the  imprudence 
of  holding  commerce  with  "dishonist  great  ones,  whose 
meanes  and  creaditts  are  not  worth  a  strawe  longer  then 
they  are  in  their  princes  favour,  and  how  instable  that  is 
daylye  experyence  shewes."  Arjunji  Nathji  made  financial 
arrangements  in  procuring  for  the  English  a  firman  for  the 
castle  and  a  sanad  for  the  fleet  and  was  rewarded  in  1759 
with  a  "writing  ...  to  show  that  the  house  is  deserving  of 
the  countenance  of  the  H'nble  Co.  in  case  of  any  oppression 
to  them."  In  1786,  Gopaldas  or  his  son  Manohardas  writes 
that  "obedience  and  submission  to  the  will  of  G.  G.  and 
service  to  the  Co.  are  prior  to  any  other  consideration  to 
him."  But,  as  will  be  easily  imagined,  the  house  of  Jagat- 
seths  achieved  a  political  power  which  almost  eclipsed  their 
banking  power.  We  read  of  Arjunji  Nathji  being  made  a 
member  of  Council  at  Calcutta  but  nothing  further  is  said 
about  it.  Jagatseths  however  always  held  membership  of 
the  Council  of  Three  of  the  Nawab  of  Bengal.  It  was  with 
the  aid  of  the  Seth  that  Murshid  Kuli  Khan  was  enabled 
to  purchase  the  continuance  of  his  office  as  Nawab  after 
the  death  of  Aurangzeb.  When  the  household  officers' 
clamour  compelled  Sarfraz  Khan  to  dismiss  the  Jagatseth 
and  his  two  colleagues  from  the  Council  in  1739,  it  was  the 
Jagatseth  who  invited  Aliwardi  Khan  to  overthrow  the 
good  but  infirm  Nawab.  As  a  consistent  and  loyal  friend 
of  the  English  even  to  the  point  of  opposition  to  the  Hindu 
Kings  of  Bihar,  he  dissuaded  by  many  subterfuges  the  hap- 
less and  imprudent  Sirajudowla  from  making  an  alliance 
with  the  French.  The  conspiracy  to  overthrow  him  origi- 
nated at  Murshidabad  and  not  Calcutta  where  the  Council 
weighed  in  a  cold  manner  only  their  business  advantages 
from  the  success  of  the  conspiracy  and  voted  in  favour. 
Contemporary  opinion,  native  and  foreign,  was  unanimous 
that  the  revolution  was  the  work  of  the  Jagatseth  and 
Durlabh  Rai  and  Clive  who  was  quite  well  known  was  merely 


THE  INDIGENOUS  BANKING  SYSTEM  19 

"a  great  captain  whom  the  Seths  had  brought  from  very  far 
at  a  great  expense  to  deliver  Bengal."  . .  .  .This  is  confirmed 
by  dive's  lavish  entertainment  to  the  Jagatseth  at  Calcutta 
for  four  days  at  a  cost  of  Rs.  17,374.  Their  influence  at  the 
Imperial  Court  of  Delhi  was  no  less  unrivalled.  The  firmans 
of  Delhi  appointing  the  Nawabs  of  Bengal — Shuja-ud-daula, 
Sarfraz  Khan,  Mir  Jaffar  and  a  series  of  them — were  always 
promulgated  through  them  as  also  Clive's  patent  as  "an 
Omrah  of  the  Empire".  The  Jagatseth  paid  the  penalty  of 
his  high  politics  when  Mir  Kassim  took  him  with  other 
bankers  to  Monghyr,  "that  they  may  always  be  with  me  and 
attend  to  my  business  and  their  own,  according  to  custom" 
and  executed  them  at  Baur,  in  the  face  of  the  protection 
promised  them  by  Clive  but  not  enforced  by  Vansittart. 

9.  Bankers  and  Revenue  Collectors  to  Government 

In  many  parts  of  the  country,  the  revenues  were  paid  not 
directly  to  the  Government  but  through  the  shroffs  as 
farmers.  As  the  Government  instalments  fell  due  before 
they  were  collected,  shroffs  made  the  payments  in  bills  of 
15  or  20  days  and  thus  became  sureties  for  the  revenues. 
Manikchand  was  the  Treasurer-General  of  Bengal  and 
keeper  of  the  Nawab's  private  hoards.  In  April  every  year 
zamindars  and  collectors  of  revenues  assembled  at  Mur- 
shidabad  and  settled  accounts  with  the  treasurer.  Entitled 
to  receive  10  per  cent  on  all  payments  to  the  Nawab,  the 
Jagatseth's  profit  from  this  source  alone  was  estimated  at 
40  lakhs.  In  all  parts  of  the  country,  revenues  were  trans- 
mitted to  the  headquarters  by  means  of  bills  supplied  by 
the  shroffs. 

10.  Mint-masters  and  Money-changers 

As  in  other  parts  of  the  world  in  old  times,  minting  money 
was  a  private  trade  of  licensed  individuals.  While  in  some 
cases,  the  Daroga  or  the  mint-master  was  quite  distinct 
from  the  banker,  it  is  easy  to  see  how  banking  and  money 
minting  must  have  tended  to  become  generally  indistin- 
guishable parts  of  the  same  occupation.  The  different  prac- 
tices in  vogue  in  different  parts  of  the  country  throw  im- 
portant light  on  the  place  of  monetary  circulation  in  the 


20  EARLY  BEGINNINGS 

activities  of  the  Indian  banker. 

In  Bengal  alone,  the  minting  of  money  appears  to  have 
approximated  to  a  monopoly  privilege,  a  result  of  the  unique 
power  exercised  by  the  house  of  Jagatseths.  Although  the 
mint  mastership  was  officially  vested  in  a  different  indivi- 
dual, nobody  but  the  house  of  Jagatseths  had  the  effective 
use  of  the  mint  at  Murshidabad.  As  early  as  1717-19,  the 
English  merchants  made  efforts  to  secure  from  the  Nawab 
the  right  of  minting.  But  they  were  informed  by  the  officers 
of  the  Nawab  that  "Fattehchand  is  so  great  with  the 
Nawab,  they  can  have  no  hopes  of  the  grant."  It  was  not 
till  1757  that  the  Company  got  the  right  to  establish  a  mint 
at  Calcutta.  Even  then  the  mint  was  of  little  use  as  the 
Calcutta  rupee,  notwithstanding  its  weight  and  standard 
in  every  respect  as  good  as  the  sicca  of  Murshidabad, 
was  at  the  mercy  of  the  Jagatseth  who  "could  make  it 
fluctuate  in  such  a  manner  as  he  seems  fitting  and  conve- 
nient for  his  purpose".  A  parwana  had  to  be  obtained  from 
Mir  Kassim,  ordering  the  rupee  of  the  Company  to  pass 
current  and  forbidding  any  person  to  demand  discount  on  it. 

The  stake  of  the  Jagatseths  and  with  them,  of  the  bank- 
ing community  in  maintaining  the  sicca  rupee  as  the  sole 
rupee  of  the  realm  was  a  very  peculiar  one.  In  virtue  of 
their  office  as  the  Treasurer  of  Bengal  revenues,  the  Jagat- 
seths prescribed  that  the  revenues  of  the  year  must  be  paid 
in  coins  of  the  current  year.  As  the  coins  of  the  earlier 
years  were  accepted  only  at  a  heavy  discount,  it  became 
a  lucrative  occupation  both  for  the  shroffs  and  the  mint  to 
receive  such  rupees  at  discount  and  recoin  them.  The  pro- 
fit of  ordinary  minting  itself  was  not  small.  In  the  year 
1746,  the  Jagatseth  was  giving  201  sicca  rupees  for  240 
rupees  weight  of  silver  offered  to  him. 

This  unusual  hold  on  the  mint  and  the  legal  tender  of 
the  land,  the  Jagatseths  strove  to  protect  by  equally  unusual 
means.  It  appears  that  about  1736,  the  English  merchants 
at  Calcutta  began  to  import  Madras  and  Arcot  rupees  and 
use  them  in  payments  to  Indian  merchants.  The  Jagatseth 
retorted  by  obtaining  a  firman  from  the  Nawab  making 
these  rupees  receivable  in  public  or  private  payments  at 
much  lower  value.  Shortly  afterwards,  a  duty  of  2£  per 


THE  INDIGENOUS  BANKING  SYSTEM  21 

cent  was  levied  on  all  foreign  rupees  tendered  to  the 
Government.  This  complete  mastery  over  the  mint  enabled 
the  Jagatseth  to  suffer  no  one  but  himself  to  buy  even  "a 
rupee's  worth  of  silver"  imported  from  outside  at  his  own 
price. 

The  grant  of  monopoly  of  dealings  in  precious  metals 
appears  to  have  appealed  to  the  Government  of  the  land  as 
a  very  profitable  source  of  income  to  themselves.  It  is 
recorded  that  in  1621  the  native  governor  of  Masulipatam 

sought  to  confer  on  one  shroff  "the  exclusive  concession 

of  the  right  of  buying,  selling  or  exchanging  all  gold  and 
silver  brought  to  port."  To  this,  the  Dutch  and  the  English 
supported  by  native  merchants  opposed  a  passive  resistance, 
with  the  result  that  after  about  three  months,  the  plan  "fell 
of  itselfe". 

In  the  Maratha  territories,  minting  appears  more  as  an 
industrial  craft  than  a  part  and  parcel  of  banking  activity. 
The  licence  to  mint  was  issued  to  many  persons  in  different 
places  for  a  period  of  years,  usually  three,  and  on  condition 
of  an  annual  payment  to  the  Government  which  rose 
annually  from  Rs.  50  to  about  Rs.  125.  In  a  place  like 
Dharwar,  separate  licences  were  to  be  found  at  one  time 
for  minting  each  different  kind  of  coin  and  six  out  of  every 
thousand  mohurs,  rupees  or  hons  minted  were  to  be  paid 
as  Government  royalty.  In  the  Konkan,  the  Government 
nazar  for  minting  the  copper  paisa  was  raised  as  high  as 
Rs.  12,001.  About  the  year  1760-61,  we  find  such  licensed 
mints  at  work  in  places  as  near  or  as  far  away  from  each 
other  as  Nagotane,  Rewadanda,  Mahuli,  Dharwar,  Nasik, 
Chinch  wad,  Chandwad,  Daulatabad,  etc.  The  number  of 
mints  need  not  cause  surprise  since  the  average  mint  was 
small  in  size.  When  a  mint  was  established  under  Govern- 
ment management  at  Nasik,  the  staff  consisted  of  one 
Karkun  or  clerk,  two  peons,  one  blacksmith,  five  goldsmiths, 
two  hammerers  and  one  engraver,  etc.  Rs.  45  per  thousand 
rupees  minted  was  estimated  as  the  cost  of  manufacture, 
i.e.  material,  wages,  wastage,  etc.  The  manufacturer 
appointed  by  Government  at  Dharwar  was  entitled  to  one 
gold  coin  out  of  every  thousand  coins  turned  out. 

In  South  India,  the  coinage  of  the  famous  gold  pagodas, 


22  EARLY  BEGINNINGS 

fanams,  etc.  was  licensed  on  lines  more  or  less  similar  to 
those  found  in  the  Maratha  territories.  From  their  earliest 
days,  European  settlers  of  all  nationalities  were  admitted 
to  this  privilege  no  less  than  the  natives  of  the  land.  In 
1692,  the  President  of  Fort  St.  George  was  presented  with 
great  ceremonial  six  iron  chops  or  stamps  for  coinage  by 
the  local  prince.  But  the  privilege  was  of  limited  value 
since  the  Nawab  would  not  make  any  coins  but  those  issued 
from  his  Arcot  mint  receivable  in  Government  payments. 
The  Nawab's  pagodas  enjoyed  for  this  reason  a  premium 
over  all  other  coins  and  the  efforts  of  the  English  to  intro- 
duce a  more  reliable  pagoda  was  discouraged  by  "the  most 
knowing  and  eminent  shroffs"  as  a  vain  novelty. 

With  these  coinage  arrangements,  it  is  easy  to  see  how 
money  changing  must  have  become  an  important  and  lucra- 
tive activity  of  indigenous  banking.  The  famous  French 
traveller  Tavernier  (1640-1665)  has  placed  on  record  many 
shrewd  observations  on  the  minting  and  money  changing 
activities  which  we  have  described  above  as  prevailing  in 
later  centuries.  "In  India,  a  village  must  be  very  small  if 
it  has  not  a  money-changer  whom  they  call  shroff,  who 
acts  as  a  banker  to  make  remittances  of  money  and  issue 
letters  of  exchange.  As  in  general  these  changers  have  an 
understanding  with  the  Governors  of  the  Provinces,  they 
enhance  the  rupee  at  their  will  for  paisa  and  the  paisa  for 
these  shells."  It  causes  hardly  any  surprise  to  learn  that 
in  1834,  2,163  bankers  at  Bombay  petitioned  the  Govern- 
ment against  the  introduction  of  a  uniform  rupee  as  likely 
to  destroy  "the  only  occupation  left  to  them  after  the  Pesh- 
wa's  Government  was  overthrown  by  the  British  Govern- 
ment in  1818."  To  the  normal  commission  on  inter-change 
of  money,  the  dishonesty  of  the  seignors  and  the  skill  of 
counterfeiters  added  further  sources  of  profit.  In  South 
India  and  elsewhere,  the  more  well-known  and  respectable 
shroffs  met  the  situation  by  putting  into  circulation  bags 
under  their  own  seals,  containing  1,000,  100,  and  50  and  at 
times,  amounts  as  low  as  10  and  5  pagodas. 

11.    Sanctions  of  Commercial  Obligations 

In  the  special  conditions  of  law  and  authority  in  those 


THE  INDIGENOUS  BANKING  SYSTEM  23 

times,  the  force  of  custom  and  social  pressure  had  to  sup- 
plement unstable  and  uncertain  political  power  to  secure 
conformity  to  trade  and  financial  obligations.  When  Surgee 
Ingedas  at  Broach  declined  to  pay  bills  drawn  on  him  unless 
he  were  allowed  15  days  more  the  English  creditors  kept 
him  prisoner  in  their  house.  Even  when  news  arrived  from 
Surat  that  satisfaction  was  received  there,  Surgee  Ingedas 
was  continued  prisoner  for  a  day  and  night  longer  until  he 
promised  1  per  cent  of  the  amount  more  as  amends  for  his 
behaviour.  This  was  in  1622.  In  1736,  the  Company's  shroff 
at  Madras,  Viswanathan,  and  two  bazaar  shroffs  were  found 
to  have  abused  public  confidence  by  putting  into  circulation 
under  their  seals  bags  containing  pagodas  of  inferior  touch. 
All  three  were  sentenced  to  transportation  to  the  Western 
Coast  of  Sumatra.  On  the  intervention  of  "the  heads  of  the 
Right  and  Left  hand  castes,"  the  sentence  on  the  bazaar 
shroffs  was  commuted  to  simple  banishment  and  a  fine  of 
2,500  pagodas  but  for  Viswanathan,  the  heinous  offence 
could  be  expiated  only  by  an  offer  by  the  caste  of  3,500 
pagodas  to  be  spent  on  the  improvement  of  the  native 
part  of  the  town.  Sometimes  the  punishments  were  less 
severe.  In  1741,  two  town  shroffs  of  Madras  who  were 
"guilty  of  sealing  inferior  pagodas"  were  "committed  to 
choultry  and  their  houses  sealed  up". 

Business  credit  was  as  delicate  and  precarious  an  asset 
in  those  days  as  now.  Even  a  remote  suggestion  of  doubt 
or  irregularity  was  a  much  more  effective  punishment  than 
any  which  authority  could  devise.  Kashmiri  Mai  of 
Benares,  a  man  of  shady  activities,  held  the  office  of 
Treasurer  to  the  Nawab  Vazir  and  did  no  small  business 
with  the  Company  for  30  years.  On  a  dispute  between  him 
and  Gopaldas  about  sums  payable  on  certain  hundis,  the 
Resident  sent  for  him  to  appear  in  person  and  on  his  excus- 
ing himself  "from  one  day  to  the  other"  dispatched  a  force 
of  10  or  15  harkaras.  Kashmiri  Mai  protested  that  15  chap- 
rasis  were  posted  around  his  banking  house  and  his  resi- 
dence, that  his  business  as  a  banker  was  greatly  injured, 
that  the  news  of  his  disgrace  had  reached  all  quarters.  The 
branches  of  his  house  were  dispersed  over  a  large  part  of 
the  country  at  Bombay,  Surat,  Poona,  Jainagar,  Delhi,  etc. 


24  EARLY  BEGINNINGS 

and  were  imperilled  by  the  rumour  of  this  news.  Since 
the  appearance  of  the  chaprasis  at  his  house  was  enough 
injury  to  his  credit,  he  could  not  think  of  going  to  the 
Resident  in  their  company.  He  pointed  out  that  the  con- 
cerns of  the  bankers  were  settled  among  themselves  by 
arbitration,  opposition  to  which  was  the  only  proper  ground 
for  punishment.  The  Resident  called  into  consultation  the 
bankers  of  Benares  who  averred  that  Kashmiri  Mai's  failure 
to  appear  was  a  fault  but  pleaded  for  pardon. 

The  bankers  through  their  Mahajans  exercised  no  doubt 
an  effective  authority  over  all  their  disputes.  About  the 
years  1780-1811,  the  Nanavatis  of  Ahmedabad  promulgated 
rules  about  rates  at  which  the  Ankra  currency  was  to  be 
exchanged  for  sicca  rupees  and  Ankra  hundis  to  be 
discounted.  Non-compliance  meant  exclusion  from  the 
Mahajan  for  two  months  and  re-admission  required  pay- 
ment of  a  fine  of  25i  maunds  of  gram  for  'Khore  Dhore'. 

But  it  was  in  the  land  of  the  soldierly  Marathas  that  the 
moral  pressure  of  fasting  was  employed  for  the  enforce- 
ment of  pecuniary  obligations.  The  recalcitrant  debtor 
found  his  threshold  occupied  by  an  emissary  or  emissaries 
who  were  hired  by  the  creditor  as  specialists  in  the  exer- 
cise of  this  spiritual  weapon.  What  made  the  pressure 
irresistible  was  the  old  moral  rule  that  the  head  of  the 
family  could  not  himself  sit  down  to  food  so  long  as  the 
guest  on  the  threshold  was  hungry. 

III.    1860-1900 

For  forty  years,  1860  to  1900,  banking  and  banking  habit 
made  but  small  headway  among  the  people  of  this  country* 
In  the  last  three  decades,  the  three  Presidency  Banks  and 
Indian  joint-stock  banks  added  to  their  capital  a  mere  three 
crores  and  to  their  deposits  only  fourteen  crores.23  These 

23.  The  phrase  "Indian  Banking"  is  meant  to  be  exclusive  of  exchange  banks 
only.  Some  Indian  authors  (e.g.  Jain,  Indigenous  Banking  in  India)  exclude 
Presidency  Banks  as  well.  Except  for  the  fact  that  the  directorate  and  the 
higher  staff  of  the  Banks  were  drawn  from  Britishers  there  is  no  sufficient 
warrant  for  the  procedure.  (See  Chapter  IV).  It  is  necessary  to  emphasize  that 
in  this  and  next  Chapter,  the  progress  of  banking  is  assessed  with  reference 
to  the  Imperial  Bank,  exchange  banks  and  Indian  joint-stock  Banks  of  Class  I 
(with  capital  and  reserves  of  five  lakhs  and  above)  and  Class  II  (with  capital 


1860-1900  25 

figures  for  such  a  lapse  of  time  appear  modest  when  com- 
pared with  the  addition  to  capital  of  4  crores  and  to  deposits 
of  29  crores  in  the  next  13  years.24 

The  city  of  Bombay  had  indeed  seen  an  extraordinary 
floatation  of  banks  during  the  speculation  fever  of  the  Ame- 
rican Civil  War.  As  many  as  25  banks  with  paid-up  capital 
of  13.6  crores  and  39  financial  associations  with  paid-up 
capital  of  6.2  crores  were  conjured  into  existence  in  the 
short  space  of  three  years  1863-65.  Of  the  banks,  four 
including  the  Bank  of  Bombay  were  old  concerns  which 
were  tempted  to  enlarge  their  capital  enormously  during 
the  speculation  wave.  The  premia  collected  on  the  bank 
shares  alone  has  been  estimated  at  10.7  crores.  Unfortu- 
nately, all  this  financial  and  banking  enterprise  was  a  mere 
incident  in  the  fantastic  speculations  in  land  and  other 
forms  of  wealth  prevalent  at  the  time  and  when  the  specula- 
tion itself  collapsed,  not  a  vestige  was  to  be  seen  of  the  colos- 
sal financial  fabric  reared  to  support  and  stimulate  it.25 

It  has  been  suggested  that  the  uncertainties  of  exchange 
explain  the  slow  rate  of  banking  progress.26  It  is  of  course 
natural  that  instability  of  exchange  should  have  caused 
much  hesitation,  additional  cost  and  difficulty  in  the 
financing  of  our  foreign  trade.  Complaints  to  this  effect  were 
heard  in  plenty  both  before  the  Herschell  and  the  Fowler 
Committees.  Nevertheless,  it  is  most  unlikely  that  exchange 
instability  could  have  affected  the  business  of  banks  other 
than  the  highly  developed  exchange  banks  and  should  not, 
for  that  reason,  be  held  responsible  for  the  slowness  of 
domestic  progress  in  this  direction.  Besides,  even  in  those 

and  reserves  between  1  and  5  lakhs)  only.  For  some  discussion  about  smaller 
banks  for  which  no  statistics  are  available,  see  Ch.  Ill  §  11,  &  Ch.  V  §  9. 

24.  Presidency  and  Indian  Joint-stock  Banks. 

(Figures  in  lakhs  of  Rs.) 

Capital  Deposits 

1870  372  653 

1880  426  912 

1890  498  1,746 

1900  686  2,035 

1906  830  3,900 

1913  1,112  5,907 

Deposits  of  Presidency  Banks  include  private  deposits  only. 

25.  A  Financial  Chapter  in  the  History  of  Bombay  City,  by  D.  E.  Wacha,  pp.  24-32. 

26.  Indigenous  Banking  in  India,  by  L.  C.  Jain,  pp.  149-151. 


26  EARLY  BEGINNINGS 

years,  the  technique  of  covering  exchange  risks  was  cer- 
tainly not  less  well  known  and  not  less  available  than  today. 
As  the  Herschell  Committee  state  in  their  main  Report, 
there  is  no  adequate  proof  either  in  the  statistics  of  our 
foreign  trade  that  growth  in  its  volume  was  retarded  or 
that  exports  were  stimulated  at  the  expense  of  imports.27 

It  accords  better  with  facts  to  say  that  the  slow  progress 
of  banking  in  India  was  a  reflection  of  the  almost  sta- 
tionary economic  conditions  in  the  latter  half  of  the 
nineteenth  century.  Instability  of  exchange  could  hardly 
be  blamed  for  this  general  stagnation  of  economic  life.  Im- 
provement no  doubt  occurred  now  and  then.  But  it  was 
more  than  destroyed  by  recurrent  famines,  and  long 
periods  of  mere  recovery  and  recuperation  had  to 
supervene.  In  the  absence  of  figures  of  national  income, 
etc. — and  at  best,  they  are  rarely  unambiguous  and  depend- 
able— evidence  of  a  piecemeal  or  general  character  is  the 
only  basis  for  forming  impressions  on  the  subject.  But 
among  those  who  have  examined  the  facts  attentively,  there 
is  or  should  be  hardly  any  ground  for  disagreement  on 
this  point.  It  is  indeed  the  inevitable  theme  of  every 
student  of  the  period.28 

Among  important  factors  which  presumably  shared  res- 
ponsibility for  this  outcome,  the  factor  of  special  significance 
for  banking  is  the  course  of  prices  and  state  of  currency.29 
After  the  inevitable  reaction  to  the  high  prices  of  the 
American  Civil  War,  the  Indian  price  level  continued  low 
with  a  downward  trend  till  1885-86.  It  then  improved,  made 

27.  Report  of  Herschell  Committee,  Paras  24;  25;  26;  27.  See  also  Ch.  XI  §  13. 

28.  Currency  and  Prices,  by  Vakil  and  Muranjan,  pp.  347-351;  364-365;  footnote, 
p.  357. 

29.  ibid.,  pp.  312-322;  Tables,  pp.  308-309;  footnote,  p.  318. 

General  Price  Price-Level          Purchasing  Power  of 

Level  Manufacturers        Silver  over  commo- 

dities in  England. 
1866  134  83 

1869  101  81 

1870  107  94 

1871  93  96  100 
1886               96              74               123 
1893              121              92  98 

1899  99       .       75 

1900  112  84  


1860-1900  27 

striking  strides  in  1891-93  and  then  got  involved  in  the  cur- 
rency and  famine  turmoils  of  1893-1900.  The  prices  of 
indigenous  manufactures  with  which  the  city-located  banks 
were  most  directly  concerned  continued  low  and  falling 
from  1866  to  1886,  recovered  appreciably  between  1888  and 
1893  and  fell  heavily  thereafter  till  1899.  Such  a  course  of 
events  was  obviously  ill  suited  to  stimulate  growth  of  de- 
posits and  banking  in  a  backward  country  like  India. 

On  these  basic  economic  factors,  there  was  superimposed 
in  1861  a  fateful  change  in  the  currency  system  of  this  coun- 
try which  influenced  profoundly  and  indeed  put  a  brake  on 
the  growth  of  banking.  In  poor  and  backward  countries 
and  in  early  stages  of  banking  development,  the  currency 
note  rather  than  the  cheque  has  proved  the  most  powerful 
factor  in  accelerating  the  growth  of  banking  and  banking 
habit.  The  existence  of  competitive  note-issues  is  the 
foundation  on  which  continental  countries  including  France, 
Germany,  Belgium,  etc.,  have  reared  up  their  banking  struc- 
tures. A  widespread  use  of  notes  ensues  more  quickly  from 
a  system  of  competing  note-issuing  banks  than  from  a  mono- 
poly of  note-issues  vested  in  a  single  bank  or  a  Government 
department.  The  banking  legislation  of  the  United  States 
in  the  nineteenth  century  and  that  of  England  till  the  middle 
of  the  century  gravitated  mainly  round  the  central  objec- 
tive of  reconciling  competitive  note-issues  with  solvency  of 
banks  or  the  monopoly  of  issue  of  one  bank  with  the  natural 
desire  of  other  banks  for  "free  banking".30 

Till  1861,  banks  in  India  enjoyed  with  or  without  restric- 
tion powers  of  note-issue.  There  were  no  doubt  dangers 
inherent  in  such  a  situation.  But  such  dangers  could  have 
been  mitigated  by  prescribing  appropriate  conditions  as  to 
form,  minimum  denomination,  aggregate  volume,  kind  of 
cover,  etc.  for  such  note-issues.  Unfortunately,  the  Paper 
Currency  Act  of  1861  fell  in  for  a  Government  monopoly 
and  closed  the  door  on  progress  along  the  one  line  which 
promised  quickest  results.  The  growth  of  our  banking 

30.  Cf.  "The  first  stage  of  credit  is  a  stage  of  note  issue  and  gradually  the 
note  issue  becomes  of  much  less  importance,  and  then  you  come  to  the  second 
stage,  when  deposits  become  the  principal  form  of  banking." — Walter  Bagehot 
before  Select  Committee  of  House  of  Commons  on  Banks  of  Issue,  1875. 


28  EARLY  BEGINNINGS 

system  without  any  prolonged  experience  or  historical 
stimulus  of  competitive  note-issues  is  indeed  a  distinguish- 
ing mark  of  banking  in  India  as  compared  with  other 
countries.31 

In  1870,  there  were  only  two  Indian  joint-stock  banks  with 
capital  and  reserves  of  5  lakhs  and  more.  By  1900,  the 
number  increased  to  9.  The  most  important  among  them 
were  the  Allahabad  Bank  of  India  (established  in  1865) ,  the 
Alliance  Bank  of  Simla  (established  in  1874) ,  the  Oudh 
Commercial  Bank  (established  in  1881),  and  the  Punjab 
National  Bank  (established  in  1894). 

While  the  progress  of  banks  and  banking  in  general  was 
very  slow  till  1900,  one  constituent  of  the  banking  system 
passed  through  a  remarkable  phase  during  the  last  decade. 
Indian  joint-stock  banks  were  hardly  in  evidence  in  the 
two  decades  1860-80.  During  the  next  decade,  they  gained 
in  size  and  strength.  But  in  the  last  decade,  they  made 
a  substantial  gain  of  more  than  5  crores  in  their  deposits32 
while  exchange  banks  showed  a  betterment  of  3  crores  only 

31.  Perhaps,  the  strangest  feature  of  the  decision  of  1861  was  that  it  was 
taken  by  James  Wilson  who  belonged  to  the  Banking  School.  The  Banking 
School  held  that  there  was  no  distinction  of  principle  between  definite  money, 
i.e.,  legal  tender  and  credit  money  like  deposits.  On  account  of  mutual 
suibstitutability,  etc.,  it  was  not  possible  to  control  rigidly  the  total  means  of 
payment.  Besides,  competition  among  banks  and  the  principle  of  reflux  i.e., 
continuous  repayment  of  loans  when  capital  needs  were  over,  made  over-issue 
unlikely.  It  was  the  rival  Currency  School  which  regarded  note-issue  as  no 
banking  function  at  all  and  advocated  its  centralization  in  a  government 
department.  See  Chap.  VIII. 

32                                                                Number  Capital  and               Deposits 

t  Reserve 

(Figures  in  lakhs  of  Rs.) 

1870 

Presidency  Banks                 ....            3  361  639  t 

Exchange  Banks        3  2.1   (m.    £s)  52 

Indian  Joint-Stock  Banks    ....           2  11  14 

1880 

Presidency  Banks                 ..         ..            3  405  849  t 

Exchange  Banks         4  3.0    (m.    £s)  339 

Indian  Joint-Stock  Banks    ....           3  21  63 

1890 

Presidency  Banks                ....           3  447  1,476  t 

Exchange    Banks       5  8.0    (m.    £s)  753 

Indian  Joint-Stock  Banks    ....           5  51  270 

1900 

Presidency  Banks                . .        . .           3  559  1,228  f 

Exchange  Banks                   ,.        ..           8  15.7   (m.   £s)  1,050 

|ndian  Joint-Stock  Banks    ....           9  127  807 
t  Private  deposits  only 


1860-1900 


29 


and  the  Presidency  Banks  actually  lost  ground  by  2i  crores. 
The  Allahabad  Bank  alone  recorded  an  improvement  of 
14  crores. 

As  our  analysis  elsewhere  shows,33  the  last  decade  wit- 
nessed a  sudden  and  remarkable  boom  of  investment  in  this 
country.  It  is  probable  that  the  pressure  of  this  boom  and 
its  subsequent  collapse  fell  very  largely  on  the  Presidency 
Banks  which  had  to  supply  cash  to  meet  the  two  phases. 
The  initial  fall  of  interest  on  the  other  hand  placed  Indian 
joint-stock  banks  in  an  advantageous  position  since  more 
than  three-fourths  of  their  deposits  were  probably  fixed 
deposits  and  rates  offered  by  them  have  been  always  very 
attractive.  Perhaps,  the  Government  also  aided  them  by 
reducing  their  rate  on  postal  savings  deposits  to  3f  per  cent. 
It  is  not  surprising  then  that  they  should  have  acquired  4 
crores  out  of  5  in  the  years  1891-97,  partly  at  the  expense  of 
Presidency  and  Exchange  Banks  but  partly  out  of  new 
sources  also.34 


33.  See  Ch.  Ill  §  1. 

34.  Private  Deposits  (in  lakhs  of  Rs.) 


1890 
1891 
1892 
1893 
1894 
1895 
1896 
1897 
1898 
1899 
1900 


Presidency 

Exchange 

Indian  Joint-Stock 

Total 

Banks 

Banks 

Banks 

1,476 

754 

271 

2,501 

1,413 

863 

346 

2,622 

1,267 

853 

387 

2,507 

1,210 

813 

408 

2,431 

1,313 

976 

450 

2,739 

1,312 

1,013 

566 

2,909 

1,292 

1,015 

538 

2,845 

1,016 

909 

681 

2,606 

1,078 

949 

689 

2,716 

1,141 

1,070 

743 

2,954 

1,288 

1,050 

808 

3,146 

CHAPTER    II 

PRESENT  CENTURY  PROGRESS  * 

A  QUANTITATIVE  ESTIMATE  of  the  progress  of  banking  and 
banking  habit  is  in  itself  beset  with  many  inherent  difficul- 
ties. The  absence  of  or  inaccessibility  to  relevant  statistics 
on  this  subject  makes  such  a  task  even  more  impracticable 
in  this  country.  The  measure  most  easily  available  and 
ordinarily  employed  is  the  size  of  banking  resources — the 
capital,  reserve,  and  deposit  liabilities  of  banks.  But  the 
use  of  this  measure  is  valid  only  within  certain  limitations. 
In  particular,  it  is  not  easy  to  distinguish  how  far  changes 
in  deposits  are  a  reflection  of  changes  in  price-levels,  growth 
of  wealth  in  general,  extension  of  facilities  to  new  areas  or 
classes,  improvements  in  banking  habits,  technique,  etc. 

1,    Absolute  Progress  of  Banking  Resources 

Between  1900  and  1914,  the  deposit  liabilities  of  Presidency ,, 
exchange  and  Indian  joint-stock  banks  recorded  an  addition 
of  57  crores.  Between  1914  and  1920,  the  gain  in  deposit 
resources  amounted  to  139  crores.  The  year  1920  was,  how- 
ever, an  exceptional  one,  being  at  once  the  climax  and 
collapse  of  war  and  post-war  inflation.  If  we  adopt  the  year 
1922  as  representing  a  substantial  restoration  of  more 
normal  conditions,  the  improvement  should  stand  at 
107  crores  instead  of  139. 

It  is  a  commonplace  of  Indian  economic  history  that  the 
first  20  years  of  the  present  century  saw  remarkable  fluctua- 
tions in  the  rupee  price  level.  Between  1899  and  1914, 
prices  mounted  by  about  30  per  cent.  The  war  caused  a 
degree  of  inflation  which  left  the  price  level  even  as  late 
as  1922  at  about  84  per  cent  higher  than  in  1914.  In  these 
circumstances,  it  is  very  difficult  to  ascertain  how  far  the 
growth  in  deposits  was  a  mere  concomitant  of  the  rise  in 
price  levels  and  how  far  it  represented  a  broadening  or 
intensification  of  our  banking  structure.  If  index-numbers 
of  prices  could  be  accepted  as  reliable  correctives  for  the 
price  factor,  about  five-sevenths  of  the  growth  between 

1,    Tables  I  to  VII  (at  the  end  of  this  volume). 


ABSOLUTE  PROGRESS  OF  BANKING  RESOURCES  31 

1900-1914  should  be  regarded  as  real,  taking  as  our  basis  of 
comparison  the  purchasing  power  of  the  rupee  in  1899-1900. 
In  terms  of  the  purchasing  power  of  the  rupee  in  1914,  the 
real  growth  in  banking  resources  between  1914  and  1922 
should  be  placed  at  a  little  more  than  half  the  nominal 
growth.  As  experience  teaches,  however,  such  reliance  on 
index  numbers  of  prices  is  not  fully  warranted. 

The  twenties  of  the  present  century  present  a  very  un- 
usual period.  Taking  1922  as  a  fairly  normal  year,  the  third 
decade  seems  to  have  been  largely  stationary  in  point  of 
growth  of  deposits.  A  slight  upward  movement  is  visible 
but  it  could  hardly  be  described  as  progress.  This  stationari- 
ness  is  in  a  large  measure  the  reflection  of  the  steady  defla- 
tion of  prices  which  was  occurring  throughout  these  years. 
The  Calcutta-Bombay  wholesale  index  numbers  stood  at  188 
in  1920,  176  in  1922,  143  in  1929  and  121  in  1930.  In  the  light 
of  this  persistent  fall  of  prices,  the  small  improvement  of 
1922-1929  even  must  be  looked  on  as  evidence  of  the  grow- 
ing strength  of  the  banking  system. 

By  1931,  the  price  level  passed  in  its  downward  progress 
the  level  of  1914.  The  aggregate  deposits  of  the  Indian 
banking  system  then  stood  somewhere  between  212  and 
197  crores  as  against  87  crores  in  1914. 

The  great  deflation  of  prices  initiated  by  the  world  crisis 
of  1929,  was  largely  concentrated  in  India  on  the  years  1929- 
1931  when  the  Calcutta-Bombay  index  number  fell  from 
143  to  102.  By  1936,  prices  settled  down  to  about  94.  It  is 
remarkable  that  only  in  1931,  was  there  recorded  a  sharp 
diminution  in  the  deposits  of  Indian  banks.  Between  1930 
and  1936,  the  Indian  banking  system  as  a  whole  took  another 
stride  forward  by  acquiring  about  45  crores  of  deposits  more.2 


2.  We  have  measured  the  growth  of  banking  habit  and  banking  power  In  the 
country  exclusively  by  the  growth  of  deposits.  The  volume  of  cheque  clearances 
is  another  index  which  however  suffers  from  the  shortcoming  that  cheques 
drawn  on  and  paid  into  the  same  bank  do  not  naturally  figure  at  the  clearings. 
It  is  likely  that  such  cheques  run  into  a  larger  volume  in  India  than  elsewhere. 
Table  I  records  the  growth  of  cheque  clearances  and  the  figures  are  corrected 
for  price  changes  by  an  index-number  for  internal  price-level.  We  owe  the 
figures  to  Dr.  Meek,  the  Director  of  Statistics,  (Journal  of  the  Royal  Statistical 
Society,  Part  III,  1937,  pp.  381-3).  The  highly  inflated  figures  for  1920,  192S 
and  1929  prove  how  cheque  clearances  are  a  better  measure  of  business  activity 
than  of  banking  habit. 


32 


PRESENT  CENTURY  PROGRESS 


2.    Place  of  Banking  Funds  relatively  to  Other  Funds 

Banks  are  only  one  among  several  reservoirs  into  which 
the  savings  of  the  community  flow.  These  other  reservoirs 
are  by  no  means  on  all  fours  with  banks.  The  quality  and 
character  of  the  resources  attracted  by  each  are  by  no  means 
identical  and,  to  that  extent,  the  comparison  is  subject  to 
certain  qualifications.  Nevertheless,  as  long-term  and  short- 
term  funds  are  distinguishable  only  in  degree  and  not  in 
kind  and  as  the  range  of  contact  between  them  is  a  wide 
one,  the  place  of  banking  funds  relatively  to  other  funds  is 
certainly  a  matter  of  deep  economic  significance. 

There  is  another  qualification  we  must  bear  in  mind  on 
this  subject.  There  exist  some  important  forms  of  investment 
for  which  we  have  no  comparable  statistics.  Building  activity, 
e.g.,  absorbs  in  many  countries  about  half  the  annual  national 
savings.  There  are  also  large  annual  investments  made  on 
other  than  joint-stock  basis.  Even  with  these  omissions,  the 
trend  of  banking  funds  relatively  to  other  funds  is  an  import- 
ant index  to  the  direction  of  economic  growth  in  this  country. 

The  relevant  statistics  are  brought  together  in  the  follow- 
ing table. 

(Figures  in  crores) 


a3 

°~0 

•»  % 

^  iX 

!:§§ 
H,  Spq 

Small 
Savings.3 

i 

Total  Working 
Capital  of 
Co-operative 
Societies. 

i 

Paid-up  Capi- 
tal Joint-Stock 
Companies.4 

Premium 
Income  of 
Insurance 
Companies.5 

Permanent 
Rupee  Debt 
of  India.6 

Net  Imports  + 
Net  Exports  — 
Gold  &  Silver 
(in  previous 
decade.)  7 

1890 

25 

6 

— 

24 

.11 

102 

+  130 

1900 

31 

10 

— 

36 

.52 

115 

4-100 

1910 

82 

16 

3 

63 

2 

138 

+227 

1920 

220 

26 

36 

164 

8 

257 

+336 

1930 

221 

75 

91 

282 

25 

494 

+348 

1939 

261 

135 

109 

290 

— 

592 

1941 

364 

95 

112 

302 

59 

753 



,1943 

719 

118 

132 

336 

1224 



1945 

109 

221 

146 

353 

^ 

1715 

*1947 

799 

268 

164 

388 

47.7 

1855 

*1948 

957 

42.92 

—  . 

443 

47.5 

1515 

_ 

*1949 

843 

70.9 

~_ 

*1950 

— 

— 

— 

— 

—  . 

r^ 

,T 

*  Indian 

Union. 

4.    An  addition  of  5  to  10  per  cent  must  be  made  for  amounts  carried  to  reserve 
annually. 


PLACE  OF  BANKING  FUNDS  RELATIVELY  TO  OTHER  FUNDS        33 

From  our  present  standpoint,  the  increments  which  have 
occurred  from  year  to  year  are  more  important  than  relative 
or  absolute  size.  As  a  topic  of  familiar  admonition,  invest- 
ment in  precious  metals  arrests  attention  first.  It  is  clear 
from  this  table  that  this  form  of  investment  is  absorbing 
a  diminishing  proportion  of  our  visible  savings  from  period 
to  period.  Between  1890-1900,  precious  metals  acquired 
were  equal  in  value  to  two-thirds  of  our  aggregate  visible 
national  savings.  The  proportion  fell  strikingly  in  the  next 
decade  1900-1910,  and  in  the  next  two  decades  other  forms 
of  investment  far  out-stripped  this  particular  form.  So  long 
as  there  is  only  a  limited  outlet  for  investment  in  urban 
property  and  peasant-proprietorship  prevails  in  agriculture, 
India  is  bound  to  have  more  need  of  gold  and  silver  than 
many  other  countries.  Even  so,  the  large  net  exports  of  gold 
from  1930  onwards  present  a  novel  feature  the  ultimate 
significance  of  which  is  a  subject  on  which  one  can  only 
speculate  at  this  stage. 

Among  other  claimants  for  our  national  savings,  Govern- 
ment and  joint-stock  companies  are  the  most  powerful  rivals 
to  banks.  The  borrowings  of  Government  have  always  been 
an  overshadowing  factor  in  this  country.  Except  for  the 
decade  1920-1930,  they  were  exceeded  only  by  the  value  of 
imported  precious  metals  while  other  investments  amount- 
ed to  only  a  fraction.  After  1910,  however,  the  capital  of 
joint-stock  companies  has  shown  a  great  capacity  for  ex- 
pansion and  is  now  a  good  rival  to  Government  borrowings. 

Since  the  close  of  the  War  of  1914-18,  banks  are  encoun- 
tering another  rival,  post  office  savings  banks  and  postal 
cash  certificates  which  attract  the  small  man's  mite.  Funds 
flowing  into  assurance  companies  which  exceeded  Rs.  19 
crores  in  1941  must  be  placed  largely  in  the  same  category. 

The  general  import  of  these  changes  deserves  some  closer 
analysis. 

Since  the  end  of  World  War  I,  the  world  has  seen  two  rival 
tendencies  in  the  financing  of  trade  and  industry.  In  seve- 
ral countries,  notably  in  the  United  States,  industrial  and 
commercial  enterprise  has  increasingly  sought  to  make  itself 
independent  of  banks  and  to  rely  on  its  own  resources 
raised  directly.  Such  a  policy  tends  to  divert  funds  from 

M.  B.  3 


34  PRESENT  CENTURY  PROGRESS 

banks  into  stocks  and  shares,  particularly  those  funds  which 
are  ordinarily  placed  with  banks  as  fixed  deposits.  The 
other  counter-acting  tendency  has  been  caused  by  the  abnor- 
mal post-1929  fluctuations  in  the  values  of  equities.  In  cer- 
tain countries,  people  are  now  inclined  to  prefer  the  safety 
and  liquidity  of  fixed  deposits  to  the  risk  of  investment  in 
industrial  issues. 

It  does  not  seem  probable  that  the  American  horror  of 
indebtedness  has  become  an  important  factor  in  this  coun- 
try. The  recent  growth  of  joint-stock  capital  is  very  largely 
due  to  rapid  industrial  development  of  the  country.  The 
second  tendency  has  been  more  visible  in  India,  as  our 
analysis  will  presently  show.  The  growth  of  fixed  deposits, 
however,  has  not  been  sufficient  to  maintain  the  growth  of 
banking  funds  in  general — which  must  be  ascribed  as  much 
to  the  gathering  momentum  of  the  deflation  following  World 
War  I  as  to  certain  other  factors  to  be  noted  presently. 

Government  borrowings  have  been  a  great  competitor  of 
banks  in  all  countries.  After  World  War  I,  the  demand  of 
State  and  public  authorities  for  capital  expenditure  has  in- 
creased very  much.  India  has  been  no  exception.  In  the 
earlier  years  budgetary  deficits,  and  later  the  needs  of  deve- 
lopment expenditure,  constantly  raided  national  savings — 
with  the  inevitable  deflationary  effect  on  banking  funds. 

Perhaps  the  most  durable  change  in  the  years  following 
World  War  I  is  the  growth  of  thrift — thrift  especially 
among  the  lower  income  classes.  It  has  been  estimated  that, 
in  some  countries  at  least,  the  thrift  of  these  classes  has 
become  the  major  source  of  capital  formation.  Apart  from 
thrift,  technological  progress  in  production,  slow  or  rapid 
fall  of  prices,  much  social  and  ameliorative  legislation  have 
been  factors  influencing  the  distribution  of  wealth  more  and 
more  in  favour  of  these  classes.  The  effect  on  the  position 
of  banking  funds  and  commercial  banks  generally  has  not 
been  quite  the  same  everywhere.  In  those  countries  in 
which  these  savings  have  been  always  relatively  unimpor- 
tant, the  fraction  of  total  deposits  held  as  postal  savings 
deposits  has  continued  fairly  unchanged.  Such  is  the  case 
with  the  United  Kingdom,  the  United  States,  and  South 
Africa.  But  in  other  countries  like  Norway,  Sweden,  New 


PLACE  OF  BANKING  FUNDS  RELATIVELY  TO  OTHER  FUNDS        35 

Zealand,  Australia,  etc.,  the  fraction  is  today  strikingly 
larger  than  it  was  in  1913  and  commercial  banking  has  to 
that  extent  lost  ground.8  India  falls  clearly  in  the  second 
category.  The  growth  of  postal  savings  and  cash  certificates 
has  been  truly  astonishing.  The  banks  themselves  assisted 
the  growth  of  this  type  of  savings  by  instituting  savings 
bank  accounts.  The  figures  of  savings  deposits  which  are 
available  separately  for  the  Allahabad  Bank  of  India  and 
the  Mysore  Bank  illustrate  this  fact  very  forcibly.9 

In  short,  the  relative  share  of  commercial  banks  in  the 
accumulation  and  disposal  of  savings  in  general  seems  to 
have  suffered  some  decline  in  recent  years.  The  same  fact 
has  been  noted  of  many  other  countries  as  well.  But  the 
causes  of  this  outcome  are  not  the  same  everywhere.  In 
France,  Germany,  Italy,  Japan,  etc.,  the  volume  of  deposits 
held  by  commercial  banks  improved  relatively  to  all  depo- 
sits between  1913  and  1925  but  lost  ground  heavily  there- 
after, due  no  doubt  to  severe  deflation.  Deflation  as  an 
important  factor  became  active  in  India  only  after  the  1929 
crisis.  The  cause  of  a  similar  decline  in  the  position  of 
commercial  banks  in  other  countries  is  the  increase  of 
savings  deposits.  New  Zealand,  Norway,  Sweden  are  such 
countries  and  there  is  little  doubt  that  India  must  rank 
among  them.  It  is,  however,  not  likely  that  this  decline 
will  be  a  permanent  feature  in  this  country.  Banking  is 
still  in  its  early  stages  of  development  and,  sooner  or  later, 
the  national  tendencies  of  growth  must  assert  themselves.  It 
is  worthy  of  note  in  this  connection  that  in  those  countries 

8.    Savings  Banks  and  Postal  Deposits  as  p.c.  of  total  Deposits. 


1925    Norway  67% 

1929-1936    Sweden  47-50% 

1925-1929    New  Zealand  48% 


1929    Australia  43% 

1936    United  Kingdom      27% 
1936    United  States  21% 


1925-1936    South   Africa       10-16% 

—Monetary  Review,  Vol.  1,  p.77  (League  of  Nations)  1938-39. 
9.    See   Tables   XXI,   XXII,   XXV  and  XXVI. 

Scheduled  Banks.     (In  Lakhs) 

Total  Deposits  Saving  Deposits 

1938                                     240,58  36,81 

1940                                       344,69  41,05 

1942  469,65  41,86 

1943  674,37  56,15 

1945  985,91  114,74 

1946  1077,27  133,52 

1947  1117,64  149,71 


36  PRESENT  CENTURY  PROGRESS 

in  which  banking  has  developed  very  highly,  commercial 
banks  have  maintained  their  relative  position  despite  the 
aforesaid  forces.10 

3.    Constituents  of  Indian  Banking  System : 
Their  Contribution  to  Growth 

While  the  present  century  has  seen  more  or  less  uninter- 
rupted growth  of  the  Indian,  banking  system,  the  progress 
of  the  constituents  of  the  system  has  occurred  at  different 
rates.  These  uneven  rates  of  growth  mean  far-reaching 
changes  in  the  quality  and  strength  of  the  whole  banking 
structure. 

Till  1906,  the  Presidency  and  exchange  banks  maintained 
their  accustomed  lead  in  general  growth,  As  compared 
with  1900,  the  increase  in  deposits  amounted  to  15  and 

8  crores  respectively.    During  the  same  years,  the  Indian 
joint-stock  banks  added  to  their  deposits  11  crores  only,11 

The  succeeding  wave  of  Swadeshi  sentiment  altered  the 
trend.  In  the  few  years  from  1906  to  1913,  Indian  joint* 
stock  banks  added  to  their  deposits  full  11  crores  against 

9  crores  of  Presidency  banks  and  13  crores  of  exchange 
banks.  The  setback  of  1913  struck  Indian  joint-stock  banks 
appreciably.    But  the   advent   of  war  conditions   arrested 
any  tendency  to    prolonged    decline.    In    the    war    years, 
1914-1920,  these  banks  with  their  aggregate  gain  of  54  crores 
maintained  their  progress  against  their  two  rivals  which 
acquired  38  and  44  crores  only. 

The  years  1920, 1930  and  1936  reveal  unusual  developments. 
The  crisis  and  deflation  of  1920  caused  a  sharp  and  general 
contraction  of  about  1J  crores  in  the  case  of  Presidency 
banks,  more  than  6  crores  in  the  case  of  exchange  banks 
and  full  8  crores  for  Indian  joint-stock  banks.  By  1922, 
however,  quieter  conditions  were  restored.  While  the 
aggregate  deposits  of  the  Indian  banking  system  remained 
more  or  less  stable  for  the  next  8  years,  a  noteworthy 
redistribution  of  resources  took  place  among  the  consti- 

10.  Bank  Deposits  as  p.c.  of  Total  Deposits:     Canada  92%,  British  Banks  70%, 
United  States   80%  .—Monetary   Review,   Vol.   I,   pp.   72-3;   75-6;    77    (League   of 
Nations)    1938-39. 

11.  Class  A  only. 


CONSTITUENTS  OF  INDIAN  BANKING  SYSTEM  37 

tuents  of  the  system.  The  territorial  expansion  of  the 
Imperial  Bank  of  India  added  19  crores  to  its  deposits 
while  Indian  joint-stock  banks  improved  their  position  by 
about  2  crores.  Their  betterment  was  partly  at  the  expense 
of  exchange  banks  which  in  spite  of  some  increase  in  their 
branches  continued  to  lose  ground  and  recorded  a  further 
contraction  in  deposits  of  5  crores  by  1930. 

Again  in  the  great  accession  to  resources  of  45  crores 
between  1930  and  1936,  these  banks  participated  in  a  very 
unequal  manner.  The  Imperial  Bank  showed  a  betterment 
of  2  crores  and  the  exchange  banks  of  about  7  crores.  The 
bulk  of  the  improvement  was  contributed  by  Indian  joint- 
stock  banks  whose  deposits  grew  by  about  35  crores.12 

These  unequal  rates  of  growth  are  inevitably  reflected 
in  the  relative  position  of  the  constituents  of  the  system 
from  time  to  time.  In  1914,  Indian  joint-stock  banks  held 
only  21  per  cent  of  the  aggregate  deposits  of  the  Indian 
banking  system.  By  1920,  their  share  rose  to  32  per  cent, 
gaining  ground  exclusively  at  the  expense  of  the  Imperial 
Bank  of  India.  The  creation  of  100  new  branches  between 
1921  and  1930  increased  the  share  of  the  Imperial  Bank 
slightly,  gaining  a  little  advantage  over  the  Indian  joint- 
stock  banks  which  made  a  small  absolute  gain,  and  the  ex- 
change banks,  which  were  actually  losing  deposits.  But  bet- 
ween 1930  and  1936,  the  share  of  the  Indian  joint-stock  banks 
rose  from  31.6  to  40.2  per  cent  as  against  a  fall  from  36  to  30 
per  cent  in  the  case  of  the  Imperial  Bank  which  increased 
its  deposits  slightly  and  a  fall  from  32.4  to  29.1  per  cent  in 
the  case  of  exchange  banks  which  had  more  than  repaired 
the  contraction  of  1922-30.  It  is  a  noteworthy  feature  of 
these  developments  that  the  share  of  the  exchange  banks 
was  steady  till  1920  and  thereafter  began  to  decline. 

In  all  the  changes  noted  till  now,  the  position  and  pro- 
gress of  Indian  joint-stock  banks  of  B  Class  appear  very 
remarkable.  Between  1914  and  1922,  their  gain  in  deposits 
was  Rs.  80  lakhs.  Between  1920  and  1930,  when  the  other 
constituents  of  the  banking  system  with  the  exception  of 
the  Imperial  Bank  of  India  were  marking  time  or  losing 

12.    See  Table  I. 


38  PRESENT  CENTURY  PROGRESS 

deposits,  they  actually  added  to  their  deposits  2  crores. 
The  years  1930-36  record  a  further  improvement  of  li 
crores.  Anticipating  a  little  of  our  later  discussion,  we 
may  note  that  this  growth  has  been  largely  a  growth  in 
numbers  rather  than  in  size.  The  deposit  resources  per 
bank  improved  under  the  influence  of  war  inflation  from 
an  average  of  about  5  lakhs  to  an  average  of  about  7  lakhs 
in  1920.  But  thereafter,  the  average  has  continued  almost 
stable,  the  actual  figures  being  7.06  lakhs  for  1920,  7.09  lakhs 
for  1930  and  7.4  lakhs  for  1936.13 

4.    Nature  and  Character  of  the  Growth: 
Geographical  Expansion14 

Apart  from  the  influences  exerting  on  the  relative  sizes 
of  banking  funds  and  non-banking  funds,  the  real  growth 
of  the  former  is  an  outcome  of  several  interdependent  and 
inseparable  factors.  The  growth  of  wealth  itself,  the  efforts 
of  banks  to  reach  newer  and  newer  levels  of  income-classes, 
geographical  expansion  of  banks — these  are  the  more 
obvious  ones  which  inevitably  suggest  themselves.  We 
have  now  to  estimate  as  accurately  as  we  can,  how  far  each 
of  these  factors  explains  the  changes  already  described. 

In  the  growth  of  banking  funds,  creation  of  new  branches 
and  expansion  of  area  over  which  banks  operate  have 
inevitably  played  a  notable  part  together.  Between  more 
intense  exploitation  of  existing  areas  and  extension  to 
virgin  fields,  however,  the  former  factor  seems  to  have 
predominated.  Except  for  war  years  when  inflation 
made  cities  fruitful  areas  of  banking  activity,  the  average 
of  branches  per  place  with  banking  facilities  fell  from  2.47 
to  2.15  between  1916  and  1926.  But  after  the  Imperial  Bank 
ceased  to  pioneer  branches  in  1926,  the  average  per  place 
has  risen  continuously  from  2.15  in  1926  to  2.82  for  1936. 
Except  for  the  post-war  year  1920.  the  latter  figure  is  the 
highest  on  record. 


13.  §11;  also  see  Ch.  V. 

14.  The  subsequent  discussion  should  be  taken  with  the  general  background 
described  in  Ch.  X  generally;  and  Ch.  VII  §  4,  Ch.  VIII  §  11;   Ch.  IX  §§,1-8; 
Ch.  X  §§  1-3. 


NATURE  AND  CHARACTER  OF  THE  GROWTH  39 

There  was  no  doubt  once  a  tendency15  to  exploit  more 
and  more  intensively  the  5  big  up-country  centres  of  trade 
and  commerce16  and  the  4  great  ports  of  India.17  Even  as 
late  as  1916,  about  32  per  cent  of  the  total  head  offices  and 
branches  were  concentrated  in  these  few  places.  The  per- 
centage has  declined  continuously  thereafter  to  about  16  in 
1936.  As  between  the  up-country  centres  and  the  ports,  the 
absolute  increase  of  branches  in  the  former  places  has  been 
23  only  between  1916  and  1936  as  against  85  for  the  latter. 
Partially  at  least,  this  must  be  due  to  the  fact  that,  as  in  all 
other  countries,  countryside  banks  find  it  an  advantage  to 
have  direct  representation  in  the  great  financial  centres  and 
money  markets  of  the  country.18 

There  are  2,300  towns  in  India  with  a  population  of  five 
thousand  and  over.  Of  these,  only  140  had  any  banking 
facilities  in  1916.  The  number  increased  to  339  in  1926,  to 
736  in  1939  and  to  1,279  in  1943.  The  greater  part  of  the  exten- 
sion occurred  in  the  small  space  of  years  1920-26,  1930-36 
and  1939-43.  In  the  earlier  period,  the  expansion  of  the  Im- 
perial Bank  of  India  according  to  the  terms  of  the  Charter 
of  1921  created  a  general  eagerness  to  expand  before  it  was 
too  late  and  as  many  as  154  new  places  were  added  to  the 
list.  During  the  depression  years,  121  more  towns  were 
placed  on  the  banking  map  of  India  in  spite  of  the  much 
stronger  tendency  on  the  part  of  rival  banks  to  concentrate 
on  the  exploitation  of  the  same  places. 

The  creation  of  banking  facilities  in  any  place  is  largely 
determined  by  the  volume  of  deposits  or  scope  for  invest- 
ment which  it  may  furnish.  While  many  other  factors  are 
usually  taken  into  account  before  reaching  a  decision  to 
open  a  branch,  population  by  itself  is  as  a  rule  a  fairly  good 
index  to  banking  potentialities.  Judged  by  this  standard, 
extension  of  banking  seems  to  have  proceeded  in  a  hap- 
hazard manner  rather  than  on  a  systematic  plan.  The  figures 
for  1936  throw  very  instructive  light  on  this  aspect  of  the 
problem.  Of  373  places  which  have  a  population  of  20,000 

15.  Q  7949;  8053— Minutes  of  Evidence,  Chamberlain  Commission. 

16.  Lahore,  Delhi,  Amritsar,  Lucknow  and  Kanpur. 

17.  Bombay,  Calcutta,  Madras  and  Rangoon. 

18.  ^Table  H. 

a 


40  PRESENT  CENTURY  PROGRESS 

and  more,  some  230  or  about  62  per  cent  had  banking  faci- 
lities in  that  year.  Of  632  places  which  were  inhabited  by* 
more  than  10  and  less  than  20  thousand  people,  91  or  about 
14  per  cent  were  endowed  with  some  bank  or  branch  of 
a  bank.  Of  the  rest  1,295  places,  186  or  about  an  identical 
percentage  have  similar  facilities. 

It  is  true  that  a  considerable  improvement  has  been  tak- 
ing place  in  the  direction  of  extension  of  banking  facilities 
to  smaller  places.  A  comparison  of  place  distribution  of 
banking  facilities  in  1921  and  1936  reveals  this  tendency 
very  clearly.  In  1921,  a  little  over  19  per  cent  of  places 
with  banking  facilities  had  populations  below  10  thousand. 
The  percentage  rose  to  36  in  1936.  The  percentages  for 
places  with  populations  above  20  thousand  confirm  the 
same  fact  by  a  consistent  decline.  When  it  is  recalled  that 
the  places  comprised  in  the  analysis  were  198  in  1921  and 
507  in  1936,  the  greatness  of  the  change  in  the  structure  of 
Indian  banking  will  be  easily  realized.  As  we  shall  dis- 
cover presently,  the  change  is  not  a  little  due  to  the  emer- 
gence of  small  banks.19 

It  is  perhaps  inevitable  that  the  bigger  places  in  the 
Country  should  attract  banking  enterprise  first.  Still,  the 
omission  of  40  per  cent  of  places  with  a  population  of  20 
thousand  and  over  is  in  itself  not  a  little  surprising.  It 
seems  to  indicate  that  preliminary  exploration  and  mapping 
out  of  banking  potentialities  do  not  play  their  due  part  in 
banking  development. 

To  a  certain  extent,  the  haphazardness  and  irregularity 
of  our  present  distribution  of  banking  facilities  are  no 
doubt  explained  by  the  general  avoidance  of  Native  State 
areas  by  responsible  British  Indian  banks.20  That  this  pru- 
dence has  ample  basis  in  fact  is  well  proved  by  the  occur- 
rences connected  with  the  failure  of  a  Native  State 

10.    Tables  III  and  IV. 

20.    In  1934,  out  of  108  important  Native  States,  only  20  had  banking  facilities. 

The  number  of  places  for  the  more  important  States  are  given  below:— 

Mysore  21  Kashmir  ..  .          4 


Travancore 
Baroda 
Hyderabad 
Cochin 


15  Gwalior 

12  Porbunder 

9  Jaipur 

9  Jodhpur 


NATURE  AND  CHARACTER  OF  THE  GROWTH  41 

bank  which  had  a  large  extension  in  British  India  terri- 
tories. The  numerous  difficulties,  legal,  judicial  and 
administrative,  which  arose  during  the  liquidation  of  the 
Travancore  National  and  Quilon  Bank  were  a  sufficient 
warning  to  British  India  enterprise.21 

It  is  more  than  probable,  nevertheless,  that  the  present 
distribution  of  banking  facilities  is  the  outcome  of  lack  of 
initiative,  adventure  and  planning  on  the  part  of  our  bank- 
ing community.  The  general  tendency  is  that  some  adven- 
turous bank  pioneers  a  branch  in  a  new  place  and  others 
hasten  in  its  wake  in  an  indiscriminate  manner.  A  com- 
parison of  the  present  place-distribution  of  the  branches 
of  the  Imperial  Bank  with  that  of  the  Big  Five  of  the 
Indian  joint-stock  banks  confirms  this  surmise  in  an 
emphatic  manner.22  In  the  year  1936,  the  Imperial  Bank 
was  spread  over  156  places  In  the  same  year  the  Allaha- 
bad Bank  existed  in  36  places  but  of  these,  in  only  three 
was  the  Imperial  Bank  unrepresented.  The  Central  Bank 
of  India  had  branches  in  52  different  places  but  it  was  free 
from  the  competition  of  the  Imperial  Bank  in  only  12  places. 
The  Punjab  National  Bank  was  active  in  46  places  but  its 
operations  were  free  from  the  shadow  of  the  Imperial  Bank 
in  only  15  places.  The  Bank  of  India,  rigidly  confined  as 
it  is  to  about  7  big  cities  of  India  naturally  encountered 
competition  from  almost  all  its  big  rivals.  Of  the  23  places 
in  which  the  Indian  Bank  of  Madras  operated,  the  Imperial 
Bank  was  absent  in  only  4.  The  Bank  of  Baroda  was  the 
only  big  bank  which  enjoyed  immunity  from  the  Imperial 
and  other  banks.  It  was  in  exclusive  ownership  of  its  areas 
in  as  many  as  16  out  of  22  places.  This  immunity  was  largely 
due  to  the  fact  that  it  was  largely  located  in  the  territories  of 
the  Baroda  State.  Even  in  the  case  of  the  Central  Bank 
of  India,  many  of  its  places  of  exclusive  jurisdiction  are 
situated  in  the  territories  of  Native  States.  In  1939,  3  towns 
with  a  population  between  50  thousand  and  1  lakh  were 
without  a  bank-office  of  any  kind.  It  is  clear  from  this  how 

21.  Ch.  IX  §  25. 

22,  Big  Five,  i.e.,  Bank  of  India;  Central  Bank  of  India;  Allahabad  Bank;  Punjab 
National  Bank  and  Bank  of  Baroda;  Big  Seven:    these  five  and  Bank  ©f  Mysore 
and  Indian  Bank  of  Madras. 


42  PRESENT  CENTURY  PROGRESS 

Indian  banks  as  a  rule  are  content  to  take  advantage  of  the 
pioneer  work  of  some  exceptionally  adventurous  or 
privileged  bank. 

Of  514  places  which  had  banking  facilities  in  1936,  the 
Imperial  Bank,  the  biggest  five  of  Indian  joint-stock  banks 
and  the  Indian  Bank  of  Madras  were  represented  in 
approximately  194  places.  It  is  very  unlikely  that  exchange 
banks  were  represented  in  places  other  than  these  194 
towns.  In  other  words,  about  two-thirds  of  the  places  with 
banking  facilities  in  1936  were  dependent  for  them  on  the 
smaller  Indian  joint-stock  banks  belonging  to  class  A  &  B 
in  the  country.  In  British  India  in  1939,  61  scheduled  banks 
were  operating  in  452  towns.  In  the  same  year,  682  non- 
scheduled  banks  were  operating  in  476  towns,  of  which  282 
were  free  from  the  competition  of  scheduled  banks.  255 
out  of  these  282  places  had  populations  between  5  and  20 
thousands.  As  the  progressive  rise  in  the  proportions  which 
the  more  populous  places  bear  to  the  total  number  occupied 
by  the  bigger  banks  indicates,  the  smaller  banks  are  con- 
centrated in  the  less  populous,  smaller  places.23 

Analysis  of  banking  facilities  by  provinces  brings  out 
with  equal  clearness  the  part  played  in  this  country  by  the 
smaller  banks. 

1939 


*H     I 

°S 
S* 

III 

4>£^ 

&<H>,3 

Number  of 
Towns. 

Towns  with 
banking  faci- 
lities. 

Population  per 
Banking  Office 
OOOs. 

Bombay 
Madras 
Punjab 
U.  P. 
Bengal 
Assam 
C.  P. 
N.-W,  F.  P. 
B.  &0. 

22.6 
13.5 
13.0 
11.2 
7.4 
2.5 
10.9 
15.9 
4.4 

214 
342 
199 
441 
139 
28 
112 
27 
78 

59 
298 
98 
80 
106 
22 
17 
7 
31 

24 
8 
12 
85 
10 

It  will  be  observed  that  the  more  highly  urbanized  pro- 
vinces are  not  those  which  have  as  a  rule  more  widespread 


23.    Table  VI. 


BRANCH  EXPANSION  AS  A  FACTOR  IN  GROWTH  43 

banking  facilities.  Provinces  like  Assam,  Bengal  and 
Madras  which  abound  in  small  banks  have  their  towns 
largely  covered  with  banks  of  one  sort  or  another.  In  a 
province  like  Bombay  which  has  few  non-scheduled  banks, 
the  bulk  of  the  towns  is  returned  as  lacking  in  banking 
facilities  altogether.  In  the  U.P.  and  the  C.P.,  the  N.-W.F.P. 
and  Bihar  &  Orissa,  which  abound  in  towns  of  5  to  20 
thousand  inhabitants,  the  extension  of  bank  branches  has 
been  extremely  slow. 

It  would  not  be  correct  to  infer  from  this  that  the  smaller 
places  outside  the  orbit  of  the  bigger  banks  do  not  possess 
adequate  banking  potentialities.  The  place  distribution  in 
1936  of  the  aforesaid  bigger  Indian  banks  itself  contradicts 
such  an  inference.  Of  194  places  mentioned  above,  37  or 
about  19  per  cent  had  less  than  20  thousand  population.  Of 
the  class  immediately  above  it,  i.e.  places  with  populations 
between  20  and  30  thousand,  there  was  32,  or  about  16  per 
cent.  The  first  percentage  is  no  doubt  low  as  compared 
with  the  figure  for  all  places  with  banking  facilities  which 
stands  as  high  as  55  per  cent.  Even  though  the  smaller 
places  are  thus  occupied  predominantly  by  smaller  banks, 
the  percentage  19  is  quite  a  substantial  proportion  and  sug- 
gests large  scope  for  extension  to  such  areas.  This  surmise 
is  much  confirmed  by  the  performance  in  this  direction  of 
one  of  the  Big  Five  and  decidedly  a  well-managed  institu- 
tion, namely,  the  Bank  of  Baroda.  Of  its  22  branches  in 
1936,  as  many  as  13,  i.e.  about  60  per  cent,  were  concentrat- 
ed in  places  with  populations  below  20  thousand.  Yet,  this 
has  not  affected  either  its  quality  or  its  profitability. 

5.    Branch  Expansion  as  a  Factor  in  Growth 

We  have  recorded  above  that  multiplication  of  branches 
has  been  a  more  marked  feature  of  the  growth  of  our  bank- 
ing system  than  extension  to  new  places.  Growth  in 
resources  and  in  the  number  of  bank-branches  shows  a 
parallel  movement.  198  new  branches  between  1916  and  1920, 
402  between  1920  and  1930  and  512  between  1930  and  1936— 
this  shows  indeed  a  momentum  which  is  progressively 
gathering  strength.  Between  1916  and  1936,  the  aggregate 
branches  and  offices  of  banks  in  India  more  than  quadrupled 


44  PRESENT  CENTURY  PROGRESS 

themselves.  Unlike  extension  to  places,  growth  in  branches  is 
taking  place  at  an  even  rate — which  marks  it  out  once  more 
as  the  more  easily  available  line  of  expansion  for  most 
banks. 

The  same  factor  explains  more  or  less  the  lines  and  rates 
of  growth  in  the  resources  of  the  constituents  of  the  bank- 
ing system.  The  competition  for  new  branches  has  rested 
chiefly  between  the  Imperial  Bank  of  India  and  the  Indian 
joint-stock  banks.  During  World  War  I,  the  Presidency  banks 
were  almost  quiescent.  In  the  short  space  1916-18  Indian 
joint-stock  banks  added  on  the  contrary  71  branches,  i.e. 
as  many  as  the  Presidency  banks  then  had.  This  should 
be  sufficient  to  explain  the  striking  improvement  in  relative 
position  which  these  joint-stock  banks  made  at  the  expense 
of  the  other  constituents.24  Between  1920  and  1930,  the 
Imperial  Bank  and  Indian  joint-stock  banks  competed  very 
keenly  for  opening  new  branches.  Of  402  new  branches 
then  created,  the  new  statutory  branches  of  the  Imperial 
Bank  ran  into  100  while  the  new  branches  of  its  compe- 
titors easily  exceeded  250.  While  the  slow  fall  of  prices  of 
those  years  over-shadowed  every  other  factor  in  growth, 
the  relative  position  of  these  rivals  remained  almost  the 
same — with  perhaps  a  slight  improvement  in  favour  of  the 
Imperial  Bank. 

The  situation  changed  in  a  very  striking  manner  after 
1929-30.  After  creating  its  statutory  100  branches  by  1926, 
the  Imperial  Bank  decided  on  a  policy  of  consolidation  and 
hardly  made  any  addition  to  its  branches.25  The  Indian 
joint-stock  banks  embarked  on  a  spate  of  branches  creation 
which  accounted  for  502  out  of  512  new  branches  which 
appeared  during  this  period.  The  striking  absolute  gain 
and  the  still  more  striking  relative  gain  of  these  banks  in 
these  years  are  thus  easily  explained. 

The  exchange  banks  maintained  their  relative  position 
till  1920.  But  thereafter  they  lost  position  both  absolutely 
and  relatively  till  1930  and  later  only  relatively.  It  has 
been  claimed  officially  on  their  behalf  that  their  policy  is 
to  refrain  from  creation  of  branches  in  the  interior  unless 

25.     §  4. 
24.    §  3. 


BRANCH  EXPANSION  AS  A  FACTOR  IN  GROWTH       45 

their  clients  demand  such  facilities  for  the  particular  kind 
of  business  in  which  these  banks  specialize.  Only  45  in 
1916,  the  branches  of  these  banks  increased  to  77  in  1926 
and  to  99  in  1936.  The  growth  in  numbers  has  been 
evidently  slow  and  is  tending  to  be  slower  and  slower.26 

Of  1450  branches,  head-offices  and  agencies  in  existence 
in  1936,  99  belonged  to  exchange  banks  and  360  to  the 
Imperial  Bank  of  India.  Of  the  balance  of  991,  about  275 
were  claimed  by  the  6  biggest  Indian  joint-stock  banks. 
In  other  words,  more  than  700,  i.e.  about  half  the  number 
of  bank  offices  in  the  country  were  created  by  the  smaller 
Indian  joint-stock  banks  of  class  A  &  B.  These  banks,  it 
will  be  recalled,  operate  exclusively  over  about  two-thirds 
of  the  places  with  banking  facilities  in  this  country. 

The  distribution  of  the  branches  of  the  seven  biggest 
Indian  joint-stock  banks  over  places  follows  more  or  less 
closely  their  distribution  on  the  basis  of  population.  The 
only  notable  departure,  as  may  be  guessed,  occurs  in  the 
highest  population  class.  Places  with  populations  of  1  lakh 
and  more  form  only  16.4  per  cent  of  the  aggregate  number 
of  places.  But  as  many  as  24.4  per  cent  of  branches  are 
concentrated  in  them.1'27 

The  growth  of  our  banking  system  and  resources  by 
means  of  creation  of  branches  raises  unavoidably  the  prob- 
lem of  overcrowding  in  certain  places.  It  is  of  course  very 
difficult  to  arrive  at  a  precise  index  or  definition  of  over- 
crowding. The  size  and  character  of  the  population  of  a 
place  are  the  outcome  of  many  circumstances  which  are  not 
always  relevant  to  the  question  of  banking  potentialities. 
Nevertheless,  unless  a  place  is  a  centre  of  mere  pilgrimage 
or  education  or  a  resting  halt  on  converging  trade  routes,  etc., 
it  may  not  be  very  wide  of  the  mark  to  suggest  that  the 
pressure  of  a  large  number  of  branches  to  such  an  extent 
that  the  ratio  of  population  per  banking  office  falls  below 
5,000,  raises  a  presumption  of  overcrowding.  In  the  more 

26-    " there  are  no  branches  of  Exchange  Banks  in  6  out  of  9  provinces 

in  India in  almost  all  these  places,  certain  Indian  joint-stock  banks  have 

opened   branches  long  after  the    establishment    of    branches    by    the    foreign 
exchange  banks."     Para.  517,  Banking  Enquiry  Committee  Report. 
27.    Table  IV. 


46  PRESENT  CENTURY  PROGRESS 

moderate  sized  towns,  deterioration  of  the  ratio  below 
10,000  might  be  accepted  as  indicative  of  a  similar  un- 
healthy condition.  The  following  analysis  covers  cities  in 
British  India  which  have  a  population  of  50,000  and  more 
and  is  based  on  the  census  of  1931. 


1939 


w  o  • 

<y  <n  <D 

7ft« 

•^o 

*^|? 

rSJ 

'S  2  S  5> 
^  SJ 

1 

1 

1     |sj 

0)^0, 
o  S 

CO  ^w  <D 

Isls 

U 

S           Ai^'ft 

f^^  a 

c^  gS  §. 

Nujnber  of  Places 

7 

16 

29 

Scheduled  bank 

branches                   32 

31 

17            32 

72 

138 

Non-scheduled 

bank  branches          2 

105 

41          122 

192 

61 

Average  Population 
per  place  (OOOs) 

.  . 

69 

149 

These  figures  suggest  important  inferences.  In  those  places 
in  which  the  ratio  of  population  falls  below  5,000  or  10,000, 
the  predominance  of  the  non-scheduled  banks  is  quite  well 
marked.  Four  of  the  places  in  the  first  category  and  eleven 
in  the  second  category  hail,  as  might  be  expected,  from  the 
province  of  Madras.  The  rest  belong  to  Bengal  or  Assam. 
In  those  places  where  overcrowding  is  not  so  obvious,  the 
scheduled  banks  preponderate  in  the  number  of  their 
branches.  In  other  words,  overcrowding  is  largely  caused 
by  non-scheduled  banks  and  is  not  to  be  found  in  those 
places  where  they  have  to  meet  the  strong  competition  of 
bigger  banks.  The  number  of  branches  of  non-scheduled 
banks  in  the  cities  of  Madras  and  Calcutta  need  not  cause 
any  surprise.  Madras  and  Bengal  are  the  two  areas  most 
prolific  in  small  banks  and  there  are  obvious  advantages 
of  having  direct  representation  at  the  provincial  head- 
quarters. 

The  part  played  by  non-scheduled  banks  in  the  over- 
crowding is  illustrated  by  the  following  more  detailed 
analysis. 


STRUCTURAL  AND  FINANCIAL  IMPLICATIONS  OF  EXPANSION  47 

1939 


£ 
co  o  o> 


8    C    »rQ 

S+ilcLcu 

isflii 
sslll 

Iljfl 

Number 
Assam,  Bengal  and 
Madras  branches 

Other  provinces 
branches 

Scheduled 
Non-sche- 
duled 
Scheduled 
Non-sche- 
duled 

19 
13 

134 
69 

10 

12 
36 

29 
54 

22 

14 
40 

38 
9 

33 

In  those  provinces  in  which  small  banks  do  not  germi- 
nate easily,  the  scheduled  banks  act  as  an  effective  check 
on  their  growth.  As  exploitation  by  scheduled  banks  be- 
comes more  intense  and  the  population  ratio  falls,  the  num- 
ber of  non-scheduled  bank  branches  declines.  In  the  pro- 
vinces of  Assam,  Bengal  and  Madras,  the  situation  is 
markedly  different.  The  grip  of  non-scheduled  banks  is 
so  well  established  that  their  branches  increase  in  number 
even  though  the  offices  of  scheduled  banks  have  smaller 
populations  to  serve. 

6.    Structural  and  Financial  Implications  of  Geographical  and 
Branch  Expansion 

When  expansion  of  banking  facilities  occurs  as  a  con- 
sequence of  creation  of  branches  by  a  few  big  banks,  it 
means  an  accession  of  strength  and  consolidation  to  the 
whole  system.  Among  other  gains,  diversification  of  risks 
which  such  expansion  brings  with  it  must  be  counted  as 
the  most  important  factor  making  for  stability.  Even  if 
expansion  causes  a  fall  in  the  average  of  resources  avail- 
able per  branch,  such  a  fall,  while  it  may  detract  something 
from  the  profitability  of  banks,  detracts  nothing  from  the 
strength  of  the  structure.  The  reverse  consequences  are 
to  be  feared  when  expansion  ensues  from  a  mere  multipli- 
cation of  smaller  banks  and  their  branches — particularly 
when  a  country  lacks  the  means  to  organized  action  in  the 
money  market. 


48  PRESENT  CENTURY  PROGRESS 

Such  geographical  and  branch  expansion  as  has  taken 
place  in  recent  years  is  bringing  our  banks  into  contact 
with  progressively  leaner  places  and  lower-income  classes. 
Between  1926  and  1936,  the  deposits  raised  per  place  with 
banking  facilities  have  fallen  from  63  lakhs  to  50  lakhs. 
This  is  a  fall  of  about  21  per  cent.  The  figures  for  earlier 
years  confirm  the  same  tendency  to  continuous  diminu- 
tion. Between  the  same  years  1926-1936,  deposits  per 
branch  for  all  banks  taken  together  fell  from  29.4  lakhs 
to  17.7  lakhs,  which  means  a  fall  of  more  than  39  per  cent. 
The  larger  fall  in  the  case  of  deposits  per  branch  as  com- 
pared with  deposits  per  place  is  a  mere  re-statement  in 
another  form  of  our  earlier  conclusion  that  exploitation  of 
existing  banking  towns  attracts  banks  more  than  extension 
of  activities  to  virgin  fields.28 

Of  course,  for  reasons  already  indicated,  this  tendency 
to  a  progressive  fall  in  resources  available  per  place  and 
per  branch  is  not  inherent  in  the  present  banking  situa- 
tion. The  geographical  and  branch  expansion  of  the 
Indian  banking  system  is  taking  place  in  an  unplanned  and 
haphazard  manner.  The  progress  has  not  occurred  in  a 
consistent  manner  from  places  with  larger  banking 
potentialities  to  places  with  smaller  banking  potentialities. 
Large  voids  and  lacunae  are  visible  in  many  bankable 
parts  of  the  country  and  until  these  areas  are  systematically 
surveyed  and  mapped  out,  our  statistical  evidence  must 
lack  finality. 

This  geographical  and  branch  expansion  has  not  the 
same  significance  for  the  different  constituents  of  the 
banking  system.  In  its  great  period  of  branch  expansion, 
1920-1930,  the  Imperial  Bank  of  India  actually  improved 
its  volume  of  resources  per  branch  in  an  appreciable 
manner.  Even  in  its  period  of  quiescence  after  1926,  there 
was  a  tendency  to  slight  improvement.  Taking  figures  in 
the  large,  however,  it  may  be  said  that  its  volume  of 
resources  per  branch  has  been  maintained  at  about  45  to 
47  lakhs. 

Very  much  the  same  statement  could  be  made  about 

28.    Table  II. 


STRUCTURAL  &  FINANCIAL  IMPLICATIONS  OF  EXPANSION      49 

exchange  banks.  As  recorded  already,  the  years  1920-1930 
saw  a  substantial  fall  in  their  deposit  resources  in  India. 
But  after  the  great  loss  of  the  initial  years,  they  also  seem 
to  have  settled  down  to  a  stable  level  of  about  75  to  79  lakhs 
per  branch. 

Appreciably  different  has  been  the  course  of  events  with 
Indian  joint-stock  banks.  Between  1926  and  1936,  they 
maintained  their  aggregate  deposits  stable  only  by  a  large 
creation  of  new  banks  and  branches.  In  these  four  years, 
deposits  per  branch  fell  drastically  from  about  13  lakhs 
to  9  lakhs.  The  next  six  years  recorded  in  an  irregular 
manner  a  further  fall  to  about  8i  lakhs.  The  fall  is  rather 
of  a  small  order  when  we  take  into  account  the  great  im- 
petus to  expansion  which  marked  these  years.  Neverthe- 
less, the  general  drift  is  quite  unmistakable. 

The  vast  disparities  in  these  figures  of  resources  per 
banking  office  cannot  but  provoke  some  surprise.  A  bank 
has  to  justify  itself  ultimately  by  its  ability  to  offer  adequate 
services  to  the  public  in  competition  with  its  rivals  and 
at  the  same  time  earn  profits  normal  to  banking  enterprise. 
Yet  there  are  banks  in  India  whose  volume  of  resources 
per  branch  varies  on  the  average  within  the  wide  range  of 
8|  to  75  lakhs  and  yet  are  able  to  satisfy  their  shareholders 
with  soothing  dividends.  The  inevitable  inference  is  sug- 
gested that  they  represent  either  different  types  of  organi- 
zation or  are  engaged  in  different  classes  of  business. 

We  must  bear  in  mind  that  even  this  figure  of  8i  lakhs 
per  branch  overstates  the  size  of  resources  for  the  major 
part  of  these  banks.  For,  these  banks  include  the  Big  Five 
or  Six  whose  deposits  per  branch  varied  in  1936  from 
11  to  13  lakhs  for  the  Indian  and  the  Punjab  National  Banks 
to  106  lakhs  for  the  Bank  of  India.  It  will  be  shown 
presently  that  these  big  banks  hold  more  than  three-fourths 
of  the  aggregate  resources  of  Indian  joint-stock  banks.  If 
they  are  omitted  from  our  present  reckoning,  the  figure 
for  the  rest  of  the  banks  will  probably  fall  to  about  3i 
lakhs.  Yet,  these  banks  are  responsible  for  banking  facili- 
ties in  about  two-thirds  of  the  places  on  the  banking  map 
of  India,  claim  about  half  of  the  bank  offices  in  the  country 
and  have  improved  their  share  of  the  aggregate  deposits  of 

M.  B.   4 


50  PRESENT   CENTURY   PROGRESS 

the  country  from  about  6  per  cent  in  1930  to  11  per  cent 
in  1936.  When  Indian  joint-stock  banks  (class  A  &  B) 
alone  are  considered,  the  proportion  of  deposits  held  by 
these  small  banks  is  seen  to  have  risen  from  19  per  cent 
in  1930  to  about  36  per  cent  in  1936. 

That  great  disparities  can  exist  in  the  volume  of  resources 
per  branch  without  crippling  the  profits  of  banks  or  forcing 
them  into  questionable  lines  of  business  is  amply  proved 
by  the  discrepancies  in  the  figures  for  the  Imperial  Bank 
of  India  and  the  exchange  banks.  The  specialization  of 
the  latter  in  exchange  business  which  earns  relatively  a  low 
rate  on  invested  funds,  and  rigorous  limitation  of  the  former 
to  the  more  lucrative  short  term  business  perhaps  explain 
a  large  part  of  the  apparent  disparities.  From  the  stand- 
point of  organization  also,  it  would  be  wrong  to  postulate 
the  standard  of  equipment  and  maintenance  of  the  bigger 
joint-stock  banks  as  the  minimum  suitable  to  this  country. 
Many  of  them  and  certainly  the  Imperial  Bank  have  yet 
to  make  efforts  to  adapt  their  technique,  business  methods 
and  staff  to  the  quality  and  size  of  business  available  in 
the  smaller  and  leaner  places  in  the  country.  This  is  well 
substantiated  by  the  figures  of  their  average  expenditure 
per  branch  in  a  good  year  like  1936.  The  Bank  of  India 
leads  with  an  expenditure  of  about  98,000  per  annum  per 
branch  and  is  followed  by  the  Imperial  Bank  with  a  figure 
of  about  82,000.  The  Bank  of  Baroda  and  the  Indian  Bank 
which  are  located  largely  outside  the  bigger  towns  bring 
up  the  rear  with  an  expenditure  per  branch,  of  Rs.  25,000 
only. 

On  account  of  varying  conditions  of  business,  costs,  etc.y 
it  is  difficult  to  state  the  minimum  resources  which  on  the 
average  a  bank  should  have  per  branch  in  order  to  assure 
sound  lines  of  business  and  adequate  profits  to  shareholders. 
To  limit  the  range  of  our  ideas  on  the  subject,  however,  a 
calculation  may  be  offered  for  banks  which  work  under 
conditions  typical  of  the  biggest  Indian  banks.  We  may 
take  as  our  basis  the  lowest  average  expenditure  incurred 
per  branch  by  Indian  joint-stock  banks  of  the  status  of  the 
Indian  Bank  or  the  Bank  of  Baroda,  namely,  Rs.  25,000. 
In  the  same  year  1936,  the  highest  rate  of  gross  profits 


DEGREE  OF  CONCENTRATION  51 

earned  was  2.68  per  cent  by  the  Imperial  Bank  of  India. 
If  banks  in  general  could  earn  as  high  a  rate  as  this,  it 
would  mean  that  a  branch  should  have  resources  on  the 
average  of  the  order  of  9  lakhs  simply  to  meet  the  minimum 
expenditure  postulated  above.  It  is  clear  from  this  that 
with  the  best  management  in  the  world  and  the  most 
skilful  technique  of  business,  the  previously  ascertained 
figure  of  3£  is  regrettably  small.29 

That  our  calculation  of  a  minimum  of  about  9  lakhs  is 
somewhere  in  the  neighbourhood  of  truth  is  corroborated 
by  another  piece  of  evidence.  Of  the  88  new  branches, 
which  the  Imperial  Bank  of  India  opened  by  1926,  only  32 
were  working  at  a  profit  and  56  showed  actual  loss. 
Deposits  at  these  branches  of  all  kinds  aggregated  to  835 
lakhs.  In  other  words,  acquisition  on  an  average  of  about 
9  to  10  lakhs  per  branch  showed  a  loss  on  the  bulk  of  the 
branches.30 

The  situation  in  the  case  of  smaller  banks  is  partially 
mitigated  by  their  capital  and  reserves  which  bear  a  much 
higher  proportion  to  deposits  than  in  the  case  of  the  bigger 
banks.  With  many  of  them,  the  bulk  of  their  resources 
is  derived  from  their  own  funds.31 

7.    Degree  of  Concentration 

Although  small  banks  hold  in  exclusive  possession  about 
two-thirds  of  the  banking  map  of  India  and  own  at  least 
half  the  total  number  of  branches,  the  Indian  banking 
system  as  a  whole  is  a  highly  concentrated  one.  Till  very 
recently,  the  Imperial  Bank  of  India,  18  exchange  banks  and 
the  Big  Five  of  Indian  joint-stock  banks  held  among  them 

29.  For  a   branch   in   Bombay  which   collects   deposits   of  about   25   lakhs  and' 
invests  about  65  to  70  lakhs  of  the  bank's  funds  and  which  has  a  staff  of  about 
25  persons,  the  pre-war  expenditure  per  month  may  be  about  Rs.  3,000.     For  a 
branch  in  a  small  place  of  about  50,000  souls  which  is  mainly  a  deposit-collecting 
agency,   the   expenditure  per   month   may   be   about   Rs.   300.      In  a   place   like 
Nagpur,  a  branch  with  a  staff  of  about  6  persons  spends  about  Rs.  900  and  with 
deposits  of  5£  to  6  lakhs  is  just  able  to  meet  the  expenditure. 

30.  Q.  9648-51;   Appendix  p.  479.      Table  15th;   Q.   12271— Minutes  of  Evidence. 
Hilton  Young  Commission.    According  to  the  third  Schedule  of  the  Reserve  Bank 
of  India  Act,  1934,  the  Imperial  Bank  received,  in  consideration  of  the  main- 
tenance of  these  branches,  9,  6  and  4  lakhs    per    annum    for    three    successive 
periods  of  5  years  each  from  the  Reserve  Bank  of  India. 

31.  See  Ch.  V. 


52  PRESENT   CENTURY   PROGRESS 

90  per  cent  of  the  deposit  resources  of  the  country. 
In  the  last  few  years,  the  percentage  has  declined  to  about 
87.  If  we  add  the  Indian  Bank  and  the  Bank  of  Mysore 
to  the  list,  the  percentages  for  the  years  1930  and  1936  are 
94  to  89.  Having  regard  to  the  area  and  the  special  politi- 
cal and  social  conditions  of  the  country,  few  countries  in 
the  world  could  show  a  higher  degree  of  concentration. 

If  Indian  joint-stock  banks  are  regarded  as  a  special 
and  peculiar  credit-structure  by  itself — and  for  certain 
purposes,  such  a  procedure  is  justified — the  degree  of  con- 
centration appears  much  less.  By  1930,  the  share  of  the 
Big  Five  in  the  aggregate  banking  power  of  Indian  joint- 
stock  banks  rose  to  about  75  per  cent  and  of  the  Big  Seven 
to  about  80  per  cent.  The  corresponding  figures  for  1936 
record  a  decline  to  68  and  73  per  cent  respectively.32 

8.    Causes  of  Concentration 

Such  concentration  is  inherent  in  the  necessities  of  the 
banking  business  itself.  The  fate  of  an  ordinary  enterprise 
is  linked  to  the  market  prospects  and  fluctuations  of  one 
commodity  or,  at  the  most,  a  group  of  commodities.  Banks 
whose  resources  are  withdrawable  on  demand  cannot  allow 
themselves  to  be  caught  in  a  stagnation  or  collapse  of  any 
particular  market  or  allied  markets.  Self-preservation 
continuously  goads  them  into  interest  in  and  relations  with 
varied  lines  of  trade  and  commerce.  Such  diversification 
of  risks  presupposes  large  resources  and  large  clientele 
which  can  be  secured  only  by  exploitation  of  new  terri- 
tories. High  specialisation  of  certain  areas  in  certain  agri- 
cultural products,  concentration  of  financial  requirements 
of  different  areas  at  different  times  of  the  year,  confinement 
of  manufactures  to  certain  narrow  belts  and  areas  of  the 
country — these  have  no  doubt  influenced  and  impelled  the 
growth  of  certain  banks. 

Inequalities  of  interest-rates  are  another  factor  causing 
territorial  expansion.  Even  in  small  countries,  rates  are 
apt  to  vary  from  area  to  area  according  as  these  are 
agricultural,  manufacturing,  etc.  In  vast  countries  Jj&e 

32.    Table  V. 


CAUSES  OF  CONCENTRATION  53 

India,  territorial  divisions  are  much  sharper  and  differen- 
tials in  rates  very  wide.  As  analysed  elsewhere,33  interest- 
rates  are  the  highest  in  Madras  and  South  India  generally 
and  quite  high  in  the  Indus  and  Gangetic  plains.  In  the 
triangle  roughly  delimited  by  Bombay,  Ahmedabad  and 
Calcutta,  which  represents  the  manufacturing  and  high 
finance  area  of  the  country,  rates  are  comparatively  low. 
To  the  impelling  motives  to  diversify  risks  are  thus  added 
tempting  opportunities  of  earning  high  rates.  Cyclical  or 
transitional  changes  which  cause  precipitous  decline  in 
interest  rates  are  apt  to  make  such  an  impulse  to  exploit 
higher  rates  almost  irresistible.  The  years  since  1929-30 
illustrate  such  times  when  interest-rates  in  certain  areas 
and  particularly  in  big  towns  have  fallen  to  persistent  low 
levels.  Whether  this  impulse  acts  slowly  or  in  great  spurts, 
it  does  not  exhaust  itself  till  rates  have  been  brought  down 
to  more  or  less  common  levels. 

The  third  factor  which  tends  in  the  same  direction  is 
the  force  of  mutual  competition  among  banks.  Fears  raised 
by  the  growth  of  rival  banks  are  very  frequently  the 
cause  of  general  movements  for  expansion  whether  by 
means  of  new  branches  or  amalgamations.  Much  of  the 
rapid  expansion  of  branches  and  places  which  took  place 
between  1921  and  1930  when  the  Imperial  Bank  was  creat- 
ing its  100  statutory  branches  was  of  this  character.  Many 
of  the  leading  banks  seem  to  have  been  seized  with  the 
fear  that  they  might  lag  far  behind  in  the  volume  of  their 
resources  and  therefore  suffer  from  the  powerful  competi- 
tion of  the  Imperial  Bank.  Such  competition  redounds  tp 
the  benefit  of  the  country  so  long  as  it  has  to  reach  its  full 
banking  development.  But  many  times,  competition 
forces  expansion  beyond  the  point  of  economic  justifiability 
and  burdens  the  country  with  too  many  branches,  over- 
centralization,  concentration  of  money-power,  high  cost  of 
finances,  etc.  The  expense  ratios  of  our  banks  analysed 
elsewhere  do  not  indicate  that  we  are  even  in  the  remote 
neighbourhood  of  this  state.34 

33.  Ch.  Ill  §  11. 

34.  Inequalities   of   seasonal   requirements   and   more  permanent   inequalities  of 
demand    and    supply    of    capital    are    well    illustrated    by    figures    overleaf. 


54  PRESENT    CENTURY    PROGRESS 

9.    Diffusion  and  Begionalization  of  Indian  Banking  Structure 

On  the  other  side,  there  are  forces  which  thwart,  though 
they  cannot  ultimately  defeat,  the  movement  towards 
concentration. 

We  have  noted  a  while  ago  the  diversity  of  interest-rates 
prevailing  in  different  areas  of  the  country.  A  bank  which 
creates  branches  in  different  parts  may  invite  embarrass- 
ment if  it  offers  markedly  different  deposit  rates  from  one 
branch  to  another.  Branches  with  lower  interest-rates 
run  the  risk  of  being  denuded  of  their  deposits  while  those 
with  higher  deposit  rates  may  have  to  cope  with  a  flood. 
Banks  are  protected  to  an  extent  from  this  difficulty  by 
the  ruling  of  law-courts  that  deposits  maintained  at  one 
branch  are  not  payable  as  a  matter  of  right  at  other 
branches.  They  protect  themselves  also  by  establishing 
their  higher  deposit-rates  not  too  high  and  contenting 
themselves  with  business  high  in  quality  and  for  that 
reason  not  too  lucrative.  The  local  banks  are  thus  left 
with  business  whose  high  profitability  goes  well  with  high 
deposit-rates. 

In  few  parts  of  the  world  perhaps  do  personal  contacts, 
informal  procedure,  even  oral  obligations  play  a  greater 
part  than  in  India.  A  highly  concentrated  banking  system 
is  too  impersonal  to  meet  requirements  of  this  kind.  The 
local  branch  is  more  or  less  subjected  to  detailed  regulations 
from  head-quarters,  procedure  and  security  are  necessarily 
documentary,  and  the  spirit  of  legal  forms  broods  over 
everything.  A  local  bank  on  the  other  hand  offers  advan- 
tages which  the  wide-flung  organisation  of  a  bank  with 
hundreds  of  branches  cannot  emulate.  To  all  this,  we 
must  add  special  types  of  business  peculiar  to  each  locality 
with  which  the  local  bank  has  obvious  advantages  in 
dealing. 

<  March  is  a  slack  month  for  borrowing  in  Bengal  but  the  slackness  explains  only 
a  small  part  of  the  discrepancy.) 

Imperial  Bank  (Bengal  Circle;  last  week,  March  1925)  Percentage  of  Bengal 
circle  to  all-India  figures.  Current  and  fixed  accounts  54%.  Bills,  Cash  credits. 
Overdrafts,  Loans  37%. 

Surplus  branches  and  deficit  or  borrowing  branches  are  determined  according 
to  location,  e.g.  Bengal  Madras,  Punjab  circles,  etc.  represent  the  former  type. 
Sometimes  two  banks  present  a  different  picture  in  the  same  place. 


DIFFUSION  AND  REGIONALIZATION 

Amalgamation  which  in  most  countries  has  been  the 
chief  instrument  of  concentration  has  also  to  run  the  gaunt- 
let of  certain  special  difficulties  in  this  country.  Like  all 
other  institutions,  banks  also  tend  to  become  the  mustering 
centres  of  all  communal,  sectional  and  even  family  interests. 
Existing  staff  and  management  fear  loss  of  importance  and 
prospects.  Shareholders  fear  loss  of  dividends.  Local  com- 
mercial and  economic  interests  fear  the  routine  and  mecha- 
nical ways  of  bigger  banks.  These  and  other  interests  are 
apt  to  rise  in  arms  with  destructive  power  and  resourceful- 
ness against  any  movement  which  threatens  them. 

Running  athwart  all  these  forces  is  the  cross-current  of 
Native  State  territories.  As  observed  already,  British  India 
banks  are  loth  to  place  their  interests  under  the  protection 
of  Native  Princes.  Native  State  banks  themselves  avoid  on 
their  part  such  common  interests.  The  upshot  is  indepen- 
dent local  banks  for  different  states. 

These  factors  have  demonstrated  their  power  in  more 
recent  years.  We  have  already  noted  the  speed  with  which 
small  local  banks  have  sprung  into  existence  or  have  ex- 
ploited opportunities  to  expand  themselves.  Banks  with 
capital  and  reserves  of  5  lakhs  and  over  have  increased  from 
30  in  1930  to  42  in  1936,  while  those  with  capital  and  reserves 
between  1  and  5  lakhs  have  increased  from  57  to  74. 

These  very  factors  have  operated  to  give  even  some  of 
the  bigger  banks  a  strongly  regional  character.  As  our  map 
(at  the  end  of  the  book)  vividly  brings  out,  the  Punjab 
National  Bank,  the  Allahabad  Bank  of  India,  the  Bank  of 
India,  the  Bank  of  Baroda,  the  Indian  Bank  and  the  Mysore 
Bank  have  their  operations  concentrated  in  certain  well- 
defined  regions  of  the  country.  The  Bank  of  Baroda  and  the 
Mysore  Bank  are  most  active  within  the  territories  of  their 
respective  states.  The  Indian  Bank  works  in  the  special  con- 
ditions of  South  India  among  a  clientele  largely  composed  of 
the  Nattukottai  Chetties.  The  narrow  area  covering  chiefly 
the  Bombay  Province  served  by  the  Bank  of  India  is  the  out- 
come of  deliberate  policy  to  adhere  to  the  biggest  indus- 
trial and  commercial  centres  of  the  land.  The  Punjab  Na- 
tional and  Allahabad  Banks  have  always  been  the  banks 
primarily  of  North- West  India.  Overshadowing  all  of  them 


56  PRESENT    CENTURY   PROGRESS 

and  competing  with  them  almost  everywhere  are  the  Im- 
perial Bank  of  India  and  the  Central  Bank  of  India,  the 
former  under  the  pressure  and  inducement  of  special  Gov- 
ernment patronage  and  concessions,  the  latter  out  of  a  will 
and  spirit  to  expand.  The  Imperial  Bank  was  a  factor  to 
reckon  with  between  1920  and  1930,  while  the  Central  Bank 
has  been  most  aggressive  after  1930.  The  marked  stationari- 
ness  of  some  of  the  regional  banks,  notably  the  Punjab 
National  and  Allahabad  Banks  may  be  due  in  large  measure 
to  their  loss  of  more  liquid  business  in  favour  of  these  two 
great  rivals. 

10.    International  Comparisons  of  Banking  Progress 

The  following  table  sets  forth  some  broad  facts  to  illus- 
trate the  progress  of  banking  in  India  and  elsewhere. 

1936  Or  Nearest  Year 


India 

England 
&  Wales 

France 
(Prin- 
cipal 
Banks) 

Ger- 
many 

Swit- 
zerland 

U.S.A. 

Density  of 
Population 
Square  Miles  per 
Banking  Office 

127 
1,392 

685 
5.79 

197 
102.7 

367 

255 

37.2' 
242.6- 

Population  per 

Banking 

Office         ..     2,76,000        3900        20,000        ..         1,333        7,900 
Population  in 

places  with 

5000  and  over 

per  branch          39,000 
Population  in 

places  with 

1000  and  over 

per  branch       1,39,000 
Deposits  per  head 

(Shillings)        (Rs.)7.0        1164          165          212          275       1,317 
Deposits  per  head 

in  places  with 

population  of 

5000  and 

above (Rs.)  45.5 .. . . 

Today,  the  deposit  per  head  in  India  is  a  little  over  10 
shillings  as  against  212  in  Germany,  275  in  Switzerland, 
1,164  in  England  *nd  1,317  in  the  United  States. 

It  is  obvious  that  the  smallness  of  our  per  head  deposit 
reflects  more  the  lack  of  banking  facilities  than  the  poverty 


OTHER  BANKS  57 

of  the  country.  The  figures  of  population  and  number  of 
square  miles  per  banking  office  brings  this  out  quite  clearly. 

Less  than  one  quarter  of  towns  with  population  of  5,000 
and  over  have  banking  facilities  at  present.  If  per  head 
deposit  is  calculated  for  these  places  only,  the  figure  is  in 
the  neighbourhood  of  70  shillings.  Even  then,  the  figure  is 
about  one-fourth  of  Switzerland  and  one-third  of  Germany. 
The  backwardness  of  banking  habit  and  the  low  levels  of 
income  in  this  country  must  be  set  down  as  the  next  cause 
in  order  of  magnitude. 

Countries  with  high  densities  of  population  find  develop- 
ment of  banking  facilities  naturally  easy.  But  densities  are 
relevant  only  when  they  indicate  degrees  of  urbanization. 
The  United  States  has  a  density  of  one-fifth  that  of  India 
only  while  France  has  a  density  much  higher  than  that  of 
India.  Yet  their  population  per  banking  office  is  about 
8,000  for  the  United  States  and  20,000  for  France.  The  figure 
for  India  is  2,76,000  per  banking  office. 

11.    Other  Banks 

The  banking  structure  and  banking  facilities  which  form 
the  basis  of  our  analysis  in  this  chapter  refer  only  to  the 
banks  which  have  a  paid-up  capital  and  reserve  of  1  lakh 
and  more.  They  exist,  however,  against  a  vast  background 
of  indigenous  credit  institutions  and  small  banks  which  in 
their  territorial  extent  and  their  aggregate  financial  opera- 
tions overshadow  by  far  modern  banking  in  this  country. 
Money-lenders  and  indigenous  bankers  still  continue  to 
be  the  backbone  of  all  agricultural  finance.35  On  acount  of 
the  deficiencies  of  law  before. 1936,  the  total  number  of  com- 
panies which  called  themselves  "banks"  was  far  above  the 
number  of  banks  mentioned  just  now.  Taking  British  India 
and  Native  States  together,  more  than  2,300  companies  re- 
turned themselves  in  1936-37  as  "banking  and  loan  compa- 
nies". Of  these  about  110  only  were  accounted  for  by  the 
banks  we  have  mentioned  above.  The  rest,  aggregating  to 
more  than  2,200,  were  "banking  and  loan  companies"  with 
a  paid-up  capital  and  reserve  of  less  than  Rs.  1  lakh.  It 

35.    Ch.  V  Part  V, 


58 


PRESENT    CENTURY   PROGRESS 


would  be  an  error  to  underestimate  their  aggregate  finan- 
cial importance  to  this  country.  Their  paid-up  capital 
appears  to  be  equal  if  not  indeed  definitely  in  excess  of  the 
scheduled  banks  and  Indian  joint-stock  banks  of  class  B. 

The  distribution  of  these  "banking  and  loan  companies" 
according  to  provinces  gives  us  an  unmistakable  clue  to 
what  they  really  represent  in  our  financial  organization. 
About  1,200  of  them  are  located  in  the  province  of  Bengal 
and  Madras  accommodates  about  500  of  them.  Bengal  is 
the  well-known  breeding  ground  of  what  are  known  as 
"loan  offices"  and  has  contributed  little  by  way  of  modern 
banks.  Madras  is  the  home  of  those  ancient  but  queer 
Nidhis  or  Chit  funds  and  has  shown  a  peculiar  genius  for 
a  prolific  output  of  tiny  banks.  Whatever  their  usefulness 
in  the  economic  life  of  the  country,  most  of  such  companies 
do  not  satisfy  the  prime  test  of  banking  business,  the 
acceptance  of  deposits  withdrawable  by  cheque.36 

According  to  figures  compiled  by  the  Reserve  Bank  of 
India  for  December  1938,  the  number  of  non-scheduled 


36. 


(Amounts  in  Lakhs  of  Rs.) 


1 


I 


U  U 


T3 

W  H 

w  g 

S-o 

$  ^ 

a  "a 

*O  co 

""•  (9 

. 

£ 

3  3 
OS 

£9 

us 

45  «s 
O  « 

1937 

2206 

1669 

41 

1296 

108 

217 

1938 

2186 

1607 

43 

1237 

120 

241 

1939 

2045 

1469 

52 

1367 

119 

512 

385 

1940 

1944 

1538 

59 

1477 

122 

453 

388 

1941 

1813 

1433 

64 

1630 

125 

271 

372 

1942 

1719 

1566 

70 

1913 

136 

270 

391 

1943 

1696 

1733 

93 

2664 

152 

302 

443 

1944 

1639 

1880 

119 

3686 

162 

348 

471 

1945 

1666 

2660 

143 

4554 

188 

391 

546 

1946 

1691 

3222 

136 

1684 

188 

296 

410 

1947 

1664 

3737 

149 

6546 

185 

291 

393 

1948 

151 

7015 

191 

277 

405 

1949 

104 

7110 

187 

244 

387 

1936-37  figures  include  loan  Cos. 
Provinces  in  1936-37  with  50  Banking  and  Loans  Cos.  or  more. 

Madras        451  Assam         67 

Bengal        1,173  U.    P 53 

Bombay 86  Punjab        79 


OTHER  BANKS  59 

"banks",  i.e.  banks  with  capital  and  reserves  of  less  than 
Rs.  5  lakhs,  is  about  1,421.  As  may  be  surmised  from  the 
distribution  of  banking  and  loan  companies  referred  to 
above,  the  bulk  of  these  banks  is  concentrated  in  Bengal 
(988)  and  Madras  (252) .  Among  them  all,  companies  which 
are  banks  in  the  sense  that  they  accept  deposits  with- 
drawable by  cheque  and  which  conform  to  the  obligation 
under  Section  L  of  the  Indian  Companies  Act  to  submit  cash 
reserve  returns,  aggregate  to  about  626  only.  If  we  reduce 
from  this  figure  the  number  of  Class  B  banks,  we  arrive 
at  about  500  and  odd  concerns  as  non-scheduled  banks  with 
capital  and  reserves  of  less  than  Rs.  1  lakh.  After  the  law 
of  1936,  the  situation  changed  inevitably  in  a  material  way. 
From  1936  till  1944,  banks  with  capital  and  reserves  ex- 
ceeding one  lakh  rose  from  74  to  152.  There  was  a  material 
rise  in  the  number  of  banks  with  owned  resources  of  Rs.  50 
thousand  to  1  lakh  but  banks  with  less  than  1  lakh  of  owned 
resources  in  general  fell  from  more  than  1,400  to  274. 


CHAPTER  III 

THE  STRUCTURE  OF  INTEREST-RATES  * 

RECENT  MONETARY  THEORY  tends  to  look  on  money  rates  of 
interest  as  the  chief  dynamic  factor  in  our  economic  system. 
Since  rent  and  wages  are  more  or  less  rigid  elements  in 
costs,  and  profits  in  the  short  run  at  least  are  only  a  residue 
or  surplus,  this  significance  ascribed  to  interest-rates  is  in 
one  sense  inevitable.  No  general  agreement  is  visible 
however  as  to  the  exact  process  by  which  these  changes  in 
rates  become  effective.  Difficulties  start  with  the  very  dis- 
tinction which  is  usually  made  between  short-term  and 
long-term  rates.  It  is  obvious  that  among  the  multiplicity 
of  rates  which  prevail  in  a  modern  money  and  capital 
market,  an  average  or  typical  rate  to  represent  either  of 
them  can  be  nothing  more  than  a  tool  of  theoretical 
analysis.  The  border  line  which  separates  short  and  long 
rates  is  necessarily  indeterminate  and  certainly  less  ascer- 
tainable  than  that  which  separates  open-market  rates  from 
customer's  rates.  Further,  differences  arise  when  attempts 
are  made  to  explain  the  exact  manner  in  which  changes  in 
short  rates  react  on  the  economic  process.  According  to 
one  view,  sponsored  notably  by  Hawtrey,  changes  in  short 
rates  are  by  themselves  sufficient  to  start  an  economic 
phase.  Hawtrey  analyses  how  costs  of  different  classes  of 
business  men  are  affected  by  a  change  in  short  rates  and 
arrives  at  the  conclusion  that  the  sensitiveness  of  dealers 
in  stocks  to  such  changes  is  the  starting  point  of  those 
Impulses  which  ultimately  take  shape  as  booms  or  depres- 
sions. The  second  view,  originated  by  Wicksell  and  re- 
interpreted in  various  ways  by  Keynes,  Hayek  and  others, 
looks  to  the  sympathetic  effect  of  short  rates  on  long  rates 
for  the  initiation  of  economic  changes.  The  essence  of  a 
phase  lies  for  them  in  the  bias  created  by  such  changes  in 
the  structure  of  production  now  in  favour  of  capital-goods 
and  now  in  favour  of  consumption-goods.  Changes  in  long- 
term  rates  are  in  this  view  interrelated  with  changes  in  the 

1.    Tables  VIII,  IX  and  X. 


RELATIONSHIP  BETWEEN  SHORT  AND  LONG  RATES  61 

structure  of  production.  An  intermediate  view  seeks  to  ex- 
plain economic  transitions  as  due  to  the  gaps  which  reveal 
themselves  now  and  then  between  short  and  long  rates. 
According  as  the  gap  is  more  or  less  tempting,  vast  funds 
on  the  border-line  flow  into  either  short  or  long  investments, 
and  without  waiting  for  sympathetic  reactions  on  long  rates 
enlarge  or  narrow  the  volume  of  employment.  This  inter- 
mediate view  has  this  common  ground  with  the  second 
view  that  it  looks  to  an  enlargement  of  the  volume  of  long- 
term  investment  for  enlargement  of  employment.2 

It  may  well  be  that  these  differences  are  ultimately 
differences  of  emphasis  only  and  do  not  mean  unqualified 
unwillingness  on  the  part  of  advocates  of  each  view  to 
concede  some  element  of  truth  in  favour  of  other  views.  In 
any  case,  it  is  clear  that  the  organization  of  interest  rates 
has  a  significance  which  goes  far  beyond  the  individual 
concern  and  interests  of  banks.  Banks  have  indeed  to 
work  within  the  conditions  set  by  interest  rates.  But  since 
commercial  banks  are  the  community's  main  repository  of 
short-term  capital  and  the  central  bank  has  the  control  of 
the  cash-basis  of  the  credit-structure,  the  banking  system 
is  also  the  most  dominating  influence  on  these  rates.  The 
exact  degree  to  which  the  banking  system  controls  or  is 
controlled  by  interest-rates  must  however  depend  on  the 
character  of  fundamental  forces  determining  the  rates 
structure  of  each  country.  An  attempt  is  therefore  made  in 
the  succeeding  pages  to  describe  the  rates  structure  as  it 
exists  in  this  country. 

1.  Relationship      between      Short-Term      and      Long-Term 
Interest-Rates 

Our  first  concern  must  be  to  examine  the  relationship 
such  as  it  exists  in  this  country  between  short-term  and 
long-term  interest-rates  Banks  are  mainly  interested  in 
short-term  investments.  But  it  is  obvious  that  the  relative 
levels  of  these  rates  have  a  direct  bearing  on  their  profits 
and  therefore  on  their  policies.  We  may  distinguish  here 
two  questions  which  must  be  answered  separately.  In  the 
first  place,  we  must  analyse  those  factors  which  decide  that 

2.  A  Study  in  Post-War  British  Capital  Market,  by  A.  T.  K.  Grant. 


62  STRUCTURE  OF  INTEREST-RATES 

one  class  of  rates  should  be  higher  or  lower  than  the  other. 
In  the  second  place,  the  causes  which  determine  whether 
the  differentials  between  them  shall  be  narrow  or  wide  have 
to  be  ascertained. 

The  yield  on  debentures  of  large  and  well-established 
industrial  concerns  furnishes  a  reliable  barometer  of  returns 
on  long-term  investments.  Unfortunately,  an  index  of  that 
quality  is  not  easily  available  for  this  country.  In  the 
absence  of  such  statistics,  we  may  fall  back  on  the  yield  of 
3£  per  cent  Government  security  as  representative  of  the 
level  of  long-term  rates.  To  a  certain  extent,  the  yield  on 
government  securities  of  this  kind  is  indeed  more  akin  to 
short  rates  than  otherwise.  The  chief  drawback  of  long- 
term  investment,  namely,  non-availability  of  funds,  is 
diminished  to  the  very  minimum  since  these  scrips  are 
highly  marketable.  Nevertheless,  political  factors  which 
are  inseparable  from  such  investment  and  which  make  for 
an  element  of  risk,  and  general  psychological  attitude  and 
practices  of  the  public  which  looks  on  them  as  an  outlet  for 
its  permanent  savings,  make  these  securities  a  fair  repre- 
sentative of  long-term  investments  in  general. 

The  rate  of  the  Imperial  Bank  on  demand  loans  represents 
par  excellence  earnings  on  short-term  investments  which 
are  free  from  risk  and  liquid  in  a  high  degree.  As  we  shall 
see  presently,3  other  open  market  rates  conform  more  or 
less  to  this  rate  on  demand  loans  which,  before  the  advent 
of  the  Reserve  Bank,  was  also  known  as  the  bank-rate. 

From  our  record  of  these  rates  in  Table  VIII  and  Chart  II 
(Interest  Rates),  the  normal  relationship  between  them 
appears  to  be  that  the  short-term  rate  is  generally,  though 
not  always,  substantially  above  the  long-term  rate.  For  30 
years  in  the  last  century  the  excess  amounted  to  more  than 
1  per  cent  for  23  years  and  in  years  of  difficulties  like  the 
seventies,  it  widened  to  as  much  as  2  per  cent.  There  is  a 
noticeable  narrowing  of  the  difference  during  the  present 
century,  particularly  after  the  outbreak  of  the  World 
War  I.4 

There  are  a  few  exceptional  periods,  which  by  their  very 

3.  §  10. 

4.  Ch.  Ill;  Ch.  V. 


RELATIONSHIP  BETWEEN  SHORT  AND  LONG  RATES  63 

unusual  character,  serve  to  throw  into  bold  relief  the  normal 
relationship.  In  1891-92,  1921-22  and  in  the  years  which 
followed  the  crisis  of  1929-30,  the  short-term  rate  actually 
fell  below  the  long-term.  The  significance  of  this  reversal 
of  what  appears  to  be  the  more  normal  relationship  for  this 
country  will  be  analysed  in  another  place  in  this  chapter.5 
In  the  meanwhile,  it  is  important  to  note  that  in  all  ordinary 
circumstances  relative  cheapness  or  dearness  of  these  rates 
expresses  itself  as  a  mere  narrowing  or  widening  of  the 
margin  between  them.  The  years  1872,  1892,  1923,  1925,  1926 
and  1930  are  illustrative  of  this  proposition. 

This  normal  relationship  between  short  and  long  rates  in 
India  is  an  arresting  contrast  to  conditions  obtaining  in  other 
countries.  In  England,  the  greatest  international  source 
and  reservoir  of  short-term  and  long-term  capital,  the 
yield  on  consols  or  on  high-grade  industrial  debentures 
shows  itself  consistently  above  short-term  rates  quoted 
for  3  months  bank  bills.  It  is  difficult  to  say  how  far  the 
long-term  rate  in  England  is  raised  by  the  annual  outflow 
of  capital  and  how  far  the  short  rate  is  lowered  by  the 
inflow  of  short-term  capital  from  abroad  for  trade  and 
investment  purposes.  It  is  more  than  probable,  however, 
that  even  without  the  intervention  of  these  factors,  the 
relationship  is  expressive  of  the  basic  and  permanent  facts 
of  British  economic  and  financial  structure.6 

At  the  first  glance,  the  United  States  appear  to  present  a 
situation  very  similar  to  that  in  India.  The  rates  for  com- 
mercial paper  of  60-90  days'  maturity  have,  on  the  whole, 
persisted  in  levels  above  the  yield  of  Home  Railway  Deben- 
tures or  Treasury  Bonds  of  more  than  8  years'  maturity. 
But  there  are  two  special  circumstances  about  this 
commercial  paper  which  deprive  the  similarity  of  its 
apparent  significance.  In  the  first  place,  commercial  paper 
in  the  United  States  does  not  represent  any  specific  trans- 
action and  consequently  any  specific  security  of  goods. 

5.  See  Part  III  of  this  Ch. 

6.  "As  a  rule,  although  by  no  means  always,  short  rates  are  below  long  rates  .  .  . 
The  true  reason  why  short  rates  are  usually  below  long  is  to  be  found  partly 
in  the  structure  of  the  market  and  partly  in  the  extra  risk  of  lending  on  long- 
term." — Economics,  by  F.  Benham,  p.  259. 

Value  and  Capital,  by  J.  R.  Hicks,  Ch.  V. 


64  STRUCTURE  OF  INTEREST-RATES 

Secondly,  commercial  paper  is  a  much  less  important  outlet 
for  investment  of  short-term  banking  funds  than  call  and 
time  loans  to  the  Stock-Exchange.  Call  loan  rates  in  the 
New  York  Market  which  are  the  true  counterpart  of  short- 
rates  in  London  tend  on  the  whole  to  be  much  below  the 
yield  of  Railway  Debentures  or  Treasury  Bonds.  Between 
1890  and  1911,  call-loan  rates  shot  above  the  yields  of  Rail- 
way Debentures  and  Treasury  Bonds  only  in  the  years  1899, 
1902,  1905-7.7  It  may  be  said  therefore  that  in  the  United 
States  also,  the  normal  relationship  is  an  excess  of  long  rate 
over  short. 

The  relationship  between  short  and  long  rates  is 
sometimes  sought  to  be  explained  by  means  of  an  alleged 
distinction  between  money  capital  and  real  capital.  The 
demand  for  short-term  loans  is  according  to  this  view 
essentially  a  demand  for  money  capital.  The  long-term 
rate  represents  the  price  which  has  to  be  paid  for  factors  of 
production  or  real  capital  in  general.  Although  divergences 
between  the  supply  of  money  capital  and  real  capital  occur 
now  and  then  and  have  far-reaching  consequences  for  the 
economic  system,  it  is  highly  doubtful  whether  the  distinc- 
tion has  any  validity  as  a  long  period  or  secular  pheno- 
menon. The  aggregate  loan-capital  of  society,  in  the  money 
sense,  arises  because  income-receivers,  etc.  prefer  to  hold  a 
part  of  their  money-income  or  money  resources  as  deferred 
purchasing  power.  To  the  extent  that  they  defer  their 
claims  on  wealth,  a  stock  of  wealth  composed  of  finished, 
half-finished  and  unfinished  goods  is  diverted  from 
direct  consumption  into  further  production.  If  a  cross- 
section  of  economic  society  were  obtained  at  any  point  of 
time,  we  should  be  able  to  see  the  two  sides  of  the  process 
at  once — a  disbursement  of  money-incomes  equivalent  to 
the  net  contribution  of  each  factor  to  the  creation  of  wealth 
and  the  existence  of  a  stock  of  wealth  in  all  inchoate  or 
finished  stages  arising  out  of  the  fact  that  a  part  of  the 
aggregate  income  of  society  is  held  back  from  consumption 
for  short  or  long  periods.  An  advance  out  of  money  capital, 
however  short  or  long  its  duration,  means  therefore  a 

7.    Study  of  Interest  Rates,  by  Kock,  j>p.  278-282. 


SOME  HISTORICAL  EPISODES  I  EPISODE  OF  THE  NINETIES         65 

transfer  of  command  over  some  portion  of  real  wealth  whe- 
ther inchoate  or  in  a  finished  condition.  It  is  clear  from 
this  argument  that  short-term  or  long-term  investments 
differ  only  in  the  time-length  of  the  advance  and  not  in  the 
kind  or  character  of  the  resources  which  they  enable  the 
borrower  to  acquire.  There  is  also  no  warrant  except  an 
-empirical  one  for  the  belief  that  short-period  advances 
mean  the  creation  of  less  durable  goods  while  long-period 
advances  mean  an  accretion  of  more  durable  goods.  If  the 
foregoing  analysis  is  valid,  then,  a  persistent  relationship, 
as  distinguished  from  cyclical  movements,  between  short 
and  long  rates  must  be  explained  as  much  in  terms  of  the 
supply  and  demand8  of  real  wealth  as  in  the  case  of  any 
other  economic  price.9 

7.     SOME  HISTORICAL  EPISODES 

While  the  normal  relationship  in  India  is  a  level  of  short 
rates  higher  relatively  to  long  rates,  exceptional  years  or 
periods  are  not  altogether  absent.10  In  1891-92,  1921-22  and 
in  the  years  following  the  <*reat  crisis  of  1929-30,  short  rates 
actually  fell  below  long. 

2.     Episode  of  the  Nineties 

Events  in  India  in  the  closing  decade  of  the  last  century 
have  an  unusual  interest  when  studied  in  their  international 
setting.  The  western  world  was  then  passing  through  what 
Keynes  has  described  as  "the  famous  and  curious  depres- 
sion of  eighteen-nineties."  The  curious  character  of  the 
episode  is  intensified  when  European  experience  is  compar- 
ed with  what  transpired  in  India  during  the  same  time.11 

In  one  important  particular,  the  situation  in  England  and 
India  was  markedly  similar.  "The  period  (1890-96)  was 
marked  [in  England]  by  an  extreme  abundance  of  gold  and 
extreme  ease  of  credit."  The  Bank  of  England  rate  was  low 

8.  Sludy  o/  Interest  Rotes,  by  Kock.   Ch.   II. 

9.  ibid.,   Ch.   IV. 

10.  ibid.,  Ch.  I,  pp.  5-6. 

11.  Treatise  on  Money,  by  Keynes,  Vol.  Ill,  Ch    V. 
M.   B    5 


66 


STRUCTURE  OF  INTEREST-RATES 


and  from  February  1894  to  September  1896,  it  stood  at  the 
unusual  level  of  2  per  cent.12 

In  India,  the  short-term  rates  fell  suddenly  below  the 
long-term  in  1891  and  1892.  In  1888,  1889  and  1890,  the 
average  rate  of  the  Bank  of  Bengal  was  5.460,  6.991  and 
5.790.  For  1891  and  1892,  the  average  reached  3.062  and 
3.4999.  The  rates  of  the  Presidency  Banks  of  Bombay  and 
Madras  recorded  identical  movements.  Although  the  rates 
firmed  up  subsequently  and  rose  above  long  rates,  conditions 
continued  on  the  whole  easy  from  1893  to  1896.13 

This  unusual  ease  of  monetary  conditions  was  the  outcome 
of  the  fall  in  silver  exchange  and  the  incidental  heavy 
imports  of  silver.  For  the  5  years,  1884  to  1889,  the  net 
imports  of  silver  amounted  to  44.6  crores  but  in  the  next 
five,  they  rose  to  61  crores. 

Most  of  this  silver  found  its  way  into  banks  which  used 
it  to  add  to  their  cash  or  converted  it  into  notes  and  coin. 
The  highest  point  reached  by  "notes  current"  between  1875 
and  1890  was  16.4  crores.  But  in  1891,  this  figure  rose  to  25 
crores  from  the  low  level  of  15.7  crores  in  1890  and  remained 
at  24  crores  in  1892. 

The  introduction  of  the  5  Rupee  note  in  1891  explains 
only  a  part  of  the  increase.  The  larger  part  of  the  increase 
occurred  in  10,000  Rupee  notes — the  form  in  which  banks 


12.     Ch.   V. 
13. 


Yield  on 
Rupee  Security 


Price  of  3i 
Govt.   Security 


Rates  of  Bank 

of 
Bengal         Bombay 


Madras 


1890 

4.0 

5.79 

6.24 

5.73 

1891 

3.8 

3.06 

3.05 

2.92 

1892 

3.9 

3.50 

3.50 

3.50 

1893 

3.0 

4.88 

4.90 

5.27 

1894 

3.9 

5.39 

5.50 

5.01 

1895 

3.4 

4.33 

3.93 

4.26 

1896 

3.2 

107-f 

}            5.69 

5.47 

5.64 

1897 

3.4 

100-i 

*            7.92 

7.87 

7.98 

1898 

3.6 

95-< 

)            8.06 

8.29 

7.80 

1899 

3.4 

101-S 

>            9.91 

9.88 

6.05 

Ketnmerer  in  his  Modern  Currency  Reforms,  pp.  66-67,  fails  to  appreciate 
accurately  the  course  of  interest-rates,  due  no  doubt  to  the  choice  of  wrong 
periods. 

Q.  109-121.    Appendices,  Herschell  Committee's  Report. 


EPISODE  OF  THE  NINETIES 


67 


usually  hold  their  cash.14 

Except  for  the  extraordinary  ease  of  monetary  conditions, 
India  presents  a  complete  contrast  to  Great  Britain.  A 
boom  in  investment,  particularly  in  foreign  lending  between 
1888  and  1890,  had  led  to  the  Banking  Crisis  in  1890  and  a 
collapse  on  investment  activity  thereafter  till  1896.15  In 
India,  on  the  other  hand,  the  fall  in  short  rates  initiated  a 
similar  fall  in  long  rates  and  paved  the  way  to  a  well-marked 
investment  boom.  When  the  rate  of  the  Bank  of  Bengal  fell 
as  low  as  2  per  cent  in  1891,  there  occurred  an  increase  in 
the  price  of  3£  per  cent  Government  security,  or  what  is 
the  same  thing,  a  fall  in  their  yield.  In  1893  the  premium 
on  these  securities  varied  between  3  and  4  rupees,  in  1895  it 
reached  5  to  9  rupees,  in  1896  the  premium  exceeded  Rs.  10. 

With  the  general  fall  in  interest-rates,  enterprise  began 
to  gather  strength.  From  1890  to  1893,  the  paid-up  capital 
of  joint-stock  companies  increased  at  a  moderate  speed. 
But  thereafter  till  1898,  it  mounted  up  at  a  rate  which  for 
those  years  was  astonishing.  The  floatation  of  joint-stock 
enterprise  was  observed  with  surprise  in  contemporary 
business  circles.16 

In  spite  of  a  rising  total  of  wages-bill,  higher  rates  of 
money-wages  and  increase  in  other  incomes,  England  expe- 
rienced "trade  ....  stagnant,  employment  bad  and  prices, 
falling."17  Between  1890-96,  Saeurbeck's  index-number  fell  by 

34.    Amount  of  10,000  Rupee  Notes  in  Circulation  (in  crores) 

1887-87  2\                       1892-93                       5    1/25 

1888-89  2                          1893-94                      11    9/10 

1889-90  li                       1894-95                       32 

1890-91  11                 •     1895-96 

1891-92  5  1/5                  1896-97                       3 

15.  New  Issues  in  England.  (Annual  Average). 

1880-89  102 

1889  163 

1890  141 
1981-96  76 

16.  Paid-up  Capital  of  Joint-Stock  Companies,  (in  lakhs), 

1890  24,25  1896  31,15 

1891  26,58  1897  33,12 

1892  26,79  1898  35,19 

1893  27,51  1899  23,60 

1894  27,66  1900  24,70 

1895  29,38 

See  also  Q.  2847-73;  3309-31;  3484-3500;  3473;  Minutes  of  Evidence,  Fowler  Com- 
mittee. 

17.  Treatise. 


68  STRUCTURE  OF  INTEREST-RATES 

18  per  cent  and  the  Economist's  by  about  14.1  per  cent.  In 
the  terminology  of  the  Treatise,  savings  outran  investment. 

Things  appeared  otherwise  in  India.  From  1881  to  1888 
prices  were  on  the  whole  stable — the  index-number  moving 
within  a  narrow  range  of  97-100.  After  1888,  however,  in 
sympathy  with  the  fall  of  interest-rates  and  progress  of  in- 
vestment boom,  prices  mounted  up  rapidly  passing  117  to 
the  1896-97  famine  level  of  132.18 

Keynes  describes  the  British  situation  of  eighteen- 
nineties  as  ua  perfect  example  of  a  prolonged  Commodity 
Deflation  developing  and  persisting  in  spite  of  a  great  in- 
crease in  the  total  volume  of  bank-money."  In  the  light 
of  the  contrast  presented  by  England  and  India,  one  may 
well  wonder  whether  something  more  than  interest-rates, 
saving  and  investment  has  not  to  be  called  in  to  explain  the 
complicated  train  of  events  under  observation. 

This  era  of  low  short  rates  and  long  rates  ended  abruptly 
about  1897.  The  reversal  of  the  trend  of  early  nineties 
had  been  really  initiated  early  in  1893,  with  the  closing  of 
the  mints.  But  many  adventitious  causes  delayed  the 
logical  consequences  of  the  step.  The  supply  of  currency 
was  actually  enlarged  as  Government  accepted  silver  from 
banks  and  other  parties  who  were  likely  to  suffer  loss  by 
the  new  exchange  policy.  The  Secretary  of  State  insisted 
on  rates  for  Council  Bills  much  higher  than  market  rates 
and  his  forced  withdrawal  from  the  field  led  only  to  large 
imports  of  silver  as  the  only  alternative  means  of  payment. 
Subsequently,  after  two  successive  reductions  in  rates,  he 
re-established  touch  with  the  market  in  January  1894  and 
released  large  quantities  of  rupees  which  had  been  im- 
pounded in  Government  treasuries  from  June  1893  to 
January  1894.19  The  improvement  in  exchange  rate,  in  the 
meantime,  tended  to  defeat  itself  by  calling  rupees  out  of 
hoards  for  the  purchase  of  the  apparently  cheapening  silver. 
The  withdrawal  of  Government  as  the  usual  largest  bor- 

18.  Currency  and  Prices  ?r>  India  (Longmans),  General  Index  Number,  Ch.  IX. 

19.  Sales  of  Council  Bills  (in  crores  of  rupees) 

1892-93  26.4 

1893-94  15.7 

1894-95  31.0 


WORLD  WAR  I  AND  THE  YEARS  FOLLOWING  69 

rower  in  the  market  intensified  the  trend  to  lower  rates. 

By  about  1897,  however,  the  closure  of  the  mints  began 
to  be  effective.  By  1897,  interest-rates  reached  levels  such 
as  were  never  seen  before  except  in  the  crisis  year  1866. 
While  a  "bank-rate"  of  5  to  6  per  cent  in  India  as  against  a 
Bank  of  England  rate  of  3  per  cent  was  regarded  as  normal, 
the  "bank-rate"  in  India  reached  levels  as  high  as  12-13  per 
cent  in  1896-97.  The  Bank  of  Bengal  pleaded  lack  of  funds 
to  make  advances  even  against  gilt-edged  Government 
securities  and  at  interest-rates  as  high  as  18  per  cent.  Up- 
country  native  firms  were  reported  to  be  in  difficulties  or 
became  actually  insolvent.  A  significant  feature  of  the 
situation  was  the  greater  stringency  of  funds  in  the  banks 
than  in  the  bazaar;  bills  for  which  the  Bank  of  Bengal 
quoted  134  per  cent  were  being  dealt  with  in  the  bazaar 
at  8  per  cent.20 

The  long-term  rate  was  not  slow  in  rising  The  price  of 
3i  per  cent  Government  security  which  had  reached  Rs.  110 
in  1896  fell  down  to  Rs.  103.8  in  1897  and  still  more  preci- 
pitately to  Rs.  93  in  the  following  year.21  Government  in- 
tensified the  situation  by  resumed  borrowing — it  borrowed 
10  crores  in  1896-99.  Investment  met  an  abrupt  check.  The 
paid-up  capital  of  joint-stock  companies  evaporated  till  in 
1899  and  1900  it  was  even  lower  than  the  pre-decade  level. 
The  price-level  was  117  in  1896  and  132  in  1897.  It  fell  to 
109  in  1898  and  99  in  1899. 

3.     World  War  I  and  the  Years  Following 

The  last  years  of  the  war  recorded  a  noteworthy  narrow- 
ing of  the  differential  between  short  and  long  rates  in  India. 
The  narrow  margin  ultimately  gave  way  to  an  actual 
reversal  of  the  relationship  in  1921  and  1922.  This  time, 

20.  Q.    1680;    1735;    5225-28:    5925.   5759-63;    3462;    3627-37;    8290;    8373-74.— Minutes 
of  Evidence  :  Fowler  Committee's  Report. 

21.  Selling  Price  of  3£  p.c.  Securities  Premium    -f          Discount  — 

1894-95  -f3-  1-0  to  +4-14-0 

1895-96  -f5-  5-0  to  +9-  1-0 

1896-97  -f  10-4-4  to  +0  14-0 

1897-98  —0-  9-0  to  —4-12-0 

1898-99  —6-  6-0  to  -fl-  1-0 

18W-1900  H-J-  0-0  to  -f  4-12-0 

1900-01  i-2-11-0  to  -1-5-  8-0 


70  STRUCTURE  OF  INTEREST-RATES 

the  narrowing  of  the  margin  and  its  final  reversal  were 
caused  not  by  any  abundance  of  credit  and  short-term  funds 
as  in  the  last  case  but  by  the  exceptional  demand  of  Govern- 
ment for  savings  of  all  kinds.  In  the  years  1917-19,  the 
Government  borrowed  Rs.  130  crores  which  in  the  circum- 
stances of  India  was  a  colossal  sum  The  pressure  of  this 
demand  and  the  growth  of  war  investments  forced  up  the 
long-term  rate  from  its  low  level  of  3.8  per  cent,  to  6.4  per 
cent  in  1922.22 

The  needs  of  war  for  which  the  Indian  capital  market 
was  depleted  of  its  resources  were  such  that  they  had  the 
effect  of  keeping  the  short-term  rate  relatively  low.  The 
funds  raised  by  Government  were  largely  used  for  securing 
an  increased  supply  of  consumption  goods  and  destruction- 
goods.  In  other  words,  long-term  funds  raised  by  Govern- 
ment were  restored  to  the  producers  as  working  capital  to 
enable  them  to  increase  the  supply  of  these  goods.  The 
production  of  capital  or  durable  goods  was  much  discouraged 
by  the  prevailing  high  rate  and  the  deflection  of  demand 
from  its  usual  channels.  The  working  of  these  forces  is  well 
reflected  in  the  striking  increase  in  the  proportion  of  current 
to  fixed  deposits  which  marked  war  and  post-war  years. 

Although  this  was  the  main  factor,  it  was  not  the  only 
one  which  tended  to  depress  the  short-term  rate.  When 
loans  fell  short  of  urgent  needs  of  war  and  further  taxation 
became  inexpedient,  Government  issued  paper  to  cover  its 
expenditure.  Of  the  net  deficit  in  revenues  estimated  for 
1914  to  1920  at  36  crores  by  the  Inchcape  Committee  the 
greater  part  was  met  in  this  manner.  Since  the  aggregate 
pre-war  cash  balances  of  all  Indian  banks  were  about  25 
crores  only,  such  an  addition  to  the  cash  of  the  community 
was  bound  in  the  first  instance  to  create  an  apparent  plethora 
of  cash  in  the  banks  and  keep  interest-rates  low. 

Despite  the  soaring  prices  of  war-years,  the  percentage 
of  cash  to  the  deposit-liabilities  of  Indian  banks  reached 
record  levels.  In  ordinary  circumstances,  unusual  accumula- 
tions of  cash  occur  either  because  of  recall  and  non- 
renewals  of  loans  or  excess  of  payments-in  over  with- 

22.    Table  IX. 


WORLD  WAR  I  AND  THE  YEARS  FOLLOWING  71 

drawals.  In  times  of  great  trade  activity  and  business  pro- 
fits, however,  such  occurrences  are  out  of  the  question.  Nor 
could  the  high  cash  balances  be  ascribed  to  the  undoubted 
fall  in  investments,  for,  the  void  was  filled  with  loans  and 
bills.  The  unusual  growth  in  the  liquidity  of  the  banking 
system  is  explained  by  the  creation  of  legal  tender  by 
Government  in  such  a  way  that  every  rise  in  the  price  level 
was  a  prelude  to  a  fresh  issue  of  currency  notes. 

The  close  of  the  war  did  not  bring  any  diminution  of 
pressure  on  the  supplies  of  long-term  capital.  The  years 
1920-23  saw  great  investment  in  housing  and  joint-stock 
enterprise  among  others.  Most  of  these  concerns  had  been 
really  initiated  in  the  great  boom  of  1920  when  the  capital 
issues  of  joint-stock  companies  alone  exceeded  by  more 
than  13  times  the  issue  of  the  previous  year  which  itself 
aggregated  to  a  Jarge  figure.  It  is  hardly  strange  that  the 
long-term  rate  continued  to  mount  up  till  1923.  Thereafter, 
with  the  decline  of  enterprise,  the  long  rate  began  to  decline. 

The  break  of  1920  boom  caused  a  slump  in  the  bank-rate 
in  1921.  The  actual  deflation  of  1920  however  seems  to  have 
caused  no  embarrassment  to  the  banks  or  their  customers. 
Although  the  sales  of  reverse  councils  effected  a  total  con- 
traction of  39.7  crores,  the  banks  offset  the  pressure  by 
allowing  their  inflated  cash  to  fall  to  its  more  normal  pro- 
portions. The  rate  of  the  Bank  of  Bombay  was  only  \  per 
cent  higher  than  in  previous  two  years  and  the  rate  of  the 
Bank  of  Bengal  was  a  trifle  higher.  The  upshot  was  that 
while  rupees  and  notes  were  drawn  out  of  circulation,  the 
deposits  of  Presidency,  exchange  and  Indian  joint-stock 
banks  increased  in  the  very  same  months  by  23|  crores.23 

23.    See  Note  by  Sir  C.  Kisch— Appendices  to  Hilton  Young  Commission. 

(Figures  in  Crores) 

Capital  Issues       Paid-up  Capital       Post  Office  Price 

of  Joint-Stock       of  Joint-Stock       Savings  and       Calcutta 
Companies.*  Companies.        Cash  Certificates. 

1918  121.2         106 

1919  281.7          122  ..          208 

1920  148.0          164  ..          188 

1921  80.8  227  ..  181 

1922  34.4  258  26  176 

1923  26.2  244  33  177 

1924  21.2  275  38  161 
*  Official  years. 


72  STRUCTURE  OF  INTEREST-RATES 

But  circumstances  were  conspiring  to  force  up  gradually 
the  short  rate  and  restore  the  usual  relationship.  Although 
banks  avoided  the  deflation  pressure,  the  bazaar  rates  could 
not  escape  it  and  rose  to  8  to  11  per  cent,  as  against  5  per 
cent  of  the  Presidency  Banks.  In  1922,  1923  and  1924,  the 
Government  were  taking  steps  to  force  up  the  external 
value  of  the  rupee  to  Is.  6d.  sterling.  In  1922  Government 
sold  no  council  bills  and  prices  both  in  India  and  the  United 
Kingdom  were  stable.  From  January  1923  to  June  1924, 
Government  sold  council  bills  to  a  very  limited  extent  and 
prices  actually  fell  in  India  while  they  rose  in  England. 
From  July  1924  to  March  1925,  prices  in  India  kept  pace 
with  the  deflationary  policy  of  the  Return  to  the  Gold 
Standard  in  the  United  Kingdom.  The  Reports  of  the 
Currency  Controller  for  the  years  1922,  1923  and  1924  bear 
ample  testimony  to  the  stringency  which  developed  and 
caused  the  average  rate  of  the  Imperial  Bank  of  India  to 
mount  up  progressively  from  5.57  in  1921  to  6.68  in  1924. 

4.     The  Aftermath  of  the  Great  Depression 

The  years  1923  to  1929  were  years  of  normal  conditions 
and  prosperity  in  India.  Although  the  yield  of  3£  per  cent 
Government  security  fell  at  first  till  1927  and  then  gradually 
rose,  the  ordinary  excess  of  short  rates  above  long  continued 
in  the  usual  manner.  The  Imperial  Bank  was  content  to 
maintain  its  investments  at  a  low  but  slowly  rising  level  of 
about  20  per  cent  and  allow  its  cash  balances  to  fluctuate 
enormously  according  to  the  course  of  the  seasons.  The 
low  level  of  war-time  investments  was  quickly  raised  to 
34-36  per  cent,  while  cash  and  loans  were  established  round 
11  and  55  per  cent  of  deposit  liabilities. 

The  disastrous  effect  of  the  great  depression  on  agricul- 
tural prices,  the  fall  in  the  value  of  Indian  exports  and 
weakness  in  exchange,  contraction  of  currency  in  2  years 
of  43  crores  and  growing  internal  political  instability  were 
creating  a  difficult  situation  just  before  England  abandoned 
the  gold  standard  and  the  rupee  was  linked  to  sterling.  The 
short  rates  were  rising  very  sharply  in  the  early  part  of 
1931  and  the  long  rate  was  mounting  all  through  1930-32. 
The  currency  measures  of  September  changed  the  situation 


AFTERMATH  OF  THE  GREAT  DEPRESSION  73 

in  a  dramatic  manner.  The  deflationary  pressure  ceased, 
agricultural  prices  were  stable  at  first  and  then  improved^ 
exports  of  gold  in  so  far  as  their  equivalent  was  not  hoarded 
relieved  the  pressure  on  monetary  supplies.  But  the  de- 
pression continued  to  deepen  for  some  time  longer. 

The  bills  and  advances  of  the  Imperial  Bank  collapsed 
from  about  51  per  cent  in  1931  to  about  23  per  cent  in  1935. 
It  met  the  onset  of  rising  cash  balances  by  raising  its  in- 
vestments from  less  than  25  per  cent  to  more  than  50  per 
cent.  The  joint-stock  banks  whose  participation  in  seasonal 
loans  is  much  more  limited  passed  through  a  similar  phase, 
though  not  on  the  same  scale.  The  ratio  of  bills  and  loans 
of  the  Big  Five  fell  from  about  55  per  cent  to  about  45  per 
cent.  They  distributed  the  inflowing  funds  somewhat 
equally  between  cash  and  investment,  cash  rising  from  less 
than  15  per  cent  to  20  per  cent  and  investments  from  about 
35  per  cent  to  about  40  per  cent. 

As  the  trade  demand  for  loans  fell,  at  least  in  money 
value,  short  rate's  collapsed  from  their  high  level  of  1931 
and  from  1933  onwards  sank  below  the  long-term  rate.  The 
latter  also  fell  though  in  a  more  slow  manner.  The  post- 
1933  years  are  an  epoch  in  the  history  of  interest  rates  in 
India.  Never  belore  has  the  short  rate  persisted  at  levels 
markedly  lower  than  the  long  rate  for  such  a  long  period 
of  time.  Never  before  has  it  been  maintained  at  one  uniform 
level  for  such  a  long  period  and  from  season  to  season. 

The  years  from  1931  onwards  present  a  contrast  to  the 
episode  of  eighteen-nineties.  In  spite  of  a  great  and  dra- 
matic fall  in  interest  rates,  recovery  was  slow  and  painful. 
On  the  industrial  side,  no  investment  boom  such  as  we 
observe  in  the  eighteen-nineties  is  visible  till  1936  and  when 
it  did  appear,  it  proved  short-lived.  New  issues  hardly 
improve  till  1936  and  the  paid-up  capital  of  joint-stock 
companies  is  almost  stationary.  The  exception  to  this  stag- 
nation of  investment  is  an  outburst  of  house-building  of 
astonishing  magnitude  which  changed  the  appearance  of 
almost  every  town  in  this  country.  Profits  began  to  recover 
almost  immediately  from  their  record  low  level  of  1931 
but  even  in  the  recovery  years  1934-35  they  were  far  short 
of  the  1928  level.  Agricultural  prices  stabilized  themselves 


74 


STRUCTURE  OF  INTEREST-RATES 


at  their  low  depression  level  till  1935. 

It  is  difficult  to  make  any  definite  statement  about  the 
parallel  course  of  savings.  With  the  drastic  fall  of  prices, 
the  middle  and  lower  urban  classes  which  depend  on  wages 
and  salaries  certainly  benefited.  The  funds  invested  in 
postal  savings  and  cash  certificates,  insurance,  etc.,  which 
come  largely  from  these  classes  record  a  striking  growth. 
Some  of  the  agricultural  classes  even  may  have  had  surplus 
funds  to  invest  out  of  the  huge  gold  exports.  Judging  from 
the  number  of  assessees  to  income-tax,  it  appears  that  out  of 
the  18  classes  into  which  they  are  divided,  the  top  8  classes 
show  some  decline  in  numbers  while  the  lower  ten  classes 
are  either  stable  or  actually  increase.  On  the  whole,  savings 
do  not  seem  to  have  declined. 

The  striking  difference  between  the  nineties  of  the  last 
century  and  the  thirties  of  the  present  century  is  to  be  in- 
terpreted only  in  terms  of  the  linking  of  the  rupee  to  the 
sterling.  This  country  was  thus  linked  to  the  international 
depression  also.  With  the  silver  rupee  in  the  nineties,  India 
had  only  her  own  weight  to  pull.  In  the  thirties,  India  was 
only  one  member  of  a  large  team  attempting  to  pull  them- 
selves out  of  an  ever  deepening  morass.24 


24. 


a  ^ 


•M     0    $ 

o  -»->  *rj 
"73      w  J3 

o  o  2 
a      rS  £ 

3  "e3     .     <S 

"3    <«  -. 

c  ti  § 

'goo, 

•-      V, 

*•*  £  & 

y               C 

-  &2§ 

*-"    ra    M 
3S^o 

3  M  1  * 

-2  <8  .*!>  ft 

i    *•*   Jl»    C* 

c  *-   1! 

.     X     a; 

O    a]    <D     || 

'a  3  g  £ 

T3    "Q,    C      £ 

'<3     ^  °3 

g-S  * 

*7      ~      ^ 

•r   S  jy  rf 

•C   o  -  ^ 

<3,is.S5 

'a  «J  'o  o 

g'^2 

g  c  3 

«    l-l      UJ 

5 

^  «  u  3 

<  £  S  S 

crores 

crores 

1928 

21 

278 

100 

101.9-  %.9 

66 

145 

1929 

28 

286 

78 

101.4-  93.2 

72 

143 

139—119 

1930 

67 

232 

47 

95.6-  75.0 

75 

121 

122—90 

1931 

29 

285 

27 

74.5-  63.2 

82 

102 

84-69 

1932 

30 

285 

34 

58.1-  77.6 

98 

100 

69—70 

1933 

50 

300 

44 

81.4-  92.8 

115 

93 

64—72 

1934 

36 

303 

62 

95.5-120.8 

123 

95 

77—74 

1935 

46 

302 

69 

112.4-102.7 

132 

94 

75—79 

1936 

109 

63 

105.8-137.0 

104 

83—84 

1937 

53 

55 

128.1-108.5 

92 

94— 

DIFFERENTIALS  BETWEEN  SHORT  AND  LONG  RATES  75 

II.    DIFFERENTIALS  BETWEEN 
SHORT  AND  LONG  RATES 

It  is  more  easy  to  account  for  the  differentials  between 
short  and  long  rates  than  their  relative  position.  These 
differentials  must  depend  in  the  long  run  on  the  extent  to 
which  funds  available  for  the  two  kinds  of  investments 
compete  with  each  other.  It  is  obvious  that  under  appro- 
priate conditions  it  is  possible  to  finance  long-term  require- 
ments with  a  series  of  short-term  loans.  The  rationality 
of  meeting  short-term  requirements  with  a  long-term  loan 
is  not  so  immediately  obvious.  A  long  loan  raised  to 
finance  short-term  needs  involves  the  inconvenience  of 
holding  idle  cash -balances  when  the  needs  are  satisfied.  In 
certain  circumstances,  however,  it  may  be  economic  to 
incur  a  long  loan,  and  place  the  balance  as  fixed  deposit, 
when  the  short-term  needs  are  over.  This  happens  when, 
although  the  rate  on  fixed  deposit  is  less  than  the  rate 
payable  on  the  long-term  loan,  the  payment  to  be  made  on 
short  loans  is  so  high  that  the  excess  more  than  counter- 
balances the  loss  on  fixed  deposit.25  To  the  extent  to  which 
such  substitution  of  long  loans  by  short  ones  and  vice  versa 
is  possible  the  rates  payable  on  them  must  tend  to  hold  close 
together.  In  ordinary  circumstances,  however,  such  substi- 
tution is  impeded  by  certain  costs  and  inconveniences  which 
to  that  extent  create  margins  between  these  rates. 

(1)  A  series  01  short  loans  can  replace  a  single  long  loan. 
But  for  the  borrower,  the  renewal  of  a  loan  means  expense 
and  inconvenience  from  time  to  time.    Besides,  there  is  an 
element  of  uncertainty  that  short  loans  may  not  be  forth- 
coming at  the  expected  time,  at  the  expected  rate  and  in 
expected   quantities.    The   borrower   is   willing   for   these 
reasons  to  offer  a  higher  rate  for  a  long  loan. 

(2)  The   preference   for   short   or   long   loans   is   much 
influenced  by  anticipations  about  future  course  of  interest- 
rates.    When  long  rates  are  high  but  in  course  of  time  are 
expected  to  fall,   financing  by  short   loans  is  sought  by 
borrowers  as  much  as  possible.    Funding  of  existing  short- 

23.     Trade  and  Credit,  by  R.  G.  Hawtrey,   Ch.  V. 


76  STRUCTURE  OF  INTEREST-RATES 

term  indebtedness  is  postponed — which  means  again 
diminished  interest  on  long  loans.  This  preference  for  short 
loans  explains  how  in  the  ascending  phase  of  the  trade- 
cycle  when  rates  are  hardening,  short  rates  are  apt,  as  in 
recent  years  in  Great  Britain  and  the  U.S.A.,  to  mount  above 
long  rates.  When  the  trade  cycle  is  reversed,  the  same 
factors  depress  short  rates  very  much  below  long.  In  the 
case  of  India,  as  noticed  already,  these  phases  reveal  them- 
selves merely  as  narrowing  or  widening  of  the  margins. 

(3)  The  trouble  and  expense  of  repeated  renewals  have 
obviously  no  relevance  to  long  loans.  Periodic  anticipations 
of  changes  in  rates  have  also  limited  significance,  since  a 
long  loan  takes  account  of  every  foreseeable  factor  over 
long  periods — which  indeed  explains  the  relative  stability 
of  long  rates.  The  factor  which  directly  affects  the  long 
rate  is  the  unavailability  of  invested  funds  and  the  risk  of 
default,  which  grow  with  the  length  of  the  loan.  In  making 
a  long  loan,  the  lender  has  to  take  into  account  not  merely 
the  ability  and  character  of  the  borrower  but  also  probable 
economic  changes  and  events  which  may  affect  the  borrow- 
er's capacity  to  repay. 

Besides  these  factors,  investment  habits  and  financial 
organisation  of  a  country  also  decide  the  extent  to  which 
short  and  long  loans  are  in  direct  competition.  If  commer- 
cial banks  hold  the  bulk  both  of  short-term  and  long-term 
savings  of  a  country,  short  and  long  rates  naturally  tend  to 
hold  close  together.  In  Sweden,  for  example,  the  small 
invester  is  not  accustomed  to  invest  directly  in  shares  and 
bonds  while  the  rich  man  is  not  able  to  find  outlet  for  his 
temporary  surpluses  because  of  the  non-existence  of  an 
open  money-market.  This  situation  is  reflected  in  the  fact 
that  80  per  cent  of  the  deposits  of  banks  consist  of  time 
and  savings  deposits  while  the  balance  is  made  up  largely 
of  special  accounts  withdrawable  at  14  days'  notice.26  In 
India,  on  the  other  hand,  investment  in  industries  etc.  is 
direct,  which  leaves  the  banks  largely  in  control  over  short- 
term  funds.  Thus,  although  the  return  on  short  loans  tends 
to  be  higher,  the  reservoir  of  funds  available  for  such 

26.    Study  of  Interest-Rates,   by   Kock,   Ch.   VII. 


DIFFERENTIALS  BETWEEN  SHORT  AND  LONG  RATES  77 

investment  is  not  directly  replenished  from  supplies  of 
long-term  capital,  and  a  deviation  of  short  rates  from  long 
wider  than  what  exists  in  Sweden  is  made  possible. 

The  foregoing  factors  explain  the  limits  within  which 
short  and  long  loans  compete  with  each  other  for  employ- 
ment and  the  consequent  margins  which  are  established 
between  them.  They  also  suggest  the  line  along  which  an 
explanation  must  be  sought  of  the  reversal  in  India  of  the 
normal  relationship  between  the  rates.  The  largest  demand 
for  employment  of  short-term  funds  in  India  arises  from  the 
needs  of  agriculture.  But  employment  of  funds  for  purposes 
of  agriculture  suffers  from  two  drawbacks  which  entirely 
change  its  character.  The  risk  of  default  is  very  high  and 
compares  unfavourably  with  the  risk  which  may  be  incurred 
in  long-term  investment  in  joint-stock  enterprise.  Secondly, 
although  the  finance  required  may  be  short-term  in  name, 
the  proportion  of  renewals  as  a  matter  of  course  is  so  high 
that  the  investment  is  inevitably  looked  on  as  long-term  in 
essence.  The  high  rates  for  what  is  in  name  only  short- 
term  finance  for  agriculture  react  on  other  rates  in  agricul- 
tural areas  and  influence  ultimately  the  situation  in  the 
organised  money  markets  of  the  country.  The  attitude  of 
the  foreigner  towards  investment  in  India  tends  towards 
the  same  result.  Foreign  funds  flow  willingly  into  long- 
term  investment,  lowering  the  long  rate,  but  hold  scrupu- 
lously aloof  from  short-term  investment — regarding  India 
as  a  particularly  unattractive  market  despite  its  high  rates. 

As  a  profit-making  business,  a  bank  is  but  a  broker 
between  persons  who  have  funds  to  lend  and  others  who 
wish  to  borrow.  The  margin  between  the  borrowing  and 
lending  rates  is  the  source  of  bank  profits.  Ultimately, 
indeed,  these  rates  depend  on  the  supply  and  demand  of 
capital  and  the  state  of  trade  and  business  confidence.  But 
within  the  limits  set  by  these  general  conditions,  banks 
offer  on  their  deposits  as  low  rates  and  charge  on  their  loans 
as  high  rates  as  are  consistent  with  maximum  profits. 
Under  perfectly  elastic  and  competitive  conditions,  the 
margin  will  correspond  to  the  costs  of  banking  business. 


78  STRUCTURE  OF  INTEREST-RATES 

III.    RATES  PAID  ON  DEPOSITS  27 

5.     Demand  Deposits 

In  offering  rates  on  deposits,  banks  have  to  take  into 
account  the  volume  of  resources  they  wish  to  attract  and 
can  profitably  invest.  If  this  object  is  approached  from  the 
standpoint  of  the  banking  system  as  a  whole,  the  offer  of 
interest  on  demand  or  current  deposits  is  either  superfluous 
or  not  justified  by  any  comparable  advantage.  Demand 
deposits  are  sought  by  the  public  more  as  a  financial  con- 
venience than  as  profitable  investment  and  as  such  their 
aggregate  volume  is  little  responsive  to  offer  of  interest- 
rates.  The  effect  of  these  payments  on  banking  policies  is 
on  the  other  hand  generally  undesirable.  The  necessity  of 
earning  interest  puts  banks  under  constant  pressure  to 
make  investments  of  some  kind  or  another,  even  in  times  of 
slack  trade  and  limited  outlets.  The  evil  of  these  rates  was 
illustrated  in  the  case  of  England  by  the  crisis  of  1857  but 
the  banks  waited  till  1877,  by  which  time  there  had  taken 
place  an  enormous  growth  in  deposits,  for  a  voluntary  abo- 
lition of  interest  payments  on  current  accounts.  It  was 
one  of  the  many  lessons  learnt  by  the  United  States  from 
the  banking  disaster  of  1932-34  and  a  prohibition  on  such 
interest  payment  was  embodied  in  the  great  banking  laws 
of  1933  and  1935. 

In  India,  exchange  banks  offer  as  a  rule  some  interest  on 
current  deposits.  The  Imperial  Bank  of  India  does  not 
allow  any  interest  on  current  accounts.  Indian  joint-stock 
banks  quote  as  a  rule  rates  on  current  as  well  as  fixed 
deposits.  The  offer  of  these  rates  appeals  to  them  as  a  means 
to  make  headway  or  at  least  hold  their  ground  against  the 
prestige,  power  and  size  of  foreign  banks.  It  is  quite  pro- 
bable that  but  for  the  attraction  of  interest  on  current 
accounts,  a  part  of  their  resources  would  be  diverted  into 
exchange  banks  and  the  Imperial  Bank.  But  it  is  a 

27.  Interest -rates  have  been  arrived  at  as  explained  in  Ch.  VII,  foot  note  3. 
Rates  are  of  course  never  quoted  in  decimal  fraction.  But  it  is  not  possible  to 
obtain  past  records  and  the  choice  lies  between  some  indication  of  level  and 
trend  and  no  indication  at  all.  In  a  certain  sense  and  for  certain  purposes  we 
are  justified  in  regarding  these  calculated  rates  as  the  real  effective  rates. 


RATES  PAID  ON  DEPOSITS  79 

matter  for  grave  consideration  whether  the  practice  is  not 
a  source  of  weakness  to  them  in  the  long  run.  The  absence 
of  a  market  in  call-loans  and  high  quality  bills  aggravates 
this  evil  by  making  the  less  liquid  investments  a  larger 
proportion  of  the  whole. 

We  have  no  satisfactory  or  abundant  record  of  rates  paid 
by  Indian  joint-stock  banks  on  current  deposits.  There  is 
available  however  a  record  of  the  average  rate  paid  on  such 
deposits  by  the  Central  Bank  of  India.28  The  Central  Bank 
may  be  said  to  represent  conditions  and  policies  which 
stand  midway  between  the  most  orthodox  and  the  unortho- 
dox banking  practices  prevalent  among  these  banks.  Infor- 
mation relating  to  it  is,  for  this  reason,  particularly 
instructive. 

Till  1931,  the  Central  Bank  paid  on  demand  deposits  an 
average  rate  which  varied  between  2.01  and  2.53  per  cent. 
In  conformity  with  the  course  of  interest-rates  in  general, 
the  rate  declined  fast  thereafter,  reaching  the  record  low 
level  of  .77  per  cent. 

Its  significance  is  made  clearer  when  compared  with  other 
rates.  Till  the  depression,  this  average  rate  of  the  Central 
Bank  was  generally  only  a  little  less  than  half  the  yield  of 
34  per  cent  Government  security.  After  1931,  the  rate 
dwindled  to  about  one-third  and  later  even  to  less  than  one- 
fourth. 

Equally  significant  is  the  gap  maintained  between  fixed 
and  current  deposit  rates.  Till  1933,  a  gap  of  about  2.7  to 
3.7  was  deemed  necessary  to  prevent  wholesale  migration 
of  funds  from  this  category  into  the  other.  The  gap  then 
narrowed  to  about  1.5  per  cent — current  rates  falling  more 
precipitately  than  fixed  rates.  These  gaps  by  themselves 
are  impressive.  As  the  level  of  current  deposit  rates  sug- 
gests, these  gaps  bespeak  mainly  the  high  levels  which 
rates  on  fixed  deposits  are  apt  to  reach. 

Half  the  yield  on  3£-  per  cent  Government  securities  is 
rather  a  high  inducement.  It  is  possible  only  on  account 
of  the  abundance  of  high  earning  assets  in  India  and  the 
paucity  of  liquid  investments  like  call  loans.  From  a  long- 
as.  Table  VII. 


SO  STRUCTURE  OF  INTEREST-RATES 

distance  viewpoint,  however,  the  presence  of  this  feature 
in  our  banking  system  must  be  reckoned  as  a  source  of 
weakness  and  likely  embarrassments. 

6.     Rates  on  Fixed  Deposits 

Rates  on  fixed  deposits  partake  of  a  different  character 
altogether.  According  as  their  level  is  high  or  low,  rela- 
tively to  returns  on  other  forms  of  investment,  the  volume 
of  fixed  deposits  is  apt  to  fluctuate  in  a  very  sensitive 
manner.  Even  as  between  fixed  and  current  deposits,  there 
is  a  minimum  level  below  which  the  return  on  fixed  depo- 
sits is  felt  hardly  to  compensate  for  the  loss  of  availability, 
and  conversion  into  current  deposits  is  preferred  to  a  certain 
extent.  There  is  on  the  other  hand  another  and  a  more 
direct  criterion  which  the  banker  takes  into  account — the 
rates  which  he  expects  to  charge  his  customers.  The  inter- 
action of  these  two  sets  of  rates,  the  rates  on  alternative 
forms  of  investment  and  the  rates  prevailing  in  the  market 
for  short-term  accommodation,  gives  the  economic  level  for 
rates  on  fixed  deposits. 

From  the  standpoint  of  the  depositor  the  most  direct 
alternative  to  fixed  deposit  is  gilt-edged  Government  securi- 
ties, represented  in  England  by  the  Consols,  and  in  India 
by  the  3£  per  cent  securities.  There  can  be  of  course  no 
invariable  relationship  between  the  yield  on  fixed  deposit 
and  the  yield  on  Government  securities.  The  state  of  busi- 
ness activity,  risk  of  depreciation  of  securities,  the  specific 
purposes  for  which  deposits  are  to  be  held,  etc. — these  are 
factors  which  may  create  divergences  between  the  two. 
Besides,  the  direct  influence  of  the  long-term  rate  is  natu- 
rally limited  to  those  deposits  which  are  fixed  for  longer 
periods.  Between  deposits  which  are  impounded  for  short 
periods  like  fourteen  days  or  even  one  month  and  deposits 
which  are  fixed  for  6  months  or  one  year,  no  direct  competi- 
tion exists.  In  India,  deposits  for  shorter  periods  than  6 
months — the  so-called  "short  deposits" — are  usually  accepted 
in  the  bigger  places  but  the  most  common  period  for  fixed 
deposits  is  one  year.  The  proportion  of  long-period  deposits 
is  apt  to  be  very  high. 

As    for    lending    rates,    these    are  represented  in  highly 


RATES  ON  FIXED  DEPOSITS  81 

organised  money-markets  like  those  of  London  and  New 
York  by  the  bank-rates.  A  practice  has  therefore  grown 
up  of  relating  deposit-rates  to  the  bank-rate  as  so  many 
points  below  the  latter.  The  other  lending  rates  then  fall 
automatically  to  their  economic  levels.  The  situation  in 
India  is  materially  different.  The  rate  on  demand-loans  of 
the  Imperial  Bank  represents  broadly  the  minimum  return 
obtainable  on  short-term  accommodation  in  the  highly 
•developed  financial  centres  of  the  country.  The  rates 
obtained  by  other  banks  vary  enormously  according  to  the 
localities  they  serve  and  the  type  of  business  they  solicit. 

Even  in  the  slack  season,  rates  as  high  as  10  to  11  per  cent 
could  be  reaped  against  wheat-pits  in  the  twenties  of  the 
present  century.  When  the  monopoly  of  the  bank  in 
question  was  intruded  011  by  another  bank,  the  rate  fell  to 
8  per  cent.  The  appearance  of  the  Imperial  Bank  brought  it 
down  to  the  civilised  level  of  6  per  cent.  What  is  more, 
the  effects  of  these  changes  are  felt  far  beyond  the  locality 
immediately  concerned,  a  big,  circumambient  region  of  100 
miles  being  mentioned.29 

Apart  from  disparities  of  economic  conditions  and  state  of 
competition  from  one  tract  to  another,  banks  themselves 
have  the  choice  between  business  and  business  in  the  same 
tract.  There  exist  strong  grounds  for  the  surmise  that  our 
banks  tend  to  concentrate  on  one  type  of  business  or  another 
according  to  the  state  of  competition  etc.  There  are  banks 
which  find  it  profitable  to  lend  money  at  rates  almost  the 
same  as  in  England.  But  for  others,  such  rates  would  be 
highly  uneconomic.30  The  Imperial  Bank  has  been  found  to 
quote  5  per  cent  at  a  time  when  the  Allahabad  Bank  could 
not  have  a  profit-margin  at  less  than  7£  per  cent.31  Thus, 
the  Indian  joint-stock  banks  are  not  a  homogeneous  system 
but  a  group  made  up  of  several  types  whose  common  form 
or  organisation  conceals  serious  qualitative  differences. 

Hence,  Indian  joint-stock  banks  offer  rates  which  are 
•conspicuous  for  their  large  variations.  Even  in  a  country 

"29.    Q.  12061,  12002— Minutes  of  Evidence.  Hilton-Young  Commision.     The  place 
concerned   was  Harpur. 

30.  Q.    10967-74,    12034— Minutes   of   Evidence,   Chamberlain   Commission. 

31.  Q.  11866-11870— Minutes  of  Evidence,  Hilton-Young  Commission. 
M.   B.   6 


82  STRUCTURE  OF  INTEREST-RATES 

like  England,  deposit-rates  in  the  short  loans  market  of 
London  and  in  the  country  reveal  as  large  differentials  as 
1  to  If  per  cent.  In  India,  the  differentials  range  much 
wider.  5  per  cent  for  one  year,  6  per  cent  two  years,  and 
so  on  at  a  time  when  the  yield  on  3£  per  cent  securities  was 
no  more  than  3i  to  4  per  cent — these  are  by  no  means 
infrequent  with  certain  types  of  banks.  The  effectiveness32 
of  high  rates  to  overcome  the  psychological  resistance  of  the 
public  cannot  be  doubted  either.  In  his  evidence  before  the 
Chamberlain  Commission,  the  Secretary  of  the  Bank  of 
Bengal  amply  testified  to  this  fact.  When  the  Bank  raised 
its  rate  for  12  months  from  3  to  4  per  cent  as  an  experi- 
mental measure,  the  incoming  flood  of  funds  was  so 
embarrassing  that  as  a  measure  of  self-protection,  it 
promptly  restored  the  old  rate.33  "Money  is  available  in 
India,"  testified  a  banker  twelve  years  later,  "if  the  price 
is  paid  for  it,  and  there  is  no  more  powerful  agent  for 
bringing  hoards  into  fruitful  employment  than  a  good  price 
for  money."34  In  fairness  to  the  more  reputable  banks,  it 
must  be  recorded  that  they  rarely  accept  fixed  deposits  for 
periods  longer  than  one  year. 

The  wide  divergence  of  rates  may  be  illustrated  with 
reference  to  Madras,  the  area  of  the  highest  rates  in  this 
country.  The  Indian  Bank  of  Madras  is  a  good  barometer 
of  local  conditions.  X  and  Y  are  two  medium  sized  schedul- 
ed banks  with  a  history  of  varying  fortunes  but  quite 
appreciable  duration.  The  bank  Y  which  claims  a  much 
longer  record  of  service  has  passed  through  serious  difficul- 
ties and,  but  for  the  War,  might  have  declined  still  further. 
The  bank  Z  approaches  the  Indian  Bank  in  its  vigorous 
activities  and  respectable  standards. 

The  bank  Y  has  been  paying  throughout  the  highest  rates. 
Particular  attention  may  be  invited  to  the  rates  paid  on  12 
months'  deposits  which  contribute  the  bulk  of  fixed  deposits 
in  this  country.  In  1936,  the  rate  varied  from  2J  of  the 
Indian  Bank  to  4i  of  the  bank  X  which  is  a  well  managed 
bank.  In  1940,  the  rate  of  the  Indian  Bank  went  a  little 

32.  Q.  8668-8728— Minutes  of  Evidence,  Chamberlain  Commission. 

33.  Q.   7950— Minutes  of  Evidence. 

34.    Appendices,  Hilton-Young  Commission;  p.  509. 


RATES  ON  FIXED  DEPOSITS 


higher  to  2f  while  the  bank  Y,  although  on  its  decline,  paid 
a  rate  of  4£  which  was  1  point  higher  than  the  rate  of 
bank  X. 


Y 

1934 
Z 

1936 
Indian 
Bank 

X 

1938 
Y 

1939 
Y 

1! 

Indian 
Bank 

940 
X 

Y 

Current  Accounts 
Savings   Account 
Fixed  Deposits 
3  months 
6  months 
9  months 
12  months 
24  months 
36  months  or  more 

21 
41 

5 
6 

1 

3 

31 

1 
21-3 

21 
3 

4 

3 
31     ' 
4 
41 
5 

1—2 

2—3 
1  41—5 

1—11 
21 

11—3 
31 

4-41 
4—51 
31—41 

1 
2 

22 
3 

1 
3 

21 
3 

31 
4 
41 

1 
21 

3 
31 

41 
4 
41 

Yield  of  31  p.c. 
Security 

3.9 

3.52 

3.55 

The  only  continuous  record  for  rates  on  fixed  deposits  we 
have  got  relates  to  the  Central  Bank  of  India.  While  the 
average  rate  paid  by  it  on  all  deposits,  current  and  fixed 
taken  together,  has  been  as  a  rule  below  the  yield  of  3J 
per  cent  security,  the  rate  on  fixed  deposits  was  above  it 
by  a  margin  of  .7  to  1  per  cent  in  the  years  of  high  interest- 
rates  1924-29.  But  after  1929,  the  fixed  deposit  rate  fell 
below  the  yield  of  these  securities  and  presumably,  this  was 
the  case  before  the  year  1923  also.35 


35.    The  rates  offered  and  changes  in  them  made  by  the  Indian  Bank  of  Madras 
are  set  out  in  the  following  table  :— 

Before   1910 
and  till        1917  1926        1936        1940 

1917 
Fixed  Deposits— 

24  months  ..  5  51  6  41  3  3 

12       „  ..  41  5  51  41  21  21 

9      „  . .  4  ....  . .        not        not 

6      „  . .  31  ....  . .        reed.      reed. 

Religious     and     Charitable 

Deposits  2  p.c.  above  the  ordinary  rates 

1  month     minimum     and 
notice  of  a  fortnight  . .  21 

Current  Account — minimum 
Daily  balance  of  Rs.  100 

(now   Rs.   300)  ..  2  ..          «.  ..  1  i 

Savings   Account   minimum 
Balance    of   Rs.   5.    (Now 
Rs.    10)  ..  41  ....  ..  3=2j:        2 

Commission    for     purchase 
and  sale  of  Govt.  scrips    ..  3/16 


84 


STRUCTURE  OF  INTEREST-RATES 


7.    Average  Rate  on  All  Deposits 

Although  we  have  no  separate  records  for  rates  paid  on 
fixed  and  current  deposits  except  for  the  Central  Bank  of 
India,  statistics  for  the  average  rate  paid  on  both  types  of 
deposits  taken  together  are  more  abundant.  The  average 
rate  is  useful  as  giving  us  a  direct  idea  of  the  profitability 
of  different  assets  of  banks. 

The  Allahabad  Bank  which  operates  largely  in  the  UP. 
and  a  part  of  the  Punjab  paid  a  rate  on  the  average  which 
till  1925  was  less  than  the  yield  of  3i  per  cent  securities. 
But  thereafter,  it  seems  to  have  been  unable  to  reduce  its 
deposit-rates  in  conformity  with  the  rapid  fall  of  interest- 
rates  which  took  place.  The  average  rate  has  been  actually 
higher  than  the  yield  on  the  aforesaid  securities. 

The  Punjab  National  Bank  which  operates  to  an  extent 
in  the  same  area  records  a  different  state  of  things.  The 
relationship  between  its  average  deposit-rate  and  the  yield 
on  3J  per  cent  securities  was  rather  indefinite  till  1929 — the 
former  fluctuating  a  little  above  or  a  little  below  the  latter. 
After  1929,  the  average  rate  sank  below  that  yield.  Since 

Deposit-Rates 


Imperial  Bank     Central  Bank 
of  India 

Bank 

of  India     Allahabad 
Bank 

•u 

w 
00 
C 

c       ^       &      c 

£     "S     .s     £ 

"S 

c 

S          TJ              § 

X 

fa 

> 

3           £          £          3 
U           fa          W         U 

^x 

>      *•«       £         ** 

£9         3          .2             3 
CO       U         fa           U 

1931 

34 

34 

nil        5        4        2 

44 

34' 

2 

1932 

24 

24 

4        3        14 

4 

3 

14 

1933 

2 

2 

3        24      1 

3 

24 

1 

1934 

2 

24 

1        2J      1 

24 

24     . 

1939 



13 

14 

1940 

13 

4  * 

1941 

U 

1!|     .  .        4 

12 

4        2r        i 

1942 

14 

.. 

n  ..     4 

15/8 

4,   ,2         4 

Bank 

of 

Punjab 

Indian 

Bank 

Bank  of  Behar 

Baroda 

National  Bank 

J 

G 

c 

"S 

TJ 

<u 

•0                  4> 

-o 

<u 

£ 

U 

S      i 

fa             U 

1 

s 

u 

o>              »-• 

fa       5 

1939 

U 

4 

25          1 

>  4 

24           1 

1940 

n 

4 

2i            1 

t> 

1 

1941 

12 

4 

2g            1 

2| 

8 

34            1 

1942 

14 

4 

24          1 

24 

i 

AVERAGE  RATE  ON  ALL  DEPOSITS  85 

the  proportion  of  fixed  deposits  in  the  liabilities  of  the 
Punjab  National  Bank  is  higher  than  in  the  case  of  the 
Allahabad  Bank,  particularly  in  recent  years,  it  is  clear  that 
the  rates  of  the  Allahabad  Bank  on  fixed  deposits  tend  to 
reach  higher  levels  than  those  paid  by  the  other  bank. 

The  rates  of  both  the  Allahabad  Bank  and  the  Punjab 
National  Bank  are  as  a  rule  higher  than  those  of  the  Central 
Bank  of  India.36  After  1925,  the  differentials  between  them 
have  widened  in  a  marked  manner. 

After  the  Allahabad  Bank  and  the  Punjab  National  Bank, 
the  highest  deposit-rates  are  paid  by  the  Indian  Bank  which 
operates  largely  in  South  India.  Till  1933  its  average  rate, 
which  as  a  rule  has  been  below  the  yield  of  3£  per  cent 
Government  securities,  stood  between  3£  and  4  per  cent. 
Afterwards,  it  fell  much  below  that  yield  but  continued  to 
be  quite  as  high  as  among  important  Indian  joint-stock 
banks.  The  margin  between  the  rates  of  the  Central  Bank 
of  India  and  the  Indian  Bank  tends  to  be  about  1  per  cent 
and  has  rarely  fallen  below  \  per  cent.  Even  during  recent 
years,  the  margin  continues  to  be  about  the  same. 

We  have  no  statistics  available  for  certain  important 
banks  like  the  Imperial  Bank,  the  Bank  of  India,  the  Bank 
of  Baroda,  etc.  From  our  analysis  of  their  profit  and  loss 
accounts  and  particularly  their  rates  of  gross  and  net  pro- 
fits, however,  it  can  be  confidently  inferred  that  their  rates 
are  lower  than  those  of  the  Central  Bank  of  India. 

As  we  have  indicated  already,  the  significance  of  the 
average  rate  cannot  be  accurately  appreciated  without  tak- 
ing into  account  the  proportions  of  fixed  and  current 
deposits.  These  proportions  vary  markedly  between  bank 
and  bank.  The  Punjab  National  Bank  has  as  high  a  pro- 
portion of  fixed  deposits  as  75  to  80  per  cent  of  the  total. 
The  Bank  of  India  maintains  it  at  about  50  to  55  per  cent. 
A  larger  proportion  of  fixed  deposits  means  a  limited  ability 
to  earn  profits  and  a  corresponding  temptation  to  launch 
into  illiquid  business. 

36.  Cf.  "The  Puniab  National  Bank  which  is  the  only  Indian  Bank  in  Northern 
India  with  foreign  connection  is  said  to  charge  very  high  rates  as  compared 
with  exchange  banks  in  Bombay." — Banking  Inquiry  Committee  Report  1931, 
p.  283* 


86  STRUCTURE  OF  INTEREST-RATES 

8.    Regulation  of  Deposit-Rates 

Variations  in  deposit-rates  from  tract  to  tract  and  banks 
with  one  type  of  business  to  banks  with  other  kinds  of  busi- 
ness are  both  inevitable  and  in  conformity  with  the  economic 
needs  of  India.  But  variations  which  arise  from  unhealthy 
competition  among  banks  are  a  source  of  weakness  to  the 
banking  system  as  a  whole.  Uneconomic  rates  offered  by 
banks  mean  unavoidably  unhealthy  business  and  banking 
practices.  Advanced  banking  systems  recognise  that  un- 
checked competition  in  deposit-rates  advance  the  interests 
neither  of  individual  banks  nor  of  the  banking  system.  The 
Federal  Reserve  Board  in  the  United  States,  the  Syndicate 
of  Banks  in  Paris,  the  Stempelvereinigung  in  Germany,  the 
informal  association  of  the  Big  Five  in  England  reach  agree- 
ments from  time  to  time  as  to  the  deposit-rate  which  are 
strictly  adhered  to.  Nothing  will  ensure  the  steady  pro- 
gress of  banking  in  India  more  than  some  regulation  of 
deposit-rates  which  is  both  effective  and  at  the  same  time 
elastic  enough  to  permit  unimpeded  the  work  of  reaching 
all  classes  of  potential  depositors.  A  workable  scheme 
would  be  to  divide  the  country  into  a  number  of  circles 
marked  from  each  other  by  well-defined  financial  needs  and 
characteristics.  As  in  France,  banks  in  each  circle  should 
voluntarily  allot  themselves  to  three  or  more  classes  accord- 
ing to  their  type  of  business  and  each  class  should  have 
maximum  rates  which  they  must  not  exceed.  The  regula- 
tion need  not  seek  to  cover  all  classes  of  deposits.  As  in 
England  where  the  agreed  rates  apply  to  deposits  subject 
to  7  days'  notice  only,  we  might  prescribe  rates  for  the  most 
common  period  of  fixed  deposits — which  is  usually  one  year. 

9*    Rates  Earned  on  Investments 

In  examining  the  structure  of  rates  charged  to  the  public, 
we  have  perforce  to  exclude  all  rates  for  which  continuous 
or  reliable  records  are  not  available.  A  modern  capital  and 
money  market  presents  two  broad  classes  of  rates :  rates 
prevalent  in  the  open  market  or  open  market  rates  and 
rates  charged  to  customers.  Even  in  more  advanced  coun- 
tries, sufficient  and  reliable  data  for  the  latter  class  are  not 
easily  obtainable.  It  is  no  surprise  then  that  the  only 


RATES  EARNED  ON  INVESTMENTS  87 

statistics  available  in  this  country  relate  to  open  market 
rates. 

The  rates  charged  to  customers  by  banks  and  particularly 
by  other  lenders  should  not,  however,  be  underestimated 
as  factors  in  the  general  banking  and  economic  situation. 
Mortgage  loans,  it  is  to  be  presumed,  absorb  no  small  frac- 
tion of  the  annual  savings  seeking  investment.  In  urban 
centres,  loans  against  houses  and  sites,  and  in  less  indus- 
trialised places,  loans  against  farms  attract  not  a  small 
share  of  banking  and  other  funds.  Loans  for  consumption 
whether  direct,  or  indirect  in  the  form  of  instalment  credit, 
have  an  important  place  in  most  countries.  The  growth 
of  institutions  for  financing  instalment  sales  have  tended  in 
recent  years  to  link  these  rates  to  the  rates  structure  of  each 
country.  A  more  astonishing  development  has  been  the 
growth  of  "professional  and  private"  loans  in  the  aggre- 
gate advances  of  banks.  No  mean  fraction  of  these  loans 
consist  of  consumption  loans,  pure  and  simple. 

Broadly  speaking,  the  main  factor  distinguishing  rates 
charged  to  customers  from  open  market  rates  is  that  while 
differentials  among  the  latter  are  much  influenced  by  the 
period  of  the  loan  and  the  quality  of  the  collateral  offered 
as  security,  the  differentials  among  the  former  are  mainly 
determined  by  the  presumed  banker-customer  relationship. 
Time  is  not  an  overriding  factor  in  customers'  rates  be- 
cause the  banker  strives  to  retain  his  customer  as  a  perma- 
nent client  while  the  customer  expects  the  banker  to  take 
into  account  not  merely  the  profit  on  the  particular  loan 
but  the  present  and  future  welfare  of  the  business  as  well. 
Renewals  of  these  loans,  whether  given  initially  on  a  time 
or  demand  basis,  is  a  common  occurrence  and  practice. 
Security  also  is  not  of  so  much  relevance  since  the  banker 
seeks  safety,  not  in  any  particular  kind  of  collateral,  but  in 
a  number  of  facts  and  factors  which  he  has  learnt  to  take 
into  account  as  a  result  of  long  personal  contacts  and  rela- 
tionship. A  customer  is  not  merely  an  outlet  for  invest- 
ment. In  his  capacity  as  depositor,  he  proves  an  important 
source  of  bank  funds  also. 

Secondly,  unlike  open  market  rates  which  tend  to  appro- 
ximate to  a  certain  level,  customers'  rates  are  apt  to  show 


88  STRUCTURE  OF  INTEREST-RATES 

great  geographical  variations.  Since  local  knowledge  and 
contacts  are  the  chief  basis  of  these  loans,  local  conditions 
influence  rates  which,  even  in  countries  like  the  United 
States,  are  apt  to  be  twice  as  high  in  certain  localities  as  in 
others.37  The  presence  or  absence  of  a  local  link  with  the 
central  bank  of  the  country,  the  abundance  or  paucity  of 
capital  indicated  roughly  by  the  volume  of  local  deposits, 
the  degree  to  which  funds  are  attracted  from  smaller  to 
bigger  centres  or  vice  versa,  operating  costs  of  banks  rela* 
tively  to  the  size  of  business — these  are  some  of  the  impor- 
tant factors  normally  at  work  in  determining  the  level  of 
these  geographical  variations.38 

10.    Open  Market  Rates 

(1)  The  Imperial  Bank's  rate  for  demand  loans  may  be 
taken  as  the  barometer  of  returns  on  short-term  capital  in 
this  country.    The  rate  may  be  treated  as  representative  of 
rates  charged  for  cash-credits  and  ordinary  loans  as  well. 
These  forms  of  accommodation  offer  certain  advantages 
which  have  reduced  other  forms  of  accommodation  like  dis-* 
count  of  bills,  etc.  to  insignificant  proportions  in  the  assets 
of  Indian  banks.39 

(2)  The  Imperial  Bank  Hundi  rate  is  the  rate  at  which 
the  bank  discounts  first  class  trade  bills.    Till  1935,  the  law 
restricted  the  maturity  of  these  bills  to  3  months.    As  a 
matter  of  practice,  the  maturity  of  bills  discounted  averaged 
to  about  60  to  61  days.40 

37,  Money  Rates  and  Money  Markets  in  the  U.  S.,  by  Riefler,  p.  80  Table  Ch.  VI. 
£8.  In  a  year  of  low  interest-rates  like  1940  when  the  yield  of  3J  p.c.  securities 
was  3.84,  a  not  too  well  managed  scheduled  bank  from  Madras  made  the  follow- 
jng  return  of  rates  charged  to  customers  : 

Advances  against  gold  and  bullion  7£  to  12  p.c. 

Govt.  obligations. 

„          Commodities  7    to    9  p.c. 

Real  estate  6    to  12  p.c. 

Fixed   deposits  5J  to     9  p.c. 

Trade   bills  9  p.c. 

Clean  Advances  6    to  12  p.c. 

Advances  against  guarantee  81  to  12  p.c. 

Decreed  debts  6  p.c. 

See  Ch.  V  §  11. 
S9.     Table  X. 

40.    Q.  9599.     Minutes  of  Evidence,  Hilton-Young  Commission. 
Para  578,  Banking  Inquiry  Committee's  Report. 


OPEN  MARKET  RATES  891 

Since  the  bank  can  terminate  a  demand  loan,  usually 
with  some  notice,  one  should  expect  the  hundi  rate  which 
is  based  on  an  assured  investment  for  a  certain  period  to- 
be,  if  at  all,  above  the  rate  on  demand  loans.  As  a  matter 
of  fact  the  hundi  rate,  although  it  moves  generally  in  sym- 
pathy with  demand  loan  rate,  is  found  to  be  sometimes 
above  it  or  below  it.41 

(3)  The  call  money  rate  is  the  rate  for  surplus  money 
seeking  investment  for  possibly  a  minimum  period  of  24 
hours.    Call  money  is  repayable  at  the  option  of  either 
lender  or  borrower.    In  London,  call  loans  are  given  only 
on  security.    It  is  the  practice  in  India  to  limit  these  loans 
to  first  class  parties  without  demanding  any  security.42 

Call  money  is  used  in  India  for  purposes  of  dealings  in 
the  bullion  markets  and  stock  exchanges.  It  is  not  infre- 
quent for  individuals  of  high  financial  status  in  Bombay 
to  apply  for  and  obtain  call  loans  for  ordinary  trade  pur- 
poses, the  object  being  to  save  interest  on  cash  credits  and 
overdrafts.  It  is  probable  that  loans  for  stock  exchange 
purposes  are  more  important  in  Bombay  than  in  Calcutta. 
Even  in  Bombay,  the  volume  for  these  purposes  does  not 
reach  more  than  a  modest  size.43  Call  money  figures  pro- 
minently in  inter-bank  loans. 

Call  money  rates44  move  generally  in  sympathy  with  the 
rate  for  demand  loans.  They  are  apt  to  rise  very  high  and 
on  occasions,  equal  it  even.  In  the  busy  season,  call  money 
is  sometimes  unavailable  at  any  rate  while  in  the  slack 
season  it  falls  below  short  deposit  rates,  losing  all  touch 
with  the  Imperial  Bank  rate  for  demand  loans. 

(4)  Bazaar  Bill  rates  are  the  highest  rates  in  the  Indian 
money  market.    They  are  charged  on  bills  which  are  dis- 
counted for  small  traders  by  shroffs.    The  rates  are  lower 
in  Bombay  than  in  Calcutta.     This  is  probably  due  to  a 
closer  association  of  shroffs  with  the  banking  system  in 
Bombay  than  in  Calcutta.45 

41.  Para  580,  Banking  Inquiry  Committee  Report. 

42.  Q.  12598  to  12604.— Minutes  of  Evidence,  Hilton- Young  Commission  (M.  S.  M. 
Gubbay  Esq.).     Para  580,  Banking  Inquiry  Committee  Report. 

43.  Para  577,  Banking  Inquiry  Committee  Report. 
44  &  45.    Table  VIII. 


90  STRUCTURE  OF  INTEREST-RATES 

Our  analysis  suggests  the  conclusion  that  the  only  rela- 
tionship which  exists  between  different  money  rates  in 
this  country  is  such  as  arises  out  of  basic  economic  facts 
like  seasonal  variations  in  demand,  general  shortage  of 
•capital,  etc.  There  is  no  precise  definiteness  about  their 
inter-relations  such  as  exists  in  the  advanced  money  mar- 
kets of  the  world.  The  indefiniteness  may  be  traceable  to 
several  causes :  absence  of  a  sense  of  common  interests  in 
the  banking  community,  the  lack  of  an  effective  central 
currency  and  credit  authority,  impediments  in  movements 
of  capital,  etc. 

Agreement  and  convention  among  bankers  regarding  the 
articulation  of  rates  have  a  very  precise  economic  objec- 
tive. Taking  the  bank-rate  as  representative  of  short  rates 
in  general,  convention  seeks  to  establish  definite  margins 
between  different  open  market  rates  and  thus  eliminate 
the  danger  of  unhealthy  competition.  The  margins  are 
not  arbitrary  but  bear  a  fairly  accurate  relationship  to  the 
costs  of  different  kinds  of  investments.  The  practice  in 
London  for  example  has  been  to  quote  rates  on  deposits 
repayable  at  short  notice  at  about  2  per  cent  below  the  bank- 
rate.  The  fixed  margin  between  deposit-rates  and  the  bank- 
rate  is  chiefly  useful  as  preventing  any  tendency  to  grab 
deposits  and  assures  banks  a  margin  of  reward  commensu- 
rate with  their  costs.  The  rates  for  short  and  call  loans  are 
^essentially  rates  for  surplus  funds  or  funds  which  are  to  be 
invested  in  such  a  manner  that  they  are  almost  equivalent 
to  cash.  These  rates  tend  to  fall  almost  to  the  levels  of 
deposit-rates  with  a  bare  margin  sometimes  for  costs.  From 
the  standpoint  of  the  control  of  the  money  market,  the 
regulation  of  these  rates  is  much  more  important  than  the 
•definition  of  the  relationship  between  the  bank-rate  and 
the  deposit-rates.  The  bill  market  and  stock  exchanges 
into  which  these  funds  flow  very  largely  are  very  sensitive 
to  changes  in  interest-rates.  The  control  of  credit  acquires 
quickness,  momentum  and  effectiveness  when  exercised 
through  these  parts  of  the  economic  structure.  Their  ulti- 
mate effects  on  other  parts  of  the  structure  are  apt  to  be 
uncertain  and  at  best  tardy.  As  for  advances,  the  tradition 
in  London  has  been  a  rate  |  to  1  per  cent  above  the  bank* 


OPEN  MARKET  RATES  91 

rate  with  a  minimum  of  4  to  5  per  cent  in  all  circumstances.46 
The  absence  of  convention  in  India  is  perhaps  best  illus- 
trated by  the  indefinite  relationship  between  the  Imperial 
Bank's  rate  for  demand  loans  and  its  hundi  rate.  As  the 
security  behind  a  demand  loan  is  as  good  as  that  support- 
ing a  trade  bill,  the  demand  loan  rate  should  be  a  little 
lower  if  the  average  period  of  such  loans  falls  short  of  60 
or  61  days  or  a  little  higher  if  the  period  tends  to  be  longer. 
Actually,  the  rate  is  sometimes  above  and  sometimes  below 
the  hundi  rate.  Such  indefiniteness  contributes  an  element 
of  uncertainty  as  to  the  best  lines  along  which  credit 
instruments  and  practices  could  develop. 

Call  loans  are  prized  abroad  because  they  serve  as  a 
second  line  of  protection  after  cash.  Rates  in  a  market  like 
London  are  fixed  in  a  definite  relationship  to  the  bank-rate 
because  if  loan?  are  not  forthcoming  from  commercial 
banks,  the  bill  market  can  always  turn  to  the  Bank  of 
England  for  discount  at  its  rate.  In  India,  call  loans  are 
essentially  loans  out  of  surplus  funds  in  which  large  varia- 
tions occur  according  to  seasonal  tightness  or  slackness. 
The  only  alternative  to  call  loans  is  maintenance  of  larger 
cash  which  earns  no  return  or  lock-up  of  funds  in  advances 
or  securities  which  on  the  average  earn  much  less  than 
demand  loans.  When  funds  are  released  by  cessation  of 
seasonal  demand,  rates  on  call  loans  are  governed  by  the 
simple  principle  that  some  return  is  better  than  no  return 
and  that  investment  should  be  of  such  duration  as  will 
release  funds  for  use  when  the  busy  season  returns.  When 
call  loans  become  scarce,  borrowers  have  no  alternative 
source  to  appeal  to  as  in  London  but  must  put  up  with  what- 

46.    The  automatic  character  of  these  rates  is  well  illustrated  by  figures  for  two 
consecutive  days  on  the  eve  of  World  War  II. 

August  23,   1939  LONDON  August  24,  1939 

Bank  Rates  «...  2  4 

Discount  Rate 

60  Days  J  3| 

1  33 

2—24  33—5 


3  Months 

6  Months 
Treasury  Bills 

3  Months 
Loans — Day  to  Day 

,,    Short-Loan 
Deposit  -Allowances 


S-l 
I— 1 


92  STRUCTURE  OF  INTEREST-RATES 

ever  levels  these  rates  reach  in  sympathy  with  the  demand 
loan  rates. 

11.    The  Gross  Rate  of  Earning  of  Banks  Generally47 

Although  we  have  no  record  of  rates  charged  to  customers 
separately,  we  are  fortunate  in  having  some  indication 
of  the  levels  of  open  market  and  customers'  rates  put 
together.  Important  banks  publish  figures  which  enable 
us  to  obtain  rates  of  earning  per  cent  of  funds  at  their  dis- 
posal. The  rate  of  earning  does  not  represent  indeed  the 
full  cost  paid  by  the  public  for  the  use  of  banking  funds. 
The  resources  of  which  gross  earnings  are  expressed  as  a 
percentage  include  cash  which  is  not  lent  out  at  all.  This: 
means  that  the  actual  cost  paid  by  the  public  for  funds 
lent  out  is  a  little  higher  than  this  percentage.  Invest- 
ments which  are  composed  largely  of  Government  securi-* 
ties  and  into  which  a  large  proportion  of  bank  funds  finds 
its  way  present  another  difficulty.  Besides,  in  making 
comparisons,  we  must  remember  that  the  rate  will  depend 
on  the  policy  of  each  individual  bank — in  particular,  the 
proportions  in  which  it  distributes  its  resources  among  the 
various  kinds  of  assets  available.  The  gross  rate  of  earn- 
ings represents  on  the  whole  the  minimum  level  above 
which  the  public  has  to  bear  on  the  average  a  certain  sur- 
charge for  banking  accommodation.48 

The  earning  rate  of  the  Central  Bank  which  is  generally 
the  lowest  for  the  banks  for  which  we  have  figures  demon- 
strates against  the  high  profitability  of  short-term  finance  in 
this  country.  The  "bank-rate"  of  the  Imperial  Bank  and 
the  Central  Bank's  earning  rate  do  not  maintain  indeed  a 
definite  relationship.  According  to  monetary  conditions  and 
cyclical  influences,  the  Central  Bank's  earning  rate  is  some- 
times above  and  sometimes  below  the  "bank-rate".  During 
the  war  years,  when  money  was  abundant,  if  not  wealth,  the 
rate  fell  below  the  "bank-rate".  From  1920  to  1927,  when 
the  world  was  generally  suffering  from  very  high  interest- 
rates,  the  rate  of  earnings  moved  on  to  a  distinctly  higher 
level.  In  the  few  following  years,  it  fell  below  the  "bank- 

47.  See  Ch.  Ill  f.  n.  27,  Ch.  VIII  f.  n.  3. 

48.  Table  X. 


GROSS  RATE  OF  EARNING  93 

rate"  but  after  1933,  since  customer's  rates  have  always  a 
rock-bottom  level,  the  earning  rate  once  more  rose  above 
the  "bank-rate". 

The  rate  on  short-term  finance  charged  by  the  Central 
Bank  could  not  be  lower  than  that  of  the  Imperial  Bank. 
If  its  gross  earning  rate  falls  below  the  Imperial  Bank's  rate 
for  demand  loans  it  must  be  because  of  lower  customers' 
rates  or  lower  yield  of  investments.  As  compared  with 
other  banks,  the  lowness  of  its  earning  rate  is  to  an  extent 
ascribable  to  the  comparatively  lower  proportion  of  its  loans 
.and  advances. 

The  facts  are  materially  different  with  the  other  three 
banks.  These  banks  operate  in  areas  of  high  rates  in  gene- 
ral and  perhaps,  the  high  deposit-rates  they  offer  may  be  a 
factor  in  inducing  them  to  seek  business  of  a  somewhat 
different  kind.  The  earning  rates  of  all  of  them  are  higher 
than  the  bank-rate.  Till  1933,  the  Punjab  National  Bank 
was  content  with  a  margin  of  less  than  1  per  cent.  There- 
after with  the  fall  of  short  rates,  the  margin  expanded  to 
about  2  per  cent. 

Till  about  the  end  of  the  first  World  War,  the  Allahabad 
Bank  kept  its  earning  rate  lower  than  the  bank-rate.  There 
after,  circumstances  seem  to  have  forced  the  bank  to  revise 
its  standards  of  acceptable  business  and  its  margin  above  the 
bank-rate  has  been  perhaps  higher  even  than  in  the  case  of 
the  Punjab  National  Bank.  Partly,  it  might  be  explained 
by  the  unusually  high  level  of  its  cash  credits  and  over- 
drafts as  against  loans. 

The  Indian  Bank  of  South  India  has  the  highest  earning 
rate  and  the  highest  rates  charged  to  the  public  in  India.49 
From  1910  till  1931,  its  earning  rate  has  been  well  above  6i 
per  cent  and  has  on  occasions  exceeded  7  per  cent.  A  mar- 
gin of  more  than  1  per  cent  and  sometimes  even  2  per  cent 
was  very  common.  A  notable  factor  at  work  in  this  con- 
nection is  undoubtedly  the  very  high  level  of  its  loans  and 
advances  till  the  Great  Depression  set  in.  In  the  depression 
years,  the  earning  rate  fell  a  good  deal  but  never  below  3£ 
per  cent — the  margin  above  the  demand  loan  rate  of  Im- 

49.    Table  X. 


94  STRUCTURE  OF  INTEREST-RATES 

perial  Bank  being  more  than  maintained.  The  margin  bet- 
ween its  average  deposit-rate  and  its  earning  rate  has  been 
generally  more  than  2£  to  3  per  cent  and  even  higher  on 
occasions. 


CHAPTER    IV 

THE  IMPERIAL  BANK  OF  INDIA  * 

THE  IDEA  OF  A  CENTRAL  BANK  or  a  great  State  bank  for  India 
is  a  very  old  one.2  The  first  tentative  effort  towards  the 
goal  was,  however,  delayed  till  1921  when  the  three  Presi- 
dency Banks  with  their  68  branches  were  amalgamated  into 
the  present  Imperial  Bank  of  India.  The  amalgamation  was 
largely  the  outcome  of  rapprochement  on  the  part  of  the 
banks  themselves  to  whom  the  events  and  experiences  of 
the  first  World  War  brought  a  new  and  broader  outlook  on 
the  banking  problems  of  the  country.  Their  informal  but 
profitable  co-operation  during  the  war  coupled  with  the 
fear  of  an  invasion  from  London  banking  interests  gave 
them  a  keen  realisation  of  the  commonness  of  their  inter- 
ests. The  intimate  touch  established  between  them  and  the 
Government  in  meeting  the  unusual  circumstances  of  the 
war  reinforced  the  same  conviction.  There  was  also  the 
pressure  of  public  opinion  which  saw  in  such  an  amalga- 
mation a  great  instrument  for  the  extension  of  banking 
facilities  in  the  country. 

1.     The  Presidency  Banks 

Prior  to  1862,  the  Presidency  Banks  were  directly  con- 
trolled by  Government  and  had  to  work  within  certain  res- 
trictions imposed  on  them  by  their  charters.  Along  with 
other  private  banks,  they  enjoyed  the  valuable  right  of 
note-issue.3 

In  1862,  they  were  deprived  of  their  right  of  note-issue, 

1.  Tables  XI  to  XIV. 

2.  See  Ch.  I  f.nn.  6  &  10. 

3.  The    Bank   of   Bengal    founded    in    1809   was   for   example   restricted    in   the 
following  ways  :  Advance  to  an  individual  could  not  exceed  1  lakh  and  to  Gov- 
ernment 5  lakhs.     Interest  charged  was  limited  to  a  maximum  of  12  p.  c.  cor- 
responding to  a  similar  maximum  of  5  p.  c.  in  England.     Cash-reserve  was  to 
be  at  least  one-third  of  demand-liabilities  while  total  liabilities — deposits  and  notes 
—were  not  to  exceed  the  capital  which  was  50  lakhs.  In  1823,  the  note-issue  was 
fixed  at  a  maximum  of  2  crores  and  cash-reserves  at  a  minimum  of  one-fourth 
of  demand  liabilities.     In  1839,  the  charter  fixed  maximum  advance  to  an  indi- 
vidual at  3  lakhs  and  currency  of  a  loan  at  3  months.     The  security  prescribed 
was  two  un-connected  persons.  Bills  discounted  were  to  be  payable  in  India  only. 


96  IMPERIAL  BANK  OF  INDIA 

although  they  continued  to  manage  the  new  Government 
note-issue  as  agents  to  Government.  As  compensation  for 
the  loss  of  their  valued  privilege,  they  were  freed  from 
many  of  the  old  restrictions  on  business  and  were  given  the 
use  and  management  of  Government  balances.  In  1866,  the 
Government  themselves  assumed  the  management  of  the 
paper  currency. 

The  danger  of  these  relaxations  of  law  were  speedily 
illustrated  by  the  behaviour  of  the  Bank  of  Bombay. 
Apart  from  negligence  or  incompetence  of  the  Presidents 
and  Directors  of  the  Bank,  the  abuse  of  powers  given  by 
Act  X  of  1863  to  the  Secretaries,  the  absence  of  sound  legal 
advice  and  assistance,  etc.,  the  chief  cause  of  the  failure 
of  the  Bank  undoubtedly  lay  in  the  legal  changes  made 
after  1862.  The  Bank  of  Bombay  Commission  which  in- 
quired into  the  whole  lamentable  episode  put  the  point  in 
quite  an  emphatic  manner.  "It  may  be,"  they  wrote,  "that 
the  old  Act  was  unnecessarily  restrictive  but  that  did  not 
justify  the  removal  of  all  restrictions ....  They  opened  the 
door  to  great  laxity  of  practice  and  a  ruinous  system  of 
banking,  and  were  in  fact  the  chief  cause  of  the  Bank's 
failure." 

The  Presidency  Banks  Act  of  1876  restored  substantially 
the  old  restrictions,  prohibiting  the  Banks  from  conducting 
foreign  exchange  business,  borrowing  or  receiving  deposits 
payable  out  of  India,  lending  for  a  longer  period  than  six 
months  or  upon  mortgage  or  on  the  security  of  immov- 
able property  or  upon  promissory  notes  bearing  less  than 
two  independent  names,  or  upon  goods,  unless  the  goods  or 
titles  to  them  were  deposited  with  the  bank  as  security.  The 
Government  balances  at  the  disposal  of  the  Banks  were 
strictly  limited.  At  the  same  time,  Government  sold  out 
their  share  holdings  in  the  Banks  and  ceased  to  appoint  offi- 
cial directors. 

The  only  notable  change  in  the  long  period  which  ensued 
till  the  amalgamation  of  1921  was  the  increase,  during  the 
first  World  War,  of  Government  balances  at  the  head- 
quarters of  Presidency  Banks,  the  object  being  to  assist  the 
money  market  in  its  periodic  stringencies. 


1921  TO  1934  97 

2.    The  Imperial  Bank  of  India :  1921  to  1934 

Under  the  amalgamation  scheme,  the  paid-up  capital  of 
the  new  bank  was  increased  from  3 J  crores  to  about  6  crores, 
raising  the  ratio  of  capital  and  reserves  to  total  public  and 
private  deposits  from  9.6  per  cent  in  1920  to  13.7  per  cent 
in  1921. 4 

The  public  character  and  responsibilities  of  the  Bank  were 
secured  in  no  uncertain  manner.  The  Managing  Govern- 
ors, not  exceeding  two  in  number,  were  to  be  appointed  by 
the  Governor-General-in-Council.  Besides  the  Managing 
Governors  and  the  representatives  of  Local  Boards,  the 
Central  Board  which  was  the  controlling  authority  was  to 
include  the  Controller  of  Currency  or  some  other  compar- 
able officer  and  four  or  less  non-officials,  all  at  the  nomina- 
tion of  the  Governor-General.  The  Governor-General  was 
empowered  to  issue  instructions  to  the  Bank  with  the  spe- 
cific object  of  safeguarding  Government  balances  or  the 
financial  policy  of  the  Government.  The  Controller  of  Cur- 
rency or  the  officer  nominated  in  his  place  was  to  act  as  the 
watch-dog  of  the  Government  in  aforesaid  matters,  could 
exercise  a  suspensive  veto  pending  final  decision  of  the 
Governor-General-in-Council. 

An  agreement  between  the  Bank  and  the  Secretary  of 
State  re-defined  in  certain  material  particulars  the  business 
of  the  Bank. 

The  management  of  the  public  debt  as  hitherto  and  all 
the  general  banking  business  of  the  Government  of  India 
were  vested  in  the  Bank.  The  Bank  was  to  hold  hereafter 
all  the  treasury  balances.  The  Government  agreed  to 
transfer  funds  for  the  Bank  through  Currency  free  of 
charge  and  discontinue  the  issue  of  currency  transfers  or 
supply  bills  in  all  those  places  where  the  Bank  existed  to 
serve  the  public.  The  Bank  was  now  allowed  to  open  an 

4.    (Figures  in  crores). 

Prior  to  Amalgamation    Post-Amalgation 

1921  January  1921 

Authorised  Capital                     . .            . ,               33/4  ll  1/4 

Paid-up   Capital                         ..            ..               33/4  53/5 

Reserve  Fund                              . .            . .                32/5  33/4 

Deposits                                       ....             76  76  2/5 

Government-Balances                 ..            ..               6  9/10  7  9/10 
M.  B.  7 


98  IMPERIAL  BANK  OF  INDIA 

office  in  London  but  it  could  not  open  cash  credits  for,  or 
receive  deposits  from,  any  one  other  than  its  old  clientele. 

In  return  for  all  these  valuable  privileges,  the  Bank 
undertook  to  open  within  five  years  100  new  branches,  of 
which  the  Government  was  to  determine  the  location  of 
one  in  four  and  further,  to  give  the  public  facility  for 
transfer  of  money  between  its  offices  at  rates  to  be 
approved  by  the  Controller  of  Currency.  To  no  part  of 
the  Imperial  Bank  Act  of  1921  did  public  opinion  attach 
greater  importance  than  this  undertaking  to  extend  bank- 
ing facilities.  The  presence  of  a  bank  whose  position  and 
stability  were  beyond  all  doubt  and  which  could  keep  their 
cash  balances  was  expected  to  have  a  very  uplifting  effect 
on  local  banks.  The  management  of  work  connected  with 
Government  securities  at  each  local  branch,  instead  of  at 
the  headquarters  of  Government  as  formerly,  was  expected 
to  stimulate  interest  in  productive  investment  and  in 
banking  generally. 

By  March  1926,  the  Bank  fulfilled  its  legal  obligation  to 
create  these  new  branches.  Of  102  new  branches,  36  or 
about  one-third  were  located  in  places  where  there  was 
previously  no  bank  of  any  kind.  As  many  as  89  were 
located  in  places  where  there  were  Government  treasuries 
or,  in  other  words,  Government  balances  to  be  taken 
possession  of. 

Schedule  I  to  the  Act  of  1921  defined  the  business  of 
the  Bank  both  positively  and  negatively  in  two  separate 
parts.  One  part  set  forth  the  business  which  was  abso- 
lutely prohibited  to  the  Bank.  The  other  part  indicated 
the  business  which  the  Bank  was  permitted  to  undertake. 

The  existence  of  special  laws  and  charters  throughout 
their  history  prove  that  the  Presidency  Banks  and  their 
successor,  the  Imperial  Bank  of  India,  have  held  and  been 
meant  to  hold  special  status  and  fulfil  special  functions 
in  the  banking  structure  of  India.  Laws  and  charters  have 
however  aimed  at  two  specific  objectives  only,  the  safe- 
guarding of  public  funds  and  the  extension  of  banking 
facilities.  But  more  peremptory  than  the  force  of  law  was 
the  pressure  of  actual  needs  and  circumstances  which 
tended  gradually  but  surely  to  widen  the  public  character 


SIZE  AND  POWER  99 

and  responsibilities  of  the  Bank.  In  this  continuous 
growth,  a  critical  stage  was  reached  when  the  Hilton- 
Young  Commission  of  1926  raised  the  question  of  a  Central 
Bank  for  India  as  the  next  logical  step  in  the  organisation 
of  currency  and  credit.  It  was  inevitable  that  for  this 
purpose,  all  eyes  should  turn,  in  the  first  instance  at  least, 
to  the  Imperial  Bank  as  the  instrument  most  easily 
available  at  hand.  But  to  the  Hilton- Young  Commission, 
it  seemed  an  unquestioned  and  unquestionable  presump- 
tion that  central  banking  function  and  commercial  banking 
activities  could  not  and  should  not  go  together.  To  dis- 
mantle the  Bank  of  its  commercial  function  was  in  its 
opinion  to  arrest  the  progress  of  the  country  in  the  one 
sphere  in  which  progress  was  most  urgent  and  vital.5  The 
creation  of  the  Reserve  Bank  of  India  in  1935  gave  effect 
to  this  conclusion  and  closed,  so  far  as  law  can  close, 
future  growth  of  the  Imperial  Bank  along  these  lines.  But 
as  history  reveals  again  and  again,  practical  necessities  are 
apt  to  overbear  and  in  the  end  dominate  the  limitations 
of  mere  laws.  Despite  the  Reserve  Bank  Act  of  1934,  the 
Imperial  Bank  holds  and  must  continue  to  hold  a  unique 
place  in  the  banking  system  of  this  country.  The  causes 
outside,  if  not  inside,  the  framework  of  law  which  gave 
it  this  unique  position  have  not  yet  ceased  to  operate  and 
it  would  be  hardly  surprising  if  the  course  of  evolution 
gradually  led  it  into  a  position  not  contemplated  by  the 
framers  of  law.  To  analyse  these  causes  is  to  analyse  the 
manner  and  character  of  the  past  and  present  working  of 
the  Bank  to  which  we  must  now  address  ourselves. 

3.    Size  and  Power  of  Imperial  Bank 

By  its  size  alone,  the  Imperial  Bank  has  been  well 
situated  to  exercise  great  power  over  the  credit  structure 
of  the  country.  Its  private  deposits  have  amounted 
generally  to  one-third  of  the  aggregate  deposits  of  banks 
in  India.  By  1926,  it  had  more  than  twice  as  many  branches 
as  all  exchange  banks  put  together  and  as  compared  with 
Indian  joint-stock  banks,  it  had  more  than  one-third  of 

5.    Report.  Paras,  87,  88. 


100  IMPERIAL  BANK  OF  INDIA 

theirs.  A  bank  with  such  enormous  resources,  expanse  and 
clientele  could  always  be  sure  of  forcing  others  to  follow 
its  lead,  when  such  lead  was  in  conformity  with  operative 
circumstances.  Its  rate  changes  and  policies  could  be 
depended  on  to  attract  or  repel  as  circumstances  required 
borrowers  on  a  scale  which  was  sufficient  to  put  the  neces- 
sary pressure  on  other  banks.6 

This  great  position  of  the  Imperial  Bank  has  been  built 
largely  no  doubt  on  the  basis  of  its  special  connection  with 
the  Government  of  the  land.  This  connection  gave  it  com- 
mand over  a  large  and  dependable  volume  of  public  funds 
which  were  of  especial  use  in  the  early  stages  of  its  career. 
But  more  decisive  than  the  funds  themselves  was  the 
general  confidence  arising  out  of  the  belief  that  the  Govern- 
ment were  deeply  concerned  in,  and  could  be  trusted  to  take 
measures  to  ensure,  its  stability  and  solvency. 

The  great  drawback  of  periodic  withdrawal  of  large 
funds  from  the  market  into  Government  treasuries  was 
not  abolished,  however,  at  a  single  stroke.  Although  the 
Imperial  Bank  and,  before  it,  the  Presidency  Banks  were 
entrusted  with  Government  balances,  the  assistance  to  the 
market  was  limited  at  first  to  certain  maxima  and,  even 
after  the  maxima  were  abolished,  to  those  places  only  at 
which  these  banks  had  their  branches.  With  the  growth 
of  the  branches  of  the  Imperial  Bank,  Government  funds 
began  to  flow  into  the  market  in  a  larger  and  larger 
volume.  Government  on  its  part  made  efforts  to  reduce 
the  amounts  kept  at  out-stations  by  instituting  currency 
chests  at  sub-treasuries  and  transferring  surplus  funds 
there  to  these  currency-chests  against  a  corresponding 
transfer  from  Currency  Reserves  at  the  headquarters  to 
their  balances  at  the  Imperial  Bank.7 


6.  Total  Deposits.           Percentage  of  Deposits  Percentage  of 
(Private;  in  crores)        of  Imperial,  Exchange,  Private  Depo- 

Big   Five   Indian  sits  of  Imperial 

Joint-Stock  Banks.  Bank  to  Total. 

1914                         ..              87                                      91.8  >       45.8 

1920                         ..            236                                      84.4  34.4 

1990                         ..            212                                      90.0  30.0 

1934                         ..            227                                      86.1  32.6 

7.  See  opposite  page. 


SIZE  AND  POWER 


101 


On  this  point  of  size  and  power,  the  Imperial  Bank  invites 
comparison  most  appropriately  with  Banque  de  France 
which  throughout  its  long  history  has  combined,  and  com- 
bined effectively,  central  banking  with  commercial  func- 
tions. Leaving  aside  Caisse  des  De'pot  et  de  Consignations 
Which  manages  public  funds,  savings  banks'  deposits,  post 
office  cheque  accounts,  etc.,  and  the  Banque  d' Affairs  which 
are  mainly  industrial  banks,  the  Banque  de  France  held  less 
than  a  quarter  of  the  banking  resources  of  the  country. 
The  six  big  deposit  banks  of  Paris  with  their  affiliates 
alone  claimed  more  than  twice  the  deposit-resources  of 
the  Banque  de  France.  Yet,  through  its  600  and  odd 
branches  and  about  4  lakhs  of  accounts,  the  Banque  de 
France  is  able  to  make  its  lead  and  power  felt  throughout 
the  country.8 


1911-12 

1912-13 

1913-14 

1917-18 

1918-19 

1919-20 

1920-21 

1921-22 

1922-23 

1923-24 

1924-25 

1925-26 

1926-27 

1927-28 

1928 

1929 

1930 


Average  Monthly        Average  Month-end 
Balances  at  Treasuries         Balances  with 
and   Sub-Treasuries.          Presidency  or 
Imperial  Banks. 
(In  lakhs  of  rupees) 
1,380  414 

1,901  451 

1,909  560 

1,242  1,282 

849  1,031 

679  1,157 

625  1,261 

509  1,391 

400  1,825 

340  1,661 

295  2,087 

267  1,638 

249  1,638 

230  1,056 


Percentage  of 

Public  to 

Private 

Deposits. 


10 

25 

12 

10 

7 

7 

10 
11 
11 
10 


These  balances  fluctuate  according  to  the  issue  of  treasury  bills,  remittances  of 
Government  of  India  to  Secretary  of  State,  etc. 

8.    Relative  Position  of  different  Classes  of  Banks  in  France.      1937. 

(Figures  in  Million  Fes.) 


Caisse  des  D'pot  et  des  Consignations 
Banque  de  France 

6  Deposit  Banks  and  Affiliated  Banks 
Independent  Provincial  Banks 
Banque  D'Afairs  . .  . . 


Capita]  and 
Reserves. 

500 
3,500 
1.000 
1,000 


Deposits.         Note 

Circulation. 
100,000 

16,000  86,000 

37,000 
6,000 
4,000 


102  IMPERIAL  BANK  OF  INDIA 

4.     Conflict  of  Commercial  and  Central  Banking  Functions 

While  the  size  and  resources  of  the  Imperial  Bank  gave 
it  a  natural  leadership  of  the  Indian  banking  system,  it 
was  a  matter  of  doubt  to  many  whether  an  ordinary  com- 
mercial bank  could  be  trusted  to  discharge  these  responsibi- 
lities in  a  loyal  manner.  A  commercial  bank  must  exist  first 
and  last  for  making  the  largest  profits  while  a  Central 
bank  has  on  occasions  to  forgo  profit  in  the  interests  of 
the  country  at  large.  When  an  incipient  boom  has  to 
be  checked,  a  commercial  bank  may  well  be  disinclined 
to  incommode  its  customers  and  to  diminish  its  profits  by 
advancing  its  rates  earlier  than  its  competitors.  Still 
greater  is  its  embarrassment  in  an  obstinate  depression 
when  the  rate  may  have  to  be  reduced  below  the  economic 
level.  The  same  unpleasant  choice  confronts  it  with  regard 
to  open  market  operations.  When  rates  are  rising  in  the 
course  of  a  boom  and  securities  depreciate  in  consequence, 
the  Central  bank  has  often  to  sell  off  these  low-priced  secu- 
rities to  stave  off  a  serious  crisis.  When  a  depression  sets 
in  with  low  rates  and  high  security  prices,  the  Central 
bank  has  to  buy  these  very  securities  to  increase  the  cash 
basis  of  banks  and  induce  lending.  The  dilemma  is  resolv- 
ed in  the  case  of  most  Central  banks  by  statutory  or  volun- 
tary limits  and  checks  on  their  rates  of  dividend. 

Firstly,  as  regards  the  bank's  obligations  towards  its 
own  customers.  The  rate  of  a  Central  bank  is  effective 
less  by  its  level,  which  must  always  maintain  touch  with 
market-rates,  than  by  the  conditions  of  eligibility  attached 
to  it.  Except  in  England,  the  declared  rate  is  a  minimum 
rate  for  bills  of  certain  stringently  defined  qualities  and 
length  but  the  bank's  established  customers  can  always 
take  to  the  bank  bills  of  other  qualities  and  length  and 
obtain  funds  at  almost  the  usual  rates.  As  for  advances, 
the  rates  are  always  subject  to  a  certain  minimum  below 
which  the  banks  hardly  ever  descend.  It  seems  unlikely 
therefore  that  a  commercial  bank  engaged  in  Central  bank- 
ing functions  will  be  embarrassed  in  regard  to  its  usual 
customers. 

Even  then,  it  must  be  admitted  that  not  every  country 


CONFLICT  OF  COMMERCIAL  &  CENTRAL  BANKING  FUNCTIONS  103 

Is  equally  well  situated  to  attempt  a  combination  of  Central 
banking  and  commercial  banking  functions.  The  Banque 
de  France  is  an  excellent  example  of  how  policy  and 
circumstances  may  conspire  to  bring  about  a  happy 
combination  of  this  kind.  With  few  sensitive  elements 
in  its  export  trade  and  with  a  perpetual  need  of  finding 
investments  for  surplus  savings  abroad,  French  economy 
is  well  suited  to  run  on  an  even  keel,  not  much  disturbed 
by  economic  changes  in  the  outside  world.  The  Banque 
de  France  improves  on  these  advantages  by  a  policy  which 
aims  at  accumulating  immense  gold  reserves  against  its 
enormous  note-issue  and  by  using  them  freely  to  aid  foreign 
Central  banks  in  difficulties  no  less  than  to  meet  internal 
demand  for  hoarding  or  export.  These  basic  economic 
facts  and  the  banking  technique  reared  on  them  find  their 
objective  expression  in  the  exceptionally  stable  rates  which 
mark  French  monetary  conditions.  Between  1898  and  1914, 
the  Swiss  National  Bank  changed  its  rate  56  times;  the 
Reichsbank,  62  times;  the  Bank  of  England,  79  times.  But 
the  Bank  of  France  found  it  necessary  to  change  its  rate 
14  times  only. 

The  position  of  India  was  till  recently  materially 
different.  There  are  of  course  many  sensitive  elements  in 
our  export  trade  and  with  the  distribution  of  economic 
power  as  it  is,  our  imports  are  relatively  inelastic  as  ex- 
perience has  indeed  demonstrated  again  and  again.  Our 
obligations  to  foreign  investors  on  private  account  are  large 
and  till  recently  our  obligations  on  public  account,  although 
less  in  bulk,  linked  our  taxation-system  to  our  monetary 
system.9  Until  these  obligations  are  materially  reduced  or 
abrogated,  the  maintenance  of  an  export  surplus  compar- 
able with  the  volume  of  these  obligations  was  naturally 
the  main  concern  of  our  monetary  authorities.  In  other 
words,  co-operation  with  our  foreign  markets  and  foreign 
creditors  has  been  our  goal  rather  than  monetary  autonomy 
on  French  lines.  Whether  and  to  what  extent  co-operation 
can  be  distinguished  from  mere  submission  to  the  lead  from 
abroad  is  a  delicate  point  which  involved  consideration  of 
our  political  relations  with  the  largest  of  our  erstwhile 

9.    The  latest  estimate  of  British  Investments  in  India  is  1100  m.  £. 


104  IMPERIAL  BAT*K  OF  INDIA 

creditors,  namely,  Great  Britain. 

To  take  up  the  next  point  regarding  the  losses  which  are 
involved  in  the  discharge  of  Central  banking  functions.  It 
is  a  point  worthy  of  close  inquiry  whether  such  losses  are 
not  more  than  counterbalanced  by  the  interest-free  funds 
of  Government  and  the  compulsory  deposits  of  commercial 
banks  with  the  Central  bank.  In  the  7  years  1921-22  to 
1927-28,  the  average  month-end  balance  of  Government 
funds  with  the  Imperial  Bank  was  about  16.6  crores.  During 
the  years  1935-36  to  1937-38,  the  average  deposits  of 
scheduled  banks  with  the  Reserve  Bank  of  India  were  in 
the  neighbourhood  of  Rs.  26  crores.  It  would  be  a  moderate- 
estimate  to  place  the  average  interest-free  balance  avail- 
able to  a  Central  bank  in  India  at  about  40  crores  in  round 
figures.  At  the  average  net  profit  rate  of  the  Imperial  Bank 
for  the  years  1935-36,  this  should  give  the  Bank 
an  annual  income  of  about  58  lakhs  or  about  half  the  net 
aggregate  profits  for  these  years.  This  is  surely  more  than 
a  generous  margin  for  any  losses  which  a  bank  could  incur 
in  the  critical  stages  of  a  boom  or  depression.  The  steady 
dividends  of  most  Central  banks  of  the  world  are  convin- 
cing proof  that  Central  banking  is  not  incompatible  with 
good  profits.10 

5.    High  Liquidity  of  Imperial  Bank  Assets 

Design  and  practice  combined  to  give  the  assets  of  the 
Bank  a  degree  of  liquidity  worthy  of  a  Central  bank  charged 
with  the  duty  of  aid  to  banks  in  difficulties  and  the  manage- 
ment of  the  note-issue  and  legal  tender  of  the  country.11 
Legal  stipulations  regarding  the  duration  and  security  of 
loans  and  bills  prescribed  as  early  as  the  law  of  1876  are 
almost  the  same  as  in  the  charters  of  many  central  banks 
like  the  Bank  of  France.  The  practice  of  the  Bank  was: 
indeed  even  more  conservative  than  the  law  itself.  While 
the  law  allowed  bills  a  maximum  maturity  of  90  days,  the* 
actual  maturity  of  bills  discounted  was  on  the  average  60^ 

10.  In  the  course  of  18  years,  the  twelve  Reserve  Banks  in  the  United  Stater 
paid  the  Treasury  $  150  m.,  dividends  to  member  banks  (6  per  cent)  aggregat- 
ing to  $120  m.  and  accumulated  a  surplus  of  $280  m.     The  steady  12  p.  c» 
dividend  of  the  Bank  of  England  is  well-known. 

11.  Tables  XI  and  XII. 


HIGH  LIQUIDITY  OF  ASSETS  105 

days  only.  In  the  absence  of  a  sufficient  quantity  of  bills, 
loans  were  kept  within  strict  bounds  while  cash  credits 
which  are  terminable  on  demand  were  generally  twice  in 
volume  and  in  adverse  days,  much  more.  Advances  against 
security  of  one  name  were  the  exception  rather  than  the 
rule.12 

Of  course,  an  even  higher  degree  of  liquidity  is  common 
among  the  central  banks  of  the  world.  Although  the  law 
fixes  90  days  as  the  maximum  maturity  for  ordinary  bills 
and  9  months  for  agricultural  bills,  the  average  maturity 
of  bills  actually  discounted  by  the  Federal  Reserve  Banks 
did  not  exceed  8  days  in  fairly  normal  years  like  1925  and 
1926.  The  practice  of  the  Bank  of  France  with  its  direct 
discounting  for  individuals  and  concerns  is  even  more  rele- 
vant and  illuminating.  From  1927  to  1934,  year§  of  great 
stress  and  strain,  the  average  maturity  of  bills  discounted 
was  only  18  days  in  1927  and  though  it  rose  subsequently* 
the  maximum  reached  was  only  33  days  in  1933.  It  must 
however  be  remembered  that  bills  are  more  abundant  in 
the  United  States  than  in  India  and  that  in  France,  they 
are  the  chief  outlet  for  bank  funds. 

6.    Profit  and  Loss  Account 

Analysis  of  profit  and  loss  account  makes  it  clear  that 
in  spite  of  restrictions  of  law,  there  was  a  most  generous 
scope  for  profitable  business.  The  margin  of  profit  was 
always  so  large  that  any  reasonable  restrictions  imposed  in 
the  interests  of  Central  banking  were  not  likely  to  make 
the  Bank  less  profitable  for  the  existing  shareholders  or 
prospective  investors.13 

Barring  the  Indian  Bank  of  Madras  in  which  province 
highest  rates  prevail  as  a  rule,  the  Imperial  Bank  has  al- 
ways had  the  highest  rate  of  gross  profits  of  which  we 
have  any  record.  Till  1932,  the  rate  rarely  fell  below  3.25 
and  was  usually  at  least  1  per  cent  in  excess  of  the  next 
best  rate  earned  by  the  Allahabad  Bank  of  India.  Even 
after  1932,  although  the  differences  narrowed,  the  rate  of 

12.  Qs.  9599;  9590;  9600— Minutes  of  Evidence,  Hilton- Young  Commission.  One- 
name  paper  is  not  a  marked  feature  of  Indian  business. 

13.  Tables  XXXVIII  and  XXXIX. 


106  IMPERIAL  BANK  OF  INDIA 

the  Imperial  Bank  did  not  fall  below  2.50. 

Its  expense  ratio,  however,  has  been  midway  between  the 
most  economically  and  the  least  economically  run  Indian 
banks.  The  ratio  showed  a  tendency  to  rise  in  the  years 
after  the  first  Great  War  but  after  the  1929-30  crisis,  it  has 
declined  in  a  significant  manner.  A  more  rapid  pace  of 
Indianisation,  etc.,  is  likely  to  prove  a  more  permanent 
influence  on  this  ratio  than  economy  expedients  improvised 
to  meet  recent  difficult  years.  Some  justification  for  this 
belief  is  found  in  the  proportion  which  salaries  bear  to  the 
aggregate  expenses  of  the  Bank.  Of  the  large  gross  profits 
it  earns,  larger  per  unit  than  in  the  case  of  any  other  im- 
portant bank,  as  large  a  proportion  as  35  to  40  per  cent  is 
spent  on  salaries.  Its  expenditure  on  salaries  compares 
favourably  only  with  that  of  the  Allahabad  Bank  of  India 
whose  rate  of  gross  profits  stands  next  to  the  Imperial 
Bank's.  The  fraction  shows  a  remarkable  stability  from 
year  to  year  but  may  be  expected  to  fall  as  the  employment 
of  foreign  skill  and  direction  is  discontinued. 

Its  rate  of  net  profits  is  more  decisive  on  the  point  we  are 
seeking  to  establish.  The  rate  for  the  Imperial  Bank  is 
easily  the  highest  among  those  for  which  we  have  any 
record.  Always  more  than  1.60  per  cent  of  resources  em- 
ployed, even  the  last  depression  could  not  reduce  it  below 
1.10.  As  a  percentage  of  capital  and  reserves,  which  them- 
selves have  always  borne  a  steady  and  high  ratio  to  deposit- 
liabilities  round  about  13  to  14  per  cent,  net  profits  are  well 
above  10  per  cent  as  a  rule.14 

7.    Imperial  Bank  and  Competition  with  other  Banks 

No  argument  weighed  so  much  in  favour  of  the  creation 
of  a  new  institution  as  the  fear  of  the  incompatibility  bet- 
ween competition  in  business  and  national  leadership. 
Limitation  of  profits  is  no  doubt  one  obvious  means  of  re- 
conciling the  two.  Restrictions  on  business  such  as  the 
Presidency  Banks  and  the  Imperial  Bank  have  always  had 
to  conform  to,  is  a  still  more  direct  means  of  attaining  the 
same  objective.  But  far  more  important  than  legal  prohi- 

14.    Table  XXXIX. 


COMPETITION  WITH  OTHER  BANKS  107 

bitions  and  restrictions  are  tradition  and  habits  growing 
out  of  natural  evolution.  We  must  examine  how  far  past 
history  was  tending  to  fit  the  Imperial  Bank  for  such  a  role. 

National  leadership  depends  on  two  factors.  It  may  grow 
out  of  a  historical  environment  of  mutual  trust  and  habits 
of  informal  co-operation.  The  growth  of  such  an  environ- 
ment may  be  initiated  or  facilitated  by  the  manner  in  which 
the  executive  of  a  bank  is  constituted.  The  two,  although 
interdependent,  deserve  to  be  analysed  separately.15 

It  appears  that  the  competition  of  the  Imperial  Bank 
became  a  source  of  constant  complaint  only  after  the 
amalgamation  of  1921  and  the  subsequent  creation  of 
branches.  The  Allahabad  Bank,  in  particular,  was  loud  in 
its  out-cry  before  the  Hilton- Young  Commission.  It  was 
on  record,  however,  that  out  of  88  new  branches  created 
by  1926,  as  many  as  75  were  located  in  places  where  no  bank 
had  any  branch  before.  The  new  branches  competed  with 
the  Allahabad  Bank  in  12  places  only  and  even  among 
these  12  places,  there  were  at  least  4  in  which  the  Allah- 
abad Bank  was  already  confronted  with  competition  from 
the  Alliance  Bank  of  Simla.16 

It  is  difficult  to  set  any  narrow  or  definite  territorial 
limits  to  the  effective  influence  of  a  new  branch.17  This 
influence  is  apt  to  extend  far  beyond  the  town  or  place 
in  which  the  bank-branch  is  located  in  the  physical  sense. 
A  range  as  wide  as  100  miles  round-about  was  mentioned 
as  the  radius  of  this  influence.  There  was  perhaps  an 
element  of  exaggeration  in  the  statement.  It  is  never- 
theless necessary  to  ascertain  how  far  the  Imperial  Bank 

15.  Almost  throughout  the  whole  of  its  history  till  almost  the  end  of  the  19th 
century,   private   bankers   and   after   1826,   joint-stock   banks   accused   the   Bank 
of  England   of  competing  unfairly   with  them  and   of  placing   its  private  gain 
above  national  interests.     The  Bank  of  England  on  its  part  tried  several  policies 
tentatively,  complete  divorce  from  the  discount  market  by  maintaining  its  dis- 
count rate  higher  than  the  market  rate  as  after  1819,  1857  and  1883;  keen  and 
active  rivalry  by  lowering  its  rate  below  the  market  rate  as  between  1844-47; 
partial  divorce  by  keeping  its  rate  higher  but  maintaining  contact  by  quoting 
a  lower  rate  for  its  special  customers  as  after  1847  and  1890.     Even  as  late  as 
1890,   the   technique  of  the   central   bank—penal   but  elastic   rate — was  so  little 
understood  that  the  commercial  banks  threatened  to  fix  their  own  rates  inde- 
pendently of  the  Bank  of  England  and  even  to  launch  a  new  Reserve  Bank  for 
themselves. 

16.  Q.  9648-51;  9581;  Table  15;  p.  479— Appendices,  Hilton-Young  Commission. 

17.  ibid,  Q.   12002;   12034;    11957. 


108  IMPERIAL  BANK  OF  INDIA 

gave  any  reasonable  grounds  for  complaint  on  the  score  of 
unfair  or  uneconomic  rates. 

Unfortunately,  the  Imperial  Bank  does  not  publish 
figures  of  its  total  earnings  like  some  other  banks.  It  is 
not  possible,  therefore,  to  compare  its  rate  of  earning  per 
unit  of  funds  employed  with  the  rates  of  other  banks. 
Its  gross  profit  rate,  as  we  have  already  recorded,  is  the 
highest  in  our  table  and  is  apt  to  stand  above  the  next 
highest  rate,  namely,  that  of  the  Allahabad  Bank,  by  an 
impressive  margin.  The  gross  profits  rate  may  be  high 
either  because  the  Imperial  Bank  is  able  to  charge  very 
high  rates  or  because  it  has  to  pay  a  relatively  lower  price 
for  the  funds  it  obtains.  Since  the  complaint  is  one  of 
unfair  competition  for  business,  it  is  clear  that  rates  of 
the  Imperial  Bank  are  alleged  to  be  uneconomically  low. 
It  was  asserted  before  the  Hilton-Young  Commission  that 
when  the  Allahabad  Bank  quoted  7£  per  cent,  the  Imperial 
Bank  was  found  to  be  content  with  5  per  cent.  The  more 
usual  difference  between  the  rates  of  the  two  banks  was 
given  out  as  i  to  1  per  cent.18 

There  could  be  no  complaint  of  unfair  competition  if 
the  low  rates  which  the  Imperial  Bank  paid  to  its  depo- 
sitors bespoke  merely  the  confidence  which  the  public 
reposed  in  the  Bank  on  account  of  its  better  management. 
But  the  argument  was  that  these  low  rates  were  due  to 
the  special  privileged  position  of  the  Bank.  Vast  funds 
free  of  interest  were  placed  at  its  disposal  in  the  course  of 
the  management  of  Government  revenues  and  expenditure 
or  the  public  debt  services.  Besides,  Government  trans- 
ferred funds  for  the  Bank  through  Currency  free  of  charge. 
These  privileges,  it  was  suggested,  enabled  the  Bank  to 
offer  accommodation  to  the  public  at  uneconomic  rates  and 
yet  to  maintain  the  highest  rate  of  gross  profits  among 
Indian  banks. 

It  will  be  recalled  that  except  in  the  year  1922,  the  pro- 
portion of  public  to  private  deposits  never  exceeded  12  per 
cent.  For  many  years,  it  was  much  less  than  12  per  cent.19* 

18.  Q.  12034;  11957—Minutes  of  Evidence,  Hilton-Young  Commission. 

19.  Appendices,  Hilton- Young  Commission,  p.  508; 


COMPETITION  WITH  OTHER  BANKS  109 

Even  if  one-sixth  of  the  total  funds  it  employed  were  assum- 
ed as  free  of  interest,  and  the  rates  paid  by  the  Imperial  Bank 
on  its  other  deposits  were  taken  to  be  as  high  as  those  of 
the  Central  Bank  of  India,  the  former  could  not  account  for 
an  advantage  in  the  gross  rate  of  more  than  6  to  7  per  cent. 
Actually,  the  difference  between  the  gross  profit  rate  of  the 
Imperial  Bank  and  the  Allahabad  Bank  is  much  more  than 
1  per  cent,  perhaps  nearer  to  2  per  cent  than  1  per  cent.  It 
is  self-evident  therefore  that  the  larger  size  of  its  gross 
profit  rate  was  due  as  much  to  its  ability  to  attract  funds 
•cheaply  as  to  the  funds  placed  at  its  disposal  by  the  Gov- 
ernment. 

It  is  also  probable  that  a  part  of  the  explanation  is  to 
be  found  in  the  composition  of  the  private  deposit  liabili- 
ties of  the  Imperial  Bank  and  other  Indian  banks.  We  have 
evidence  for  the  Imperial  Bank  only  for  the  war  years 
1915-17,  1919,  the  post-war  year  1925  and  the  years  1939-43. 
In  these  years,  the  Banks  of  Bengal  and  Madras  showed 
fixed  and  savings  deposits  to  be  about  33  to  45  per  cent  of 
all  deposits.  For  the  same  years,  the  percentage  for  the 
Allahabad  Bank  was  as  high  as  77  per  cent  for  fixed  and 
savings  deposits.  When  we  recall  that  even  for  the  Central 
Bank  of  India,  the  average  difference  between  rates  paid 
on  fixed  and  current  accounts  is  about  2.5  to  3  per  cent,  and 
that  the  Imperial  Bank  pays  no  interest  on  current  accounts, 
the  ability  of  the  Imperial  Bank  to  quote  lower  interest- 
rates  on  its  loans  is  seen  to  be  due  not  entirely  to  uneco- 
nomic competition.20 

It  is  rather  significant  that  the  loudest  outcry  has  gene- 
rally come  from  those  areas  where  high  interest-rates 

20.    Imperial   Bank    (lakhs.      Last   Week.   March   1925). 

Percentage  of     Total  Deposits. 

All-India.        Bengal  Circle.       All-India.       Bengal  Circle. 
Current  Accounts      ..         1,544  2,717  55.1  53.1 

Fixed    Deposits  ..         1,256  2,498  44.9  46.9 

Bengal  Provincial  Inquiry  Committee  Report,  pp.  39-40.     See  also  Table. 
Fixed  Deposits  (percentage  to  total) 

Imperial  Big  Five 

1939  .  .  ..  37.8  48.4 


1940 
1941 
1942 
1943 


33.7  45.4 
34.4  36.9 
29.9  26.1 

21.8  24.4 


110  IMPERIAL  BANK  OF  INDIA 

prevail  generally.  One  such  area  is  the  Punjab  and  the 
United  Provinces  where  the  Allahabad  Bank  and  the 
Punjab  National  Bank  carry  on  their  main  business. 
Another  such  area  is  South  India  where  the  Indian  Bank 
and  a  large  number  of  small  banks  ply  their  trade.  The 
relative  level  of  gross  earnings  of  different  banks  is  a 
good  indication  of  the  conditions  amidst  which  these  banks 
lend  their  funds.  The  Central  Bank  of  India  with  its 
branches  more  or  less  evenly  distributed  in  all  parts  of 
India  may  be  taken  as  the  type  of  banks  which  are  neither 
exceptionally  favoured  by  high  interest-rates  nor  excep- 
tionally prejudiced  by  low  rates.  Yet,  the  Allahabad  Bank 
and  the  Punjab  National  Bank  are  able  to  maintain  their 
gross  earnings  rate  at  one  per  cent  and  more  above  the 
rate  of  the  Central  Bank  of  India.  In  the  years  after  the 
crisis  of  1929,  the  differences  have  widened  still  further  in 
favour  of  the  aforesaid  two  banks,  2  and  3  per  cent  being 
quite  common.  The  earnings  rate  of  the  Indian  Bank  is 
much  higher,  an  excess  of  3  per  cent  and  more  above  the 
Central  Bank  rate  being  quite  common.  This  leads  to  the 
conclusion  that  while  sporadic  cases  of  drastic  use  of 
its  power  by  the  Imperial  Bank  could  be  cited  here  and 
there,  a  general  tendency  to  the  lowering  of  rates  on 
account  of  the  appearance  of  the  Bank  on  the  scene  was  but 
a  natural  effect  of  the  aforesaid  conditions  and  could 
hardly  be  a  ground  for  legitimate  complaint  on  the  part  of 
other  banks.21 

It  is  not  sufficient  merely  to  prove  that  the  complaints 
of  certain  banks  were  not  altogether  well  founded.  A 
bank  which  is  moving  towards  the  leadership  of  a  banking 
system  must  actively  foster  and  justify  confidence  in  itself. 
As  the  history  of  the  Bank  of  England  proves,  a  tradition 
of  such  confidence  is  slow  to  grow  and  has  to  progress 
through  much  difficulty  and  misunderstanding.  There  is, 
however,  some  evidence  that  the  Imperial  Bank  was  slowly 
establishing  for  itself  a  somewhat  analogous  position. 

One  great  obstacle,  perhaps  the  greatest  obstacle,  was 
ignorance — ignorance  on  the  part  of  the  public  as  well  as 

21.    Q.  11866-11870;  12061.     —Minutes  of  Evidence,  Hilton- Young  Commission. 


COMPETITION  WITH  OTHER  BANKS  111 

banks.  This  was  well  illustrated  by  the  crisis  of  1923. 
The  Allahabad  Bank  found  itself  in  an  embarrassing 
situation  because  a  rumour  spread  that  it  had  asked  for 
assistance  from  the  Imperial  Bank.22  For  a  long  time  there- 
after, the  Allahabad  Bank  made  it  a  policy  not  to  borrow 
from  any  big  bank  to  meet  even  temporary  difficulties. 
Unwillingness  to  borrow  from  a  rival  on  grounds  of 
prestige  is  to  be  met  with  even  in  advanced  countries  like 
France.  But  backwardness  of  public  sentiment  is  an 
additional  difficulty  in  the  adoption  of  what  in  other  coun- 
tries would  be  looked  on  as  normal  and  natural  banking 
operations. 

Things,  however,  tended  to  gradual  improvement  with 
the  passage  of  time.  In  the  twenties  of  the  present 
century,  the  Bengal  National  Bank  had  cause  to  express 
gratitude  for  the  willing  assistance  rendered  by  the 
Imperial  Bank.  The  special  position  of  the  Imperial  Bank 
was  brought  into  greater  prominence  by  the  events 
subsequent  to  the  failure  of  the  Alliance  Bank  of  Simla 
Ltd.,  on  27th  April,  1923.  Acting  under  instructions  of 
Government  and  a  guarantee  of  the  Finance  Dept.,  the 
Imperial  Bank  undertook  to  pay  immediately  50  per  cent 
of  the  amounts  due  to  depositors  inclusive  of  current 
accounts  and  savings  bank  accounts.  To  enable  the  Bank 
to  meet  such  situations  with  promptitude  and  effectiveness 
in  the  future,  an  amendment  was  enacted  shortly  after* 
wards  by  which  the  Bank  was  empowered  to  advance  or 
lend  money  to  a  banking  institution  with  a  rupee  capital 
upon  security  of  its  assets  with  the  specific  object  of 
averting  or  facilitating  a  winding-up.23 

The  more  enlightened  among  the  banks  have  shown 
from  very  early  days  a  better  appreciation  of  the  position 
and  responsibilities  of  such  a  Bank.  They  have  entrusted  to 
it  their  surplus  cash  balances;  and  a  certain  proportion  of 
the  Imperial  Bank's  private  deposits  is  accounted  for  by  this 
practice.  The  volume  tended  to  fluctuate  according  to 
the  demands  of  trade.  We  have  it  on  the  authority  of  the 

22.  Q.  12263.     —Minutes  of  Evidence,  Hilton- Young  Commission,  p.  419,  Table 
No.  13. 

23.  Indian  Central  Banking  Inquiry  Committee  Report,  Vol.  I,  p.  24. 


112  IMPERIAL  BANK  OF  INDIA 

Central  Banking  Inquiry  Committee's  Report  that  in  1925 
these  balances  varied  between  such  wide  limits  as  Rs.  2 
crores  and  Rs.  13J  crores.  The  figures  given  for  March  and 
•September  of  1928,  1929  and  1930  by  the  same  Report  show 
•these  balances  at  about  3  to  4  crores.  The  funds  borrowed  by 
the  banks  from  the  Imperial  Bank  varied  in  a  like  manner. 

8.    Character  of  Executive,  Ownership  and  Personnel 

A  powerful  influence  in  the  creation  of  such  leadership 
is  the  public  confidence  that  the  character  of  the  executive, 
ownership  and  personnel  is  such  as  to  conduce  to  national 
outlook  and  conservation  of  public  interests.  This  con- 
dition is  satisfied  in  most  countries  by  vesting  the  power 
to  appoint  the  executive  in  the  Government  or  making  the 
appointment  subject  to  its  confirmation.  Some  countries 
go  much  further  in  these  safeguards.  As  our  account  of 
the  history  of  the  Imperial  Bank  indicates,  the  constitution 
of  the  executive  has  always  been  recognised  as  a  national 
concern  and  more  emphatically  so,  in  the  changes  of  1921. 
The  history  of  the  Bank  of  England  should  be  sufficient 
assurance  that  with  this  initial  advantage,  the  course  of 
development  might  have  followed  similar  lines  but  for  the 
decisions  of  1926  and  1934. 

The  public  mind  in  India  was  impressed  not  so  much 
with  the  policies  of  the  Imperial  Bank  as  the  large  European 
element  in  its  personnel  and  clientele.  For  a  long  time, 
there  has  been  an  undisguised  suspicion  that  the  presence 
of  this  element  made  the  Bank  more  solicitous  of  alien 
banking  and  commercial  interests.  Many  changes  in  the 
desired  direction,  particularly  Indianisation  of  personnel, 
Jtiave  taken  place  in  recent  years.  But  the  close  alliance 
between  the  Bank  and  British  commercial  interests  still 
persists,  albeit  to  a  more  limited  extent  now  than  formerly.24 

24.    Distribution  of  Shares  of  Bank  of  Bombay.  (1840). 

No.  of  Shares 

173  Europeans   (Resident  in  India)            . .  . .  ,.           3,261 

12  Native  Christians         ..            ..            ..  ..  .,                49 

3  Muslims           ,.            ..            ..            ..  ..  ..                55 

109  Parsees              . .            . .            , .            . .  . .  . .            1,333 

35   Hindus             ..            ..            ..            ..  ..  ..             '327 

Government  Shares          . .           , .           , .  . ,  , .           5,300 

in  India,   by  Cooke,   p.   165. 


SEASONAL  CHARACTER  OF  BUSINESS  AND  RATE  VARIATIONS  113 

The  evidence  tendered  before  the  Chamberlain  Commis- 
sion as  long  ago  as  34  years  showed  that  four-fifths  of  the 
shareholders  of  the  Bank  of  Madras  were  Indians.  Out  of  732 
lakhs  of  advances  588  were  advanced  to  Indians.  Three-fifths 
of  the  deposits  of  the  three  Presidency  Banks  belonged  to 
Indians.  Of  the  aggregate  advances  of  the  Bank  of  Bom- 
bay, five-sixths  were  made  to  Indians  and  Indian  industries. 
By  1925,  the  situation  improved  still  further.  Of  individual 
deposits,  Indians  then  held  67  per  cent  as  against  33  per 
cent  held  by  Europeans.  Of  advances,  68  per  cent  went  to 
Indians  as  against  32  per  cent  to  Europeans.  Of  the  deposits 
of  banks,  one-quarter  belonged  to  Indian  banks  but  of 
advances,  more  than  one-half  were  made  to  Indian  banks.25 
In  spite  of  this  growing  stake  of  Indians  in  the  Bank,  the 
supreme  direction  of  the  Bank  has  always  remained  in" 
non-Indian  hands. 

9.    Seasonal  Character  of  its  Business  and  Rate  Variations 

It  would  be  more  legitimate  to  blame  the  Imperial  Bank 
on  the  ground  of  its  almost  total  failure  to  prevent  a  very 
wide  range  of  seasonal  fluctuations  in  interest-rates26  and 
the  very  high  levels  which  they  reach  at  certain  times  of 
the  year.  The  retention  of  the  ultimate  control  of  currency 
in  the  hands  of  the  Government  and  the  peculiar  arrange- 
ment by  which  aid  from  currency  reserves  was  made 
dependent  on  particular  levels  of  the  bank-rate  were  no 
<Joubt  aggravating  factors  in  the  situation.  Still,  it  cannot 
be  doubted  that  it  lay  in  the  power  of  the  Imperial  Bank 
to  moderate  the  range  of  fluctuations  but  it  preferred  its 
own  profits  to  national  interests  and  exploited  to  the  full 
the  highly  seasonal  demand  for  currency. 

The  burden  of  meeting  the  seasonal  demand  was  support- 

25.  Q.  1829;  9832;  9855;  9857— Minutes  of  Evidence,  Vol.  II.  Chamberlain  Com- 
mission 1912.  . 

Last  week  of  March  1925.  (in  Lakhs)       ' 

Indian  Banks    Other  Banks 
Deposits  ..         .    ...  ..  185  578 

Advances  ....  ..  306  223 

§.   9750.   Appendix   No.   48— Hilton-Young  Commission. 

26.  During  the  10  years  1921-30,  the  rate  for  demand  loans  of  the  Imperial  Bank 
stood  at  9  p.c.  for  approximately  3  weeks;-    8  p.c.  for  47  weeks;      7  p.c.  for 
119  weeks;  6  p.c.  for  140  weeks;    5  p.c.  for  129  weeks;    4  p.c.  •f 

JM.  B.  8 


114  IMPERIAL  BANK  OF  INDIA 

ed  largely  by  the  Imperial  Bank,  This  was  a  consequence 
largely  of  the  prohibitions  laid  on  it  against  engaging  in 
any  but  truly  short-term  and  self-liquidating  business. 
Great  variations  in  cash  rather  than  in  any  other  assets  of 
the  Bank  were  the  main  technique  employed  by  the  Bank 
for  this  seasonal  adaptation.  When  seasonal  demand  rose, 
cash  was  permitted  to  fall  to  comparatively  low  levels. 
When  seasonal  slackness  caused  the  inevitable  fall  in  loans, 
cash  credits  and  above  all  in  bills,  the  inflowing  repayments 
merely  went  to  swell  the  cash.  Investments  which  are 
composed  almost  entirely  of  Government  paper  could  not 
,be  availed  of  for  the  purpose  since  depreciation  and  capa- 
city of  the  market  are  factors  to  be  reckoned  in.  In  the 
stable  years  1923-1929,  between  the  months  of  March  and 
•September,  an  average  fall  of  about  7  per  cent  in  cash 
credits,  5  per  cent  in  loans  and  7  per  cent  in  bills  measured 
on  the  basis  of  the  volume  of  deposits  was  offset  by  an 
increase  of  more  than  16  per  cent  in  cash.  The  increase 
in  investments  is  so  slight  as  to  be  hardly  comparable  and 
reflects  more  truly  a  secular  trend.27  In  contrast  with  this 
high  seasonal  trend  of  the  balance-sheets  of  the  Imperial 
Bank,  the  balance-sheets  of  other  Indian  joint-stock  banks 
hardly  disclose  much  seasonal  variation.28 

Analysis  of  aggregate  monthly  advances  for  the  years 
1921  to  1930  suggests  June  as  the  month  lying  midway 
between  the  peak  and  trough  of  the  seasonal  demand  for 
money.  In  March  or  April,  business  demand  reaches  its 

27.  Average  Percentage  to  Total  Liabilities.    (Liabilities  :  Capital,  Reserve,  Public 
and  Private  Deposits). 

1921-1922  1923-1929 

Marc 
Cash 
Loans 
Cash 
Credits 
Bills 
Investments 

Table  XI 

28.  55  Scheduled  Banks  (Including  Imperial  Bank). 

(Average  Percentage  to  Total  Liabilities). 

March  September 

Cash    (1935-36;    1938-39)       ..  ,,  12.81  14.88 

Bills  and  Loans  (1937-38;  1938-39)     ..  54.20  4634 

See  Table  XIV. 


March 

September 

March 

September 

24.8 

32.5 

16.5 

32.8 

19.7 

22.8 

17.8 

12.2 

29.9 

24.4 

34.1 

26.7 

10.9 

5.9 

11.7 

4.8 

13.8 

12.6 

16.7 

19.9 

SEASONAL  CHARACTER  OF  BUSINESS  AND  RATE  VARIATIONS  115 

full  height,  the  average  level  of  advances  as  a  proportion 
of  deposits  being  about  15  per  cent  over  the  June  level. 
September  records  the  lowest  level,  about  14  per  cent  less 
than  in  June.  The  average  difference  in  advances  in  the 
aforesaid  years  was  15  crores  between  the  peak  and  trough 
months  while  the  average  cash-balance  held  in  March  was 
about  18  crores  and  in  September  above  30  crores. 

Seasonal  demand  by  itself  need  not  cause  embarrassment 
to  individual  banks  or  to  the  banking  system  as  a  whole. 
When  the  outflow  of  cash  at  one  time  of  the  year  is  certain 
to  be  followed  at  another  time  by  inflow  on  the  same  scale, 
variations  in  cash  caused  by  them  cease  to  have  much 
significance  for  safety  or  liquidity  of  bank  assets.  When 
interest-rates  show  a  wide  range  of  seasonal  variation,  it 
is  apt  to  bespeak  more  the  character  of  the  monetary 
organisation  of  a  country  than  the  inevitability  of  such 
monetary  rhythm.  The  demand  for  finance,  for  example, 
has  assuredly  a  far  wider  seasonal  range  in  the  United 
States  than  in  England.  Yet  even  before  the  advent  of  the 
Federal  Reserve  system,  the  monthly  averages  of  rates  on 
prime  commercial  paper  for  the  years  1890-1900  gave  a 
spread  of  1.04  only.  The  spread  in  England  for  the  period 
1882-1913  was  1.50  for  average  Floating-Rate  and  1.70  for 
average  Discount-Rate  for  3  months  bank  bills.  The  greater 
spread  in  England  is  explained  by  the  fact  that  the  money 
market  cannot  replenish  itself  at  the  Bank  of  England 
unless  the  market  rate  rises  to  the  bank-rate  and  the  bill- 
brokers  are  forced  into  the  Bank.  In  India,  the  Imperial 
Bank  which  had  some  of  the  privileges  and  a  few  of  the 
responsibilities  of  a  Central  bank  preferred  to  raise  its  rate 
to  the  point  of  maximum  profit  rather  than  allow  its  cash 
to  fall  low  in  the  interest  of  stable  rates.  The  fact  that 
the  level  of  cash  in  the  busy  month  of  March  was  on  the 
average  as  high  as  16  per  cent  of  deposits  during  the 
twenties  of  the  present  century  proves  what  a  large  margin 
there  was  for  a  policy  of  more  rational  rates.  Unfortunately 
Government  also  set  its  imprimatur  on  unstable  and  high 
rates  by  linking  aid  from  Currency  Reserves  with  certain 
prescribed  levels  of  the  bank-rate.  A  more  rational  policy 
has  had  to  await  the  creation  of  a  Central  bank  placed 


116  IMPERIAL  BANK  OF  INDIA 

above  the  motive  of  private  profit.29 

10.    Imperial  Bank  after  1934 

The  Reserve  Bank  Act  of  1934  put  an  end  to  or  at  least 
sought  to  barricade  the  growth  of  the  leadership  of  the 
Imperial  Bank  along  certain  lines.  That  law  caused  certain 
changes  in  the  position  and  powers  of  the  Bank  which  we 
must  now  proceed  to  assess. 

The  Bank  ceased  to  be  the  banker  to  Government.  The 
Government,  on  its  part,  practically  withdrew  from  the 
management  of  the  Bank.  In  the  general  interests  of  the 
country,  however,  power  was  reserved  to  the  Governor- 
General-in-Council  to  nominate  to  the  Central  Board  non- 
official  persons  not  exceeding  two  in  number.  Contact 
between  Government  and  the  Bank  was  assured  by  the 
nomination  by  Governor-General  of  an  officer  of  Govern- 
ment entitled  to  attend  the  meetings  of  the  Central  Board, 
to  take  part  in  its  discussions  but  not  to  vote.  This 
arrangement  is  an  obvious  recognition  of  the  unique  place 
of  the  Imperial  Bank  in  the  financial  and  banking  interests 
of  the  country  especially  in  times  of  crisis  and  war. 

With  the  withdrawal  of  special  privileges  and  Govern- 
ment control,  the  justification  of  old  restrictions  on  the 
business  of  the  Bank  ceased. 

The  Bank  was  now  authorised  to  transact  foreign 
exchange  business,  to  open  branches  and  undertake  bank- 
ing business  of  any  kind  inclusive  of  borrowing  abroad.  It 
was  allowed  to  buy  bills  of  exchange  payable  abroad  and 
of  a  usance  not  exceeding  nine  months  in  the  case  of  bills 
relating  to  the  financing  of  seasonal  agricultural  operations 
and  six  months  in  the  case  of  other  bills. 

In  the  case  of  advances  or  loans  relating  to  the  financing 
.of  seasonal  agricultural  operations,  the  period  of  six  months 
was  extended  to  nine  months.  The  Bank  was  now  permit- 
ted to  acquire  and  hold,  and  generally  to  deal  with,  any 
right,  title,  or  interest  in  any  property  movable  or  immov- 
able which  may  be  the  Bank's  security  for  loans  and 
advances  or  may  be  connected  with  any  such  security.  The 

29.    Ch.  VIII  §  11,  and  Study  of  Interest-Rates  by  Kock,  pp.  110-114. 


AFTER   1934  117 

security  for  loans  and  cash  credits  was  now  widened  to 
include  municipal  debentures  or  securities,  when  permitted 
by  the  Governor-General-in-Council,  of  a  Native  State  of 
India,  the  debentures  of  limited  liability  companies  approved 
by  the  Central  Board,  etc. 

Under  an  agreement  between  the  Imperial  Bank  and  the 
Reserve  Bank  which  was  to  last  in  the  first  instance  for  15 
years  and  which  could  terminate  with  5  years'  prior  notice  on 
either  side,  the  former  was  to  act  as  agent  for  the  latter  in  all 
places  in  British  India  where  it  had  a  branch  and  the  latter 
had  got  none.  The  Imperial  Bank  was  also  to  perform  in 
those  places  the  usual  functions  on  behalf  of  Central  and 
Provincial  Governments  and  the  Railway  Board.  For  these 
latter  services,  the  Imperial  Bank  was  to  receive  commission 
at  certain  rates  on  the  volume  of  transactions  for  the  first 
ten  years  and  the  actual  cost  for  the  next  five  years  and,  if 
necessary,  thereafter  also.  This  agreement  has  recently  been 
revised  on  similar  lines. 


CHAPTER    V 

STRUCTURE  OF  ASSETS  AND  LIABILITIES 

THE  STRUCTURE  OF  ASSETS  AND  LIABILITIES  of  a  banking  system 
is  the  outcome  within  certain  limits  of  their  mutual  inter- 
action. The  quantities  and  character  of  resources  which 
form  the  liabilities  of  banks  limit  naturally  the  choice  of 
business  which  they  undertake.  But  it  is  also  within  the 
power  of  banks  themselves  to  influence  to  an  extent  the 
volume  and  composition  of  their  liabilities.  Both  assets 
and  liabilities  in  the  long  run  are  themselves  the  reflection 
of  basic  economic  conditions  of  a  country  or  region  in  the 
determination  of  which  the  banking  system  as  such  is  only 
one  among  several  factors. 

It  is  usual  to  speak  of  the  Indian  banking  system  as  being 
composed  of  three  elements.  The  Exchange  Banks  conform 
to  one  pattern,  the  basic  aims  and  objects  of  which  are 
broadly  reflected  in  their  structure  of  assets  and  liabilities.1 
The  Imperial  Bank  of  India  holds  a  special  status  which,  is 
to  be  largely  interpreted  in  terms  of  political  and  historical 
circumstances.  The  third  constituent  is  made  up  of  Indian 
joint-stock  banks  which  it  is  usual  to  class  under  one  head. 
As  a  matter  of  fact,  Indian  joint-stock  banks  do  not  conform 
to  one  homogeneous  type  but  reveal  certain  divergences  of 
aims  and  objects  or  economic  environment  which  it  should 
be  one  of  our  main  objects  to  study.  The  present  chapter 
is  devoted  to  the  study  of  these  three  constituents  but  in 
the  case  of  the  last,  it  covers  very  largely  those  leading 
banks  for  which  information  is  easily  available.1A 

I.    STRUCTURE  OF  LIABILITIES 

1.     Capital  and  Reserves 

The  capital  and  reserves  of  a  bank  perform  a  dual 
function.  They  serve  as  a  guarantee  fund  to  the  creditors 
of  a  bank,  since  in  case  of  failure,  losses  must  in  the  first 
instance  fall  on  capital  and  reserves.  To  that  extent,  a  high 

1.    See  f .  n.  79  of  the  present  Ch. 
1A.    Tables  XV,  XVI  and  XVII. 


STRUCTURE  OF  LIABILITIES  119 

proportion  of  capital  and  reserves  is  the  basis  of  public 
confidence  in  a  bank.  Secondly,  they  form  the  fixed  part 
of  the  resources  of  a  bank  and  as  such  may  be  found  useful 
for  certain  types  of  investments  for  which  other  borrowed 
resources  are  not  deemed  so  eligible. 

To  a  certain  extent,  the  size  of  the  general  reserve  and, 
according  to  circumstances,  of  special  reserves  if  any,  is  a 
better  index  to  the  strength  and  stability  of  a  bank  than 
^ven  paid  capital.  For,  the  building  up  of  a  large  reserve 
.over  a  period  of  time  is  itself  a  record  of  the  profit-making 
capacity  and  therefore  the  success  of  a  bank.  Taken  with 
the  dividend  distributed,  it  is  a  proof  of  prudent  and  cautious 
management. 

This  proportion  is  the  outcome  of  diverse  factors.  They 
may  be  stated  in  general  terms  as — Bank  Policy;  Banking 
Laws;  Bank- Amalgamations;  Causes  influencing  the  normal 
size  of  deposits;  Monetary  changes  which  ensue  in  appre- 
ciable inflation  or  deflation  and  which,  though  they  act  on 
deposits,  are  so  important  that  they  deserve  a  separate  place 
in  our  analysis. 

The  banks  themselves  have  it  in  their  power  to  fix  this 
proportion  by  estimating  the  volume  of  business  they  aim 
at  or  aspire  to  build  and  raising  their  capital  accordingly. 
It  has  been  a  serious  and  well-founded  complaint  against 
Indian  banks  that  many  of  them  start  on  their  career  with 
capital*  which  is  altogether  insignificant  for  the  type  of 
business  and  responsibilities  which  a  bank  is  held  to 
undertake.  The  more  flagrant  type  of  abuse  has  now  been 
prohibited  by  the  Indian  Company  Law  of  1936  which 
prescribes  a  minimum  capital  of  Rs.  50,000  and  a  statutory 
accumulation  of  reserves  so  as  to  raise  the  owned  funds  by 
a  further  Rs.  50,000  in  a  short  period. 

The  growth  of  banks  whether  by  natural  expansion  or 
amalgamation  tends  to  lower  the  ratio  of  capital  and 
reserves.  Economies  of  large  scale  are  to  a  certain  extent 
as  much  evident  in  banking  as  elsewhere.  Growth  in  size 
attracts  confidence  and  confidence  attracts  resources  and 
so  on  in  an  endless  chain.  The  more  expensive  staff  at  the 
top  is  either  utilised  more  intensively  or,  as  in  the  case  of 
amalgamations,  rendered  partially  superfluous.  The  less 


120  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

profitable  branches  or  lines  of  business  can  now  be  closed 
and  the  work  passed  on  to  existing  organisations.  In  the 
case  of  amalgamations,  there  is  the  further  factor  that  the 
absorbing  bank  which  is  as  a  rule  the  bigger  one  offers  its 
shares  which  have  a  great  market  value  in  exchange  for 
the  issued  capital  of  the  smaller  bank.  There  takes  place  in 
this  way  a  reduction  in  the  amount  of  the  nominal  capital 
added  to  the  capital  of  the  bigger  bank.  Sometimes,  indeed, 
amalgamations  take  place  by  discharging  the  shares  of  the 
small  bank  in  cash  or  by  the  allotment  of  Government 
stock,2 

The  proportion  under  discussion  depends  as  much  on  the 
absolute  size  of  deposits  as  the  absolute  size  of  capital  and 
reserves.  It  is  within  the  discretion  of  banks  to  determine, 
at  least  initially,  the  size  of  the  latter.  But  the  factors 
which  influence  the  size  of  the  former  are  very  largely  be- 
yond the  power  of  the  banks  to  determine. 

Holland  is  a  very  arresting  example  of  how  a  high  pro- 
portion may  be  the  outcome,  not  of  the  largeness  of  capital 
and  reserves,  but  of  the  relative  smallness  of  deposits.  In 
India  also,  factors  are  at  work  which  on  the  balance  tend  to 
keep  down  the  volume  of  deposits.  Ignorance  and  illiteracy 
make  the  cheque  habit  the  exception  rather  than  the  rule. 
Hoarding  or  direct  investment  whether  in  industries  or 
money-lending  is  preferred  to  the  use  of  banks  as  custodians 
or  intermediaries.  Postal  money  orders  are  a  more  common 
medium  of  transfer  of  funds  while  postal  cash  certificates 
and  postal  savings  accounts  attract  not  a  small  part  of  the 
savings  of  the  community.  Hence,  the  volume  of  deposits, 
small  as  it  is  in  relation  to  the  area  and  population  of  the 
country,  tends  to  be  small  also  in  relation  to  the  capital 

2.    The   influence  of  this   factor  is   well   illustrated   in  the  case  of  the   British- 
banking  system. 

UNITED  KINGDOM 

1897      1910      1914      1919      1922      1930      1938 
Proportion  of  Capital  and  Reserve 
to  Deposits  and  Notes  (including 
Bank  of  England)  ..         ..        15.3        12.8        9.7        6.0        7.0        7.5        6.7 

Proportion  of  Capital  and  Reserve 
to  Deposits  and  Notes  (excluding 
Bank    of    England)  ..         ..  ..  ,.        9.9       6.0        7.2       8.4       7.5 

—Bankers,   Insurance   Managers   and   Agents   Magazine,    October   1939,. 
pp.  513-514. 


CAPITAL  AND  RESERVES  121 

structure  of  banks. 

No  factor  we  have  analysed  till  now  can  compare  in  its 
importance,  however,  with  inflationary  or  deflationary 
movements  and  the  rise  and  fall  of  prices.  In  such  times, 
capital  and  reserves  remain  unchanged  while  the  volume 
of  deposits  is  subject  to  large  and  rapid  alterations.  Even 
when  further  capital  is  called  and  profits  diverted  into 
reserves,  the  aggregate  is  hardly  able  to  keep  pace  with 
inflation.  When  inflation  ultimately  gives  way  to  its  defla- 
tionary sequel,  bank  failures  and  net  withdrawals  of  cash 
are  the  only  factors  exerting  to  bring  deposits  into  some 
adjustment  with  the  fixed  capital  structure.  The  more  usual 
course  of  events  is  that  the  proportion  falls  in  times  of 
rising  prices  and  remains  steady  in  times  of  falling  prices* 
The  uncertainties  of  inflation  and  deflation,  their  uncertain 
degree,  duration,  etc.,  make  bank  managements  naturally 
unwilling  to  undertake  in  such  times  any  hasty  alterations 
in  the  fixed  capital  structures  of  banks. 

The  force  of  this  factor  is  well  illustrated  by  the  banking 
systems  of  those  countries  which  have  passed  through  great 
inflationary  and  deflationary  phases.  In  France,  the  pre- 
war ratio  of  20  per  cent  fell  to  8  per  cent  by  1929,  i.e.  till 
the  currency  stabilisation  of  1928.  In  Germany,  the  pre- 
war ratio  of  30  per  cent  deteriorated  to  8  per  cent  by  1929. 
Many  other  countries  show  evidence  of  the  operation  of  the 
same  forces — although  not  on  the  same  scale.3 

The  slow  progress  of  the  banking  habit  and  growth  of 
deposits  in  the  nineteenth  century  in  India  has  been  already 
recorded  elsewhere.4  Even  the  Presidency  Banks,  with  all 
the  prestige  of  Government  to  support  them,  found  it  neces- 
sary to  depend  for  a  substantial  part  of  their  working 
resources  on  their  capital  and  reserves.  As  high  as  56  per 
cent  and  more  of  their  private  deposits  in  1870,  their  capital 
and  reserves  were  still  30.2  to  43.2  per  cent  of  deposits  during 

3.  Percentage  of  Capital  and  Reserves  to  Public  Liabilities. 

1913        1929  1913  1929 

Netherlands  53  28  England  10  7 

Germany  30  8  France  20  8 

Switzerland  22  16  U.S.A.  (Member-banks)  19  14 

— Commercial  Banks  1913-29  (League  of  Nations),  pp.  27-8. 

4.  Ch.  I  Part  III. 


122  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

the  interesting  episode  of  the  nineties. 

The  present  ratio  of  the  Imperial  Bank  is  partly  the  out- 
come of  the  great  inflation  of  war  years.  Before  the  first 
World  War,  the  ratio  used  to  be  in  the  neighbourhood  of  20 
per  cent  and  even  above.  That  war  with  its  grave  inflation 
caused  a  rapid  fall  till  it  was  less  than  10  per  cent  by  1920. 
The  increase  of  capital  in  the  amalgamation  of  1921  on  the 
one  hand  and  the  great  expansion  of  deposits  consequent 
on  the  creation  of  its  100  statutory  branches  on  the  other 
seem  on  the  whole  to  have  balanced  each  other  at  a  steady 
level  of  about  13  to  14  per  cent.  The  great  deflation  of  post- 
1929  years  has  not  affected  this  proportion. 

In  a  growing  banking  system,  the  factor  which  influences 
the  proportion  most  is  naturally  the  growth  of  deposits 
caused  by  expansion  of  branches  or  new  places  of  operation. 
The  Allahabad  Bank  of  India,  the  oldest  among  existing 
"Indian"  joint-stock  banks,  had  a  capital  of  3  lakhs  in  1870, 
when  the  Presidency  Banks  had  a  capital  and  reserves  of 
361  lakhs.  In  1870,  i.e.,  5  years  after  its  establishment,  the 
proportion  of  owned  to  borrowed  resources  was  as  high 
as  78  per  cent.  With  the  growth  of  deposits,  the  proportion 
fell  to  22.8  in  1880  and  by  the  turn  of  the  century,  it  dimi- 
nished to  a  mere  6.5  per  cent.  The  Punjab  National  Bank 
was  launched  in  the  middle  of  the  remarkable  nineties  with 
capital  and  reserves  which  amounted  to  less  than  2  lakhs 
only  by  1900.  At  that  time,  the  proportion  stood  at  14,1 
per  cent. 

In  the  early  years  of  their  career,  just  before  the  first 
World  War,  the  Big  Five  of  Indian  joint-stock  banks  main- 
tained a  ratio  of  12  per  cent.  This  ratio  is  best  understood 
in  the  light  of  the  previous  history  of  Indian  joint-stock 
banks  of  A  Class  in  which  they  are  included.  Till  1906, 
when  the  Swadeshi  movement  became  active,  these  banks 
had  maintained  a  ratio  between  16  and  18  per  cent.  The 
Swadeshi  wave,  reinforced  by  steadily  rising  prices,  caused 
an  increase  in  deposits  and  lowered  the  ratio  to  less  than 
11  per  cent  in  1910.  In  1912,  the  year  before  the  banking 
crisis  broke  out,  the  ratio  of  the  Big  Five  was  12.8. 

During  the  first  World  War,  extension  of  branches  and 
inflation  acted  together  to  affect  this  ratio  adversely.  In 


CAPITAL  AND  RESERVES  123 

the  case  of  Class  A  banks,  the  ratio  fell  from  14.5  per  cent 
in  1915  to  12.9  per  cent  in  1919.  The  figures  for  the  Big 
Five  are  19.3  and  10.6  per  cent  in  spite  of  substantial  addi- 
tions to  their  capital  and  reserves  in  the  closing  years  of  the 
war.5 

The  steady  deflation  of  1922-29  was  more  than  counter- 
balanced by  extension  to  new  places  and  creation  of  new 
branches.  Class  A  banks  maintained  a  steady  ratio  of  16 
to  18  per  cent.  The  Big  Five  among  whom  the  Central 
Bank  of  India  recorded  a  great  accession  to  capital  and 
reserves  on  its  amalgamation  with  the  Tata  Industrial 
Bank,  improved  and  maintained  their  level  at  about  the 
same  proportion  as  the  Imperial  Bank,  viz.,  13  to  14  per 
cent.  The  situation  changed  strikingly  after  1929  when 
the  great  spate  of  expansion  added  so  enormously  to  their 
deposits  that  the  proportion  fell  down  to  9  per  cent  by  1938. 
Class  A  banks  recorded  a  fall  to  about  14  per  cent. 

Class  B  banks  present  an  altogether  different  case.  Insig- 
nificant capital  and  reserves  means  ipso  facto  insignificant 
capacity  to  attract  deposits.  It  is  hardly  surprising  that 
such  banks  should  have  to  depend  for  their  working  capital 
more  on  owned  than  borrowed  resources.  Hence,  the  pro- 
portion, in  their  case,  has  been  always  very  high,  generally 
much  more  than  30  per  cent.  It  shows  also  much  less  fluc- 
tuation for  the  simple  reason  that  their  growth  is  always 
more  in  numbers  than  in  size.6 

The  general  drift  of  our  analysis  may  be  stated  in  this 
manner.  The  capital  and  reserves  of  a  banking  system  may 
not  be  judged  as  adequate  or  inadequate  on  any  a  priori 
grounds.  While  a  certain  minimum  size  may  be  always 
postulated  as  desirable  on  the  basis  of  the  wealth  and  cir- 
cumstances of  a  country,  their  ratio  to  deposits  is  deter- 
mined by  many  factors  among  which  the  policy  of  bank 
management  is  only  one  and  by  no  means  the  most  power- 
ful. Among  the  other  factors,  a  high  place  must  be  assigned 
to  the  past  history  of  a  banking  system  and  world-wide 
forces  like  inflation  or  deflation.  The  desirable  level  is  to 

5.  Ch.  VI  §  1.  2,  5. 

6.  Ch.  I  §  10. 


124  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

be  decided  relatively  to  the  special  circumstances  of  each 
country  and  particularly,  to  each  phase  of  growth.  An 
effort  to  set  up  rigid  standards  on  this  subject  should  have 
to  take  account  of  so  many  complicated  and  special  factors 
as  to  make  it  nugatory  in  practice. 

There  is  indeed  an  additional  factor  relating  to  differences 
between  individual  banks  of  which  we  have  yet  to  take  note 
and  which  is  no  less  important  than  others.  It  appears 
obvious  that  the  protective  value  of  capital  and  reserves 
should  be  assessed  not  merely  by  the  ratio  to  deposits  liabi- 
lities they  must  support  but  also  by  the  liquidity  or  risk- 
lessness  of  the  assets  in  which  the  deposits  are  invested. 
But  this  is  true  in  a  special  sense  which  ought  to  be  care- 
fully distinguished.  Unlike  cash  which  has  to  be  held 
against  immediate  demands,  capital  and  reserves  exist  as 
an  assurance  to  creditors  available  only  in  the  last  resort. 
The  liquidity  or  risklessness  of  assets  held  is  therefore  rele- 
vant here  only  in  so  far  as  it  has  a  tendency  to  diminish 
the  chance  of  incurring  losses  in  the  ultimate  outcome.  It 
would  indeed  be  difficult  to  prove  that  the  magnitude  of 
losses  in  the  long  run  is  likely  to  be  small  in  the  case  of 
so-called  short  term  or  liquid  business  as  compared  with 
so-called  long  term  or  non-liquid  finance. 

2.    Deposits-Liabilities  of  Banks7 

The  bulk  of  the  resources  which  a  bank  employs  are  bor- 
rowed from  the  public.  This  is  indeed  one  of  the  main,  if 
not  the  main,  characteristic  which  distinguishes  banking 
from  ordinary  money-lending.  The  quality,  character,  be- 
haviour, etc.,  of  these  resources  are  therefore  an  important 
key  to  the  interpretation  of  the  inner  character  of  a  bank- 
ing structure. 

7.  Aggregate  Deposits    Scheduled  Banks         Percentage  of 

(Calendar  Year-end)  Deposits  2  to  1 

(Figures  in  crores) 

1935-36                                            245  217  88.8 

1936-37                                            257  229  893 

1937-38                                              —  241  — 

1938-39                                            —  237  — 

1945-46                                          1092  985  — 

1946-47                                          1183  1077  — 

1947-48                                          1208  111?  — 


DEPOSITS-LIABILITIES  125 

By  far  and  away  the  most  significant  fact  about  these 

borrowed  resources  is  their  distribution  between  time  and 

demand   deposits.8    The   only   statistics   available   on   this 

point  relate  to  the  Big  Five  or  Seven  of  Indian  joint-stock 

Ratio  of  Demand  Deposits  to  Total  Deposits 


1912 

1913 

1920 

1926 

1929 

1935 

England  and  Wales 
U.S.A.    (N.  -Bs.)               — 

91.1 

63.8 
73.3 

57.3 

58.8 

54.1 
56.3 

54 
54 

France   (Principal)         — 
Germany  (Berliner)       — 
Netherlands                      — 

93.0 
58.6 
55.2 

95.5 
76-7 
69.1 

96.7 
50.1 
52.1 

92.7 
41.8 
47.6 

97 
45 

Switzerland                       — 

23.5 

37.6 

31.0 

29.5 

— 

Indian    (Scheduled)       — 

— 

— 

— 

— 

54.7 

Big  Five                         27  9 

13.1 

34.8 

33.4 

35.0 

49.1 

Ratio  of  Current  to  Total  Accounts 


London 
Clearing 
Banks 

U.S.  Com- 
mercial 
Banks 

France 
6  principal 
Banks 

Germany 
5  Banks 
Nov.  figure 

Indian 
Scheduled 
Banks 

1929 

54.1 

55.9 

92.7 

41.8 

— 

1930 

52.9 

— 

.  — 

— 

— 

1931 

52.7 

53.4 

93.7 

— 

— 

1932 

49.5 

53.3 

952 

— 

— 

1933 

51.3 

56.2 

94.8 

— 

— 

1934 

51.8 

55.9 

95.0 

— 

54.7 

1935 

53.8 

— 

— 

45.3 

— 

1936 

— 

— 

— 

— 



1937 

— 

— 

— 

46.3 

54.8 

1938 

— 

— 

— 

46.9 

54.6 

banks  and,  for  a  few  recent  years,  the  Scheduled  Banks  in 
which  the  former  are  of  course  included.  The  Scheduled 
Banks  represent  almost  90  per  cent  of  the  organised  bank- 
ing power  of  the  country.  The  Big  Seven  claimed  in  the 
same  years  30  per  cent  of  this  banking  power.  Figures 
relating  to  these  banks  may  therefore  be  taken  as  repre- 
senting fairly  general  conditions  in  the  country. 
These  figures  indicate  that  demand  deposits  formed  in 

8.  Certain  qualifications  have  to  be  borne  in  mind  in  interpreting  these  terms 
and  particularly  in  making  comparisons.  In  certain  countries  (e.g.  U.S.A.  and 
England)  deposits  for  three  months  and  more  only  are  returned  as  fixed  deposits. 
In  other  countries,  the  minimum  period  may  be  as  short  as  one  month  or  even 
one  week.  In  India,  fixed  deposits  are  rarely  accepted  for  less  than  six  months. 
But  the  figures  in  the  text  are  compiled  on  the  basis  that  whatever  each  bank 
so  describes  is  fixed  deposits.  Again,  it  should  be  borne  in  mind  that  in  times  of 
difficulties  respectable  banks  do  not  insist  on  their  legal  right  but  allow  even 
fixed  deposits  to  be  withdrawn  before  due  time.  Insistence  on  legal  rights  is  apt 
to  aggravate  fear  and  suspicion.  Finally,  sometimes  overdraft  is  granted  on  the 
security  of  a  fixed  deposit.  In  this  case,  the  procedure  is  tantamount  to  con- 
version of  a  fixed  deposit  into  a  current  deposit. 


126  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

recent  years  more  than  half  of  total  deposit-liabilities.  In 
the  case  of  our  Big  Five,  the  proportion  has  been  a  little 
less,  50  per  cent  in  fact.  This  proportion  is  almost  as  high 
as  in  many  advanced  countries  like  the  United  Kingdom,  the 
United  States,  etc.  Even  though  allowance  has  to  be  made 
for  differences  in  definitions  of  time  and  demand  deposits, 
the  figures  are  nevertheless  arresting  in  themselves.  Evi- 
dently, they  demand  some  scrutiny  for  their  proper  inter- 
pretation. A  high  proportion  of  demand-deposits  reflects 
sometimes  a  highly  developed  banking  habit.  But  in  cer- 
tain other  circumstances,  as  in  France  for  example,  it  is 
indicative  merely  of  the  smallness  of  time  deposits. 

In  the  first  place,  the  use  of  cheques  in  India  is  more 
or  less  limited  to  five  hundred  and  odd  towns  and  cities 
only.  A  good  proportion  of  places  with  a  population  of 
20  thousand  and  over,  a  fair  proportion  of  places  which 
have  populations  between  10  and  20  thousand  and  a  very 
few  places  with  populations  under  10,000 — these  are  the 
territorial  limits  of  the  banking  habit  in  this  country.  An 
analysis  of  currency  habits  indicates  how  the  use  of  notes 
and  rupees  predominates  in  certain  parts  of  the  country 
while  other  means  of  payment  are  in  vogue  in  other  parts.9 
The  high  proportion  of  demand  deposits  in  our  banking 
resources  is  therefore  representative  only  of  a  small  India, 
hidden  in  and  overshadowed  by  an  immense  India  around, 
still  addicted  to  primitive  monetary  habits. 

Secondly,  this  high  proportion  seems  to  be  only  a  recent 
occurrence,  particularly  of  post-1929  times.  It  is  sympto- 
matic not  so  much  of  any  unusual  growth  of  demand  depo- 
sits as  of  an  arrest  in  the  growth  of  fixed  deposits.  Before 
the  outbreak  of  the  first  World  War,  fixed  deposits  of  the 
Big  Five  used  to  be  as  high  as  70  per  cent  and  more.  The 
war  with  its  great  inflation  initiated  a  change  and  till  1920, 
the  proportion  fell  with  marked  rapidity.  The  percentage 
continued  stable  at  about  60  to  65  till  1925  but  a  rapid 
decline  set  in  thereafter.  Between  1926  and  1936,  the  fixed 
deposits  of  the  Big  Five  rose  from  30  to  34  crores  only  but 
demand-deposits  mounted  from  17  crores  to  35  crores. 

9.    Ch.  VIII  §2. 


DEPOSITS-LIABILITIES  127 

Several  causes  have  been  at  work  to  diminish  the  impor- 
tance of  fixed  deposits  in  the  banking  system. 

Since  1920,  Postal  Accounts  and  Cash  Certificates  have 
competed  severely  with  fixed  deposits  as  an  alternative 
outlet  for  investment.  Hardly  one-ninth  of  private  deposits 
of  all  banks  in  1920,  they  grew  to  be  more  than  half  in  1934. 
Apart  from  the  confidence  which  post  offices  must  always 
inspire  in  a  country  like  India,  the  course  of  interest-rates 
in  post-war  and  particularly  post-1929  years  has  been  no 
inconsiderable  factor  in  this  development.10 

The  remarkable  and  growing  popularity  of  life  insurance 
and  preference  for  direct  investment  in  stocks  and  deben- 
tures must  tend  in  the  same  direction.  Funds  which  used 
to  appear  formerly  as  fixed  deposits  now  pause  for  a  while 
as  current  deposits  on  their  way  to  absorption  in  permanent 
investment.  Preference  for  direct  investments  of  this  kind 
has  been  no  mean  factor  in  the  surprising  bulge  of  current 
deposits  which  is  such  a  feature  of  the  French  banking 
system.  This  factor  is  seen  in  operation  in  India  on  a  far 
larger  scale  during  the  second  World  War.  Demand  liabili- 
ties outdistanced  time  liabilities  till  they  became  twice  and 
then  thrice  as  high.  Land,  houses,  precious  metals,  any 
durable  assets  were  preferred  to  fixed  deposits. 

The  relative  rates  obtainable  on  current  and  fixed  depo- 
sits and  on  other  forms  of  investment  have  a  direct  bearing 
on  this  distribution.  In  connection  with  the  former,  the 
position  of  short  rates  relatively  to  long  rates  which  we 
have  already  emphasised  in  a  previous  chapter  has  an 
obvious  and  profound  bearing  on  this  question.  The  long- 
term  rate  was  falling  between  1920  and  1927  but  it  still 

10.    Rates  of  Interest  of  Postal  Savings  Bank  Accounts. 

(1)  4  per  cent  per  annum  in  1833-35. 

(2)  32  per  cent  per  annum  in  1870. 

(3)  4  1/6  per  cent  per  annum  in  1879. 

(4)  3t  per  annum  in  1880. 

(5)  Three  pies  for  complete  sum  of  Rupees  five  for  one  month  upto  31-3- 
1894,   i.e.,  32  per  cent. 

(6)  Three  pies  for  complete  sum  of  Rupees  six  for  one  month  from  1-4-1894 
to  31-6-1905. 

(7)  3  per  cent  per  annum  from  1-7-1905. 

(8)  2j  per  cent  per  annum  from  1-11-1933. 

(9)  2  per  cent  per  annum  from  1-7-1936. 
(10)  1J  per  cent  per  annum  from  1-12-1938. 


128  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

remained  at  the  high  level  of  4.4  per  cent.  It  rose  subse- 
quently, reaching  5.7  per  cent  in  1932.  Throughout  these 
years,  rates  offered  on  fixed  deposits  were  unusually  high 
even  in  the  case  of  exchange  banks  and  the  Imperial  Bank 
of  India.  As  we  have  recorded,  the  fixed  and  saving  depo- 
sits of  the  Big  Five  accounted  for  about  65  per  cent  of  the 
total  till  1930-31.  The  situation  changed  radically  after 
1932.  The  long-term  rate  declined  from  5.7  in  1932  to  3.55  in 
1938.  The  short  rates  fell  even  more  precipitately.11  From 
1931,  the  proportion  of  fixed  and  savings  deposits  for  the 
Big  Five  began  to  fall  steadily.  By  1938,  it  reached  the 
unprecedentedly  low  level  of  50  per  cent. 

The  average  size  of  accounts,12  their  degrees  of  activity 
.and  the  aggregate  number  of  depositors  have  no  doubt  a 
direct  bearing  on  the  profits  of  banking  business.  They  have 
also  a  deep  significance  for  the  strength  and  stability  of  a 
banking  system.  To  extend  exploitation  from  classes  and 
places  of  larger  banking  potentialities  to  those  with  smaller 
banking  potentialities  is  not  a  matter  of  mere  economy  in  ex- 
penditure or  technical  organization.  It  means  sometimes  the 
exposure  of  the  banking  system  to  all  irrational  and  tidal 
•changes  of  moods  which  sway  the  mass  of  humanity.  It 
is  more  than  probable  that  the  extraordinary  increase  in 
the  number  of  depositors  of  commercial  banks  between  1915 
and  1930  was  no  mean  factor  in  the  collapse  of  confidence 
which  occurred  in  the  United  States  in  1932-33.  Saving 
depositors  who  are  generally  drawn  from  the  strata  of 
moderate  incomes  had  alone  recorded  an  increase  from 
8£m.  to  41m.  In  a  country  like  India,  the  infiltration  of  the 
masses  into  the  banking  system  is  fraught  with  even  more 
incalculable  dangers. 

Direct  statistics  on  these  matters  do  not  exist  in  this 
country.  We  have  noted  that  the  proportion  of  places  with 
banking  facilities  has  altered  very  much  in  favour  of  smaller 
towns  with  less  than  10  thousand  population.  Since  crea- 
tion of  branches  has  been  a  more  important  factor  in  the 
growth  of  deposits  than  extension  to  new  places,  it  must 

11.  Ch.  Ill  §  4. 

12.  Ch.  V  §  11;  Ch.  X  f  n.  9. 


STRUCTURE  OF  ASSETS  129 

.also  tend  in  the  direction  of  bringing  into  the  orbit  of  the 
banking  system   classes   of   smaller  banking  potentialities. 
In  his  testimony  before  the  Hilton- Young  Commission,  the 
Chairman  of  the  Bengal  National  Bank  referred  pointedly 
to  the  great  growth  in  small-sized  savings  bank  accounts 
which  proved  very  expensive  and  troublesome  to  manage.13 
It  is  even  more  difficult  to  speak  of  the  social  strata  from 
whom  our  depositors  are  drawn.    We  can  merely  draw  on 
the  impressions  from  time  to  time  of  leading  men  in  the 
banking  world  and  trust  to  the  imagination  of  the  reader 
to  complete  the  picture.    The  Secretary  of  the  Bank  of 
Bengal  averred  before  the  Fowler  Committee  of  1898  that 
the  wealthier  ryots  and  zemindars  rarely  deposited  their 
money  in  banks.14    The  situation  had  apparently  changed 
favourably  by  1911-12.    In  his  evidence  before  the  Cham* 
berlain  Commission,  the  agent  of  the  Allahabad  Bank  des- 
tribed  Indian  joint-stock  banks  as  drawing  their  funds  from 
Hhe  artisan,  babu,  pleader  and  cultivator."    While  express- 
ing fears  about  "mushroom  'banks  operating  all  'over  the 
country,"  he  described  the  depositors  of  respectable  banks 
as  professional  people,  doctors,  lawyers,  government  ser- 
vants, etc.15    The  Chairman  of  the  Bengal  National  Bank 
giving  his  evidence  before  the  Hilton-Young  Commission 
of  1926  reported  that  a  movement  from  hoarding  into  bank- 
ing was  visible  even  among  peasants  and  cultivators.16 

II.    STRUCTURE  OF  ASSETS  17 

There  is  nothing  like  an  ideal  distribution  of  assets  which 
holds  true  for  all  times,  for  all  countries  or  even  for  all 

13.  Q.   7933-38— Evidence,   Hilton- Young  Commission. 

The  Bengal  Provincial  Inquiry  Committee  records  as  follows  with  reference 
Jo  the  Bengal  Circle  figures  of  the  Imperial  Bank  for  the  quinquennium  ended 
31st  December  1929.  "Deposits  in  current  accounts  and  fixed  deposits  have  some- 
what declined  and  those  in  savings  banks  have  increased  during  the  period, 
but  the  number  of  holders  of  current  accounts  has  increased  much  more  than 
that  of  savings  banks  deposits.  Another  noticeable  feature  is  that  the  average 
amount  for  which  each  cheque  is  drawn  has  declined  while  the  number  of 
cheques  drawn  on  each  account  has  increased,  specially  after  the  abolition  of 
stamp-duty  on  cheques."  Pp.  39-40.  See  also  p.  339  n. 

14.  Q.  3613;  3616. 

15.  Q.  8663;  8625. 

16.  Q.  7933-39. 

17.  The  percentages   usually  used   in  the  analysis   of  assets   and  liabilities   of 
M.  B.  9. 


130  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

banks  in  the  same  country.  The  financial  and  economic 
structure  of  each  country  prescribes  in  a  broad  manner  the 
character  of  resources  which  banks  attract  and  the  type  of 
investments  in  which  their  funds  find  outlet.  Within  the 
limits  set  by  the  financial  and  economic  structure,  each  bank 
and  banking  system  have  to  strive  to  reach  a  balance,  often 
a  very  delicate  one,  between  a  maximum  of  profit  and  a 
maximum  of  liquidity  and  elasticity.  The  factors  which 
underlie  the  financial  and  economic  structure  are  them- 
selves liable  to  large  cyclical  and  secular  changes  amidst 
which  eternal  vigilance  and  adaptability  are  the  only  key 
to  success  in  banking. 

Percentage  of  Deposits 

British  Clearing  Banks 


1929 

1935 

1939 

1947 

Deposits  m.  £ 

1750 

2240 

5930 

Cash 

10.6 

10.5 

10.3 

— 

Call  and  short  loans 
Discounts 

7.9 
13.2 

7.1 
14.6 

6.6    I 
12.4    I 

19.9 

Investments 

14.8 

30.2 

26.7 

25.a 

Advances 

55.5 

37.3 

43.9 

zo.a 

4  French  Deposit  Banks 


1929 

1935 

1936 

1946 

Deposits  m.  Frs.                             — 

27550 

28480 

38800 

Cash  &  at  Bank                           — 

20 

19.5 

6.9 

Discounts                                      — 

58 

61 

71.0 

Loans  &  Advances                         — 

35.5 

31.0 

6.4 

Investments  and  Premises           — 

1.3 

1.2 

— 

5  German  Banks 


1929 

1935* 

1936* 

1937 

1938 

Cash 



3.5 

2.5 

Discounts 

— 

45.6 

_ 

55.7 

__. 

Loans 

— 

44.9 

_ 

45.6 

, 

Securities 

— 

8.9 

— 

17.7 

— 

*  November. 

banks  in  such  discussions  have  to  be  accepted  with  certain  qualifications.  (1) 
Collecting  bankers  are  apt  to  credit  cheques  before  the  drawee  bankers  have 
debited  them.  If  in  order  to  rectify  this  double  counting  in  the  figures  for 
aggregate  deposits  cheques  in  course  of  collection  were  substracted,  the  deposits 
in  England,  it  has  been  estimated,  will  have  to  be  reduced  by  3  to  4  per  cent. 
(2)  The  proper  place  of  sight  deposits  with  foreign  banks  and  foreign  currency 
does  not  yet  seem  to  have  been  fixed.  (3)  Under  a  loan  account,  the  whole  of 
£1,000,  of  which  only  £600  have  been  availed  of,  appear  as  an  asset.  But  under 
an  overdraw  account,  £400  only  are  shown  as  an  asset. 


STRUCTURE  OF  ASSETS  131 

5  Dutch  Banks 


1929 

1933 

1937 

Capital  and  Reserves 

95 

173 

122 

Cash                         

69.4 

139.2 

131.1 

Bills               

83.7 

101.9 

135.6 

Advances  against  securities 

58.8 

41.6 

72.9 

Investments 

22.9 

49.7 

29.5 

U.S.A. 

(In  percentages  of  deposits  ex-inter-bank.) 


1929* 

1931* 

1933* 

1934* 

1935t 

1936t 

1937t 

Cash 

8.6 

9.5 

11.6 

16.7 

15.8 

13.4 

10.9 

Bills 

— 

— 

— 

— 

— 

— 

— 

Investments 

34.9 

41.0 

50.6 

54.7 

67.9 

69.3 

62.3 

Loans  and 

Advances 

77.7 

70.5 

55.7 

45.6 

46.6 

43.1 

47.0 

Premises 

3.9 

4.2 

4.4 

3.8 

— 

— 

— 

*  End  of  June  National  Banks.  League  of  Nations.  Commercial  Banks.  1036,  p.  201. 
t  Annual  Averages.  Members-banks;  Federal  Reserve  Bulletin.  Dec.  1938  p.  1041. 

France,  Commercial  Banks 
(Percentages   of   Deposits) 


1936 

1937 

1938 

Dec. 

Dec. 

Dec. 

Capital  and  Reserves 

11.1 

10.3 

9.3 

Time  Deposits 

7.2 

7.4 

7.0 

Sight  Deposits 

92.8 

92.6 

93.0 

Cash                      

10.4 

10.9 

10.7 

With  Banks  and  Correspondents 

10.6 

13.3 

12.0 

Bills  and  T-Bills 

59.0 

57.3 

61.6 

Advances  and  Participation 

30.5 

28.7 

24.9 

The  Big  Five 
(Percentages  based  on  Capital,  Reserve  and  Deposits  except  for  1928) 


1916* 

1917* 

1927 

1928t 

1930 

1934 

1935 

1936 

Cash 

24.7 

25.0 

13.8 

11.6 

11.8 

14.0 

21.1 

21.1 

Bills  and 

Loans 

65.0 

71.4 

55.3 

2.0 

48.8 

37.7 

44.2 

40.4 

Security 

9.2 

11.4 

36.0 

24.0 

37.0 

45.3 

40.0 

38.5 

Fixed  Assets 

1.9 

1.5 

3.5 

3.5 

4.0 

4.1 

4.4 

4.0 

*  India,  Central  and  Allahabad  only  t  The  Big  Five  and  People's  Bank  of 
Northern  India.  Percentages  based  on  current  and  deposit  accounts  only  and 
therefore  relatively  larger. — Banking  Inquiry  Committee  Report,  p.  408. 

3.    Loans  and  Advances 

As  indicated  in  our  analysis  of  the  structure  of  interest 
rates,  returns  on  short-term  investment  tend  to  be  rela- 
tively more  attractive  than  on  long-term  investment.  This 
should  by  itself  make  investments  in  short  loans  particu- 
larly sought  by  banks.  A  a  matter  of  fact,  the  proportion 
of  loans  and  advances  to  total  liabilities  does  not  appear  to 


132  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

be  much  higher  in  India  than  in  some  other  countries. 
Indeed  it  is  even  difficult  to  speak  of  a  normal  volume  of 
loans  and  advances  for  banks  in  India.  It  is  of  much  more 
practical  importance  to  note  the  large  fluctuations  which 
occur  in  this  volume  and  to  seek  their  causes.  It  is  prob- 
able that  in  these  fluctuations,  the  relative  position  of  short 
and  long  rates  is  much  less  decisive  than  the  differential 
between  the  two.  In  India,  as  observed  already,  a  change 
in  the  trend  of  long  and  short  rates  rarely  takes  shape  as  a 
reversal  of  the  permanent  relationship  between  them.  Its 
effect  is  $een  largely  in  widening  or  narrowing  the  gap 
according  as  rates  are  tending  to  be  stable  or  moving  up 
and  down.  In  the  war  years  1916  and  1917,  when  short 
rates  were  rising  faster  than  long  rates,  the  proportion  of 
loans  and  advances  of  the  Big  Five  to  their  deposit-liabilities 
rose  as  high  as  70  to  80  per  cent.  In  the  more  stable  years 
1922-29  when  the  long-rate  was  moving  on  a  high  plane,  the 
proportion  declined  to  62  per  cent.  In  the  years  after  1930, 
when  with  stagnation  of  trade  and  industry  short  rates 
actually  fell  below  long,  the  percentage  of  loans  and 
advances  reached  much  lower  levels  round  40  per  cent  and 
showed  signs  of  recovery  only  after  1937. 

These  figures  do  not  convey  adequately  the  extent  to 
which  banks  invest  in  and  profit  by  short-term  loans.  The 
percentages  ate  based  on  figures  which  are  not  average3 
for  the  whole  year  but  relate  to  a  particular  date,  generally 
December  end.  Oh  account  of  the  predominance  of  agri- 
culture in  India,  short-term  finance  has  a  highly  seasonal 
character.  It .  may,  therefore,  be  expected  that  the  assets 
of  banks  should  show  large  fluctuations  according  to  the 
time  of  the  year.  As  a  matter  of  fact,  however,  such  a 
strongly  seasonal  trend  holds  true  only  of  the  Imperial 
Bank  of  India.  The  balance  sheets  of  the  other  big  joint- 
stock  banks  do  not  show  seasonal  variations  which  could 
be  compared  with  those  of  the  Imperial  Bank. 

September  and .  March  or  April  represent  the  two 
extremes  of  the  demand  for  seasonal  accommodation.18 
Unfortunately,  comparative  figures  on  this  point  are  avail- 
is.  Ch.  IV  §  9  and  Table  XIV. 


LOANS  AND  ADVANCES  133 

able  only  for  June  and  December.  June  may  b6  described 
as  lying  midway  in  the  transition  from  conditions  of 
stringency  to  conditions  of  slackness  while  December 
represents  the  antipode  of  June.  Although  the  contrast 
between  June  and  December  is  not  as  sharp  as  between 
March  and  June,  it  demonstrates  sufficiently  the  point  at 
issue. 

In  the  two  five  yearly  periods  of  1921-25  and  1926-30,  the 
proportion  of  cash  to  deposits  between  the  months  of  June 
and  December  shows  as  large  a  variation  as  15  and  11  per 
cent  in  the  case  of  the  Imperial  Bank.  For  four  among 
the  Big  Five,  the  variation  is  barely  2  to  3  per  cent.  It  is 
only  with  the  onset  of  the  depression  and  stagnation  of 
1931-35  that  the  Imperial  Bank  has  a  cash-ratio  as  stable 
as  those  of  other  banks. 

The  reverse  side  of  the  picture  is  represented  in  the 
movements  of  Loans,  Advances  and  Bills.  For  the  first  two 
periods,  the  advances  of  the  Imperial  Bank  show  an  aver- 
age increase  in  the  proportion  of  the  order  of  14  and  11  per 
cent  for  the  month  of  December  against  corresponding 
counterbalancing  movements  in  cash.  The  movement  in  the 
case  of  the  other  banks  are  small  and  insignificant.  In  all 
cases,  investments  move  independently  of  changes  in  cash 
or  advances  ratios  and  record  a  definite  secular  trend  irres- 
pective of  seasonal  conditions.  The  significance  of  this  point 
will  be  elaborated  presently. 

We  have  observed  above  that  loans  and  advances  of  Indian 
banks  do  not  bear  a  much  higher  proportion  to  their  deposit 
liabilities  than  elsewhere.19  This  suggests  that  the  exploita- 
tion of  the  profitability  of  short-term  investment  is  impeded 
either  by  the  shortage  of  credit-worthy  borrowers  or  by  the 
attractiveness  of  some  other  forms  of  investments.  A 

19.    Loans  and  Advances. 

(As  percentage  to  Deposits) 

1929  1931  1935  1936  1937 

United  States                                        77.7  70.5  46.6  43.1  47.0 

England                                                  55.5  —  37.3  39.8  42.6 

France                                                      —  —  33.5  31.0  — 

Germany                                                  —  —  44.9              —  45.6 

Indian  Scheduled   Banks                     —  —  33.9  38.5  41.4 

Big    Five                                                 61.8  45.6  42.7  43.9  50.5 

All  Scheduled  Banks                           —  —  42.0  43.4  49.4 


134  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

paucity  of  borrowers  who  are  willing  and  able  to  offer 
security  acceptable  to  banks  is  not  a  problem  special  to 
India.  It  is  the  other  factor  which  requires  analysis  here. 

The  profitability  of  short-term  loans  in  India,  which  we 
have  analysed  elsewhere,  is  an  average  profitability.  The 
lender  who  is  eager  to  reap  the  high  returns  of  the  busy 
season  has  to  take  into  account  the  risk  that  his  average 
profit  may  fall  very  much  if  the  slack  season  fall  of  rates 
should  turn  out  severer  than  expected.  Investments  in  time 
loans,  renewable  according  to  circumstances,  offer  a  lucra- 
tive alternative  whose  steady  returns  are  not  an  inadequate 
compensation  for  loss  of  liquidity.  The  rates  on  such  loans 
are  stated  to  be  about  the  same  as  in  England  or  Scotland, 
5-5|  per  cent.20 

Secondly,  in  discussing  the  proportion  of  loans  and 
advances  to  total  deposits,  we  must  note  that  the  attraction 
of  short-term,  seasonal  loans  is  not  the  same  to  all  banks. 
If  seasonal  loans  are  more  profitable  than  equally  safe  long- 
term  loans,  there  are  other  kinds  of  loans  which  rank  higher 
in  profitability  than  even  seasonal  loans.  Mortgage  loans 
offer  a  type  which  is  least  shiftable  and  at  the  same  time 
most  lucrative.  In  the  absence  of  mortgage  institutions, 
many  banks  in  this  country,  there  is  ground  to  believe,  are 
tempted  into  this  field.  The  high  proportion  of  fixed 
deposits  and  among  them  a  high  proportion  of  those  fixed 
for  one  or  two  years  or  even  longer  may  be  an  inducement 
to  such  loans.  This  seems  to  explain  how  even  in  the  post- 
Crisis  years  1931-1936,  certain  banks,  e.g.  the  Punjab 
National  Bank  and  the  Allahabad  Bank  of  India,  carry  loans 
and  advances  at  the  surprisingly  high  level  of  about  60 
per  cent. 

According  to  the  law  relating  to  balance  sheets  in  India, 
loans  and  advances  of  banks  may  be  analysed  under  three 
heads. 

The  first  and  by  far  the  most  important  head  is  "secured 
debts."  The  character  of  these  secured  loans  is  made  clear 
when  they  are  grouped  under  the  various  kinds  of  security 
in  vogue  in  this  country.  The  following  classification  is 

20.    Chamberlain  Commission,  Vol.  II.  Appendices,  p.  614. 


LOANS  AND  ADVANCES  135 

sufficiently  representative  of  conditions  in  different  parts 
of  India. 

Loans  against  Gold,  bullion  and  jewelry. 
„  „        Government  obligations. 

„  „        Shares  etc.  of  joint-stock  Cos. 

„  „        Commodities,  e.g.  paddy,  piece-goods,  coal, 

turmeric,  cotton,  ground-nut,  oil,  etc. 
„  „        Real  estate — municipal,  agricultural. 

„  „       Own  fixed  deposits. 

The  proportions  in  which  total  loans  and  advances  are 
distributed  over  these  sub-heads  furnish  a  fair  index  to  the 
activities  and  character  of  a  bank.  Smaller  and  less  known 
banks  will  show  sometimes  as  much  as  40  to  50  per  cent  of 
their  loans  and  advances  against  gold,  bullion  and  jewelry, 
a  clear  proof  that  they  have  not  moved  much  further  away 
from  money-lenders'  or  pawn-brokers'  business.  It  was 
not  unusual  before  the  World  War  II  to  find  the  average 
amount  of  such  loans  falling  below  Rs.  50,  the  margins  as 
high  as  50  per  cent,  the  actual  security  consisting  largely 
of  trinkets,  the  rates  charged  varying  between  7i  and  12  per 
cent.  The  bigger  banks  deal  of  course  with  quite  different 
clientele.  Bombay  with  its  great  and  unique  Bullion 
Exchange  offers  great  scope  for  loans  against  gold  and 
silver  bars.  The  margins  in  this  case  are  small  and  aggre- 
gate loans  run  into  big  figures.  The  closer  a  bank 
approximates  to  banking  business  proper,  the  higher  is  the 
proportion  of  loans  against  commodities. 

The  second  head  under  Loans  and  Advances  is  "unsecured 

Real  estate  is  apt  to  be  the  Achilles'  heel  of  many  banks 
In  India.  The  changes  in  the  proportions  of  "fixed  assets" 
may  be  taken  as  indicative  of  the  trend,  if  not  the  extent, 
of  loans  against  real  estate,  urban  and  agricultural.  Recent 
events,  e.g.  in  the  United  States  in  1932-34,  have  proved  the 
dangerous  instability  of  values  of  this  asset.  Of  the  aggre- 
gate increase  in  the  assets  of  commercial  banks  between 
1921-29,  one-third  went  into  investments,  one*half  into 
security  loans,  one-fifth  into  real  estate  loans.  But  in  the 
amazing  collapse  which  followed,  urban  real  estate  proved 
the  doom  of  the  banking  system,  and  these  loans,  the  most 
intractable  head  in  the  balance  sheets. 


136  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

debts.'*  These  are  composed  of  advances  against  trade- 
bills,  clean  advances  and  finally  advances  which  are  clean 
but  supported  by  the  guarantee  of  persons  other  than  the 
borrower  himself.  The  volume  of  trade-bills  should  ordi- 
narily be  an  excellent  index  to  the  liquidity  of  a  bank  and, 
according  to  the  area  in  which  the  bank  operates,  is  apt  to 
be  as  important  as  and  sometimes  even  more  important 
than  the  advances  against  commodities.  But  the  quality 
of  the  portfolio  must  in  actual  practice  depend  on  the  cha- 
racter and  financial  status  of  the  parties  to  such  bills.  It  is 
not  unusual  in  the  case  of  many  small  banks  to  find  that 
most  of  the  bills  in  the  portfolio  are  made  or  endorsed  by 
the  same  few  parties  and  the  average  value  of  the  bills  does 
not  exceed  a  few  hundred  rupees — sometimes  indeed  not 
even  one  or  two  hundred  rupees. 

Finally,  we  arrive  at  the  head  "bad  and  doubtful  debts" 
or  decreed  debts.  As  pointed  out  elsewhere  the  balance 
sheets  of  banks  can  least  afford  to  be  frank  and  precise  on 
this  point.  The  big  banks  as  a  matter  of  prestige  or 
accounting  practice  rarely  show  any  figures  under  this 
head.  The  smaller  or  less  well  managed  banks  show  them 
more  or  less  fully  only  when  their  difficulties  have  become 
public  knowledge  or  they  have  made  up  their  minds  to 
return  to  the  paths  of  virtue.  Sometimes,  one  stumbles  on 
a  bank  which  actually  claims  to  have  over-estimated  its 
bad  and  doubtful  debts  by  as  much  as  30  per  cent  just  to 
forestall  the  clamour  of  shareholders  for  dividends. 

Funds  included  in  the  omnibus  head  "Loans  and  Ad- 
vances" are  offered  under  three  forms  :  cash  credits,  demand 
loans  or  overdrafts,  and  loans.21  These  forms  of  accom- 
modation deserve  attention  not  only  as  points  of  banking 
technique  but  also  because  they  offer  another  illustration 
of  the  eternal  economic  problem  of  reconciling  liquidity 
and  profitability.  The  practical  significance  of  this  ques- 
tion is  well  revealed  by  the  striking  contrasts  disclosed  in 
the  balance  sheets  of  individual  banks.  The  Bank  of  India 
and  especially  the  Bank  of  Baroda  returned  formerly  a 
larger  volume  of  assets  under  loans  than  under  cash  credits 

21.    Ch.  V  Part  V. 


LOANS  TO  MONEY  MARKET  137 

and  overdrafts  but  are  satisfied  in  recent  years  with  an 
approximate  equality  between  the  two.  The  Imperial  Bank 
of  India  shows  a  regular  predominance  of  cash  credits  and 
overdrafts  over  loans.  The  most  arresting  example  is  the 
Allahabad  Bank  of  India  which  does  not  seem  to  cultivate 
loans  much  but  has  consistently  a  volume  of  cash  credits 
and  overdrafts  four  to  five  times  as  large. 

Banks  must  adapt  themselves  to  the  business  offering  int 
the  areas  of  their  operation  or,  as  in  the  case  of  the  Imperial 
Bank  before  1934,  allowed  by  law.  But  within  these  limits, 
banks  can  and  do  influence  the  quality  and  composition  of 
their  assets  by  means  of  differential  interest  rates,  margins, 
facilities  and  concessions  as  regards  insurance  of  stocks,  etc. 
From  the  standpoint  of  banks,  cash  credits  suffer  from 
certain  drawbacks,  notably  the  uncertainty  of  the  extent 
to  which  funds  lent  may  actually  be  availed  of  and  the  low 
interest  rate  obtained.  But  cash  credits  mean  also  large 
amounts,  the  personal  security  of  men  of  large  financial 
status  and  short  duration  of  the  relationship  ranging  from 
2  to  6  months.  Overdrafts  are  more  suitable  for  lendings 
of  medium  size  and  fetch  a  higher  rate  of  interest.  In  a 
financial  centre  like  Bombay,  with  its  Stock  Exchange  and 
other  markets,  the  security  for  overdrafts  in  their  order  of 
importance  will  be  stocks  and  shares,  Government  obliga- 
tions, personal  credit,  etc.  Loans  show  a  greater  variation 
in  size  and  continue  for  a  longer  duration,  which,  however, 
rarely  extends  beyond  one  year.  Government  obligations, 
real  estate,  stocks  and  shares  are  in  the  order  of  mention 
more  suitable  security  for  this  form  of  lending.  Cash  cre- 
dits and  overdrafts  are  invariably  used  for  trade  and  busi- 
ness but  loans  are  raised  not  infrequently  for  non-trading 
purposes  as  well.  Real  estate,  ornaments  and  rarely 
Government  obligations  are  in  the  latter  case  the  common 
security  offered. 

4.    Loans  to  the  Money  Market22 

After  cash,  loans  to  the  money  market  are  regarded  in  all 
advanced  banking  systems  as  the  next  best  protection  of 

22.    Ch.  VIH  §  3. 


138  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

"liquidity.'  They  have  the  advantage  over  cash  that  they 
•earn  some  return.  In  London,  the  rates  on  call-loans  and 
discounts  tend  to  fall  almost  as  low  as  deposit  rates.  In  the 
United  States,  rates  on  call-loans  and  loans  on  short-term 
Government  obligations  are  generally  below  the  Federal 
Reserve  discount  rate  which  represents  the  price  banks  have 
to  pay  for  funds  from  the  F.  R.  System.  Rates  on  commer- 
cial paper  and  time  loans  to  the  stock  exchanges  are  well 
-above  the  F.  R.  Bank-Rate. 

Loans  to  the  money  market  fall  under  three  categories — 
call-loans  to  the  bill  market,  call-  and  time-loans  to  stock- 
exchanges,  and  finally  loans  between  the  banks  themselves. 
The  extent  to  which  the  available  volume  of  short-term 
funds  is  used  for  one  purpose  or  another  has  itself  a  deep 
significance  for  the  economy  of  a  country  no  less  than  for 
the  stability  and  character  of  a  banking  system. 

It  is  generally  presumed  that  the  creation  of  bills  and  a 
bill  market  in  India  is  a  pre-requisite  of  a  sound  commercial 
and  central  banking  system.  As  a  preliminary  step,  there- 
fore, it  is  necessary  to  estimate  the  potentialities  of  such  a 
development  in  our  present  conditions.  Three  questions 
have  to  be  answered  in  order  to  reach  conclusions  on  this 
point.  In  the  first  place,  it  is  necessary  to  ascertain  the  basic 
conditions  which  give  rise  to  bills  and  the  extent  to  which 
they  are  present  in  this  country.  Secondly,  we  have  to 
inquire  how  far  the  existence  of  bills  implies  automatically 
the  services  of  brokers  and  dealers  to  deal  in  them.  Finally, 
the  causes  and  the  extent  of  the  desire  of  banks  either  to 
invest  their  resources  in  bills  or  offer  their  funds  for  busi- 
ness in  bills  have  to  be  taken  account  of. 

(1)  It  is  a  self-evident  principle  of  all  exchange  that  no 
place  or  country  can  in  the  long  run  buy  more  than  it  sells. 
But  because  of  territorial  specialisation  in  production  and 
the  consequent  roundaboutness  of  trade,  the  equality  of 
credits  and  debits  may  not  hold  good  as  between  two  spe- 
cific places  or  with  reference  to  any  particular  span  of  time. 
When  a  trade  in  bills  develops,  i.e.,  these  titles  to  debts  are 
concentrated  in  a  few  hands,  debits  owed  to  whomsoever 
in  the  wide  world  can  be  used  to  satisfy  credits  in  favour  of 
persons  in  the  same  place.  Apart  from  rendering  unneces- 


LOANS  TO  MONEY  MARKET  139 

sary  in  this  manner  movements  of  currency  or  gold  to  and 
fro,  bills  as  objective  expressions  of  the  need  for  funds  en- 
able temporary  surpluses  in  certain  places  to  be  employed 
to  meet  temporary  needs  of  other  pla.ces.  A  bill  market 
thus  serves  to  equalise  the  flow  of  capital  over  space  or  time 
and  thus  prevent  wide  fluctuations  in  interest-rates. 

The  need  to  offset  credits  and  debits  which  ensues  from 
the  indirectness  of  all  modern  trade  is  common  to  India  and 
all  other  countries.  But  territorial  disparities  in  the  supplies 
and  needs  of  working  capital  caused  by  the  seasonal  factor 
are  of  such  outstanding  importance  in  this  country  that  some 
description  of  their  working  may  not  be  out  of  place. 

When  the  Rangoon  rice  crop  matures,  advances  in  antici- 
pation of  disposal  have  to  be  made  to  the  Burman  cultivator 
from  December  to  March.  Cotton  seeds  and  early  wheat 
of  Bombay  and  Karachi  and  the  spring  crops  of  Northern 
India  which  are  the  staples  of  trade  in  the  great  markets 
of  Lahore  and  Kanpur  require  to  be  financed  in  the  same 
manner  between  November  to  March  and  between  April  to 
May  respectively.  The  Calcutta  jute  crop  has  its  demand 
for  finance  concentrated  from  July  to  October.23  Of  course, 
the  quicker  the  transport  of  goods  and  disposal  to  the  final 
consumer,  the  less  is  the  burden  of  holding  stocks  and 
financing.  So  far  as  domestic  consumption  is  concerned, 
agriculturists  and  non-agriculturists  have  perforce  to  share 
the  burden  of  holding  stocks  till  such  time  as  their  depletion 
makes  room  for  the  output  of  the  next  season. 

The  aggregate  of  funds  to  be  paid  to  the  producers  or,  in 
other  words,  the  value  of  stocks  to  be  held  in  anticipation 
of  the  demand  of  consumers  runs  into  large  figures.  30  to 
40  per  cent  of  the  total  value  of  cotton  crops  raised  in  cer- 
tain areas  and  estimated  at  10  to  16  crores  was  reported  in 
the  early  thirties  of  the  present  century  to  have  been  directly 
financed  by  the  Imperial  Bank,  Government  treasuries,  cur- 
rency railed  out  of  the  Currency  Office  and  that  imported  by 
private  agency.  In  the  case  of  jute,  out  of  a  crop  valued 
between  50  and  55  crores  in  the  late  twenties,  Government 
treasuries  and  the  Imperial  Bank  alone  are  estimated  to 

23.    Report  of  the  Controller  of  Currency,  p.  36.  1921-22. 


140  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

have  financed  something  like  30  to  40  per  cent. 

While  a  bill  market  may  serve  as  a  valuable  connecting 
link  between  credits  and  debits  and  between  areas  of  surplus 
and  deficit  capital,  it  is  by  no  means  the  only  intermediary 
available  for  the  purpose.  As  banks  have  grown  and  ex- 
tended their  branches  far  and  wide,  they  have  tended  to 
supplant  the  domestic  bill  market  in  many  countries.  His- 
torically, it  will  be  found  that  bill  markets  have  established 
themselves  in  those  times  when  banks  were  highly  localised 
in  their  business  or  in  those  countries  where  branch  bank- 
ing is  not  allowed  by  law.  In  India,  there  are  as  yet  no 
restrictions  on  the  creation  of  branches.  Direct  discounts 
and  collection  of  bills  by  bank  branches  must  therefore 
militate  against  the  rise  of  a  bill  market  on  the.  scale  fami- 
liar in  some  other  countries. 

As  for  bills  themselves,  they  serve  no  doubt  as  an  excel- 
lent basis  for  the  grant  of  credit.  A  bill  is  in  itself  only  a 
legal  evidence  of  indebtedness  between  persons  but  its  ex- 
cellence as  an  instrument  of  financing  trade  and  commerce 
lies  in  three  important  qualities — its  simplicity,  the  short 
and  definite  period  within  which  it  matures  and  the  gua- 
rantees of  the  acceptor,  drawer  and  endorser  attached  to  it. 
When  a  seller  of  goods  wants  immediate  payment  for  the 
furtherance  of  his  business  but  the  buyer  must  have  time 
to  dispose  of  the  goods,  other  persons  or  institutions  are  glad 
to  step  in  and  discount  the  bill,  i.e.,  make  the  required 
advance  on  it  with  due  deduction  for  interest. 

It  is  clear  that  the  bill  will  have  its  vogue  as  the  basis 
of  credit  only  so  long  as  other  forms  of  advances  do  not 
prove  cheaper  and  safer.  As  a  matter  of  fact  there  has  been 
a  recent  tendency  to  prefer  the  overdraft  to  the  bill  as  a 
means  of  raising  finance  from  banks.  From  a  purely  logical 
point  of  view,  there  is  no  reason  why  the  overdraft  should 
involve  more  formalities  or  be  less  certain  of  repayment  on 
an  appointed  day  or  have  less  dependable  security  behind  it 
than  a  bill.  Apart  from  incidental  expenses  like  stamp  duty, 
acceptor's  commission,  taxes,  etc.,  it  lies  in  the  power  of  the 
banks  themselves  to  decide  whether  one  form  of  advance 
shall  be  cheaper  than  the  other  according  to  the  rates  they 
quote. 


LOANS  TO  MONEY  MARKET  141 

(2)  There  will  still  remain  some  scope  for  bills  and  a 
bill  market.    Many  traders  lack  the  requisite  standing  with 
banks  to  have  overdraft  facilities  or  to  draw  bills  which 
may  be  directly  discounted.    Such  traders  find  in  bills  as 
compared  with  bank-guarantees  a  more  convenient  docu- 
ment  on   which   a   third  party,   the   bill-broker,   may   be 
induced  for  a  modest  commission  to  add  his  guarantee  by 
endorsement  and  which  may  thus  be  made  acceptable  to 
banks. 

To  the  function  of  bill  broking,  pure  and  simple,  the  bill 
brokers  find  it  necessary  and  profitable  to  add  another 
function,  that  of  the  dealer  in  bills.  For  banks  are  not 
always  able  or  willing  to  take  up  all  bills  on  offer.  They 
insist  on  high  quality  and  have  a  special  interest  in  those 
bills  which  are  admissible  for  rediscount  at  the  central 
banks.  Besides,  according  as  the  surplus  of  funds  they 
have  varied,  they  vary  also  the  quantities  and  maturities 
of  the  bills  they  discount.  This  means  that  there  must  exist 
a  bill-market  which  holds  on  the  one  hand  quantities  of  bills 
which  fall  short  of  banking  standards  or  exceed  the  tempo- 
rary needs  of  banks  and  on  the  other,  judges,  grades  and 
classifies  bills  so  as  to  supply  at  short  notice  parcels  of 
bills  which  conform  exactly  to  bank  requirements.  For 
reasons  of  economy,  the  bill-broker  prefers  to  act  as  a  holder 
of  such  stocks  also. 

(3)  To  discharge  the  function  of  bill-dealer  efficiently, 
the  broker-dealers  must  have  adequate  funds  to  meet  all 
the  varying  phases  of  the  trade.    They  can  and  do  engage 
in  this  business  with  their  own  funds.    But  as  in  all  other 
trades,  temporary  needs  of  working  capital  have  to  be  met 
with  temporary  funds.    In  other  words,  efficient  trading  in 
bills  presupposes  ability  to  raise  funds,  when  required,  at 
rates  which  are  sufficiently  below  the  market  rate  of  dis- 
count to  give  an  adequate  profit  margin  to  the  dealers.    In 
many  countries,  loans  to  the  stock  exchanges  are  so  much 
more  attractive  that  banks  are  unwilling  to  place  any  large 
volume  of  funds  in  the  bill  market.24    For  quite  different 
reasons,  it  is  probable  that  banks  in  India  have  no  such 

24.    According  to  the  law  in  France,  securities  pledged  for  loans  cannot  be  sold 
without  a  notice  of  7  days.    This  proves  naturally  an  onerous  condition  for  call- 


142  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

surplus  funds  to  lend  for  this  purpose.  In  India,  the  surplus 
of  bank  funds  when  available  is  a  seasonable  and  not  a 
steady  suplus.  Even  when  banks  seek  bills  for  themselves, 
they  naturally  prefer  those  which  mature  at  specific  busy 
times  of  the  year  and  the  volume  of  such  bills  is  inevitably 
very  limited. 

Even  in  these  circumstances,  more  funds  could  be  released 
for  the  bill  business  if  banks  were  enabled  to  lower  their 
cash  ratios.  But  this  is  feasible  only  when  funds  placed  in 
the  money  market  can  be  withdrawn  or  replaced  with 
funds  from  some  other  source.  The  bill  market,  on  its 
part,  could  grow  only  if  there  is  a  dependable  supply  of 
funds  from  one  source  or  another  and  at  rates  which  enable 
steady  business. 

Till  the  recent  establishment  of  the  Reserve  Bank  of  India,, 
the  only  alternative  source  of  such  funds  was  the  Imperial 
Bank  of  India.  Unfortunately,  commercial  banks  in  India 
have  been  inclined  by  tradition  to  look  on  the  Imperial  Bank 
more  as  a  competitor  than  as  a  friend  in  need.  Public 
rumour  also  was  apt  to  associate  aid  from  such  a  rival  with 
embarrassment  and  difficulties  rather  than  normal  banking 
operations.25  The  banks  had  even  a  grievance  against  the 
Imperial  Bank  in  its  alleged  privileged  position  which 
enabled  it,  according  to  them,  to  undercut  its  rivals. 

The  Imperial  Bank  on  its  part  took  a  commercial  view 
of  its  position  and  never  sought  to  define  the  relationship 
between  its  rate  for  demand  loans  and  its  hundi-rate.26  The 
hundi-rate  was  sometimes  higher  and  sometimes  lower  than 
the  other  rate.  No  discrimination  in  rates  was  made  in 
favour  of  bank-endorsed  bills  as  compared  with  bills 
endorsed  by  private  parties.  It  is  no  surprise  that  in  these 
circumstances  banks  preferred  to  raise  demand  loans  against 
securities  since  the  period  at  least  for  which  a  loan  is  to 

loans.  Besides,  the  personal  element  in  the  relationship  between  banker  and 
customer  in  France  make  the  courtier  i.e.  broker  less  necessary. 

In  the  U.S.A.  the  prevalence  of  unit  banking  should  make  the  bill  market  a 
valuable  medium  for  proper  distribution  of  bank  risks  and  capital.  But  the 
stock  exchange  is  too  powerful  a  rival  for  loanable  funds  and  it  is  to  be  seen 
how  far  recent  legal  restrictions  on  speculative  loans  to  the  stock  exchanges 
really  release  funds  for  the  bill  market. 

25.  Q.    12253-60  and  12263— Appendices,  Hilton- Young  Commission,  pp.  508-09. 

26.  Ch.  HI  §  10;  Ch.  IV  §  9. 


LOANS  TO  MONEY  MARKET  14$ 

run  is  within  their  discretion. 

With  the  establishment  of  the  Reserve  Bank  of  India,  the 
situation  may  now  be  expected  to  change  in  an  important 
manner.  With  the  lure  of  profits  out  of  its  way,  the  Reserve 
Bank  can  devote  itself  to  the  creation  of  a  stable  and  welU 
articulated  rates-structure.  By  maintaining  an  appropriate 
margin  between  the  discount-rate  and  the  loan-rate,  it  may 
give  a  powerful  stimulus  to  the  desire  of  banks  to  acquire 
bills  and  bring  into  existence  an  outside  market  in  bills. 

But  although  direct  investment  by  banks  in  bills  might 
stimulate  the  creation  of  bills,  it  is  doubtful  whether  banks 
will  be  inclined  to  offer  loans  to  brokers  and  dealers  for 
such  business.  Since  under  our  arrangements,  banks  are 
to  have  direct  discount  facilities  at  the  Reserve  Bank,  they 
have  much  less  need  of  loans  to  the  money-market  recall- 
able at  short  notice.  London  banks  feel  such  need  because 
on  account  of  historical  circumstances,  they  have  no  direct 
but  only  an  indirect  access  to  the  Bank  of  England  through 
bill-brokers  and  discount  houses.  Indian  banks  will  natu* 
rally  prefer  to  absorb  for  themselves  as  large  a  quantity  of 
bills  as  possible — taking  care  to  maintain  a  large  proportion 
of  rediscountable  bills.  In  other  words,  the  market  for 
bills  which  are  not  bankable  or  are  in  excess  of  what  the 
banks  can  absorb  seems  to  have  a  doubtful  future  in  this 
country. 

The  bill  of  exchange  in  the  form  of  hundi  has  been  known 
and  used  in  this  country  from  times  immemorial.  Several 
causes,  many  of  them  of  recent  origin,  have  however 
retarded  and  even  diminished  the  growth  of  this  most  valu* 
able  instrument  of  commerce  and  credit. 

In  the  first  place,  the  mudatti  hundi  or  usance  bill  has 
become  a  very  expensive  instrument  of  finance  on  account 
of  heavy  stamp  duties  which  Governments  have  imposed 
in  the  interests  of  revenue.  Calculations  show  that  the 
levy  may  vary  from  i  per  cent  and  more  to  anything  like 
3  to  4  per  cent  even.  It  is  reported  from  Bihar  and  Orissa, 
Assam  and  other  provinces  that  the  mudatti  hundi  has 
almost  disappeared  from  use  while  in  the  province  of  Bom* 
bay,  the  cities  of  Bombay  and  Shikarpur,  which  are  the 
native  places  of  the  indigenous  bankers  dealing  in  bills, 


144  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

alone  retain  it  in  their  affections.  Bengal  is  perhaps  the 
only  important  province  in  which  the  mudatti  hundi  is  still 
in  common  use.  Everywhere  else  the  darshani  hundi  or 
demand  draft  which  is  on  a  par  with  promissory  notes  in 
regard  to  stamp  duties  and  pays  only  £-  per  cent  has  taken 
its  place.  With  the  quick  means  of  transport,  the  darshani 
hundi  is  obviously  of  little  use  for  the  grant  of  short-term 
credit. 

In  the  second  place,  the  free  negotiability  of  a  hundi  is 
apt  to  be  much  restricted  by  certain  conditions  which  are 
attached  to  it  by  usage.  As  a  conditional  document,  it  does 
not  then  fall  within  the  definition  of  a  bill  of  exchange 
in  the  Negotiable  Instruments  Act.  Three  classes  of 
hundis  may  be  distinguished  in  this  connection.  The  sahjog 
or  shah- jog  hundi  is  so  called  because  it  is  payable 
only  to  a  shah,  i.e.  payable  only  after  ascertaining  the 
respectability,  title  and  address  of  the  payee.  Although, 
as  in  Bombay,  the  shah  condition  may  be  increasingly 
ignored  in  practice,  its  presence  cannot  but  limit  its  legal 
capacity  to  circulate.  The  shah- jog  hundi  is  in  most 
common  use  in  Bombay,  Bengal,  Central  Provinces,  Bihar 
and  Orissa,  etc.  The  second  class  of  this  indigenous  instru- 
ment of  finance  consists  of  jokhmi  hundis  which  are  to  be 
sometimes  met  with  in  Bengal  but  are  not  found  at  all  in 
certain  other  provinces  like  Bihar  and  Orissa.  In  the  jokhmi 
hundi,  the  drawer  or  the  holder  of  the  hundi  and  not  the 
drawee  is  required  to  bear  loss  in  case  of  destruction  or 
damage  to  the  goods  which  gave  rise  to  the  paper.  Finally 
we  have  got  in  this  country  the  dhani-jog  hundi  which 
corresponds  to  the  true  bill  of  exchange.  The  dhani  i.e. 
the  party  to  whom  the  hundi  is  payable  means  in  this  case 
the  holder.  With  the  exception  of  Assam  where  it  is  usually 
known  as  hundi- jog  and  is  in  very  common  use,  no  other 
province  reports  more  than  a  very  infrequent  appearance 
of  this  instrument. 

Local  variations  from  these  well-established  and  well- 
known  forms,  tending  either  to  retard  or  facilitate  their 
circulation,  are  to  be  noted  here  and  there.  The  shroffs 
of  Bombay  have  attempted  to  overcome  the  disadvantages 
of  conditional  hundis  by  introducing  a  class  of  bearer 


LOANS  TO  MONEY  MARKET  145 

instruments  described  as  dekhadnar-jog  hundis,  i.e.  hundis 
payable  to  him  who  presents.  Its  circulation  is  however 
limited  to  Bombay  and  Gujarat  where  the  Gujarati  shroffs 
are  present  in  large  numbers.  Firman-jog  hundis,  i.e. 
instruments  payable  to  firman  or  order  were  also  tried  but 
have  failed  to  establish  themselves.  Far  in  the  South,  the 
great  banking  caste  of  Nattukkottai  Chettiyars  use  a  sight 
bill  called  nadappu  vaddi  hundis.  These  are  so  called 
because  they  are  discountable  at  the  nadappu  rate — the 
rate  fixed  by  Nagarathas  on  the  16th  of  each  Tamil  month 
at  Madras  and  Rangoon.  This  variable  rate  is  itself  a  diffi- 
culty when  banks  are  approached  to  discount  them.^7 

In  the  third  place,  there  is  nothing  on  the  face  of  a  hundi 
to  indicate  whether  it  is  a  trade  bill  arising  out  of  a  genuine 
deal  in  goods  or  mere  accommodation  or  finance  paper.  No 
documents  of  any  kind,  whether  railway  receipts,  ware- 
house receipts,  etc.,  are  attached.  In  Bengal  and  the  United 
Provinces,  hundis  serve  almost  always  as  a  means  to  borrow. 
In  Bihar  and  Orissa,  as  much  as  37  per  cent  of  the  remittance 
business  was  found  in  the  thirties  to  be  executed  by  means 
of  hundis.  The  Nattukkottai  Chettiyars  in  Madras  use 
this  paper  very  largely  for  purposes  of  accommodation  and 
remittance  in  their  widely  spread  business  in  Burma, 
Ceylon,  Strait  Settlements,  etc.  An  advance  on  a  hundi  is 
thus  generally  an  advance  on  the  personal  credit  of  the 
parties. 

In  spite  of  these  difficulties,  the  high  specialisation 
achieved  in  this  business  by  a  few  castes  and  communities 
has  made  the  hundi  the  prime  and  most  ancient  instrument 
of  finance  in  this  country.  The  Marwaris  are  almost  in 
entire  possession  of  the  field  in  Bengal  and  Assam  while 
in  Bihar  and  Orissa  they  share  the  trade  with  Gujaratis 
and  Kachis.  In  Bombay,  Gujarati,  Marwari  and  Multani 
or  Shikarpuri  shroffs  share  the  honours  equally  and  are 
organised  in  their  respective  associations.28  In  Madras,  the 

27.  In  'purja'  hundis,  the  drawer  and  acceptor  are  identical,  i.e.,  there  are  only 
two  parties  to  the  hundi. 

Hundis  are  drawn  in  triplicate.     The  first  copy  is  known  as  "khoka",  the 
second  as  "paith"  and  the  third  "parapaith". 

28.  During  the  season  of  1937,  Multani  shroffs  in  Bombay  were  estimated  to  have 
loaned  well  over  11  crores  in  the  bazaar. 

M.  B.  10 


146  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

Nattukkottai  Chettiyars  who  are  estimated  to  employ  as 
much  as  Rs.  50  crores  of  their  own  capital  in  the  banking 
business  have  to  face  competition  from  Marwaris  and  to  a 
much  less  extent,  Multanis  and  Kullidiakurchi  Brahmans 
of  Tinnevelly.  In  many  places,  as  in  the  United  Provinces 
and  Bihar  and  Orissa,  some  of  these  people  act  as  brokers 
pure  and  simple  in  the  capacity  of  dalals  or  sarafs. 

The  strong  ties  of  caste  and  community  tend  on  the  other 
hand  to  isolate  the  hundi  market  from  the  general  modern 
market  for  short-term  funds.  The  Nattukkottai  Chetti- 
yars raise  some  thavanai  or  fixed  deposits  for  periods  of 
2  to  3  months  and,  at  their  nadappu  rates,  some  current 
deposits  as  well.  Rates  offered  by  them  are  as  a  rule  higher 
than  those  of  joint-stock  banks.  Multanis  accept  little 
deposits.  When  in  need,  they  apply  to  their  native  place, 
Shikarpur.  The  Marwaris  are  even  less  inclined  to  approach 
the  outside  market  for  deposits.  In  the  province  of  Bombay, 
except  for  the  capital  city  and  the  bigger  cities,  the  busy 
season  is  met  very  largely  by  inter-shroff  borrowing  which 
significantly  enough  is  cheaper  than  borrowing  from  banks. 

As  for  the  practice  of  discounting,  in  most  places  in  the 
country  the  payee,  when  a  merchant,  rarely  discounts. 
The  indigenous  bankers  resort  to  banks  more  frequently. 
In  Bombay  and  the  bigger  places  in  the  province,  shroffs 
replenish  themselves  at  their  banks  by  means  of  either 
promissory  notes  of  two  approved  shroffs  or  by  re-discount 
of  hundis.  In  a  place  like  Kanpur,  discounting  and  re- 
discounting  in  the  native  bill  market  are  more  common. 

The  extension  of  bank  branches,  restricted  urgency  of 
loans  to  the  bill  market,  lack  of  standardization,29  etc.,  are 
several  other  factors  which  limit  the  future  growth  of  a 


29.    Standardization  is  required  in  respect  of  the  following  points  :— 

(i)  Although  Hindi  with  different  scripts  is  used  as  a  rule,  a  hundi  printed 

in  vernacular  and  English  seems  very  desirable, 
(ii)  Time  and  hours  of  presentation,  acceptance,  etc.    Business  till  midnight 

is  not  uncommon, 
(iii)  Days  of  Grace.    In  'after  date'  hundis,  3  days  of  grace  are  allowed.    In 

'days  Khara'  hundis,  no  grace  is  allowed, 
(iv)  Holidays.     In  C.P.   entering  of   office  dhara   means   that   holidays  are 

excluded. 

(v)  Procedure  in  case  of  lost  hundis. 
(vi)  Procedure  in  case  of  dishonoured  hundis^ 


LOANS  TO  MONEY  MARKET  147 

market  in  domestic  bills.  For  similar  reasons,  creation 
of  large  quantities  of  foreign  trade  bills  also  appears  to 
have  only  a  limited  future.  Vast  distances,  natural  obstacles 
to  full  and  accurate  information,  etc.,  make  the  intervention 
of  a  bill  and  discount  market  even  more  advantageous  in 
this  field.  But  in  the  absence  of  a  large  maritime  trade, 
a  world-wide  network  of  financial  and  economic  service, 
such  as  England  has,  the  basis  for  foreign  bills  must  be 
relatively  slender.  As  our  more  exhaustive  analysis  of  this 
subject  in  another  section  will  show,  the  sterling  bill  and 
operators  in  sterling  bills,  namely,  the  exchange  banks, 
control  the  whole  field  of  foreign  trade  finance. 

Just  at  present,  the  volume  of  bill-discounts  is  very  insig- 
nificant in  India.  In  1928,  the  five  leading  Indian  joint-stock 
banks  held  bills  of  domestic  origin  to  the  extent  of  7.1  per 
cent  of  their  aggregate  deposits.  For  Indian  Scheduled 
Banks  which  include  the  Imperial  Bank  and  exclude  ex- 
change banks  with  their  high  specialization  in  foreign  trade 
bills,  the  percentages  for  the  three  years  1935-37  were  3.2, 
5.0  and  5.9  respectively. 

The  volume  of  bills  discounted  fluctuates  much  according 
to  the  course  of  prices  and  trade.  The  figures  compiled  for 
the  Big  Five  or  Big  Seven  of  Indian  joint-stock  banks 
demonstrate  this  very  clearly.  Before  and  during  the 
early  part  of  the  first  World  War,  the  proportion  of  bills 
discounted  to  their  deposits  was  15  per  cent  and  even  more. 
In  the  later  stages  of  the  War,  dislocation  of  foreign  trade, 
exchange  restrictions,  etc.  caused  a  steep  shrinkage  in 
foreign  trade  bills  and  consequently  in  that  portion  of  our 
domestic  bills  which  are  meant  to  finance  the  movements 
of  our  goods  from  the  interior  to  the  ports.  The  tendency 
to  shrinkage  continued  steadily  even  after  the  war  and  by 
1929,  their  proportion  had  fallen  from  about  10  per  cent 
in  1919-20  to  about  6  per  cent.  The  collapse  of  prices  and 
trade  in  1929-30  caused  an  immediate  contraction  to  about 
3  per  cent  and  after  still  further  deterioration,  the  proportion 
recovered  to  3£  per  cent  only  by  1937. 

The  Imperial  Bank  which  participates  on  a  larger  scale 
in  short-term  seasonal  accommodation  shows  parallel 
movements  although  on  a  higher  plane.  As  high  as  20  per 


148  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

cent  in  1914,  the  proportion  stood  at  about  12-13  per  cent 
during  the  war.  It  fluctuated  much  in  the  next  few  years 
but  reached  higher  levels  just  before  the  crisis.  The  crisis 
affected  the  Bank  most,  the  proportion  was  only  2.4  in  1933, 
recovering  thereafter  to  more  than  6  and  7  per  cent  by 
1937-38. 

Indeed  it  is  a  matter  for  speculation  whether  this  asset, 
so  well  beloved  of  bankers,  will  ever  again  assert  its  old 
quantitative  importance.  Forces  of  a  more  permanent 
character  than  the  course  of  trade  and  prices  are  active 
in  retarding  the  recovery  of  bills  to  their  old  levels.  In 
many  countries,  notably  in  the  United  States,  industry 
now  prefers  to  finance  itself  by  direct  appeals  to  the  capital 
market  instead  of  bills  floated  against  its  assets  in  general. 
Movements  are  on  foot  in  many  countries  to  eliminate  the 
wholesale  merchant  and  as  many  intermediate  stages 
between  producer  and  consumer  as  possible.  The  seller 
instead  of  drawing  a  bill  on  the  buyer  is  inclined  to  throw 
the  burden  of  arranging  the  finance  on  him  and  the  buyer 
prefers  to  create  an  overdraft  at  his  bank  which  enables 
him  to  extinguish  the  debt  by  instalments  and  thus  save 
in  interest  charges.  The  more  frequent  use  of  telegraphic 
transfers  tends  in  the  same  direction,  i.e.,  narrowing  the 
basis  for  creation  of  bills.  It  is  true  that  some  of  these 
forces  have  not  yet  become  visible  in  this  country  and 
others  are  operating  but  weakly.  Sooner  or  later,  however, 
changes  occurring  in  the  finance  of  foreign  trade  are  sure 
to  affect  the  volume  of  domestic  bills  also,  the  two  opera- 
tions of  financing  trade  between  the  interior  and  ports  and 
between  ports  and  foreign  countries  being  indissolubly 
linked.30 

Although  ordinary  commercial  bills  as  outlet  for  short- 
term  investment  seem  destined  not  to  recover  their  pre- 
volume  in  post-war  years.  These  are  treasury  bills  which 
are  now  issued  both  by  central  and  provincial  Governments 
and  in  which  the  Reserve  Bank,  ordinary  banks,  Govern- 
ments, commercial  bodies,  etc.,  find  an  excellent  lodgement 
for  their  temporary  surpluses.  But  while  treasury  bills 

30.    Bills.     (See  opposite  page.) 


LOANS  TO  MONEY  MARKET  149 

offer  all  the  advantages  of  liquidity,  specific  maturity,  etc., 
war  importance,  another  kind  of  bill  has  greatly  grown  in 
they  do  not  require  any  grading  or  further  endorsement 
to  enhance  their  security.  The  banks  can  therefore  tender 
for  them  directly.  In  other  words,  no  elaborate  machinery 
of  a  bill  and  discount  market  is  necessary  in  their  case. 
The  importance  of  treasury  bills  as  a  factor  in  the  money 
market  may  be  inferred  from  the  fact  that  the  total  of 
treasury  bills  outstanding  with  the  public,  the  Reserve 
Bank  and  Provincial  Governments  and  Burma  stood  at 
Rs.  31,  28.54,  38.01  and  46.30  crores  at  the  end  of  the  official 
years  1935-36  to  1938-39.  These  figures  might  be  compared 
with  the  year-old  holdings  of  ordinary  bills  of  the  Imperial 
Bank  and  four  of  the  Big  Five  (the  Punjab  National  Bank 
being  excluded)  which  were  Rs.  6.4,  8.4  and  7.6  crores  for 
the  years  1936  to  1938.  Even  if  these  holdings  reached  their 
pre-crisis  proportion  to  deposits,  the  volume  must  still  be 
comparatively  small.  The  importance  of  the  treasury  bill 
as  a  factor  in  the  money  market  has  been  recognised  by 
the  Reserve  Bank  which  has  intimated  to  the  scheduled 
banks  its  willingness  to  purchase  from  them  Central  Gov- 
ernment treasury  bills  of  currency  up  to  three  months  at 
fine  rates  on  the  current  tender  rates.  The  banks  have 
naturally  been  encouraged  to  invest  in  treasury  bills  and 
to  make  use  of  this  facility  at  the  Reserve  Bank. 

We  have  examined  the  nature  of  call  loans  and  the  rates 
charged  on  them  in  our  chapter  on  Structure  of  Interest- 
rates.31  The  other  important  use  of  short-term  loans  to  the 

(Percentage   to  Deposits) 

1914        1915     1920      1928      1929     1931      1935      1936    1937      1938 
United  States  _         ___         _         _         __________ 

England 

(Clearing  Banks)  —  —  —  —  13.2  —  14.6  15.5  13.0  — 
France 

(4  deposit  Banks)     —         —         ——         —         —      58.0      61.0         —         — 

Germany 

(5  German  Banks)    —         —         —         —         —         —      45.6      55.7         —         — 

Indian   Scheduled 

Banks  _______          __        __        32        5.0        5.9         — 

Big  Five  (Indian 

Joint-Stock)  14.7      14.7      10.1        7.1        6-6        3.0        2.0        2.9        3.6         — 

All  Scheduled 

Banks  —         —         —         —         —         —        2.3        2.4        1 5         — 

31.     Ch.  Ill  §  10. 


150  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

money  market  relates  to  dealings  on  stock  exchanges.  The 
nature  and  effect  of  loans  for  this  purpose  as  also  inter- 
bank loans  are  analysed  elsewhere. 

5.    Investments 

Banks  invest  a  proportion  of  their  resources  in  Govern- 
ment and  non-Government  securities  partly  as  a  source  of 
steady  income  and  partly  as  a  means  to  raise  cash  when 
required.  From  the  latter  standpoint  Government  securities 
are  preferred  as  being  less  liable  to  depreciation.  Even 
among  Government  securities,  short-dated  ones  obviously 
give  better  protection  from  fluctuations  in  value.  Under 
banking  conditions  such  as  obtain  in  India  where  scheduled 
banks  have  to  depend  more  on  loans  against  securities  than 
on  discounts  at  the  Central  bank,  the  definition  of  securities 
eligible  as  collateral  for  loans  must  exercise  a  powerful 
influence  on  the  choice  of  investments  by  banks.32 

The  relative  importance  of  investments  differs  from  one 
banking  system  to  another  according  to  the  availability  of 
alternative  outlets  for  funds  and  relative  position  of  short 
and  long  rates.  Investments  of  British  clearing  banks 
which  have  access  to  the  largest  money  market  of  the  world 
have  rarely  reached  30  per  cent  of  deposits  and  are  usually 
well  below  25  per  cent.  Before  the  outbreak  of  the  first 
World  War,  a  much  smaller  proportion  somewhere  in  the 
neighbourhood  of  15  per  cent  was  the  unwritten  rule.  The 
presence  of  special  institutions  for  long-term  finance  in 
France  and  ample  scope  for  short-term  investments  as  dis- 
counts or  loans  to  the  stock  exchanges  in  France  and 
Holland  reduce  investments  almost  to  insignificance  in  these 
countries.  The  heterogeneous  and  scattered  banking 
structure  of  the  United  States  and  its  great  dependence  on 
local  business  and  interests  appear  to  make  investments  a 
great  necessity  there.  In  India,  limited  scope  for  invest- 
ments in  bills  or  loans  to  the  money  market  is  an  important 
factor  in  making  the  more  liquid  and  realisable  securities 
eagerly  sought  by  banks. 

The  relative  position  of  short  and  long  rates  and,  more 

32.     Ch.  XI  §  19. 


INVESTMENTS  151 

particularly,  cyclical  trends  in  rates  and  security  values 
cause  marked  cyclical  and  secular  changes  in  investments. 
When  the  long  rate  was  expected  to  rise  and  securities  to 
depreciate  in  the  early  years  of  the  first  World  War,  invest- 
ments of  the  Big  Five  sank  below  8  per  cent.33  Widening 
differentials  between  short  and  long  rates  and  enormous 
pressure  for  short-term  accommodation  made  investments 
•even  less  attractive.  The  burden  of  maintaining  the  values 
of  Government  securities  fell  on  the  Imperial  Bank  which 
continued  to  maintain  its  securities  at  the  high  level  of 
20  per  cent.  Investments  of  the  Big  Five  began  to  mount 
slowly  in  the  later  stages  of  the  War  when  the  differential 
began  to  narrow  and  Government  issued  its  vast  terminable 
loans.  As  the  long-term  rate  fell  steadily  from  6.2  per  cent 
in  1921  to  4.4  in  1927,  both  the  Big  Five  and  the  Imperial 
Bank  hastened  to  profit  from  these  appreciating  investments. 
By  1928,  the  Imperial  Bank  reached  a  percentage  of  27.4 
but  the  Big  Five  recorded  the  much  higher  level  of  45  per 
cent.  When  the  approach  of  the  crisis  initiated  a  stiffening 
of  rates  which  continued  till  1932,  there  was  some  hesitation 
and  even  a  desire  to  reduce  the  volume.  The  proportion 
of  Government  securities  shows  a  tendency  to  decline.  But 
the  abandonment  of  the  gold  standard  in  England  and  the 
linking  of  the  rupee  to  sterling  brought  about  a  dramatic 
change;  the  long  rate  fell  steeply  from  5.7  in  1932  to  3.5  in 
1936  and  short  rates  collapsed  much  more.  The  Big  Five 
staged  a  recovery  but  they  had  already  moved  into  securities 
in  the  period  of  falling  long  rate  between  1921  and  1928  to 
such  an  extent  that  despite  a  further  collapse  in  loans, 
advances  and  bills,  the  scope  for  further  loading  of  securities 
was  limited.  As  pointed  out  in  another  section,34  they  were 
now  inclined  to  develop  certain  other  lines  of  investment. 
The  position  of  the  Imperial  Bank  was  different.  It  has  not 
.suffered  in  the  pre-crisis  years  so  much  as  other  banks  in 
its  short-term  business  and  it  had  not  loaded  itself  with 
securities  to  their  extent.  But  now,  deprived  of  its  main- 
stay of  short-term  accommodation  to  which  its  charter  con- 

33.  From  Rs.    92,  the  price  of  3£  p.c.  security  fell  to  68  in  1917, 

Rs.    70,  ,,  „  „  59  in  1920. 

34.  Ch.  V  H.  5  &  6. 


152  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

fined  it,  the  Imperial  Bank  added  to  its  securities  quickly 
till  it  reached  66  per  cent  by  1936.  In  a  single  year,  1929-30,. 
the  proportion  increased  by  14  and  in  another  turning  point 
year  1932-33  it  made  another  stride  by  15. 

Naturally,  Indian  joint-stock  banks  differ  among  them- 
selves in  the  extent  to  which,  in  order  to  meet  these 
vicissitudes,  they  have  rung  the  changes  on  their  invest- 
ments. The  Bank  of  India  and  the  Bank  of  Baroda  which 
pursue  a  stricter  policy  of  short-term  finance  have  con- 
tented themselves  with  a  moderate  and  steady  volume  of 
investments.  The  Central  Bank  of  India  and  the  Allahabad 
Bank  have  made  more  frequent  and  larger  changes  in  this 
class  of  assets,  the  former  largely  as  an  alternative  to  cash. 
The  Indian  Bank  does  not  find  investments  more  attractive 
than  the  re-lending  business  it  has  developed  through  the 
medium  of  the  Chetties,  the  premier  money-lenders  and 
indigenous  bankers  of  the  South.  The  Punjab  National 
Bank  does  not  find  its  assets  sufficiently  elastic  to  permit 
much  cyclical  or  secular  adaptation  of  investment.  Since 
1936,  incalculable  factors  of  war  and  politics  began  to  exert 
themselves  on  the  banking  situation  and  a  general  though 
somewhat  hesitant  tendency  to  reduce  investments  made 
itself  visible.35 

Our  previous  analysis  does  not  support  the  general  belief 

35.    Investments. 

(Percentage   to   Deposits) 

1913  1914  1915  1920  1925  1928  1929  1931  1935  1936  1937 

United   States  .._  —  ______  34.9  41.0  67.9  69.  61.3 

England               ..  ..       —  —  27.0  16.7  15.3  —  14.3  —  30.2  ,27.  27.2 

France  (including 

Premises)  —  —  —  —  —  —  —  —  1.3      1.2  — 

Germany             . .  —  —  —  —  —  —  —  —  8.9  17.  — 

Indian  Scheduled 

Banks  .._____  ___„_-.__  51.5  55.  50.3 

All  Scheduled 

Banks              ....__________  43.0  43.0  49.4 

Big  Five  (Indian 

Joint-stock)  ..  7.3  8.3  8.4  12.0  33.6  45.3  38.8  35.6  36.9  40.  37.2 

Imperial  Bank  ..  —  19.7  28.7  —  20.3  27.4  41.5  40.4  59.1  66.  58.fi 

Bank  of  India  ..  9.9  3.5  9.5  8.6  42.0  28.2  29.3  22.2  29.8  31.  31,1 

Central  Bank  ,.  40.0  61.3  30.2  21.4  53.3  61.7  52.9  44.7  39.5  40  40.1 
Punjab  National 

Bank  ..  ..  21.4  36.2  28.4  —  26.0  30.8  38.8  50.6  35.1  31  28.1 

Bank  of  Baroda  ,.  —  2.3  4.2  17.1  45.5  47.3  45.9  40.4  52.0  51  45.8 

Allahabad  Bank  2.0  3.0  2.9  1.8  17.2  29.2  28.7  30.8  35.1  32  32.6 

Indian  Bank  ..  3.7  4.7  —  —  16.1  10.1  16.6  26.7  17.7  23  23.2 


INVESTMENTS  153 

that  Indian  banks  invest  a  disproportionate  part  of  their 
resources  in  Government  securities.  On  the  contrary,  their 
investments  show  a  commendable  degree  of  elasticity  and 
adaptability  according  to  circumstances.  The  present  high 
level  of  Government  securities  is  not  peculiar  to  the  Indian 
banking  system  as  such.  It  has  been  a  widely  observed 
feature  of  banking  in  many  parts  of  the  world.  With  the 
present  relative  position  of  short  and  long  rates,  no  other 
policy  could  commend  itself  to  banks.36  It  may  be  that 
elasticity  and  adaptability  of  investment  policies  in  India 
relates  to  a  larger  volume  on  the  whole  than  is  found  in 
other  countries.  But  it  must  be  borne  in  mind  that  these 
countries  have  as  a  rule  a  second  line  of  protection  after 
cash  in  their  call-loans  to  the  bill  markets  or  the  stock 
exchanges. 

It  is  not  easy  to  make  out  how  far  the  low  level  of  loans 
and  advances  before  the  second  World  War  reflects  cyclical 
conditions  which  are  bound  to  pass  away  and  how  far  it  is 
part  of  a  secular  tendency  to  contraction  and  fore- 
shadowed a  fundamental  change  in  the  methods  of  finance. 
The  falling  volume  of  loans,  advances  and  discounts  sug- 
gests that  the  subsequent  collapse  is  merely  an  aggravation 
of  a  deep-rooted  trend.  The  banking  system  was  therefore 
confronted  with  a  more  permanent  problem,  viz.  how  to 
replace  this  time-honoured  asset  with  some  other  worthy 
of  its  traditional  place  in  the  banking  system.  For  the  time 
being,  the  void  was  filled  very  largely  with  Government 
securities.  Unless  banks  are  content  to  become  investment 
trusts,  however,  a  rise  in  the  short  rates  and  long  rates 
might  have  caused  a  disgorging  of  securities  and  revive  the 
problem  of  alternative  outlets.  With  the  outbreak  of  the 
second  World  War,  the  pressure  of  surplus  funds  and  limited 
outlets  has  temporarily  disappeared  and  the  pre-war  problem 

36.    1936  Government  Securities. 

(Percentage  of  Total  Assets). 

Canada              . .  .  . .  36.6 

United   States  .  ..  33.1 

South  Africa  .  ..  26.2 

United  Kingdom  .  ..  23.8 

Belgium             , .  .  . .  16.6 

—'-League  of  Nations,  Monetary  Review,  Vol.   II,  p.  85. 


154  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

perhaps  stands  postponed.37 

One  or  two  of  the  Big  Five  have  always  held  a  small 
proportion  of  their  funds  in  Improvement  Trust,  Port  Trust, 
and  Municipal  Bonds.  Only  two  among  them  make  a  sepa- 
rate return.  Their  proportion  was  4  per  cent  in  1926  but 
has  risen  well  above  it  recently.  A  much  more  significant 
development  has  been  the  changed  attitude  towards  indus- 
try. Four  of  the  Big  Five  have  increased  their  proportion 
of  funds  invested  in  debentures,  shares  and  stocks  of  joint- 
stock  companies.  Two  per  cent  only  of  deposits  in  1924, 
the  level  stood  in  1938  at  about  5J  per  cent.  The  implica- 
tions of  this  tendency  are  examined  in  the  following  section 
of  this  chapter. 

6.     Cash 

Banks  seek  safety  partly  in  highly  shiftable  assets  like 
loans  to  the  bill  and  money  markets  and  partly  in  actual 
cash.  The  cash  ratio  of  Indian  banks  as  a  whole  is  gene- 
rally much  higher  than  in  the  United  States  or  in  England. 
British  Banks  adhere  to  a  ratio  of  approximately  10  per 
cent  from  which  only  moderate  departures  take  place  from 
time  to  time.  The  cash  ratio  tends  to  average  to  the  same 
level  in  the  United  States  but  fluctuations  round  the  aver- 
age are  apt  to  be  much  wider.  Between  1929-37,  the  United 
States  ratio  has  moved  between  a  substantial  margin  of  8.6 
per  cent  and  16.7  per  cent.  The  relatively  low  cash  ratio  of 
British  clearing  banks  is  easily  explained  by  the  important 
place  which  call  and  short  loans  occupy  in  the  assets.  The 
lower  cash  ratios  of  the  United  States  are  perhaps  justified 
by  the  large  volume  of  call-loans  offered  by  banks  to  the 
stock  exchange.  Perhaps,  the  country  which  is  most  simi- 
lar to  India  in  this  respect  is  France  where  about  20  per 

37.    Government  Security  Investments  by  Maturity,  August  1943. 

(Percentages  to  Capital  and  Deposits) 

Treasury     Maturing  Maturing       Maturing      Maturing 

Bills           Within  5  to  10          10  to  15          after  15       Total 

5  years  years             years             years 

Imperial   Bank             36.7               13.3  6.8                 8.2                 2.2               67.2 

Central                              —                 1.0  16.8                 3.8               13.6               352 

India                              23.4               11.5  14.5                 0.8                 3.2               53.4 

Punjab                               —                 6.7  4.0                  6.5                34.0                51.2 

Allahabad                        2.5               11.5  12.2               14.5                 5.1               45.8 

Baroda                             9.7               12.4  7.0                  —               13.3               42.4 


CASH  155 

cent  is  the  normal  ratio.  The  need  for  such  a  high  propor- 
tion is  explained  largely  by  the  extent  to  which  coins  and 
notes  rather  than  cheques  are  used  in  ordinary  transac- 
tions. But  there  also  exist  important  differences  between 
France  and  India  which  deserve  careful  notice.  Banking 
in  India  is  concentrated  in  a  few  large  urban  and  industrial 
centres  where  the  cheque  habit  is  much  more  developed 
than  elsewhere.  In  France,  banking  facilities  have  been 
carried  to  the  remotest  villages  which  makes  need  of  cash 
much  more  urgent.  The  situation  is  partly  remedied  by 
the  fact  that,  in  France,  the  scope  for  loans  and  advances  is 
very  limited  while  the  habit  of  creating  bills  for  even  small 
transactions  furnishes  banks  with  a  liquid  asset  which  they 
can  always  use  at  the  Bank  of  France  or  otherwise  to 
replenish  their  cash. 

Among  Indian  banks  themselves,  cash-ratios  show  quite 
remarkable  disparities.  These  disparities  are  partly  due  to 
policy  and  partly  to  the  extent  and  character  of  the  regions 
they  serve.  Banks  which  like  the  Bank  of  India  confine 
their  operations  to  a  few  large  urban  and  industrial  centres 
are  always  able  to  show  a  relatively  more  liquid  position. 
Other  banks  like  the  Imperial  Bank,  the  Central  Bank  of 
India,  Bank  of  Allahabad,  etc.,  which  either  belong  to  or 
have  spread  into  the  smaller  places  and  the  countryside, 
show  large  variations  in  their  cash-ratios.  Some  of  them 
adhere  strictly  to  short-term  finance  while  others  venture 
into  mortgage  or  long-term  business.  The  persistently  low 
cash-ratios  of  the  Punjab  National  Bank  even  in  times  of 
stagnation  after  1930  indicates  a  large  participation  in  long- 
term  business.  The  Imperial  Bank  which  by  its  charter  or 
inherited  practice  is  confined  to  short-term  business  shows 
high  but  fluctuating  ratios.  Other  banks  lie  between  these 
extremes  inclined  largely  to  short-term  business  but  parti- 
cipating to  fair  extent  in  long-term  business  as  well.38 

38.     Cash. 

(Percentage  to  Deposits). 

1914    1915    1920    1928    1929    1931    1935    1936    1937    1938 

United    States  8.6      9.5    15.8    13.4    10.9 

U.K.    (Clearing    Banks)  10.6       ..     10.5    10.0    10.2 

France   (4  Deposit  Banks)       20.0    19.5 

(Continued  overleaf) 


156 


STRUCTURE  OF  ASSETS  AND  LIABILITIES 


7.    Fixed  Assets39 

Fixed  assets  consist  of  immovable  properties  like  bank 
premises,  etc.  and  the  equipment  of  the  offices.  Obviously, 
they  are  incidental  acquisitions  and  not  an  integral  part  of 
the  business  of  banks  as  such.  But  several  factors  are  apt 
to  invest  these  assets  with  more  importance  than  their 
intrinsic  affinity  to  banking  could  justify.  Many  times, 
these  assets  fall  into  the  possession  of  banks  unsought  be- 
cause they  formed  the  security  of  loans  which  have  not 
been  repaid.  In  the  second  place,  it  is  a  practice  with 
many  banks  to  undervalue  them  as  a  device  for  creating 
hidden  reserves.  On  the  other  hand,  many  banks  find  in 
their  valuation  a  means  to  conceal  losses  or  bad  debts.  For 
these  reasons  this  item  in  the  balance-sheets  deserves  closer 
scrutiny  than  it  would  otherwise  attract. 

The  disparities  in  the  ratios  Of  fixed  assets  are  indeed 
remarkable.  The  Central  Bank  which  acquired  the  impos- 

Germany    (5    Banks) 
Indian   Scheduled   Banks 
All  Scheduled  Banks 

Big-Five  

Imperial  Bank 

Exchange  Banks  A 

B 

Indian  Joint-Slock 

Banks—A 
Indian  Joint-Stock 

Banks— B 


3.5 

2  5 

13,5 

12.9 

12.9 

17.3 

14.0 

12.8 

.  27.3 

21.5  21.2 

139  13.4 

12.1 

10.9 

15.9 

16.5 

.  46 

..  30 

..  18 

15 

24.5 

9.9* 

13.3* 

6.9* 

(0.2) 

(0.9) 

(3.1) 

(9.1) 

.  28 

..  30 

..  15 

15 

15 

18 

19 

.  26 

..  58 

..  10 

9 

19 

10 

10 

.  21 

..  28 

..  14 

13 

23 

16 

17 

.  22 

..  18 

..  13 

12 

16 

19 

16 

'  Ex.  balances  with  other  banks. 


39.    Fixed  Assets. 


(Percentage  of  Capital, 

Reserve  and  Deposits) 

(Percentage 

to  Deposits) 

1916    1917    1927    1929 

1930 

1934 

1935    1936 

1941    1942    1943 

Bank    of    India 

0.07        ,  .       0.9      09 

0.5 

0.5 

Central  Bank  of 

India 

..       5.1       62 

6.2 

49      4.4 

Punjab  National 

Bank 

..       4.1 

10.1 

14.8 

14.5     13.3 

Bank  of  Baroda 

..       2.6      2.8 

2.7 

3.2 

3.4      3.0 

Bank  of   Allahabad 

32      3.2 

3.9 

4.5 

..       4.2 

Indian  Bank 

0.06 

Imperial  Bank 

..       2.9 

2.9 

2.6 

2.5      2.4 

1.5    0.97    0.72 

Other  Scheduled 

Banks 

4.4      2.8      1.5 

Non-Scheduled 

Banks  (Capital 

and  Reserve 

over  1  lakh) 

3.8      2.8      8.2 

OTHER  SERVICES  OF  BANKS  IN  INDIA  157 

ing  premises  of  the  Tata  Industrial  Bank  shows  a  substan- 
tial ratib.  But  banks  like  the  Bank  of  India  which  depend 
very  largely  on  hired  premises  naturally  show  much  less 
significant  ratios.  More  remarkable  and  suggestive  than 
these  disparities  is  the  tendency  of  some  banks  like  the 
Punjab  National  Bank  to  show  an  increasing  ratio  from 
year  to  year. 

8.     Other  Services  of  Banks  in  India 

Besides  the  collection  of  temporary  savings  and  their 
investment,  banks  in  India  engage  in  many  other  services 
some  of  which  are  cognate  to  banking  while  others  are 
essentially  non-banking  in  character.  The  years  after  the 
first  World  War  witnessed  a  remarkable  expansion  of  such 
non-banking  activities  in  most  countries.  The  impelling 
motive  is  the  substitution  of  impersonal  and  therefore  dis- 
interested agency  of  banks  in  the  place  of  individuals  like 
solicitors  and  brokers  who  offer  no  doubt  the  advantage  of 
greater  adaptability  and  informality  but  cannot  be  expect- 
ed to  be  always  above  self-interest.  As  the  custodian  of  all 
financial  interests,  the  banker  indeed  bids  fair  to  take  his 
place  alongside  the  trinity  of  the  family  doctor,  priest  and 
lawyer.40 

As  elsewhere,  banks  in  India  undertake  transfer  of  funds 
by  telegraphic  transfer  or  demand  draft  as  required.  Each 
bank  makes  a  minimum  charge  for  the  purpose — about  4 
annas  per  cent — while,  for  larger  amounts,  favourable  rates 
are  quoted.  The  scheduled  banks  make  use  without  charge 
of  the  agency  of  the  Reserve  Bank  which  in  its  turn  makes 
use  of  the  Imperial  Bank  and  its  numerous  branches  and 
pay-offices. 

Many  banks  receive  valuable  articles  like  ornaments, 
securities,  etc.,  for  safe  custody  and  have  built  modern 
vaults  for  the  purpose.41  The  usefulness  of  such  services  in 

40.  The  bank-Manager  in  the  mofusil  is  recognised  even  in  India  as  an  important 
member  of  local  society  and  his  acitivities  are  apt  to  extend  much  beyond  his 
official  narrow  sphere.  It  appears  to  have  been  quite  an  ordinary  occurrence  early 
in  the  present  century  to  be  called  in  to  draw  up  wills  and  to  settle  petty  matri- 
monial squabbles.    Indian  banks  have  yet  to  recognise  the  value  of  social  contacts 
outside  formal  banking  relations  on  the  part  of  their  managers  particularly  in 
the  mofussil. — Commerce,  May  27th,  1933. 

41.  See  overleaf. 


158  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

a  country  like  India  where  people  hold  such  a  large  part  of 
their  savings  in  precious  metals  and  stones  hardly  needs 
any  emphasis. 

Many  banks  undertake  to  buy  and  sell  shares,  stocks,  etc., 
on  account  of  their  customers.  Advice  on  investment  is  a 
natural  incident  of  such  activities  and  banks  employ  suit- 
able staff  for  this  purpose.  It  cannot  be  said  that  banks 
have  yet  made  any  systematic  efforts  to  build  up  this  busi- 
ness to  the  full  possible  extent.  As  pointed  out  elsewhere,42 
there  is  every  advantage  in  banks  replacing  the  individual 
broker  in  as  large  a  part  of  this  business  as  possible.  In 
order  to  facilitate  this  development,  the  rules  of  our  stock 
exchanges  should  be  amended  so  as  to  permit  at  least 
scheduled  banks  to  become  members  of  these  institutions. 
Many  of  our  brokers  could  then  find  employment  as  salaried 
officers  of  banks  and  be  freed  from  the  temptation  of  offer- 
ing any  advice  but  what  should  conduce  to  the  welfare  of 
the  clientele.  New  floatations  would  not  then  find  their 
course  as  easy  as  at  present  since  a  bank's  support,  although 
very  decisive,  will  be  obtainable  only  when  the  bank  has 
carefully  scrutinised  the  position  and  satisfied  itself  on  all 
relevant  points.  The  customer  also  will  not  have  to  pay  a 
double  commission  as  at  present  on  the  ground  that  the 
bank  has  to  put  through  its  business  through  a  regular 
broker. 

Some  of  the  more  respectable  banks  have  also  ventured 
into  executor  and  trustee  work.  The  execution  of  wills 
is  made  a  very  difficult  task  in  India  by  the  complicated 
personal  laws  of  each  community  and  the  proneness  of 
parties  to  evade  wills  in  their  own  interests  by  collusion. 
More  lamentable  is  the  state  of  administration  of  trusts 

41.  Early  in  the  present  century,  the  "strong  room"  of  a  bank  in  Quetta  which 
accepted  regimental  plate  for  safe  custody  was  a  mere  lean  to  bath  room  !     At 
Peshawar,  a  bank  had  an  armed  guard  at  night  which  was  composed  of  a  dozen 
wild  Pathans  armed  with  ancient  muzzleloaders  and  without  any  ammunition. 
No  ammunition  was  known  to  have  been  supplied  either  within  living  memory  ! 
People,  however,  seem  to  have  been  more  honest  then  than  now.     It  is  recorded 
how  in  Simla,  a  peon  about  18  years  old  could  go  to  the  Bank  of  Bengal  with 
a  cheque  of  Rs.  50,000,  collect  50  miscellaneous  coolies  from  the  local  bazaar,  place 
a  bag  containing  Rs.  1.000  on  each  head  and  then  lead  the  procession  to  the 
payee  bank  without  any  guard  and  without  any  mishap. —Commerce,  May  27th, 
1933. 

42.  Ch.  XL 


SMALLER  BANKS  159' 

in  favour  of  widows,  minors  and  charitable  objects.  The 
agency  of  banks  for  these  purposes  has  an  advantage 
which  no  other  private  agency  can  offer.  Unfortunately, 
the  work  involves  great  costs  and  when  the  banker's  costs; 
are  added  to  ordinary  legal  costs,  the  facility  is  hardly  worth- 
while for  any  but  big  estates.  Larger  social  ends  may 
more  than  justify  a  lightening  of  legal  charges  when 
execution  of  wills  and  administration  of  trusts  are  sought 
to  be  put  through  the  medium  of  banks.  The  banks  on 
their  part  have  also  yet  to  make  efforts  to  organise  their 
work  on  a  basis  more  suitable  to  the  means  and  circum- 
stances of  this  country. 

It  is  difficult  to  estimate  or  describe  how  far  each  Indian 
bank  takes  a  share  in  the  variety  of  services  which  modern 
banks  offer  to  the  public.  The  introduction  of  home  safes 
to  encourage  thrift  and  of  night  safes  for  the  convenience 
of  traders  and  others  who  come  into  possession  of  cash 
after  ordinary  banking  hours;  the  extended  payment  of 
salaries,  on  behalf  of  public  authorities  and  other  customers 
by  crediting  employees'  banking  accounts;  similar  arrange- 
ments in  respect  of  interest  and  dividends,  avoiding  the  dis- 
tribution of  individual  warrants;  payments  for  customers 
under  "standing  orders";  payment  of  trading  accounts  for 
customers — these  are  some  examples  of  service  which 
banks  offer  according  to  circumstances.  As  a  distinguished 
banker  observed  not  long  ago,  banks  have  in  essence  be- 
come a  labour-saving  device  with  the  added  advantage  of 
guaranteeing  security,  v 

9.    Smaller  Banks 

The  foregoing  analysis  of  the  structure  of  assets  and 
liabilities  of  banks  is  based  on  the  balance  sheets  of  the 
biggest  seven  or  eight  among  Indian  joint-stock  banks  and, 
for  the  last  three  or  four  years,  the  consolidated  balance 
sheets  of  all  scheduled  banks.  Of  the  aggregate  resources 
of  banks  which  have  paid-up  capital  and  reserves  of  Rs.  1 
lakh  and  more,  the  scheduled  banks  account  for  about  90 
to  95  per  cent. 

Still,  by  their  number  and  territorial  jurisdiction,  if  not 
by  their  resources,  the  other  twenty-five  smaller  scheduled 


160  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

banks  and  the  non-scheduled  Class  B  banks  equal  in 
importance  the  big  scheduled  banks.  We  have  noted  that 
they  are  responsible  for  banking  facilities  in  as  many  more 
places  as  are  covered  by  the  bigger  banks  and  that  they 
claim  as  many,  if  not  more,  bank  offices  and  branches.43 
In  addition  to  these  banks,  we  have  also  to  bear  in  mind 
the  525  and  odd  banks  which  have  a  paid-up  capital  and 
reserve  of  less  than  Rs.  1  lakh.44 

The  problem  of  small  banks  deserves  more  accurate 
analysis,  if  not  sympathy,  than  has  been  usually  bestowed 
on  it  till  now.  The  situation  must  be  appreciated  against 
its  proper  background  of  varied  territorial,  economic  and 
demographic  conditions  such  as  few  countries  in  the  world 
can  show.  The  savings  which  these  banks  attract  are  not 
the  savings  which  the  bigger — particularly,  metropolitan — 
banks  will  care  to  run  after.  The  financial  needs  which 
they  supply  are  probably  such  as  most  modern  banks  will 
consider  outside  their  proper  purview.  The  case  for 
investigation  becomes  more  obvious  when  it  is  realized  that 
these  smaller  banks  lie  midway  between  the  moneylender 
and  indigenous  banker  on  the  one  hand  and  the  big  modern 
bank  on  the  other.  If  the  moneylender  and  indigenous 
banker  cannot  be  abrogated,  then  the  small  bank  deserves 
to  be  conserved  and  improved  as  a  possible  bridge  leading 
the  country  from  the  older  credit  agencies  and  practices  to 
modern  banking  as  such.  At  the  very  least,  when  an  opinion 
is  offered  that  small  banks  should  be  discouraged  or 
persuaded  to  amalgamate  with  the  bigger  banks,  it  deserves 
to  be  considered  whether  the  void  will  be  covered  by  the 
old,  antiquated  agencies  or  by  the  new  and  better  credit 
institutions  or  will  be  allowed  to  remain  a  void. 

To  illustrate  these  remarks  we  present  as  specimens  the 
life  history  and  working  of  two  smaller  scheduled  banks 
which  for  obvious  reasons  may  be  allowed  to  remain 
incognito. 

10.    Bank  X 

The  Bank  X  was  established  in  1932,  and  in  1934  its  paid- 

43.     Ch.  Ill  §  6. 
-44.    Ch.  Ill  §11. 


BANK  X  161 

up  capital  and  reserves  were  still  under  Rs.  5  lakhs  and  its 
deposits  under  Rs.  45  lakhs.  It  had  then  created  1? 
branches  which  gave  it  resources  amounting  on  an  average 
to  4.15  lakhs  per  branch.  In  1934,  it  was  able  to  pay  a 
dividend  of  7|  per  cent. 

The  bank  was  a  product  of  the  unusual  monetary  condi- 
tions which  ensued  in  the  wake  of  the  Great  Depression. 
Banks,  whether  old  or  new,  were  seized  with  a  contagious 
enthusiasm  for  expansion  and  the  Bank  X  was  no  exception. 

(Figures  in  OOOs.) 
1935  1936  1937  1938  1939 


Paid-up  Capital  & 
Reserves 
Deposits 
Total 
Branches 
Resources  per 
branch 

11.15 
51.89 
63.04 
18 

3.50 

12.09 
105.36 
117.45 
30 

3.91 

12.54 
143.91 
156.45 
38 

4.11 

18.88 
85.45 
104.33 
37 

2.82 

19.09 
70.60 
89.69 
29 

3.09 

It  will  be  observed  that  paid-up  capital  and  reserves  were 
at  first  doubled  and  in  the  year  of  crisis,  1938,  trebled. 
Deposits  grew  but  only  as  branches  multiplied  with  the 
result  that  resources  per  branch  hardly  showed  any  im- 
provement. In  the  crisis  of  1938,  when  the  Travancore 
National  and  Quilon  Bank  collapsed,  deposits  flowed  out 
fast  and  as  many  as  8  of  the  less  promising  branches  had 
to  be  closed  down  in  the  very  next  year. 

The  structure  of  assets  by  itself  gives  indeed  little  cause 
for  criticism. 

Percentage   of   Deposits 


1934 

1935 

1936 

1937 

1938 

1939 

Cash  in  hand  and 

at  Bank 

11.6 

24.8 

19.1 

14.4 

23.4 

20.9 

Bills  Discounted    .  . 

9.8 

9.2 

5.4 

6.6 

12.4 

Investments 

43.2 

45.7 

47.9 

36.9 

36.7 

42.3 

Loans  &  Advances 

64.1 

42.1 

38.4 

54.9 

58.4 

54.6 

Bad  and  Doubtful 

Debts 

0.1 

0.4 

Capital  &  Reserves 

10.9 

2L5 

11.5 

8.7 

22.1 

27.0 

But  one  must  look  behind  the  balance  sheets  and  take 
into  account  the  economic  environment  of  such  smaller 
banks.  In  a  year  of  low  interest  rates  like  1936,  when  the 
price  of  3£  per  cent  Government  security  stood  at  par,  this 
bank  was  raising  12  months7  deposits  at  a  rate  of  4J  per  cent. 
It  was  not  till  1940  that  it  reduced  this  rate  to  3|  per  cent. 

M.   B.   11 


162  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

Like  other  small  banks,  it  accepted  deposits  for  24  and  36 
months  also  at  still  higher  rates,  Its  savings  account  rate 
was  stable  at  4  per  cent.  If  the  composition  of  deposits  were 
available,  it  would  no  doubt  show  the  preponderance  of  fixed 
accounts  over  current  and  the  average  amount  per  account 
at  appreciably  low  levels. 

These  high  deposit  rates  and  the  effort  to  maintain  a 
large  number  of  branches  with  a  small  volume  of  resources 
per  branch  mean  inevitably  a  search  for  business  which  is 
correspondingly  lucrative.  It  is  not  surprising  that  the 
bank's  rate  for  advances  varied  between  7i  to  9  per  cent, 
giving  a  generous  margin  out  of  which  its  high  deposit 
rates,  the  expenditure  of  its  numerous  branches  and  a 
steady  dividend  of  6  per  cent  have  been  maintained. 

The  distribution  of  its  loans  and  advances  according  to 
security  gives  us  an  insight  into  the  working  of  factors  we 
have  already  commented  on  above. 

Percentage  to  Total  Loans 


Bullion  and  Gold    

1939 
13.0 

1940 
9.9 

Usual  Margins. 

25% 

Govt.  Obligations 

•         .  . 

10% 

Jt.-Stock  Co.  shares  and  stocks 

5.1 

5.8 

30  to  40% 

Commodities            .  .         >  . 

33.9 

46.1 

25  to  35% 

Real  Estate 

13.2 

16.2 

Own  Deposits 

6.5 

5.9 

Clean  Advances 

5.6 

4.3 

Clean  but  under  guarantee 

22.1 

15.9 

Bad  and  Doubtul 

. 

If  the  average  size  of  the  different  classes  of  advances 
were  available,  it  would  no  doubt  show  itself  very  small 
under  the  first  head  and  at  a  figure  nearer  to  5  thousand  than 
10  thousand  against  commodities.  The  sizes  of  other  loans 
would  range  themselves  between  these  two  extremes. 

11.    BankY 

The  Bank  Y  is  one  of  the  few  banking  enterprises  in  this 
country  which  were  launched  as  private  concerns  initially 
and  have  managed  to  survive  long  enough  to  see  great  days. 
Founded  in  1899,  it  was  still  a  small  bank  with  less  than 
Rs.  5  lakhs  as  owned  and  borrowed  resources  in  1913  when 
it  was  converted  into  a  joint-stock  company.  The  first 
World  War  brought  prosperity  and  with  prosperity  came 


BANK  Y  163 

ambition  to  expand.  By  1920,  the  owned  and  borrowed 
resources  were  well  above  a  quarter  crore  while  its  branches 
numbered  10.  Till  the  onset  of  the  Depression,  progress 
was  uninterrupted  and  the  landmark  of  Rs.  1  crore  was  well 
within  sight  by  1928  when  its  branches  numbered  16  with 
an  average  volume  of  resources  per  branch  almost  5  lakhs. 

Exploitation  of  public  concerns  for  the  advancement  of 
the  family  and  relatives  is  not  an  evil  special  to  India  as 
such  but  a  fundamental  bane  of  all  capitalism.  Unfortu- 
nately, the  evil  is  much  aggravated  in  this  country  by  the 
fact  that  beyond  the  family  is  the  caste  and  sub-caste;  and 
beyond  the  caste  and  sub-caste  extends  the  sect;  and  beyond 
the  sect  lies  the  community  first  of  language  and  then  of 
religion.  The  outcome  is  a  regular  welter  of  preference 
and  exclusiveness  in  which  merit  and  qualifications  hardly 
count  and  public  interests  are  invariably  sacrificed. 

At  an  advanced  age,  the  founder  of  the  bank  who  as 
manager  had  received  by  1930  a  not  ungenerous  commis- 
sion 2  1/3  lakhs  in  the  aggregate,  seems  to  have  been 
seized  with  solicitude  for  his  family  and  relatives.  His  son 
was  appointed  to  the  key  post  of  manager  at  the  Metro- 
politan branch  and  his  relatives  found  their  way  to  other 
posts.  There  ensued  then  years  of  wilful  neglect  and  utter 
carelessness  on  the  part  of  the  then  management.  The 
chief  executive  officer  of  the  bank,  the  secretary,  received 
a  salary  of  Rs.  100  per  month  and  as  usual  looked  about  for 
other  means  to  supplement  his  income.  The  son  and  the 
secretary  advanced  the  funds  of  the  bank  lavishly  to  all 
and  sundry  and  although  bad  debts  to  the  extent  of  12 £ 
lakhs  were  reported  from  the  metropolis  alone,  no  steps 
were  taken  to  check  the  deterioration.  The  old  father 
who  continued  as  Manager  till  1933  was  either  unable  or 
unwilling  to  exercise  proper  supervision  and  check  abuse. 
Instead,  the  balance  sheet  of  1938  pleaded  in  picturesque 
language  as  follows.  "Many  of  our  constituents  once  con- 
sidered to  be  men  of  means  and  standing  were  seen  to  be 
hopelessly  involved  and  ready  to  take  the  benefit  of  the 
Insolvency  Act.  From  many  of  them,  we  are  still  collect- 
ing our  dues;  but  they  are  coming  by  driblets.  It  looks  as 
if  the  whole  country  is  gone  poor." 


164  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

The  decline  had  begun  in  a  gradual  but  unmistakable 
manner.  Deposits  which  had  reached  the  high  water-mark 
of  81  lakhs  in  1928  fell  to  64  lakhs  in  1929  and  21  lakhs  by 
1934.  A  new  management  at  this  stage  made  resolute 
efforts  to  set  the  bank  on  its  feet  again.  The  capital  of  the 
bank  was  reduced  in  1935  from  more  than  154  lakhs  to  less 
than  8  lakhs,  the  reserve  of  4  lakhs  was  practically  wiped 
out  and  thus  bad  debts  of  more  than  10  lakhs  were  written 
off  during  1935-39.  As  a  further  precaution,  bad  and 
doubtful  debentures  were  even  over-estimated  just  to  dis- 
courage shareholders  from  clamouring  for  dividends. 

In  1940,  deposits  fell  to  10  lakhs  which  included  staff 
securities  and  provident  fund.  Of  the  15  branches  in  exist- 
ence only  5  reported  deposits  of  over  Rs.  50,000  while 
others  showed  them  at  varying  figures  between  4  and  47 
thousands. 

The  bank  had  been  paying  the  highest  deposit  rates 
among  the  scheduled  banks.  In  J934,  it  paid  a  rate  of  5 
per  cent  for  6  months'  deposits  and  6  per  cent  on  24  months' 
deposits.  In  1939  and  1940,  its  rate  on  12  months'  deposits 
was  4  to  4i  per  cent.  Similar  rates  were  offered  on  other 
deposits.  Its  savings  account  rate  was  4|  per  cent  in  1934 
and  only  under  pressure  was  it  reduced  to  2i  per  cent  in 
1939. 

In  1940,  when  the  bank  reached  its  nadir  and  the  bulk  of 
the  deposits  had  disappeared,  the  surviving  deposit  struc- 
ture still  revealed  the  governing  conditions  of  its  business, 


Per  cent  of  Total 

Average  amount 

Deposits. 

per  Account. 

Rs. 

Current  Accounts 

16.1 

145 

Savings   Accounts 

15.1 

46 

Fixed   Deposits 

63.8 

864 

Fixed  Deposits. 

3  months 

0.6 

550 

6  months 

6.5 

1,070 

12  months 

58.5 

745 

24  months 

30.5 

1,218 

36  months 

2.8 

823 

Special  terms 

0.9 

669 

The  smallness  of  individual  current  and  savings  accounts 
calls  for  no  special  comments.  The  average  size  of  12 
months'  accounts  which  furnished  much  more  than  half  of 


BANK  Y 


165 


fixed  deposits  reveals  itself  as  considerably  less  than  Rs.  800. 
The  general  structure  of  the  assets  of  the  bank  has  stood 
at  different  dates  as  follows. 

(in  OOOs) 
1913  1920  1928  1929  1934  1935   1936  1937  1938  1939 


Deposits  p.   c              380 

2,339     8.158     6.4G3     2,112 

1.858 

2,290 

2,753 

2,163 

1,431 

Due  to  Bankers 

21.4 

4.8 

3.4 

9.5 

14.0 

5.9 

Cash  in  hand 

12.6 

15.8 

20.4 

108 

115 

14.8 

Bills  Discounted 

8.8 

7.5 

10.6 

8.1 

4.8 

Investments 

33.2 

13.6 

7.0 

12.0 

18.6 

17.0 

Loans  &  Advances  122.8 

110.3       96.7     104.3     137.5 

97.5 

92.0 

98.2 

103.6 

110.5 

Immovable 

Properties 

11.9 

13.5 

6.3 

10.1 

12.1 

19.3 

Branches 

14 

14 

18 

21 

23 

With  the  outflow  of  deposits,  the  capital  and  reserve  struc- 
ture betrays  unhealthy  inflation  while  the  cash  ratio  is 
unable  to  recover  and  continues  low.  Loans  and  advances 
could  not  be  liquidated  pari  passu  with  the  outflow  of 
deposits  and  immovable  properties  proved,  as  is  to  be  expect- 
ed, a  disturbing  head.  Even  in  these  days  of  decline,  crea- 
tion of  branches  offered  the  only  means  of  buttressing  the 
deposits  which  meant  no  profits  for  the  shareholders. 

It  had  to  seek  or  encourage  business  in  consonance  with 
its  deposits  rates  and  deposit  structure. 


Percent  of  loans      Average 
and  Advances.        amount 
per  Loan 
Rs. 

Interest 
charged. 
Per  cent. 

Margins. 

1938 

1939 

1940 

1940 

Bullion  &  Gold 

43.4 

38.0 

18.9 

36 

7£ 

to 

12 

40% 

Government 

Obligations 

0.4 

t 

25% 

Shares 

0.3 

6.3 

1.3 

2,815 

Commodities 

10.9 

7.3 

11.6 

6.245 

7  ' 

to 

9 

20  to  26% 

Real  Estate 

8.9 

15.4 

9.9 

2,558 

6 

to 

12 

50  to  60% 

Own  Deposits 

5.3 

7.0 

3.9 

264 

5i 

to 

9 

Trade  Bills 

9.8 

2.3 

200 

9 

Clean  Advances 

1.3 

6.6 

2,442 

6 

to 

12 

Clean  but  under 

guarantee 

7.0 

11.0 

500 

81 

to 

12 

Bad  and  Doubtful 

7.3 

17.2 

Decreed  Debts 

7.5 

17.8 

*6 

Advances  against  gold  and  bullion  are  obviously  advances 
against  ornaments  and  trinkets.  These  account  for  the  bulk 
of  loans  and  advances  and  when  taken  with  the  average 
size  of  the  loans  clearly  indicate  a  large  clientele  of  small 


166  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

people.  Loans  against  real  estate  and  clean  but  guaranteed 
advances  convey  the  same  tale.  The  two  items  taken  to- 
gether indicate  the  extent  to  which  such  banks  depend  on 
professional,  personal  and  non-business  clientele  as  the 
outlet  for  their  funds.  Trade-bills,  the  second  largest  item 
in  the  list,  are  for  small  amounts.  Advances  against  com- 
modities which  disclose  medium  sized  borrowers  do  not 
aggregate  to  much,  the  effcet  probably  of  competition  of 
other  and  more  powerful  banks.  Bad  and  doubtful  debts 
and  decreed  debts  reveal  by  their  large  proportions  the 
quality  of  the  clientele  among  whom  the  bank  works  and 
finds  its  being. 

The  figures  of  three  consecutive  years  during  which  a 
local  crisis  aggravated  the  decline  of  the  bank  illustrate  the 
difficulties  of  such  banks  in  adverse  weather.  With  the 
fall  in  deposits,  bad,  doubtful  and  decreed  debts  tend  natu- 
rally to  become  a  larger  and  larger  proportion  of  the  whole. 
The  advances  under  Gold  and  Bullion  and  guaranteed  do 
not  prove  easy  to  liquidate.  The  only  encouraging  feature 
in  the  situation  is  the  apparent  ability  of  the  bank  to  pre- 
vent advances  against  real  estate  becoming  a  large  pro- 
portion of  the  whole. 

The  tables  on  pp.  167-8  summarize  the  broad  facts  concern- 
ing all  non-scheduled  banks. 

The  proportion  of  capital  and  reserves  of  Class  B  banks 
to  their  deposits  has  always  been  strikingly  high.  In  recent 
years,  it  has  continued  to  be  as  high  as  27  to  28  per  cent. 
It  is  obvious  that  this  merely  indicates  their  incapacity  to 
attract  deposits  on  the  scale  of  other  bigger  banks.  It  will 
be  recalled  that  their  growth  has  been  generally  growth 
in  numbers  and  not  in  average  size.45  In  1936,  their  capital 
and  reserves  averaged  to  about  2  lakhs  per  bank  and  their 
deposits  to  a  little  more  than  7  lakhs. 

With  borrowed  resources  limited  in  this  manner,  their 
employment  of  funds  has  to  seek  avenues  which  yield  gene- 
rous profits  rather  than  conform  to  accepted  standards  of 
liquidity  etc.  As  much  as  88  per  cent  of  their  deposits  is 

45.    Ch.  I   §  9. 


M 


H 
O 


Q 
W 


u 


"S  S 


8 


•g 

(0 


I    s 


S3 


UO       rH  in 

00       ^  rH 


CM  10  CM  CM 

£  rH  rH 

g§  CO  S3  S 

S 

CO  (o  1/3  \f) 

1  8  8  S 

^  CM  Irt  rH 

CO  t<>  CD  CM 


0»       IO  rH  OS 


00  * 


oo    en    co    ^ 

°*       CM       rH       W 


S?  §5 


5     ^ 

04  rH 


^      C<?      2      S 

3   8   5  *• 


S       S 


C»       CM  0  ^H 


1 


"8  I" 

co     (3 


CM      £J 


0) 

"0 


g     g    g 

S  I  i 
s 


s?  s     i  g     5  2 

*M  O      i-l  CO 


OO      CM 

CO      <« 


oo  o  oo 

*»  o  o 

S  "  8 

s  s  s 

a  *  R 


s? 


krt  o> 


CM     Jo  £r     ~ 

-«;   co       «   ^ 


IC5      ^d4  C3> 

05       CO  «H 

So 

CO      O) 

O*      O  O 

t5  ^ 

00 
_::     CO  ^ 

fH        N  S 

*  |       - 

*  ^       S 

5?   S 


CO 

co. 


I     s 


sg  ^      ^  «* 

"^      rn  co      ^ 

00      CM  g 


°°.       rH 


O      »O 

S3  ® 


^i 

8    I 


^      CO  rf 

00       S  ^ 


^H      W      rH  CO 


Numbe 
Capital 


'ft  A 


J9 


I 


;    a  al 
«  «  «  & 

" 


t3     T3 

§    S* 


*    8 


.2    -2 

ft 
o>  fl£ 

II 


18 


«M      - 

So 


168  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

Deposit  structure  of  Non-Scheduled  Banks 

(December  31st) 


OJ      .  P-JM     tuc'?^   S^     tUD       ±S   S'tt     t>JO.t2   SS     kJO        Sj3  Si   CL 

|.S      ~|  2 1 1^|  g«|.Sf  2|^§  |.g.8|    .gSg 
-°       --  -^  ^  5>       ^^-"^^     -^Qa     <!Oa       O  a'o 


1938 

626 

1541 

61 

185 

246 

17 

6.8 

1939 

669 

1595 

73 

166 

239 

17 

6.9 

1940 

604 

1674 

87 

190 

277 

22 

7.9 

1941 

601 

1953 

118 

208 

326 

27 

8.4 

1942 

534 

2464 

207 

254 

461 

49 

10.7 

1943 

557 

3302 

278 

315 

593 

65 

10.9 

1945 

632 

7364 

536 

628 

1164 

146 

12.6 

1946 

659 

7844 

497 

694 

1191 

100 

8.4 

1947* 

459 

4728 

420 

610 

1030 

72 

7.0 

1948 

419 

4450 

428 

636 

1063 

92 

8.6 

1949 

358 

4000 

430 

688 

1117 

101 

9.0 

1945 

632 

7364 

536 

628 

1164 

146 

12.6 

*  From  here  on  the  figures  relate  to  Indian  Union  only, 
returned  as  invested  in  bills  and  loans  which  are  as  a 
rule  the  most  lucrative  assets  in  the  balance  sheets  of  banks. 
That  such  a  high  proportion  should  hold  true  of  years  of 
such  exceptionally  low  interest-rates  as  the  present 
suggests  that  either  the  loans  are  of  the  more  lucrative  and 
therefore  risky  kind  or  they  are  frozen  to  a  great  extent. 
Investments  in  Government  or  gilt-edged  securities  are 
barely  12  per  cent  of  deposits  and  in  some  individual  cases 
they  are  almost  non-existent.  The  only  bright  spot  in  the 
picture  is  the  relatively  high  ratio  of  cash  balances. 

Most  of  the  observations  suggested  by  facts  relating  to 
Class  B  banks  hold  good  on  an  aggravated  scale  for  the  500 
to  600  other  banks  which  have  a  paid-up  capital  of  less  than 
Rs.  1  lakh.  Many  of  them  are  really  more  money-lending 
institutions  than  banks.  It  is  probable  that  the  average 
capital  and  reserves  of  those  banks  which  have  capital  and 
reserves  between  Rs.  50,000  to  1  lakh  is  nearer  60  thousand 
than  any  higher  figure  and  their  deposits  average  to  about 
2  lakhs.  In  the  case  of  banks  whose  capital  and  reserves 
fall  short  of  Rs.  50,000,  the  average  capital  and  reserve  per 
bank  is  only  about  15  thousand  rupees  and  the  average 
deposits  about  65  thousand.  These  latter  banks  number  477 
as  against  94  only  of  those  whose  capital  and  reserve  fall 


NON-SCHEDULED  BANKS  169 

between  Rs.  50,000  and  Rs.  1  lakh.  As  long-term  loans  form 
an  appreciable  part  of  their  business,  they  depend  very 
largely  on  their  own  funds.  Time  liabilities  predominate 
in  an  overwhelming  manner  in  whatever  deposits  they  are 
able  to  attract.  The  proportion  of  current  deposits  seems 
to  range  much  nearer  one-quarter  than  one-third  of  the 
whole.  It  is  usual  for  small  banks  in  the  smaller  towns  to 
have  their  deposit-liabilities  composed  almost  entirely  of 
fixed  deposits.46 

The  social  and  economic  basis  pre-determines  the 
character  and  principles  of  their  business.  Many  of  them 
avowedly  exist  to  serve  the  interests  of  particular  castes 
and  communities  or  particular  classes  of  persons  like 
Government  servants  etc.  It  is  a  necessary  consequence  of 
this  as  of  their  small  capital  and  reserves  that  most  of  them 
are  unit  banks.  The  bigger  ones  among  them,  those  with 
capital  between  Rs.  50,000  and  1  lakh  for  example,  may 
have  a  few  branches  but  their  essential  limitation  to  and 
pre-occupation  with  local  interests  and  local  opinion  mean 
inability  to  extend  or  adventure  much  beyond  the  outskirts 
of  their  home  town  or  home  province. 

Since  many  of  them  exist  to  meet  the  needs  of  certain 
narrow  communities  and  areas,  it  is  inevitable  that  the 
personal  element  should  predominate  in  everything.  The 
bulk  of  funds  as  in  the  case  of  Class  B  banks  flows  into 
loans  and  advances.  The  need  of  directors  and  their  friends 
rather  than  impartial  assessment  of  the  merits  of  applicants, 
personal  credit  and  paper  security  rather  than  tangible 

46.  Capital-structure  of  Non-scheduled  Banks. 

December  1937. 

Paid-up  Capital  and  Banks  with  capital  and 

Reserves  Number  reserves  of  less  than  5  lakhs 

and  more  than  1  lakh 

Below  5  thousand  , .         . .        377  1  lakh  to  2  lakhs  65 

5  to  10  thousand  236  2  lakhs  to  3  lakhs  17 


10  to  20  thousand 
20  to  30  thousand 
30  to  40  thousand 
40  to  50  thousand 
50  thousand  to  1  lakh 


237  3  lakhs  to  4  lakhs  10 

128  4  lakhs  to  5  lakhs  9 

58 

50 
135 


Below     50     thousand 
but  unclassified  . .        . .        101 

Total  ..        ..      1,320  101 


170  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

security,  these  and  other  factors  undermine  the  quality  of 
assets  held.  Gilt-edged  investments  are  either  insignificant 
or  in  many  cases  do  not  exist  at  all.  As  Section  277L  of  the 
Indian  Company  Law  prescribes  for  every  non-scheduled 
banking  company  a  minimum  cash  balance  equivalent  to 
at  least  \  per  cent  of  time-liabilities  and  5  per  cent  of  de- 
mand liabilities,  the  natural  tendency  of  these  banks  is  to 
hold  as  low  cash  as  possible  under  the  Act.  In  the  light  of 
these  circumstances,  it  should  not  be  surprising  if  most  of 
these  banks  are  found  in  a  chronic  state  of  frozen  assets. 

We  have  recorded  already  what  a  large  part  the  loan 
offices  of  Bengal  and  Nidhis  and  Chits  of  South  India 
bear  in  the  credit  facilities  of  this  country.  While  it  is 
probable  that  the  ancestry  of  these  institutions  could  be 
traced  to  very  early  times,  their  modern  history  dates 
largely  from  post-Mutiny  days.  We  may  well  conclude  our 
present  study  with  a  brief  description  of  the  business  and 
character  of  this  undergrowth  of  our  credit  structure. 

12.    Loan  Offices  of  Bengal 

The  loan  offices  of  Bengal  are  among  the  many  offshoots 
of  the  permanent  settlement  which  made  land  more  valu- 
able there^than  elsewhere.  Although  the  paucity  or  abun- 
dance of  local  money-lenders  is  a  factor  in  their  growth,  the 
main  influence  determining  their  number  and  distribution 
is  the  productivity  of  land  and  the  ensuing  demand  for 
loans.  Zemindars  and  superior  classes  of  holders  of  land 
compose  the  chief  clientele  of  these  loan  offices. 

Their  number  at  any  time  depends  on  the  phase  of  the 
agricultural  cycle  and  is  maintained  very  largely  by  new 
births  which  more  than  counterbalance  their  continuous 
mortality.  Of  782  loan  offices  which  were  in  existence  in 
March  1929,  as  many  as  400  were  launched  after  1925-26. 
Their  present  number  most  probably  exceeds  1,000.47 

Their  paid-up  capital  is  generally  small.  In  1929,  there 
were  only  five  whose  capital  exceeded  and  only  three  whose 
capital  was  equal  to  Rs.  1  lakh.  As  they  attract  deposits, 
the  working  fund  is  perhaps  a  better  index  to  their  financial 

47.    Ch.  II  §  2. 


NIDHIS  AND  CHITS  OF  SOUTH  INDIA  171 

status  and  utility.  Of  381  loan  offices  in  1929  for  which 
statistics  were  available,  the  working  fund  of  15  exceeded 
Rs.  10  lakhs  and  in  the  case  of  as  many  as  199,  it  fell  below 
Rs.  50,000.  The  total  working  fund  of  all  loan  offices  was 
more  than  Rs.  9  crores. 

The  longest  period  for  which  deposits  are  accepted  rarely 
exceeds  5  years.  The  bulk  of  deposits  is  composed  of  short 
deposits  which  are  payable  at  1  month's  notice  and  inter- 
mediate deposits  which  are  repayable  within  2  years.  The 
rates  offered  vary  between  4  and  8  per  cent  as  a  rule. 
Unfortunately,  competition  for  deposits  is  sometimes  very 
keen  and  touting  and  offer  of  absurdly  high  interest  rates 
are  a  growing  practice. 

Their  description  of  business  in  their  memoranda  of 
association  is  apt  to  be  in  the  widest  possible  terms  and 
ranges  from  bus  traffic  pure  and  simple  to  transport  by  all 
mechanically  constructed  carriers  "in  land,  water  or  air". 
Actually,  the  vast  majority  is  chiefly  interested  in  mort- 
gage loans  against  land  and  ornaments.  The  newer  ones 
are  developing  loans  against  personal  credit.  There  is  a 
tendency  also  to  give  up  the  older  practices  of  trading, 
Zemindari,  etc.,  and  the  bigger  ones  like  Comilla,  Luxmi, 
etc.,  are  increasing  their  proportion  of  liquid  and  purely 
banking  business.  The  rates  charged  are  apt  to  range  in 
most  cases  between  12  and  18  per  cent. 

The  fact  that  the  management  is  usually  vested  in  practis- 
ing lawyers  throws  a  great  deal  of  light  on  their  nature  and 
business.  On  the  one  hand,  the  stimulus  to  the  growth  of 
loan  offices  is  perhaps  supplied  by  educated  unemployment 
while,  on  the  other,  the  knowledge  of  lawyers  regarding  the 
legal  and  financial  affairs  of  their  clients  is  the  essential 
basis  of  their  business. 

13.    Nidhis  and  Chits  of  South  India 

The  Nidhis  of  South  India  are  distinguishable  from  other 
credit  institutions  registered  under  the  Company  Law  by 
three  main  features.  Their  share  capital  is  paid  by  monthly 
instalments  spread  over  a  certain  predetermined  period. 
The  paid-up  capital  is  withdrawable  at  the  end  of  the  period 
when  the  Nidhi  automatically  ceases  to  exist.  Finally,  the 


172  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

members  of  the  Nidhi  are  entitled  to  borrow  against  their 
share  capital,  which  is  tantamount  to  a  reduction  of  capital 
and  therefore  the  security  of  the  creditors  and  is  clearly 
contrary  to  the  law  and  principle  of  joint-stock  companies 
Some  of  the  Nidhis  are  now  coming  into  line  with  the  Corn- 
pay  Law  on  all  these  three  major  points;  out  of  114  exa- 
mined in  1929,  eleven  were  reported  to  have  adopted  the 
practice  of  other  joint-stock  companies. 

They  attract  deposits.  218  out  of  a  total  of  228  in  1929 
showed  a  paid-up  capital  of  244  lakhs,  deposits  of  116  lakhs 
and  small  reserves  aggregating  to  only  31  lakhs.  Many  of 
them  have  fixed  margins  for  their  loans — 90  per  cent 
against  share  capital,  90  per  cent  against  deposits,  50  per 
cent  against  jewels,  80  to  90  per  cent  against  gold  and 
silver,  75  per  cent  against  goods  in  godowns  and  90  per  cent 
against  Government  paper.  That  their  main  object  is  to 
meet  the  credit  needs  of  the  humbler  folk  is  proved  by  the 
fact  that  the  orthodox  type  has  the  same  borrowing  and. 
lending  rates.  The  source  of  profit  is  the  fines  and  penalty 
interest  levied  on  defaults  and  delays,  and  constitutes 
usually  the  perquisite  or  remuneration  of  the  promoter. 

With  Chits,  Chit  Funds  or  Kuries  of  South  India,  we 
move  furtherest  away  from  modern  credit  institutions  as 
such.  The  promoter  who  is  more  often  than  not  a  needy 
man  of  straw  invites  members  to  make  periodic  payment 
to  him  over  a  period  of  time  which  is  predetermined.  Out 
of  the  payments  received  on  each  occasion  from  members, 
an  advance  is  available  to  a  member  in  either  of  two  main 
ways.  In  the  auction  Chit,  the  promoter  himself  claims  all 
the  collections  of  the  first  instalment.  On  collection  of  each 
subsequent  instalment,  the  member  who  bids  for  the  lowest 
amount  receives  that  amount  and  the  balance  is  distributed 
among  the  remaining  fraternity.  It  is  obvious  that  on  each 
occasion,  the  most  needy  among  the  bidders  will  make  sure 
of  his  loan  by  bidding  for  the  lowest  amount.  In  the  Prize 
Chit,  a  fixed  sum  or  prize  is  drawn  by  lot  and  the  balance 
is  disposed  of  in  the  same  manner  as  above.  When  a 
member  has  once  made  a  successful  bid  or  drawn  a  prize, 
he  drops  out  of  all  subsequent  bids  or  draws  and  thus  every- 
one is  assured  of  his  turn.  It  is  clear  that  while  the  former 


MAJOR  INDUSTRIES  173 

type  of  chits  may  be  described  as  "useful  institutions  which 
have  arisen  under  conditions  of  defective  credit  arrange- 
ments, exorbitant  interest  rates  and  faulty  communica- 
tions,"48 the  latter  is  nothing  of  a  credit  institution  but  a 
mere  lottery.  Two  grave  defects  vitiate  all  chits.  The 
amounts  received  ultimately  by  members  must  vary  in  an 
arbitrary  manner.  What  is  more  serious,  once  a  member 
or  particularly  a  promoter  has  received  his  amount,  he  has 
every  inducement  to  wish  and  intrigue  for  a  premature 
demise  of  the  Chit.  The  Madras  Banking  Enquiry  Com- 
mittee were  perfectly  justified  in  their  conclusion  that  "no 
attempt  should  be  made  to  foster  their  development  if  they 
show  signs  of  dying  a  natural  death." 

III.    BANKS  AND  INDUSTRIAL  FINANCE 

An  industrial  or  commercial  enterprise  has  a  double 
financial  problem.  It  has  to  raise  adequate  permanent 
capital  to  finance  its  fixed  assets  and  to  obtain  temporary  or 
seasonal  credits,  either  of  a  self-liquidating  character  or  to 
be  repaid  by  a  subsequent  issue  of  more  permanent  capital. 
In  so  far  as  minimum  stocks  of  finished  goods  or  raw  mate- 
rials, etc.,  have  to  be  maintained  to  assure  smooth,  uninter- 
rupted working  of  an  enterprise,  these  must  be  included 
among  fixed  assets  and  therefore  financed  out  of  permanent 
capital. 

14.    Major  Industries 

It  is  the  traditional  sphere  of  commercial  banks  to  supply 
working  capital  to  industries  out  of  their  short-term  depo- 
sits. It  is  difficult  to  judge  how  far  the  Imperial  Bank  and 
the  Indian  joint-stock  banks  are  able  to  render  adequate 
financial  assistance  of  this  kind.  The  main  major  industries 
to  be  financed  in  this  manner  are  jute,  cotton,  iron  and  steel, 
sugar,  cement,  coal,  engineering  construction,  and  a  few 
others  of  less  significance.  The  enormous  but  compensatory 
variations  in  the  cash  and  advances  of  the  Imperial  Bank 
which  follow  closely  changes  in  the  agricultural  seasons 
seem  to  indicate  that  steady  but  continuously  revolving 

48.    Madras   Report,   p.   235. 


174  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

advances  such  as  these  industries  need  do  not  form  a  large 
part  of  its  assets.  It  concentrates  more  on  seasonal  move- 
ments of  crops  and  raw  materials  and  less  on  the  working 
capital  requirements  of  industry.  The  advances  of  Indian 
joint-stock  banks  which  do  not  show  any  seasonal  trend  are 
presumably  used  for  financing  of  the  self-liquidating  but 
ever-renewed  needs  of  industry. 

Complaints  made  before  the  Banking  Inquiry  Committee 
on  this  subject  may  be  presumed  to  throw  some  light  on 
the  existing  situation.  It  was  alleged  that  in  making  loans 
banks  are  willing  to  take  account  only  of  tangible  and  easily 
realisable  assets  like  stock,  etc.,  but  not  of  block  capital. 
They  are  not  inclined  to  offer  loans  on  personal  credit  and 
character  although  the  offer  of  mere  promissory  notes  en- 
ables them  to  include  such  loans  in  their  balance  sheets 
under  the  head  "secured  loans".  Margins  as  large  as  30 
per  cent  and  much  more  are  claimed  and  enforced  against 
tangible  and  realisable  assets.  Many  banks  do  not  maintain 
the  expert  and  technical  staff  required  for  a  proper  evalua- 
tion of  assets  and  to  that  extent  industry  does  not  obtain 
the  full  advantage  of  its  security.  The  rates  charged  are 
alleged  to  be  more  than  industry  can  bear. 

15.    Medium-sized  and  Small  Enterprises 

It  is  much  more  certain  that  our  commercial  banks  have 
not  proved  very  useful  in  meeting  the  short-term  require- 
ments of  medium-sized  and  small  enterprises.  These 
industries  are  scattered  far  and  wide  all  over  the  country 
and  in  the  aggregate  are  as  important,  if  not  indeed  more 
important,  a  factor  in  our  national  economy  as  the  above- 
mentioned  major  industries.  They  include  rice,  flour  and 
oil  milling,  sugar  refining,  lac  manufacture,  mica  mining, 
cigarette  and  silk  manufacture,  cotton  ginning  and  cleaning, 
tea  growing  and  manufacture,  glass  manufacture,  brass  and 
copper  vessel  industry,  tanning  and  leather  industry,  blan- 
ket weaving  and  embroidery  industry,  etc.  Many  of  these 
industries  are  reported  as  languishing  for  lack  of  adequate 
finance  or  unreasonably  high  rates  they  have  to  pay  for 
what  finance  is  available  from  loan  offices,  money-lenders, 
mahajans,  Marwari  bankers,  exporting  firms,  middlemen, 


MEDIUM-SIZED  AND  SMALL  ENTERPRISES  175 

karkhandars,  etc. 

It  is  an  error  to  suppose  that  banks  as  big  financial  insti- 
tutions must  inevitably  limit  their  interest  to  big  industry 
alone.  It  is  true  that  growth  in  the  size  of  the  industrial 
and  business  unit  has  been  an  important  factor  impelling, 
if  not  forcing,  banks  to  seek  similar  expansion.  But  the 
very  bigness  of  particular  industries  has  made  them  so  sen- 
sitive to  world  factors  that  wise  bankers  seek  an  escape 
from  too  great  a  dependence  on  them  into  the  better  dis- 
tributed risks  of  a  smaller  clientele  not  so  vulnerable  to 
these  forces.  In  certain  countries,  big  industry  of  its  own 
accord  has  sought  to  release  itself  from  the  restraints  of 
indebtedness  to  banks  and  has  even  added  banking  and 
financial  functions  to  their  own  legitimate  sphere.  In  the 
United  States,  the  bulk  of  direct  commercial  loans  is  made 
to  small  or  medium-sized  firms,  wholesalers,  retailers,, 
service  trades,  professional  persons,  etc. 

The  distribution  of  advances  in  England  is  on  similar 
lines  though  not  on  the  same  scale.  We  may  take  as  a 
typical  sample  the  distribution  of  advances  of  Barclay's 
Bank  for  the  year  1935.  Of  the  total  advances  of  £155m. 
about  8  per  cent  went  to  farmers  and  the  average  size  of 
the  loan  was  in  round  figures  £610.  Retailers  obtained  8.7 
per  cent  of  the  total,  with  an  average  per  head  of  £540* 
"Professional  and  private"  advances,  i.e.  loans  largely  for 
purposes  of  consumption  and  perhaps  dealings  in  securities 
took  away  as  much  as  35.7  per  cent  and  the  average  size 
of  the  loans  was  £450  only.  For  a  country  of  the  wealth, 
commerce  and  industry  of  England,  it  is  certainly  remark- 
able that  more  than  half  the  advances  of  a  leading  bank 
should  consist  of  small  loans  of  this  kind. 

These  figures  appear  even  more  instructive  when  con- 
trasted with  the  relative  insignificance  of  the  aggregate 
advances  to  heavy,  big  industries  and  their  much  larger 
per  head  indebtedness.  Textile,  Heavy,  Coal-mining,  Ship- 
ping industries  obtained  only  12.7  per  cent  of  aggregate 
advances  while  the  average  size  of  loans  to  all  these 
industries  taken  together  was  £8,500.  Coal-mining  sup- 
ported the  largest  burden  of  per  head  indebtedness — £61 
thousand  in  round  figures.  Building  which  is  such  an  im~ 


176 


STRUCTURE  OF  ASSETS  AND  LIABILITIES 


portant  form  of  investment  in  all  highly  urbanised  coun- 
tries was  allotted  7.5  per  cent  of  all  advances — the  average 
advance  amounting  to  £1,800. 

The  immense  range  of  variation  in  the  sizes  of  loans  may 
now  be  judged  from  the  fact  that  the  average  size  of  all 
loans  was  £774  only.49 

16.     Provision  of  Long-term  Capital 

Long-term  capital  required  to  finance  the  fixed  assets  of 
industry  is  derived  from  three  sources.  As  in  the  earlier 
stages  of  industrial  development  in  other  countries,  capital 
subscribed  privately  on  a  family  basis  or  from  friends  has 
played  and  still  plays  a  large  part  in  industrial  ventures. 
The  managing  agency  system  originated  in  and  is  closely 
associated  with  this  fact.  Secondly,  it  is  the  practice  in 
certain  places  to  raise  a  larger  or  smaller  part  of  the  required 
capital  by  means  of  deposits  which  are  generally  fixed  for 
one  year  but  in  many  cases  extend  to  as  long  periods  as 
7  years.  These  deposits  are  naturally  strictly  local  in 
character  since  their  chief  basis  is  the  reputation  for 
business  integrity  or  social  and  caste  affiliations  of  the 
management  of  mills.  Finally,  we  have  the  more  general 
and  fast  growing  method  of  direct  appeal  to  investors 
through  prospectuses,  etc. 

The  method  of  direct  appeal  to  investors  suffers  in  India 


49. 


Percentage  of  Advances       Average  Size  of  Loans 

Barclays  1935  Barclays  1936        Lloyd  1926 


Farmers 
Textile 
Clothing 
Heavy 
Building 
Food 

Coal-mining 
Others 
Merchants  (Raw) 
(Manu.) 
Retailers 
Hotels,  Laundry 
Loc.  Govt.  Pub.   Ut. 
Shipping 

Finance,  Insurance 
Professional,  Private 
Entertainments,  etc. 
Average  Adcance 


7.9 
1.1 
1.9 
4.9 
1.7 
1.7 
5.0 
2.7 
2.6 
2.7 
8.7 
2.5 
4.2 
14 
4.9 
35.7 
4.6 


610 


1,800 


61,000 


540 


450 


774 


881 
15,356 


12,925 


610 


5,484 


545 


500 


PROVISION  OB*  LONG-TERM  CAPITAL  177 

-as  everywhere  else  from  two  defects.  The  supply  of  capital 
is  forthcoming  not  at  a  steady  rate  but  in  sudden  sporadic 
waves.  These  waves  occur  at  times  when  some  events  create 
^uch  unusual  states  of  mass  expectation  that  the  usual 
motives  of  prudence  and  caution  are  weakened  and  the 
investor  surrenders  to  the  lure  of  quick  and  large  specula- 
tive profits.  In  the  recent  history  of  capital  issues  in  this 
•country,  the  years  1920-21  and  1935-37  stand  out  as  illustra- 
tions of  this  fact.  Enterprises  whether  new  or  old  have 
to  wait  for  such  golden  opportunities  or  else  raise  capital 
in  ways  which  are  onerous.50 

A  much  graver  defect  of  this  system  is  the  lack  of 
.guidance  to  the  general  run  of  investors.51  Even  in  a 
country  like  England  in  which  there  has  always  existed 
a  large  class  of  investors  with  means  to  invest  who  are 
accustomed  to  exercise  independent  judgment  as  to  what 
to  invest  in,  large  quantities  of  capital  run  to  waste.  As 
the  MacMillan  Committee  record,52  the  shares  and  deben- 
tures of  281  companies  which  raised  on  them  £117m.  in 
1928  had  a  market  value  of  only  £66m.  in  May  191.  As 
many  as  70  of  these  companies  had  been  wound  up  by 
that  date  and  the  capital  of  36  others  had  no  ascertainable 
value.  If  details  of  what  happened  to  the  floatations  of 
1920-21  and  1935-37  in  India  were  compiled,  the  outcome 
is  not  likely  to  turn  out  less  ghastly. 

When  conditions  in  the  capital  market  are  temporarily 
unfavourable  or  the  requirements  are  only  temporary  or 
adequate  capital  willing  to  undertake  risks  is  not  forth- 
coming, the  issue  of  suitable  debentures  is  a  legitimate 
method  of  raising  the  needed  finance.  It  happens,  how- 
ever, that  debentures  are  not  as  popular  in  India  as 


SO. 

Capital  Issues  (in  crores) 
1918-19  ..  21.2  1932-33  ..  30.2 


1919-20 
1920-21 
1921-22 
1922-23 
1928-29 

51.  Ch.  X  §  1. 

52.  §  8. 
M.  B.   12 


281.7  1933-34 

14&.0  1934-35 

80.8  1935-36 

24.9  1936-37 
1937-38 


50.8 
36.4 
40.2 
109.0 
53.1 


178  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

elsewhere.  Among  the  more  important  causes  of  this 
backwardness  are  the  unfamiliarity  of  the  general  public 
with  this  form  of  investment,  the  preference  of  the  more 
business  and  money  minded  classes  for  speculative  scrips, 
heavy  stamp  duties  on  debentures  and  on  transfers  of 
debentures,  lack  of  confidence  in  all  but  the  largest, 
best-known  and  well-established  enterprises,  the  ensuing 
concentration  of  debentures  in  the  hands  of  our  potentates* 
merchant  princes  and  other  wealthy  clients,  and  finally 
the  avoidance  of  such  investment  by  insurance  and  other 
cognate  concerns  with  large  investible  resources.53 

The  practice  of  raising  capital  by  means  of  deposits  fixed 
from  one  to  seven  years  is  an  outcome  of  local  ties  and 
confidence  and  its  extent  for  that  reason  varies  from  place 
to  place.  The  Ahmedabad  industry  depends  on  it  most — 
to  such  an  extent  indeed  that  neither  fixed  nor  liquid 
assets  of  the  industry  can  be  used  as  security  for  loans 
from  banks  or, from  any  other  quarter  without  undermin- 
ing the  whole  credit  structure.54  The  Banking  Enquiry 
Committee  (1931)  found  that  there  had  been  no  reduction 
in  the  total  of  deposits  received  by  Ahmedabad  textile  mills 
during  the  previous  25  years.  It  is  still  a  point  worthy  of 
consideration  whether  continuance  of  the  system  is  not 
fraught  with  grave  dangers,  particularly  in  times  of 
depression.  These  deposits  have  been  described  very 
appropriately  as  fair-weather  friends,  attracted  by  generous 

53.  Banking  Inquiry  Committee's  Report,  pp.  273-5. 

54.  Percentages  of  Total  Finance. 

Bombay  Ahmedabad 

(64  mills)  (56  mills) 

Amount  loaned  by  mortgage-agencies          .  21  24 


Amount  loaned  by  banks 
Amount  by  public  deposits 
Amount  of  Share-capital 
Amount  of  debentures  issued 


9  4 

11  39 

49  32 

10  1 


Interest-rate  offered  Yield  of  3  p.  c.  Govt.       Average  bank-rate 

by  a  mill  under  a  Security  on  April  1st  for  the  year 

particular  manage-  of  the  year 
ment  in  Ahmedabad 

1926  May           . .               54  4.4  5.72 
1923                     ..6  5,7  5.96 

1927  Jan.                              5  4,4  5.72 
1929  Oct.            . .                5£  4.9  6.32 
—Banking  Inquiry  Committee  Report,  p.  278. 


COMMERCIAL  BANKS  AND  INDUSTRY  179 

offers  of  interest  but  likely  to  fall  into  a  stampede  at  the 
slightest  approach  of  danger.  Their  replacement  by  share 
or  debenture  capital  is  much  to  be  desired  as  abrogating  a 
weak  link  in  the  industrial  structure  of  the  country. 

17.    Commercial  Banks  and  Industry 

Banking  funds  reach  industry  through  several  channels. 
There  are,  in  the  first  place,  short-term  advances  made 
directly.  Secondly,  a  good  deal  of  commercial  or  instal- 
ment  paper  which  banks  discount  results  in  financing 
industry  either  directly  or  through  intermediaries.  Loans 
given  to  brokers  or  customers  to  enable  dealings  in  or 
holding  of  stock  exchange  securities  ultimately  find  their 
way  in  a  similar  manner  to  these  enterprises  as  share 
capital  or  other  kinds  of  capital.55  Finally,  direct  invest- 
ments by  banks  in  industrial  scrips  or  temporary  loadings 
which  occur  in  the  course  of  underwriting  or  issuing  acti- 
vities are  apt  to  reach  large  or  small  proportions  according 
to  the  traditions  of  each  banking  system. 

It  is  not  a  matter  of  indifference  whether  these  funds 
reach  commerce  and  industry  through  one  channel  or 
another.  If  direct  loans  give  place  to  indirect  methods  of 
finance,  industry  is  released  from  the  healthy  check  and 
experienced  guidance  of  bankers  who  in  their  turn  must 
also  suffer  from  loss  of  direct  contact.  If  loans  to  brokers 
and  customers  take  the  place  of  direct  investments  in 
industrial  and  other  scrips,  banks  are  automatically 
involved  in  the  severe  speculative  waves  of  stock  exchange 
dealings.  Not  only  the  technique  and  methods  of  bank 
finance  have  then  to  be  re-adapted  but  the  quality  and 
stability  of  the  banking  business  as  such  tend  to  alter  in 
an  important  manner. 

It  is  a  tradition,  particularly  of  British  thought  on  the 
subject,  to  distinguish  broadly  between  short-term  and 
long-term  finance  and  to  argue  that  deposit  banks  should 
limit  themselves  to  the  former.  The  policy  is  partly 
justified  by  the  natural  rule  of  prudence  that  short-term 
deposits — and  British  banks  are  known  to  hold  particularly 

55.    Ch.  XI. 


180  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

large  proportions  of  short-term  deposits — should  be  used 
to  finance  short-term  requirements.  Besides,  there  is  also 
the  feeling  that  short-term  finance  assures  safety  in  a 
manner  and  to  a  degree  which  cannot  be  expected  of  long- 
term  finance.  It  is  necessary  to  analyse  this  belief  carefully 
so  as  to  place  industrial  financing  in  its  proper  perspective. 
.  It  is  self-evident  that  the  banker  does  not  and  cannot 
seek  an  ultimate  repayment  as  such.  His  profits  are  main- 
tained only  by  continuous  repayments  and  continuous  re- 
investment in  such  a  quick  succession  that  only  a  minimum 
of  his  resources  is  idle  at  any  time.  From  the  standpoint 
of  maintenance  of  a  steady  social  butput,  a  repayment 
means  a  successful  advancing  of  goods  to  a  further  stage  of 
production  and  a  re-investment  means  acquisition  of  mate- 
rials from  an  earlier  stage  for  further  fabrication.  A  failure 
to  repay  means  that  goods  have  been  created  which  are  not 
able  to  find  a  market  and  a  failure  to  re-invest  means  an 
accumulation  of  idle  stocks  which  fail  to  be  absorbed  into 
the  productive  process.  In  case  of  failure  at  any  stage, 
adjustment  has  to  take  place  by  a  fall  of  prices  at  all 
earlier  stages  and  distribution  of  incidental  losses  through 
the  production  and  banking  structure.  Looked  at  in  this 
way,  the  difference  between  short-term  .and  long-term 
finance  reduces  itself  to  the  simple  fact  that  a  short  loan 
involves  estimation  of  the  possibilities  in  the  very  near 
future  only.  A  long-term  loan  raises  more  complicated 
questions.  The  banker  must  estimate  in  the  first  place  the 
prospects  of  a  particular  industry  over  a  long  period  and 
secondly  the  prospects  of  the  particular  firm  with  refer- 
ence to  its  own  special  circumstances.  Even  if  mistakes 
are  detected,  there  is  but  limited  opportunity  for  periodic 
revisions  of  judgment,  once  the  investment  is  made. 
Besides,  when  an  enterprise  is  new,  a  relatively  long  period 
of  incubation  and  immaturity  must  elapse  before  the 
investment  will  bear  fruit.  In  the  case  of  a  tea  garden,  for 
example,  production  does  not  commence  till  after  the  expiry 
of  four  years  from  the  laying  out  of  the  garden.  .  For  some 
other  industries,  periods  of  ten  and  even  twenty  years  may 
be  necessary.  Hence,  even  when  investments  are  prudently 
undertaken  and  properly  diversified,  sporadic  and  individual 


COMMERCIAL  BANKS  AND  INDUSTRY  181 

factors  may  land  the  banker  into  serious  embarrassment. 

It  is  only  in  this  sense  that  we  can  ascribe  "liquidity" 
to  the  short-term  advances  of  a  bank  or  banking  system 
and  claim  "a  solid  residium  of  truth  in  the  older  doctrine 
that  the  banking  system  is  less  vulnerable  and  more  stable 
if  the  individual  banks  are  in  a  genuinely  liquid  condition." 
There  is,  however,  another  sense  in  which  the  word 
"liquidity"  is  sometimes  used.  The  assets  of  an  individual 
bank  are  described  as  liquid  when  they  can  be  readily 
exchanged  for  cash.  Government  securities  for  example 
are  specially  prized  in  this  country  as  assets  of  this  kind. 
Since  Government  themselves  are  not  expected  to  repay, 
it  is  clear  that  liquidity  means  here  a  high  degree  of 
marketability  or  shiftability.  This  shiftability  has  its  own 
well-marked  limits.  An  individual  bank  can  dispose  of 
its  assets  to  the  public  or  to  another  bank;  all  banks  taken 
together  can  shift  them  within  the  limits  of  law  and 
practice  to  the  Central  bank,  if  one  is  in  existence.  In 
certain  circumstances,  the  banking  system  of  a  country 
may  be  able  to  invoke  the  aid  of  foreign  banking  systems 
for  the  same  purpose.  But  except  within  these  limits, 
there  is  no  such  thing  as  liquidity  for  the  banking  system 
as  a  whole,  whether  the  phrase  is  understood  in  the  first 
sense  or  the  second.  If  every  bank  were  to  decline  to 
renew  its  loans  or  to  endeavour  to  place  on  the  market 
its  assets  on  any  substantial  scale,  a  complete  break-down 
of  the  economic  system  could  be  the  only  result. 

Although  loans  to  finance  fixed  assets  of  industries  are 
not  liquid  in  the  first  sense,  the  shares  and  scrips  repre- 
senting them  are  certainly  liquid  in  the  sense  of  shift- 
ability.  This  shiftability,  however,  is  apt  to  hold  true  in 
many  cases  only  in  the  literal  and  not  economic  sense. 
For  reasons  discussed  elsewhere,  grave  instability  of  values 
is  almost  inseparable  from  scrips  which  figure  in  stock 
exchange  dealings.56  Recent  experiences  illustrate  very 
forcefully  the  waves  of  appreciation  and  depreciation  to 
which  these  industrial  investments  are  prone.  The  index- 
number  of  maximum  prices  of  ordinary  shares  stood  at 

56.    See  Ch.  XI. 


182 


STRUCTURE  OF  ASSETS  AND  LIABILITIES 


about  102  in  1929,  fell  to  58  in  1932  and  flared  upto  128  in 
1937.  Considering  minimum  prices,  the  index-number  was 
93  in  1929,  63  in  1931,  37  in  1936  and  108  in  1937.57  Even 
more  instructive  for  the  life  history  of  a  bank  are  the 
vicissitudes  of  investments  taken  over  by  the  Central  Bank 
of  India  from  the  Tata  Industrial  Bank.  The  following 
figures  speak  for  themselves. 


No.  of 

Name 

Nominal 

Mkt.  value 

Shares. 

value 

adopted 

Market  value 

in  Dec. 

Dec.  1939 

1924 

24373 

Tata 

Iron  (2nd  Pref.) 

100 

20 

134    8    0 

11562 

Nira 

Valley  Sugar  Co. 

100 

1 

828 

Tata 

Power  Co. 

800 

95 

1376    4    0 

(Pd.-up  1000) 

19250 

New 

India  Assurance 

25 

11-12-0 

35    2     0 

(Pd.-up  15) 

If  ultimate  solvency  were  the  criterion  of  sound  banking, 
few  banks  need  fall  into  difficulties  on  the  ground  of 
industrial  finance.58  Unfortunately,  banking  business  is 
different  from  all  others  because  it  has  to  be  solvent  every 
minute  of  its  existence. 

These  difficulties  which  are  partly  economic  and  partly 
technical  are  sometimes  held  to  suggest  an  inevitable 
bifurcation  of  the  banking  system  into  separate  institutions 
for  short-term  and  long-term  finance.  There  is,  however, 
hardly  an  example  in  economic  history  where  such  a 
separation  of  banks  has  existed  and  has  expedited  indus- 
trial and  economic  progress.  On  the  contrary  examples 
of  countries  which  adopted  mixed  banking  and  hastened 
their  industrialisation  are  more  numerous.59  The  excep- 
tions are  not  countries  which  have  a  bisected  banking 
system  but  countries  like  England  in  which  an  independent 
class  of  investors  with  means  and  judgment  to  invest 
ante-dated  a  commercial  banking  system  which  grew  on 

57.  Review  of  Trade,  1937-38,  p.  25. 

58.  The  Deutsche  Bank  of  Germany,  ordinarily  inclined  to  confine  its  interests 
to  pure  deposit  banking  sponsored  the  formation  of  the  Mannesmannwerke  the 
well-known  manufacturers  of  tubes,  subscribed  the  share  capital  and  gave  ex- 
tensive credit.    For  years,  it  was  a  source  of  trouble  but  the  Deutsche  Bank  saw 
it  through  and  the  Mannesmannwerke  became  one  of  their  finest  connections. 

59.  Mac-Millan  Committee's  Report,  paras,  337,  378,  379,  380,  381. 


COMMERCIAL  BANKS  AND  INDUSTRY  183 

industries  already  in  existence.  Prudence,  therefore,  sug- 
gests that  we  should  analyse  in  detail  the  exact  strong 
and  weak  points  in  mixed  or  integrated  banking  before 
supporting  the  alternative  offered. 

There  should  be  no  question  but  that  long-term  invest- 
ments should  not  be  financed  to  any  appreciable  extent  out 
of  short-term  deposits.  In  other  words,  banks  which  embark 
on  industrial  finance  should  take  care  that  such  invest- 
ments are  well  within  the  fixed  and  long-term  funds  at 
their  disposal.  Expansion  of  such  activities  should  be 
preceded  by  an  adequate  proportion  of  capital  and  reserves 
and  acquisition  of  funds  on  a  longer  basis  than  suits  the 
book  of  ordinary  commercial  banks.  That  this  proportion 
need  not  be  excessively  high  is  proved  by  the  Banque 
D'Affairs  of  France  whose  ratio  of  capital  and  reserves  to 
deposits  has  been  well  within  30  per  cent  and  is  about 
three  times  as  high  as  in  the  case  of  ordinary  commercial 
banks.60 

Sources  for  such  funds  are  by  no  means  insignificant 
even  at  present.  A  proper  scheme  of  co-operation  between 
the  Government,  the  Reserve  Bank  and  commercial  banks 
should  release  large  funds  for  use  in  industry  which  are 
at  present  either  idle  or  are  diverted  into  less  useful 
channels.  Postal  cash  certificates  issued  by  Government 
for  example  absorbed  about  35  crores  between  1920-30  as 
against  a  net  increment  in  paid-up  capital  of  joint-stock 
companies  of  150  crores.  Between  1930  and  1937,  joint- 
stock  companies  showed  an  increment  of  about  29  crores 
only  as  against  26  crores  attracted  into  cash  certificates. 
It  is  perhaps  undesirable  that  such  large  funds  should  be 
absorbed  by  Government  when  certificates  and  debentures 
of  well-established  banks  could  as  well  serve  the  purpose 
of  attracting  into  productive  channel  these  dormant 

60.    Banques  D'affairs. 

1933  Dec.      1936  Dec. 


Capital  and  Reserve,   (Million  Frs.) 
Deposits,  „ 

Cash  and  at  Bank,   (Percentage  of  liabilities) 
Loans  and  Advances.  ,, 

Discounts,  „ 

Investments  &  Premises,      ,, 
Acceptance,  etc.  ••  «• 


1,078  1,118 

4,115  3,813 

19.6  23.7 

30.9  25.7 

31.6  35.3 

25.1  22.2 

4.5  5.9 


184  STRUCTURE  OF  'ASSETS  AND  LIABILITIES 

resources.    Precedent    for    such    a    departure    exists    in? 
Switzerland    where    commercial    banks    issue   debentures; 
of  3  to  5  years,  changes  in  interest  rates  being  regularly 
notified   to   and   approved   by  the   Swiss  National   Bank. 
Power  to  permit  the  issue  of  such  debentures  and  the  rates 
at  which  they  are  issued  may  well  lie  with  the  Reserve 
Bank  which  should  be  the  best  judge  of  the  character  and 
policies   of   the   banks   concerned.    The   extent   to   which 
industry  raises  capital  in  the  form  of  deposits  in  certain 
parts  of  the  country  points  to  another  source  of  funds  which 
has  not  yet  been  fully  tapped.    Another  indication  in  the 
same    direction    is    the    recent    rapid    growth    in    savings 
accounts  of  many  important  banks.    The  creation  of  this- 
facility    has   for    its   object  the  extension  of  the  banking 
habit  to  lower  income  classes  and  its  astonishing  success 
in   post-war   years   in   many   advanced  countries  like  the 
United  States,  Sweden,  Norway,  etc.,  should  leave  no  doubt 
about  its  future  in  India  as  well.    The  average  period  for 
which  deposits  are  fixed  in  India  is  much  longer  than  in 
many  Western  countries,   and  decidedly   longer  than   in 
England  where  shorter  deposits,  perhaps  as  short  as  14  days,, 
form  the  great  bulk.   For  these  reasons  the  adaptation  of  the 
structure  of  certain  Indian  banks  so  as  to  fit  them  for  ven- 
turing into  the  field  of  industrial  finance  should  not  be  found 
materially  difficult. 

Participation  of  commercial  banks  in  industrial  finance 
and  flotations  offers  certain  advantages  which  should  not 
be  under-rated.  In  the  case  of  established  industries,, 
their  usual  business  of  short-term  finance  brings  them  in 
contact  with  their  own  special  problems  as  well  as  the 
problems  of  allied  or  dependent  industries.  Through  their 
large  number  of  branches  and  through  their  connection? 
with  all  markets  and  lines  of  business,  they  are  able  ta 
judge  the  prospect  of  each  enterprise  against  a  compre- 
hensive perspective  of  the  economic  milieu  as  a  whole. 
No  other  agency  is.  better  qualified  to  offer  advice  and 
guidance  of  long-term  policies  on  questions  of  extension, 
amalgamations,  etc.,  and  no  other  agency  is  better  situated 
to  bring  to  bear  appropriate  pressure  for  their  adoption. 
While  any  tendency  on  the  part  of  banks  to  manage  indus- 


COMMERCIAL  BANKS  AND  INDUSTRY  185 

try  is  to  be  deprecated,  their  supervision  of  and  informal 
association  with  the  financial  policies  of  industry  should 
certainly  redound  to  the  benefit  of  the  large  investing 
public  whose  enforced  or  voluntary  abdication  of  functions 
and  responsibilities  is  a  standing  reproach  and  scandal  of 
the  so-called  "financial  democracy"  of  joint-stock  enterprise. 

In  the  case  of  new  enterprises,  their  active  participation 
may  prove  even  more  beneficial.  The  gravest  defect  of 
the  present  system  of  investment  is  the  absence  of  any 
reliable  guidance  to  the  investor.  The  stock-exchanges 
are  more  a  barometer  of  fears  and  hopes  about  the  future 
generated  by  the  passing  events  of  the  present  than  a 
balanced  long-term  view  of  the  future  itself.  Unlike 
individual  brokers  or  firms  of  stock-brokers,  banks  are 
immortal  institutions  with  reputation  and  traditions  to 
maintain.  They  are  unlikely  to  give  the  prestige  of  their 
support  and  recommendation  to  doubtful  issues,  still  less  to 
underwrite  them.  Banks  can  afford  to  gather  information, 
maintain  records,  employ  specialists  such  as  may  not  be 
expected  of  small  firms. 

It  is  sometimes  suggested  that  the  check  of  a  single  bank 
which  supplies  both  short-term  and  long-term  finance  may 
not  prove  as  efficient  and  impartial  as  the  multiple  check 
of  one  institution  which  supplies  fixed  capital,  another 
which  supplies  short-term  finance  and  so  on.  The  suggestion 
springs  from  two  assumptions  both  of  which  seem  ground- 
less. It  is  assumed  that  the  parties  which  supply  fixed 
capital  or  are  connected  with  it  exercise  some  check  at 
present.  As  a  matter  of  fact,  neither  investors  nor  stock- 
exchange  authorities  are  to  any  degree  effective.  In  the 
second  place,  it  is  taken  for  granted  that  participation  in 
issues  and  flotations  means  a  permanent  connection  with 
individual  enterprises.  As  a  matter  of  fact,  the  ideal  should 
be  as  rapid  a  change  in  the  composition  of  the  investment 
portfolio  as  market  conditions  and  circumstances  permit. 
The  ultimate  holder  of  securities  should  be  the  public  and 
not  banks— the  latter  only  correcting  the  tendencies  of 
investment  to  occur  in  sporadic  waves  and  other  defects. 

There  is  nevertheless  a  danger  that  when  a  bank  holds 
an  interest  in  the  fixed  assets  of  an  enterprise,  it  may  be 


186  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

tempted  to  offer  much  more  short-term  accommodation 
than  a  strict  view  of  the  circumstances  and  ordinary  business 
caution  will  justify.  Similarly,  capital  extensions  might  be 
undertaken  more  in  the  hope  of  extricating  itself  from 
unwise  commitments  whether  on  account  of  short  or  long 
loans  than  placing  the  concern  on  sounder  footing  as  such. 
It  will  be  seen  later  that  complications  or  suspected  com- 
plications of  this  kind  lay  at  the  root  of  the  ultimate 
disaster  which  overtook  the  People's  Bank  of  Lahore,  the 
Bank  of  Burma  and  the  Tata  Industrial  Bank.  But  on 
closer  analysis  it  will  be  realised  that  this  is  a  danger  not 
of  combination  of  short-term  and  long-term  finance  as  such 
but  of  the  interlocking  of  authorities.  Even  today,  the  men 
who  sit  on  the  boards  of  our  commercial  banks  are  generally 
men  who  have  deep  stakes  in  the  industries  of  the  country. 
As  the  aforesaid  failures  revealed,  the  men  and  concerns 
which  were  responsible  for  banking  ventures  were  more 
often  than  not  the  very  men  and  concerns  which  sought  to 
pioneer  industries  in  this  country.  The  ultimate  cause  of 
this  interlocking  is  partly  the  paucity  of  high  business 
talent  as  such  and  partly  the  circumstances  which  confine 
access  to  economic  power  and  experience  to  a  few  families 
or  narrow  social  circles.  Until  it  is  possible  to  enforce  a  rule 
that  officers  of  banks  may  sit  on  the  boards  of  companies 
as  representatives  of  banks  and  in  no  other  capacity,  an 
alleviation  of  our  present  difficulty  could  be  sought  in 
associating  as  a  rule  more  than  one  bank  with  any  issue. 
Such  consortiums  have  been  common  in  Germany  and  they 
are  to  be  desired  not  only  as  supplying  a  multiple  check 
but  as  enabling  a  wider  distribution  of  risks. 

Post-war  changes  in  the  outlets  for  banking  funds  are 
putting  pressure  on  banks  in  the  same  direction.  Even  in 
a  country  like  England,  industrial  and  commercial  advances 
of  banks  are  becoming  a  diminishing  proportion  of  the 
whole  and  it  is  only  an  expansion  of  "other"  loans  which 
has  enabled  them  to  maintain  their  advances  somewhere  in 
the  neighbourhood  of  their  accustomed  volume.61  The 
causes  which  have  brought  about  this  situation  vary  from 

<>1.    f.n.  on  opp.  page. 


COMMERCIAL  BANKS  AND  INDUSTRY  187 

country  to  country.  In  some,  direct  investment  has  received 
a  severe  check  on  account  of  the  complete  break  of  values 
in  the  crisis  of  1929-30  and  1936-37  and  fixed  deposits  are 
much  preferred  to  shares  and  equities.  In  others,  as  we 
have  already  said,  industry  raises  its  working  capital 
directly,  seeks  to  increase  the  rapidity  of  turn-over  and 
maintains  smaller  stocks — in  order  to  escape  dependence 
on  banks.  This  should  explain  why  in  some  countries  loans 
to  brokers  and  customers  for  security  dealings  grew  so 
rapidly  and  in  others,  large  funds  were  driven  into  real 
estate  loans.  It  may  well  be  that  in  these  countries,  indus- 
trial finance  may  assist  banks  to  create  new  outlets  for 
investment  and  at  the  same  time  restore  direct  touch 
between  banking  and  industry.  As  the  MacMillan  Com- 
mittee say  very  truly,  "in  any  community  which  wishes  to 
keep  in  the  van  of  progress,  the  financial  and  industrial 
worlds  should  be  closely  integrated  through  appropriate 
organisation."62 

We  have  already  noted  how  the  problem  of  outlets  for 
investment  of  funds  which  was  already  acute  in  pre-war 
times  has  become  seriously  aggravated  in  post-war  years.63 
There  is  some  evidence  that  banks  are  changing  their  invest- 
ment policies  in  the  direction  .of  industrial  finance  already. 
Of  the  Big  Five,  the  Allahabad  Bank  does  not  venture  into 
any  investments  except  Government  securities.  But  the 
other  four  have  been  gradually  increasing  their  investments 
in  debentures  and  ordinary  and  preference  shares  of  joint- 
stock  companies.  About  2  per  cent  only  of  their  deposits 
in  1924-25,  the  proportion  has  risen  steadily  to  a  little  above 

61. 

British  Clearing  Banks. 
(Percentage  of  Total  Advances). 

1929-30  1936  1937 

Industrial    and    Commercial 

Advances  ..  55.5  47.2  46.2  i.e.      Textile,      Heavy 

Agriculture,  Mining, 
Food,  Drink,  Shipping, 
Bldg..  Retail,  Misc. 

"Other  Advances"    ..  44.5  52.8  53.8  Loc.      Govt.      Public, 

General,    Uti.    Amuse- 
ments,    Clubs,     Chur- 
ches,  Charity. 
€2.    Para  385. 

63.    Ch.  V  §  5  and  Chart  I  in  Ch.  VI. 


188  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

5  per  cent  by  1937-38.  This  is  certainly  a  very  conservative 
position  since  the  capital  and  reserves  of  these  banks  are 
apt  to  be  above  9  to  10  per  cent.  A  reference  to  the  balance 
sheets  of  Banque  D'Affairs  will  show  that  their  investments 
and  premises  are  almost  identical  in  amount  with  their 
capital  and  reserves.64  A  little  more  than  two-thirds  of  their 
deposits  are  invested  in  short-term  finance,  i.e.,  discounts- 
and  advances,  which  shows  what  a  large  part  ordinary  com- 
mercial banking  plays  in  their  activities  even.  In  absolute 
figures,  the  industrial  stake  of  our  four  big  banks  is  very 
small,  being  about  3J  crores  in  all.  But  the  steady  increase 
from  half  a  crore  only  is  certainly  a  pointer.  Even  this  small 
amount,  if  it  is  constantly  turned  over  from  one  scrip  into 
another  is  not  insignificant  since,  except  in  years  of  invest- 
ment booms,  the  net  increment  of  paid-up  capital  of  joint- 
stock  companies  rarely  exceeds  5  crores  in  a  single  year. 

18.     Industrial  Banks  and  Small  Industries 

In  consequence  of  the  foregoing  facts,  it  would  be  otiose 
to  discuss  whether  long-term  finance  for  big  industrial 
enterprises  could  not  be  better  supplied  by  a  special  type  of 
banks.  Proposals  have  been  made  by  the  Central  Banking 
Enquiry  Committee65  and  by  others  for  provincial  or  all- 
India  industrial  corporations.  Although  the  Committee  does; 
not  indicate  the  desirable  amount  of  share  capital,  and 
merely  suggests  that  debenture  capital  should  be  twice  the 
amount  of  share  capital,  it  is  to  be  presumed  that  such 
corporations  are  intended  to  have  quite  large  resources. 
Now,  as  we  have  already  seen,  even  industrial  banks- 
depend  for  their  success  and  profits  on  quite  a  large  pro- 
portion of  short-term  resources  and  short-term  finance.  In 
the  present  circumstances  of  the  country,  such  large,  short- 
term  resources  can  be  acquired  only  at  the  expense  of  exist- 
ing commercial  banks.  Such  proposals  overlook  the  basic 
fact  that  the  question  of  industrial  finance,  whether  short- 
term  or  long-term,  has  arisen  here  as  elsewhere  out  of 
the  paucity  of  mobilisable  capital  of  both  kinds.  A  multi- 
plication of  institutions  presumes  on  the  other  hand  a  rela- 

64.  f.n.  60. 

65.  Paras  401  to  413. 


INDUSTRIAL  BANKS  AND  SMALL  INDUSTRIES  189 

tive  abundance  of  funds.  It  is  the  basic  justification, 
central  object  and  outstanding  merit  of  mixed  or  integrated 
banking  that  it  enables  a  country  to  make  an  economic  and 
intensive  use  of  its  limited  capital  resources. 

Although  specialised  industrial  banks  might  not  be  feasi- 
ble or  desirable  for  large  enterprises,  it  may  be  that  they 
have  important  services  to  perform  towards  small  or  cottage 
industries.  These  industries  labour  under  certain  special 
difficulties  which  repel  the  bigger  banks  from  supplying 
them  either  short-term  or  long-term  accommodation.  Their 
shares  and  stocks,  if  they  exist,  have  hardly  any  market 
and  cannot  be  easily  marketed,  should  need  arise.  Con- 
trolled by  relatively  obscure  managements  and  existing  in 
scattered  and  obscure  places,  the  technique  of  financial  aid 
and  supervision  has  to  be  on  a  different  scale  and  altogether 
different  in  character.  Their  problems  of  marketing  are 
more  difficult  and  urgent  than  those  of  production. 

The  history  of  such  banks  as  have  been  floated  illustrates 
well  these  various  difficulties.  Of  the  8  industrial  banks 
which  were  traceable  early  in  the  post-war  year  1923,  four 
have  disappeared.  The  small  size  of  one  gave  it  the  much- 
needed  obscurity  in  which  alone  irresponsible  finance  and 
fraud  can  thrive.66  Another  started  well  with  a  substantial 
capital  but  soon  resorted  to  doubtful  practices  with  the 
object  of  collecting  deposits.67  The  interlocking  of  the  Tata 
Industrial  Bank  with  Tata  enterprises  and  the  impatience 
of  the  shareholders  accounted  for  the  disappearance  of  the 
third  and  the  greatest  Indian  enterprise  in  this  line.  The 
birth  of  a  fourth  which  was  'a  small  bank  was  registered 

66.  Industrial  and  Exchange  Bank  of  India,  Bombay:  (1920-24)  Paid-up  capital 
12.3  lakhs.    It  started  branches  at  Karachi,  Surat,  Fazilka,  Kapurthala,  and  Rawal- 
pindi.   When  the  bank  closed  its  doors,  the  debtors  at  Karachi  were  untraceable. 
The  manager  of  the  Surat  branch  was  found  to  have  used  bank's  funds  for  his 
own  purposes.     Of  the  total  debt  of  1  lakh  at  the  head-office,  half  the  amount 
had  been  advanced  to  persons  who  became  insolvents.    One  of  the  directors  who 
had  a  decree  for  Rs.  87,000  against  him  fjed  to  Germany  before  the  first  balance- 
sheet  was  out  and  his  co-signatories  proved  paupers.     The  bank  underwrote  the 
shares  of  the  Solar  Assurance  Co.,  but  they  could  not  be  sold. 

67.  Calcutta  Industrial  Bank,  Calcutta:  (1919-23)  Paid-up  capital  79  lakhs.    Some 
calls  were  not  paid  as  late  as  1921  and  shares  had  to  be  confiscated.     In  1922,  it 
floated  the  Marwari  Commercial  Bank — itself  paying  its  entire  capital  of  75  lakhs: 
Secretary,  directors,  etc.  were  identical.     The  object  was  to  collect  deposits  and 
business  for  both  banks  but  as  none  were  forthcoming,  a  petition  for  winding  up 
was  filed  in  1922. 


190  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

but  its  demise  seems  to  be  lost  in  the  massive  banking 
mortality  of  the  country. 

The  industrial  banks  which  existed  in  1936  and  for  which 
some  information  is  available  suggest  some  important  in- 
ferences.68 Of  these,  only  three  are  really  noticeable.  It 
is  not  perhaps  surprising  that  their  essentially  local  charac- 
ter should  be  reflected  in  their  small  size.  The  five  im- 
portant Banque  D'Affairs  of  France  had  in  1936  merely  a 
quarter  of  the  capital  and  reserves  of  8  big  deposit  banks 
of  the  country  and  their  aggregate  resources  including 
deposits  were  only  a  little  more  than  one-eleventh.  Even  in 
Germany,  in  the  earlier  and  perhaps  more  important  phase  of 
industrial  banking,  a  considerable  part  of  this  business  was 
transacted  by  the  smaller  provincial  banking  institutions. 
But  the  industrial  banks  of  India  could  not  be  compared 
even  with  the  Banque  D'Affairs  of  France.  What  is  more 
surprising  about  Indian  ventures  in  this  field  is  their  in- 
ability to  attract  or  retain  deposits.  The  Banque  D'Affairs 

68.  Loans      Government    Other 

Capital  &  Deposits.  and         and  other      Assets 

Reserves.    Fixed.   Current   Cash   Advances       Secu- 
rities, 

(1936.    Figures  in  LakhsO 
Industrial  Bank  of 

Western   India      20-f9        00.12+        2.74        3.22  25.0  6.53  2.26 

Karachi  Industrial 

Bank  60+1          2.62  ..          .57  355  ..  36.15 

Simla  Banking  & 

Industrial    Co.        5+2        26.0  +        3  3.6  21.2  15.8  4.9 

Luxmi  Industrial 

Bank  1-fl        10.00  ..        0.4  5.5  ..  8.6 

Raikut  Industrial 

Bank  (Jalpaiguri)  3X0          0.1  ..  ..  19  ..  1.6 

Tezpur  Indus.  Bank 

(Tezpur)  0.5+0.7          2.0  -f        1  1.0  3.0  ..  .3 

(Kamani  Industrial  Bank,  March  31st  1937:  in  lakhs) 
Capital  ..  ..60 

Customer's  Accounts     . .          2 
Other  liabilities  10 

Fixed  Assets  ..        00.3 

Investments  . .        28.0 

Bills,  Loans,  etc.  ..        38.0 

Cash  ..  ..        00.5 

No  dividends  were  declared  between  1928  and  1938.    Current  and  fixed  deposits 
were  as  under  (in  lakhs): 

1928  . .        24 


1930 
1931 
1935 
1936 


32 

18 

25 

2 


FOREIGN  TRADE  AND  EXCHANGE  BANKS  191 

in  France  depend  on  borrowed  resources  to  the  extent  of 
two  to  three  times  their  capital  and  reserves.  Except  in 
one  instance,  the  deposit  resources  of  Indian  industrial  banks 
hardly  deserve  notice. 

It  is  clear  that  industrial  banks  as  such  are  not  able  to 
create  the  necessary  confidence  in  themselves.  Indeed, 
the  experience  of  certain  Provincial  Governments  about 
such  long-term  assistance  as  they  gave  under  State  Aid  to 
Industries  Acts  seems  to  give  justification  for  such  lack 
of  confidence.  In  Madras,  in  Bihar  and  Orissa  and  in  the 
Punjab,  the  tale  is  one  of  uniform  losses  of  the  major  part 
of  the  capital  supplied.69  It  is  here  that  a  proper  integration, 
of  the  bigger  commercial  banks  and  small  industrial  banks 
is  likely  to  confer  great  benefit  on  the  country.  On  a  basis 
of  affiliation  with  approved  industrial  banks,  the  bigger 
banks,  while  limiting  their  direct  aid  to  short-term  finance 
only,  could  supply  through  their  branches  the  necessary 
expert  guidance  and  knowledge  in  industrial  banking.  The 
known  co-ordination  of  relations  between  them  will  ensure 
proper  regard  for  banking  practice  and  will  tend  to  create 
the  necessary  basis  for  public  confidence  in  the  smaller 
institutions. 

IV.    FINANCE  OF  FOREIGN  TRADE  AND 
EXCHANGE  BANKS 

Foreign  trade  between  two  countries  is  financed  largely 
by  means  of  bills  of  exchange  drawn  by  the  exporter  on 
the  importer,  with  banks  as  intermediaries  to  purchase  or, 
in  due  course,  to  collect  them.  The  financing  of  the  foreign 
trade  of  India  is  distinguished  by  certain  special  features 
which  we  now  proceed  to  note. 

(1)  The  bulk  of  this  business  is  in  the  hands  of  non- 
Indian  banks,  popularly  known  as  exchange  banks,  of 
which  there  are  now  nineteen.  Two  of  these  are  concerned 
largely  with  tourist  traffic.  Of  the  rest,  five  have  a  consi- 
derable portion  of  their  business  in  India  while  the  other 
twelve  are  only  branches  or  agencies  of  big  banking 
corporations  doing  the  major  portion  of  their  business 

69.    Banking  Inquiry  Committee's  Report,  pp.  306-9. 


1&2  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

outside  India. 

Indian  joint-stock  banks  have  little  share  in  this  business 
unless  the  exchange  bank  concerned  has  no  branch  in  the 
interior  of  the  country  and  the  financing  of  the  export  or 
import  business  has,  for  that  reason,  to  be  split  into  two 
transactions — the  financing  from  or  to  the  Indian  port  to 
or  from  the  upcountry  distributing  or  collecting  centre,  and 
the  financing  from  the  Indian  port  to  foreign  port  or  vice 
Versa.  Indian  exporters  or  importers  naturally  prefer  the 
financing  to  be  arranged  by  a  single  agency  as  being  cheaper, 
but  in  the  absence  of  an  upcountry  branch  of  the  exchange 
bank,  the  first  part  of  the  financing  is  generally  undertaken 
by  the  Imperial  Bank  of  India,  the  Indian  joint-stock  banks 
and  the  indigenous  bankers  in  the  case  of  exports  and  in 
the  case  of  imports,  by  commission  agents,  shroffs  and  Indian 
joint-stock  banks.  Demand  draft  is  the  instrument  usually 
employed  by  Indian  banks  for  this  purpose. 

It  is  difficult  to  estimate  the  actual  share  which  Indians 
hold  in  this  business.  A  part  of  the  import  trade  is  arranged 
with  documents  made  out  in  the  names  of  Indians  instead 
of  exchange  banks  as  a  matter  of  convenience  but  the 
financing  is  really  done  by  non-Indians.  There  is  also  some 
trade  which  is  handled  without  the  intervention  of  exchange 
banks.  Allowing  for  these  two  factors,  the  share  of  Indians 
has  been  placed  by  competent  observers  at  about  15  per 
cent,  and  according  to  the  testimony  of  the  exchange  banks, 
it  is  a  share  which  is  slowly  growing. 

The  loss  to  this- country  from  the  predominance  of  the 
exchange  banks  is  not  confined  to  the  financing  of  foreignv 
trade  as  such.  Other  incidental  losses  have  also  to  be 
reckoned  in.  There  is  reason  to  fear  that  branches  of 
exchange  banks,  opened  though  they  may  be  at  the  request 
of  Indian  clients,  encroach  on  the  financing  of  domestic  trade 
as  well.  The  cheap  deposits  raised  by  exchange  banks  place 
them  in  a  strong  competitive  position  which  is  further 
reinforced  by  the  natural  tendency  on  the  part  of  their 
customers  to  open  and  keep  accounts  with  them.  Besides, 
exchange  banks  have  been  accused  of  compelling  Indians 
to  insure  their  goods  with  foreign  companies  on  the  usual 
grounds  which,  however  plausible  on  their  face,  cannot  but 


FOREIGN  TRADE  AND  EXCHANGE  BANKS  193 

limit  the  growth  of  Indian  enterprise  in  this  field.  With 
their  practical  monopoly  of  this  business,  it  should  not  be 
surprising  if  non-nationals  in  the  export  and  import  business 
of  this  country  are  encouraged  by  them  with  the  offer  of 
better  facilities,  etc. 

(2)  The  Indian  exporter  draws  bills,  usually  of  3  months7 
usance  and  rarely  longer,  against  credits  opened  by  the 
buyer  with  London  banks  and  advised  to  India  through  the 
medium  of  an  exchange  bank.  Our  export  bills  are  as  a 
rule  in  sterling  although  in  the  case  of  Japan  and  China 
they  are  in  terms  of  yen  and  rupees  respectively.  Since 
these  bills  can  be  and  are  usually  discounted  in  London 
with  the  endorsement  of  exchange  banks,  the  negotiating 
^exchange  bank  here  gives  the  foreign  importer  the  benefit 
<of  the  low  interest  rates  of  London.  It  is  very  unusual  for 
,an  exchange  bank  to  hold  these  bills  till  maturity  except 
in  times  of  abundant  funds  or  slack  trade  in  India.  It  is 
also  unusual  for  the  Indian  exporter  to  entrust  his  bills  to 
the  banks  for  collection  since  it  means  waiting  for  funds 
till  they  fall  due. 

In  the  case  of  our  imports,  things  work  out  differently. 
A  small  part  of  our  import  trade  is  financed  by  London 
banks'  acceptance  of  "house"  paper.  This  means  that  bills 
•of  a  foreign  exporter  who  has  got  the  requisite  standing  to 
draw  on  a  bank  in  London,  are  accepted  by  it  and  returned 
to  the  exporter  to  be  discounted  in  the  London  money- 
market.  The  importing  agency  here  which  is  usually  a 
branch  of  the  London  exporting  firm  thus  obtains  the 
advantage  of  lower  London  rates.  Since,  as  we  shall  see 
presently,  the  Indian  rival  of  the  importing  agency  is  denied 
the  same  advantage,  the  procedure  places  him  at  a  dis- 
.advantage  in  his  competition  with  the  British  or  foreign 
rival. 

The  bulk  of  our  import  trade  from  Western  countries  is 
financed  by  60  days'  bills  drawn  on  the  Indian  importers.70 


70.    Cf.     "These  Indian  Import  bills are  usually  drawn  in  India  at  three 

months'  sight;  there  is  also  a  fair  proportion  of  four  months'  paper  drawn,  but 
not  many  six  months'  bills  are  taken."    Eastern  Exchange  Currency  and  Finance 
by  Spalding  (3rd  Edition.  Pittman  and  Sons,  1920);  also  Banking  Inquiry  Com- 
mittee Report,  p.  315  Para.  429a. 
M.  B.   13 


194  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

The  London  banks  which  buy  or  advance  funds  on  them 
in  London,  send  them  for  collection  to  India.  Although  the 
bills  are  drawn  in  sterling  and  although  they  are  held  till 
maturity,  the  benefit  of  lower  London  rates  is  not  given  to 
the  Indian  importer.  These  bills  have  an  interest  clause 
under  which  the  importer  here  is  made  to  pay  interest  at 
a  stated  rate,  usually  6  per  cent,  from  the  date  of  the  bills 
to  the  approximate  or  estimated  date  of  arrival  of  return 
remittance  in  London.  The  local  drawee  has  to  find  local 
currency  to  cover  not  merely  the  sterling  face  amount  of 
the  bill  but  something  more  to  purchase  the  additional 
amount  of  sterling  required  to  cover  the  interest.  The 
drawer  abroad  eventually  receives  the  face  amount  of  the 
bill  plus  interest  at  the  agreed  rate.71  The  rate  is  raised 
when  the  Bank  of  England  rate  rises  above  5  per  cent.72 

From  the  standpoint  of  the  banker,  the  substance  of  these 
two  operations  may  be  put  in  this  way.  The  discounting  of 
the  Indian  exporters'  bills  in  London  releases  funds  imme- 
diately for  transfer  to  India.  He  prefers  to  hold  the  British 
exporters'  bills  till  maturity,  i.e.  lock  up  his  funds  in  India 
because  they  earn  for  the  whole  or  the  unexpired  portion 
of  the  maturity  a  rate  of  interest  higher  than  what  any 
money  market  in  the  West  can  offer. 

This  difference  in  practices  relating  to  export  and  import 
bills  calls  for  some  explanation.  It  is  logical  that  bills 
on  India  which  may  have  to  be  discounted  in  India  should 
bear  the  higher  interest-rates  of  this  country.  But  as  a 
matter  of  fact,  these  bills  are  held  till  maturity  and  sent 
to  India  only  for  collection.  If  instead  of  negotiating  these 
bills,  the  London  banks  only  accept  them  as  in  the  case 
of  "house-paper",  cheaper  London  funds  could  be  made 

71.  Cf.    "Interest  is  usually  collected  from  the  Indian  acceptor  for  the  estimated 
period  the  bank  in  London  is  out  its  money,  and,  if  the  bill  is  paid  before  matu- 
rity, interest  is  adjusted  accordingly It  is  difficult  to  say  why  some  Indian 

acceptors  willingly  acquiesce  in  the  interest  charged  in  the  interest  bills,  while 
others  refuse  to  pay  it.     The  reason  according  to  some  bankers,  is  to  be  found 

in  the  rules  of  the  different  castes the  drawer  on  this  side  is  not  the  loser, 

and  where  he  pays  the  interest  himself  he  doubtless  recoups  himself  in  the  price 
he  charges  for  the  goods,  so  it  comes    to    the  same  thing  in  the  end." — Eastern 
Exchange  Curency  and  Finance,  by  Spalding,  p.  84. 

72.  In  1929,  it  was  7  per  cent  for  the  greater  part  of  the  year  and  7£  per  cent 
from  the  middle  of  October  to  the  end  of  November.     The  Bank  of  England 
rate  was  6  1/3  per  cent— Central  Banking  Inquiry  Report.    1931.    P.  317. 


FOREIGN  TRADE  AND  EXCHANGE  BANKS  195 

available  for  the  benefit  of  the  Indian  importer.73 

Since  the  bills  are  in  sterling,  the  question  arises  how 
the  sterling  amount  is  to  be  converted  into  the  local 
currency  for  payment  by  the  local  drawee.  This  is  done 
by  an  exchange  clause  which  is  a  special  feature  of 
import  trade  with  South  America,  India,  etc.  The  exchange 
clause  is  a  phrase  included  in  the  bill  to  direct  the  method 
by  which  return  remittance  is  secured  in  sterling.  Its 
object  is  to  throw  the  risk  of  any  loss  of  exchange  from 
the  drawer  to  the  drawee.  Some  bills  are  drawn  with  the 
clause:  "payable  at  the  particular  Exchange  Bank's  drawing 
rate  for  demand  bills  on  London."  Others  contain  the 
clause:  "payable  at  the  particular  Exchange  Bank's  rate  for 
demand  bills  or  telegraphic  transfers  on  London."  If  no 
rate  has  been  arranged  with  the  bank,  the  rate  is  that  fixed 
by  the  exchange  banks  in  India  from  day  to  day.  Of  course, 
the  Indian  importer  can  take  steps  to  protect  himself  against 
exchange  fluctuations  by  buying  pounds  forward  to  the 
required  extent.  This  means  an  additional  operation  for 
which  he  will  have  to  bear  the  costs. 

(3)  Bills  drawn  on  foreigners  by  Indian  exporters  are 
usually  D/A  bills.  In  other  words,  when  a  bill  is  accepted 
by  the  foreign  importer,  of  course  through  the  medium 
of  banking  houses  as  explained  above,  the  documents 
accompanying  the  bill  are  handed  over  to  him  and  he  is 
able  to  obtain  immediate  possession  of  the  goods.  The 

73.    The  difference  between  an  "interest  bill"  and  a  banker's  acceptance  depends 
on  the  level  of  interest  rates  in  London.     Take  for  example  a  bill  on  India  at 
3  months'  sight— the  mailing  time  being  15  days  each  way. 
(i)     Cost   of  interest   bill. 

£     s.   d- 

Interest  for  120  days  at  6%  on  500    . .  . .  9    17      3 

Indian  Stamp  duty  ..  ,.  ..  050 


Total           ..  10      2      3 

(ii)    Cost  under  acceptance  credit 

Acceptance  commission  at  1J%  per  annum     . .  2    10      0 

Discount  for  120  days  at  say,  2%     . .                 ..  368 

Stamp  duty        ,,                ,»                ..                ..  050 


Total 


If  the  discount  rate  in  London  is  5  per  cent,  the  latter  cost  would  be  £11-1-8, 
i.e.  acceptance  credit  would  be  more  costly. 


196  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

payment  may  be  postponed  till  the  bill  matures. 

Bills  drawn  by  foreigners  on  the  Indian  purchasers  are 
usually  on  D/P  terms  without  letters  of  credit.  Techni- 
cally, the  Indian  importer  is  not  entitled  to  obtain 
possession  of  goods  except  on  payment.  The  difficulty  has 
been  met  by  requiring  the  importer  to  execute  a  Trust 
Receipt  by  which  he  agrees  to  hold  goods  or  their  sale 
proceeds  in  trust  for  the  banker  until  payment  is  com- 
pleted.74 The  advantage  from  the  banker's  standpoint  is 
that  in  case  of  failure  to  pay,  a  criminal  liability  is  added 
to  the  civil  liability  enforceable  on  the  bill.  A  recent 
decision  of  the  Madras  High  Court  seems,  however,  to 
throw  doubt  on  this  remedy  since  a  bank  is  apparently 
required  to  prove  actual  loss  to  the  bank  or  likelihood  of  loss 
arising  from  the  fraud  of  the  executants.75 

That  the  foreigner  should  receive  entitling  documents 
on  mere  acceptance  while  the  Indian  should  be  required 
to  execute  an  additional  safeguard  like  a  trust  receipt  and 
incur  the  additional  cost  of  it  is  certainly  an  invidious  dis- 
crimination. The  exchange  banks  defend  the  practice  on 
the  ground  that  the  Indian  importer  is  usually  a  man  of 
limited  means  whose  credit  would  not  justify  the  other 
practice.76  Exchange  Banks  themselves,  it  must  be  record- 
ed, are  not  uninterested  in  the  continuance  of  the  discri- 
mination since  loans  against  trust-receipts  fetch  a  higher 
rate  of  interest  than  loans  against  bills.77 

It  is  more  than  probable  that  the  issue  turns  mainly  on 
the  kind  of  bank  references  given  about  Indian  businessmen. 
There  has  always  been  a  feeling  that  these  are  not  as  satis- 

74.  Cf.    " from  the  standpoint  of  British  Banking  we  have  no  hesitation 

in  saying  that  trust  receipt  facilities  are  open  to  grave  objection The  trust 

receipt  system is  said  to  have  been  evolved  in  the  United  States   ('where 

the  law  recognised  to  a  far  greater  extent  than  elsewhere  the  bank's  property 
in  the  goods  after  they  are  given  up  to  the  acceptor  of  a  bill')   but  something 
akin  to  it  is  seen  in  the  cotton  and  woollen  manufacturing  districts  of  England, 
where  it   is  no  uncommon  thing  for  the  raw  material  to  be  delivered  on  the 
signature  of  a  trust  document  before  the  bills  of  exchange  are  paid."     Foreign 
Exchange  and  Foreign  Bills,  by  Spalding,  (3rd  edition,  Pittman),  pp.  181,  183  and 
185;  also  Banking  Inquiry  Committee's  Report,  para  565. 

75.  The  case  showed  that  in  practice  banks  did  not  insist  on  scrupulous  fulfilment 
of  all  clauses  of  Trust  Receipts  and  this  tends  to  throw  doubts  on  the  validity 
of  the  instruments.    Banking  Frauds  in  India,  by  V.  R.  Sonalker,  pp.  93-96. 

76.  Banking  Inquiry  Committee  Report,  p.   323. 

77.  ibid,  p.  323. 


FOREIGN  TRADE  AND  EXCHANGE  BANKS  197 

factory  as  they  should  be.  Otherwise,  D/A  bills  should  find 
no  difficulty  in  passing  current  in  our  import  trade  just  as 
in  our  export  trade.  Lack  of  personal  and  social  contact 
between  the  European  officers  of  exchange  banks  and  Indian 
businessmen  is  only  a  part  of  the  difficulty.  The  belief  of 
Indian  businessmen  in  the  virtue  of  secrecy  in  business,  their 
unwillingness  to  have  their  balance-sheets  prepared  and 
audited  by  qualified  accountants  are  further  aggravating 
factors.  Even  so,  the  fact  that  in  opening  a  confirmed  credit 
with  an  exchange  bank,  the  best  Indian  importing  firms  in 
Calcutta  are  required  to  deposit  10  to  15  per  cent  of  the  value 
of  goods  ordered  while  the  rival  European  Houses  are 
exempted  from  such  requirements  is  a  clear  proof  that  mere 
racial  prejudice  plays  not  a  little  part  in  the  situation.  It  is 
no  satisfactory  reply  to  say  that  nine-tenths  of  the  imports 
business  is  done  without  such  credit  and  that  the  complaint 
relates  to  only  a  small  part  of  the  business.  The  principle 
involved  remains  unaffected.78 

19.    Foreign  Banks  Generally79 

The  existence  of  foreign  banks  in  this  country  may  be 
approached    from    three    different    angles.    Firstly,   it  is 

78.  Several  other  small  complaints  were  placed  before  the  Banking  Inquiry 
Committee.  It  was  said  that  alterations  were  made  in  the  rules  of  business  and 
were  not  promptly  communicated  to  the  clients.  (P.  324).  Till  recently,  penalties 
for  the  late  completion  of  exchange  contract  were  different  in  Bombay  and 
Calcutta.  (P.  325).  Foreigners'  drafts  on  Indian  importers  held  by  exchange 
banks  are  not  allowed  to  be  paid  by  means  of  (a)  importers'  cheques  on  their 
London  agents  although  funds  are  known  to  be  available  there,  or  by  (b)  T.  T.  of 
other  exchange  banks  on  London,  or  by  (c)  demand  drafts  of  other  exchange 
banks.  The  ground  for  declining  is  of  course  that  it  will  give  no  profit  to  the 
collecting  bank.  (P.  325).  Unlike  British  importing  firms,  Indian  importers 
are  notified  the  arrival  of  documents  and  asked  to  go  in  person  to  the  exchange 
banks  to  complete  the  formalities  on  the  ground  that  no  special  clerks  attend 
to  this  business  in  an  Indian  firm  and  that  the  clients  are  not  available  after 
even  five  or  six  visits  by  the  representatives  of  the  exchange  banks.  (P.  327) 
79. 

Exchange  Banks  (Indian  Resources,  in  lakhs). 

Demand 

Deposits.  Demand  Deposits       Cash  percentage 

Deposits.      percentage  of         of  deposits. 

total  Deposits. 

1939  7,418  4,824  65  9.2 

1340  8,528  6,161  72  20.1 

1941  10,550  8,048  76          12.6 

1942  11,685  9,748  84          10.2 

1943  13,627          11,586          87          8.9 


198  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

necessary  to  consider  whether  foreign  banks  should  enjoy 
a  footing  of  equality  or  whether  Indian  interests  require 
any  special  conditions  or  restrictions  to  be  imposed  on 
them.  Secondly,  it  should  be  ascertained  whether  there 
exists,  as  claimed  by  foreign  banks,  a  division  of  functions 
between  them  and  the  Indian  banks  and  how  far  any  such 
separation  of  sphere  can  be  enforced  by  legal  or  adminis- 
trative means.  Finally,  we  must  explore  how  far  Indian 
participation  in  the  financing  of  foreign  trade  is  hampered 
by  the  existence  of  these  banks  and  what  means  could  be 
adopted  to  give  them  a  reasonable  chance  of  holding  their 
own  against  the  competition  of  these  foreign  rivals. 

20.    Status  of  Foreign  Banks 

As  banks  not  incorporated  in  this  country,  exchange 
banks  are  nbt  subject  to  the  requirements  of  the  Indian 
Company  Law.  Any  grievance  on  this  ground,  however, 
cannot  be  more  than  formal  since  the  conditions  prescribed 
by  our  Law  are  not  in  any  way  onerous.  Exchange  banks 
should  not  find  it  difficult  to  submit  like  other  banks 
annual  statements  of  their  assets  and  liabilities.  The  only 
special  feature  which  should  be  insisted  on  in.  their  case 
is  that  they  should  make  separate  returns  in  regard  to  their 
Indian  and  non-Indian  business.  This  separation  is  neces- 
sary to  enable  an  easy  ascertainment  of  the  position  of 
Indian  interests  in  the  aggregate  interests  of  the  banks. 

It  has  been  sometimes  suggested  that  in  case  of  failure 
of  any  exchange  bank,  the  interests  of  Indian  depositors 
and  creditors  stand  in  need  of  some  protection.  Recent 
difficulties  in  the  location  and  distribution  of  assets  between 
creditors  in  British  India  and  in  Native  States  give  some 
relevance  to  the  argument.  It  has  to  be  observed,  however, 
that  the  contingency  contemplated  is  a  very  remote  and 
almost  theoretical  one.  Short  of  a  great  war  or  political 
upheaval,  no  ordinary  causes  are  likely  to  overthrow  these 
institutions. 

It  is  difficult  to  suggest  other  restrictions  which  may  not 
in  the  end  recoil  on  Indian  banks  themselves.  Indian 
banking  must  sooner  or  later  extend  its  activity  into  foreign 
countries.  Anything  which  .should  provoke  retaliation 


FOREIGN  TRADE  AND  EXCHANGE  BANKS  199 

against  them  must  make  such  progress  difficult.  If  any 
restrictive  measures  are  adopted  here,  the  only  objective 
should  be  to  secure  reciprocity  for  our  banks  abroad.  An 
•example  justifying  such  reciprocal  restrictions  is  the 
insistence  of  the  Bank  of  England  on  two  British  signatures, 
one  of  which  must  be  that  of  the  acceptor,  as  a  condition 
precedent  for  re-discount. 

At  present,  foreign  banks  have  for  their  avowed  object 
the  financing  of  foreign  trade.  They  claim  that  their 
branches  in  the  interior  of  the  country  have  been  created 
only  at  the  request  of  their  Indian  clients  and  only  insofar 
as  they  subserve  their  main  business.  This  argument 
regarding  the  demarcation  of  their  special  sphere  has  been 
somewhat  weakened  as  one  Indian  bank  at  least  has  been 
now  acquired  by  an  exchange  bank. 

Indian  banks  have  serious  complaints  to  make  of  their 
competition  in  the  sphere  of  domestic  trade.  They  have 
cause  to  fear  such  competition.  Their  enormous  goodwill 
and  prestige,  their  great  hold  on  those  customers  who  have 
large  interests  in  the  foreign  trade  of  the  country,  their 
vast  capital  and  reserves  enable  exchange  banks  to  raise 
deposits  here  at  very  cheap  rates.  It  is  felt  as  a  grievance 
by  Indian  banks  that  Indian  funds  should  be  used  against 
themselves  for  the  encouragement  of  foreign  firms  and 
traders.80  It  may  be  noted,  however,  that  the  deposits  of 
exchange  banks  have  shown  in  recent  years  no  improvement 
relatively  to  other  banks  in  the  country.  Perhaps,  a  system 
of  licensing  of  new  branches  under  the  auspices  of  the 
Reserve  Bank  of  India  should  be  a  sufficient  assurance 
against  further  encroachment  by  exchange  banks  on 
domestic  business.  The  value  of  any  protection  of  this  kind 
must  not  however  be  exaggerated. 

In  lieu  of  or  in  addition  to  licensing  of  branches,  it  has 
been  sometimes  suggested  that  restrictions  should  be  placed 
on  the  aggregate  volume  of  Indian  deposits  which  exchange 
banks  may  raise  and  use.  These  suggestions  are  sometimes 
inspired  by  the  belief  that  Indian  funds  are  used  to  supple- 
ment the  resources  of  these  banks  for  their  business  abroad. 
There  is  little  evidence  to  substantiate  this  belief.  On  the 

$0.    Banking  Inquiry  Committee  Report,  pp.  335-6. 


200  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

contrary,  it  is  probable  that  funds  from  abroad  flow  into 
this  country,  although  not  in  sufficient  volume  to  prevent 
high  seasonal  fluctuations  in  the  rates.  If  restrictions  are 
placed  on  the  deposits  of  exchange  banks,  they  must 
inevitably  ensue  in  raising  still  further  the  cost  of  finance 
which  must  ultimately  fall  on  the  Indian  trader.  The 
deposits  which  are  declined  by  exchange  banks  will  no 
doubt  flow  in  the  first  instance  into  Indian  banks  but  when 
the  exchange  banks  suffer  from  shortage  of  funds,  the  same 
deposits  will  find  their  way  back  to  them — at  higher  rates 
and  to  the  inconvenience  of  Indian  trade.81 

It  is  the  natural  aspiration  of  Indian  enterprise  to  increase 
its  share  in  the  financing  of  foreign  trade.  With  this  object 
in  view,  several  proposals  have  been  put  forward. 

The  most  direct  way  to  increase  our  participation  in  this 
business  would  be  to  acquire  a  share  in  the  control  and 
profits  of  the  exchange  banks  themselves.  It  is  thought 
that  if  exchange  banks  were  compelled  to  register  them- 
selves with  rupee  capital,  such  acquisition  of  shares  by 
Indians  and  their  representation  on  Boards  of  Directors 
would  be  facilitated  and  quickened.  Such  changes  may 
have,  it  is  to  be  feared,  undesirable  consequences  in  other 
directions.  The  separation  of  Indian  interests  from  their 
foreign  interests  might  seriously  curtail  the  size  and  pre- 
stige of  exchange  banks  and  destroy  their  access  to  the 
London  market  which  is  as  we  have  seen  an  essential  con- 
dition of  efficiency  and  success  in  this  field.  Informal  asso- 
ciation of  Indians  in  the  Indian  side  of  their  business  may 
be  a  preferable  first  step  which  in  the  course  of  time  should 
pave  the  way  for  a  more  organic  co-operation  between 
Europeans  and  Indians. 

There  is  another  line  along  which  progress  could  be 
hastened  with  benefit  to  both  the  parties.  It  is  well  known 
that  exchange  banks  have  as  a  rule  refrained  from  employ- 
ment of  Indians  in  the  higher  and  responsible  posts. 
Cashiership  is  the  highest  position  to  which  Indians  may 
aspire  in  the  present  circumstances.  The  fact  that  their 
employees  in  the  higher  grades  are  recruited  with  a  view 
to  employment  all  over  the  world  need  not  work  as  a  bar 

81.    Banking  Inquiry  Committee  Report,  pp,  335-6;  338;  340. 


FOREIGN  TRADE  AND  EXCHANGE  BANKS  201 

to   the   employment   of  Indians  in  something  better  than 
clerical  posts. 

It  should  cause  little  surprise  if  Indian  banks  have  failed 
or  encountered  difficulties  in  developing  this  side  of  busi- 
ness. It  has  sometimes  been  argued  that  funds  of  Indian 
banks  already  find  ample  employment  in  internal  finance 
and  at  rates  much  more  lucrative  than  what  the  business  of 
foreign  exchange  carried  on  in  the  most  highly  developed 
money  markets  of  the  world  can  offer.  As  a  matter  of  fact, 
the  only  bank  of  whom  this  statement  may  be  said  to  hold 
true  is  the  Imperial  Bank  of  India  particularly  as  it  existed 
before  1935.  But  as  applied  to  other  banks,  this  argument 
seems  rather  overdone.  They  have  a  steady  business  but 
in  the  absence  of  sufficient  liquid  assets,  they  have  to  hold 
too  large  a  proportion  of  their  funds  in  Government  secu- 
rities. Since  financing  of  foreign  trade  involves  dealings 
in  drafts  or  bills  of  three  months'  maturity  at  the  most,  a 
movement  of  some  of  the  Indian  banks  into  this  business 
should  mark  an  improvement  on  existing  conditions.  There 
are,  however,  other  difficulties  to  be  taken  into  account. 
Sale  and  purchase  of  foreign  trade  bills  imply  constant 
accumulation  and  transfer  of  funds  between  domestic  and 
foreign  centres — in  both  of  which,  therefore,  banks  must 
have  branches  to  manage  and  employ  them.  But  foreign 
branches  mean  political  and  currency  difficulties  which  are 
surmounted  partly  by  inviting  and  making  use  of  foreign 
deposits  at  the  other  end.  The  acquisition  of  foreign  deposits 
is  a  task  made  difficult  by  the  prestige,  power  and  size  of 
the  established  rivals.  German  banks  confronted  with  the 
same  difficulties  late  in  the  19th  century  devised  various 
friendly  arrangements  with  local  indigenous  banks  and,  to 
obtain  full  employment  and  adequate  profits  for  their  funds, 
added  advances,  issue  and  promotion  business  to  their 
purely  exchange  work.  They  attracted  custom  by  offering 
longer  term  credit  and  being  in  other  ways  more  accom- 
modating. Even  then  the  cheap  funds  of  the  London  money 
market  more  than  offset  British  stamp  duties,  British 
brokerage  and  .profits  and  the  cost  of  an  extra  exchange 
operation  !  The  task  before  Indian  banks  is  today  much 
more  formidable.  Its  successful  performance  could  be 


202  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

undertaken  only  with  the  co-operation  of  all  Indian  banks 
under  the  leadership  of  some  one  bank  like  the  Imperial 
Bank  of  India  or  the  Bank  of  India.  Both  these  banks  have 
large  resources  and  satisfy  the  condition  of  a  high  degree 
of  liquidity.  If  a  scheme  of  co-operation  were  worked  out, 
either  of  them  could  act  abroad  as  the  agent  for  all  Indian 
banks  undertaking  this  exchange  business. 

Lack  of  trained  abilities  to  deal  with  the  difficult  and 
highly  technical  work  of  foreign  exchange  need  not  be  an 
insuperable  difficulty.  As  the  Governor  of  the  Imperial 
Bank  of  India  testified  before  the  Banking  Enquiry  Com- 
mittee, the  creation  of  the  requisite  staff  should  not  involve 
much  delay.  The  risks  of  foreign  exchange  business  have 
been  felt  as  another  obstacle  in  the  way  of  this  develop- 
ment. But  except  in  times  of  upheaval,  the  ordinary  pre- 
caution of  obtaining  cover  both  ways  should  be  sufficient  to 
protect  banks  from  exchange  losses. 

On  account  of  its  large  capital  and  deposit  resources  and 
its  established  status  in  London,  the  Imperial  Bank  of  India 
has  been  thought  of  as  the  best  agency  available  for  the 
purpose.  It  is  a  moot  point  whether  its  exclusion  from 
foreign  exchange  business  till  1935  was  devised  in  the  in- 
terests of  public  funds  which  it  held  or  in  the  interests  of 
exchange  banks  whose  balances  it  used  to  hold.  It  has  been 
suggested  as  a  counterblast  to  Indian  suspicions  on  this 
point  that  their  anxiety  to  saddle  the  Imperial  Bank  with 
exchange  business  is  inspired  by  a  desire  to  relieve  them- 
selves of  its  competition  with  them  in  the  finance  of  domestic 
trade.  Whatever  the  truth  in  these  charges  and  counter- 
charges, its  conversion  into  an  exchange  bank  must  be  con- 
sidered in  relation  to  all  the  banking  needs  of  this  country. 

When  the  decision  is  taken  to  convert  it  into  an  exchange 
bank,  its  Indian  character  and  personnel  will  have  to  be 
assured  first.  The  Banking  Enquiry  Committee  suggest  a 
statutory  provision  of  three-fourths  Indians  on  Local  Boards, 
a  majority  of  Indians  on  Central  Board  and  complete  stop- 
page of  recruitment  of  non-Indian  staff.  As  an  inducement 
to  the  Imperial  Bank  to  agree  to  these  conditions,  the  Bank 
might  be  made  the  offer  of  appointing  it  as  agent  for  the 
Reserve  Bank  in  all  places  where  the  latter  has  not  got  its 


FINANCE  OF  AGRICULTURE  203 

branches.  The  privilege  confers  a  substantial  advantage  in 
that  it  means  great  prestige  and  enables  the  Bank  to  attract 
deposits  on  relatively  cheap  terms. 

As  an  alternative  to  this  scheme,  the  Indian  Banking 
Enquiry  Committee  proposes  the  creation  of  a  bank  on  the 
initiative  of  Government.  A  large  capital  of  3  crores  is 
suggested,  to  be  offered  in  the  first  instance  to  Indian  banks 
for  subscription.  The  participation  of  Indian  banks  in  the 
scheme  is  an  assurance  that  the  branches  of  the  new  bank 
in  the  interior  of  the  country  will  not  encroach  on  their 
present  business  and  deprive  them  of  their  profits.  To  give 
prestige  to  the  new  institution  in  the  public  eyes,  it  may 
be  entrusted  with  the  management  of  the  remittance  busi- 
ness of  the  Government  under  the  supervision  of  the 
Reserve  Bank  of  India.  The  guidance  and  direction  of  the 
Reserve  Bank  are  necessary  since  the  remittance  business 
involves  considerations  of  currency  policies  from  time  to 
time.  The  Bank  should  not  be  allowed  to  make  profit  on 
this  business  since  any  competition  with  the  existing  ex- 
change banks  with  the  aid  of  Government  funds  might 
provoke  them  to  combined  retaliation.  The  Government 
might  exercise  the  right  to  appoint  a  majority  of  directors 
if  it  has  to  subscribe  more  than  50  per  cent  of  its  capital.82 

In  the  meanwhile,  Indian  banks  which  are  in  a  position 
to  do  so  should  establish  their  agencies  in  great  financial 
centres  like  London.  As  suggested  above,  co-operation 
among  them  promises  the  best  chance  of  meeting  success- 
fully all  difficulties  which  lie  in  their  way. 

V.    FINANCE  OF  AGRICULTURE™ 

In  spite  of  remarkable  industrial  progress  in  recent  years, 
agriculture  still  continues  to  contribute  almost  the  whole 
of  our  annual  wealth.84  The  requirements  of  agriculture, 
therefore,  overshadow  all  other  requirements  and  determine 
directly  or  indirectly  credit  conditions  in  the  country  as  a 

82.  Banking  Inquiry  Committee  Report,  pp.  349;  361;  509. 

83.  See  also  Chapter  XI. 

•84.    Percentage  of  Population  in  Non-agricultural  Industries: 

1901  ..  23  1921  ..  18 

1911  ..  19  1931  ..  17 


204  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

whole.  It  is  not  possible  to  estimate  within  reasonable 
margin  of  error  the  total  volume  of  requirements  from 
season  to  season.  Some  clue  is  afforded  by  the  fact  that  the1 
Banking  Enquiry  Committee  placed  total  agricultural 
indebtedness  before  the  crisis  of  1929  at  900  crores — a  colos- 
sal figure  which  must  have  increased  still  further  in  post- 
crisis  years.  If  the  indebtedness  before  World  War  II  is 
placed  at  1,200  crores,  it  should  mean  a  burden  of  more 
than  Rs.  50  per  cultivated  acre  in  the  country,  It  is  doubt- 
ful whether  the  gross  value  of  the  produce  raised  per  acre 
per  annum  was  more  than  three-fourths  of  this  burden. 

The  extent  of  credit  facilities  available  to  any  class  and 
the  price  to  be  paid  for  them  are  largely  determined  by  the 
following  factors — the  size  and  probable  duration  of  the 
loans,  their  avowed  purpose  and  actual  use,  the  security 
offered  or  presumed,  the  degree  of  continuous  access  to 
information  about  the  progress  of  each  enterprise,  etc.85 
For  reasons  which  need  no  elaboration  here  the  Indian 
agriculturist  falls  grievously  short  of  ideal  conditions  on 
every  one  of  these  several  heads.  In  these  circumstances,, 
the  modern  bank,  competent  to  deal  with  clients  who  reach 
some  standard  of  literacy  and  business  habits,  has  neces- 
sarily to  retreat  before  the  money-lender  and  indigenous 
banker. 

An  effort  was  made  to  remedy  these  defects  by  substi- 
tuting through  co-operative  credit  societies  group  respon- 
sibility born  of  residential  and  social  ties  for  individual 
responsibility.  Apart  from  lowering  somewhat  rural  in- 
terest rates,  the  effort  has  not  achieved  much.  At  the  very 
best,  co-operative  credit  societies  have  not  attracted  more 
than  10  per  cent  of  the  agriculture  families  in  any  province 


85. 

Population  sup-  Net  Acreage        Acreage  per        Acreage  per 

ported  by  Agri-  cultivated,     head  of  popula-      tenants  or 

culture.  tion  supported          Owner 

by  Agriculture.         Cultivator. 

(Crores)  Crores    of    acres 

1901                                15.5  199                           1.28 

1911                                 17.3  21.5                            1.24 

1921                                 18.3  21.2                            1.15 

1931                                19.0  22.8                           1.20                           41 


FINANCE  OF  AGRICULTURE  205 

while  in  some,  the  proportion  is  as  low  as  2  to  3  per  cent.86 

Their  relative  lack  of  success  is  to  be  ascribed  to  two  main 

omissions.    Co-operation  attacked  the  problem  at  one  point 

•only,  namely,  the  cost  of  short-term  finance  or  working 

capital,  ignoring  the  equally  important  aspects  of  technique 

and  efficiency  of  production  and  the  technique  and  efficiency 

»bf  marketing.    Moreover,  there  was  a  tendency  to  overlook 

the  simple  fact  that  the  knowledge  and  character  of  a  small 

social  unit  are  rarely    much    above    the    knowledge    and 

character  of  the  individuals  composing  it,  while  the  needs 

of  mass  action  particularly  in  the  peculiar  social  structure 

of  India  are  apt  to  bring  to  the  surface  evil  proclivities  from 

which  the  individual  acting  for  himself  is  happily  free.    In 

the  result,  co-operation  has  been  moving  along  a  trail  of 

bad  management,  factional  or  communal  policies,  collusion, 

accumulated  overdues,  etc.8*7 

It  is  clear  that  in  the  present  state  of  our  agriculture, 
there  cannot  be  a  direct  contact  between  commercial  banks 
and  the  individual  cultivator.  Some  intermediaries  like 
central  co-operative  banks  and  co-operative  societies  are 
quite  unavoidable.  Efforts  must  be  largely  concentrated 
on  the  one  hand  on  reducing  the  number  and  cost  of  such 
mediate  links  and  on  the  other  hand  on  making  the  primary 
society  an  effective  instrument  for  converting  agriculture 
into  a  solvent  and  profitable  business  and  the  agriculturist 
into  a  keen  and  dependable  businessman.  It  is  obvious  that 
the  latter  task  is  both  more  vital  and  difficult. 

Most  of  the  proposals  made  with  the  latter  objective  in 
view  suffer  from  one  grave  drawback.  They  tend  to  look 
on  the  ryot  as  a  perpetual  infant  who  has  to  be  put  under 
the  guardianship  of  a  multi-purpose  society  which  leaves 
him  no  discretion  on  any  side  of  his  economic  life.  Some  of 
these  proposals  seek  to  save  him  from  the  temptation  of 

86. 

1937-38  1945-46 

No.  of  Societies  in  India                 ..                ..                76,000  1,47,247 

No.    of   Members              . .                 . .                 . .            22,00,000  56,42,671 

Members  as  percentage  of  agricultural  population  5% 

Working  Capital                                                 Crores           27  33 

Share  Capital  and  Reserve  (British  India)          „                 8  11 

87.    See  Table  4  Bulletin  No.  3,  Reserve  Bank  of  India      (Agricultural     Credit 
Department). 


206  STRUCTURE  OF  ASSETS  AND  LIABILITIES 

cash  which  is  not  to  be  allowed  to  fall  into  his  hands.  Others 
aim  at  taking  into  custody  his  annual  produce  and  allowing 
only  net  profits  to  reach  his  hands.  Others  go  so  far  as  to 
eliminate  cash  altogether  and  arrange  all  settlements  to  take 
place  in  kind.  While  many  of  their  incidental  proposals 
deserve  adoption  as  interim  or  transitional  palliatives,  it 
would  be  a  grave  error  to  permit  education  and  mental 
upliftment  of  the  ryot  to  fall  into  the  background  in  pre- 
ference for  such  illusory  shortcuts.88 

Despite  the  keen  competition  of  co-operative  societies  and 
despite  the  heavy  losses  and  difficulties  of  the  last  depres- 
sion, the  money-lender  and  the  indigenous  banker  still  con- 
tinue to  be  the  backbone  of  our  rural  finance.89  Recent 
country-wide  legislation  on  money-lending  and  old  indebted- 
ness may  lead,  more  by  the  implied  threat  than  any  actual 
enforcement,  to  an  improvement  in  their  practices  and 
methods  of  business.  But  it  is  hardly  conceivable  that  their 
partnership  in  agriculture  itself  will  diminish  in  importance. 
It  deserves  to  be  considered  very  carefully  how  far  these 
ancient  agencies  could  be  made  into  serviceable  links 
between  agriculture  and  commercial  banks. 

Not  all  money  lenders  and  indigenous  bankers  will  be 
found  useful  for  this  purpose.  For  obvious  reasons,  those 
who  are  principally  agriculturists,  merchants  or  traders 
will  have  to  be  excluded  from  such  schemes.  Of  the  others, 
only  such  could  be  deemed  eligible  as  agree  to  follow  strict 
banking  practices,  to  maintain  their  accounts  in  certain 
prescribed  forms  and  exhibit  their  financial  position  from 
time  to  time  as  required.  It  would  be  also  necessary  to 
devise  a  special  form  of  bill  or  pro-note  against  which 
commercial  banks  and,  in  case  of  need,  the  Reserve  Bank 


88.    Bulletins  No.   1,   2,  3  and  5,   Reserve  Bank  of  India      (Agriculture  Credit 

Department.) 

89. 

Number  of  Money-Lenders,   193X 
Bengal      ..  .  25,000 


Bombay 

C.    P. 

B.   and   O. 

Delhi 

A  j  mer-  Mer  wara 

N.  W.  F.  P. 


20,000 

43,000  Bank-managers,    Money- 

100,000  lenders  and  their  employees. 

100  All-India— 329,   500. 
17 

657  Paying  Income-tax  in  1938-9. 


FINANCE  OF  AGRICULTURE  207 

might  advance  funds.  Perhaps,  the  village  as  a  whole  or 
those  of  the  village  community  who  are  agreeable  to  main- 
tain exclusive  relations  with  these  authorised  agencies 
might  be  made  joint  and  several  parties  to  the  document. 
Since  commercial  banks  are  expected  to  advance  funds  in 
the  first  instance,  they  must  be  invited  to  share  in  the 
selection  of  the  agencies,  along  with  the  Reserve  Bank.  If 
the  scheme  succeeds,  money  lending  could  be  made  at  a 
later  stage  a  profession  on  licensed  basis. 

Since  close  contact  with  rural  financial  agency  and  rural 
borrowers  is  the  only  safe  basis  for  rural  credit,  it  is  desir- 
able that  only  those  banks  which  are  highly  localised  in 
their  operations  should  engage  in  this  field.  Most  of  the 
smaller  banks  answer  well  to  this  description.  Among  the 
bigger  banks,  the  Punjab  National  Bank,  the  Allahabad 
Bank,  the  Bank  of  Baroda,  the  Indian  Bank  of  Madras  and 
the  Bank  of  Mysore  are  well  situated  to  take  the  lead  in  this 
matter  in  their  respective  areas  of  operation.  Co-operation 
between  these  banks  and  the  provincial  co-operative  banks 
which  have  the  undoubted  leadership  of  co-operative  credit 
societies  should  solve  many  of  the  problems  which  have 
proved  intractable  till  now.  The  foundations  for  such 
co-operation  have  been  well  laid  by  the  creation  of  the 
Reserve  Bank  of  India  which  has  been  invested  with  special 
responsibilities  for  agricultural  credit  and  its  improvement. 
These  special  responsibilities  which  are  analysed  and  dis- 
cussed in  another  place90  indicate  the  great  part  which  the 
Reserve  Bank  is  expected  to  play  in  the  reconstruction  of 
our  rural  financial  economy. 


90.    See  Chapter  VIII. 


CHAPTER   VI 

THE  LEADING  INDIAN  JOINT-STOCK  BANKS1 

1.    The  Bank  of  India 

THE  BANK  OF  INDIA  was  registered  in  1906  in  the 
memorable  days  of  the  Swadeshi  movement  and  started 
operations  in  the  same  year.  With  a  capital  of  50  lakhs  and 
total  liabilities  in  December  1906  of  66  lakhs  only,  it  made 
quick  strides  till  in  1912,  the  eve  of  the  banking  crisis,  its 
capital,  reserve  and  liabilities  exceeded  3  crores.  In  1920, 
the  liabilities  amounted  to  well  above  11  crores  and  in  1938, 
they  exceeded  19  crores,  composed  of  1  crore  capital,  a 
reserve  of  more  than  1  crore  and  deposits  of  17  crores  and 
odd.  In  point  of  resources,  the  bank  held  in  1938  the  second 
place  among  the  Big  Five. 

Among  Indian  joint-stock  banks,  the  Bank  of  India  has 
enjoyed  a  remarkable  immunity  from  runs.  In  1910,  "most 
alarming  rumours"  were  in  circulation  about  the  losses  of 
the  Bank  in  the  failure  of  Dwarkadas  Dharamsey.  In  1913, 
the  directors  were  able  to  report  that  not  a  rupee  was  lost  on 
that  account.  It  was  stated  at  the  general  meeting  of 
February  1914  that  even  in  the  great  banking  crisis  which 
preceded,  the  Bank  was  "no  more  than  slightly  affected". 

One  effect  of  1913-14  crisis  was  that  the  Bank  created 
"with  regret"  a  reserve  fund  for  bad  and  doubtful  debts. 

The  Bank  has  pursued  a  very  cautious  policy  of  expansion. 
Till  1927  when  its  capital,  reserve  and  deposit  liabilities 
exceeded  5  crores,  it  had  no  branch.  By  1938,  its  branches 
numbered  only  16  of  which  as  many  as  6  were  in  Bombay 
and  8  in  the  big  urban  and  industrial  centres  of  Ahmedabad, 
Poona,  Nagpur  and  Calcutta.  The  bank  is  thus  entirely  a 
bank  for  cities  with  average  resources  per  branch  of  120 
lakhs  and  more. 

It  showed  some  venture  in  opening  a  branch  outside  India 
at  Mombasa  in  1921.  Unfortunately,  a  collapse  of  credit 
was  reported  from  Africa  by  December  1922  the  effects  of 
which  were  aggravated  by  the  behaviour  of  the  Bank's 

1.    Tables  XVIII  to  XXXVII. 


BANK  OF  INDIA  209 

agent.  It  was  found  that  he  had  concealed  facts  and  made 
advances  against  express  instructions  of  the  head  office. 
After  an  inquiry  by  the  Bank's  auditors  deputed  from  India, 
the  branch  came  to  an  end  by  1923. 

The  Bank  has  sought  to  maintain  an  impressively  large 
ratio  of  capital  and  reserve  to  its  deposit  liabilities.  Till 
inflation  became  serious  during  the  first  World  War,  the 
ratio  was  well  above  20  per  cent.  When  in  the  course  of 
war  inflation,  deposits  expanded  rapidly  and  the  ratio  fell 
seriously,  steps  were  taken  in  1919  to  double  the  capital  and 
to  add  materially  to  the  reserve.  Till  the  onset  of  the 
Depression,  the  ratio  continued  well  above  15  per  cent.  The 
Depression  caused  no  slackening  in  the  growth  of  deposits 
and  the  ratio  fell  to  about  12  per  cent.  With  abundance  of 
funds  and  slack  demand,  this  fall  does  not  mean  any 
weakening  of  the  creditors'  guarantee. 

Among  assets,  loans  and  advances  amounted  to  65  per 
•cent  and  more  of  deposits  till  the  Depression  set  in.  The 
Bank  also  held  a  strong  portfolio  of  bills  which  tended  to 
be  more  than  10  per  cent  of  deposits.  The  Depression  caused 
a  shrinkage  in  loans  and  advances  which  reached  as  low 
a  level  as  40  per  cent.  There  was  a  subsequent  recovery 
to  50  per  cent.  The  quantity  of  bills  suffered  much  more 
amounting  to  less  than  1  per  cent  of  deposits  in  post-1929 
years. 

It  is  noteworthy  that  for  a  few  years  after  the  Bank  was 
started,  its  constitution  prohibited  advances  against  shares 
and  on  mortgage.  Experience  showed  that  this  prohibition 
was  a  great  hindrance  to  the  full  employment  of  the  Bank's 
funds.  In  1911,  the  rules  were  altered  so  as  to  permit  such 
advances.  As  the  war  broke  out  only  three  years  later,  the 
relaxation  proved  very  timely  and  the  Bank  was  able  to 
raise  its  loans  and  advances  progressively  to  the  high  levels 
of  80  and  85  per  cent  in  1914  and  1915. 

The  bulk  of  the  Bank's  investments  is  in  Government 
securities.  Debentures,  preference  and  ordinary  shares  of 
joint-stock  companies  have  never  been  above  2  per  cent  of 
deposits  and  even  Improvement  Trust,  Port  Trust  and 
Municipal  Bonds  are  not  allowed  to  rise  above  6  or  7  per 
cent.  Investments  are,  as  we  have  already  noted,  the 

M.  B.  14 


210  LEADING  JOINT-STOCK  BANKS 

means  par  excellence  of  adaptation  to  cyclical  and  secular 
changes.  About  10  per  cent  of  deposits  before  the  first  Great 
War,  they  fell  very  low  during  the  War  and  then  increased 
after  1922  till  during  the  Depression  a  level  above  30  per 
cent  was  reached. 

Except  during  the  crisis  of  1913-14  and  the  War  years, 
when  it  reached  levels  above  25  and  30  per  cent,  the  cash 
ratio  of  the  Bank  has  been  maintained  between  15  and  20 
per  cent. 

The  Bank  of  India  is  one  of  the  few  fortunate  Indian 
banks  which  have  escaped  the  activities  of  professional 
"credit  wreckers"  in  the  country.  The  only  serious 
incident2  in  its  steady  and  undisturbed  career  was  a 
temporary  three  days'  spell  of  unpopularity  in  1930  which 
took  shape  more  as  a  political  demonstration  than  a  run  and 
was  speedily  proved  to  be  the  outcome  of  sheer  misappre- 
hension. The  rumour  originated  in  the  Bombay  Stock 
Exchange  and  as  the  bank  acts  as  the  clearing  house  for  the 
Exchange,  the  members  and  hangers-on  of  that  institution 
took  a  prominent  part  in  the  incident. 

As  pointed  out  above,  the  bank  is  remarkable  for  three 
features,  the  fewness  of  its  branches,  its  concentration  in 
a  few,  big  urban  and  industrial  centres  of  the  country  and 
its  high  degree  of  liquidity  which  perhaps  is  largely  a 
product  of  the  first  two  features.  These  facts  are  well 
reflected  in  its  rate  of  gross  profits  which  is  lower  than  that 
of  any  other  bank  with  the  exception  of  the  Bank  of  Baroda. 
Since  its  deposits  are  certainly  not  raised  at  higher  rates 
than  those  of  other  banks,  this  low  rate  of  gross  profits  is 
only  indicative  of  the  very  liquid  and  safe  business  it 
engages  in  and  the  low  rates  which  are  realisable  on  such 
business.  Unlike  many  other  banks,  the  rate  of  gross  profits 
of  the  Bank  of  India  seems  to  have  stabilised  itself  round 
about  2  per  cent.  It  has  rarely  fallen  below  1.90  per  cent — 
its  lowest  level  being  1.47  per  cent  during  the  last 

2.  21st  May,  1930.  An  allegation  was  made  at  the  General  Meeting  of  the 
Bombay  Stock  Exchange  that  the  British  Manager  of  the  Bank  had  taken  part 
in  the  suppression  of  the  Civil  Disobedience  movement  in  the  country.  In 
spite  of  an  emphatic  denial  by  the  Manager  communicated  immediately  through 
a  responsible  person,  the  members  persisted  in  the  allegation  and  helped  to 
spread  it.  The  outcome  was  an  angry  crowd  at  the  Bank. 


CENTRAL  BANK  OF  INDIA  211 

Depression. 

Its  expense  ratio  is  easily  the  best  among  all  Indian 
banks,  which  bespeaks  the  large  volume  of  business  avail- 
able in  a  few  big  cities  in  the  country.  Till  1925,  it  paid 
less  than  20  per  cent  of  its  gross  profits  in  salaries  but  the 
fraction  has  since  then  mounted  to  round  about  25  per  cent. 
With  a  volume  of  resources  per  branch  which  is  about  four 
times  what  the  bank  next  in  rank,  viz.,  the  Central  Bank 
of  India,  can  claim,  it  is  not  surprising  that  its  expense  per 
unit  of  resources  handled  should  be  the  lowest  on  record. 

Its  rate  of  net  profits  is  as  a  rule  second  only  to  that  of 
the  Imperial  Bank  of  India.  It  started  with  a  dividend  of 
5  per  cent  in  1907,  raised  it  to  8  per  cent  about  the  time 
of  the  Great  War  and  in  the  twenties  and  thereafter  has 
maintained  it  at  10  to  12  per  cent.  Even  in  1907,  its  half- 
paid  shares  of  Rs.  100  nominal  value  stood  between  Rs.  53 
and  66i  and  have  continually  appreciated  since.  In  1916, 
India  Banks  were  quoted  at  Rs.  62  to  68  and  by  1929,  at  Rs. 
97  to  105.  The  lowest  level  of  the  depression  period  was 
Rs.  72J  to  90  in  1931  but  by  1936,  they  mounted  once  more 
to  Rs.  125J  to  142.  The  history  of  its  reserves  proves  that 
this  value  has  not  been  inflated  or  maintained  by  imprudent 
or  fictitious  dividends.  It  had  paid  usually  two-thirds  of  its 
net  profits  in  dividends — which  is  certainly  a  conservative 
procedure. 

2.  The  Central  Bank  of  India3 

The  Central  Bank  of  India  was  launched  into  existence 
in  December  1911  mainly  by  the  untiring  efforts  and  bank- 
ing genius  of  Sorabji  Pochkhanawalla  whose  life  history 
belongs  to  the  regions  of  romance  in  banking  and  finance. 
In  Sir  Pherozeshah  Mehta,  the  Bank  secured  a  chairman 
who  brought  with  him  great  public  prestige  and  patriotic 
appeal.  In  spite  of  difficult  situations,  the  Bank  made  asto- 
nishingly rapid  progress  and  passed  all  other  joint-stock 
banks  in  the  size  of  its  aggregate  resources.  Its  capital, 
reserve  and  deposits,  amounting  to  a  mere  77  lakhs  in 
December  1912,  reached  more  than  10  crores  in  December 

3.  Tables  XX  &  XXI  and  Tables  XXXVIII    &    XXXIX. 


212  LEADING  JOINT-STOCK  BANKS 

1920,  about  15  crores  in  1930  and  31  crores  in  1938. 

The  year  1923  which  saw  the  amalgamation  of  the  Tata 
Industrial  Bank  with  it  was  a  turning  point  in  the  Bank's 
career.4  Two  shares  of  the  Tata  Industrial  Bank,  each 
of  the  nominal  value  of  Rs.  75  and  paid-up  value  of  Rs.  22-8 
were  exchanged  for  one  Central  Bank  share  of  the  nominal 
value  of  Rs.  50  and  paid-up  value  Rs.  25.  The  shareholders  of 
the  Tata  Bank  lost  by  the  exchange  Rs.  5  only  since  the 
Central  Bank  shares  were  being  then  quoted  at  Rs.  40. 
They  even  gained  something  since  the  uncalled  liability  of 
Rs.  105  on  two  Tata  shares  was  now  converted  into  an 
uncalled  liability  of  Rs.  25  only  on  one  Central  Bank  share. 
The  aforesaid  difference  of  Rs.  5  was  taken  as  writing  off 
the  losses  of  the  Tata  Bank. 

The  effect  of  the  amalgamation  on  the  balance-sheet  of 
the  new  Central  Bank  was  profound.  The  capital  and 
reserve  liability  which  stood  at  Rs.  80  lakhs  in  December 
1922  rose  to  Rs.  268  lakhs  in  December  1923.  The  deposits 
rose  from  Rs.  14  crores  to  Rs.  18  crores.  The  ratio  of  capital 
and  reserve  to  deposits  which  had  sunk  during  the  first 
World  War  and  post-war  years  to  as  low  as  5  to  7  per  cent 
now  improved  to  17  to  18  per  cent. 

More  far-reaching  was  the  effect  on  the  quality  and 
distribution  of  the  assets.  The  ratio  of  loans  and  advances 
to  deposits  did  not  alter  much — it  increased  for  a  short  time 
only  from  55  per  cent  to  about  60  per  cent.  But  investments 
which  were  rarely  above  20  per  cent  in  previous  years  shot 
up  to  44  and  53  per  cent  in  the  next  two  years.  The  change 
in  their  quality  was  equally  remarkable.5  The  cash  ratio 
remained  very  much  the  same  except  for  the  panic  year 
1924.  The  balance-sheet  has  never  lost  its  mark  of  the 
great  amalgamation.  Unlike  the  Bank  of  India,  the  Central 
Bank  has  pursued  a  very  vigorous  policy  of  branch  expan- 
sion. It  opened  its  first  branch  at  Karachi  in  the  early  phase 
of  the  first  World  War  but  at  close  of  the  war  the  number  of 
branches  was  still  5  only.  By  1934,  it  had  created  68 
branches  and  pay-offices  which  mounted  up  to  89  in  1937 
and  101  in  1938.  Comparing  the  branches  and  pay-offices  to 

4.  Ch.   VI. 

5.  Ch.  V  §  4. 


CENTRAL  BANK  OF  INDIA  213 

its  aggregate  resources,  the  bank  has  about  33  lakhs  per 
office. 

Few  Indian  joint-stock  banks  have  faced  more  difficulties. 
It  has  been  recorded  that  there  were  as  many  as  9  runs  on 
the  bank  during  the  first  25  years  of  its  existence. 

Almost  at  its  very  birth,  it  became  involved  in  the  bank- 
ing crisis  of  1913-14.  Grossly  exaggerated  reports  about  its 
holdings  of  or  loans  against  the  shares  of  the  Indian  Specie 
Bank  found  eager  circulation.  In  the  last  few  months  of 
1913,  the  young  Bank  paid  out  as  much  as  75  lakhs  before 
the  run  abated. 

In  1918  again,  the  Bank  suffered  from  two  successive 
panics  caused  by  the  collapse  of  certain  markets  in  the 
Bombay  City. 

The  absorption  of  the  Tata  Bank  gave  another  opportunity 
to  the  enemies  of  the  Bank.  Certain  shareholders  started 
frivolous  legal  proceedings  against  it.  The  consequence 
was  an  "organised  run"  on  the  Calcutta  branch  during  which 
the  Bank  paid  out  Rs.  50  lakhs.  During  the  silver  jubilee 
proceedings  of  the  next  year,  the  Managing  Director  was 
constrained  to  complain  of  "the  despicable  habit  of  irres- 
ponsible persons  of  making  reckless  and  unfounded  charges 
and  instituting  futile  legal  proceedings".  The  matter  had 
by  now  assumed  grave  proportions  and  all  responsible  sec- 
tions of  the  community  and  the  Press  in  the  country  joined 
the  Managing  Director  in  deprecating  and  reprimanding 
these  activities. 

Hardly  had  the  voice  of  admonition  died  down  when 
another  "organised  attempt  to  impair  its  credit"  became 
visible.  In  the  course  of  two  brief  days  in  August  1925,  the 
Bank  stood  a  run  of  2  crores  and  more.6 

After  surviving  the  crisis  of  1913-14,  the  Bank  found  itself 
confronted  with  the  conditions  of  war.  In  spite  of  doubling 

6.  This  run  had  a  curious  origin.  Some  merchants  lost  heavily  in  sugar  and 
wool.  Among  them,  one  bore  the  name  of  A  jam  which  was  also  the  name  of 
one  of  the  directors  of  the  Central  Bank.  On  this  flimsy  basis,  the  usual 
detractors  of  the  Bank  are  said  to  have  created  a  scare  in  Zaveri  Bazaar  in 
Bombay.  Despite  categorical  denials,  the  panic  was  reproduced  at  Ahmedabad. 

— Commerce,  September  5th,   1925. 

The  last  run,  which  however  was  on  a  small  scale,  occurred  on  15th  July, 
1939  when  baseless  rumours  were  circulated  that  the  Bank  had  incurred  losses 
on  account  of  the  fall  of  silver  prices. 


214  LEADING  JOINT-STOCK  BANKS 

the  paid-up  capital  and  making  some  addition  to  the  reserve, 
the  ratio  to  deposits  fell  to  less  than  7  per  cent.  The  real 
recovery  in  the  ratio  of  capital  and  reserve  to  deposits 
occurred,  as  recorded  above,  with  the  amalgamation.  From 
that  year  till  the  onset  of  the  Depression  the  ratio  was  well 
above  15  per  cent.  The  Depression  coincided  among  other 
forces  with  a  great  expansion  of  branches.  Between  1930 
and  1938,  deposits  practically  doubled  and  the  ratio  fell 
continuously  to  8  per  cent.  The  Bank  may  well  be  awaiting 
a  favourable  opportunity  in  the  capital  market  to  strengthen 
its  fixed  capital  structure. 

Till  the  Depression,  the  Bank  aimed  at  a  level  of  loans 
and  advances  somewhere  in  the  neighbourhood  of  55  per 
cent  of  deposits.  Its  bill  portfolio  fluctuated  a  good  deal, 
tending  to  be  about  10  per  cent  of  deposits. 

With  the  amalgamation  of  1923,  the  proportion  of  invest- 
ments rose  very  sharply  from  about  20  to  25  per  cent  of 
deposits  in  pre-1923  years  to  more  than  50  to  60  per  cent. 
The  steep  fall  in  loans  and  advances  after  1930 — from  a 
level  of  55  per  cent  to  35  per  cent  and  less,  confirmed  the 
importance  of  investments  still  further  although  there  was 
a  little  fall  subsequently.  Government  and  "other"  gilt- 
edged  securities  form  the  backbone  of  investments,  being 
more  than  one-half  and  three-fourths  sometimes  of  the  total. 
In  post-Depression  years,  ordinary  and  preference  shares  of 
joint-stock  companies  recorded  a  marked  improvement  from 
less  than  2  per  cent  to  more  than  5  to  6  per  cent  of  deposits. 

Lands  and  Buildings  and  investment  in  Lands  and  Build- 
ings have  always  claimed  a  sizable  share  of  the  Bank's 
funds.  The  amalgamation  brought  with  it  the  splendid 
structure  of  the  Tata  Industrial  Bank  and  raised  the  Bank's 
investments  in  property  to  more  than  5  per  cent  of  depo- 
sits. Despite  the  doubling  of  deposits  between  1930  and 
1938,  the  proportion  of  funds  invested  in  property  is  still 
returned  at  about  4  per  cent.  This  4  per  cent  in  property 
and  6  per  cent  locked  up  in  ordinary  shares  of  companies, 
represent  the  Bank's  most  fluctuating  asset.  In  value,  they 
amount  to  3  crores  and  more. 

In  the  lean  years  after  the  crisis,  treasury  bills  were  for 
sometime  an  excellent  outlet  for  accumulating  funds.  For 


CENTRAL  BANK  OP  INDIA  215 

the  rest,  the  Bank's  cash  ratio  has  been  of  a  very  unstable 
character.  Between  15  and  20  per  cent  generally  before  the 
amalgamation,  it  showed  a  tendency  to  fall  subsequently  to 
less  than  12  per  cent.  But  the  stagnation  of  1932  and  1933 
raised  it  immediately  to  more  than  15  per  cent  and  in  1935, 
it  actually  shot  up  to  32  per  cent  and  more. 

The  Central  Bank  of  India  shares  the  honour  with  the 
Imperial  Bank  of  being  represented  in  all  the  provinces  and 
advanced  parts  of  India.  The  average  rate  of  interest 
offered  by  it  on  time  and  demand  deposits  taken  together 
is  lower  than  what  is  paid  by  the  Allahabad  and  Punjab 
National  banks  which  have  their  areas  of  operation  concen- 
trated in  the  Punjab  and  the  U.P.  It  is  of  course  much 
lower  than  the  rate  of  the  Indian  Bank  of  South  India. 
Till  1920,  the  average  fell  generally  between  2.0  and  3.5 
per  cent  and  in  the  succeeding  twenties  of  high  interest 
rates  all  over  the  world,  it  moved  between  3.6  and  4.3  per 
cent.  After  the  Depression,  the  rate  fell  steeply  from  3.23 
in  1930  to  a  mere  1.3  per  cent  in  1938. 

The  rates  for  the  Central  Bank  on  the  one  hand  and  of 
Allahabad,  Punjab  National  and  Indian  banks  on  the  other 
show  differences  ranging  between  0.6  per  cent  to  1.5  per 
cent.  The  margins  are  even  wider  for  certain  exceptional 
years. 

From  1921,  the  Central  Bank  instituted  the  most  instruc- 
tive and  valuable  practice  of  giving  under  separate  heads 
the  aggregate  interest  paid  on  fixed  deposits  and  current 
deposits.  The  average  rate  on  current  deposits  in  the 
twenties  ranged  between  2.1  to  2.5  per  cent.  After  1931,  it 
began  to  fall  till  the  unexampled  low  levels  of  0.81  and  0.77 
were  recorded  for  1937  and  1938. 

More  important  still  is  the  margin  which  the  Bank  has 
found  necessary  to  maintain  between  fixed  and  current 
deposit  rates.  In  the  twenties,  fixed  rates  were  above  cur- 
rent rates  by  more  than  2  to  3  per  cent.  The  margin 
narrowed  only  after  1934  since  when  it  has  been  between 
1.3  to  2  per  cent. 

To  appreciate  the  significance  of  these  rates  for  the  work- 
ing of  the  Bank  and  its  profits  in  particular,  we  must  recall 
here  that  the  Central  Bank's  current  and  savings  accounts 


216  LEADING  JOINT-STOCK  BANKS 

have  been  generally  slightly  less  than  50  per  cent  of  total 
deposits  in  the  twenties  and  have  grown  to  55  to  60  per  cent 
in  recent  years.  This  ratio  is  no  doubt  more  favourable  ta 
the  Central  Bank  than  to  the  other  banks  we  have  just  now 
mentioned.  Even  then,  the  rate  paid  on  current  and  savings 
account  is  sufficiently  high  to  make  it  a  very  important 
factor  in  the  Bank's  investment  policies. 

In  industrial  and  urban  India,  competition  is  very  keen. 
The  average  rate  of  earning  per  cent  which  represents  the 
minimum  above  which  the  rates  charged  to  customers  must 
range  prove  these  disparities  of  conditions.  While  earnings 
above  6  and  7  per  cent  are  most  common  for  the  Punjab 
National  and  Allahabad  banks  and  8  to  9  per  cent  is  the 
earning  rate  of  the  Indian  bank  in  the  South,  the  rate  of 
the  Central  Bank  falls  usually  between  6  to  7  per  cent.  Of 
course,  some  allowance  may  have  to  be  made  for  differences 
in  the  quality  of  business  sought. 

The  Central  Bank  has  paid  20  to  25  per  cent  of  its  gross 
profits  in  salaries  in  the  earlier  years  and  the  fraction  has 
been  generally  35  to  41  per  cent  since  1925.  The  Imperial 
Bank,  in  spite  of  its  higher  salaries  has  been  spending  only 
a  little  more  which  indicates  that  the  Central  Bank  suffers 
some  drawback  in  the  quality  of  its  personnel  or  organisa- 
tion. The  Bank  of  India  reflects  purely  city  conditions  and 
it  is  not  surprising  that  its  rate  of  gross  profits  should  be 
lower  and  the  expense  ratio  lower  still.  But  the  Bank  of 
Baroda  which  represents  largely  rural  conditions  shows 
identical  tendencies.  Even  more  than  salaries,  overhead 
expenses  of  the  Central  Bank  appear  to  cut  rather  severely 
into  its  gross  profits. 

This  analysis  seems  to  find  support  in  another  very  useful 
kind  of  information  which  the  Central  Bank  alone  among 
Indian  joint-stock  banks  supplies  in  its  balance-sheets. 
Since  1924,  the  salaries  paid  at  the  headquarters  have  been 
separated  from  those  of  the  upcountry  branches.  Between 
1924  and  1938,  the  aggregate  resources  of  the  Bank  have 
risen  from  16i  crores  to  33J  crores,  and  the  branches  have 
grown  from  20  to  101.  Yet,  except  for  the  last  3  years,  which 
saw  an  addition  of  33  branches,  the  proportion  of  salaries 
paid  at  the  headquarters  and  those  paid  at  the  branches- 


PUNJAB  NATIONAL  BANK  217 

remained  roughly  half  and  half.  It  is  permissible  to  surmise 
that  outward  expansion  brings  no  economy  in  the  utilisation 
of  the  headquarters  organisation. 

3.    The  Punjab  National  Bank7 

The  Punjab  National  Bank  is  one  of  the  few  purely  Indian 
joint-stock  banks  which  have  survived  over  from  the  last 
century.  It  was  started  early  in  1895  and  at  the  year  end, 
its  paid-up  capital  stood  at  the  modest  figure  of  Rs.  41 
thousand  and  its  deposits  at  about  If  lakhs.  It  made  very 
slow  progress  till  1905  but  with  the  rise  of  the  Swadeshi 
movement  its  deposits  increased,  exceeding  Rs.  1  crore  in 
1910.  The  authorities  had  the  prudence  to  raise  its  paid-up 
capital  and  reserve  year  after  year  till  in  1910  they  aggre- 
gated to  about  Rs.  15  lakhs. 

The  crisis  of  1913-14  was  a  severe  ordeal.  On  the  out- 
break of  the  crisis,  the  Bank  was  able  to  call  in  loans  very 
quickly  and  raise  its  holdings  of  cash  and  G.P.  notes  to 
46  per  cent  of  deposits.  Between  September  20th  of  1913 
i.e.,  the  date  of  the  collapse  of  the  People's  Bank  of  Lahore 
and  31st  December,  investments  to  the  extent  of  44  lakhs 
were  realised.  Its  deposits  fell  from  Rs.  147  lakhs  in  1912 
to  Rs.  77  lakhs  in  1914. 

The  Bank  set  about  with  determination  to  retrieve  its 
position.  Early  in  1914,  5,000  more  shares,  each  of  the 
nominal  value  of  Rs.  100,  were  issued  and  a  further  call 
of  Rs.  10  was  made  on  existing  shares.  Early  in  1915  again, 
1,000  more  shares  were  added  to  the  existing  mass.  The 
paid-up  capital  of  the  Bank  which  was  about  Rs.  9  lakhs  in 
1912  rose  to  Rs.  16  lakhs  by  1916  and  the  reserve  funds 
increased  from  about  Rs.  8  lakhs  to  Rs.  11  lakhs.  By  1916 
end,  the  deposits  once  more  exceeded  one  crore. 

In  the  early  twenties  of  the  present  century,  the  paid-up 
capital  was  raised  above  Rs.  30  lakhs  and  the  reserves  above 
Rs.  20  lakhs.  But  for  an  appreciable  fall  in  the  1929-30  crisis 
and  a  few  years  thereafter,  deposits  tended  to  maintain 
themselves  at  a  level  above  Rs.  7  crores.  In  January  1940, 
this  bank  absorbed  the  Bhagwandas  Bank  Ltd.,  a  scheduled 
bank  in  the  Delhi  circle. 

7.    Tables  XXII  and  XXIII. 


218  LEADING  JOINT-STOCK  BANKS 

As  compared  with  other  banks  the  ratio  of  capital  and 
reserves  to  deposits  has  been  rather  modest.  In  exceptional 
years,  when  deposits  were  running  low  as  in  the  early  years 
of  the  Bank's  existence,  the  years  following  the  banking 
crisis  of  1913  and  the  years  after  the  world  crisis  of  1929, 
the  ratio  naturally  improved.  But  otherwise,  it  used  to  be 
about  12  per  cent  before  the  first  World  War,  and  in  the 
post-war  years  it  has  been  in  the  neighbourhood  of  about 
7  to  8  per  cent. 

Before  the  war,  the  Bank's  investments  rarely  exceeded 
25  per  cent  of  its  deposits  and  after  1920,  they  have  already 
exceeded  35  per  cent.  While  formerly,  Government  secu- 
rities on  the  one  hand  and  Government  guaranteed  deben- 
tures and  municipal  loans  on  the  other  shared  about  equally 
in  the  composition  of  investments,  the  post-war  tendency 
has  been  to  hold  the  bulk  in  the  former.  In  recent  years,  a 
good  portion  of  the  securities  has  been  lodged  again  and 
again  with  bankers  against  amounts  due  to  them.  It  is 
usual  with  smaller  banks  to  lodge  their  securities  with  other 
banks  as  a  remittance  arrangement.  When  a  branch  is  in 
need  of  cash,  it  is  enabled  to  acquire  cash  at  that  place  from 
the  branch  of  some  bigger  bank  with  whom  the  securities 
are  lodged.  Such  overdrafts  are  frequently  only  a  small 
fraction  of  the  securities  actually  lodged.  The  Imperial 
Bank  in  particular  with  its  branches  all  over  the  country 
is  much  availed  of  by  smaller  banks  for  the  purpose. 

Before  the  first  World  War,  investments  in  "Lands,  Build- 
ings, and  Machinery"  rarely  exceeded  2  per  cent  of  depo- 
sits. In  post-war  years,  this  head  discloses  a  continuous 
increase,  approaching  the  substantial  fraction  of  15  per 
cent  of  deposits.  It  is  to  be  presumed  that  most  of  these 

8.  Due  to  Bankers.  Bad  or  Doubtful 

Debts. 
(Figures  in  Lakhs) 

1928  . .  6 

1929  41  11 

1931  113 

1932  35 

1934  66  14 

1935  28  13 

1936  50  11 

1937  11  8 

1938  34  11 


PUNJAB  NATIONAL  BANK  219 

acquisitions  have  been  involuntary — the  property  falling 
into  the  hands  of  the  Bank  as  security  surrendered  for 
unrealizable  loans. 

It  is  in  no  way  strange  that  the  last  agricultural  collapse 
should  leave  some  trace  on  the  position  of  the  Bank,  located 
as  it  is  in  the  great  wheat  granary  of  India.  The  balance 
sheet  of  December  1928  had  returned  Rs.  6  lakhs  under 
the  head  "Bad  and  Doubtful  Debts".  The  new  auditors  in- 
sisted on  putting  the  figure  in  the  next  balance-sheet  at 
Rs.  11.9  lakhs,  "to  which  the  directors,  to  be  on  the  safe  side 
agreed,  although  holding  somewhat  different  views."  This 
figure  has  remained  stable,9  new  bad  debts  perhaps  taking 
the  place  of  old  ones  which  are  either  realised  or  written 
off.  This  item  and  the  previous  item  of  fixed  assets  are 
obviously  difficult  accounting  points  in  the  balance  sheets. 

In  the  disturbed  years  1912-20,  when  its  investments  were 
low  and  its  lock-up  in  land  and  property  was  negligible, 
the  ratio  of  cash  to  deposits  was  rarely  below  15  per  cent 
and  generally  much  above  it.  The  situation  has  changed 
much  after  the  World  War  I.  The  cash  ratio  has  declined, 
fluctuating  within  a  wide  margin  of  4  to  8  per  cent  but 
approaching  the  higher  limit  in  recent  years. 

It  would  be  an  unwarranted  misreading  of  the  history 
and  position  of  the  Bank  to  take  the  foregoing  facts  by 
themselves.  An  important  clue  to  the  position  and  policies 
of  any  bank  lies  in  the  composition  of  its  deposit-liabilities. 
It  should  be  noted  that  in  the  case  of  the  Punjab  National 
Bank,  fixed  and  savings  deposits  are  apt  to  be  as  high  as 
75  and  at  times  even  80  per  cent  of  its  total  deposits.  Its 
limited  obligations  on  account  of  current  accounts  permits 
it  a  degree  of  freedom  which  would  be  inappropriate  and 
even  imprudent  in  the  case  of  other  banks.  In  this  connec- 
tion, it  is  well  to  point  out  that  the  bank  made  an  un- 
accountable change  in  its  presentation  of  figures  in  1937. 
Till  that  year,  savings  deposits  were  included  under  the 
head  "fixed  deposits".  From  that  year,  savings  deposits 
are  coupled  with  current  deposits.  Since  current  deposits 
have  been  running  low  in  recent  years,  the  change  is  to  be 

S.    In.  8. 


220  LEADING  JOINT-STOCK  BANKS 

regretted  as  raising  suspicion  of  a  desire  on  the  part  of  the* 
authorities  to  conceal  the  fact. 

The  Bank  had  48  branches  in  1938,  of  which  the  bulk  was- 
concentrated  in  the  Punjab.  Its  resources  per  branch 
averaged  to  Rs.  15  lakhs  only.  Among  the  Big  Five,  it  has 
the  smallest  volume  of  resources  per  branch. 

Like  some  other  Indian  joint-stock  banks,  the  Punjab* 
National  Bank  has  had  its  difficulties  and  its  critics.  The 
report  of  December  1916  notes  "with  regret  that  the  Arya 
Patrika,  which  recently  started,  made  a  mountain  out  of  a 
molehill  by  its  dark  references  to  the  loss  the  bank  may 
suffer  by  the  conduct  of  the  local  director  of  the  Ludhiana 
branch."  Actually,  the  loss  could  not  have  exceeded 
Rs.  45,000.  The  Bank  suffered  another  small  mishap  in  June 
1917  when  its  accountant  and  cashier  of  the  Bombay  branch 
absconded  with  Rs.  45,000.  The  selection  of  bank  personnel 
and  the  control  and  inspection  of  branches  are,  it  is  to  be 
very  much  feared,  very  weak  points  with  many  Indian 
banks. 

The  average  rate  paid  by  the  Bank  on  its  deposits  tends; 
to  be  a  little  lower  than  what  is  paid  by  the  Allahabad 
Bank  whose  rates  tend  to  the  highest  among  the  Big  Five. 
More  than  4  per  cent  during  the  war,  the  average  was  a 
little  higher  during  the  twenties  and  declined  faster  than 
the  rate  of  the  Allahabad  Bank  during  and  after  the  Depres- 
sion. But  its  rate  of  earning  has  been  always  inferior  to 
that  of  the  Allahabad  Bank  while  its  ratio  of  expenses  is 
the  highest  among  the  Big  Five. 

Before  the  Depression,  the  Bank  had  paid  dividends  as- 
high  as  7  (1903),  10  (1912),  and  15  per  cent  (1927).  In 
recent  years,  it  has  maintained  it  at  much  more  modest 
levels,  5  to  6  per  cent  in  fact.  The  value  of  its  shares  which 
once  were  quoted  as  high  as  Rs.  161-171  (1927)  declined 
fast  to  51-80  in  the  dark  depression  year  1933  and  are  now 
quoted  at  about  par. 

4.    The  Allahabad  Bank10 

The  Allahabad  Bank  of  India  is  the  oldest  among  "Indian"1 
joint-stock  banks.  Registered  in  1865  at  Allahabad,  it 

10.    Tables  XXIV  and  XXV. 


ALLAHABAD  BANK 


221 


rstarted  operations  in  the  same  year  with  a  paid-up  capital 
of  Rs.  1.9  lakhs  and  hardly  any  deposits.  It  raised  its  capital 
to  Rs.  3  lakhs  by  1870,  Rs.  4  lakhs  by  1890  and  Rs.  5  lakhs 
by  1900.  A  small  reserve  fund  of  Rs.  3,000  only  was  launched 
in  1867  and  with  small  additions  was  raised  to  about  Rs.  1 
lakh  in  1880,  a  little  above  Rs.  3  lakhs  in  1890  and  almost 
Rs.  10  lakhs  in  1900. 

The  progress  of  deposits  was  very  slow;  80  per  cent  of 
deposits  in  1870,  its  capital  and  reserve  still  amounted  to  as 
much  as  22.8  per  cent  as  late  as  1880.  After  1880,  the  pro- 
gress was  quickened  but  it  was  during  the  remarkable 
closing  decade  of  the  last  century  that  the  Bank  grew  to 
impressive  size.  Its  deposits  which  amounted  to  Rs.  59 
lakhs  only  in  1890  passed  Rs.  2  crores  by  1900.  The  ratio 
of  capital  and  reserve  to  deposits  sank  from  12.3  per  cent  in 
1890  to  as  low  as  6.6  per  cent  in  1900. 

It  adopted  a  cautious  policy  of  expansion.  It  opened  its 
first  branch  at  Kanpur  at  late  as  1888  when  its  aggregate 
resources  were  well  over  Rs.  40  lakhs.  Even  after  the  out- 
break of  the  first  World  War,  it3  branches  numbered  only 
12  in  1917,  when  its  aggregate  resources  amounted  to  more 
than  Rs.  6  crores.  The  subsequent  growth  was  a  little  more 
rapid.  In  1938,  its  branches,  including  two  pay-offices, 
numbered  56  and  were  largely  concentrated  in  the  Punjab 
and  the  U.P.  Its  resources  per  branch  thus  aggregate  to 
Rs.  20  lakhs  on  the  average. 

In  1922,  the  P.  &  O.  Banking  Corporation  made  an  offer 
of  affiliation  which  was  accepted  with  great  eagerness,  90 
per  cent  of  the  shareholders  voting  in  favour.  The  P.  &  O. 
Banking  Corporation  offered  a  price  of  Rs.  436  per  fully 
paid  share  of  Rs.  100  when  the  highest  pre-war  quotation 
for  it  was  Rs.  365  and  the  quotation  during  the  hectic  days 
of  1920  was  never  above  Rs.  300.  From  the  earliest  days, 
the  Allahabad  Bank  had  never  been  free  of  European 
influence  and  management  but  now  its  subjugation  was 
•complete  and  official. 

In  1927,  a  further  change  in  the  same  direction  occurred. 
The  Chartered  Bank  of  India,  Australia  and  China  pur- 
chased 196,059  out  of  259,416  shares  of  the  P.  &  O.  Banking 
Corporation.  A  great  exchange  bank  thus  acquired  an 


222  LEADING  JOINT-STOCK  BANKS 

overwhelming  foothold  in  the  interior  of  the  country. 

The  progress  of  deposits  during  the  first  decade  of  the 
present  century  and  the  first  World  War  was  so  rapid  that 
in  spite  of  the  quadrupling  of  the  paid-up  capital  and  reserve 
of  the  Bank  in  the  first  twenty  years,  their  ratio  to  deposits 
remained  low  at  about  7  to  8  per  cent.  The  subsequent 
history  reveals  a  stabilisation  of  resources  and  the  ratio. 

During  the  war  years,  it  kept  its  investments  prudently 
low  and  maintained  its  advances  and  loans  at  about  60  per 
cent  and  more.  The  policy  was  reversed  after  the  first 
World  War,  loans  and  advances  falling  to  about  50  per  cent 
and  less  and  investments  increasing  from  less  than  5  per 
cent  to  20  and  later  30  per  cent.  The  stagnation  of  post^ 
1929  years  confirmed  the  trend,  loans  and  advances  falling 
below  40  per  cent  and  investments  improving  to  40  per  cent 
and  more. 

Almost  the  whole  of  its  investment  portfolio  consists  of 
Government  securities.  Since  1922,  the  Bank  developed  for 
some  time  the  practice  of  holding  2  to  4  per  cent  of  its 
deposits  as  Short  Deposits  with  other  banks.  Its  portfolio 
of  bills  has  been  always  substantial,  generally  exceeding  8 
per  cent  but  in  recent  years  as  in  the  case  of  all  other  banks, 
it  has  fallen  very  low — as  low  as  2  per  cent. 

At  no  time  during  the  last  30  years  has  the  cash  ratio 
fallen  below  10  per  cent  and  more  often  than  not,  it  has 
been  above  15  per  cent.  When  treasury  bills  were  avail- 
able at  the  fall  of  the  year,  it  has  tried  to  lay  by  a  stock  of 
them — sometimes  as  high  as  10  per  cent  and  more  of  its 
deposits.  These  facts  taken  together  indicate  how  the  Bank 
has  been  strong  in  its  desire  to  maintain  a  liquid  position. 
When  it  is  recalled  that  its  fixed  deposits  tend  to  be  about 
70  per  cent  of  the  total,  i.e.,  lower  than  in  the  case  of  the 
Punjab  National  Bank  only,  its  position  appears  almost  im^ 
pregnable.  Besides,  we  must  note  that  recent  years  have 
seen  a  remarkable  growth  of  Saving  Deposits,  which  as  a 
point  of  strength  stand  midway  between  fixed  and  current 
deposits.  Till  the  year  of  affiliation,  saving  deposits  never 
exceeded  2.5  per  cent  of  the  total.  Since  then,  they  have 
grown  fast  till  by  1936-37,  they  were  higher  than  11  per  cent. 

The  Allahabad  Bank  operates  chiefly  in  the  U.  P.  and 


ALLAHABAD  BANK  223 

the  Punjab.  Before  and  during  the  first  World  War,  its  rate 
of  earnings  used  to  be  generally  between  5  and  6  per  cent 
while  the  average  rate  offered  on  deposits  varied  between 
2.5  and  5  per  cent.  The  margin  of  gross  profits  was  there- 
fore quite  a  generous  one — the  rate  working  out  at  2.0  and 
2.5  per  cent.  Its  ratio  of  expenses  in  those  years  was,  how- 
ever, inferior  only  to  those  of  the  Imperial  Bank  of  India, 
Bank  of  Baroda  and  the  Bank  of  India  and  its  net  profits 
rate  was  quite  respectable — varying  between  0.75  and  1.0 
per  cent. 

In  the  period  of  high  interest-rates  and  more  acute 
competition  which  succeeded  the  first  World  War,  the 
Allahabad  Bank  has  been  paying  rates  on  its  deposits  which 
are  generally  higher  than  those  of  any  other  bank  barring 
the  Indian  Bank  of  Madras  which,  however,  is  in  a  class  by 
itself.  Before  the  Depression,  the  average  rate  on  deposits 
was  generally  between  4.5  to  5.5  per  cent  and  even  6  per 
cent  and  since  then,  it  has  fallen  to  somewhere  below  4  per 
cent.  The  rate  of  earning  had  increased  to  somewhere 
between  6.5  and  7.5  per  cent  in  pre-Depression  years  and 
fell  to  5  per  cent  thereafter,  leaving  practically  the  same 
profit  margin  as  before. 

The  expense  ratio  of  the  Bank  has,  however,  gradually 
moved  up  and  shows  no  fall  even  after  the  Depression.  The 
creation  of  branches  explains  it  very  largely — the  average 
resources  being  only  20  lakhs  per  branch  which  is  more 
than  twice  the  figure  for  the  Indian  Bank  but  less  than  the 
figure  for  any  other  of  the  Big  Five.  The  Allahabad  Bank 
deserves  commendation  on  the  ground  that  among  the  Big 
Five,  it  has  always  devoted  a  good  fraction  of  its  gross  pro- 
fits to  salaries  of  employees.  Even  before  1920,  this  fraction 
was  well  maintained  at  40  per  cent  and  above.  But  since 
then,  more  branches  have  come  into  existence  and  the  frac- 
tion of  salaries  has  mounted  up  to  55  per  cent. 

The  rate  of  net  profits,  always  the  lowest  among  the  Big 
Five  has  fallen  still  further  after  1920.  It  has  maintained 
itself  with  difficulty  at  0.50  per  cent. 

Its  rate  of  dividend  was  15  per  cent  till  1905,  rose  to  17 
per  cent  in  1906  and  16  per  cent  in  1908 — the  last  rate  being 
maintained  consistently  till  now.  Its  reserve  fund  has 


224  LEADING  JOINT-STOCK  BANKS 

.stood  at  about  the  same  figures  as  in  the  last  War,  which 
means  that  net  profits  have  been  entirely  used  to  bolster 
up  the  dividend  rate.  During  the  War,  much  less  than 
half  the  net  profits  used  to  be  paid  in  dividends — which  was 
certainly  a  very  conservative  policy.  The  price  of  its  ordi- 
nary shares  which  stood  between  Rs.  254  to  270  as  early  as 
1907  rose  to  Rs.  355  to  365  in  1913  and  declined  to  less  than 
Rs.  300  by  1920. 

5.    The  Bank  of  Baroda11 

The  Bank  of  Baroda  was  established  in  1909  under  the 
patronage  of  the  enlightened  Ruler  of  that  State  and  with 
an  assured  volume  of  working  resources  as  incidental  to  the 
management  of  State  revenues  and  expenditure. 

As  early  as  1912,  its  deposits  reached  the  neighbourhood 
of  1  crore  and  the  ratio  of  capital  and  reserve  to  deposits 
stood  well  above  10  per  cent.  When  the  first  World  War 
inflated  its  deposits  from  about  1  crore  in  1914  to  more  than 
5  crores  in  1920,  the  authorities  took  the  precautionary  step 
of  raising  its  capital  and  reserve  to  20  and  12  lakhs  respec- 
tively in  1918  in  the  first  instance  and  again  in  1921  to  30 
and  17  lakhs  respectively.  Its  reserve  has  been  steadily 
augmented  till  in  1938  it  reached  25  lakhs.  The  progress  of 
deposits  has  been,  however,  so  steady  that  the  capital  and 
reserve  ratio  has  not  been  much  above  8  or  9  per  cent  and 
sometimes  indeed  has  fallen  below  these  levels. 

The  authorities  took  steps  in  1939  to  remedy  this  falling 
ratio  of  owned  to  borrowed  resources.  Shares  were  issued 
at  a  premium  of  Rs.  45  per  share  and  paid  capital  was 
augmented  from  Rs.  30  to  37^  lakhs.  The  premium  money 
was  used  to  raise  the  reserve  from  26i  to  55  lakhs. 

The  Bank  opened  its  first  branch  at  Bombay  in  1919.  By 
1938,  it  had  established  23  branches  most  of  which  were 
concentrated  in  Gujarat  and  Kathiawar.  Its  average 
resources  per  branch  stood  in  that  year  at  the  respectable 
figure  of  more  than  30  lakhs. 

Except  for  the  years  of  the  first  World  War,  when  the 
percentage  to  deposits  exceeded  80  and  even  90,  the  aggre- 

11.    Tables  XXVI  and  XXVII. 


BANK  OF  BARODA  225 

gate  of  loans  and  advances  has  been  generally  less  than 
55  per  cent  and  in  the  recent  post-Depression  years,  it  has 
been  as  low  as  30  per  cent.  Its  bill-portfolio  has  occasionally 
reached  arresting  size  but  as  a  post-war  practice,  the  Bank 
has  been  inclined  to  find  a  larger  and  larger  outlet  for  its 
funds  in  investments.  Government  securities  account  for 
as  high  a  percentage  of  deposits  as  30,  35  and  40  but  the 
years  after  the  first  World  War  have  witnessed  a  remark- 
able rise  in  Railway  and  other  debentures  and  ordinary 
shares  of  public  companies.  During  the  last  decade, 
these  latter  investments  have  been  well  above  15  per  cent. 

The  Bank  has  maintained  a  high  cash  ratio.  Generally 
above  15  per  cent,  it  has  never  fallen  below  12  per  cent. 
Till  the  Depression  produced  its  effects  in  recent  years,  the 
proportion  of  fixed  deposits  was  rarely  below  60  per  cent. 

Most  banks  in  India  suffer  from  time  to  time  from  some 
chronic  malady  which  public  imagination  attaches  to  it  as 
its  special  weakness.  The  malady  to  which  the  Bank  of 
Baroda  is  prone  is  periodic  rumours  of  withdrawal  of  Baroda 
State  funds  and  support.  In  1925  and  again  in  November  1933, 
these  rumours,  even  though  utterly  unfounded,  succeeded 
in  causing  temporary  runs  on  the  bank. 

Its  rate  of  gross  profits  is  the  lowest  among  important 
Indian  banks — and  till  recently  showed  a  tendency  to  de- 
cline. Well  over  2  per  cent  during  and  before  the  first  World 
War,  it  has  fluctuated  very  much  thereafter,  being  generally 
between  1.40  and  1.60  per  cent.  This  modest  rate  may  be 
partly  due  to  the  high  liquidity  of  the  Bank's  assets  in 
general.  We  have  noted  the  high  proportion  of  its  cash  and 
its  investments.  Partly,  this  should  be  ascribed  to  the  fact 
that  its  chief  area  of  operation  is  Gujarat  and  Kathiawar 
•where  funds  are  relatively  more  abundant  and  competition 
among  banks  and  private  lenders  decidedly  keen. 

Its  expense  ratio  is  also  low,  being  inferior  only  to  the 
Bank  of  India's.  The  Bank  of  Baroda  has  only  a  few 
branches  and  its  average  resources  per  branch  are  high, 
being  somewhat  smaller  than  the  Central  Bank's.  Till  1933, 
its  expenditure  on  salaries  also  was  less  than  that  of  any 
other  bank — being  less  than  30  per  cent  of  its  gross  profits. 
A  large  volume  of  resources  relatively  to  the  size  of  the 

!M.  B.   15 


226  LEADING  JOINT-STOCK  BANKS 

organisation  is  probably  a  part  of  the  secret  of  its  low 
expenses  ratio. 

Although  the  rates  of  gross  profits  and  the  expenses  ratio 
are  both  low,  the  former  is  relatively  so  modest  that  the 
difference  between  them,  i.e.  the  rate  of  net  profits  compares 
unfavourably  with  those  of  the  Imperial  Bank,  the  Central 
Bank  of  India  and  the  Bank  of  India.  The  rate  also  shows 
a  progressive  decline.  Well  over  1  per  cent  before  1924,  it 
has  never  reached  those  levels  again,  0.60  to  0.80  per  cent 
being  the  usual  range. 

Altogether,  the  Bank  seems  to  have  reached  the  maximum 
point  of  exploitation  of  the  area  over  which  it  operates.  For 
further  growth  and  conquest,  it  must  look  in  the  future  more 
and  more  to  other  parts  of  the  country  and  to  other  lines  of 
business. 

6.     The  Bank  of  Mysore12 

The  Bank  of  Mysore  was  established  in  1912  with  the 
active  patronage  and  support  of  the  Mysore  State.  Its  paid-up 
capital  was  Rs.  10  lakhs,  the  state  holding  one-third  of  its 
shares.  The  state  retained  in  its  hands  the  right  of  general 
supervision  and,  what  was  much  more  important  in  those 
days,  the  right  of  audit  as  well.  A  proportion  of  the  direc- 
torate was  to  consist  of  state  officials.  The  Bank  was 
entrusted  with  the  management  of  state  funds  which,  in  the 
earlier  years,  equalled  the  paid-up  capital  of  the  Bank. 

In  1915,  the  aggregate  liabilities  amounted  to  about  50 
lakhs  of  which  the  paid-up  capital  and  state  funds  account- 
ed for  a  little  more  than  one-half.  By  1919  and  1920,  the 
deposits  of  the  Bank  reached  1  crore  and  on  the  eve  of  the 
1929-30  crisis,  nearly  2  crores. 

During  the  Depression,  the  Bank  fairly  maintained  its 
ground  and  after  the  recovery  of  1934-35  recorded  further 
progress  till  its  deposits  reached  2£  crores  in  1938. 

A  remarkable  feature  of  its  recent  history  is  the  impres- 
sive growth  of  savings  deposits  or  as  the  balance-sheets 
describe  it  more  appositely,  "thrift  deposits".  Between 
1914  and  1926,  these  deposits  rarely  amounted  to  2  per  cent  of 

12.    Tables  XXVIII  and  XXIX. 


BANK  OF  MYSORE  227 

total  deposit  liabilities.    After  1926,  they  increased  progres- 
sively till  in  1938,  the  percentage  was  well  above  14. 

Before  the  Depression,  loans  and  advances  of  the  Bank 
were  apt  to  be  more  than  75  per  cent  of  deposits  and  it  is 
significant  that  even  after  the  Depression,  the  percentage 
has  rarely  fallen  below  65  and  even  then,  not  in  any  appre- 
ciable degree.  Its  bill  portfolio  has  rarely  exceeded  5  per 
cent  of  deposits. 

As  in  the  case  of  other  banks,  the  conclusion  of  Peace 
and  the  expected  fall  in  interest-rates  proved  a  strong 
inducement  to  increase  investments.  Less  than  5  per  cent 
of  deposits  before  1920,  investments  increased  steadily  till 
in  more  recent  years,  they  have  tended  to  be  in  the 
neighbourhood  of  30  per  cent  and  even  more.  Till  the 
onset  of  the  Depression,  these  investments  used  to  be  held 
almost  wholly  in  Government  of  India  Securities.  There- 
after, the  shares  of  Mysore  Government  loans  began  to 
increase  till  they  were  a  close  second  to  Government  of 
India  Securities.  In  the  last  three  or  four  years,  Govern- 
ment-guaranteed and  miscellaneous  securities  have  also 
reached  an  appreciable  size — being  above  8  per  cent  in  1938. 

On  account  of  the  predominance  of  loans  and  advances, 
however,  the  investment  portfolio  of  this  bank  is  smaller 
in  size  as  compared  with  those  of  other  banks. 

Changes  in  the  size  of  loans,  advances  and  investments 
are  explained  to  a  certain  extent  when  the  cash-ratio  of  the 
Bank  is  examined.  Till  1922  the  cash  ratio  used  to  be  very 
high  as  a  rule,  generally  above  20  per  cent  of  deposits, 
in  fact.  It  shows  a  sensible  decline  thereafter  to  as  low 
levels  as  11  and  13  per  cent.  In  the  year  1938,  it  has  sunk 
as  low  as  7  per  cent  but  in  the  earlier  two  or  three  years 
the  fall  was  partly  compensated  by  3  to  5  per  cent  of 
deposits  being  held  with  other  banks.  The  bulk  of  the 
increase  in  investments  has  thus  taken  place  at  the  expense 
of  cash,  a  procedure  justified  somewhat  by  the  rapid  growth 
of  saving  deposits. 

The  Bank,  although  well  managed,  has  had  its  phases  of 
distrust  and  the  difficulties  springing  from  it.  Perhaps,  it 
experienced  its  most  difficult  time  when  the  failure  of  the 
Alliance  Bank  of  Simla  created  nervousness  and  doleful 


228  LEADING  JOINT-STOCK   BANKS 

speculations  about  Indian  joint-stock  banks.  Critics  claimed 
to  have  discovered  that  a  large  amount  of  about  25  lakhs 
had  been  lent  without  adequate  security  to  directors  or  ex- 
directors,  either  personally  or  through  the  medium  of  con- 
cerns in  which  they  were  directly  interested.  The  share- 
holders appointed  a  committee  of  investigation  on  25th  July, 
1925.  The  inquiry  disclosed  that  the  security  behind  the 
loans  was  more  than  adequate,  that  no  preferential  treat- 
ment had  been  accorded  in  the  matter  of  rates  charged  and 
the  loans  were  being  liquidated  on  due  dates. 

Including  its  head  office,  the  Bank  has  at  present  18 
branches.  Almost  all  of  them  are  in  the  territories  of  the 
Mysore  State.  The  deposits  per  branch  work  out  at  about 
14  lakhs  on  the  average. 

7.    The  Indian  Bank13 

The  Indian  Bank  established  in  1907  is  at  present  the 
largest  of  South  Indian  banks. 

Its  progress  in  the  earlier  years  was  slow — a  fact  indicative 
largely  of  smaller  banking  potentialities  of  South  India. 
In  1908,  its  paid-up  capital  was  about  10  lakhs  and  its 
deposits  a  little  more  than  8  lakhs.  By  the  crisis  of  1913-14, 
it  had  succeeded  in  building  up  a  reserve  of  li  lakhs  and 
accumulated  deposits  of  more  than  30  lakhs.  The  sponsors 
of  the  Bank  were  singularly  fortunate  in  that  the  1913-14 
crisis  did  not  penetrate  into  South  India  and  they  could  say 
with  justification  that  bank  failures  "have  not  affected  us". 

It  was  not  till  1925  that  the  deposits  of  the  Bank  passed 
1  crore.  By  1932,  they  were  in  the  neighbourhood  of  2 
crores  and  by  1938,  they  approached  3J  crores. 

Much  of  this  recent  increase  in  resources  has  to  be  ascribed 
to  vigorous  extension  of  branches.  Till  1935,  branches 
numbered  only  6  which  gave  an  average  volume  of  resources 
per  branch  of  about  20  lakhs  of  rupees.  The  number 
increased  to  15  in  1930,  26  in  1936,  33  in  1937  and  40  in  1938. 
The  average  resources  per  office  fell  to  about  9  lakhs  in  1938. 
This  extraordinary  extension  of  branches  was  the  outcome 
of  unusual  banking  conditions  in  the  South  which  ultimately 

13.    Tables  XXX  and  XXXI. 


INDIAN  BANK  229 

ended  in  the  banking  crisis  of  South  India  centering  round 
the  collapse  of  the  Travancore  National  and  Quilon  Bank.14 

With  increase  in  resources,  the  Bank  adopted  the  prudent 
policy  of  adding  to  its  reserve.  Its  capital  was  increased 
slightly  to  about  12£  lakhs  in  1930  and  about  13  lakhs  in 
1938  but  its  reserve  was  augmented  much  faster  and  caught 
it  up  by  1935.  Only  4  lakhs  in  1920,  it  was  raised  to  10 
lakhs  in  1930  and  is  still  maintained  at  that  figure.  The 
ratio  of  capital  and  reserve  to  deposits  has  nevertheless 
steadily  fallen  from  well  above  20  to  25  per  cent  prior  to 
1920  to  about  10  per  cent  by  1935  and  less  than  8  per  cent 
in  subsequent  years. 

Its  loans,  advances  and  bills  which  are  not  separately 
stated  amounted  usually  to  more  than  100  per  cent  of 
deposits  till  1925  and  before  the  crisis  of  1929-30  ranged 
above  80  per  cent.  After  a  great  shrinkage  to  less  than 
40  per  cent,  they  have  recovered  recently  to  about  65  to 
70  per  cent.  The  figures  for  the  last  few  years  show  that 
the  proportion  of  bills  in  the  aggregate  of  loans,  advances 
and  bills  has  been  quite  high,  about  one-seventh  to 
one-fourth  of  the  total. 

Its  investments  which  are  composed  almost  entirely  of 
Government  securities  were  below  5  per  cent  till  1920  and 
have  only  risen  after  1925  to  15,  20  and  25  per  cent  of 
deposits.  In  the  last  few  years,  the  Bank  has  shown  some 
inclination  to  pay  attention  to  Native  State  loans  and 
shares  of  joint-stock  companies. 

The  cash  ratio  of  the  Bank  has  been  always  impressive, 
standing  always  above  15  per  cent  and  sometimes  in  the 
neighbourhood  of  20  per  cent. 

It  would  be  strange  if  banking  institutions  in  the  South 
stood  above  other  institutions  in  being  free  from  communal 
influences.  As  a  matter  of  fact,  the  infection  is  too  all- 
pervasive  for  a  bank  to  escape  it.  The  following  extract 

14.  Ch.  IX. 

1908  1  branch  1926  4  branchs 

1914  1    „  1927  2 

1916  1    „  1929  2 

1919  1    „  1931  1 

1920  1    „  1932  1 

Total  15 


230  LEADING  JOINT-STOCK  BANKS 

from  the  speech  of  the  Bank  Chairman  proves  how  great 
is  the  need  of  vigilance  on  this  point.  "There  seems  to 
be  an  impression  in  some  quarters  that  the  Nattukottai 
Chetties  are  unduly  favoured  by  this  Bank  in  the  matter 
of  loans.  In  the  sense  that  a  much  larger  amount  is  lent 
to  them  than  to  non-Nattukottai  Chetties,  it  may  be  true 
to  some  extent.  .  .  .  The  bank  has  sustained  no  loss  by 
reasons  of  loans  to  the  Nattukottai  Chetties,  but  on  the 
other  hand,  all  the  comparatively  little  loss  it  has  sus- 
tained (is)  by  reason  of  loans  made  to  non-Nattukottai 
Chetties  ...  if  Nattukottai  Chetties  are  not  to  be  encour- 
aged to  the  extent  they  are,  our  money  is  likely  to  lie 
locked  up." 

The  particular  impression  dealt  with  by  the  Chairman 
was  most  probably  without  any  substance.  But  recent 
events  connected  with  the  failure  of  the  Travancore 
National  &  Quilon  Bank  prove  that  there  cannot  be  over- 
cautiousness  on  this  head.  The  facts  so  far  as  they  can 
be  ascertained  seem  to  be  these.  The  shares  of  the  Indian 
Bank  are  held  largely  by  the  Nattukottai  Chetties  who 
are  consequently  in  a  strong  position  to  mould  the  policy 
of  the  Bank.  They  may  have  made  use  of  their  power 
as  alleged  to  secure  advances  to  their  own  community 
members  on  the  basis  of  mere  two  name  paper.  In  certain 
years,  these  advances  on  personal  credit  have  been  almost 
as  large  as  the  deposits  of  the  Bank  while  advances  against 
goods  and  for  trade  purposes  have  been  only  a  fraction, 
from  about  one-thirteenth  to  one-tenth  of  advances.  The 
Chetty  firms  themselves  engage  almost  exclusively  in  bank- 
ing and  not  in  trade.  In  other  words,  the  funds  of  the  Bank 
are  not  available  directly  for  trade  of  the  country  but  only 
indirectly  through  the  lending  operations  of  the  Chetties. 
What  gives  a  tinge  of  bitterness  to  the  complaints  is  the 
fact  that  the  deposits  of  the  Bank  are  not  drawn  in  any 
appreciable  measure  from  the  Chetties  who  have  other 
outlets  for  their  money  but  from  other  classes  and  com- 
munities, salary-earners  and  wage-earners.  The  Bank 
prefers  the  security  of  the  Chetty  intermediary  to  that  of 
goods  or  other  assets  and  earns  perhaps  a  higher  rate  of 
interest.  This  should  explain  why  the  Indian  Bank  avoids 


INDIAN  BANK  231 

investments  and  holds  such  a  large  proportion  of  funds  in 
loans,  advances  and  bills.15 

The  Indian  Bank  carries  on  its  business  in  the  special 
circumstances  of  South  India.  These  might  be  described 
in  one  phrase  as  paucity  of  bankable  resources.  In  spite 
of  this  paucity,  moderation  has  been  the  keynote  of  rates 
which  the  Indian  Bank  offers  on  its  deposits.  Till  the 
onset  of  the  Great  Depression,  the  average  rate  paid  by 
it  on  time  and  demand  deposits  tended  to  be  next  to  those 
paid  by  respectable  banks  in  the  Punjab  and  the  UP.  In 
the  twenties  and  till  1931,  rates  from  3£  to  4  per  cent  were 
the  general  rule.  Since  the  Depression,  the  rates  of  the 
Indian  Bank  are  exceeded  by  the  Allahabad  Bank  and  the 
Punjab  National  Bank  only. 

Moderate  as  its  deposit  rates  are,  the  requirements  of 
capital  in  the  South  exceed  supplies  by  such  a  margin 
that  the  returns  on  funds  invested  are  the  highest  among 
those  of  which  we  have  record.  The  earnings  of  the 
Indian  Bank  per  cent  of  resources  employed  represent, 
as  pointed  out  above,  only  the  minimum  average  charges 
paid  by  its  clientele.  When  we  take  account  of  the  inter- 
mediary services  of  the  Chetties,  the  cost  of  finance  to  the 
public  must  turn  out  very  much  higher  than  this  minimum. 
Yet,  the  rate  of  earning  of  the  Indian  Bank  was  perhaps 
the  highest  among  the  Big  Seven  till  1925  and  now  after 
the  Punjab  National  Bank,  it  is  the  next  best  rate  earned 
among  the  Big  Seven.  Till  1931,  the  earning  rate  was 
commonly  above  6|-  per  cent.  After  1931,  the  rate  has  been 
rarely  below  4  per  cent.  Perhaps,  the  predominance  of 
coffee,  rubber  and  other  agricultural  interests  in  the  clientele 
of  the  Bank  partly  explains  the  high  level  of  these  rates. 

The  margin  between  the  average  rate  paid  on  deposits 
and  the  rate  earned  on  assets  is  apt  to  be  as  wide  as  2£  to  3 
per  cent  and  even  more  and  the  rate  of  gross  profits  has 
been  always  the  highest  among  big  banks  and  only  recently 
after  1925,  has  become  inferior  to  that  of  the  Imperial  Bank. 
The  latter  has  rarely  fallen  below  3  per  cent. 

The  advantage  of  the  highest  rate  of  gross  profits  was 

15.    Commerce,  July  18th  and  25th,  1925. 


232  LEADING  JOINT-STOCK  BANKS 

much  reduced  by  the  fact  that  till  1925  the  expense  ratio 
was  also  the  highest  among  those  banks  of  which  we  have 
any  record.  This  could  not  be  due  to  any  special  expen- 
siveness  of  carrying  on  banking  business  in  South  India. 
Clerical  labour  is  notoriously  cheap  in  those  parts  of  the 
country.  Yet,  the  fraction  of  gross  profits  paid  as  salaries 
which  was  about  20  to  25  per  cent  before  the  close  of  the 
first  World  War  has  mounted  to  30  per  cent  since.  A  fraction 
of  25  to  30  per  cent  holds  good  for  some  of  the  most  highly 
staffed  and  expensively  managed  banks  in  this  country  like 
the  Bank  of  Baroda,  Bank  of  India,  etc.  After  1925,  its 
expense  ratio  is  showing  itself  to  advantage  as  compared 
with  those  of  the  Imperial  Bank  and  the  Allahabad  Bank 
of  India. 

The  explanation  of  this  high  expense  ratio  and  particularly 
the  recent  increase  in  the  proportion  of  expenses  to  gross 
profits  lies  in  the  extension  of  branches  and  the  small 
volume  of  resources  per  branch.  With  26  branches  in  1936, 
the  resources  per  branch  were  Rs.  12  lakhs  only.  With  40 
branches  in  1938,  the  resources  per  office  dwindled  to  9 
lakhs.  The  Allahabad  Bank  which  stands  immediately 
above  it  in  point  of  resources  per  office  or  branch  has  an 
average  of  20  lakhs.  It  is  hardly  surprising  in  these  circum- 
stances that  the  Indian  Bank  is  one  of  the  most  expensive 
to  run  among  the  big  Indian  banks.  That  its  fraction  of 
expenses  to  gross  profits  is  no  higher  than  those  of  some 
other  banks  in  the  country  is  understandable  only  on  the 
assumption  of  poor  salaries  paid  to  employees. 

In  spite  of  its  high  expense  ratio,  however,  its  rate  of  net 
profit  was  the  highest  among  leading  banks  till  the 
Depression  years  1935-38.  It  redounds  to  the  credit  of  the 
management  that  ever  since  the  first  World  War,  it  has  used 
a  large  part  of  the  net  profits  to  add  to  the  reserves.  Only 
3  lakhs  in  1918,  the  reserve  improved  to  6  lakhs  in  1923, 
9  lakhs  in  1929  and  13  lakhs  in  1935.  Today  the  paid-up 
capital  and  reserve  are  equal,  although  their  ratio  to  deposits; 
has  fallen  rather  low. 

The  dividend  declared  in  1908  was  only  4  per  cent  and 
was  raised  gradually  to  7£  per  cent  till  1920.  By  1927,  it  had 
reached  12  per  cent,  and  with  an  occasional  increase  in  a 


UNION  BANK  OF  INDIA  23$ 

year  or  two,  it  has  been  maintained  at  that  figure.  The  sum 
diverted  to  dividends  has  been  about  a  half  of  net  profits, 
which  is  not  excessive  according  to  the  usual  policies  of 
banks  in  India. 

8.  The  Union  Bank  of  India16 

The  Union  Bank  of  India  was  started  very  recently,  in 
1919.  Its  paid-up  capital  was  impressively  large — being  40 
lakhs,  and  recently  the  bank  has  built  up  a  reserve  of  7 
lakhs.  In  spite  of  its  own  large  funds,  its  acquisition  of 
deposits  has  been  rather  slow — indicating  either  that  the 
banking  potentialities  of  Bombay  City  are  already  well 
exploited  or  the  Union  Bank  has  confined  its  activities  to 
those  classes  which  are  already  well  served  by  pre-existing 
banks.  By  1929,  the  deposits  of  the  bank  passed  half  a 
crore.  The  Depression  caused  the  bank  a  sensible  setback 
but  it  recovered  lost  ground  by  1934  and  by  1937,  the 
deposits  were  well  above  1  crore. 

In  consequence  of  foregoing  facts,  the  ratio  of  capital  and 
reserve  stood  as  high  as  150  per  cent  and  more  for  the 
greater  part  of  the  Bank's  existence  and  even  now  it 
exceeds  40  per  cent. 

Its  loan  and  advances  have  been  40  to  50  per  cent  of 
deposits  in  recent  years  and  its  investments  have  been  70 
per  cent  and  more.  It  is  remarkable  that  ordinary  shares 
of  joint-stock  companies  account  for  about  one-fourth  of  the 
investment  portfolio.  The  cash  ratio  is  more  often  than  not 
above  20  per  cent. 

It  is  clear  that  the  Bank  is  still  in  its  initial  stages  and  the 
balance  sheet  still  bears  the  mark  of  immature  conditions, 

9.  The  Bank  of  Behar17 

Judged  by  its  long  life,  the  Bank  of  Behar  is  one  of  the 
senior  banks  in  the  country,  its  year  of  establishment  being 
1911. 

It  had  a  very  modest,  almost  obscure  beginning.  In  1911, 
its  paid-up  capital  was  only  a  meagre  Rs.  7000,  as  against 
authorised  and  subscribed  capital  of  10  lakhs  and  2i  lakhs 

16.  Tables  XXXII  and  XXXIII. 

17.  Tables  XXXIV  and  XXXV. 


234  LEADING  JOINT-STOCK  BANKS 

respectively.  By  1913,  the  bank  created  a  reserve  of  Rs. 
3,000.  The  deposit  liabilities  against  these  slender  owned 
resources  amounted  to  Rs.  6,000  only. 

In  its  earlier  stages  at  least,  the  Bank  engaged  in  fire  and 
life  insurance  business  as  well. 

Its  paid-up  capital  was  raised  very  slowly,  to  Rs.  36,000 
in  1913,  a  little  over  a  lakh  in  1917  and  1£  lakhs  in  1920.  The 
reserve  in  these  years  amounted  to  3,  32  and  85  thousands 
only.  It  attracted  a  respectable  volume  of  deposits,  5  lakhs 
and  over  in  1913,  8  lakhs  in  1917  and  more  than  13  lakhs  in 
1920. 

Thereafter,  steps  were  taken  to  expand  the  capital 
structure  of  the  Bank.  In  1938,  the  capital  exceeded  13  lakhs 
•and  deposits  stood  at  120  lakhs. 

The  ratio  of  capital  and  reserve  to  deposits  has  been  in 
the  neighbourhood  of  10  per  cent  in  recent  years.  Its 
investments  are  rather  slender,  about  5  to  10  per  cent  of 
deposits  only.  The  bulk  of  its  deposits  from  70  to  80  per 
cent  in  fact  is  placed  in  loans  and  advances.  The  bank 
maintains  a  high  cash  ratio — 20  per  cent  and  more. 

10.    The  Bharat  Bank18 

The  Bharat  Bank  is  one  of  the  many  banking  ventures  in 
which  the  years  of  World  War  II  proved  quite  prolific. 
Believed  to  be  closely  inter-locked  with  the  many  Dalmia 
concerns,  it  was  conceived  on  a  big  scale  from  the  very 
start.  As  early  as  March  1944,  it  reported  no  less  than  121 
branches,  36  sub-branches  and  18  pay-offices.  In  March 
1948,  it  claimed  160  branches,  35  sub-branches  and  57  sub- 
offices.  Its  business  in  Pakistan  was  carried  through  19 
branches. 

Starting  from  13  crores,  its  deposits  reached  nearly  29 
crores  in  1946  but  fell  subsequently  on  account  of  the  poli- 
tical and  economic  conditions  of  1947-48.  Securities  were 
unloaded  heavily  and  cash  reached  a  very  high  level.  The 
losses  in  Pakistan  were  estimated  in  1948  at  Rs.  10  lakhs 
against  which  out  of  the  profits  of  the  year  of  more  than 
Rs.  13  lakhs,  an  amount  of  Rs.  7  lakhs  was  set  aside  towards 

18.    Tables  XXXVI  and  XXXVIa. 


UNITED   COMMERCIAL  BANK  235 

Contingency  Fund  and  another  Rs.  3  lakhs  towards  the 
writing  off  of  bad  debts. 

Starting  with  a  high  paid  up  capital,  its  ratio  of  paid-up 
capital  and  reserve  to  deposits  continues  at  a  satisfactory 
level. 

Agency  arrangements  exist  with  the  National  City  Bank 
of  New  York,  London  and  exchange  facilities  within  the 
sterling  area  are  offered. 

11.     The  United  Commercial  Bank19 

Started  under  the  auspices  of  a  powerful  industrial  and 
trading  group,  the  United  Commercial  Bank  took  rank 
within  five  years  of  its  existence  among  the  leading  half 
a  dozen  banks  of  India.  In  1947  when  it  was  overtaken  by 
the  orgy  of  mob  violence  and  destruction,  it  had  58  branches 
in  India  and  24  more  in  Pakistan.  Although  the  Bank  had 
loaded  itself  with  the  Pakistan  branches  only  recently  by 
a  merger  with  the  United  Sind-Punjab  Bank  Ltd.  and  these 
branches  ceased  to  function  after  the  Partition,  the  Bank 
saved  itself  from  any  serious  losses  by  a  commendable 
exercise  of  foresight  and  cautiousness.  During  a  time  of  high 
dividends  and  mounting  share  prices,  it  has  refused 
resolutely  to  declare  any  dividends  and  preferred  to  aug- 
ment its  reserves. 


19.    Tables  XXXVII  and  XXXVIIa. 


CHAPTER   VII 

ECONOMY  AND  EFFICIENCY  OF  INDIAN  BANKS1 

1.    Gross  Profits 

THE  GROSS  PROFITS  OF  A  BANK  are  the  difference  between 
its  total  earnings2  and  the  interest  it  pays  its  depositors. 
In  other  words,  gross  profits  represent  the  cost  which  the 
public  has  to  bear  for  the  services  of  banks  as  intermedia- 
ries. Changes  in  gross  profits  may  occur  either  because 
earning  and  deposit  rates  are  not  accurately  adjusted  to 
each  other  or  because  the  costs  of  banking  business13  have 
altered.  Maladjustments  between  earning  and  deposit 
rates  can  be  only  temporary  and  therefore  are  not  relevant 
factors  in  long  period  changes.  Under  competitive  condi- 


1.    Tables  XXXVIII  to  XLI. 
la 


1939 

(Rupee 

Figures  in 

Lakhs) 

Capital        Gross 

P.C.  to 

P.C.  to        Net 

P.C.  to 

Reserves      Profits 

Total 

Expenses      Total    Profits 

Total 

&   Deposits 

Resources 

Resources 

Resources 

Mysore 

324.45 

2.6 

1.3 

1.3 

Union 

197.09 

3.1 

1.5 

1.6 

Comilla 

136.13 

3.3 

2.6 

0.7 

Behar 

135.19 

2.5 

2.1 

0.4 

Indo-Commercial 

90.23 

4.4 

30 

1.4 

Devkaran  Nanjee 

49.95 

1.3 

2.3 

0.1 

Nath 

132.37 

2.8 

2.2 

0.6 

Indian 

122.10 

2.2 

1.3 

0.9 

24 

Indian  Scheduled  Banks 

1939 

203,54 

477 

2.34 

303 

1.49 

174 

0.85 

1940 

223,37 

490 

2.18 

312 

1.39 

176 

0.79 

1941 

261,89 

529 

2.02 

334 

1.27 

1% 

0.75 

1942 

363,28 

597 

1.64 

370 

1.02 

227 

0.62 

Indian  Scheduled 

Banks 

Capital 

Total 

P.C.  to 

Gross 

P.C.  to 

Net 

P.C.  to 

Salaries 

Reserves 

Earnings      Total 

Profits 

total 

Profits 

total 

&  wages 

&  deposits 

resources 

resources 

resources 

as  P.C. 

to  gross 

profits. 

1945 

852,64 

_ 

— 

_ 

_ 

— 

— 

— 

1946 

814,01 

2726 

3.34 

1948 

2.39 

936 

1.14 

35.8 

1947 

864,02 

2983 

3.45 

2155 

2.49 

918 

1.09 

38.0 

1948 

837,37 

2973 

3.55 

2213 

2.64 

807 

0.96 

42.9 

2.    Table  X  and  Ch.  Ill  §  11. 


GROSS  PROFITS  237 

tions,  long  period  movements  in  gross  profits  are  as  a  rule 
the  expression  of  changes  in  costs  of  banking  business. 

Gross  profits  are  best  expressed  as  a  percentage  of 
aggregate  resources,  capital,  reserve  and  deposits  which  are 
employed  in  earning  them.3 

Among  big  Indian  joint-stock  banks,  the  highest  rate  of 
gross  profits  is  earned  by  the  Imperial  Bank  of  India. 
Actually,  the  rate  is  much  higher  since  the  Imperial  Bank, 
following  the  practice  of  British  banks,  excludes  taxes 
payable  by  it  from  the  figures  of  gross  profits.  Till  the 
Depression  cut  into  its  profits  appreciably  about  1931  and 
the  statutory  changes  of  1935  deprived  it  of  a  portion  of 
interest-free  funds,  the  rate  rarely  fell  below  3.20  and  was 
usually  very  much  higher.  Self-evidently,  new  areas  and 
classes  with  which  the  bank  was  brought  into  contact 
through  its  new  statutory  branches  created  very  largely 
between  1921  and  1926  have  not  caused  any  adverse  changes 
in  the  rates  paid  on  deposits  or  the  lucrativeness  of  its  busi- 
ness. Even  after  the  Depression,  the  rate  continues  pretty 
high,  never  falling  below  2.50.  These  rates  may  be  com- 
pared with  that  of  a  typical  big  British  bank  like  the 
Barclays  which  earned  2.4  per  cent  in  a  fairly  normal  year 
like  1926. 

The  lowest  rate  of  gross  profits  is  earned  usually  by  the 
Bank  of  Baroda.  Except  for  a  sporadic  fluctuation  in  depo- 
,sits  or  in  gross  profits  here  and  there,  the  Depression  seems 
to  have  affected  this  bank  but  little.  Its  rate  of  gross  profits 
has  rarely  fallen  below  1.50  and  levels  above  1.70  and  1.80 
are  pretty  common,  particularly  in  pre-Depression  years. 

A  close  examination  of  the  figures  for  the  leading  six 
banks  of  India  makes  it  clear  that  there  is  no  evidence  of 
any  tendency  to  a  secular  fall  in  the  rate  of  gross  profits. 
In  the  case  of  some  of  these  banks,  the  onset  of  the  Depres- 
sion caused  some  recession  in  the  rate  of  gross  profits  but 
there  is  more  than  ample  evidence,  in  recent  years,  of 
recovery  to  accustomed  levels. 

3.  In  all  cases  interest  earnings,  profits,  expenses,  etc.,  are  aggregates  for  the 
whole  year,  but  to  arrive  at  percentages,  have  been  divided  not  by  the  average 
resources  for  the  year  but  resources  as  they  stood  on  31st  December  (31st  March 
for  Allahabad  Bank).  In  so  far  as  December  represents  average  conditions  the 
inaccuracy  is  mitigated. 


238  ECONOMY  AND  EFFICIENCY 

This  evidence  of  recovery  is  again  very  remarkable  since 
in  the  last  few  years,  Indian  joint-stock  banks  have  added 
to  their  branches  in  a  most  striking  manner.  It  will  be 
recalled  that  in  the  case  of  many  of  them  the  volume  of 
resources  per  branch  has  shown  substantial  declines.  Yet, 
the  tendency  of  gross  profits  rate  to  maintain  itself  proves 
that  we  are  far  from  reaching  positively  unprofitable 
classes  or  areas  in  the  country. 

2.     Net  Profits 

The  net  profit  of  a  bank  is  the  balance  of  gross  profits 
over  and  above  the  expenses  incurred  in  the  management 
of  its  business.  Changes  in  net  profits  over  a  period  of 
time  indicate  whether  changes  in  the  size  of  a  bank  have 
brought  with  them  economies  or  diseconomies  of  manage- 
ment. Net  profits  of  banks  relatively  to  each  other  throw 
light  on  their  relative  efficiencies  of  management  or 
organization  as  well  as  their  special  problems  and  diffi- 
culties. Net  profits  are  thus  a  matter  of  deep  concern  both 
to  shareholders  and  the  community  at  large. 

Net  profits  are  again  best  expressed  as  a  percentage  of 
the  aggregate  resources,  capital,  reserve  and  deposits  which 
are  employed  to  earn  them.  The  difference  between  the 
rates  of  gross  profits  and  net  profits  gives  us  the  expense 
ratio  of  banks  per  unit  of  resources.4 

The  Imperial  Bank  of  India  maintains  again  the  highest 
rate  of  net  profits.  Till  the  Depression  produced  its  effects 
by  1932,  the  rate  moved  well  above  1.50  reaching  as  high 
as  2.0  in  the  boom  year  1921  and  1.85  in  the  normal  year 

4.  Net   Profits    (Percentage   of   Resources.) 

Dec.          Lloyds.              Midland.  National             Westminster  Barclays. 

31st.  Provincial. 

1929  0.59  0.60  0.72  0.65  0.65 

1930  0.49  0.51  0.60  0.66  0.47 

1931  0.49  0.51  0.60  052  0.48 

1932  0.35  0.44  0.50  0.44  0.38 

1933  0.33  0.50  0.51  0.43  0.39 

1934  0.37  0.50  0.51  0.42  0.41 

1935  0.36  0.48  0.51  0.38  0.40 

1936  0.37  0.46  0.51  0.42  0.41 

1937  0.39  0.46  0.54  0.43  0.45 

1938  0.37  0.48  0.53  0.39  0.40 

1939  0.32  0.40  0.52  0.36  0.35 


EXPENSES  239 

1927. 

The  Allahabad  Bank  or  the  Bank  of  Baroda  tends 
generally  to  show  the  lowest  rate  of  net  profits.  The  Bank 
of  Baroda,  it  will  be  recalled,  has  the  lowest  rate  of  gross 
profits  and  its  expense  ratio  shows  itself  to  advantage  as 
compared  with  many  banks  in  this  country.  Its  low  rate 
of  net  profits  is  therefore  due  to  causes  which  operate  on 
its  gross  rate  and  which  we  have  analysed  elsewhere.5 

The  Allahabad  Bank  reveals  a  different  situation.  Its 
rate  of  net  profits,  although  low,  has  been  remarkably  stable. 
While  it  reached  levels  much  above  0.80  during  the  first 
World  War,  it  has  been  generally  in  the  neighbourhood  of 
0.50  and  sometimes  above  it  in  post-war  times. 

The  Depression  makes  it  difficult  to  speak  about  any 
secular  tendencies  of  net  profits.  While  gross  profits  fell 
and  recovered,  different  banks  were  able  to  reduce  their 
expenses  in  different  degrees.  Most  of  the  banks  found 
their  expense  ratio  actually  mounting  up  while  one  or  two 
like  the  Bank  of  Baroda  and  the  Central  Bank  of  India 
succeeded  in  checking  the  rise.  The  Imperial  Bank  seems 
to  have  succeeded  most,  due  probably  to  its  growing 
Indianisation.6 

3.     Expenses 

Salaries  paid  to  the  staff  are  at  once  the  most  important 
and  unfortunately  the  most  elastic  head  of  a  bank's  expen- 
diture. They  are  best  expressed  as  a  percentage  of  the 
gross  profits  of  a  bank,  gross  profits  being  the  direct  source 
out  of  which  they  must  be  supported.  The  Barclays  Bank 
showed  this  fraction  for  a  normal  year  like  1926  at  49.75, 
a  figure  which  holds  good  probably  for  all  the  Big  Five 
of  England. 

In  India,  this  fraction  varies  from  about  25  per  cent  in 
the  case  of  the  Bank  of  India  to  about  52  to  55  per  cent  in 
the  case  of  the  Allahabad  Bank.  Comparing  post-Depres- 
sion years  with  those  immediately  preceding,  we  do  not 
find  an  appreciable  rise  in  the  fraction.  Over  the  last  25 
years  or  so,  however,  the  fraction  shows  a  secular  rise.  It 

5.  Ch.   VI.    §5. 

6.  See  Table  XXXIX. 


240  ECONOMY  AND  EFFICIENCY 

is  partly  due  no  doubt  to  the  extension  of  branches  but 
partly  it  may  be  due  to  qualitative  improvement  in  the 
bank  personnels. 

The  stability  of  gross  profits  rates  and  the  secular  rise 
in  the  expense  ratios  of  banks  raise  the  question  whether 
our  banks  have  expanded  beyond  the  point  of  maximum 
profitability.  It  is  not  easy  to  draw  definite  inferences 
since  the  Depression  has  hit  different  banks  in  different 
•degrees.  Their  ability  to  reduce  their  overhead  expenses 
naturally  varies.  The  Punjab  National  Bank  is  perhaps 
the  worst  sufferer,  if  only  the  level  of  net  profits  is  taken 
into  account.  The  Allahabad  Bank  more  than  maintained 
its  position  while  the  Bank  of  India,  the  Central  Bank  of 
India  and  the  Bank  of  Baroda  prevented  fall  to  very  low 
levels.  The  net  profits  rate  of  the  Imperial  Bank  never 
receded  below  1.10  per  cent.  The  tide  was  generally 
reversed  by  1936  and  recovery  to  pre-Depression  levels  is 
now  only  a  question  of  time. 

Taking  pre-Depression  years,  three  banks,  namely,  the 
Imperial  Bank,  the  Central  Bank  of  India  and  the  Bank  of 
India  showed  a  rate  of  net  profits  well  above  1.00  per  cent. 
The  Punjab  National  Bank  and  the  Bank  of  Baroda  record 
a  rate  generally  above  0.80.  The  Allahabad  Bank  had  and 
still  has  a  stable  rate  of  about  0.50  and  more. 

4.     Examples  from  other  countries 

Experience  of  other  countries  should  throw  some  light 
on  the  significance  of  these  differences.  The  net  profits  rate 
of  London  banks  between  1861  and  1913  and  the  rate  for 
banks  in  England  and  Wales  between  1874  and  1913  have 
both  declined  in  a  progressive  manner.  In  the  latter  case, 
the  decline  has  been  from  1.88  per  cent  in  1874  to  0.57  per 
cent  in  1923.  For  Barclays  Bank,  which  may  be  taken  as 
typical  of  the  Big  Five,  the  rate  for  1926  was  0.73.  There  is 
no  doubt  about  the  causes  of  this  remarkable  decline.  Their 
expenditure  ratio  has  mounted  up  with  ruthless  consistency, 
the  items  of  expenditure  practically  remaining  the  same. 
Increased  charges  have  largely  occurred  under  the  heads 
Salaries,  Rents,  Taxes  and  Telephone  Charges,  items  all 
connected  with  the  expansion  of  branches.  In  actual 


EXAMPLES  FROM  OTHER  COUNTRIES  241 

figures,  the  ratio  of  expenses  to  working  resources  mounted 
up  from  0.74  in  1861  to  0.96  in  1914  for  all  banks  in  London. 
Per  unit  of  resources  employed,  there  is  no  doubt  that 
the  expenses  of  banking  business  are  very  high  in  this 
country.  In  spite  of  a  progressive  deterioration  from  1861 
to  1914,  the  expense  ratio  of  British  banks  was  only  0.96  per 
cent  in  the  latter  year.  Only  two  banks  in  this  country, 
the  Bank  of  India  and  the  Bank  of  Baroda  show  a  ratio 
which  compares  favourably  with  the  British  ratio.  The 
example  of  these  two  banks,  so  diverse  in  the  character  of 
the  territories  served,  is  sufficient  proof  that  special  condi- 
tions of  India  as  such  cannot  explain  the  difference  in  the 
outcome  of  banking  in  India  and  banking  in  England.  The 
expense  ratios  of  these  two  banks,  which  vary  between  0.75 
to  0.85  per  cent  are  superior  to  that  of  a  typical  big  bank 
like  the  Barclays  even.  The  other  big  five  Indian  banks 
have  expense  ratios  which  vary  between  the  wide  range  of 
1.40  to  2.50  per  cent.  The  lower  limit  is  represented  by  the 
Central  Bank  of  India  and  the  upper  limit  by  the  Indian 
Bank  of  Madras. 

Comparison  with  British  banks  is  to  an  extent  unfair  to 
Indian  banks  since  Great  Britain  represents  the  most 
advanced  and  experienced  banking  system  of  the  world. 
The  volume  of  resources  per  office  and,  consequently,  gross 
profits  are  so  large  in  Great  Britain  that  even  with  their 
much  more  elaborate  organisation  and  liberal  salaries,  only 
a  small  fraction  out  of  the  latter  has  to  be  paid  out  in 
expenses.  In  other  words,  the  fraction  of  gross  profits 
retained  as  net  profits  is  the  highest  in  the  world.  It  has 
tended  even  in  recent  years  to  exceed  85  and  90  per  cent 
when  in  other  countries  like  Switzerland  and  the  United 
States  35  to  40  per  cent  before  the  crisis  and  25  to  35  per 
cent  after  the  crisis  have  been  the  rule.  Among  Indian 
banks  the  fraction  has  been  the  lowest  for  the  Allahabad 
Bank  (21  to  25  per  cent)  and  the  Punjab  National  Bank 
(10  to  20  per  cent),  moderately  low  for  the  Central  Bank 
(35  to  40  per  cent)  and  fairly  high  for  other  banks  (40  to 
50  per  cent).  The  Bank  of  India  leads  with  the  highest 
fraction  which  is  generally  in  the  neighbourhood  of  55  per 
cent. 

M.  B.  I.— 16 


242  ECONOMY  AND  EFFICIENCY 

5.    Organization  and  Practices 

The  main  factor  in  the  high  expense  ratios  of  our  banks 
is  indisputably  the  small  volume  of  resources  with  which 
they  have  to  operate.  Modern  methods  of  banking  pre- 
suppose certain  elaborate  organisation  and  practices.  They 
prove  cheap  only  when  the  resources  which  are  to  be 
handled  are  very  large.  In  India  each  step  in  expansion 
means  as  a  rule  venturing  on  areas  of  lower  and  lower 
banking  potentialities.  The  outcome  is  increasing  expense 
ratios. 

The  resources  per  branch  of  the  Bank  of  India  are  thrice 
as  high  as  those  of  the  Imperial  Bank  which  ranks  next  to 
it  on  this  point.  It  is  inevitable,  therefore,  that  its  expense 
ratio  should  be  the  lowest.  Other  banks  have  resources 
per  branch  which  range  from  about  45  lakhs  in  the  case 
of  the  Imperial  Bank  of  India  to  a  mere  10  lakhs  in  the 
case  of  the  Indian  Bank  of  Madras.  In  regard  to  their 
expense  ratios,  it  will  be  found  that  their  ranking  is 
approximately  the  same  as  that  which  holds  for  their 
resources  per  branch. 

It  is  also  true  that  our  banks  have  yet  to  develop  a 
technique  suitable  to  the  conditions  and  banking  resources 
of  the  country.  Perhaps,  the  main  weakness  lies  in  the 
quality  of  the  personnel  which  our  banks  recruit.  It  is  to 
be  feared  that  the  wastefulness  of  cheap  labour  and  the 
economy  of  high  wages  are  no  more  than  pious  phrases 
even  in  the  highest  business  quarters  in  this  country. 
Every  factor  seems  to  conspire  to  put  a  premium  on  every- 
thing except  qualifications  and  ability.  Little  has  been 
done  to  develop  any  special  type  of  training  suitable  for 
the  small  and  distant  places  in  the  countryside  or  the  lean 
outskirts  of  big  places.  Premises  of  Indian  banks  are  apt 
to  present  the  appearance,  sometimes  of  a  holiday  picnic 
and  sometimes  of  the  confusion  and  disorder  of  an  Indian 
bazaar.7 


7.    On  the  occasion  of  the  inauguration  of  the  Sydenham  College  Banking  Asso- 
ciation in  1924  Sir  Alexander  Gray,   Manager  of  the  Bank  of  India,  observed 
inter  alia— -"The  answer  is — the  extraordinary  expense  of  a  branch  office  in  India 
as  compared  with  that  in  England  and  more  especially  in  Scotland. 
In  Great  Britain,  the  staff  of  a  new  branch  bank  may  consist  of  nothing  but 


DIVIDENDS  243 

Little  accurate  or  systematic  thought  has  been  devoted 
to  the  planning  and  execution  of  bank  organisation.  Modern 
devices  are  conspicuous  by  their  absence.  Little  effort  is 
made  to  distinguish  between  profitable  and  unprofitable 
activities,  cost  accounting  and  specific  investigations  being 
looked  on  as  dangerous  heresies. 

The  net  profits  of  banks  computed  as  percentages  of 
capital  and  reserves  vary  between  9.01  per  cent  for  the 
Bank  of  Baroda  to  16.5  per  cent  for  the  Indian  Bank.  This 
is  indeed  remarkable  since  the  ratio  of  capital  and  reserves 
to  borrowed  resources  is  much  higher  than  in  England  and 
certainly  not  inferior  to  those  of  other  countries.  The 
corresponding  percentages  for  England,  France,  the  United 
States  and  Switzerland  are  markedly  lower.  In  other 
words,  the  profits  available  for  distribution  to  shareholders 
are  quite  generous  in  this  country. 

6.     Dividends 

It  has  been  sometimes  alleged  that  banks  in  India 
distribute  too  large  a  share  of  their  net  profits  as  dividends 
with  the  object  of  maintaining  the  value  of  their  shares  and 
creating  a  spurious  kind  of  confidence  in  themselves.  Such 
an  allegation  could  not  hold  true  of  the  more  well-known 
banks  in  the  country.8  In  times  of  exceptionally  lean  profits 
like  those  which  succeeded  the  1929  crisis,  dividends  have 
been  maintained  by  allotting  as  large  a  fraction  of  net  profits 
as  80  to  90  per  cent  for  the  purpose.  Such  was  the  policy 
of  the  most  conservative  and  well-managed  banks  even  like 

a  manager  and  one  junior  clerk,  probably  an  apprentice  while  a  small  office  at 
Parel  (a  poor  part  of  Bombay)  would  require  : — 

An  Agent, 

Accountant, 

Receiving  Cashier, 

Paying  Cashier, 

Two  clerks, 

and  about  four  sepoys  or  hamals, 

together  with  an  organization  at  Head  Office  to  replace  these  men  at  a  moment's 
notice  in  case  of  sickness  or  ceremonies. 

But  the  real  crux  of  the  matter  is  that  the  Indian  Bank  Official  must  learn 

to  do  his  own  routine  work  and  not  only  sit  in  an  office  chair  and  give  orders 
to  clerks  and  peons;  at  the  same  time,  I  do  not  suggest  that  you  should  blindly 
imitate  British  banking  practice.  I  would  ask  you  to  study  the  real  indigenous 

banking  organizaton  of  India  i.e.  the  Shroffing  System " 

8.    Ch.  VI  §  1,  2,  3  and  4. 


244  ECONOMY  AND  EFFICIENCY 

the  Bank  of  India  and  the  Bank  of  Baroda.  But  ordinarily, 
the  fraction  rarely  exceeds  60  per  cent.  The  share  values 
of  these  banks  follow  the  course  of  the  stock  exchange 
cycles  and  give  no  ground  to  suspect  any  undue  inflation 
of  values.  As  in  the  case  of  the  Allahabad  Bank,  their 
affiliation  and  other  well-known  qualities  exercise  some 
influence  on  values  over  and  above  the  influence  of  mere 
relative  return.  Otherwise,  the  main  evil  in  this  field  is  the 
declaration  of  profits  and  dividends  even  though  no  profits 
or  no  adequate  profits  have  been  made  by  new  banks  or 
banks  which  have  yet  to  establish  themselves  in  public 
esteem.  The  practice  is,  however,  very  hard  to  eradicate  as 
a  low  dividend  is  apt  to  be  understood  as  an  admission  of 
doubtful  prospects  for  a  bank.  Since  the  public  does  not 
and  cannot  discriminate  between  prudent  policy  and  admis- 
sion of  frustrated  hopes,  a  bank  management  which  has  the 
courage  to  declare  a  low  dividend  may  find  itself  inviting 
the  very  disaster  it  is  seeking  to  avert.9 


9.    Table  XL. 


CHAPTER    VTII 

THE  RESERVE  BANK  OF  INDIA1 

IN  HIS  ANNEXE  to  the  Chamberlain  Commission's  Report, 
Keynes  developed  the  first  serious  and  comprehensive 
scheme  for  a  Central  bank  for  India.  In  view  of  subsequent 
events,  it  is  a  memorable  feature  of  his  scheme  that  he 
envisaged  a  combination  of  central  and  commercial  banking 
functions,  very  much  on  the  lines  of  the  Banque  de  France. 
The  need  of  a  Central  bank  did  not,  however,  become  an 
article  of  accepted  faith  in  India  till  central  banks,  indepen- 
dent of  government  influence,  were  proclaimed  in  inter- 
national conferences  as  the  only  protection  against  economic 
and  monetary  chaos  of  the  post-World-War  I  kind.  The 
Hilton- Young  Commission  thereafter  discovered  or  pre- 
tended to  discover  "the  inherent  weakness  of  a  system  in 
which  the  control  of  currency  and  of  credit  is  in  the  hands 
of  two  distinct  authorities  whose  policies  may  be  widely 
divergent,  and  in  which  the  currency  and  banking  reserves 
are  controlled  and  managed  separately  one  from  the  other". 
It  rejected  the  proposal  to  transform  the  Imperial  Bank  of 
India  into  a  Central  bank  for  the  purpose  in  a  doctrinaire 
manner  and  elaborated  a  scheme  for  a  new  Central  bank, 
the  main  features  of  which  were  later  incorporated  into  the 
Reserve  Bank  of  India. 

It  is  necessary  to  recall  the  background  to  the  present 
Reserve  Bank  of  India  Act  of  1934.  For,  the  main  consti- 
tuents of  that  background  still  persist  and  may  influence 
the  future  working  of  the  Reserve  Bank  in  a  material 
manner. 

Action  on  the  conclusions  of  the  Hilton- Young  Commis- 
sion was  taken  in  January  1927  with  the  introduction  in  the 
Legislative  Assembly  of  a  bill  for  the  Reserve  Bank.  In 
this  bill,  the  bank  was  envisaged  as  a  shareholders'  bank 
with  a  majority  of  the  Board  of  Directors  elected  by  share- 
holders and  a  Governor  and  Deputy  Governor  nominated 
by  the  Governor-General-in-Council.  A  Joint  Select  Com- 

1.    See  Table   XLI. 


246  RESERVE  BANK  OF  INDIA 

mittee  of  the  Assembly  to  which  the  bill  was  referred  made 
important  changes.  In  the  first  place,  it  held  that  the  capital 
of  the  Bank  should  be  supplied  by  the  State  since  it  is  an 
invariable  experience  that  the  participation  of  shareholders 
in  the  control  of  joint-stock  enterprise  is  a  mere  myth  and 
power  always  falls  into  the  hands  of  a  self-elective,  close 
oligarchy.  Secondly,  while  active  engagement  in  agri- 
culture, commerce,  finance  or  industry  was  a  desirable 
qualification  in  a  member  of  the  Board,  membership  of  the 
Indian  or  local  Legislatures  or  of  the  Board  of  Directors  of 
Co-operative  Banks  should  not  be  a  bar,  as  proposed  in  the 
Bill.  Rejecting  the  shareholders'  principle  in  this  manner 
the  Committee  then  proceeded  to  indicate  how  the  Govern- 
ing Board  of  the  Reserve  Bank  was  to  be  created.  Six 
members  of  the  Board  out  of  a  total  15  were  to  be  elected 
by  the  Indian  and  Local  Legislatures  and  the  majority  was 
to  be  Indian.  The  Committee  insisted  that  either  the 
Governor  or  the  Deputy  Governor  must  be  an  Indian.  These 
changes  were  suggested  on  the  ground  that  the  Executive 
in  India  in  no  way  represented  or  was  responsible  to  the 
Indian  public  and  that  its  nominations  meant  in  effect  alien 
political  influence  in  the  place  of  Indian  political  influence. 

At  one  stage,  Government  were  willing  to  give  up  the 
shareholders'  principle  so  far  as  the  supply  of  capital  went 
but  insisted  that  the  bill  would  have  "to  live  or  die  accord- 
ing to  our  success  ...  in  finding  a  satisfactory  directorate". 
After  a  visit  to  London  for  discussion  by  the  Finance 
Member,  however,  Government  tried  to  revert  to  the  share- 
holders' principle  but  the  new  bill  was  disallowed  by  the 
President  of  the  Assembly.  In  February  1928,  after  some 
erratic  voting  in  the  Assembly,  the  Government  abandoned 
the  Bill. 

The  immediate  cause  which  brought  a  Reserve  Bank  into 
existence  was  not  the  monetary  and  banking  needs  of  the 
country  but  impending  changes  in  the  Central  Government 
which  involved  the  transfer  of  the  Finance  Portfolio  and 
Finance  Department  to  a  minister  responsible  to  a  Federal 
Legislature.  The  Second  Report  of  the  Federal  Structure 
Committee  (13th  January  1931)  described  it  as  "a  funda- 
mental condition  of  the  success  of  the  Constitution  that  no 


RESERVE  BANK  OF  INDIA  247 

room  should  be  left  for  doubts  as  to  the  ability  of  India  to 
maintain  her  financial  stability  and  credit,  both  at  home 
and  abroad".  In  the  sphere  of  currency,  credit  and  exchange, 
this  meant,  according  to  the  Parliamentary  Joint  Committee 
on  Indian  Constitutional  Reform  (1933-34),  that  "a  Reserve 
Bank  on  a  sure  foundation  and  free  from  political  influence 
should  already  have  been  established  and  in  successful 
operation  before  the  Constitutional  changes  at  the  Centre 
take  place".2  The  Joint  Committee  was  as  a  matter  of  fact 
already  anticipated  by  the  Reserve  Bank  of  India  Act  1934 
which  was  piloted  through  a  Legislature  which  could  have 
claimed  for  itself  anything  except  representative  character. 

The  "sure  foundation"  of  the  Reserve  Bank  was  made 
clear  in  Section  153  of  the  subsequent  Government  of  India 
Act  1935.  No  Bill  or  amendment  which  affects  the  coinage 
or  currency  of  the  Federation  may  be  introduced  or  moved 
in  either  chamber  of  the  Federal  Legislature  without  the 
previous  sanction  of  the  Governor-General  in  his  discretion. 
Tha  restrictions  relating  directly  to  the  Reserve  Bank  as 
such  are  even  more  significant.  The  White  Paper  proposals 
which  were  the  basis  of  the  work  of  the  Joint  Committee 
had  suggested  such  prior  consent  only  in  regard  to  the 
powers  and  duties  of  the  Bank  as  may  be  included  in  a 
Reserve  Bank  Act.  But  the  Act  of  1935  taking  its  cue  from 
the  Report  of  the  Joint  Committee3  required  such  prior 
consent  not  only  to  changes  in  the  "functions"  but  also  the 
"constitution"  of  the  Reserve  Bank  of  India.  In  the  light 
of  the  previous  history  of  the  question  given  above,  the 
object  behind  this  extension  of  restrictions  is  quite  obvious. 

We  have  already  discussed  some  of  the  problems  involved 
in  the  creation  of  a  Reserve  Bank  in  our  examination  of  the 
status  and  working  of  the  Imperial  Bank  of  India  before 
1935.  On  several  grounds,  the  Imperial  Bank  had  a  good 
claim  to  be  considered  as  the  most  natural  heir  to  the 
privileges  and  responsibilities  of  a  central  bank.  The  more 
important  among  them  were,  its  size  and  resources,  gradual 
but  natural  tendency  to  harmonisation  of  commercial  and 

2.  Report,  para  300. 

3.  Report,  para  391. 


248  RESERVE  BANK  OF  INDIA 

central  banking  functions,  the  high  liquidity  of  its  assets 
secured  and  enforced  by  law,  a  growing  friendliness  and 
acceptance  of  its  leadership  on  the  part  of  other  banks,  the 
clear  and  traditional  emphasis  on  public  interests  in  the 
appointment  of  its  executive,  an  unmistakable  trend 
towards  Indianisation  in  the  ownership  of  its  capital  and 
management,  etc.4  These  facts  have  to  be  borne  in  mind 
in  assessing  the  worth  and  value  of  the  new  institution 
created  by  the  Act  of  1934. 

1.     Constitution 

The  Reserve  Bank  of  India  is  a  shareholders'  bank.  Its 
share  capital  of  5  crores  is  divided  into  fully  paid-up  shares 
of  Rs.  100  each.  Any  person  domiciled  in  India  and  any 
company  registered  under  the  Indian  Companies  Act  can 
become  a  shareholder.  In  the  case  of  persons  who  are 
ordinarily  resident  in  India  but  domiciled  in  some  other 
part  of  the  Empire  and  companies  which  have  branches  in 
India  but  are  incorporated  under  the  law  of  some  other 
part  of  the  Empire,  it  is  a  condition  of  shareholding  that 
the  Governments  of  the  countries  concerned  should  not  be 
discriminating  against  Indians  in  any  way. 

Precautions  were  taken  to  prevent  accumulation  of  power 
in  particular  parts  of  India  or  in  a  few  hands.  Initially,  the 
aggregate  shares  were  allotted  on  the  basis  of  relative 
importance  to  five  areas,  Bombay,  Calcutta,  Delhi,  Madras 
and  Rangoon — into  which  the  country  was  divided  for  the 
purpose.  Secondly,  while  one  vote  was  allowed  to  be  cast 
for  each  five  shares  at  elections  to  the  local  Board  of  the 
area  concerned,  the  maximum  number  of  votes  for  each 
shareholder  was  fixed  at  10.  As  was  to  be  expected,  how- 
ever, economic  power  and  inherent  tendencies  of  joint-stock 
enterprise  are  slowly  frustrating  both  these  objects.  As 
the  law  does  not  prohibit  the  transfer  of  shares  from  the 
register  of  one  area  to  the  others,  the  financial  power  of 
Bombay  is  gradually  asserting  itself.  Its  shareholding 
which  amounted  to  140  lakhs  on  1st  April  1935  rose  to  236 
lakhs  by  30th  June  1946,  every  other  area  sustaining  a 

4.    Ch.  IV. 


CONSTITUTION  249 

loss.  Again,  since  the  ordinary  shareholder  understands 
little  and  cares  less  for  the  public  importance  of  the  Reserve 
Bank  but  is  only  interested  in  the  scrip  as  an  investment, 
shares  of  the  Bank  are  gradually  accumulating  into  fewer 
and  fewer  hands.  Between  the  dates  mentioned  just  now, 
the  number  of  shareholders  has  fallen  from  92  thousand  to 
about  46  thousand,  a  decline  in  which  all  the  five  areas 
share  more  or  less.  Short  of  a  limitation  on  the  number 
of  shares  which  an  individual  may  be  permitted  to  hold  and 
prohibition  of  transfer  from  one  area  to  another,  it  is  diffi- 
cult to  counteract  this  drift.  Leaving  out  of  account  danger 
of  evasion  and  arbitrary  interference  with  the  values  of 
shares  it  is  still  very  doubtful  whether  unwilling  share- 
holders will  take  any  interest  in  elections  or  prove  desirable 
or  enlightened  voters.  It  should  not  be  surprising  if  as  in 
France  and  England,  shareholding  is  in  the  course  of  time 
concentrated  in  a  few  plutocratic  families. 

As  the  history  of  several  central  banks  proves,  the  exist- 
ence of  shareholders  is  as  a  rule  an  immaterial  factor  in 
their  actual  working.  Either  by  tradition  as  in  England  or 
by  law  as  in  France,  the  United  States  and  elsewhere,  the 
day  to  day  executive  power  and  consequently  the  predomi- 
nant share  in  the  framing  of  policy  are  vested  in  persons 
who  acknowledge  no  responsibility  to  any  one  save  the 
country  at  large  or  immediately,  the  Government  of  the 
country.  This  precedent  is  followed  by  the  Reserve  Bank 
Act  of  India  in  that  the  appointment  and  removal  from 
office  of  its  Governor  or  Deputy  Governors,  approval  of 
their  salaries  and  allowances,  fixing  of  their  terms  of  office, 
any  officiating  appointments  connected  therewith,  super- 
session of  the  Central  Board,  liquidation  of  the  Bank  itself 
are  vested  in  the  Governor-General  who  is  to  act  in  his 
discretion.  But  this  adoption  of  the  practice  of  other  coun- 
tries is  merely  one  of  form  only  and  not  substance.  The 
relationship  of  the  Governor-General  to  the  people  of  this 
country  has  no  parallel  elsewhere  and  this  deprives  the 
arrangement  of  its  usual  import  and  significance. 

The  general  superintendence  and  direction  of  the  affairs 
and  business  of  the  Bank  are  entrusted  to  a  Central  Board 
of  Directors.  This  Board  consists  of  the  aforesaid  Governor 


250  RESERVE  BANK  OF  INDIA 

and  Deputy-Governors,  four  Directors  nominated  and 
removable  by  the  Governor-General  in  his  individual 
judgment,  eight  Directors  elected  by  Local  Boards  of  the 
five  areas  and  one  Government  official  nominated  by  the 
Central  Government.  A  Local  Board  is  constituted  for  each 
of  the  five  areas,  composed  of  five  members  elected  from 
among  themselves  by  the  shareholders  and  not  more  than 
three  members  nominated  by  the  Central  Board  and  repre- 
senting territorial  and  economic  interests  not  already  repre- 
sented in  the  Board.  Special  attention  is  to  be  given  to  the 
interests  of  agriculture  and  co-operative  banks  in  these 
nominations.  Local  Boards  are  to  advise  the  Central  Board 
on  such  matters  as  may  be  generally  or  specially  referred 
to  them  and  perform  duties  which  are  delegated  to  them. 

Freedom  from  political  influence  desired  by  the  Joint 
Committee  is  secured  by  two  main  disqualifications  which 
apply  to  Directorships  and  Membership  of  Local  Boards. 
No  salaried  Government  official  or  salaried  official  of  a  State 
in  India  can  hold  these  positions.  Members  of  the  federal 
or  provincial  legislatures  who  desire  to  hold  these  positions 
must  sever  their  connection  with  those  bodies.  Among  other 
persons  similarly  disqualified  are  officers  or  employees  of 
banks  other  than  co-operative  banks  or  persons  who  do  not 
hold  unencumbered  shares  of  the  Bank  to  the  nominal  value 
of  at  least  Rs.  5,000. 

2.    Monopoly  and  Management  of  Note-Issue5 

The  monopoly  of  note  issue  is  intended  to  give  the  Reserve 
Bank  complete  control  over  the  volume  of  cash  and  there- 
fore credit  in  the  country.  As  a  means  to  the  control  of 
the  entire  monetary  and  credit  situation,  its  usefulness  may 
be  analysed  from  different  angles. 

In  some  countries  notes  or  notes  and  coins  which  com- 
prise their  legal  tender  constitute  the  bulk  of  purchasing 
power.  They  are  the  main  media  of  transactions.  In 
others,  they  hold  an  inferior  status  as  means  of  exchange 
which  figure  largely  in  the  smaller  transactions  which  arise 
from  or  co-exist  with  the  volume  of  big  transactions.  The 

5.    Ch.  I  part  III. 


MONOPOLY  AND  MANAGEMENT  OF  NOTE-ISSUE  251 

former  situation  is  well  typified  by  France  in  which  the 
note  circulation  of  the  Bank  of  France  exceeds  by  a  third 
the  aggregate  time  and  demand  deposits  of  the  Bank  of 
France,  Parisian  banks  and  provincial  banks.  Control  of 
the  legal  tender  means  in  such  countries  control  of  the 
entire  monetary  system.  In  countries  like  England  and  the 
United  States  where  90  per  cent  and  even  more  of  the 
transactions  are  discharged  by  means  of  cheques,  the 
demand  for  currency  is  largely  a  demand  for  deposits.  The 
requirements  of  legal  tender  are  apt  to  be  very  sporadic 
and  to  lag  a  good  deal  behind  the  creation  of  bank  money. 
The  power  to  control  the  volume  of  legal  tender  is  there- 
fore an  ultimate  power  which  is  ill-suited  for  expeditious 
effects  and  still  less  for  anticipatory  checks.  Such  countries 
have  had  to  develop  close-knit  banking  systems  and  well- 
articulated  structure  of  interest-rates  in  which  an  impulse 
released  from  the  Central  bank  travels  automatically  to 
the  furtherest  extremities  of  the  monetary  organization. 
The  object  sought  to  be  achieved  is  to  affect  the  volume  of 
credit  directly  and  not  mediately  through  the  volume  of 
legal  tender. 

The  monetary  organisation  of  India  belongs  to  the  first 
type.  Though  the  public  has  been  long  familiar  with  three 
chief  forms  of  purchasing  power,  namely,  rupees,  currency 
notes  and  chequeable  deposits,  their  relative  importance 
today  is  very  different  from  what  it  was  a  few  decades  ago. 
Institutional  conditions  no  doubt  set  ultimate  limits  to  the 
use  of  each  form.  But  within  these  limits,  considerations 
of  convenience,  average  size  of  transactions,  per  head 
income,  level  of  prices,  etc.,  influence  the  use  of  each  and 
there  are  good  grounds  to  surmise  that  these  factors  have 
changed  considerably  in  the  last  forty  years.  On  the  whole, 
the  extension  of  notes  and  cheques  has  been  favoured  at  the 
expense  of  rupees. 

As  early  as  1913,  the  receipts  of  banks  in  Bengal  and 
Bombay  showed  for  rupees  as  low  a  percentage  as  8  to  24, 
as  against  a  percentage  for  currency  notes  of  70  to  88.  In 
a  poor  and  predominantly  agricultural  province  like  Madras, 
the  percentage  of  rupees  in  the  receipts  reached  44  only  as 


252  RESERVE  BANK  OF  INDIA 

against  52  for  currency  notes.6 

The  situation  must  have  altered  much  more  in  favour 
of  notes  when  the  Hilton- Young  Commission  deliberated 
on  the  currency  and  banking  problems  of  India.  It  was 
stated  before  the  Commission  that  places  which  at  the 
beginning  of  the  century  sent  their  remittances  to  banks  in 
nothing  but  rupees  were  sending  twenty-five  years  later  as 
much  as  half  in  currency  notes. 

Since  the  post-war  boom  year  1920,  there  began  a  remark- 
able return  of  rupees  from  circulation  which  was  much 
intensified  later  by  the  deflationary  movement  of  the  thirties. 
Between  1920-21  and  1937-38,  138  crores  of  rupees  have 
flowed  back  into  the  Currency  Office.  The  note-circulation 
has  actually  recorded  an  increase  in  the  same  period. 

It  is,  therefore,  more  than  probable  that  till  the  inflation 
of  the  second  World  War  currency  notes  out-distanced  in 
volume,  rupees  by  a  large  margin.  Official  witnesses  in 
India  placed  before  the  Hilton -Young  Commission  estimates 
tending  to  show  that  including  Rs.  85  crores  of  silver  coin 
and  bullion  then  held  in  the  Paper  Currency  Reserve,  the 
total  amount  of  rupees  coin  in  issue  at  the  time  was  Rs.  350 
to  Rs.  400  crores.  Of  this  huge  volume,  150  crores  only 
were  regarded  as  serving  monetary  purposes.  Taking  into 
account  the  great  return  of  coins  from  circulation  it  appears 
highly  improbable  that  the  volume  of  rupees  in  circulation 
could  have  been  anywhere  in  the  neighbourhood  of  active 
note  circulation  which  amounted  to  Rs.  183  crores  in 
1937-38.7 

As  between  currency  notes  and  chequeable  deposits  the 

former  still  exceed  the  latter  which  however  are  slowly 

i* 

6.  Receipts  of  Banks 

Percentage        Percentage        Gold 

in  in 

Currency  Rupees 

Notes 

Bank  of  Bengal  (4  weeks  ending  28  June  1913)     69.83  24.27  5.90 

Bank  of  Bombay  (February  to  May  1913)  81.39  15.56  3.08 

Bank   of  Madras  51.91  44.12  3  .92 

National  Bank  (10  May  to  30  June  1913)  88.21  7.95  3.80 

—Volume  III.     Appendices,  Chamberlain  Commission,  Pp.  724-726. 
Minutes  of  Evidence,  Hilton- Young  Commission,  Q.  7939-40. 

7.  Para  123.     Since  the  nickel  rupee  has  begun  to  replace  the  silver  rupee  from 
1947,  the  rupee  is  now  hardly  distinguishable  from  the  currency  note. 


MONOPOLY  AND  MANAGEMENT  OF  NOTE-ISSUE  253 

gaining  over  them.  If  allowance  were  made  for  the  un- 
doubted greater  velocity  of  deposits,  it  would  be  difficult 
to  say  which  predominate.78  This  might  be  compared  with 
the  proportion  of  deposits  to  note  circulation  which  is  3  :  2 
in  France  and  12  :  1  in  the  United  States. 

It  is  clear  in  any  case  that  notes  and  chequeable  deposits 
make  up  the  bulk  of  the  purchasing  power  of  the  country. 
Control  of  the  monetary  system  means,  therefore,  mainly 
the  control  of  notes  and  deposits.  Even  if  rupees  held  a 
status  higher  than  a  mere  means  for  small  change,  the 
demand  for  them  would  record  economic  changes  long  after 
they  have  gathered  momentum.  Besides,  there  is  ample 
evidence  to  believe  that  the  quantitative  relationship 
between  the  three  forms  of  purchasing  power  is  not  of  an 
invariable  kind. 

The  presumed  close  relationship  or  dependence  between 
credit  and  legal  tender,  etc.,  overlooks  the  natural  resistance 
which  any  sudden  and  drastic  changes  in  purchasing  power 
inevitably  set  up.  The  close  dependence  may  assert  itself 
in  the  long  run  but  measures  of  credit  control  must  act 
quickly  and  with  certainty.  Indian  experience  itself  fur- 
nishes illustrations  of  the  high  elasticity  and  mutual  inde- 
pendence which  different  forms  of  exchange  media  disclose 
in  practice. 

In  1920,  a  hectic  sale  of  reverse  councils  in  the  course 
of  a  few  months  withdrew  from  circulation  rupees  and 
notes  to  the  extent  of  39.07  crores.  Nothing,  however,  was 
detracted  from  the  volume  of  deposits.  On  the  contrary, 
during  the  same  months,  there  was  a  rise  in  deposits  of  23J 
crores  in  which  the  Presidency  banks  and  Indian  joint- 

7a.  (Figures  in  Crores) 

Demand  Deposits.  Active  Note  Bank  Clearings 

(Scheduled  Banks.)  Circulation 

1935-36  128  163  18,43 

1936-37  128  175  19,31 

1937-38  135  183  20,51 

1939-40  139  209  23,18 

1940-41  164  241  21,49 

1945-46  654  1162  61,20 

1946-47  725  1223  67,17 

1947-48  706  1228  59,61 

1948-49  674  1232 


254  RESERVE  BANK  OF  INDIA 

stock  banks  shared  equally.  The  rate  of  the  Bank  of  Bengal 
was  higher  by  J  per  cent  only  than  in  previous  2  years  and 
the  rate  of  the  Bank  of  Bombay  reached  a  slightly  higher 
level.  The  burden  of  the  stringency  was  mainly  thrown  on 
the  open  bazaar  where  the  rate  was  11  per  cent  as  against 
the  Presidency  banks'  rate  of  5  per  cent.  A  study  of  the 
cash  ratios  of  Indian  banks  indicates  that  they  are  adaptable 
to  changes  in  monetary  conditions  within  quite  wide  limits.8 

Again,  in  the  18  years  ending  with  1937-38,  118  crores  of 
rupees  have  returned  from  circulation.  But  there  has 
been  actually  a  net  absorption  of  currency  notes  to  the 
extent  of  49  crores,  a  very  remarkable  occurrence  in  view 
of  the  continuous  downward  pressure  on  the  price  level. 
Only  in  one  year,  1924-25,  was  there  a  return  of  notes  from 
circulation  against  an  absorption  of  rupees.  The  volume  of 
deposits,  as  is  to  be  expected,  continued  stable  till  1930  and 
with  the  expansion  of  bank  branches,  etc.,  grew  fast  there- 
after. 

Control  of  the  monetary  system  in  India  means  then  very 
largely  control  of  note-issue  and  control  of  deposit-currency. 
It  was  a  weakness  in  the  position  of  the  Imperial  Bank  that 
while  its  very  size  and  expanse  gave  it  some  control  over 
credit,  the  control  of  legal  tender  was  retained  by  the  Gov- 
ernment in  its  own  hands.  The  step  in  the  line  of  natural 
evolution  should  have  been  to  hand  over  the  management 
of  the  note-issue  to  the  Imperial  Bank.  But  a  new  institu- 
tion has  been  created  to  undertake  both  the  responsibilities. 
Our  subsequent  discussion  will  make  clear  whether  the  new 
institution  really  unifies  control  of  currency  and  credit  or 
the  old  dichotomy  of  monetary  management  continues  under 
a  different  form. 

(1)  Under  our  present  reserve  arrangements,  which  are 
described  in  detail  presently,  domestic  lack  of  confidence 
in  the  note-issue  or  an  internal  drain  by  presentation  of 
notes  for  encashment  is  not  contemplated  as  a  factor  which 
should  influence  the  size  of  our  reserves.  Our  present 
arrangements  are  aimed  at  securing  a  certain  volume  of 
gold  or  gold  equivalents  in  the  reserve.  Gold  does  not  cir- 

8.     Ch.  V  §  6. 


MONOPOLY  AND  MANAGEMENT  OF  NOTE-ISSUE  255 

culate  in  the  country  and  indeed  the  condition  of  redeem- 
ability,  namely,  sales  and  purchases  of  gold  in  bars  of  400 
oz.  each,  is  intended  to  discourage  raids  on  the  reserve  for 
domestic  purposes.  A  small  quantity  of  rupees  is  no  doubt 
stipulated  for  as  a  part  of  the  reserve  but  it  is  insignificant 
as  compared  with  the  volume  of  gold  and  gold  equivalents 
and  is  obviously  meant  to  meet  the  requirements  of  people 
for  small  change.  This  arrangement  is  justified  only  on  the 
presumption  that  the  people  of  India  have  full  confidence 
in  the  note-issue  of  the  country  and  in  a  crisis  would  be 
quite  content  with  supplies  of  notes. 

Our  reserve  then  is  held  largely  with  a  view  to  our  prob- 
able external  liabilities.  There  are  two  points  to  be  noted 
in  this  connection.  Any  demand  on  our  gold  resources  is 
now  connected  directly  with  our  volume  of  foreign  trade 
and  only  mediately  with  the  internal  volume  of  purchasing 
power  in  the  country.  As  a  matter  of  fact  the  old  view 
that  equilibrium  of  foreign  debits  and  credits  requires  a 
continuous  effort  to  maintain  the  domestic  price  and 
income  structure  in  equilibrium  with  price  and  income 
structures  abroad  contained  a  large  element  of  exaggera- 
tion and  unreality.  Under  conditions  of  continuous  inter- 
national trade,  it  is  unlikely  that  prices  and  incomes  will 
fall  out  of  step  very  far  without  calling  into  action  auto- 
matic and  immediate  correctives.  The  more  frequent 
causes  of  disequilibrium  are  temporary  breakdowns  of  mar- 
kets, divergences  in  interest-rates,  etc.,  which  cause  a  tem- 
porary excess  of  foreign  debits  over  credits  but  which  do 
not  justify  measures  to  restrict  or  diminish  the  volume  of 
domestic  credit.  Interference  with  price  and  income  struc- 
ture is  more  often  than  not  a  necessity  arising  out  of  gene- 
ral world  movement  towards  inflation  or  deflation.  Secondly, 
in  so  far  as  movements  of  our  trade-balance  are  influenced 
by  the  domestic  price-level,  it  would  have  been  more  logical 
to  fix  the  reserve  proportion  on  the  basis  of  notes  and 
deposits  rather  than  notes  alone. 

(2)  Although  notes  form  the  largest  single  constituent 
of  our  purchasing  power,  it  is  not  to  be  presumed  that  the 
state  of  money  and  credit  will  be  immediately  reflected  in 
the  volume  of  notes  held  in  the  Banking  Department  of 


256  RESERVE  BANK  OF  INDIA 

the  Reserve  Bank.  According  to  present  law,  commercial 
banks  need  hold  only  a  small  fraction  of  their  reserves  as 
compulsory  deposits  with  the  Reserve  Bank.  While  in 
recent  years  their  cash  on  hand  and  at  the  Bank  has  been 
about  15  per  cent  of  their  deposits,  the  minimum  amount 
to  be  lodged  by  them  at  the  Reserve  Bank  is  2  per  cent  of 
their  time  and  5  per  cent  of  their  demand  deposits  or  on 
the  average  3i  per  cent  only  of  their  total  deposits.  In 
regard  to  the  excess  over  this  minimum,  banks  have  two 
alternative  courses  open  to  them.  They  may  hold  the 
whole  of  this  excess  with  themselves  in  their  vaults  in 
which  case  it  will  consist  perforce  of  notes  and  coin.  Alter- 
natively, after  keeping  on  hand  a  bare  minimum  of  till 
money,  the  rest  could  be  deposited  with  the  Reserve  Bank. 

According  to  the  present  practice,  banks  hold  quite  a 
large  proportion  of  these  excess  reserves  with  themselves 
in  their  vaults  in  notes  or  coin.  Coins  are  probably  a  small 
part  while  the  greater  part  consists  of  currency  notes,  per- 
haps currency  notes  of  larger  denomination.  Even  if  we 
assumed  that  the  Big  Five  held  only  4  per  cent  of  their 
aggregate  deposits  in  1938-39  in  this  manner,  it  would  mean 
a  reserve  in  notes  in  their  vaults  of  about  3  crores.  For 
all  scheduled  banks  whose  deposits  were  then  about  240 
crores,  the  cash  actually  held  as  excess  reserve  would  be 
6  crores  out  of  a  total  banking  reserve  of  22  crores.  This 
figure  may  be  compared  with  notes  in  circulation  which 
amounted  to  about  185  crores  and  notes  held  in  the  Bank- 
ing Department  of  the  Reserve  Bank  which  amounted  to 
about  28  crores.  The  note  circulation  appearing  in  the 
returns  of  the  Reserve  Bank  included,  of  course,  the  6  crores 
which  were  really  dormant  in  the  vaults  of  banks. 

It  is  clear  that  if  inflation  took  the  form  of  more  notes 
in  public  hands,  the  banks  could  support  it  for  some  time 
without  recourse  to  the  Reserve  Bank.  Intimation  to  the 
Reserve  Bank  may  be  delayed  till  banks  begin  to  feel  that 
their  stock  of  notes  is  falling  to  imprudently  low  levels. 
If  inflation  were  to  take  place  in  the  form  of  deposits,  the 
volume  of  mutual  claims  at  the  clearing  house  should 
immediately  reveal  the  drift  of  things.  In  case  a  more 
definite  signal  in  the  shape  of  a  demand  for  more  notes 


MONOPOLY  AND  MANAGEMENT  OF  NOTE-ISSUE  257 

is  awaited,  the  commercial  banks  will  receive  it  first  after 
some  lapse  of  time  and  the  Reserve  Bank  will  become  aware 
of  the  situation  only  when  commercial  banks  decide  to  re- 
plenish their  coin  and  notes.  If  banks  made  it  a  practice 
of  holding  all  excess  over  till  money  as  deposits  at  the 
Reserve  Bank,  intimation  of  credit  conditions  will  reach 
that  Bank  at  a  much  earlier  stage. 

There  is  another  reason  why  the  practice  of  holding  all 
excess  over  till  money  as  a  deposit  with  the  Reserve  Bank 
is  likely  to  promote  efficiency  of  credit  control.  The  liabi- 
lities of  the  Reserve  Bank  in  the  form  of  notes  are  regu- 
lated by  law  by  prescribing  certain  reserve  requirements. 
But  the  deposits  it  holds  on  account  of  scheduled  banks  are 
subject  to  no  such  restrictions.  To  the  extent  to  which 
these  deposits  are  not  withdrawn  in  the  form  of  notes  to 
meet  the  requirements  of  circulation,  the  Reserve  Bank 
can  inflate  them  to  any  extent  by  rediscounts  or  grant  of 
loans.  Since  a  deposit  with  the  Reserve  Bank  is  treated  by 
banks  as  equivalent  to  cash  and  is  usable  at  clearing  for 
meeting  adverse  balances,  it  may  become  the  basis  for  a 
multiple  expansion  of  credit.  In  this  way,  the  fact  that  all 
the  surplus  cash  of  the  community  is  concentrated  in  the 
Reserve  Bank  and  that,  of  any  balances  created  in  favour 
of  scheduled  banks,  only  a  fraction  need  be  withdrawn  for 
expansion  of  the  circulation  while  the  rest  may  be  retained 
at  the  Bank  to  satisfy  compulsory  reserve  requirements  puts 
enormous  power  into  the  hands  of  the  Bank  over  the  mone- 
tary system.  If  excess  reserves  were  always  retained  in 
the  vaults  of  banks,  loans  made  by  the  Reserve  Bank  must 
immediately  cause  a  drain  on  notes  and  limit  its  power  to 
expand  purchasing  power. 

(3)  The  Reserve  Bank  Act  copied  from  the  Bank  of 
England  its  peculiar  feature  of  the  separation  of  Issue  and 
Banking  Departments.  During  the  long  century  which  has 
elapsed  since  the  Bank  Charter  Act  of  1844,  no  other  coun- 
try outside  the  British  Empire  has  found  it  necessary  or 
advisable  to  adopt  this  practice.  It  is  reasonable  to  ask  in 
these  circumstances  what  purpose  such  a  separation  is  in- 
tended to  serve  or  what  special  advantages  it  may  offer  to 
.this  country. 

M.   B.   17 


258  RESERVE  BANK  OF  INDIA 

Historically,  this  separation  marked  the  prevalence  in 
England  of  the  views  of  the  Currency  School  over  its  rival) 
the  Banking  School.  The  Currency  School  argued  that 
only  bank-notes,  which  according  to  their  proposals  were 
to  be  freely  convertible  into  gold  and  were  to  rise  or  fall 
with  inflow  or  outflow  of  gold,  and  metallic  coins  were 
money.  Other  forms  of  means  of  exchange,  particularly 
deposits,  were  not  money.  The  management  of  money  in- 
cluding notes  was  no  banking  function  at  all  and  might  be 
even  entrusted  to  a  government  department.  While  no 
competition  was  admissible  in  the  issue  and  management 
of  money  and  while  the  aggregate  of  coins  and  notes  was 
to  behave  as  if  it  were  fully  metallic,  the  Currency  School 
regarded  the  banking  work  of  the  Bank  of  England  to  be 
on  the  same  footing  as  the  business  of  other  banks.  The 
separation  of  the  two  departments  was  devised  to  mark 
this  alleged  distinction  of  principle  between  note-issue 
management  and  banking  business. 

Even  in  those  early  years,  events  speedily  proved  that  the 
alleged  distinction  between  notes  and  deposits  did  not 
exist  and  that  the  view  of  the  rival  school,  the  Banking 
School,  that  forms  of  currency  were  easily  interchangeable 
and  bore  no  fixed  relationship  to  each  other  was  the  correct 
one.  In  the  crisis  of  1847,  the  note  circulation  of  the  country 
did  not  fall  with  the  efflux  of  gold  but  deposits  only  fell. 
The  subsequent  enormous  growth  of  deposits  did  away  with 
the  last  vestiges  of  this  particular  belief  of  the  Currency 
School.  Besides,  in  those  countries  which  accepted  the 
principle  of  very  strict  restriction  or  almost  complete 
abrogation  of  the  commercial  functions  of  their  central 
banks,  the  other  part  of  the  doctrine  of  the  Currency  School, 
ill-conceived  as  it  was,  also  ceased  to  have  any  validity. 

As  the  MacMillan  Committee  on  Finance  and  Industry 
point  out,  "the  only  solid  reason"  for  this  arrangement  is 
that  "the  separation  of  the  Issue  Department  has  provided 
a  convenient  formula  for  dividing  the  profits  of  the  Bank 
of  England  between  the  Treasury  and  the  Bank  itself". 
According  to  the  British  practice,  the  profits  of  the  note- 
issue  belong  to  the  Treasury  and  the  rest  of  the  profits 
belong  to  the  Bank  of  England.  The  profits  of  the  note- 


MONOPOLY  AND  MANAGEMENT  OF  NOTE-ISSUE  259 

issue  consist  largely  of  the  income  from  assets  held  against 
the  fiduciary  part  of  the  note-circulation.  The  segregation 
of  the  Issue  Department  and  its  assets  facilitates  calculation 
of  these  profits  and  the  incidental  expenditure.  But  as  the 
Committee  showed,  this  elaboration  of  organisation  for  this 
particular  purpose  is  neither  necessary  nor  conducive  to 
accurate  or  just  results.9 

In  any  case,  this  argument  has  no  relevance  to  the 
Reserve  Bank  of  India  whose  profits  are  allocated  on  an 
altogether  different  basis.  Under  our  arrangements,  a 
cumulative  dividend  on  the  share  capital  of  the  Bank  at  a 
rate  not  exceeding  5  per  cent  and  as  fixed  by  the  Governor- 
General-in-Council  is  first  assured  to  the  shareholders.  Out 
of  the  surplus,  when  certain  prior  claims  of  the  Reserve 
Fund  were  met  till  it  was  raised  to  equal  the  capital  of  the 
Bank,  shares  were  to  be  allocated  out  of  the  balance  to 
additional  dividend  and  the  Governor-General-in-Council 
according  to  a  certain  scale.  It  is  clear  that  we  have  no 
separation  here  of  profits  according  to  their  source  and 
therefore  no  justification  on  this  ground  for  copying  the 
unique  bisection  of  the  Bank  of  England. 

The  publication  of  separate  balance-sheets  for  the  Issue 
and  Banking  Departments  conveys  certain  other  implica- 
tions which  deserve  to  be  examined  closely.  In  the  first 
place,  the  reserves  of  the  Central  bank  are  linked  indissolu- 
bly  in  the  public  mind  with  the  note-circulation  of  th£ 
country.  In  the  second  place,  the  notes  held  in  the  Banking 
Department,  which  should  represent  the  surplus  that  can 
be  legally  issued  with  the  existing  reserves  naturally  invite 
comparison  with  deposit  liabilities  of  the  Bank  to  the 
scheduled  banks. 

The  second  consequence  is  well  illustrated  by  reference 
to  the  beliefs  and  practices  of  the  British  system.  Since  the 
Act  of  1844,  England  has  adhered  to  the  principle  of  a  fixed 
fiduciary  issue.  The  excess  over  the  fixed  fiduciary  issue 
is  required  by  law  to  be  covered  by  gold  coin  or  bullion  to 
the  full  extent  This  excess  over  the  fiduciary  issue  is 
partly  in  actual  circulation  and  partly,  to  the  extent  that 

9.    Committee  on  Finance  and  Industry,   (1931)  pp.  143,  144. 


260  RESERVE  BANK  OF  INDIA 

trade  and  economic  conditions  do  not  require  it,  in  the 
Banking  Department.  The  notes  in  the  Banking  Depart- 
ment could  be  put  into  circulation  at  any  time  without 
infringing  the  law  of  note-issue  regulation.  The  deposit 
liabilities  of  the  Bank  of  England  to  joint-stock  banks  are 
the  measure  of  the  extent  to  which  that  bank  may  have  to 
meet  a  demand  for  notes.  The  relation  between  the  two 
volumes,  the  notes  in  the  Banking  Department  and  bankers' 
deposits  is  the  famous  "ratio"  or  "proportion"  of  the  British 
system. 

It  is  clear  that  the  "proportion"  in  so  far  as  it  has  a 
guidance  value  has  a  simple  and  obvious  meaning  to  the 
average  businessman  in  England.  The  simplicity  and 
obviousness  are  due  to  the  fact  that  above  a  certain 
minimum,  every  pound  note  must  be  covered  with  one  £  of 
gold  or  in  other  words,  notes  in  the  Banking  Department 
and  the  deposit  liabilities  of  the  Bank  of  England  can  be 
compared  directly  with  each  other  on  the  basis  1:1. 

In  India,  the  arrangements  are  altogether  different.  Our 
law  prescribes  that  gold  and  gold  equivalents  should  not  be 
less  than  two-fifths  or  40  per  cent  of  the  assets  held,  i.e.,  of  the 
note-circulation.  In  other  words,  8.47512  grains  of  fine  gold 
in  the  reserve  which  has  been  defined  as  the  gold  equiva- 
lence of  the  rupee  may  justify  the  Reserve  Bank  in  putting 
into  circulation  Rs.  2£  in  notes.  In  the  opposite  circum- 
stances, 8.47512  gold  issued  could  be  made  use  of  to  cause  a 
deflation  to  the  extent  of  Rs.  2£  in  notes.  It  is  clear  from 
this  that  calculations  of  the  excess  notes  which  are  avail- 
able for  issue  with  existing  reserves  cannot  be  simple  or 
obvious  under  our  system.  Even  the  British  arrangement, 
much  simpler  as  it  is,  has  been  described  by  the  MacMillan 
Committee  as  "confusing  and  misleading  to  anyone  who  is 
not  an  expert".  They  adduced  a  further  weighty  condem- 
nation on  the  ground  that  the  words  "reserve"  or 
"proportion"  under  such  an  arrangement  have  quite 
different  meanings  from  what  they  have  elsewhere — as  in 
India.  The  separation  of  Departments  and  balance-sheets 
of  the  Reserve  Bank  has  taken  place  on  such  a  basis  that 
the  inherent  difficulties  of  its  interpretation  have  been 
heaped  on  the  difficulties  of  complicated  reserve  arrange- 


MONOPOLY  AND  MANAGEMENT  OF  NOTE-ISSUE  261 

ments.10 

The  practice  of  the  Reserve  Bank  itself  is  an  admission  of 
the  inapplicability  in  the  case  of  our  note-issue  arrange- 
ments of  the  principle  of  separation  of  departments.  From 
1935-36  to  1937-38,  it  maintained  a  volume  of  notes  in  the 
Banking  Department  which  was  approximately  equal  to 
its  deposit-liabilities  to  scheduled  banks.  If  closely  adhere- 
ed  to,  the  practice  may  acquire  a  simple  and  logical  mean- 
ing in  ordinary  circumstances,  fluctuations  in  the  two 
quantities  indicating  the  trend  of  things.  But  the  initial 
equating  of  notes  in  the  Banking  Department  to  the  deposits 
of  scheduled  banks  is  obviously  an  arbitrary  procedure 
which  has  no  warrant  in  our  note-issue  regulations.  The 
working  of  this  arbitrary  practice  is  well  illustrated  by 
events  which  happened  in  1938-39.  It  appears  that  scheduled 
banks  acquired  balances  abroad  from  the  Reserve  Bank 
whose  corresponding  item  recorded  a  fall  of  about  9  to  10 
crores.  The  acquisition  was  effected  by  a  withdrawal  from 
their  statutory  deposits  to  the  tune  of  about  7£  crores  and 
an  increase  of  their  loans  and  discounts  at  the  Reserve  Bank 
of  about  2  crores  and  more.  The  Reserve  Bank  was  thus 
confronted  with  a  deflation  of  about  10  crores.  The  Bank 
preferred  to  add  about  2.6  crores  to  the  notes  held  in  the 
Banking  Department  against  an  actual  fall  of  3.8  crores  in 
Notes  in  Circulation  and  allow  Rupee  Coin  in  the  Issue 
Department  to  mount  up  by  about  7  crores.  A  net  reduction 
of  8.2  crores  in  the  volume  of  sterling  and  rupee  securities 
in  the  Issue  Department  as  against  this  inflow  of  Coins  shows 
how  a  fraction  of  the  incoming  notes  was  cancelled  and 
discrepancy  allowed  to  arise  between  the  fall  in  note- 
circulation  and  the  addition  to  the  notes  held  in  Banking 
Department. 


10.    Cf "We  have  stated  above  that  the  proportional  reserve  system  does 

not  necessitate  the  separation   of  the   banking  and   note-issue    functions    of    a 

Reserve  Bank If  nevertheless,  in  the  plan  submitted  in  our  Report  such 

a  separation  is  proposed,  it  is  because  we  have  been  impressed  by  the  view  put 
forward  by  many  witnesses  that  the  accounts  of  the  Reserve  Bank  should  be 
presented  in  the  simplest  possible  form  and  that  it  is  essential  from  this  point 
of  view  to  set  out  in  a  separate  statement  the  assets  and  liabilities  in  respect  of 
the  note-issue.  We  think  such  a  separation  would  inspire  greater  confidence  in 
the  note."  —Report,  Hilton- Young  Commission,  Para  137. 


262  RESERVE  BANK  OF  INDIA 

3.    Central  Banking  Control — Its  Technique  and  Relation  to 
the  Money  Market 

A  money  market  is  by  definition  a  market  for  borrowing 
and  lending  of  short-term  funds.  As  explained  elsewhere,11 
these  loans  arise  very  largely  in  connection  with  trade  in 
bills,  stock-exchange  operations  and  dealings  between 
banks.  Unlike  ordinary  loans  and  advances,  a  loan  to  the 
money  market  presumes  no  permanent  relationship  between 
banker  and  customer  but  is  treated  as  a  separate,  self- 
contained  transaction.  While  commercial  banks  are  deeply 
interested  in  the  market  as  offering  highly  liquid  and  safe 
outlets  for  investment,  its  working  and  character  are  of 
immense  significance  to  credit  and  monetary  control  by  the 
Central  bank.  While  open  market  operations  might  be 
sought  as  an  instrument  to  influence  both  short  and  long- 
term  rates  of  interest,  the  bank  rate  gives  the  Central  bank 
direct  contact  with  short  rates  and  the  money  market.  The 
effectiveness  of  this  contact  and  the  speed  with  which  it  is 
able  to  affect  the  credit-structure  are  a  measure  largely  of 
the  organised  and  well-knit  character  of  the  market.12 

The  power  of  the  Central  bank  in  relation  to  the  money 
market  depends  firstly  on  how  far  the  money  market  is 
accustomed  to  depend  on  its  own  funds  and  on  funds 
borrowed  from  banks  and  secondly  how  far  banks  them- 
selves have  occasion  to  apply  for  rediscounts  or  loans  from 
the  Central  bank. 

As  we  have  already  noted,  the  volume  of  bills  arising  in 
India  is  not  very  large  and  shows  small  prospect  of  any 
material  growth.  Our  Shroffs,  Multanis  and  Chetties  who 
deal  in  these  wares  are  willing  to  borrow  until  the  rate  of 
interest  reaches  a  certain  level  and  thereafter  are  able  to 
fall  back  on  private  sources  of  funds  which  are  by  no  means 
inconsiderable.  The  present  process  of  levelling  down  of 
interest-rates  may  in  the  course  of  time  dry  up  these 
sources  but  till  that  stage  is  reached  banks  could  hardly  be 

11.  Ch.  V,  part  III. 

12.  Ch.  Ill  §  10.     While  deposit-rates  were  related  to  the  Bank-rate  in  England 
as  early  as  1886,  it  was  not  till  about  1911  that  money  market  rates,  particularly 
rates  on  7  days'  loans,  were  similarly  denned. 


CENTRAL  BANKING  CONTROL  263 

said  to  be  in  control  of  the  bill-market.13  The  bazaar  bill 
rates  which  apply  to  bills  discounted  for  small  traders  by 
shroffs  are  the  highest  rates  in  the  Indian  money-market. 
Sometimes,  they  lose  touch  entirely  with  the  rates  of  banks 
and  till  1931,  used  to  be  markedly  lower  in  Bombay  than 
Calcutta.  As  for  short  and  call  loans  for  purposes  other 
than  investment  in  bills,  they  are  made  use  of  largely  for 
dealings  on  the  stock  exchanges  and  the  bullion  markets. 
But  they  bear  hardly  any  significant  proportion  to  the 
deposits  of  banks. 

As  for  the  relationship  between  scheduled  banks  and  the 
Reserve  Bank  of  India,  it  is  very  difficult  to  appraise  it  in 
the  present  circumstances.  The  creation  of  the  Reserve 
Bank  has  coincided  with  an  ease  of  rates  and  plenitude 
of  funds  which  have  no  parallel  in  our  previous  history. 
Many  of  the  scheduled  banks  have  reached  a  size  and  own 
funds  on  a  scale  which  make  them  fairly  independent  of 
outside  assistance  in  all  but  exceptional  times.  According 
to  the  course  of  the  seasons  and  the  business  in  which  they 
specialise,  the  surplus  funds  of  certain  banks  are  borrowed 
by  other  banks  which  are  in  need  of  them.  The  exchange 
banks  in  particular  raise  short  deposits  of  this  kind  from 
Indian  joint-stock  banks  as  a  matter  of  course  in  the  busy 
season.  Somewhat  on  the  lines  of  banks  in  France,  where 
the  operation  is  strictly  confined  to  banks  among  them- 
selves, it  is  also  an  occasional  practice  with  certain  banks 
in  India  to  mark  post-dated  cheques  payable  to  private 
persons  as  "good  for  payment".  The  post-dating  rarely 
exceeds  three  days  and  the  practice  has  developed  largely 
as  an  inter-bank  convenience.  While  post-dating  for  3  days 
may  not  signify  much  in  practice,  any  general  tendency  to 
borrow  from  other  banks  in  this  manner  is  to  be  deprecated 
as  weakening  Central  banking  control.  Besides,  as  is  well- 
known,  many  small  banks  which  are  denied  or  find  no 
access  to  the  Reserve  Bank  have  developed  a  practice  of 

13.  In  1896-97,  the  bazaar  quoted  8  per  cent  for  bills  for  which  the  Bank  of 
Bengal  was  quoting  13|  per  cent. 

Q.  1735;  1968;  3431.    Evidence,  Fowler  Committee. 

During  the  deflation  of  1920,  the  rate  of  the  Presidency  banks  reached  only 
5  per  cent,  but  the  bazaar  rates  shot  up  to  11  per  cent— Note  by  Sir  C.  Kisch, 
Appendices,  Hilton- Young  Commission. 


264  RESERVE  BANK  OF  INDIA 

approaching  the  bigger  joint-stock  banks  for  any  required 
aid.  To  the  extent  that  such  inter-bank  lending  prevails 
and  Reserve  Bank  funds  can  reach  other  banks  through 
the  medium  of  scheduled  banks,  the  power  of  the  Reserve 
Bank  over  the  market  is  either  frustrated  or  has  to  be 
shared  with  these  banks.  The  real  test  will  arrive  when 
the  present  ease  of  funds  gives  place  to  stringency  and  the 
Reserve  Bank  tries  to  enforce  its  credit-lines. 
4.  The  Rank-Ratc 

The  Reserve  Bank  encourages  or  discourages  scheduled 
banks  to  obtain  more  cash  from  itself  by  means  of  its 
bank-rate  policy.  The  rate  of  the  Reserve  Bank  is  a 
minimum  rate  at  which  it  undertakes  to  discount  for  the 
scheduled  banks  bills  of  certain  defined  qualities.  The 
effectiveness  of  this  rate  depends  on  two  things,  its  level, 
and  the  liberality  or  narrowness  with  which  the  bills  to 
which  the  rate  applies  are  defined. 

The  level  of  the  bank-rate  is  not  by  itself  a  sufficient 
means  of  control.  Even  in  those  countries  in  which  the 
rate  is  higher  than  the  market  rate  of  discount,  its  level 
is  certainly  not  higher  than  the  average  rate  earned  by 
banks  on  all  their  assets  taken  together.  The  situation  is 
even  more  difficult  in  India  because  interest-rates  obtain- 
able in  different  parts  of  the  country  show  wide  disparities. 
It  has  been  shown  elsewhere  that  while  the  earning  rate 
of  the  Central  Bank  of  India  is  somewhere  near  the  pre-1935 
"bank-rate",  the  earning  rates  of  regional  banks  of  the 
Punjab,  U.  P.  and  Madras  are  very  much  higher.  A  uniform 
minimum  rate  such  as  the  Reserve  Bank  maintained  in  the 
last  few  years  must  surely  prove  in  times  of  less  abundant 
money  either  too  high  for  certain  areas  or  too  low  for  certain 
others.  Different  regional  rates  for  different  parts  will 
create  other  difficulties  and  indeed  be  frustrated  on  account 
of  the  presence  in  this  country  of  banks  with  a  wide  network 
of  branches.  In  these  circumstances,  it  is  difficult  to  foresee 
how  the  Reserve  Bank  will  maintain  effective  touch  with 
rates  all  over  the  country. 

The  same  difficulties  were  encountered  in  the  United 
States  during  the  greater  part  of  the  existence  of  the 
Federal  Reserve  System.  In  the  United  States,  regional 


CENTRAL  BANKING  CONTROL  265 

variations  even  in  open  market  rates  are  substantial  while 
those  in  customers'  rate  are  astonishingly  wider.  The 
Federal  Reserve  System  tried  at  different  times  both  uniform 
rate  and  regional  rates  and  at  present  is  working  on  the 
basis  of  a  uniform  rate.  The  further  complication  of  banks 
with  branches  in  all  parts  does  not,  however,  exist  there. 

A  central  bank  like  the  Banque  de  France  which  combines 
commercial  and  central  banking  functions  demonstrates  its 
effectiveness  in  situations  like  these.  The  original  object 
of  founding  the  Banque  de  France  was  to  make  credit 
available  to  all  parts  at  cheap  rates.  Government  compelled 
adherence  to  this  object  by  insisting  on  the  creation  of  more 
and  more  branches  at  each  renewal  of  the  charter.  The 
Banque  works  on  the  basis  of  a  uniform  minimum  rate 
which  applies  to  individuals  as  well  as  banks.  Although 
the  bigger  banks  quote  a  lower  discount  rate  and  denude  the 
market  of  the  best  bills  on  offer  the  smaller  banks  which 
quote  higher  rates  are  glad  to  discount  at  the  Banque. 
Under  the  country-wide  influence  of  the  Banque  de  France 
short  rates  Jhave  everywhere  approximated  to  the  discount- 
rate  of  the  Banque  which,  while  it  "makes  no  claim  to 
manage  money  and  control  credit  after  the  manner  of  newer 
central  banks  nor  .  .  .  wishes  to  dominate  the  money  market" 
has  yet  never  lost  the  financial  leadership  of  the  country 
built  largely  on  its  monopoly  and  management  of  the 
note-issue. 

While  the  level  of  the  bank-rate  by  itself  is  not  the  chief 
element  in  its  effectiveness,  it  certainly  proves  decisive 
when  combined  with  the  restrictive  (or  liberal)  manner  in 
which  the  assets  to  which  it  applies  are  defined. 

The  Reserve  Bank  is  allowed  to  buy  and  sell  domestic 
or  inland  bills,  sterling  and  bills  on  United  Kingdom.  In 
all  ordinary  circumstances,  the  dealings  are  confined  to 
bank-endorsed  bills.  These  "eligible"  bills  fall  into  three 
categories  :  ordinary  bona  fide  commercial  bills  with  an 
outstanding  maturity  of  not  more  than  90  days,  bills  of 
the  same  limited  maturity  but  arising  out  of  the  holding 
of  or  trading  in  certain  defined  securities,  largely  Govern- 
ment, and  finally  bills  which  are  to  run  for  not  more  than 
9  months  and  arise  out  of  the  financing  of  agricultural 


266  RESERVE  BANK  OF  INDIA 

operations  or  marketing  of  agricultural  produce. 

The  importance  of  this  means  of  access  to  Reserve  Bank 
cash  has  to  be  judged  in  the  light  of  the  quantity  of  such 
assets  held  by  banks  in  India.  The  bills  portfolio  of  our 
scheduled  banks  has  been  on  the  average  3,  4,  6  and  5  crores 
for  the  four  years  1935-36  to  1938-39.  It  is  to  be  presumed 
that  a  portion  at  least  of  this  quantity  will  not  reach  the 
standard  and  quality  prescribed  for  or  insisted  on  by  the 
Reserve  Bank.  With  these  figures  may  be  compared  the 
aggregate  reserves  of  the  scheduled  banks,  cash  on  hand 
and  balances  at  the  Reserve  Bank.  These  amounted  in  the 
aforesaid  years  to  about  38,  32,  25  and  22  crores.  Even 
allowing  for  the  low  volume  of  bills  and  high  level  of 
reserves  caused  by  economic  stagnation,  it  is  clear  that 
rediscount  as  a  means  of  credit  control  has  only  a  limited 
significance  for  India. 

Alternative  to  rediscount,  the  scheduled  banks  can  obtain 
loans  and  advances  from  the  Reserve  Bank.  The  Act  per- 
mits the  Reserve  Bank  to  grant  such  accommodation  to 
scheduled  banks  for  fixed  periods  not  exceeding  90  days 
against  trust  securities,  gold  and  silver  or  documents  of 
title  to  gold  and  silver,  eligible  bills  of  exchange  and  pro- 
notes,  promissory  notes  of  the  banks  themselves  which  are 
supported  by  documents  of  title  to  goods  in  possession  of  or 
assigned  or  pledged  to  the  banks. 

Commercial  banks  have  one  ground  of  preference  for 
loans  and  advances  as  against  discounts.  A  loan  can  be 
arranged  for  any  period  within  the  limits  of  law  or  repaid 
at  any  time  according  to  the  convenience  or  need  of  the 
borrowing  banks.  The  discount  of  a  bill  transfers  the  pro- 
perty in  the  bills  once  and  for  all  to  the  Central  bank.  As 
against  this  preference  for  loans  and  advances,  account  has. 
to  be  taken  of  the  fact  that  most  Central  banks  charge  a 
higher  rate  for  them  and  as  a  matter  of  fact,  discourage 
them  as  being  of  a  non-self-liquidating  character.  Contrary 
to  this  common  practice,  however,  our  Reserve  Bank  makes 
no  difference  between  its  discount  rate  and  the  rate  for 
loans  and  advances  perhaps  on  the  ground  that  in  Indian 
conditions  this  must  always  be  the  main  form  of  borrowing. 
Even  in  England  and  France,  discrimination  against  loans 


OPEN   MARKET   OPERATIONS  267 

and  advances  appeared  much  later  in  their  history — the 
initial  practice  being  actually  a  discrimination  in  their 
favour.14  The  practice  of  the  Reserve  Bank  presents  another 
difficulty  in  that  it  is  its  avowed  object  to  encourage  the 
creation  of  bills  and  the  growth  of  a  bill  market.  A  lower 
rate  of  discounts  is  more  in  harmony  with  this  avowed 
object. 

As  observed  already,  the  last  few  years  have  been  so 
remarkable  for  easy  conditions  and  abundance  of  funds 
that  the  Reserve  Bank  has  had  hardly  any  important  role 
to  play.  Bills  purchased  and  discounted  by  it  have  hardly 
attained  any  significant  volume  except  for  the  early  months 
of  the  year  1939.  "Other  loans  and  advances"  have  been 
hardly  in  existence,  despite  the  fact  that  the  investments 
of  Indian  banks  are  composed  largely  of  eligible  Govern- 
ment securities  and  are  at  present  running  at  very  high 
levels.  None  of  the  big  banks  could  be  in  need  of  funds 
and  there  is  no  means  to  ascertain  how  far  the  Reserve 
Bank  has  been  willing  to  entertain  the  overtures  of  the 
smaller  scheduled  banks.  A  just  appraisal  of  the  policy 
and  effectiveness  of  the  Reserve  Bank  must,  however,  await 
the  occurrence  of  stiffer  monetary  conditions. 

5.     Open  Market  Operations 

The  discouragement  or  encouragement  offered  by  the 
bank-rate  becomes  effective  only  through  the  initiative  of 
scheduled  banks  themselves.  The  Reserve  Bank  may  itself 
initiate  these  effects  by  the  purchase  or  sale  in  the  open 
market  of  such  assets  as  it  is  allowed  to  hold  or  deal  in. 
The  bank-rate  acts  on  the  willingness  of  scheduled  banks 
to  borrow  from  the  Reserve  Bank;  open  market  operations 
act  on  the  willingness  of  banks  to  lend  to  their  customers. 
Open  market  operations  may  be  used  either  to  supplement 
the  effectiveness  of  the  bank-rate  or  independently,  within 

14.  The  Bank  of  England  discovered  this  form  of  lending  against  securities  in 
1824  and  the  rate  was  lower  than  its  bank-rate,  i.e.  discount  rate.  In  the  crisis 
years  1838-39,  while  the  bank  rate,  i.e.  the  rate  of  discount  stood  at  4  per  cent, 
advances  against  securities  were  made  at  3£  per  cent. 

Allowed  to  make  loans  against  short-dated  Government  securities  first, 
against  all  Government  securities  in  1834  and  against  railway  and  Paris  Muni- 
cipality bonds  in  1848,  the  Banque  de  France  raised  its  rate  for  loans  higher  than 
the  discount  rate  only  in  1864. 


268  RESERVE  BANK  OF  INDIA 

moderate  limits,  to  narrow  the  gap  between  bank-rate  and 
market  rates,  to  induce  banks  to  move  in  step,  to  avoid  the 
psychological  difficulties  of  changes  in  the  bank-rate,  etc. 
On  account  of  the  character  of  the  assets  employed  to  carry 
out  these  operations,  the  Reserve  Bank  has  in  them  a  direct 
means  to  influence  the  long-term  rate  also. 

The  extent  and  effectiveness  of  open  market  operations 
depend  on  three  conditions:  the  size  of  the  resources  which 
the  Reserve  Bank  can  muster  for  the  purpose,  the  quality 
and  volume  of  the  assets  it  is  permitted  to  deal  in  or  hold, 
and  the  capacity  and  organisation  of  the  market  in  which 
they  have  to  be  carried  out. 

(1)  The  resources  at  the  disposal  of  the  Bank  are  derived 
from  several  sources.  In  the  first  instance,  there  is  the 
capital  and  reserve  of  the  Bank  which  today  stand  at  5 
crores  each.  As  the  reserve  has  reached  equality  with 
capital,  no  further  augmentation  will  now  occur  from  that 
source.  In  the  second  instance,  the  Bank  is  the  sole  reposi- 
tory of  the  funds  of  the  Government.  These  funds  are  of 
two  kinds,  those  which  accrue  to  the  Bank  in  the  course  of 
the  collection  and  disbursement  of  ordinary  revenues  and 
those  which  flow  in  and  out  because  the  Reserve  Bank 
manages,  on  agreed  conditions,  public  loans  and  debt  opera- 
tions of  Central  and  provincial  Governments.  The  time  and 
manner  of  these  operations  no  less  than  the  incidental 
accumulation  and  dispersal  of  funds  are  important  factors 
in  the  management  of  the  money  market.  The  aggregate 
funds  held  on  behalf  of  the  Government  have  been  on  the 
average  as  large  as  11  to  12  crores. 

The  third  source  of  its  funds  is  the  compulsory  deposits 
of  the  scheduled  banks.  Every  bank  included  in  the 
schedule  has  to  maintain  at  the  Reserve  Bank  amounts  equal 
to  at  least  5  and  2  per  cent  respectively  of  their  demand  and 
time  liabilities  in  India  computed  as  averages  of  deposits 
held  at  the  close  of  business  on  each  Friday.  In  case  of 
failure  to  maintain  the  required  deposit,  the  defaulting  bank 
has  to  pay  penal  interest  on  the  deficit  balance  at  a  rate 
which  may  be  five  per  cent  higher  than  the  bank-rate  at 
a  maximum  and  for  failure  to  make  the  incidental  returns 
of  figures,  it  has, to  pay  a  penalty  of  Rs.  100  for  each  day  of 


OPEN  MARKET  OPERATIONS  269 

failure.  Events  have  proved  that  it  may  be  to  the  imme- 
diate advantage  of  an  embarrassed  bank  to  pay  the  penal 
interest  and  make  use  of  its  funds  to  meet  its  immediate 
needs.  The  existing  law  makes  no  attempt  to  prevent  such 
a  course  of  development  and  it  is  indeed  difficult  to  see 
justification  for  any  such  prohibitions.  If  the  Reserve 
Bank  offers  assistance  in  excess  of  the  funds  it  holds  from 
a  particular  bank,  the  question  of  a  return  of  its  compulsory 
deposit  does  not  arise.  If  the  Reserve  Bank  is  not  willing  to 
discount  or  grant  advances  to  that  extent,  it  would  be  a 
grave  injustice  and  against  public  interests  not  to  permit 
the  bank  to  save  itself  with  its  own  unaided  efforts  and 
its  own  funds. 

Another  source  of  funds  is  dependent  on  the  extent  to 
which  the  machinery  of  the  Bank  is  used  by  other  banks 
for  collection  of  bills  or  transfer  of  customers*  funds.  In  all 
countries  which  lack  the  cheque  habit  or  a  sufficiency  of 
bank  branches,  such  facilities  for  collection  and  transfer 
serve  to  prevent  large  inflows  into  or  expulsions  from  the 
banking  system  of  cash  and  are  for  that  reason  a  great 
boon  to  the  money  market.  The  Banque  de  France  and  the 
Reichsbank  of  Germany  derive  quite  an  appreciable  part 
of  their  resources  from  this  business.  The  Reserve  Bank 
now  and  the  Imperial  Bank  before  it  have  been  charged 
with  the  development  of  these  facilities.  As  telegraphic 
transfers  form  the  bulk  of  remittances  and  demand  drafts 
or  mail  transfers  are  quite  insignificant  in  volume,  these 
operations  do  not  mean  at  present  any  appreciable  acquisi- 
tion of  funds.15 

15.  The  part  played  by  the  money  order  in  transmission  of  funds  is  quite  appre- 
ciable. The  post  office  took  over  the  business  of  money  orders  from  Government 
treasuries  in  1880.  In  1884,  the  telegraphic  money  orders  from  Government 
treasuries  in  1880.  In  1884,  the  telegraphic  money  order  was  introduced.  Land 
revenue  money  orders  were  first  tried  in  1884  and  rent  money  orders  in  1886.  It 
was  in  1886  that  the  payment  of  money  orders  at  the  houses  of  payees  began. 
(Nos.  in  lakhs,  values  in  crores) 


1880-81 
1886-87 
1890-91 
1900-01 
1910-11 


irdinary  Money 

Revenue  Money 

Rent  Money 

Orders. 

Orders. 

Orders. 

Nos.           Value 

Nos.           Value 

Nos.            Value 

16                 4.5 

48               10.6 

0.66               0.11 

0.0001              .0002 

73                15.7 

2.78               0.41 

0.0078              .0974 

129                26.3 

4.53                0  82 

0.0134            0.1972 

247                41.8 

7.50                1.24 

0.0222            0.2987 

270  RESERVE  BANK  OF  INDIA 

It  could  be  claimed  in  one  sense,  though  in  one  sense 
only,  that  the  resources  of  the  Bank  are  virtually  limitless. 
Under  our  present  law  of  note-issue,  the  Bank  has  a  very 
large  margin  of  gold  or  gold  equivalents  against  which 
great  quantities  of  notes  could  be  issued.  Theoretically  at 
least,  the  possibilities  of  such  inflation  have  hardly  any 
measurable  limits.  In  practice,  of  course,  these  powers  are 
likely  to  be  invoked  only  on  exceptional  occasions  when 
the  assets  of  banks  or  individuals  have  to  be  converted  into 
cash  on  a  very  large  scale  as  in  the  case  of  a  general  panic 
and  break-down  of  the  monetary  and  banking  structure. 
The  present  practice  of  the  Reserve  Bank  in  regard  to  the 
volume  of  notes  issued  to  and  held  in  the  Banking  Depart- 
ment shows  that  in  ordinary  times  and  circumstances  it 
does  not  intend  to  undertake  open  market  operations  beyond 
the  means  it  is  able  to  acquire  in  the  ordinary  way.  Despite 
the  existence  of  the  proportional  reserve  system,  the  volume 
of  notes  in  the  Banking  Department  is  almost  exactly  equal 
to  the  deposits  of  scheduled  banks  at  the  Bank.16  Neverthe- 
less, the  potential  aberrations  of  such  a  power  should  not 
be  underrated.  In  all  countries,  the  trading  and  business 
community  is  always  highly  critical  of  stiffening  of  interest- 
rates  and  restriction  of  credit  and  is  generally  able  to 
exercise  pressure  in  favour  of  stable  or  lower  rates.  In  a 
country  of  farmers  and  cultivators  like  India,  the  desires 
of  the  mass  must  always  tend  to  coincide  with  this  parti- 
cular prejudice  of  businessmen  and  its  political  power  must 
be  taken  into  account  as  a  serious  factor.  If  we  add  to  this 
pressure  of  practical  interests,  the  new-born  faith  of  aca- 
demic economists  in  low  money  rates  of  interest  and  their 
power  to  achieve  almost  any  miracle,  it  is  clear  that  the 
bias  of  the  whole  system  must  always  be  towards  creation  of 
inflationary  conditions  and  away  from  measures,  howsoever 
necessary,  for  drastic  revision  of  values,  costs,  expectations, 
etc.  Any  doubts  on  this  point  have  met  with  emphatic 
warnings  in  the  recent  monetary  history  of  the  United 
States. 

What  makes  this  one-sided  power  look  rather  suspicious 

16.     §  2. 


OPEN   MARKET   OPERATIONS  271 

is  the  invariable  absence  in  the  statutes  of  such  Central 
banks  of  corresponding  powers  to  cause  similar  deflation. 
Withdrawals  of  currency  and  credit  from  circulation  mean 
sale  of  assets  which  the  Central  bank  had  already  acquired 
and  holds  out  of  its  ordinary  resources.  These  resources, 
as  we  have  already  seen,  are  strictly  limited  in  the  case  of 
our  Reserve  Bank.  The  counterpart  to  the  power  to  cause 
limitless  inflation,  theoretically  possible  under  our  present 
law,  would  be  a  statutory  power  either  to  create  and  sell 
its  own  debentures  and  short-term  bonds  or  to  raise  the 
proportions  of  the  compulsory  reserves  which  member 
banks  have  to  hold  at  the  Reserve  Bank.  Such  an  arrange- 
ment has  no  place  in  our  present  Reserve  Bank  Act.  In 
short,  while  the  law  recognises  the  possibilities  of  a  need 
to  enlarge  the  cash  basis  to  any  unusual  extent,  it  does 
not  anticipate  the  necessity  or  wisdom  of  similar  drastic 
deflation.  It  is  more  than  likely  that  this  lack  of  symmetry 
in  the  powers  of  Central  banks  has  much  to  do  with  the 
general  prejudice  which  has  always  prevailed  on  the  Con- 
tinent, e.g.  in  France,  against  the  grant  of  open  market 
operation  powers  to  Central  banks.  The  objection  is  not 
merely  the  logical  one  that  open  market  operations  place 
costless  credit  at  the  disposal  of  banks  while  individuals 
have  always  to  pay  a  price  for  it.  The  Continental  prejudice 
is  rooted  in  the  belief  that  the  interference  of  open  market 
operations  does  not  permit  the  natural  changes  in  the  eco- 
nomic structure  to  express  and  work  themselves  out  in 
changes  of  interest-rates,  etc.  and  that  while  inflationary 
panaceas  find  a  place  in  the  repertory  of  the  Central  banks, 
the  pains  and  penalties  of  deflation  are  scrupulously  avoided. 
It  is  a  poor  weapon  of  currency  and  credit  management  when 
a  Central  bank  exists  only  to  evade  or  moderate  the  impact 
of  the  inevitable  penalties  of  imprudent  expansion  and  un- 
healthy growth,  if  not  indeed  to  cause  and  stimulate  it. 

(2)  The  assets  which  the  Bank  may  acquire  or  own  on 
its  initiative  may  be  described  in  a  general  way  as  follows. 

The  Bank  is  allowed  to  purchase  or  sell,  without  limita- 
tion of  amount,  Government  securities  of  the  United  King- 
dom maturing  within  ten  years  from  the  date  of  purchase. 

The  Bank  is  permitted  to  buy  or  sell  securities  issued 


272  RESERVE  BANK  OF  INDIA 

or  guaranteed  as  to  principal  and  interest  by  the  Govern- 
ment of  India  or  a  Provincial  Government  of  any  maturity, 
or  such  securities  issued  or  guaranteed  by  a  local  authority 
in  British  India  or  by  Indian  State  as  may  be  specified  by 
the  Governor-General-in-Council  on  the  recommendation 
of  the  Central  Board.  The  volume  of  these  Indian  securities 
is,  however,  subject  to  a  two-fold  limit.  In  the  first  place, 
the  aggregate  value  of  Indian  securities  must  not  exceed 
the  capital  and  reserve  of  the  Bank  plus  three-fifths  of  the 
deposit-liabilities  of  the  Banking  Department.  Secondly, 
the  value  of  securities  maturing  after  one  year  and  of  those 
maturing  after  10  years  should  not  exceed  the  capital  and 
reserve  of  the  Bank  plus,  in  the  order  of  mention,  two-fifths 
and  one-fifth  of  Deposit-Liabilities  of  the  Banking  Depart- 
ment. In  other  words,  of  the  maximum  value  fixed  for 
Indian  securities,  the  maximum  allotted  to  the  longer  dated 
securities  is  smaller  than  the  maximum  allotted  to  the 
securities  of  one  to  ten  years. 

The  predominance  assigned  to  short-dated  securities  is 
of  course  intended  to  save  the  Central  bank  from  serious 
fluctuations  in  values  and  thus  maintain  its  liquidity. 
Short-dated  securities  are  liable  to  be  influenced  less  by 
changes  or  anticipated  changes  in  interest-rates,  political 
and  social  factors,  etc.,  than  by  the  proximity  or  otherwise 
of  the  date  of  repayment.  In  any  circumstances,  there  is 
the  certainty  that  on  specific  dates  their  full  value  will  be 
realised. 

A  point  less  obvious  is  the  limit  placed  on  the  total  value 
of  Indian  securities  and  the  absence  of  any  such  limit  on 
sterling  or  securities  of  the  United  Kingdom.  The  volume 
of  Indian  and  sterling  securities  taken  together  measures 
the  extent  to  which  the  Reserve  Bank  can  cause  at  any 
time  deflation  of  the  price  and  income  structure  of  the 
country  apart  from  or  in  addition  to  similar  effect  produced 
by  an  increase  in  the  bank-rate.  While  circumstances 
which  justify  a  contraction  of  domestic  currency  are  likely 
on  occasions  to  coincide  with  a  keen  demand  for  remit- 
tances abroad,  it  is  equally  likely,  as  we  have  already 
observed,  that  large  payments  will  have  to  be  undertaken 


OPEN   MARKET   OPERATIONS  273 

abroad  without  any  necessity  of  deflation  at  home.17  In 
the  former  case,  the  sterling  holdings  of  the  Issue  Depart- 
ment will  be  available  to  supplement  the  resources  of  the 
Banking  Department.  In  the  latter  case,  the  sterling  hold- 
ings of  the  Banking  Department  can  be  replaced  with  rupee 
securities  without  any  adverse  change  in  the  "Percentage  of 
Gold  and  Sterling  Securities  to  Total  Notes  issued".  Besides, 
as  internal  drain  is  not  contemplated  as  a  serious  factor  in 
our  future  currency  management,  large  resources  in  foreign 
currencies  must  be  the  constant  aim  of  the  Reserve  Bank. 

The  liabilities  of  the  Banking  Department  for  the  four 
years  1935  to  1938-39  give  us  a  good  measure  of  the  resources 
available  to  the  Reserve  Bank  for  fulfilling  its  obligations. 
These  liabilities  are  composed  of  its  capital  and  reserve, 
deposits  of  Governments,  compulsory  and  voluntary  deposits 
of  banks  and  items  described  as  "Other  Deposits"  and 
"Other  Liabilities".  The  aggregate  has  been  in  the  neigh- 
bourhood of  36  to  38  crores  in  the  first  three  years  and  has 
declined  to  32  crores  in  the  last  year  due  to  heavy  with- 
drawals by  banks  already  noted.  In  other  words,  the 
resources  of  the  Reserve  Bank  amount  to  about  one-third 
of  those  of  the  Imperial  Bank  of  India  which  itself  has  held 
steadily  about  one-third  of  the  resources  of  the  Indian 
banking  system. 

It  deserves  to  be  considered  seriously  whether  these 
resources  are  adequate  for  the  responsibilities  which  the 
law  lays  on  the  Reserve  Bank.  It  may  be  advisable  to 
place  the  Reserve  Bank  in  a  position  to  enlarge  or  diminish 
its  resources  from  time  to  time  according  to  the  exigencies 
of  the  situation.  Suitable  variations  in  the  funds  raised 
compulsorily  from  the  banks  themselves  offer  a  means 
which  has  the  additional  advantage  of  affecting  most 
directly  the  credit  situation  in  the  country.  Under  our 
present  law,  a  rigid  percentage  is  prescribed  which  is  to 
hold  good  in  all  circumstances  whether  tending  to  infla- 
tionary or  deflationary  conditions.  It  may  be  a  better  device, 
as  under  the  new  law  of  the  Federal  Reserve  System,  to 
prescribe  maximum  and  minimum  percentages  within  which 

17.     §  2. 
M.B.I.— 18 


274  RESERVE  BANK  OF  INDIA 

the  Reserve  Bank  could  fix  the  operative  ratio  according 
to  the  circumstances  of  each  phase.  In  an  undeveloped 
money  market  like  India,  such  an  elastic  but  direct  control 
should  prove  a  more  effective  means  of  monetary  manage- 
ment. 

(3)  The  desirability  of  such  a  direct  means  to  influence 
the  cash  position  of  scheduled  banks  appears  more  obvious 
when  we  take  into  account  the  capacity  and  organization 
of  the  market  in  which  these  operations  have  to  be  piloted. 
The  total  membership,  active  and  inactive,  of  the  Bombay 
Stock  Exchange  is  about  450  as  against  1100  in  New  York 
and  4000  in  London.  The  aggregate  volume  of  transactions 
is  of  a  comparable  order.  An  endeavour  to  unload  a  large 
stock  of  short-term  or  long-term  assets  cannot  but  have 
serious  consequences  for  the  whole  financial  and  invest- 
ment mechanism.  The  difficulty  is  no  doubt  partly  over- 
come by  including  in  our  assets  foreign  claims  which  link 
our  currency  management  with  the  largest  and  most  stable 
market  of  the  world,  namely,  London.  But  it  is  not  and 
cannot  be  altogether  obviated.18 

The  assets  of  the  Banking  Department  reflect  the  present 
conditions  in  the  money  market.  As  pointed  out  above, 
rediscounts  and  loans  to  scheduled  banks  hardly  exist. 
Balances  abroad  and  investments  which  include  cash  and 
short-term  securities  represent  the  bulk  of  the  income- 
earning  assets.  On  account  of  easy  conditions,  the  Bank 
has  refrained  from  holding  more  than  a  minimum  volume 
of  funds  in  investments.  About  four-fifths  of  the  total 
liabilities  are  mere  notes  which,  as  noted,  were  first  equated 
to  the  deposits  of  scheduled  banks  held  by  the  Reserve  Bank 
and  variations  in  which  under  certain  conditions  may  be 
interpreted  as  reflecting  the  currency  operations  of  the 
Bank.19 

6.    Direct  Relations  with  Trade  and  Commerce 

It  is  clear  from  the  foregoing  description  of  the  business 

18.  See  also  Ch.  XI  f.n.  18.  The  ordinary  turnover     of     Government  securities 
on  the  Bombay  Stock  Exchange  per  day  is  estimated  at  20  to  30  lakhs.     Actual 
deliveries  amount  to  5  to  10  lakhs. 

19.  See  p.  261. 


DIRECT  RELATIONS  WITH  TRADE  AND  COMMERCE  275 

of  the  Reserve  Bank  that  its  normal  relations  are  with  the 
scheduled  banks  only  and  that  it  is  not  permitted  business 
relations  which  will  mean  competition  with  other  banks  in 
the  country.     The  difficulties  created  by  such  competition 
in  the  way  of  the  national  leadership  of  a  Central  bank 
have  been  already  analysed  and  assessed  in  our  study  of 
the  Imperial  Bank  of  India.20    It  has  been  made  clear  there 
that  they  are  not  altogether  insuperable  and  that  historical 
environment  and  tradition  are  powerful  factors  in  recon- 
ciling commercial .  and  Central  banking  functions.     More- 
over, we  must  take  account,  on    the    other    side,    of    the 
special  circumstances  of  India  which  make  bank-rate  or 
open  market  policies  on  orthodox    Central    banking    lines 
much   less    efficacious   than   elsewhere.    The    diversity    of 
interest-rates  in  several  parts  of  the  country,21  the  absence 
of  a  money  market  which  may  respond  quickly  and  sensibly 
to  Central  bank  policies,22  the  unavailability  of  assets  which 
reach  the  degree  of  safety,  liquidity  and  quantitative  vari- 
ability demanded  by  Central  banking  functions  as  such,  the 
vast  territorial  extent  of  the  country  over  which  monetary 
impulses  released  from  a  few  advanced  centres  have  to 
travel,  a  banking  structure  in  which  numerous  small  banks 
scattered  all  over  the  country23  must  remain  for  a  long 
time   outside   the   orbit   of  the   Reserve   Bank — these   are 
obstacles  which  a  Central    bank    acting    through    a    few 
scheduled  banks  may  not  succeed  in  over-mastering. 

The  legal  restrictions  on  dividends24  take  away,  or  at  least 
weaken  considerably,  motives  to  competition  with  ordinary 
commercial  banks.  The  usual  practice,  which  has  been 
adopted  in  our  Reserve  Bank  Act,  is  to  allocate  the  surplus 
to  the  State  from  whom  the  Central  bank  receives  its  valu- 
able privileges.  While  State  privileges  should  not  be 
under-estimated  as  sources  of  its  profits,  there  is,  however, 
another  source  which  should  not  be  overlooked,  viz.  the 
compulsory  deposit  of  reserves  by  scheduled  banks.  If 

20.  Ch.  IV  §  7. 

21.  Ch.   Ill,  part  in. 

22.  §  3. 

23.  Ch.  II  §  9,  11;  Ch.  V  §  9. 

24.  See  p.  259,  para  1. 


276  RESERVE  BANK  OF  INDIA 

grounds  of  justice  were  allowed  to  prevail  over  strict  needs 
of  Central  banking,  the  scheduled  banks  must  be  admitted 
to  have  a  good  claim  to  a  share  in  these  profits.  In  a 
country  like  India  where  the  object  of  such  compulsory 
deposits  is  not  adequately  appreciated  and  is  even  felt  by 
many  as  a  grievance,  it  may  even  prove  an  excellent  means 
to  conciliate  scheduled  banks.  But  there  is  a  danger  also 
in  this  procedure.  The  Central  bank  may  be  tempted  to 
overstep  the  bounds  of  prudence  in  its  enthusiasm  to  con- 
ciliate and  create  and  try  to  maintain  too  high  a  standard 
of  dividends  for  scheduled  banks.  To  that  extent  it  will 
be  nullifying  its  power  as  a  Central  bank. 

To  this  general  statement  of  the  relationship  between 
the  Reserve  Bank  and  ordinary  commercial  banks,  the  Act 
makes  one  exception.  On  the  authority  of  the  Central 
Board  and,  in  cases  of  special  urgency,  a  Committee  of  the 
Board  or  the  Governor,  the  bank  is  allowed  to  engage  in 
business  directly  with  individuals  or  firms  and  purchase, 
sell  or  discount  bills  or  make  loans  or  purchase  and  sell 
sterling  on  same  conditions  as  in  the  case  of  banks  but 
without  their  intermediaryship.  The  sanctioning  authority 
must,  however,  satisfy  itself  that  the  occasion  of  departure 
from  normal  practice  is  a  special  one  and  that  the  depar- 
ture is  required  for  the  purposes  of  regulating  credit  in 
the  interest  of  Indian  trade,  commerce,  industry  and 
agriculture. 

It  is  clear  that  the  power  is  intended  to  be  used  only 
in  very  exceptional  circumstances.  Even  then,  the  precise 
object  of  its  inclusion  is  not  easy  to  discern.  An  impor- 
tant precedent  of  this  kind  occurred  in  the  United  States 
when  the  Relief  Emergency  Act  of  1932  and  Act  of  19th 
June  1934  conferred  similar  powers  on  the  Federal  Reserve 
System.  But  these  measures  were  adopted  in  the  United 
States  at  a  time  when  ordinary  commercial  banks  had 
ceased  to  function  and  as  a  matter  of  fact  the  acts  proved 
dead  letter  from  the  very  moment  of  enactment.  The 
Indian  Act  does  not  look  to  the  Reserve  Bank  to  fill  the 
void  of  ordinary  banks  but  to  regulate  credit  amidst  a 
system  of  functioning  banks.  It  is  reasonable,  therefore, 
to  presume  that  this  power  is  intended  to  supplement,  when 


AND    BANKING    STANDARDS    AND    PRACTICES  277 

necessary,  its  efforts  to  control  credit  in  the  ordinary  way. 
If  this  interpretation  is  correct  and  the  Reserve  Bank  in 
course  of  time  creates  many  branches,  this  clause  may  open 
the  way  to  a  gradual  but  moderate  super-imposition  of  com- 
mercial functions  on  strict  Central  banking  functions. 
Whether  the  future  development  will  tend  towards  the 
model  held  before  us  by  the  Banque  de  France  or  the  Bank 
of  England  will  depend  as  much  on  the  leadership  supplied 
by  the  executive  of  the  Reserve  Bank  as  the  strict  letter 
and  interpretation  of  the  law. 

7.    The  Reserve  Bank  and  Banking  Standards  and  Practices 

The  control  of  currency  and  credit  envisaged  in  the  Act 
and  elaborated  above  places  the  Reserve  Bank  in  an 
excellent  position  to  exercise  steady  pressure  on  individual 
banks  in  favour  of  better  banking  policies  and  practices. 
For  ability  to  offer  assets  conforming  to  conditions  of  legal 
eligibility  is  not  by  itself  an  unqualified  assurance  of  aid 
from  the  Central  bank.  The  latter  has  necessarily  to  take 
account  of  the  general  position  of  the  applicant  and  to  make 
it  reasonably  sure  that  such  aid  proves  an  effective  means 
to  ward  off  its  difficulties.  Such  discretion  assumes  special 
significance  in  times  of  general  difficulty  when  discrimina- 
tion has  to  be  made  between  banks  whom  aid  from  tha 
Central  bank  could  save  and  others  whom  no  aid  of  what- 
ever magnitude  could  rescue  from  their  fate.  Funds  placed 
at  the  disposal  of  the  latter  mean  merely  subsidies  towards 
the  relief  and  profit  of  the  more  astute  or  impatient  creditors 
while  banks  with  much  better  prospects  of  solvency  are 
perhaps  starved  of  well-deserved  aid.  The  exercise  of 
such  discrimination  could  be  based,  however,  only  on  conti- 
nuous contact  with  and  ample  information  from  the  banks 
concerned  and  their  willingness  to  act  on  the  advice  and 
guidance  of  the  Reserve  Bank.  Such  information  and 
analysis  are  of  special  importance  in  India  where,  as  we 
have  amply  demonstrated,  the  balance-sheets  of  banks  are 
more  remarkable  for  their  disparities  than  approximation 
to  any  standard  pattern.  Each  bank  is  a  special  case  to  be 
understood  and  appreciated  only  by  due  regard  to  its  special 
circumstances  and  particularly  to  its  past  history  and 


278  RESERVE  BANK  OF  INDIA 

development.  At  present  the  usefulness  of  the  Reserve  Bank 
is  limited  by  two  circumstances.  The  Bank  has  no  powers 
to  obtain  information  or  enforce  inspection  except  in  so  far 
as  the  banks  themselves  are  willing  to  co-operate.  The 
consequence  on  at  least  one  occasion  has  been  that  whei} 
difficulties  did  arise,  the  time  available  for  ascertaining 
facts  proved  too  short  for  any  definite  or  large  decisions.25 
Secondly,  the  influence  and  pressure  of  the  Reserve  Bank 
are  confined  at  present  to  scheduled  banks  as  defined  in  the 
Act.  Banks  which  need  much  supervision  and  most  nursing 
are  outside  the  purview  of  the  Bank  and  no  means  has  yet 
been  devised  to  bring  them  within  its  orbit.  Our  proposals 
for  a  deposit  insurance  scheme  to  cover  these  banks  should 
remedy  this  deficiency  in  the  present  situation.26 

8.     Definition  of  Scheduled  Banks 

According  to  the  present  notification  under  the  Reserve 
Bank  Act,  banks  which  have  not  less  than  Rs.  5  lakhs  capital 
and  reserve  can  alone  be  scheduled  to  the  Reserve  Bank. 
The  deposits  of  these  banks  which  number  56  at  present 
form  the  overwhelming  bulk  of  the  banking  deposits  of 
the  country — to  the  extent  of  95  per  cent  and  more.  Yet 
there  is  some  oddness  about  a  situation  in  which  the  bank- 
ing law  of  the  country  aims  at  1  lakh  as  the  minimum 
capital  and  reserve  of  a  bank  while  the  condition  of 
scheduling  to  the  Reserve  Bank  is  fixed  by  another  law 
at  5  lakhs  and  more.  It  is  quite  conceivable  that  in  the 
rural  conditions  of  India,  banks  with  capital  and  reserve 
of  less  than  5  lakhs  have  as  important  a  role  to  play  in  the 
future  development  of  its  economy  as  banks  with  more 
imposing  figures  of  capital  and  reserve. 

It  is  necessary  to  bear  in  mind  as  a  preliminary  point  the 
precise  advantage  of  inclusion  in  the  schedule.  A  scheduled 
bank  is  not  entitled  as  such  to  rediscounts  or  loans  from 
the  Reserve  Bank.  It  has  to  qualify  for  such  aid  by  satisfy- 
ing the  Reserve  Bank  about  its  soundness  and  stability.  It 
may  even  have  to  bear  some  loss  if,  and  to  the  extent  that, 

25.  A  model  for  such  power  would  be  Sec.  IV  of  the  U.  S.  Federal  Reserve 
Banks  Act.     See  also  Ch.  X. 

26.  Ch.  X,  §  1   (b). 


DEFINITION   OF  SCHEDULED  BANKS  279 

its  compulsory  deposits  with  the  Reserve  Bank  are  in 
addition  to,  and  not  a  part  of,  the  reserve  it  is  accustomed 
normally  to  maintain.  The  advantage  it  gains  really  lies 
in  its  prestige  in  the  public  mind.  Although  a  part  of  the 
prestige  is  ascribable  to  quite  erroneous  beliefs  on  the  part 
of  the  public  about  the  implications  of  scheduling,  it  cannot 
be  denied  that  affiliation  to  the  Reserve  Bank  carries  an 
assurance  that  the  bank  is  at  least  in  outward  conformity 
with  the  law  and  accepted  decencies  of  the  banking  busi- 
ness. It  is  needless  to  add  that  the  Reserve  Bank  under- 
takes no  guarantees  about  the  solvency  or  competent 
management  of  its  scheduled  banks. 

It  should  not  be  difficult  to  reconcile  the  legitimate  object 
of  scheduling  to  the  Reserve  Bank  the  more  respectable 
and  important  banks  only  in  the  country,  with  a  due  soli- 
citude for  the  growth  and  encouragement  of  the  smaller 
banks.  Apart  from  the  size  of  resources,  the  period  of 
existence  of  a  bank  is  one  among  other  indices  of  its  in- 
herent strength.  Our  analysis  of  bank  failures  shows27  that 
more  than  two-thirds  of  the  banks  which  fail  belong  to  the 
age-groups  below  10  years  while  the  percentage  for  those 
between  10  and  20  years  is  only  20.  It  should  more  than 
meet  the  requirement  of  stability  and  proved  usefulness  if 
for  banks  with  capital  and  reserve  of  1  to  5  lakhs,  an  addi- 
tional condition  of  an  uninterrupted  existence  of  10  or  15 
years  is  imposed. 

It  has  been  said  above  that  scheduling  as  such  is  no 
assurance  that  a  bank  in  difficulties  will  receive  assistance 
from  the  Reserve  Bank  as  a  matter  of  course.  Even  when 
the  Reserve  Bank  is  satisfied  that  a  bank  deserves  to  be 
saved  and  can  be  saved,  certain  precautionary  conditions 
have  to  be  insisted  on.  The  Reserve  Bank  must  be  satis- 
fied in  the  first  instance  that  the  bank  in  question  is  making 
efforts  to  save  itself.  The  best  proof  of  such  efforts  is  its 
ability  to  liquidate  its  less  liquid  assets  like  loans  and 
advances  pari  passu  with  the  outflow  of  deposits.  The  main- 
tenance of  its  old  volume  of  business  or  the  creation  of 
unnecessary  new  business  would  mean  that  Reserve  Bank 

27.    Ch.  IX  S  1,  2  and  3. 


280  RESERVE  BANK  OF  INDIA 

funds  are  being  used  not  to  save  itself  but  merely  to  replace 
outflowing  deposits.  Again,  the  Reserve  Bank  must  satisfy 
itself  that  more  liquid  assets  are  being  preserved  and  not 
used  to  raise  funds  from  other  banks  or  sources.  The  holdings 
of  Government  securities  are  particularly  important  as  assur- 
ing the  safety  and  ultimate  realisation  of  Reserve  Bank  funds 
lent  to  the  bank.  Besides,  the  facility  of  acquiring  funds 
from  other  sources  means  frustration  of  any  credit  lines 
fixed  by  the  Reserve  Bank  and,  if  the  bank  ultimately  fails, 
preference  for  the  more  impatient  creditors  of  the  bank 
at  the  expense  of  others.  The  Reserve  Bank  will  also  see 
that  proper  proportions  are  maintained  among  the  various 
classes  of  assets  and  precautions  like  closing  down  of 
unremunerative  branches  etc.  taken  to  achieve  better  and 
more  economic  working  in  the  future. 

9.    Reserve  Bank  as  Clearing  House 

The  Reserve  Bank  acts  as  the  Clearing  House  for  member 
banks.  In  the  absence  of  such  a  facility,  a  large  quantity 
of  cash  should  have  to  move  to  and  from  and  in  a  circum- 
locutory manner  between  bank  and  bank.  But  economy  of 
movement  and  of  cash  is  not  the  only  or  the  greatest 
significance  of  such  an  institution.  Under  a  system  of  daily 
and  frequent  clearing,  an  over-extension  of  business  by  any 
individual  bank  must  reveal  itself  immediately  in  the 
clearing  house  at  the  close  of  each  clearing.  In  other 
words,  this  facility  and  practice  is  a  great  factor  in  making 
banks  move  in  step  with  each  other.  In  a  vast  country 
with  scattered  banks  like  India,  there  is  also  another 
danger — that  cheques  which  are  long  in  transit  and  take 
some  days  to  be  cleared  may  be  treated  as  cash  and  thus 
become  the  basis  of  a  certain  degree  of  permanent  inflation. 
Relying  on  such  outstanding  cheques,  banks  may  be 
tempted  to  lower  to  that  extent  their  cash  reserves,  the 
same  cheque  serving  as  a  cash  item  to  more  than  one  bank 
at  one  and  the  same  time.  The  extent  of  the  need  and 
importance  of  this  facility  may  be  inferred  from  the  fact  that 
the  aggregate  volume  of  cheque?  which  passed  through  the 
clearing  in  8  big  centres  of  India  in  the  last  four  years  has 
been  in  the  neighbourhood  of  20,00  crores.  The  volume  of 


AND   AGRICULTURE  281 

deposits  has  varied  in  the  same  years  between  250  to  260 
crores. 

10.    Reserve  Bank  and  Agriculture28 

By  its  sheer  magnitude,  the  finance  needed  by  agriculture 
overshadows  and  must  continue  to  overshadow  all  other 
financial  requirements  of  the  country.  The  habits  and 
practices  of  the  cultivators  no  less  than  the  social  and 
economic  institutions  v/hich  govern  the  cultivation  of  land 
make  the  supply  of  this  finance  the  most  difficult  of  our 
banking  problems.  These  two  factors  no  less  than  the  fast 
growing  political  power  of  the  peasant  masses  were  bound 
sooner  or  later  to  win  a  recognition  for  problems  of  rural 
finance  in  the  activities  and  policies  of  the  Reserve  Bank. 
As  the  situation  is  envisaged  in  the  Reserve  Bank  Act,  the 
Bank  is  charged  to  make  remedial  endeavours  along  two 
lines. 

The  resources  of  the  Reserve  Bank  are  made  available  to 
agriculture  under  conditions  which  suit  agricultural 
requirements  and  at  the  same  time  ensure  conformity  to 
strict  Central  banking  principles.  While  bills  and  promis- 
sory notes  against  which  the  funds  of  the  Reserve  Bank 
may  be  obtained  must  relate  to  short-term  needs,  i.e.  the 
financing  of  seasonal  agricultural  operations  or  the  market- 
ing of  crops  only,  the  maturity  of  such  bills  and  notes  is 
extended  as  a  special  case  to  a  maximum  of  nine  months. 
Secondly,  while  the  principle  that  the  funds  of  the  Reserve 
Bank  can  be  available  only  for  the  relief  of  exceptional 
pressure  on  the  resources  of  intermediary  banks  is  strictly 
adhered  to,  the  endorsement  of  provincial  co-operative 
banks  is  given  as  a  special  case  the  same  status  as  the 
endorsement  of  a  scheduled  bank  for  the  purpose  of 
purchase,  sale  or  rediscount  of  these  bills.  As  for  loans  and 
advances,  provincial  co-operative  banks  can  obtain  them 
from  the  Reserve  Bank  but  on  the  same  conditions  as 
scheduled  banks,  i.e.  for  a  minimum  period  of  90  days  and 
against  Government  securities,  agricultural  paper  and 
documents  of  title  to  goods. 

28.     Ch.  V  part  V. 


282  RESERVE  BANK  OF  INDIA 

The  authors  of  the  Act  saw  clearly  that  the  banking 
problem  is  only  a  part,  if  not  indeed  a  mere  bye-product,  of 
the  much  larger  question  of  the  reconstruction  of  our 
agricultural  economy  and  that  intensive  education  and 
investigation  must  form  a  necessary  basis  of  all  remedial 
endeavours.  The  Reserve  Bank  has  thus  got  a  statutory 
Agricultural  Credit  Department  which  maintains  an  expert 
staff  to  study  all  questions  of  agricultural  credit,  is  available 
to  all  banks  and  banking  organisations  for  consultation  and 
seeks  to  co-ordinate  the  operations  of  the  Bank  in  connection 
with  agricultural  credit  and  its  relations  with  the  above- 
mentioned  organisations  for  the  same  purpose.  The 
bulletins  which  the  Department  has  issued  from  time  to 
time  bear  evidence  to  its  research  and  collation  work  while 
the  work  of  making  ideas  and  experiences  of  different  parts 
of  the  country  available  to  each  other  is  also  understood  to 
reach  impressive  proportions. 

Without  committing  the  Reserve  Bank  to  any  further 
action,  the  Act  required  the  Bank  to  make  to  the  Central 
Government  a  report  on  two  specific  matters — the  extension 
of  Reserve  Bank  facilities  and  obligations  to  persons  and 
firms,  not  being  scheduled  banks;  and  the  improvement  of 
machinery  for  dealing  with  agricultural  finance  and  methods 
for  effecting  a  closer  connection  between  agricultural 
enterprise  and  the  operations  of  banks.  The  former  subject 
obviously  relates  to  the  future  status  of  money-lenders  and 
indigenous  bankers  in  the  country  which  we  have  already 
examined  elsewhere.29  The  report  was  issued  in  due  course 
and  along  with  the  bulletins  embodies  the  conclusions  of 
the  Reserve  Bank  on  the  whole  question  of  agricultural 
credit  and  indigenous  banking.  It  points  out  the  difficulties 
we  have  already  noted  about  the  inclusion  of  money-lenders 
and  indigenous  bankers  within  the  organised  banking 
structure  of  the  country,  particularly  their  unwillingness  to 
shed  non-banking  business  and  adoption  of  modern  account- 
ing and  banking  practices.  In  regard  to  the  co-operative 
movement,  it  develops  a  case  for  a  radical  reconstruction 
of  the  whole  structure.  While  overdues  are  scaled  down 

29.    Ch.  V  part  V. 


IN  ACTION  283 

and  passed  on  to  long-term  credit  institutions,  and  co-opera- 
tive credit  societies  restrict  themselves  in  future  to  crop 
loans  repayable  out  of  the  harvest  or  intermediate  credit  in 
a  limited  measure,  an  endeavour  should  be  made  to  enlarge 
the  functions  of  these  societies  so  that  they  cover  the  whole 
life  of  the  farmer,  i.e.  become  multi-purpose  societies.  The 
financing  agency  is  to  consist  of  two  stages,  banking  unions 
for  small  areas  with  a  radius  of  7  to  8  miles,  and  provincial 
co-operative  banks.  Strict  observance  of  business  and 
banking  principles,  highly  trained  staffs,  etc.,  are  other 
directions  in  which  improvement  is  urgently  necessary.  As 
for  money-lenders,  while  supplanting  them  is  not  possible, 
regulation  of  their  business  by  laws  is  suggested. 

11.     Reserve  Bank  in  Action 

The  creation  of  the  Reserve  Bank  of  India  coincided  with 
continued  low  interest-rates  with  certain  unmistakable 
symptoms  of  revival  of  economic  activity.  The  bank-rate 
which  stood  at  6  or  7  per  cent  for  more  than  9  months  in 
1931  had  then  fallen  to  a  steady  level  of  3£  per  cent  and  the 
Reserve  Bank  reduced  it  in  November  1935  to  3  per  cent 
at  which  it  is  maintained  till  today.  The  scheduled  banks 
have  found  themselves  with  such  surplus  funds  that  the 
concentration  of  their  reserves  in  the  Reserve  Bank  and  the 
greater  sense  of  security  implied  in  the  assured  access  to 
the  Bank  in  case  of  need  are  not  yet  reflected  in  any  marked 
way  in  a  lowering  of  their  cash  ratios.  Nevertheless,  it 
is  doubtful  whether  the  revival  of  economic  activity  such  as 
has  occurred  in  the  last  three  years  and  more  could  have 
taken  place  without  the  usual  seasonal  fluctuations  in  rates 
but  for  the  existence  of  the  Bank.  A  comparison  of  the 
range  within  which  the  cash  of  the  Imperial  Bank  on  the 
one  hand  and  the  notes  held  in  the  Banking  Department, 
deposits  of  banks,  and  assets  of  the  Reserve  Bank  on  the 
other,  have  moved,  makes  clear  the  influence  of  the  Reserve 
Bank  in  eliminating  the  evil  of  seasonal  extremes  in 
interest-rates.  (See  tables  overleaf.) 

Between  1931  and  1935,  the  usual  seasonal  variations  in  the 
percentage  of  cash  to  deposits  of  the  Imperial  Bank  almost 
disappeared.  In  the  next  three  years,  the  June  and  Decem- 


284 


RESERVE  BANK  OF  INDIA 


Reserve  Bank — Range  of  Variation 

(Figures  in  crores) 


Notes  held  in 

Banking 
Department 


Deposits  of 
Banks 


Loans,  Advances 
and  Bills 


1936  August 
June 

1937  August 
April 

1938  August 
January 


27.42 


19.78 


29.45 


Aug.-Feb.   22.62 
Aug.-Jan.  12  34 


.05 


7.97 


Deposits  of 

Govt.  Loans  and 

Advances  to 

Government 


6.92 


Imperial  Bank 

Reserve  Bank 

Deposits 

Percentage 

Range 

Loans 

of  Gov- 

of Cash  to 

of 

Advances 

Notes  held 

Loans 

ernment 

Deposits     Variation 

Deposits 

in  Banking 

Deposits 

Advances 

Loans  & 

of  cash 

(percen- 

Depart- 

o'f 

and  Bills 

advance 

(crores) 

tage) 

ment  and 

Banks 

(Last 

to  Gov. 

range 

Friday) 

(Avrg.  of 

Friday 

figures) 

1931-35 

(average) 

June 

25.2 

37.9 

Dec. 

23.7 

.  . 

35.1 

1936 

31.70) 

June 

25.0 

32.6 

)  14.86 

Dec. 

10.8 

11.20 

33.9 

16.92) 

1937 

17.49) 

0 

June 

26.0 

36.2 

)13.63 

26.51 

Dec. 

16.5 

8.25 

36.2 

31.12) 

24.36 

,  . 

.  . 

1938 

40.33) 

June 

20.0 

42.6 

40        21.90 

18.10 

2.10 

10.2 

Dec. 

11.0 

7.28 

46.9 

18.42) 

12.17 

ber  disparity  of  cash  ratios  makes  its  reappearance  on 
almost  the  pre-Depression  scale.  The  corresponding 
seasonal  change  in  the  volume  of  bills,  loans  and  advances 
is  not  marked  till  1938  which  is  to  be  explained  by  the 
secular  changes  which  were  taking  place  in  the  Imperial 
Bank's  volume  of  investment.30 

The  seasonal  demand  for  currency  finds  its  expression  in 
the  balance-sheets  of  the  Reserve  Bank  in  this  manner.  In 
the  balance-sheet  of  the  Issue  Department,  while  the  annual 
average  of  notes  held  in  the  Banking  Department  is  more 
or  less  stable,  there  is  a  large  consistent  seasonal  fall  in 
June  as  over  August.  This  fall  is  distributed  on  the 
liabilities  side  of  the  Banking  Department  as  a  fall  in  the 


30.    Ch.  V  §4;  Tables  XIII  and  XIV. 


IN  ACTION  285 

deposits  of  the  scheduled  banks  and,  on  the  assets  side,  of 
an  increase  in  the  discounts  and  loans  granted  to  them. 
Similar  changes  in  the  figures  relating  to  Government 
operations  have  to  be  taken  account  of  in  tallying  changes  in 
notes  and  coin  of  the  Banking  Department  with  other 
changes. 

The  difference  between  the  maximum  and  minimum  of 
notes  held  in  the  Banking  Department  in  any  year  measures 
the  seasonal  pressure  for  funds  which  the  Reserve  Bank 
has  met  without  any  change  in  its  rate.  These  figures  may 
be  compared  with  the  average  seasonal  difference  of  12 
crores  in  the  cash  of  the  Imperial  Bank  in  the  years  1921-29 
and  the  large  variations  in  seasonal  rates  which  occurred.31 
The  much  larger  variations  in  the  case  of  the  Reserve  Bank 
even  in  these  years  of  low  prices  and  moderate  business 
activity  and  the  size  of  the  average  cash  balances  of  the 
Imperial  Bank  which  stood  in  the  neighbourhood  of  30 
crores  indicate  that  but  for  the  creation  of  the  Reserve  Bank, 
the  old  variations  in  the  rates  of  interest  might  have  esta- 
blished themselves  again. 

In  the  second  sets  of  figures,  a  comparison  is  instituted 
between  the  variations  in  June  and  December  of  the  cash 
balances  of  the  Imperial  Bank  and  the  notes  held  by  the 
Reserve  Bank  in  the  Banking  Department.  In  1938,  a  fall  of 
about  7  crores  in  the  cash  balances  of  the  Imperial  Bank 
contrasts  with  the  fall  of  about  22  crores  in  the  notes  of  the 
Banking  Department.  These  figures  illustrate  how  the  main 
burden  of  seasonal  pressure  is  supported  by  the  Reserve 
Bank  while  the  banks  which  participate  in  that  finance 
bear  it  to  a  smaller  extent  by  lowering  their  cash  ratios. 
It  is  evident  that  the  Reserve  Bank  is  playing  a  great  and 
effective  part  in  the  elimination  of  seasonal  extremes  in 
rates,  which  cannot  but  have  far-reaching  consequences  on 
India's  economy  in  the  future. 

While  it  may  be  claimed  that  the  management  by  the 
Reserve  Bank  of  India  of  the  seasonal  requirements  of 
currency  and  credit  discloses  no  ground  for  dissatisfaction 
and  that  this  management  may  prove  to  be  the  herald  of 

31.    Ch.  V  §4. 


286  RESERVE  BANK  OF  INDIA 

a  new  era  for  trade  and  business,  it  is  to  be  recorded  with 
regret  that  the  same  unanimity  of  opinion  cannot  be  claimed 
for  its  management  of  the  first  banking  difficulties  of  the 
country  during  its  short  existence.  As  we  have  noted,  the 
failure  of  the  Travancore  National  and  Quilon  Bank 
created  an  undoubtedly  dangerous  situation  in  South  India. 
In  the  restoration  of  confidence,  the  Government  of  Madras 
exercised  a  decisive  moral  influence  which  won  a  well- 
deserved  recognition  in  all  quarters.  The  Government  of 
India,  while  it  maintained  a  close  contact  with  and  presum- 
ably offered  advice  and  opinion  to  the  Reserve  Bank,  pre- 
ferred, like  the  Greek  wife  of  yore,  to  be  heard  of  neither 
for  good  nor  for  evil.  It  is  unfortunate  to  have  to  record 
that  the  activities  of  the  Reserve  Bank  to  whom  belonged 
the  natural  direction  and  leadership  of  the  situation  did  not 
evoke  the  degree  of  confidence  and  approbation  which  are 
so  much  to  be  desired  particularly  in  the  early  years  of  its 
existence.  Responsible  bodies  like  the  South  Indian 
Chamber  of  Commerce  and  the  scheduled  banks  of  Madras 
blandly  complained  of  failure  of  expected  aid  and  the  latter 
could  not  see  any  justification  why,  in  the  circumstances, 
they  should  be  required  to  place  their  balances  with  the 
Reserve  Bank. 

Difficulties  seem  to  have  begun  when,  before  the  suspen- 
sion of  that  bank,  the  Reserve  Bank  insisted  on  an  investi- 
gation as  a  preliminary  to  any  aid.  True,  the  investigation 
was  intended  to  cover  only  the  bigger  loans  and  items  in 
the  balance  sheet.  But  it  was  pointed  out  on  behalf  of 
the  bank  that  the  news  of  such  an  investigation  could  not 
be  suppressed  and  was  bound  to  precipitate  the  very  evil 
which  it  should  have  been  its  object  to  avoid.  When  the 
Travancore  Bank  ultimately  agreed  to  an  investigation  just 
a  little  before  the  final  end,  it  was  too  late  for  any  succour. 

It  is  difficult  not  to  concede  on  point  of  principle  the 
validity  of  the  position  taken  up  on  this  point  by  the 
Travancore  Bank.  The  proper  time  to  satisfy  itself  on  the 
general  position  of  the  bank  was  not  when  the  bank  was 
actually  gasping  for  breath  but  in  the  course  of  the  preced- 
ing three  years  during  which  it  was  on  the  list  of  scheduled 
banks.  It  could  not  be  argued  either  that  the  existence  of 


IN  ACTION  287 

the  Reserve  Bank  had  been  too  short  to  permit  of  the  accu- 
mulation of  sufficient  material  on  which  to  base  its  policy 
and  decision.  Only  two  years  before  the  crisis,  the  Reserve 
Bank  had  granted  the  ill-starred  bank  a  substantial  credit- 
line  to  enable  it  to  put  through  its  amalgamation  scheme. 
It  would  be  hardly  proper  to  presume  that  this  offer  was 
made  without  adequate  preliminary  inquiry. 

The  Reserve  Bank  was  on  firmer  ground  when  it  insisted 
that  assistance  could  be  given  only  against  assets  which 
were  segregated  and  clearly  assigned  to  the  Bank.  This 
difficulty  was  inherent  in  the  native  state  domicile  of  the 
bank  which  meant  difficulties  in  case  of  suspension  as  to 
assets  which  could  be  availed  of  by  British  India  creditors 
and  those  which  might  be  claimed  and  seized  by  native 
state  creditors.  The  Reserve  Bank  was  justified  in  assuring 
the  absolute  safety  of  its  funds.  Its  stand  is  not  so  free 
from  doubt  when  it  claimed  that  the  situation  had  altered 
in  principle  because  the  T.  N.  &  Q.  Bank  had  withdrawn 
the  greater  part  of  its  legal  reserves  with  the  Reserve  Bank. 
So  long  as  the  T.  N.  &  Q.  Bank  paid  the  prescribed  penalty 
interest,  the  Reserve  Bank  Act  was  not  intended  to  prohibit 
and  did  not  prohibit  such  withdrawals.  Besides,  it  could 
not  be  gainsaid  that  the  withdrawals  were  the  unavoidable 
sequel  to  the  refusal  of  the  Reserve  Bank  to  give  any  aid 
except  after  a  preliminary  inquiry.  Again,  Central  bank 
aid  should  have  no  relevance  to  the  volume  of  compulsory 
reserve  lodged  with  it  but  only  the  general  position  of  the 
bank  and  the  volume  of  its  realisable  assets.  If  aid  were  to 
be  limited  to  the  volume  of  compulsory  reserves,  scheduled 
banks  might  as  well  keep  their  balances  with  themselves 
and  forgo  the  dubious  advantage  of  affiliation. 

Certain  difficulties  of  purely  legal  interpretation  also 
arose  in  the  course  of  the  crisis.  It  was  held  by  the  Reserve 
Bank  that  demand  promissory  notes  could  not  fall  within 
the  category  of  bills  of  exchange  and  promissory  notes 
maturing  90  days  from  the  date  of  purchase,  etc.,  which 
alone  the  Bank  was  authorised  to  deal  in.  With  reference 
to  Section  17-4d,  the  Bank  held  that  the  documents  of  title 
to  goods  and  not  the  goods  themselves  should  have  been 
transferred  to  the  borrowing  banks  and  should  support  the 


288  RESERVE  BANK  OF  INDIA 

promissory  notes  which  were  to  be  the  basis  of  Reserve 
Bank  advances.  It  will  serve  no  useful  purpose  to  examine 
here  the  accuracy  or  otherwise  of  this  interpretation.  The 
Bank  could  not  have  acted  except  on  the  strict  interpreta- 
tion of  law  as  it  existed  at  the  time  of  the  crisis.  As  a 
matter  of  future  policy,  however,  it  is  indubitable  that  the 
law  of  the  Reserve  Bank  should  be  co-ordinated  with  the 
existing  banking  and  commercial  practice  of  Indian  business 
unless  the  latter  can  and  is  willing  to  adapt  them  to  the 
special  requirements  of  Central  banking.  It  would  be 
meaningless  to  postulate  conditions  which  in  fact  do  not 
and  cannot  exist  for  a  long  time.  If  warehouses  and  conse- 
quently warehouse  receipts  do  not  exist,  it  is  idle  to  pres- 
cribe such  documents  as  a  basis  for  Central  bank  assistance. 
The  experiences  of  this  crisis  have  established  the  urgent 
need  of  an  inquiry  into  the  kind  of  assets  most  in  vogue  and 
the  incorporation  of  the  most  realisable  of  them  in  the  law 
of  the  Reserve  Bank  as  eligible  paper.  In  a  country  where 
standardisation  in  such  matters  hardly  exists,  wisdom  lies 
in  defining  eligible  paper  or  security  in  a  wide  manner  and 
entrusting  it  to  the  discretion  of  the  Reserve  Bank  authori- 
ties to  liberalize  or  make  stringent  its  conditions  of  assist- 
ance according  to  market  and  economic  conditions.  Rigid 
or  narrow  restrictions  on  its  powers  of  discount  or  advances 
is  tantamount  in  a  country  like  India,  as  in  the  case  of  the 
United  States,  to  legal  incapacity  for  timely  or  massive  action 
in  states  of  grave  emergency. 


CHAPTER    IX 

A  BANKING  CRISIS  &  MANY  "BANK  FAILURES" 

BANK  FAILURES  REPORTED  in  India  from  year  to  year  have 
not  the  same  significance  as  in  other  countries  with  more 
advanced  banking  systems  or  stricter  banking  or  company 
laws.  Till  the  amendment  of  the  Indian  Company  Law 
in  1936,  no  effort  was  made  either  to  define  the  word  "bank" 
or  to  ensure  in  any  indirect  way  that  only  respectacle  con- 
cerns used  that  description  in  their  title.  The  consequence 
was  that  many  insignificant  or  doubtful  ventures  registered 
themselves  as  banks  and  when  they  failed,  served  to  swell 
the  number  of  so-called  bank  failures. 

The  amended  Act  of  1936  allows  banking  companies  to 
commence  business  only  when  they  have  a  minimum  paid- 
up  capital  of  Rs.  50,000.  Besides,  in  the  course  of  a  defini- 
tion which  is  by  no  means  precise,  a  company  in  order  to 
be  a  bank  within  the  meaning  of  the  Act  is  required  to 
carry  on  as  its  principal  business  the  accepting  of  deposits 
withdrawable  by  cheque,  draft  or  order.  The  effect  of 
these  conditions  will  not  become  immediately  visible  since 
concerns  which  were  registered  as  banks  before  15th 
January,  1937  are  allowed  to  retain  that  description.  At 
no  distant  future,  however,  the  statistics  of  bank  failures 
are  bound  to  undergo  a  profound  change. 

The  only  episode  which  may  be  described  as  a  banking 
crisis  occurred  in  1913-14  when  one  Indian  joint-stock  bank 
after  another  met  with  disaster.  Otherwise,  bank  failures 
of  the  past  have  been  sporadic,  individual  failures,  illustrat- 
ing certain  weaknesses  and  deficiencies  to  which  Indian 
joint-stock  enterprise  in  general  is  prone.  Epidemics  such 
as  those  which  have  threatened  to  sweep  off  the  banking 
system  of  the  United  States  or  which  shook  banking  in 
several  countries  in  the  early  thirties  of  the  present  century 
have  been  fortunately  almost  absent.  Indian  banks  suffer 
from  certain  endemics  the  extermination  of  which  is  the 
main  problem. 

M.B.I.— 19 


290 


A  BANKING  CRISIS   AND  MANY  BANK  FAILURES 


1.     Failures  According  to  Age 

Ordinarily,  the  long  life  of  a  bank  should  by  itself  be  a 
proof  of  its  good  management.  Failures  naturally  tend  to 
be  concentrated  on  banks  which  are  more  or  less  young. 
Two-thirds  of  the  failures  which  have  occurred  since  the 
banking  crisis  of  1913-14  are  among  banks  which  were  less 
than  11  years  old.  The  proportion  of  failures  declines  very 
rapidly  as  we  reach  banks  higher  up  the  age-scale. 

Bank-Failures  Grouped  by  Age 

S* SF 

!>li— I  P^r-l 


5  .o         jS^w       JS  .jo 
o^         •*-•  o  •*•*  o^ 


1913-14 
1915-20 
1921-30 
1931-36 

5 
1 
11 
10 

26          11 
7           13 
54          22 

72          77 

213 
623 
11           13            5 
19           18          23 

2 
11 
8          19 
1           18 

(  Totals  for  the  four  periods—  50;   43;   143;   238. 

In  Percentages 

of  Total  Failures 

upto  10  yrs. 
11  mos. 

More  than  10  yrs. 
11  mos.  and  less 
than  19  yrs. 
11  mos. 

More  than  19 
yrs.  11  mos. 

1913-14 
1915-20 
1921-30 
1931-36 

88 
62 
68 
74.7 

8 
11.6 
18.1 
17.6 

4 
25 
13.2 
7.5 

Leaving  aside  the  crisis  year  1913-14  when  very  few 
Indian  joint-stock  banks  could  have  claimed  for  themselves 
an  existence  of  more  than  a  few  years,  this  table  of  morta- 
lity suggests  another  important  inference.  The  proportion 
of  failures  of  banks,  20  years  and  more  old,  seems  to  be 
definitely  on  the  decline.  The  failures  are  being  more  and 
more  confined  to  the  infants  and  the  young.  As  the  absolute 
figures  of  failures  of  such  banks  however  suggest,  this 
declining  proportion  reflects  only  the  fecundity  of  the 
country  in  small  insignificant  "banks". 

As  a  matter  of  fact,  the  failures  among  banks  20  years 
and  more  old  present  a  disturbing  tale.  From  a  qualitative 


FAILURES  ACCORDING  TO  AGE  291 

standpoint,  a  bank  10  years  old  should  have  more  than 
twice  the  survival  probability  of  a  five  years  old  bank.  A 
bank  which  has  managed  to  prolong  its  existence  for  more 
than  20  years  should  have  more  than  twice  the  resistance 
power  of  a  bank  which  has  existed  only  for  ten  years.  The 
failure  of  a  bank  20  years  old  means  much  more  harm  to 
the  community  than  the  failure  of  4  banks  still  struggling 
for  a  footing  in  the  5th  or  6th  years  of  their  existence.  Yet, 
our  table  records  that  11  banks  which  were  more  than  20 
years  old  failed  during  1915-20,  as  many  as  19  failed  between 
1921  and  1930  and  18  failed  during  1931-36.  In  other  circum- 
stances, these  should  be  viewed  as  highly  disturbing  figures. 

Much  of  the  significance  of  this  analysis  of  bank-failures 
by  age  is  lost  when  we  take  into  account  the  size  and 
character  of  the  banks  which  make  up  these  totals.  We 
may  take  as  an  illustration  banks  which  failed  after  an 
existence  of  20  years  and  more.  Of  eleven  banks  which 
failed  in  the  years  1915-20  after  an  existence  of  20  years  and 
more,  only  four  had  a  capital  of  1  lakh  and  more.  Seven 
of  them  were  so  insignificant  that  nothing  about  them  is 
traceable.  Of  the  total  eleven,  only  two  deserve  to  be  noticed 
as  causing  appreciable  loss  to  the  country  or  its  banking 
system.  The  four  banks  of  some  size  which  we  have  refer- 
red to  were  among  eleven  which  had  a  capital  of  more  than 
1  lakh  and  failed  in  this  period.1 

Between  1921  and  1930,  19  banks  failed  after  a  similar 
long  existence  and  of  them,  only  five  had  a  paid-up  capital 
of  more  than  1  lakh.  As  many  as  fifteen  do  not  seem  to 

1.  Bank  of  Upper  India— (1862-1917)  This  bank  had  a  paid-up  capital  of  10  lakhs. 
See  §  23. 

The  Kyastha  Trading  and  Banking  Corporation.  (1900-1920).  It  had  a  paid- 
up  capital  of  7J  lakhs.  The  bank  carried  on  banking  and  trading  side  by  side 
and  as  a  rule,  losses  on  its  trading  branch  were  made  good  out  of  profits  on  the 
banking  business.  Sometimes,  debts  of  the  trading  branch  were  met  from 
advances  from  the  bank.  Advances  to  directors  and  managers,  advances  against 
bank's  own  shares,  advances  against  single  name  pro-notes  made  up  more  than 
one-third  of  the  total  advances. 

Deccan  Bank— (1890-1916).  Paid-up  capital  50  thousand.  P.  Puddumjee  and 
Co.,  agents,  advanced  money  from  1897  to  Gadag  Spinning  Co.,  till  the  loan 
reached  3  lakhs.  On  liquidation,  the  Spinning  Company  was  purchased  by  the 
bank  for  282  thousand  and  placed  under  the  management  of  the  nephew  of  the 
Agent.  A  criminal  charge  was  brought  against  the  Agent  but  withdrawn  on 
ground  of  his  serious  illness. 

[Continued  overleaf. 


292  A   BANKING    CRISIS    AND   MANY   BANK   FAILURES 

have  left  any  record  behind  them.  Of  the  four  about 
which  some  stray  information  is  available,  the  failures  of 
two  only  deserve  to  be  recorded  as  appreciable  mishaps. 
During  the  same  years,  the  number  of  banks  with  a  paid- 
up  capital  of  one  lakh  and  more  which  failed  runs  into  as 
large  a  figure  as  twenty-three.2 

In  the  period  of  great  expansion  of  joint-stock  banks 
1931-36,  among  those  that  failed,  as  many  as  18  could 
claim  a  prolonged  existence  of  twenty  years  and  more. 
Only  5  among  them  had  a  paid-up  capital  of  1  lakh  and 
more.  Information  regarding  only  one  of  them  is  available. 

The  other  banks  making  up  the  list  are  : 

Name  Paid-up  Capital  Place 

Kashmiri   Bank      . .  . .  . .        100  thousand  Fyzabad        1882-1916 

Rajdhany  Bank       . .  . .  . .  19        „  Bangalore     1889-1915 

Kayastha  Mercantile  Banking 

Corporation  ..  ..  ..          20  Delhi  1881-1916 

Gorakhpur  Bank  . .  . .        300        „  Gorakhpur    1895-1917 

Chickballapur  Rajdhani  Bank         ..  6  1886-1917 

Gudibanda   Ooperhalli   Shri   Hanu- 

mantarayaswami  Bank      . .     Rs.     830   only  1890-1918 

Jwala  Prakash  Meerut  Bank  . .          11        „  Meerut          1888-1920 

2.     Alliance  Bank  of  Simla.    See   §   24. 

Bengal  National  Bank.     See  §  14. 

Allahabad  Union  Bank.  (1904-1924).  Paid-up  capital  65  thousand.  The  manager 
Kedarnath  Mitra  gave  an  unsecured  overdraft  of  18  thousand  to  himself,  10 
thousand  to  his  brother,  21  thousand  to  his  relatives  and  did  not  forget  his  wife 
who  got  2  thousand.  He  was  also  the  manager  of  Annapurna  Co.,  which  dealt 
in  grain  which  was  untraceable.  He  absconded  but  the  directors  had  to  make 
good  all  dividends  from  1915  to  the  extent  of  40  thousand  as  being  paid  out  of 
capital. 

Balance  Sheet.      (OOOs) 

Fixed    Deposits    3    years  Unsecured  Overdraft  113 

1  Yr.  62  Pro-Notes  24 

6  Mos.  0.5  Bank's   own   Shares  ,  0.7 

„  „          3  Mos.  0.1  Remortgaged   Ornaments  24 

Savings  Banks  30  Annapurna   Co.  48 

Family  Endowment  33  Cash  in  hand  (Rs.  54  Only) 

Poona  Bank.     (1898-1924)    See   §   4. 
The  other  banks  were  : — 

Bank  of  Trichinopoly  (1900-1921).  Paid-up  capital  10  thousand.  Kisha  Mer- 
cantile and  Agricultural  Bank  (1901-1922).  Paid-up  capital  14  thousand-  Chik- 
ballapur  Kandavarsapet  Sri  Venkataramanaswamy  Bank  (1890-1922).  Paid-up 
capital  11  thousand.  Hassna,  Karnatic  Bank  (1877-1922).  Capital  6  thousand. 
Mandya  Lakshmi  Vilasa  Bank  (1894-1922)  Capital  13  thousand.  Pretoria  Bank 
U901-1923)  Capital  about  3  thousand.  Poona  Mercantile  Bank  (1893-1923)  Capital 
124  thousand.  Vellore  Commercial  Bank  (1904-1926)  Capital  3  lakhs.  Gundlupet 
Sri  Himavat  Gopala  Krishnaswamy  Bank  (1901-1926)  Capital  12  thousand.  Mer- 
cantile Bank,  Bangalore  (1892-1927)  Capital  4  thousand.  Gundlupet  Sri  Raja- 
rajeswari  Bank  (1900-1929)  Capital  33  thousand.  Pabna  Union  Bank  (1908-1930 
Capital  30  thousand.  Devanalli  Sri  Adinarayanaswamy  Bank  (1895-1929)  Capital 
15  thousand. 


FAILURES    ACCORDING    TO    PAID-UP    CAPITAL  293 

Those  five  which  had  a  paid-up  capital  of  more  than  1  lakh 
were  among  the  seven  which  had  a  similar  capitalization  and 
failed  in  this  period.3 

The  general  conclusion  stands  out  from  these  facts  that 
among  reported  bank  failures  in  this  country,  age  by  itself 
is  not  a  significant  factor.  Concerns  which  hardly  deserve 
to  be  described  as  banks  manage  to  lead  a  charmed  life  for 
years  and  years  and  then  slip  out  of  existence. 

2.    Failures  according  to  Paid-up  Capital 

It  would  be  difficult  to  decide  whether,  among  banks 
which  have  reached  or  passed  a  certain  optimum  size,  long 
life  or  large  resources  are  a  better  indication  of  capacity 
to  withstand  adverse  times.  If  age  were  no  factor  to  be 
taken  account  of,  it  is  natural  that  mortality  should  be 
more  frequent  among  banks  with  smaller  resources  than 
those  with  ample  resources.  It  is  unfortunate  that  the 
statistics  of  bank  failures  indicate  only  the  paid-up  capital 
of  banks  which  have  gone  into  liquidation  and  are  silent 
about  reserves  or  deposits.  Basing  our  analysis  on  paid-up 
capital  only,  we  find  that  more  than  three-fourths  of  the 
failures  which  have  occurred  since  the  banking  crisis  of 
1913-14  are  accounted  for  by  banks  with  paid-up  capital 


3.  Peoples  Bank  of  Northern  India  (1925-31)  and  Dawsons  Bank  which  failed  but 
was  reconstructed  were  the  only  important  failures.  Both  were  less  than  20  years 
old,  the  latter  being  founded  in  1914. 

Karachi  Bank :— ( 1910-1930)  With  a  paid-up  capital  of  2\  lakhs,  the  bank  had 
branches  at  Bombay,  Hyderabad  and  Larkana.  The  manager,  accountant  and 
cashier  of  the  Bombay  branch  who  were  paid  Rs.  150,  130  and  110  per  month  res- 
pectively misappropriated  bank's  money  and  successfully  concealed  the  facts 
from  the  branch  inspector  by  manipulation  of  accounts.  A  sum  of  32  thousand 
was  tapped  at  the  account  at  the  Mercantile  Bank  and  signatures  of  constituents 
were  forged.  All  were  sentenced,  the  first  two  to  long  trms.  Loans  to  relations 
of  directors  proved  another  cause  of  the  bank's  difficulties. 

The  other  banks  were  :— Pabna  Bank  (1883-1930)  Capital  20  thousand:  Lyallpur 
Bank  (1907-1931)  Capital  1.8  lakhs;  Chinese  Merited  Company  (1909-1931)  Capital 
1  lakh,  Trichinopoly  Bank  (1905-1932)  Capital  32  thousand;  Trinnevelly  Bank 
C1896-1932)  Capital  1.8  lakhs.  Co-operative  Hindusthan  Bank  (1908-1932)  Capital 
1.7  lakhs.  Meerut  Bank  (1884-1932)  Capital  60  thousand.  Darbhanga  Bank 
(1921-1932)  Capital  40  thousand.  Bharat  National  Bank  (1908-1934)  Capital  2.83 
lakhs.  Coimbatore  Sabanati  Bank  (1913-1935)  Capital  8  thousand.  Midnapore 
Bank  (1915-1935).  Mufassil  Bank  U.  P.  (1910-1935)  Capital  4.7  lakhs.  Banking 
and  Ornament  Manufacturing  Co.  (1906-1935)  Capital  49  thousand.  Lahore  Bank 
C1906-1935)  Capital  95  thousand.  Hazaribag  Bank  (1911-1935)  Capital  20  thou- 
sand. Madaripur  Bank  (1911-1936)  Capital  10  thousand.  Nanjangud  Sri  Nanjun- 
deswara  Bank  (1885-1936)  Capital  21  thousand. 


294 


A   BANKING   CRISIS   AND   MANY   BANK  FAILURES 


of  less  than  1  lakh.  The  table  below  illustrates  the  tendency 
of  the  proportion  to  fall  as  we  move  up  in  the  scale  of 
capital  resources. 

Failures  according  to  Paid-up  Capital 


(when   available.) 


,3  8l 


S*^ 

rt   c 


^    '""'      rC      OT     _       £      W 

SS  ~«S  -S! 


S  c 

o  2 


1913-14    12 

4 

4 

5 

8 

7            3 

2 

2 

1 

1915-20    15 

4 

1 

5 

8 

1            2 

.  . 

. 

1921-30    40 

15 

4 

11 

11 

11            6 

3 

.  . 

2 

, 

1931-36    95 

23 

14 

]3 

12 

7           2 

.. 

Summary  Table 

In 

percentages  of  total  failures 

Less  than 

More  than 

5 

lakhs 

Less  than 

More  than 

5  lakhs 

1 

lakh 

1  lakh  and 

and  more 

1 

lakh 

1  lakh  and 

and  more 

less  than 

less  than 

5  lakhs 

5  lakhs 

1913-14 

33 

7 

7 

70 

15 

15 

1915-20 

31 

8 

o 

74 

19 

7 

1921-30 

81 

11 

12 

78 

10 

12 

1931-36 

157 

7 

2 

94.5 

4.2 

1.2 

The  first  and  third  periods  show  a  high  percentage  of 
failures  among  the  biggest  banks.  The  failure  of  7  banks 
with  a  paid-up  capital  of  5  lakhs  and  more  in  a  total  of 
47  in  1913-14  should  not  cause  any  surprise.  The  panic  of 
1913-14  started  with  the  fall  of  one  of  the  biggest  Indian 
ventures  and  spread  to  all  other  banks.  A  panic  does  not 
discriminate  in  its  victims. 

The  failure  of  12  such  banks  among  a  total  of  104  during 
1921-30  stands  on  a  different  footing.  Among  the  victims 
were  the  Alliance  Bank  of  Simla,  the  Tata  Industrial  Bank, 
the  Calcutta  Industrial  Bank,  Trust  of  India,  Industrial  and 
Exchange  Bank  of  India,  Bengal  National  Bank,  Bombay 
Merchants  Bank,  the  Bank  of  Morvi,  Indian  Industrial  Bank 
and  two  private  concerns  connected  with  the  House  of  Petits 
in  Bombay.  Most  of  these  failures  have  been  analysed  else- 
where in  this  chapter.  It  is  clear  that  in  every  case  the 
failure  was  an  individual  misfortune,  more  than  deserved 
in  most  cases  by  long  and  recalcitrant  mismanagement.  No 
evidence  is  forthcoming  to  prove  that  these  years  present- 
ed any  exceptional  difficulties  to  Indian  banks  as  such. 


FAILURES   ACCORDING   TO   PAID-UP   CAPITAL  295 

The  rate  of  annual  suspensions  of  banks  indicates  that 
failures  among  the  bigger  banks  are  gradually  declining 
with  the  progress  of  years.  The  rate  we  have  calculated 
is  not  exact  since  for  banks  in  liquidation  we  have  figures 
only  of  paid-up  capital,  while  for  banks  in  existence  at  the 
commencement  of  each  period,  the  figures  take  account 
both  of  paid-up  capital  and  reserves.  Banks  with  paid-up 
capital  only  of  Rs.  1  lakh  and  more  must  be  considerably 
less  than  banks  with  capital  and  reserves  of  the  same  mag- 
nitude. In  other  words,  the  rate  calculated  understates  the 
mortality  from  period  to  period.  But  this  discrepancy  is 
not  likely  to  alter  the  trend  of  things  as  such. 


Banks  in  existence 

at  commencement 

of  each  period. 

Total  banks  in 

Rate  of  Suspension 

(Capital  Rs.  1  lakh 

liquidation. 

per  annum. 

and   above.) 

1913-14 

41 

47 

17.0 

1915-20 

45 

42 

4.0 

1921-30 

65 

104 

3.5 

1931-36 

84 

166 

1.8 

The  striking  discrepancies  of  the  first  two  columns  prove 
the  great,  almost  overwhelming  share  of  the  small  banks 
in  "bank-failures"  in  this  country.  The  growing  stability 
of  the  bigger  banks  is  well  demonstrated  by  a  consistent 
decline  in  the  rate  of  annual  suspensions. 

We  shall  now  present  an  account  and  analysis  of  some 
of  the  bank  failures  which  are  representative  and  indicate 
certain  broad  inferences  and  conclusions.  An  effort  is 
made  to  group  the  failures  according  to  the  main  causes 
which  appear  to  have  brought  them  about.  In  every 
failure,  of  course,  many  causes  have  been  at  work;  in  some, 
one  cause  may  have  called  into  existence  others  and  it  is 
not  altogether  feasible  to  reconstruct  the  chain  of  events. 
Still  an  arrangement  of  this  kind  is  much  to  be  preferred 
to  a  chronological  account  as  facilitating  the  review  of  the 
whole  problem  which  is  the  subject  matter  of  the  next 
chapter. 

3.    Lax  Laws,  Public  Ignorance  and  Bad  or  Dishonest 
Management 

Among  many  wiles  employed  to  beguile  the  public  into 


296  A   BANKING  CRISIS   AND   MANY  BANK  FAILURES 

placing  their  funds  with  banks,  none  was  more  crude  or 
more  frequent  than  the  advertisement  of  imposing  figures 
of  authorised  or  subscribed  capitals  as  against  very  frac- 
tional amounts  of  paid-up  capital. 

4.  Poona  Bank,  Poona 

This  bank  was  founded  in  June  1889  and  went  into  liquida- 
tion in  August  1924.  There  is  little  in  its  balance  sheets  to 
justify  its  marvellously  prolonged  existence.  It  took  full 
advantage,  however,  of  the  banking  boom  before  1913  to 
tempt  into  its  coffers  deposits  9  to  10  times  its  paid-up 
capital.  At  a  time  when  its  paid-up  capital  was  little  more 
than  3  lakhs,  an  advertisement  in  the  leading  English  daily 
of  the  province  announced  its  authorised  capital  as  10 
crores  and  its  subscribed  capital  as  50  lakhs.  While  Rs.  85 
per  share  of  100  were  still  uncalled,  it  even  issued  new 
shares  to  bring  more  grist  to  its  mills.  The  crisis  of  1913-14 
denuded  the  bank  of  the  bulk  of  its  deposits  and  it  never 
recovered  thereafter.4 

5.  Amritsar  National  Bank 

This  bank  had  a  very  brief  but  apparently  bright  career 
from  January  1922  to  May  1923.  Within  that  amazingly  short 
period  of  time,  it  collected  deposits  equal  to  about  12  times 
its  paid-up  capital.  Its  authorised  capital  was  advertised  as 
50  lakhs  and  subscribed  capital  as  Rs.  10  lakhs  while  the 
capital  actually  paid  in  was  Rs.  160  thousand  only. 

To  create  or  merely  to  advertise  a  large  number  of 
branches  was  a  common  device  which  promised  a  double 
advantage.  It  created  a  sense  of  imposing  size  or  enabled 
the  banks  actually  to  spread  their  talons  far  and  wide. 

Poona  Bank  (100  s) 

Subscribed  Paid-up  Reserves  Deposits 

1907-08  20,000  60  35  590 

1910-11  ,  330  66  2,590     ' 


1911-12 

1914 

1915 

1916 

1920 

1923    . 


330  70  3,060 

900  100  1,010 

900  100  470 

900  260  240 

600  71  189 

v  600  '  12.0  355 


LAX  LAWS,  IGNORANCE,  BAD  MANAGEMENT  297 

6.  The  Pioneer  Bank 

This  Bank  which  we  shall  notice  again  presently  had  a 
paid-up  capital  of  about  2£  lakhs  and  deposits  of  about  3 
lakhs.  In  its  advertisement  in  the  Press,  it  promised  the 
public  that  branches  were  to  be  opened  in  London,  Paris, 
New  York  and  31  places  in  India  "as  soon  as  certain  arrange- 
ments were  completed". 

7.  The  Hindustan  Bank,  Multan 

This  bank  was  founded  by  Mr.  Daulatrai,  brother  of  Mr. 
Lala  Harkishen  Lai,  in  July,  1906  and  went  into  liquidation 
in  January,  1914.  At  one  stage,  its  authorised  capital  was 
increased  from  Rs.  2J  lakhs  to  10  lakhs  but  the  paid-up 
capital  remained  unchanged  at  120  thousand.  Within  the 
short  space  of  six  years,  as  many  as  36  branches  were 
created  and  the  amount  of  deposits  was  inflated  to  above 
Rs.  10  lakhs. 

8.  Kathiawar  and  Ahmedabad  Corporation 

This  bank  established  in  June  1910  and  liquidated  in 
December  1913  took  evident  pride  in  its  authorised  capital 
of  50  lakhs  against  paid-up  capital  of  7  lakhs  and  odd.  In 
its  brief  career  of  two  years  and  a  half,  it  created  about  a 
dozen  branches  in  India  and  one  more  in  Nairobi.  On  its 
failure,  the  wily  shareholders  in  Ahmedabad  did  everything 
to  frustrate  the  depositors  and  creditors  of  the  Bank  who  un- 
fortunately for  them  hailed  largely  from  the  Punjab.  When 
the  Court  ordered  compulsory  liquidation,  the  shareholders 
tried  to  evade  the  rigorous  inquisition  by  pleading  for 
voluntary  liquidation.  The  auditors  of  the  bank  avoided 
to  report  and  the  auditor  appointed  by  the  Court  could  not 
obtain  access  to  the  relevant  material ! 

The  adoption  of  similar  or  imposing  names  was  another 
bait  offered  to  the  ignorant  or  ill-informed  public.  There 
was  launched  in  Delhi  in  February  1913  a  bank  named 
Imperial  Bank.  Its  authorised  capital  was  Rs.  10  lakhs,  sub- 
scribed capital  40  thousand  and  paid-up  capital  about  8 
thousand  !  Luckily,  it  disappeared  in  October  1914.  Other- 
wise, the  christening  of  the  three  amalgamated  Presidency 


298  A   BANKING   CRISIS   AND   MANY  BANK  FAILURES 

Banks  might  have  raised  a  nice  difficulty  seven  years  later.5 
The  fact  is  that  the  very  word  "bank"  has  a  connotation 
for  the  ordinary  man  which  proves  his  siren  song  of  disas- 
ter. Even  before  the  outbreak  of  the  banking  crisis  of 
1913-14,  the  danger  was  quite  felt  and  realised  by  the  Gov- 
ernment. "Poor  and  uneducated  people",  the  Finance 
Member  of  the  Government  of  India  said  in  March  1912, 
"are  attracted  by  the  word  'bank'  thinking  that  it  neces- 
sarily implies  security  and  stability  ;  and  unscrupulous  per- 
sons accordingly  apply  the  term  to  speculative  business  in 
order  to  attract  investors  and  depositors."  But  the  Finance 
Member  could  think  of  no  remedy,  legal  or  otherwise.  He 
contented  himself  with  declaring  that  the  Government  of 
India  might  well  hesitate  to  rush  in  "where  more  experi- 
enced legislators  fear  to  tread."  The  consequence  was  the 
banking  panic  of  1913-14,  any  remedial  action  being  deferred 
even  after  that  on  account  of  the  outbreak  of  the  Great  War. 
As  one  peruses  the  doubtful  tale  of  bank-failures  in  India, 
one  wonders  whether  the  ignorance  of  the  public  was  not 
equalled  and  indeed  exceeded  by  that  of  the  worthy  bankers 
who  set  out  to  endow  India  with  a  great  banking  system. 
Undoubtedly,  fraud  there  was  in  plenty  and  in  quite  despi- 
cable forms.  Yet,  it  is  more  probable  that  in  many  cases, 
ignorance  in  very  naive  forms  was  more  responsible  for  the 
misfortune  of  Indian  banks. 

9.    The  British  India  Bank 

This  bank  was  established  in  April  1911  and  for  two  years 
before  it  was  formally  liquidated  in  September  1913,  it 
seems  to  have  become  somnolent.  Its  authorised  capital  was 
Rs.  250  thousand  while  its  paid-up  and  subscribed  capital 
was  Rs.  6  thousand  only.  In  less  than  a  year  of  its  establish- 

5.  In  the  Bombay  High  Court,  Mr.  Mulla  J.,  recorded  an  interesting  Judgment 
in  1922  restraining  the  National  Bank  of  Indore  from  carrying  on  business  under 
that  name  on  the  action  of  the  National  Bank  of  India.  Leading  brokers  gave 
evidence  for  the  plaintiff  bank.  It  was  held  that  the  question  in  such  cases  was 
not  whether  the  intelligent  section  of  the  public  was  likely  to  be  deceived  but 
whther  the  public  at  large  was  likely  to  be  deceived.  The  following  dictum  of 
Sir  G.  Jessel  50  L  J.  ch.  255  was  quoted  with  approbation.  "This  public  are  care- 
less and  it  is  no  use  supposing  that  if  they  paid  a  moderate  attention  to  names 
they  would  see  they  are  not  the  same  but  only  similar." 

— Commerce,  9th  September,  1922. 


LAX  LAWS,  IGNORANCE,  BAD  MANAGEMENT  299 

ment,  it  boasted  of  3  branches  and  17  agencies  in  "all  towns, 
cities,  trade-centres  throughout  British  India." 

The  promoters  of  the  bank  who  elected  Allahabad  for 
their  operations  adduced  certain  very  forceful  reasons  to 
overcome  the  traditional  timidity  and  suspiciousness  of  the 
investors.  "Unlike  concerns  in  which  machinery  has  to  be 
purchased  and  buildings  have  to  be  erected,  and  the  money 
of  the  investors  has  to  be  idle  for  a  considerable  period," 
they  pointed  out  in  their  prospectus,  "in  the  banking  busi- 
ness, money  is  invested  in  some  other  profitable  venture 
from  the  day  it  is  paid  in  and  the  shareholders  and  deposi- 
tors can  always  expect  quick  and  good  return  on  their  in- 
vestment." The  prospectus  then  proceeded  to  unfold  the 
many  and  varied  services  which  the  bank  aspired  to  bring 
to  the  doors  of  the  public.  It  undertook  to  offer  "sound  and 

proper  advice concerning  investment  of  any  class."    "It 

was  prepared  to  effect  all  classes  of  insurance  as  agents 
for  the  leading  Life,  Fire,  Marine  and  Accident  Offices."  It 
would  "engage  passages  to  any  part  of  the  world."  On 
behalf  of  its  constituents,  it  was  to  undertake  "to  conduct 
business  of  any  nature,  whether  occasional,  special  or  per- 
manent under  a  power  of  attorney." 

10.  The  Sivarama  Ayyar  Bank,  Madras 

A  touch  of  the  genuine  Quixotic  is  supplied  by  this  bank 
which  went  into  liquidation  in  1932.  It  was  set  up  as  a 
poor  man's  bank  and  true  to  its  name,  it  accepted  deposits  of 
even  a  fraction  of  an  anna.  Among  its  valued  customers 
were  reported  many  beggars.  When  ultimately  the  bank 
closed  down  amidst  exciting  scenes,  the  ingenious  Sivarama 
Ayyar,  its  founder,  shareholder  and  manager  ascribed  the 
failure  to  heavy  expenses  of  organisation  and  the  prevailing 
trade  depression  !  During  its  brief  and  presumably  bright 
life,  it  had  opened  branches  at  Madura,  Thrichinopoly  and 
several  other  towns. 

11.  Bombay  Banking  Company 

This  bank  was  established  in  November  1898  and  after  a 
long  and  apparently  useful  life  was  dragged  into  liquidation 
in  the  panic  of  1913-14.  The  concern  achieved  reputation 


300  A  BANKING  CRISIS   AND  MANY  BANK  FAILURES 

and  confidence  in  certain  social  circles  and  communities  be- 
cause of  the  presence  on  its  directorate  of  a  highly  respected 
and  eminent  medical  practitioner  of  Bombay.  It  appears 
that  the  Directors  gave  "complete  discretion  to  the  agents 
of  the  bank."  This  discretion  was  used  by  the  agents  to  give 
liberal  loans  to  themselves  and  to  prepare  entirely  false 
balance-sheets.  The  shareholders  gratefully  received  their 
dividends  of  12  per  cent  and  made  no  inquiries.  A  flutter  of 
suspicion  was  caused  in  October  1912  when  the  manager 
took  a  trip  to  America  and  Rs.  5  lakhs  were  withdrawn  by 
the  depositors.  The  dividend  of  June  1913  was  a  modest 
one  of  6  per  cent.  The  bank  continued,  however,  in  an  un- 
concerned manner  as  the  eminent  director  mentioned  above 
endorsed  without  inquiry  or  appreciation  of  the  responsibili- 
ties he  incurred  thereby,  all  hundis  submitted  to  him.  But 
when  panic  arose  over  the  failure,  first  of  the  Peoples  Bank 
of  Lahore,  and  then  the  Credit  Bank  of  India  at  Bombay, 
suspension  was  forced  on  it  despite  courageous  efforts  to 
stave  it  off.  The  agents  promptly  declared  themselves  in- 
solvent. 

The  directors  seem  to  have  then  discovered  the  way  in 
which  the  bank  was  managed.  "As  to  books,"  observes  the 
report  of  the  liquidators,  "the  bank  failed  to  keep  even  such 
books  as  are  generally  kept  by  private  banking  firms.  Only 
one  day  book  and  one  ledger  were  maintained  and  the 
directors  and  shareholders  appear  to  have  been  content 
with  these  two  books."  The  liquidators  express  the  suspi- 
cion that  "the  registers  of  securities  and  pro-notes  were 
suppressed." 

12.    The  Pioneer  Bank,  Bombay 

Established  in  September  1911  by  Rahim  Joosab,  the 
brother  of  the  much  more  well-known  Jaffar  Joosab, 
manager  of  the  Credit  Bank  of  India,  the  bank  was  finally 
liquidated  in  December  1916.  With  an  authorised  capital  of 
Rs.  50  lakhs  and  subscribed  capital  of  about  Rs  15  lakhs,  it 
collected  a  paid-up  capital  of  about  2J  lakhs  and  deposits  by 
1913  of  about  3  lakhs.  Most  of  its  paid-up  capital  was  bogus. 
Moneys  which  were  paid  in  as  subscription  to  the  bank's 
Shares  were  loaned  out  to  the  same  parties  against  those 


LAX  LAWS,  IGNORANCE,  BAD  MANAGEMENT  301 

very  shares.  Persons  in  financial  difficulties  were  invited 
and  given  loans  part  of  which  was  retained  as  application 
money  for  Pioneer  Bank  shares.  When  petitions  were 
presented  for  winding  up  on  these  grounds,  it  was  held  that 
these  grounds  related  to  the  internal  management  of  the 
bank  and  did  not  fall  under  any  one  of  the  five  heads  stated 
for  the  purpose  in  the  Indian  Companies  Act. 

13.  The  Credit  Bank  of  India 

Established  in  December  1909  with  an  authorised  capital 
of  Rs.  100  lakhs,  subscribed  capital  of  Rs.  50  lakhs  and  paid- 
up  capital  of  Rs.  10  lakhs,  the  bank  started  in  Bombay  the 
epidemic  which  had  broken  out  in  the  Punjab  with  the  col- 
lapse of  the  Peoples  Bank  of  Lahore.  The  Credit  Bank 
achieved  among  other  things  an  unusual  distinction  for 
gathering  within  its  fold  men  who  were  quite  untrained  for 
the  responsibilities  entrusted  to  them.  On  appointment  as 
manager  of  the  bank,  Jaffer  Joosab  pleaded  ignorance  of 
banking  or  accountancy  and  requested  the  Directors  to  give 
a  strong  committee  to  assist  him.  Till  the  day  of  the  collapse 
of  the  bank,  he  had  not  grapsed  the  meaning  of  a  bill  of  ex- 
change. When  asked  to  account  for  Rs.  5  lakhs  out  of  a  total 
of  about  Rs.  7  lakhs  shown  as  current  accounts,  he  made  the 
following  confession  :  "That  was  made  up  of  mere  paper 
entries;  Mistry  taught  me  this  window-dressing  and  said  it 
was  not  illegal  and  many  banks  were  doing  it The  ac- 
count and  balance-sheets  were  prepared  by  my  staff  under 
instructions  from  the  auditor."  The  chairman  of  the  Board 
of  Directors  was  in  no  happier  situation.  "Before  I  became 
acquainted  with  the  bank",  he  admitted,  "I  had  absolutely 
no  knowledge  of  finance  or  banking,  nor  have  I  any  now." 
Mistry,  the  auditor,  pleaded  ignorance  as  defence  for  every 
omission  or  error  pointed  out  in  the  course  of  the  trial. 

14.  The  Bengal  National  Bank 

The  Bengal  National  Bank  was  one  of  the  few  outstand- 
ing institutions  which  resurgent  patriotism  created  in  the 
eventful  years  1906-07.  Throughout  its  career,  it  adhered 
very  strictly  to  the  initial  resolution  of  the  founders  to  ex- 
clude all  foreign  element  from  the  management.  Inexperi* 


302  A  BANKING  CRISIS   AND  MANY  BANK  FAILURES 

ence  of  banking,  however,  was  more  than  offset  by  a  very 
overcautious  policy  in  the  initial  years  of  its  existence.  As 
late  as  1913,  the  balance-sheet  discloses  the  high  amount  of 
Rs.  5.1  lakhs  as  cash  on  hand  and  at  bankers  against  a  total 
deposit  liability  of  24.8  lakhs.  The  ratio  of  working  ex- 
penses to  total  resources  was  not  too  unfavourable  while  the 
temptation  to  declare  high  dividends  was  firmly  and  consist- 
ently resisted. 

Dividend  per  cent 

1908  Nil 

1909  1 

1910  1 

1911  4 

1912  5 

There  had  been  difficulties  in  1913-14.  In  1917,  a  litiga- 
tion caused  a  severe  fall  in  deposits  from  Rs.  25  lakhs  to 
Rs.  2.7  lakhs.  But  the  bank  recovered  steadily  from  these 
disasters  till  by  1923  its  deposits  exceeded  Rs.  80  lakhs. 

Unfortunately,  more  permanent  causes  were  slowly  un- 
dermining the  strength  of  the  institution.  Patriotism  by 
itself  is  a  poor  substitute  for  business  ability  and  vigilance. 
Sooner  or  later,  it  serves  as  a  convenient  cloak  in  the  hands 
of  unprincipled  men  in  which  all  walks  of  life  and  parti- 
cularly business  always  abounds.  The  bank  became 
gradually  a  family  concern.  Young  men  without  any  quali- 
fications found  themselves  in  responsible  positions  simply 
because  they  were  connected  with  the  promoters  and  orga- 
nizers of  the  bank.  Five  out  of  six  directors  became  heavily 
indebted  to  the  bank.  One  of  them  alone  obtained  a  loan  of 
Rs.  3  lakhs  against  no  security  of  any  kind.  Two  of  the 
moving  spirits  made  it  their  special  concern  to  obtain  un- 
secured accommodation  for  a  host  of  their  friends  and 
associates.  Most  of  the  bank  officers  were  content  to  have 
overdraft  accounts  for  themselves  without  any  security  or 
with  insufficient  security.  The  auditors  were  not  forgotten; 
they  received  generous  accommodation  from  the  bank. 

With  deposits  of  Rs.  81  lakhs,  unsecured  loans  reached 
the  astonishing  figure  of  50  lakhs  while  industrial  concerns 
of  very  doubtful  character  received  by  way  of  loans  as 
much  as  Rs.  25  lakhs. 


LAX  LAWS,  IGNORANCE,  BAD  MANAGEMENT  303 

A  severe  warning  came  in  1923  when  with  the  failure  of 
the  Alliance  Bank  of  Simla  a  run  on  the  Bengal  National 
Bank  drained  away  as  much  as  Rs.  24  lakhs  out  of  deposits 
aggregating  to  Rs.  85  lakhs.  The  Imperial  Bank  of  India 
came  to  its  aid  with  two  loans  amounting  to  Rs.  20  lakhs 
against  the  liquid  assets  of  the  bank.  The  warning  either 
came  too  late  or  was  not  heeded.  On  March  31,  1926,  the 
bank  issued  the  following  astonishing  balance-sheet. 

(figures  in  lakhs) 

Liabilities  Assets 

Capital  . .         . .        8.0       Fixed  Assets  . .        0.1 

Reserve  Fund          . .        2.5       Bills  and  Loans      . .     112.0 
Contingency  Fund  0.7       Securities  and 

Deposits  . .       81.0        Investments  . .         1.6 

Sundry  including  profit  Cash  . .         . .         3.8 

and  loss  . .       25.0 

The  bank  now  developed  an  extraordinary  technique  of 
returning  cheques  on  flimsy  excuses  while  men  of  straw 
were  alleged  to  be  still  receiving  overdrafts.  Withdrawals 
began  in  April  1927  and  culminated  in  the  closing  of  the 
bank.  It  was  estimated  later  that  not  more  than  Rs.  60 
lakhs  worth  assets  were  recoverable. 

A  criminal  prosecution  brought  to  a  close  this  inglorious 
history.  The  auditor  whose  criminal  compliance  was  res- 
ponsible for  the  postponement  of  the  evil  day  for  a  long 
time,  the  director  and  managing  director  who  were  the  real 
culprits  in  this  abuse  of  public  trust  were  all  sentenced  to 
long  terms  of  imprisonment. 

15.    Dangers  of  Industrial  Finance 

In  another  chapter,  we  have  analysed  the  implications 
and  present  position  of  finance  of  industries  out  of  banking 
funds.  From  very  early  days,  public  opinion  in  India 
stimulated  by  the  spectacular  economic  success  of  Germany 
and  Japan  has  been  overwhelmingly  in  favour  of  mixed 
banking  such  as  prevails  in  these  and  other  countries.  It  is 
hardly  surprising  that  the  opinion  should  have  reflected 
itself  from  time  to  time  to  ventures  along  these  lines. 
Unfortunately,  it  is  not  clear  whether  the  public,  most  con- 
cerned with  such  ventures,  has  begun  to  appreciate  even 
now  the  limitations,  precautions  and  technical  conditions 


304  A  BANKING   CRISIS   AND   MANY  BANK  FAILURES 

presupposed  in  their  successful  working. 

16.     The  Peoples  Bank  of  Lahore 

This  bank  was  established  in  February  1901  with  an 
authorised  capital  of  Rs.  35  lakhs  and  subscribed  capital  of 
22  lakhs.  It  closed  its  doors  on  19th  September  1913.  The 
magnitude  of  its  resources  was  by  itself  sufficient  to  make 
its  failure  a  major  event  in  the  world  of  Indian  banking  and 
finance.  Unfortunately,  its  disappearance  acted  as  an  im- 
mediate provocation  to  a  wide-spread  outbreak  of  distrust 
which  had  been  gathering  force  slowly  in  the  previous  few 
months.  In  the  rapid  succession  of  failures  which  now  en- 
sued the  panic-stricken  public  lost  all  sense  of  discrimina- 
tion and  each  bank  which  failed  was  judged  by  the  stand- 
ards applicable  to  the  worst  of  them. 

In  the  case  of  the  Peoples  Bank  of  Lahore,  there  was  less 
justification  for  such  an  attitude.  The  object  of  the  bank 
was  stated  very  clearly  in  its  memorandum  of  association. 
The  bank  was  founded  to  promote  and  maintain  industrial 
enterprises  on  "swadeshi"  lines.  In  an  early  report,  the 
directors  were  quite  explicit.  The  report  ran  :  "Our  manag- 
ing director,  Mr.  Harkishen  Lall,  having  espoused  the  cause 
of  industries  in  the  Province,  the  directors  agreed  with  him 
in  investing  funds  in  industrial  concerns  in  preference  to 
land  mortgages  or  trade-hundis." 

The  following  balance-sheet  published  three  years  before 
the  collapse  of  the  bank  may  be  compared  with  the  princi- 
ples and  practices  of  mixed  banking  we  have  already 
analysed.6 

31  December  1910 
(figures  in  lakhs) 

Paid-up  Capital  115        Cash-credits,     bills,     pro- 

notes,      overdrafts  79.3 

Reserves  1.8        Deposits     with     other 

Deposits  98.4  banks  2.4 

Drafts  in  hand  1.9 

Debentures  and  other 

Investments  4.2 

Govt.  Paper  4.2 

Cash  in  hand  and  at 
bank  7 l 

6.    Ch.  V  §  17  and  18. 


DANGERS    OP   INDUSTRIAL   FINANCE  305 

The  circumstances  in  which  the  bank  undertook  to  aid  or 
initiate  industries  in  this  country  were  in  no  way  favour- 
able. Industries  were  either  conspicuous  by  their  absence 
or  in  very  immature  stages  of  growth.  While  men  made 
fortunes  in  mere  trade  and  commerce,  industrial  enterprise 
was  nowhere  visible  except  in  the  already  well-established 
cotton  and  jute  mills  of  Bombay  and  Calcutta.  It  is 
not  surprising  that  the  managing  director  of  the  Peoples 
Bank  became  also  the  promoter  and  manager  of  several 
enterprizes.  He  had  the  long  vision  also  to  incur  much  ex- 
penditure to  finance  Indians  abroad  for  the  study  of  indus- 
trial and  technical  subjects.  The  combination  of  banking 
and  entrepreneurial  functions  need  not  have  led  the  bank 
into  difficulties  if  the  standards  of  banking  practice  had 
been  quite  strict. 

When  the  bank  ceased  to  operate,  it  was  found  that  88 
lakhs  out  of  total  deposits  of  Rs.  1  crore  and  more  were 
advanced  to  enterprises  in  which  the  managing  director 
was  directly  interested.  The  number  of  concerns  in  which 
the  managing  director  exercised  direct  control  was  as  high 
as  17.  As  late  as  1913  the  directors  do  not  seem  to  have 
found  any  cause  for  uneasiness.  In  their  report  of  that 
year,  they  even  took  notice  of  "some  adverse  talk  about 
bank  investments  in  industrial  concerns."  They  however, 
declared  themselves  as  satisfied  that  all  liabilities  to  the 
bank  were  adequately  covered  by  properties.  Unfortunate- 
ly, many  of  the  major  concerns  on  which  the  funds  of  the 
bank  were  embarked  did  not  prove  profitable.  The  most 
important  among  them  were  the  Punjab  Cotton  Press  to 
which  20  lakhs  were  advanced,  the  Lahore  Spinning  and 
Weaving  Mills  and  the  Pioneer  Investment  Company  to 
which  8  lakhs  had  been  offered.  The  confidence  which  the 
directors  had  placed  in  the  managing  director  was  never- 
theless vindicated  by  subsequent  investigations.  The  report 
of  the  official  liquidators  could  not  discover  any  trace  of  an 
effort  or  intention  on  the  part  of  the  managing  director  to 
profit  himself  at  the  expense  of  the  bank.  On  the  contrary 
there  was  much  in  his  behaviour  to  prove  the  excellence 
of  his  motives.  In  the  ultimate  result  the  bank  paid  all  its 
credits  in  full  but  the  shareholders  lost  all  their  capital. 

M.  B.  I.— 20 


306  A  BANKING  CRISIS   AND  MANY  BANK  FAILURES 

17.  The  Amritsar  Bank,  Lahore 

Along  with  itself,  the  Peoples  Bank  dragged  into  the  abyss 
the  Amritsar  Bank  which  was  deeply  interlocked  with  it.  Mr. 
Harkishen  Lall  whom  his  detractors  nicknamed  the 
Napoleon  of  Punjab  Finance  on  account  of  the  magnitude 
and  boldness  of  his  ventures  had  been  its  director  till  1910 
but  even  after  his  retirement  continued  to  influence  its 
policy  in  a  decisive  manner.  In  the  post-mortem,  it  was 
found  that  Rs.  4  lakhs  were  advanced  to  Mr.  Harkishen 
Lall  in  his  personal  capacity.  Against  advances  of  Rs.  21 
lakhs  more,  the  securities  were  either  mere  promises  to 
pay  or  shares  of  Mr.  Harkishen  Lall's  concerns.  In  the 
auditors'  report  for  1911,  the  following  significant  sentence 
occurs :  "We  referred  to  the  directors  certain  accounts 
which  appeared  to  us  to  be  not  fully  secured.  The  directors 
however  hold  the  opinion  that  the  accounts  are  secured." 
66  per  cent  of  the  assets  of  the  Amritsar  Bank  as  against  56 
per  cent  of  those  of  the  Peoples  Bank  were  found  to  be 
invested  in  the  same  10  companies. 

18.  The  Tata  Industrial  Bank 

The  Tata  Industrial  Bank  came  into  existence  in  1917  in 
the  very  midst  of  the  first  World  War  amidst  the  glamour  of 
the  House  of  the  Tatas  and  the  warm  greetings  and  expecta- 
tions of  the  business  public.  The  termination  of  war  pros- 
perity with  the  crisis  of  1920  and  hopes  deferred  of  high 
dividends  seem  however  to  have  induced  sobriety,  if  not 
positive  sickness,  in  the  hearts  of  the  shareholders.  With- 
in about  six  years  of  its  establishment,  their  clamour  forced 
amalgamation  with  a  commercial  bank,  the  Central  Bank 
of  India. 

The  following  statement  of  liabilities  shows  its  progress 
and  the  extent  and  degree  to  which  it  was  qualified  to 
undertake  industrial  finance. 

(figures  in  lakhs.) 

Capital  and  Reserve         Deposits.  Total  Cash- 

Fixed         Current  balance 


1918 

70+ 

228 

198 

438 

70 

1919 

152-f 

415 

390 

871 

160 

1922 

225  -f 

is 

419 

325 

905 

216 

DANGERS  OF  INDUSTRIAL  FINANCE  307 

In  1923,  on  account  of  the  severe  collapse  of  the  post-war 
boom,  industrial  holdings  showed  some  depreciation  and 
there  was  a  loss  on  sterling  bills  acquired  in  times  of  low 
exchange  rates.  An  allotment  of  11  lakhs  out  of  profits 
had  to  be  made  to  offset  these  losses.  As  a  memorandum 
subsequently  circulated  by  the  general  manager  pointed 
out,  purely  industrial  investments  aggregated  to  Rs.  27 
lakhs  only.  These  were  distributed  among  three  enter- 
prises chiefly — a  bank  in  London  by  name  British  Italian 
Corporation,  Tata  Iron  and  Steel  Company  (second  prefe- 
rence shares)  and  Bombay  Electric  Supply  and  Tramways 
Co.  Two  of  these  three  have  subsequently  more  than 
justified  the  choice  of  the  manager.  It  was  also  pointed  out 
that  liquid  assets  accounted  for  about  66  per  cent  of  the 
deposits.  Since  more  than  half  the  deposits  were  fixed  and 
the  fixed  capital  amounted  to  more  than  15  per  cent  of  the 
deposits,  this  certainly  indicated  a  sound  state  of  things. 
True,  66  lakhs  had  been  lavished  on  magnificent  structures 
in  Bombay  and  Calcutta.  Better  insight  into  public  psy- 
chology about  banks  and  a  knowledge  of  practice  elsewhere 
should  have  perhaps  reconciled  the  shareholders  to  this 
Indian  prodigality.  The  management  pleaded  that  after 
housing  the  bank,  the  properties  were  estimated  to  give  a 
return  of  4  per  cent. 

But  the  House  of  Tatas  was  then  under  a  cloud.  Many 
of  its  other  enterprizes  were  yet  to  fulfil  the  investors' 
sanguine  hopes,  hopes  fostered  by  the  quick  riches  begotten 
of  the  war.  The  Industrial  Bank  had  some  interests  in  the 
Industrial  Finance  Ltd.,  which  was  but  another  name  for 
some  Tata  concerns — notably  New  India  Assurance  Co., 
Nira  Valley  Sugar  Co.,  Tata  Power  Co.7  In  this  atmosphere 
explanations,  however  valid,  were  of  little  avail. 

One  decisive  fact  stared  the  shareholders  in  the  face. 
The  profits  from  ordinary  banking  business  were  mode- 
rately good  and  consistent.  The  industrial  side  of  its  acti- 
vities appeared  to  exist  only  to  diminish  these  profits. 
Under  great  clamour,  the  directors  were  coerced  to  promise 
not  to  make  further  investments  in  industries. 

7.     Ch.  V   §   17. 


308  A   BANKING   CRISIS   AND   MANY  BANK  FAILURES 

When  the  shareholders  met  shortly  thereafter  on  19th 
July,  1923  to  cast  550,000  votes  in  favour  of  amalgamation 
as  against  259  votes  against  it,  they  exacted  one  safeguard 
from  the  management.  The  directors  of  the  new  bank  were 
required  to  eschew  seats  on  the  directorates  of  other  banks. 
Obviously,  interlocking  directorates  were  an  evil  much 
feared  in  those  days. 

19.  The  Bank  of  Burma 

Interlocking  interests  may  be  unavoidable  and  perhaps 
even  desirable  in  certain  stages  of  industrial  progress. 
With  a  high  standard  of  business  ethics,  they  are  quite 
innocuous.  Character  and  not  laws  is  the  ultimate  founda- 
tion on  which  greatness  of  a  community  in  economic  as  in 
other  fields  of  endeavour  has  to  rest.  Yet,  it  is  equally 
undeniable  that  laxity  of  law  and  practice  is  more  often 
than  not  an  invitation  to  all  that  is  mean  and  unestimable 
in  a  community. 

The  manager  of  the  Bank  of  Burma  fell  under  the  power 
of  its  two  directors,  Messrs.  Mower  and  Clifford.  These 
two  grabbed  the  funds  of  the  bank  for  their  own  enter- 
prises. The  security  of  the  loans  consisted  entirely  of  the 
shares  of  the  companies  of  which  the  agency  was  with 
Mower  &  Co.  Only  two  of  these  companies  were  paying 
dividends.  The  bank  went  to  the  length  even  of  under- 
writing the  shares  of  Mower  &  Co.,  at  Rs.  21  per  share  of 
Rs.  15  nominal  value.  Imprudence  or  speculation  was  piled 
on  fraud.  Rs.  10  lakhs  were  lost  on  shares  of  Burma  In- 
vestments, Ltd.,  and  Burma  Petroleum  Co.,  but  the  direc- 
tors would  not  take  any  notice.  Even  when  the  fate  of  the 
bank  was  clear,  large  fixed  deposits  were  offered  and  ac- 
cepted in  the  last  few  weeks  of  its  existence. 

It  took  about  10  years  to  liquidate  the  bank  completely. 
The  creditors  were  lucky  in  receiving  a  dividend  of  as 
much  as  annas  0-14-6  in  the  rupee  while  the  shareholders 
lost  everything. 

20.  Dangers  of  Speculation 

It  is  a  matter  for  opinion  whether  ordinary  deposit 
banking  can  be  combined  in  a  prudent  manner  with  the 


DANGERS  OF  SPECULATION  309 

finance  of  industry.  When  a  bank  is  launched  with  a  clear 
avowal  of  this  object,  no  blame  could  rest  with  the  organ- 
isers on  the  ground  of  misleading  the  public  or  misapplica- 
tion of  their  funds.  Very  frequently,  however,  banks 
appeal  to  the  less  scrupulous  as  a  convenient  means  to 
acquire  funds  which,  if  the  object  were:  stated  clearly, 
would  not  be  forthcoming  at  all.  While  many  of  the  fail- 
lures  already  noted  illustrate  this  danger,  the  most  glaring 
example  of  such  abuse  has  yet  to  be  recorded. 

21.     The  Indian  Specie  Bank,  March  1914 

The  foundation  of  this  bank  with  an  authorised  capital 
of  Rs.  2  crores,  subscribed  capital  of  1J  crores  and  paid-up 
capital  of  about  75i  lakhs  was  due  to  the  initiative  and 
enterprise  of  one  man,  Mr.  Chunilal  Saraiya.  Orginally 
a  man  of  medical  qualifications,  he  had  had  a  long  experi- 
ence in  the  methods  and  practice  of  banking  on  the  staff  of 
the  Bank  of  Bengal.  He  played  a  noteworthy  part  in  the 
launching  of  the  Bank  of  India  in  1906.  He  withdrew  from 
the  bank  when  the  authorities  of  that  bank  declined  to  ap- 
point him  its  manager.  His  reputation  for  ability  and 
financial  skill  was,  however,  so  high  that  he  attracted  into 
the  directorate  of  his  new  bank  some  of  the  most  eminent 
men  in  the  public  and  business  life  of  Bombay.  Unfortu- 
nately, events  proved  that  Mr.  Chunilal  Saraiya's  inclina- 
tions lay  all  in  the  direction  of  speculation  rather  than  con- 
structive business. 

Very  early  in  its  career,  rumour  became  busy  that  the 
bank  had  embarked  on  colossal  speculations  in  silver. 
Authoritative  notice  of  this  rumour  was  taken  when  in  the 
course  of  the  fifth  general  meeting  of  the  shareholders  in 
1911,  the  chairman  said  :  "I  may  mention  that  not  one 
ounce  of  silver  is  held  by  this  Bank  on  its  own  account  and 
your  Board  is  determined  to  adhere  to  this  policy."  Yet, 
the  belief  persisted  obstinately  in  the  public  mind.  Within 
less  than  a  year  of  this  disavowal,  the  Commerce  of  Cal- 
cutta reported  that  "the  attempt  to  corner  silver,  a  project 
of  the  directors  of  the  Indian  Specie  Bank,  still  continues, 
and  the  leading  spirits  of  the  enterprise  entered  the  market 
again  as  buyers  on  a  large  scale."  In  the  following  May, 


310  A   BANKING   CRISIS   AND   MANY  BANK   FAILURES 

the  market  recorded  its  estimate  of  the  success  by  putting 
up  shares  of  the  Indian  Specie  Bank  from  Rs.  52  to  Rs.  66. 
Admirers  of  this  species  of  banking  were  not  lacking  either 
in  those  quarters  which  should  have  known  better.  A 
local  journal  commended  Mr.  Saraiya  with  evident  appro- 
bation as  the  manager  "who  forced  the  Secretary  of  State 
in  England  and  the  finance  member  in  India  to  buy  silver 
at  enhanced  rates,  thus  earning  a  profit  of  about  Rs.  25 
lakhs  at  a  stroke/' 

The  mode  of  operation  of  the  speculators  whose  names, 
although  known  with  an  absolute  moral  certainty,  were 
never  officially  disclosed,  was  neither  original  nor  inge- 
nious. In  the  list  of  the  debtors  of  the  bank,  there  appear- 
ed the  mysterious  firm  of  Mr.  Nanabhai  &  Co.,  which  was 
the  fixed  ring  or  syndicate  of  the  aforesaid  speculators. 
When  the  time  for  the  compilation  of  each  balance-sheet 
arrived,  the  firm  used  to  disappear  to  make  room  for  ficti- 
tious debtors  who  passed  appropriate  promissory  notes. 
The  directors  of  the  bank  itself  took  good  care  to  show 
their  liabilities  to  the  bank  as  nil.  As  a  matter  of  fact, 
when  the  bank  closed  its  doors,  they  had  to  admit  a  liabi- 
lity of  Rs.  12  lakhs  which  they  hurried  immediately  to  pay 
off.  The  following  figures  set  out  what  the  trying  judge 
describes  as  "a  miserable  tale  of  the  lowest  form  of  fraud," 
the  creation  of  fictitious  debtors  and  the  preparation  of 
demand  promissory  notes  in  support  of  these." 

(in  lakhs  of  rupees.) 
Losses  Gains 

1909        22      — 

1910        9      — 

1911        81      — 

1912        —      80 

1913        78      — 

Thus  the  bank  was  saddled  with  a  net  loss  on  account  of 
speculation  in  silver  to  the  extent  of  Rs.  Ill  lakhs,  while 
silver  worth  more  than  4  crores  was  found  to  have  been 
held  on  behalf  of  the  bank  in  London  by  Messrs.  Sharp 
and  Wilkinson. 

The  immediate  cause  of  the  collapse  was  the  fear  raised 
in  the  public  mind  by  the  fall  of  the    Peoples  Bank  of 


DANGERS  OF  SPECULATION  311 

Lahore  in  September  1913  and  the  end  of  the  Credit  Bank 
in  Bombay  on  1st  November  1913.  The  Specie  Bank  was 
presumed  to  have  common  interests  with  the  latter.  Later, 
the  manager  of  the  Credit  Bank  himself  admitted  that 
large  sums  were  represented  with  mutual  consent  as  lying 
with  the  Specie  Bank  on  behalf  of  the  Credit  Bank  which, 
in  his  opinion,  was  a  legitimate  form  of  window-dressing. 
The  Specie  Bank  also  held  under  doubtful  title  cotton  mill 
shares  of  the  value  of  Rs.  20  lakhs  which  had  to  be  subse- 
quently surrendered.  In  the  run  which  ensued,  the  Indian 
Specie  Bank  paid  out  in  cash  Rs.  90  lakhs  in  a  few  weeks. 
The  public  was  profoundly  impressed  with  the  promptitude 
and  the  apparent  ease.  Yet,  more  critical  minds  could  not 
but  notice  mysterious  movements  in  the  balance  sheet. 
The  reserve  fund  of  Rs.  15  lakhs  invested  in  Govern- 
ment securities  had  disappeared.  Deposits  fell  by  Rs.  48 
lakhs.  But  loans  actually  mounted  by  30  lakhs  to  a  figure 
of  Rs.  2^  crores.  No  man  could  guess  what  the  security 
behind  these  loans  was.  Sundries  to  the  extent  of  13  lakhs 
occupied  an  uncomfortable  place  in  a  corner  on  the  liabili- 
ties aside. 

The  actual  course  of  events,  however,  bore  singular  testi- 
mony to  the  confidence  which  the  public  placed  in  the  dir- 
ectors and  particularly  the  abilities  and  financial  genius 
of  the  managing  director.  An  insignificant  shareholder 
who  held  only  10  shares  of  the  bank  and  was  alleged  to 
have  been  instigated  by  the  personal  enemies  of  the  ma- 
naging director  presented  a  petition  to  the  High  Court  for 
winding-up.  It  was  clearly  felt  that  the  ordinary  public 
would  not  be  able  to  discriminate  between  the  petition  of 
a  shareholder  for  liquidation  and  the  order  of  a  proper 
court  for  the  same  object.  There  took  place  an  astonish- 
ing rally  of  the  shareholders  and  directors  in  support  of 
the  bank.  The  judge,  unable  to  restrain  the  processes  of 
law,  felt  constained  to  admit  it  with  these  words  :  "I 
should  like  to  say  that  it  struck  me  as  a  most  remarkable 
circumstance  that  shareholders  representing  a  capital  of 
three  quarters  of  a  crore  of  rupees  and  creditors  to  the 
extent,  of  a  crore  of  rupees,  should  come  forward  together 
to  support  the  directors  and  the  managing  director  in  the 


312  A   BANKING    CRISIS    AND   MANY   BANK   FAILURES 

manful  fight  they  have  made  for  the  existence  of  the  bank, 
in  spite  of  allegations  of  very  hazardous  trading.  Not  a 
single  shareholder  or  contributory  or  creditor  has  come  for- 
ward to  support  the  petition." 

The  trading  had  been  indeed  hazardous.  The  loans  to 
constituents  for  speculation  in  silver  alone  aggregated  to 
3  crores  and  more.  60  lakhs  and  more  were  advanced 
against  pearls  which  the  bank  held.  The  pearl  market 
had,  it  is  true,  grown  brighter  and  brighter  since  the  advent 
of  the  century.  But,  unfortunately  for  the  bank,  the  two 
parties  to  whom  advances  had  been  made  became  insolvent 
just  about  the  time  of  the  failure  of  the  bank.  The  stock 
exchange  also  had  its  share  of  the  bounty.  From  55  to  65 
lakhs  were  advanced  for  budla  transactions  for  which  the 
bank  ultimately  could  lay  its  hands  on  shares  valued  at  not 
more  than  Rs.  9  lakhs. 

In  the  last  eventful  weeks  of  the  bank's  existence,  heavy 
withdrawals  occurred  from  Monday  to  Saturday  to  the 
extent  of  about  Rs.  15  lakhs.  Saturday's  toll  was  a  mode- 
rate one,  about  1£  lakhs  only.  After  a  strenuous  but  im- 
pressively well  sustained  cross-examination,  Mr.  Chunilal 
Saraiya  withdrew  to  participate  till  a  late  hour  in  the  feast 
and  festivities  held  to  mark  public  confidence  in  him  and 
the  bank's  survival  in  the  ordeal.  The  dinner  does  not 
seem  to  have  agreed  with  the  hero  of  the  episode.  For, 
next  morning,  the  city  was  petrified  to  hear  that  Mr.  Chu- 
nilal Saraiya  had  died  of  heart  failure.  On  Monday  morn- 
ing before  anybody  else  had  a  chance,  the  directors  rushed 
to  the  High  Court  with  a  petition  in  their  hands  for 
voluntary  liquidation. 

The  inevitable  post-mortem  exposed  to  light  the  follow- 
ing doleful  history. 

in  lakhs 

Loss  on  silver  speculation  . .         . ,         111 

Loss  on  advances  against  pearls        . .         . .          36 
Loss  on  loans  for  budla  deals  . .         . .          14 

Loss  on  imprudent  loans  . .         . .  4 


Total  Loss         165 


VICTIMS  OF  MISFORTUNE  313 

The  bank  had  no  profits  since  1909  and  dividends  aggre- 
gating to  22  lakhs  had  been  paid  out  of  capital.  After  all 
assets  were  realised,  there  still  yawned  a  deficit  of  Rs.  79 
lakhs  against  which  there  was  the  unpaid  capital  of  the 
bank  of  Rs.  74  lakhs. 

22.  Victims  of  Misfortune 

It  would  be  strange  if  banks  were  more  immune  from 
sheer  misfortune  than  any  other  kind  of  business.  Banks 
depend  for  their  stability  on  mere  mass  opininon  to  such 
an  extent  that  they  have  more  cause  to  fear  misfortune 
than  other  enterprises.  Yet,  examples  of  failure  due  to 
circumstances  outside  the  sphere  of  bank  managements  are 
hard  to  find.  A  tinge  of  imprudence  if  not  positive  derelic- 
tion of  duty  is  always  present  in  almost  every  disaster. 

23.  The  Bank  of  Upper  India,  Meerut 

The  bank  established  as  long  ago  at  27th  June  1863  was 
slowly  but  steadily  built  up  to  a  position  of  importance  in 
the  Indian  banking  world  from  very  modest  beginnings. 
Launched  with  a  paid-up  capital  of  Rs.  15  thousand  only, 
it  progressed  till  just  before  the  crisis  of  its  existence  it  had 
a  paid  up  capital  of  Rs.  10  lakhs,  an  ample  reserve  of  Rs.  7 
lakhs  and  deposit  liabilities  of  2  crores.  Confined  to  the 
Punjab  and  the  UP.  it  had  created  17  branches  and  sub- 
agencies. 

It  was  much  crippled  in  the  banking  crisis  of  1913-14.  In 
the  9  months  succeeding  in  the  collapse  of  the  Peoples  Bank 
of  Lahore,  the  bank  had  to  pay  out  Rs.  78  lakhs.  Still,  its 
investments,  largely  loans  to  Talukdars,  shipping  interests 
(Rs.  6  lakhs)  and  jute  concerns  of  M.  V.  Apcar  &  Co.  (Rs.  5 
lakhs)  were  sound  and,  given  some  time  for  recuperation, 
the  bank  could  have  recovered  the  lost  ground.  But  on  the 
heels  of  the  crisis,  within  a  month  or  so  in  fact,  came  the 
outbreak  of  the  World  War  which  proved  the  final  blow. 
Securities  depreciated  enormously  and  in  spite  of  the 
soundness  of  its  assets,  the  bank  had  to  announce  suspen- 
sion in  October  1914.  As  the  Allahabad  High  Court  found, 
"the  present  position  of  the  bank  is  not  due  to  bad  man- 
agement but  is  the  result  of  the  recent  financial  crisis." 


314  A   BANKING   CRISIS   AND   MANY   BANK  FAILURES 

Both  the  depositors  and  the  shareholders  were  repaid  in 
full — which  is  indeed  a  striking  proof  of  the  inherent 
soundness  of  the  bank. 

24.     The  Alliance  Bank  of  Simla8 

This  bank,  one  of  the  oldest  in  India,  was  launched  into 
the  world  in  1874  and  suspended  payment  on  27th  April 
1923.  It  fell  on  evil  days  largely  on  account  of  the  imprud- 
ence of  their  London  Agents,  Boulton  Bros.  The  Boulton 
Bros,  initiated  a  policy  of  expansion  out  of  all  proportion  to 
their  resources.  Involved  inevitably  in  difficulties,  they 
were  unable  to  return  a  deposit  of  Rs.  150  lakhs  which  they 
held  from  the  Alliance  Bank.  The  Boulton  Brothers  and 
the  officer  of  their  firm  were  prosecuted  in  London  on  vari- 
ous grounds  including  the  alleged  misapplication  of  the 
funds  of  the  Alliance  Bank  but  were  acquitted.  The  secu- 
rities held  for  them  by  the  bank  amounted  to  a  mere  50 
lakhs.  Another  debtor  to  the  bank  was  the  Trust  of  India, 
Punjab,  which  had  a  paid  up  capital  of  65  lakhs  and  opera- 
ted as  a  bank  from  1916  to  1923.  The  Trust  was  liable  to 
the  bank  for  one  full  crore  against  securities  which  were 
worth  only  Rs.  10  lakhs.  Advances  against  personal 
security  amounted  to  Rs.  180  lakhs. 

In  their  report  for  1922,  the  directors  spoke  plainly  of  the 
"knock-out  blow"  which  the  bank  had  sustained.  This  led 
to  continued  withdrawals,  the  effect  of  which  may  be  stu- 
died from  the  following  extracts  from  the  balance-sheets 
of  the  bank  before  and  after  the  run  started, 
(in  lakhs  of  Rupees) 

1914    1921     1923   (before  suspension) 
Paid-up 

Capital  30        88        88 

Reserve  40        53 

Fixed  Deposits  900      498 

Current  Deposits  679      373 

Total  Deposits  554    1627      871 

Cash-Balance  103      439        76 

A  new  management  made  efforts  to  link  "the  bank  with 

8.    Ch.  X  §  l(a). 


VICTIMS  OF  MISFORTUNE  315 

more  powerful  banking  interests  in  order  to  re-establish 
public  confidence/'  When  the  effort  bore  no  fruit,  the 
notice  of  suspension  was  put  up. 

Then,  an  event  took  place  which  surprised  all  who  re- 
membered the  banking  crisis  of  1913-14.  Directed  by  the 
Governor-General-in-Council,  the  Imperial  Bank  of  India 
undertook  to  repay  50  per  cent  of  deposits  including  cur- 
rent accounts  and  savings  bank  deposits.  The  Imperial 
Bank  was  precluded  from  making  a  profit  on  the  liquida- 
tion but  at  the  same  time  it  was  guaranteed  by  Government 
against  loss.  Messrs.  Grindlay  &  Co.  ran  to  further  rescue 
by  announcing  their  willingness  to  repay  deposits  of  Gov- 
ernment officials. 

The  bank  had  36  branches  when  it  closed  its  doors. 

25.     Travancore  National  and  Quilon  Bank 

Most  of  the  bank  failures  we  have  drawn  on  for  illustra- 
tion belong  to  the  crisis  of  1913-14  while  some  very  import- 
ant ones  belong  to  the  twenties  of  the  present  century.  We 
have  now  to  close  this  account  with  the  obituary  of  the 
Travancore  National  and  Quilon  Bank  which  suspended 
payment  as  late  as  June  20th  1938.  In  many  ways,  the 
submergence  of  this  bank  was  very  remarkable.  The 
failure  occurred  some  time  after  the  severest  depression 
India  has  ever  known  had  well  passed  into  a  perceptible 
recovery.  Secondly,  it  took  place  three  years  after  a 
Central  bank  had  been  established  in  this  country.  Finally, 
from  the  legal  standpoint  the  bank  was  a  Native  State  insti- 
tution which  had  however  attained  its  stature  on  the  fat 
of  a  British  province,  itself  remarkable  for  fecundity  in  all 
sorts  of  small  banks. 

The  Travancore  National  and  Quilon  Bank,  as  it  stood  on 
the  date  of  suspension,  was  the  outcome  of  an  amalgama- 
tion between  the  Travancore  National  Bank  and  the  Quilon 
Bank.  Significantly,  the  amalgamation  had  taken  place 
only  two  years  before  the  crash  occurred.  More  signifi- 
cantly still,  it  was  an  agreed  condition  of  the  amalgamation 
that  the  assets  of  the  Quilon  Bank  were  to  be  taken  over 
without  any  investigation.  To  facilitate  the  amalgamation, 
the  Reserve  Bank  placed  a  substantial  credit  at  the  dispo- 


316  A   BANKING   CRISIS   AND   MANY  BANK   FAILURES 

sal  of  the  two  banks. 

The  previous  history  of  the  Travancore  National  Bank 
with  its  long  spell  of  life  was  quite  remarkable.  In  1912, 
its  paid-up  capital  was  only  Rs.  13  thousand  and  with  de- 
posits its  aggregate  liabilities  amounted  to  Rs.  32  thousand 
only.  It  made  steady  progress  during  the  war  and  post- 
war years.  By  1922,  its  paid-up  capital  and  reserve  were 
raised  to  about  Rs.  3  lakhs  and  its  deposits  were  a  little 
short  of  Rs.  4  lakhs.  In  1929,  just  before  the  great  depres- 
sion, the  total  liabilities  were  still  uiider  Rs.  18  lakhs. 

Like  other  Indian  banks,  this  bank  seized  the  post-De- 
pression years  for  a  policy  of  rapid  expansion — particularly 
by  multiplication  of  branches.  From  4  lakhs  in  1930,  its 
capital  was  raised  to  11  lakhs  in  1936  while  its  reserve 
which  was  a  little  over  a  lakh  in  1927  rose  to  Rs.  3i  lakhs 
only.  The  deposits  rose  far  more  steeply  due  to  a  rapid 
extension  of  branches.  Rs.  19  lakhs  only  in  1930,  the  figures 
were  37  lakhs  in  1932,  94  lakhs  in  1934  and  177  lakhs  in  the 
boom  year  1936.  The  ratio  of  capital  and  reserve  to  de- 
posits fell  from  1:5  in  1930  to  1:13  in  1936. 

The  history  and  progress  of  the  Quilon  Bank  are  not 
dissimilar. 

Just  before  the  run  began  in  April  1938,  the  March 
balance-sheet  of  the  amalgamated  banks  disclosed  the  fol- 
lowing situation.  The  situation  as  on  17th  June  1938  des- 
cribes the  effects  of  the  run  just  before  the  bank  suspend- 
ed payments. 

(Figures  in  lakhs) 

April     June  April       June 

1938       1938  1938          1938 

Capital  ..24      24      Cash  ..47        17 

Reserves          . .     5J      5£      Bills   (contra)  18        15 

Deposits          . .  324    252      Loans  &  advances  C 

Borrowing  against  i   (against  gold)    41  <    245 

Govt.  G.  P.  Notes      35         ii   (others)  242   (_ 

Bills  . ,     18      15,     Investments: 

i  Govt. 

Securities  45        45 

ii  Others  4         4 

Lands  13        14 

The  ratio  of  cash  and  bills  to  aggregate  liabilities  works 
out  at  18  per  cent  and  of  Government  securities  at  less  than 


VICTIMS  OF  MISFORTUNE  317 

13  per  cent.  These  ratios  compare  unfavourably  with  those 
of  the  leading  banks  of  India  we  have  already  examined.9 
This  by  itself  was  proof  of  the  inflation  and  illiquidity  of 
loans  and  advances.  Investments  had  hardly  any  place  in 
the  assets  of  the  Travancore  National  Bank  as  late  as  1932 
and  in  1936,  the  date  of  the  amalgamation,  the  proportion 
was  only  11.5  per  cent. 

"A  run  on  the  finances  of  the  bank,"  the  Report  of  the 
Madras  Official  liquidator  dated  3rd  January  1939  tells  us, 
"began  early  in  April  1938  and  from  that  date  until  the 
suspension  of  payment  on  June  20th  1938,  a  sum  of  appro- 
ximately Rs.  1,10,00,000  was  paid  in  satisfaction  of  demands 
made  during  that  period."  The  payments  made  amounted 
to  about  25  per  cent  of  the  assets  as  on  the  date  before  the 
run  commenced.  "The  bank  had  failed,"  continued  the 
liquidators,  "  (a)  by  reason  of  the  fact  that  sufficient  further 
cash  resources  were  not  available  wherewith  to  meet 
further  demand  for  payment  and  (b)  because  the  realisable 
value  of  the  remaining  assets  on  the  books  was  very  con- 
siderably less  than  the  book  values  of  the  assets." 

The  run  had  begun  in  a  most  unusual  manner.  It  was 
repeatedly  alleged  later  that  the  highest  state  authorities 
had  much  to  do  in  the  creation  of  the  initial  panic.  None 
can  read  the  subsequent  liquidation  and  reconstruction 
proceedings  in  the  State  and  in  British  India  without  be- 
coming aware  of  the  vast  difference  between  the  highly 
surcharged  atmosphere  of  Travancore  Courts  and  the  scru- 
pulously objective  and  judicial  atmosphere  of  British  India 
Courts.  Behind  the  collapse  of  the  Travancore  National 
and  Quilon  Bank,  there  lurks  the  sinister  shadow  of  a 
struggle  for  political  power  between  the  Hindus  and  the 
Syrian  Christians  of  Travancore.  The  bank  was  alleged 
to  have  made  itself  the  sponsor  of  Christian  interests  and 
was  suspected  of  complicity  in  affairs  which  could  be  no 
concern  of  a  bank. 

Apart  from  the  peculiar  ways  and  atmosphere  of  Native 
States  the  failure  of  the  Travancore  National  and  Quilon 
Bank  raised  difficult  questions  of  jurisdiction  which  must 

9.    Ch.  VI. 


318  A   BANKING   CRISIS   AND   MANY   BANK   FAILURES 

influence  the  future  course  of  banking  and  banking  law 
in  the  country. 

The  Madras  High  Court  was  inclined  to  give  chance  to 
a  reconstruction  scheme  preferred  before  it.  As  the  judge 
himself  explained — "The  scheme  was  propounded  on  the 
basis  that  if  there  would  be  co-operation  on  the  part  of  all 
courts,  where  liquidation  proceedings  are  pending  and  the 
scheme  is  sanctioned,  it  would  be  possible  to  realize  12 
annas  in  the  rupee  and  possibly  more.  I  cannot  say  that 
this  expectation  on  the  part  of  applicants  was  not  justified 
....  I  cannot  say ....  that  their  action  in  filling  the  petition 
was  not  bona  fide."  The  Court  saw  no  cause  for  fearing 
that  other  courts  would  not  co-operate  especially  since  it 
was  always  clear  that  ultimate  sanction  could  be  withheld 
if  the  scheme  proved  unworkable. 

The  first  difficulty  was  created  by  the  official  liquidator 
of  Cochin.  He  was  not  prepared  to  recognise  the  claims  of 
foreign  creditors  in  the  distribution  of  Cochin  assets  of  the 
Bank.  The  Madras  High  Court  was  constrained  to  admit 
that  if  co-operation  was  not  forthcoming  for  winding-up,  it 
could  not  be  presumed  in  favour  of  any  reconstruction 
scheme. 

The  District  Court  of  Quilon  was  much  more  explicit 
even  to  the  point  of  undisguised  hostility.  Since  the  bank 
was  registered  in  Quilon,  it  argued  that  the  principal  court 
for  winding-up  was  Quilon  Court  and  that  a  reconstruc- 
tion scheme  must  be  considered  in  the  first  instance  there. 
It  criticised  severely  the  past  management  of  the  bank  plac- 
ing reliance  on  the  report  of  the  official  liquidator  in  Tra- 
vancore.  It  found  the  Madras  reconstruction  scheme  "fan- 
tastic," "illusory"  and  "unworkable".  It  pooh-poohed  the 
bona  fides  of  the  reconstruction  scheme,  stating  inter  alia: 
"The  sponsors  of  the  scheme  were  successful  in  no  time  in 
getting  round  a  large  body  of  creditors  numbering  about 
2,400  and  whose  deposits  amount  to  about  Rs.  72  lakhs  to 

file  affidavits  in  support  of  the  scheme It  is  said  that 

there  are  High  Court  judges,  advocates,  bishops,  etc.  among 

the  creditors majority  of  shareholders  (of  the  bank)  are 

relatives  or  nominees  of  the  directors  themselves. ..  .the 
staff  in  the  several  branches  of  the  Bank  consists  mostly  of 


VICTIMS  OF  MISFORTUNE  319 

:he  relations  of  the  directors ....  propaganda  in  support  of 
:he  scheme  of  reconstruction  is  being  carried  on  by  the  ex- 
servants  of  the  bank."  On  these  grounds,  the  Court  con- 
cluded that  the  creditors  of  the  bank  must  be  protected 
against  their  own  ignorance  and  gullibility  by  ordering  a 
winding-up. 

When  an  appeal  was  preferred  before  the  Travancore 
High  Court,  that  court  confirmed  the  winding-up  order  but 
in  a  manner  which  approached  the  subject  from  a  stand- 
point diametrically  opposite  to  that  of  the  Madras  High 
Court.  The  Madras  High  Court  desired  to  explore  the 
possibilities  of  reconstruction  prior  to  enforcing  a  winding- 
up.  The  Travancore  High  Court  favoured  winding-up 
since  "the  creditors  would  not  be  prejudiced  in  any  manner 
by  the  winding-up  order  as  it  was  open  to  the  Court  after 
completion  of  such  investigation,  as  it  might  deem  neces- 
sary, to  take  suitable  steps  under  sections  157,  175  or  176 
in  furtherance  of  any  scheme  of  reconstruction  that  might 
be  proposed.'* 

The  whole  situation  was  well  epitomised  in  the  attitude 
of  the  British  India  creditors  of  the  Bank.  In  explaining 
their  overwhelming  vote  in  favour  of  reconstruction,  the 
counsel  for  petitioners  said  before  the  court  in  Madras — 
"The  Quilon  judgment  did  not  influence  the  meeting  of  the 
creditors  though  printed  copies  of  the  judgment  were  cir- 
culated to  them  beforehand.  They  could  easily  see  the 
obvious  meaning  behind  it  all." 

The  episode  illustrates  forcefully  the  inherent  difficulties, 
if  not  the  impracticability  of  reconstructing  banks  once 
they  have  suspended  payment.  It  is  never  easy  to  ascertain 
the  realizability  of  certain  assets — much  time  and  inquiry 
are  needed  to  reach  accurate  estimates.  Certain  incidents 
illustrate  difficulties  of  investigations  as  such.  The  Madras 
High  Court  found  itself  unable  under  the  law  to  sanction 
the  expenditure  for  which  the  Reserve  Bank  wanted  to  be 
indemnified  before  undertaking  the  investigation.  The 
District  Judges  of  Quilon  went  further  and  described  the 
contemplated  investigation  by  the  Reserve  Bank  as  "an 
unauthorised  interference  with  the  concern  of  the  Bank." 
In  the  case  of  the  Travancore  National  and  Quilon  Bank 


320  A   BANKING  CRISIS  AND  MANY  BANK  FAILURES 

the  last  balance-sheet  had  shown  bad  debts  of  1J  lakhs 
only.  During  the  proceedings  on  a  winding-up  petition, 
the  bank  authorities  admitted  bad  debts  as  equal  to  Rs.  15 
lakhs.  The  Quilon  reconstruction  scheme  placed  them  at 
Rs.  40  lakhs  and  the  Madras  liquidators  report  at  70  lakhs. 
Even  if  all  the  material  facts  are  available  within  a  reason- 
able time  and  a  bank  is  reconstructed  on  that  basis,  much 
time  must  elapse  before  deposits  can  be  coaxed  in.  In  the 
meanwhile,  working  expenses  have  to  be  incurred,  the  only 
source  for  which  could  be  the  realised  assets  or  the  willing- 
ness of  creditors  to  accept  a  lower  rate  of  interest  on  the 
dues. 

A  large  share  of  responsibility  for  the  failure  must  be 
ascribed  to  the  incompetent  or  disingenuous  management 
of  the  bank's  business.  Some  of  the  manipulations  and 
misleading  features  of  the  bank's  balance-sheets  have  been 
already  referred  to  above.  The  directors  and  their  relatives 
were  allowed  to  borrow  heavily  and  these  debts  which 
reached  Rs.  25 \  lakhs  by  the  date  of  suspension  of  the  bank 
were  not  shown  in  the  balance-sheet  as  such.  In  sentenc- 
ing the  miscreants  to  heavy  fines  and  terms  of  imprison- 
ment, the  Court  in  Trivandrum  cited  grave  instances  of 
falsification  of  balance-sheets.  The  1937  balance-sheet 
stated  the  advances  to  directors  at  about  6  lakhs  when  the 
true  figure  was  not  less  than  14  lakhs.  Investments  in 
shares  to  the  book  value  of  more  than  Rs.  6  lakhs  were  not 
disclosed  at  all.  Debts  considered  bad  and  doubtful  were 
reduced  from  more  than  8J  lakhs  to  less  than  li  lakhs. 
Profits  of  about  2£  lakhs  were  declared  when  as  a  matter 
of  fact  there  was  a  gaping  loss  of  more  than  2J  lakhs  to  be 
covered  even  after  the  general  reserve  fund  was 
fully  utilised.  These  practices  had  been  in  vogue  even  be- 
fore the  amalgamation  and  were  continued  after  the 
amalgamation.  "So  far  as  can  be  ascertained,"  the  Tra- 
vancore  official  liquidator  alleged,  "little  or  no  control  was 
exercised  over  advances  at  branches  and  information  re- 
garding borrowers,  etc.,  is  not  on  record.  We  found  that 
agents  have  very  little  knowledge  of  their  duties  or  of 

business  at  their  branches The  management  was  not 

effective  and  the  staff  not  properly  trained.    Account  books 


VICTIMS  OF  MISFORTUNE  321 

were  maintained  in  haphazard  fashion  and  seldom  bear 
evidence  of  having  been  checked  or  balanced  while  at  some 
offices  essential  figures  in  books  have  been  recorded  in 
pencil."  As  indicated  above,  bad  debts  were  systematical- 
ly understated.  A  private  and  confidential  circular  issued 
on  December  llth  1937  ran  as  follows  :  "To  all  branches. 
Branches  shall  not  treat  and  classify  any  loan  and  advance 
as  doubtful  or  bad  without  written  instructions  from  this 
office.  They  are  not  to  include  any  debt  as  doubtful  or  bad 
in  the  balance-sheet  as  on  December  31st  1937  except  those 
that  have  been  shown  in  the  half  yearly  balance-sheet  as 
at  June  30th  last " 


M.  B.-€l 


CHAPTER  X 


BANKING  REFORM  AND  BANKING  LEGISLATION 

THE  MAIN  THEME  of  the  previous  chapter  is  the  growth, 
achievements  and  failures  of  the  Indian  banking  system. 
When  causes  have  been  indicated,  they  relate  either  to  in- 
ternal difficulties  and  deficiencies  of  Indian  banks  or  to 
their  demographic  or  political  environment  which  is  exem- 
plified in  distribution  of  population,  presence  of  foreign 
banks,  etc.  Not  less  important  for  the  growth  or  retarda- 
tion of  a  banking  system  is  the  state  of  the  banking  habit 
of  a  people.  Banking  habit  is  an  omnibus  phrase  which 
covers  economic  psychology  in  regard  to  banks  no  less  than 
objective  economic  facts  and  practices.  To  the  analysis  of 
this  banking  habit,  the  causes  and  forces  which  check  or 
facilitate  its  progress,  we  must  now  address  ourselves. 

I.    BANKING  REFORM 

The  absence  of  the  habit  of  banking  in  this  country  is 
due  to  several  causes,  the  relative  importance  and 
remedies  of  which  have  to  be  assessed  separately.  These 
causes  may  be  placed  under  three  heads  ;  absence  of  con- 
fidence, ignorance  and  illiteracy  of  the  people,  and  low 
level  of  incomes  in  general.  In  examining  their  operation, 
we  must  distinguish  between  fixed  deposits,  savings  deposits 
and  current  deposits  and  indeed  other  activities  of  banks. 
For  the  legal  and  practical  obligations  and  requirements 
which  arise  from  each  class  of  borrowed  resources  and  from 
other  activities  of  banks  are  materially  different  in  each 
case. 

1.    Absence  of  Confidence 

Lack  of  confidence  in  banks  as  an  endemic  must  be  dis- 
tinguished to  a  certain  extent  from  banking  panics  which 
break  out  suddenly  like  epidemics  on  account  of  excep- 
tional causes.  Of  course,  the  two  cannot  be  regarded  as 
altogether  independent  of  each  other  since  the  known 
existence  of  safeguards  against  emergencies  is  an  important 


ABSENCE  OF  CONFIDENCE  323 

element  in  day-to-day  confidence  and  the  prevalence  of 
general  confidence  is  itself  an  important  factor  in  prevent* 
ing  or  moderating  panics.  The  disinction  made  is  not  so 
much  one  of  principle  as  convenience  for  analysis. 

(a)  In  times  of  general  distress  and  danger,  such  as 
ensue  from  a  widespread  loss  of  faith  in  the  banking  sys- 
tem of  a  country,  it  is  inevitable  that  all  eyes  should  turn 
to  the  government  of  the  land  for  assistance  and  protection. 
It  is  not  feasible,  however,  to  lay  down  in  advance  the  pre- 
cise extent,  form,  manner  and  occasions  of  government  in- 
tervention in  such  situations.  The  Indian  Government 
itself  has  always  been  vague  and  hesitant  as  to  the  alloca- 
tion of  the  spheres  of  government  intervention,  operation  of 
ordinary  law  and  law-courts  and  finally  the  prudence  and 
wisdom  of  depositors  to  the  extent  that  these  may  be  pre- 
sumed to  exist  in  this  country.  The  creation  of  the  Re- 
serve Bank  of  India  and  particularly  the  discussions  and 
controversies  which  preceded  its  creation  have  in  no  way 
facilitated  clarification.  The  alien  character  of  the  govern- 
ment has  been  no  doubt  a  factor  of  no  mean  importance  in 
the  situation  as  it  has  historically  developed.  But,  as  we 
shall  see  presently,  the  advance  of  democracy  and  advent 
of  provincial  autonomy  have  raised  new  problems  and 
difficulties.1 

The  banking  crisis  of  1913-14  appears  to  be  the  first 
occasion  when  the  issue  of  the  Government's  duties  and  res- 
ponsibilities in  such  circumstances  was  definitely  raised. 
The  danger  itself  had  been  clearly  foreseen  both  by  the 
public  and  Government.  In  a  speech  delivered  early  in 
1912,  the  Finance  Member  lamented  certain  tendencies  in 
the  Indian  banking  world  in  these  words :  "Poor  and  un- 
educated people  are  attracted  by  the  word  'bank'  thinking 
that  it  necessarily  implies  security  and  stability,  and  un- 
scrupulous persons  accordingly  apply  the  term  to  specula- 
tive business  in  order  to  attract  investors  and  depositors." 
He  then  proceeded  to  explain  how  the  best  talents  in  Eng- 
land and  elsewhere  had  failed  to  devise  legislative  safe- 
guards against  the  abuse  of  the  word  'bank*  and  concluded 

1.    Ch.  VIU  §  7  &  11. 


324  BANKING  REFORM  AND  BANKING  LEGISLATION 

that  "the  Government  of  India  might  well  'hesitate  to  rush 
in'  where  more  experienced  legislators  fear  to  tread." 
While  ruling  out  direct  legislative  remedy  in  this  manner, 
the  Finance  Member  does  not  seem  to  have  allowed  his 
mind  to  be  disturbed  with  its  logical  corollary  that  the  dis- 
cretionary or  administrative  duties  of  Government  are  auto- 
matically enhanced  in  proportion. 

When  the  crisis  ultimately  broke  out,  the  Government 
were  constrained  to  admit  certain  responsibilities  in  such 
emergencies.  Interest-free  Government  balances  were 
placed  at  the  disposal  of  Presidency  Banks  to  enable  them 
to  help  banks  in  temporary  difficulties.  Yet,  as  the  follow- 
ing extract  from  a  speech  made  at  Madras  by  the  Viceroy 
shows,  such  intervention  was  deemed  to  be  sporadic  and 
exceptional.  For  the  day-to-day  stability  of  the  banking 
system,  the  official  mind  could  not  envisage  any  responsi- 
bility for  itself.  "We  have  closely  followed  the  course  of 
events/'  said  the  Viceroy,  "and  where  it  has  been  possible 
and  legitimate  to  do  so,  we  have  given  timely  assistance. 
I  am  glad  to  say  that  there  has  been  no  undue  disposition 
to  look  to  Government  for  such  help.  Such  help  as  we  can 
properly  give  is  limited  in  extent  and  necessarily  subject 
to  conditions  and  safeguards.  But  what  we  could  do  has 
been  done  and  will  continue  to  be  done.  If  the  Indian 
investor  is  taught  by  these  events  to  be  careful  to  distin- 
guish between  sound  and  unsound  undertakings  or  if  they 
pave  the  way  to  some  better  system  of  regulation  and  pro- 
tection they  will  not  have  been  unfruitful  of  beneficial 
result."2  So  far  as  banks  were  concerned,  the  concluding 
part  of  the  extract  remained  a  dead  letter  for  two  decades 
and  more. 

The  next  occasion  on  which  the  Government  of  India 
exercised  its  discretionary  responsibilities  to  assuage  dis- 
tress caused  by  the  difficulties  of  private  banking  was  when 
the  Alliance  Bank  of  Simla  closed  its  doors  on  27th  April 
1923.  Under  instructions  from  the  Governor-General-in- 
Council,  the  Imperial  Bank  undertook  to  pay  immediately 
50  per  cent  of  the  amounts  at  credit  of  depositors  includ- 

2.    Commerce,  December  1913. 


ABSENCE  OP  CONFIDENCE  325 

ing  current  accounts  and  savings  bank  balances.  It  was 
explained  subsequently  that  these  amounts  "could  be  paid 
without  incurring  financial  risk  provided  that  the  liquida- 
tion was  properly  supervised"  and  that  under  the  Govern- 
ment guarantee,  "Imperial  Bank  would  make  no  profits  by 
this  business  but  was  assured  against  loss."  It  may  be  pre- 
sumed from  this  that  even  before  its  suspension  the  Alliance 
Bank  of  Simla  enjoyed  an  intimate  and  close  contact  with 
the  Government  which  claimed  a  close  converse  with  its 
affairs  such  as  a  Central  bank  might  well  have  envied. 
Could  banks  with  purely  Indian  management  have  aspired 
to  the  same  facilities  and  access  to  those  in  autority  ? 

The  grounds  on  which  the  intervention  was  undertaken 
deserve  careful  examination.  Under  the  Imperial  Bank 
Act  of  1921,  instructions  from  the  Governor-General  to  the 
Imperial  Bank  were  specifically  limited  to  safeguarding  of 
Government  balance  or  the  financial  policy  of  Govern- 
ment. The  defence  by  the  Finance  Member  of  government 
action  interpreted  these  phrases  in  the  statute  in  this 
manner :  He  expressed  himself  as  "most  anxious  that 
favourable  conditions  in  the  money  market  both  in  London 
and  in  India  for  borrowing  sums  needed  by  government 

in  both  markets  on  better  terms and  the  good  effect 

which  the  balancing  of  the  budget  had  created  should  not 
be  upset."  He  seems  to  have  felt,  however,  that  this  was 
too  large  a  proposition  to  hang  on  the  outstanding  current 
and  fixed  deposits  of  the  bank  amounting  to  Rs.  7  crores 
only  and  that  the  technical  excuse  of  law  was  hardly  ade- 
quate to  carry  moral  conviction.  He,  therefore,  widened 
his  defence,  and  in  doing  so  widened  also  the  future  res- 
ponsibilities of  the  Government.  He  represented  the  step 
as  "most  desirable  in  the  interests  of  Indian  Finance  and 
Indian  Banking"  and  also  as  well  calculated  "to  restore 
public  confidence"  and  to  prevent  "causing  inconvenience 
and  probably  danger  to  other  sound  institutions."3  If  the 
Government  admitted  in  1913  its  obligation  to  render  assist- 
ance after  a  crisis  has  broken  out,  the  Finance  Member 
completed  the  admission  in  1923  by  including  prevention 

3.    Commerce,  July  28th  1923. 


326  BANKING  REFORM  AND  BANKING  LEGISLATION 

as  a  part  of  the  responsibility. 

But  there  was  scepticism  in  the  hearts  of  those  who 
listened  to  defence  of  the  Government.  Those  among  them 
who  did  not  suffer  from  short  memories  found  the  prompti- 
tude of  the  Government  on  this  occasion  a  very  strange 
contrast  to  their  slovenliness  and  reluctance  in  the  1913-14 
crisis.  How  did  the  Government  detect  so  quickly  that  the 
assets  of  the  bank  were  of  sound  quality  ?  They  reflected 
that  the  Bank's  clientele  was  largely  official  and  European 
and,  perhaps,  in  India  such  connections  were  a  special 
advantage  to  which  Indian  enterprize  may  not  aspire.  Nor 
did  they  forget  that  undisguised  hostility  to  and  continuous 
vilification  of  Indian  banks  on  the  part  of  European  banks 
and  Journals  were  no  mean  factor  in  the  1913-14  situation. 
The  Legislative  Assembly  conveyed  its  appraisal  of  the 
situation  by  a  successful  vote  of  censure  against  the 
Government. 

The  situation  had  changed  in  several  fundamental  res- 
pects when  the  Travancore  National  and  Quilon  Bank4 
suspended  activities  in  the  middle  of  1938.  Till  1935,  the 
Government  of  India  with  its  direct  control  of  currency 
and  its  indirect  control  of  credit  through  the  Imperial  Bank 
of  India  was  the  one  unique  authority  to  deal  with  emer- 
gencies of  this  kind.  In  1935  was  created  the  Reserve  Bank 
of  India  with  statutory  duties  and  responsibilities  for  the 
banking  stability  of  the  country.  The  events  of  1938 
revealed  the  emergence  of  still  another  authority — provin- 
cial governments  inclined  to  make  provincial  autonomy 
conterminous  only  with  the  aggregate  welfare  of  their  sub- 
jects. A  bald  statement  of  the  course  of  events  connected 
with  the  suspension  of  the  Travancore  National  and  Quilon 
Bank  should  make  clear  the  confusion  of  guardianships, 
which,  however,  inevitable,  has  yet  to  be  resolved  in  the 
only  manner  in  which  it  can  be  resolved,  namely,  the  per- 
meation of  one  common  mind  i.e.,  the  Indian  mind  in  all 
agencies. 

The  Madras  Government  initiated  consultations  with  the 
authorities  of  the  Reserve  Bank  of  India  and  made  sug- 

4.    Ch.  IX  §  25. 


ABSENCE  OF  CONFIDENCE  327 

gestions  to  the  Travancore  National  and  Quilon  Bank  to 
apply  "to  the  Reserve  Bank  of  India,  to  undertake  an 
immediate  and  thorough  investigation,  through  competent 
officers  and  accountants  appointed  by  them,  into  the  affairs 
of  the  bank  and  agree  to  act  according  to  such  advice  as 
may  be  tendered  as  a  result  of  such  investigation  for  the 
continuation,  re-organisation  or  liquidation  of  the  bank, 
whichever  course  is  finally  suggested." 

In  an  appeal  to  the  public  to  remain  calm  and  refuse  to 
be  rushed  by  ill-founded  rumours,  the  Prime  Minister  in- 
formed them  that  "the  Government  of  Madras  are  taking 
steps  to  secure  an  immediate  examination  of  the  accounts 
and  affairs  of  the  banks  in  Madras."  About  two  months 
later,  he  felt  constrained  to  issue  "on  behalf  of  the  Govern- 
ment of  Madras"  a  statement  "emphasising  the  fact  that 
the  scheduled  banks  in  Madras  are  in  a  perfectly  sound 
position."  The  statement  proceeded  :  "Even  those  banks 
that  took  help  from  the  Reserve  Bank  during  the  recent 
crisis  have  cleared  off  all  those  accounts.  Further,  the 
local  Reserve  Bank  has  sanction  to  give  accommodation  to 
these  banks,  should  such  accommodation  be  ever  found 
necessary."  In  another  significant  part  of  the  statement, 
the  Prime  Minister  informed  the  public  :  "I  am  in  close 
touch  with  the  Manager  of  the  local  Reserve  Bank  branch, 
and  issue  this  statement  as  a  result  of  the  conversations  I 
had  with  him." 

The  establishment  of  co-operation  between  provincial 
Governments  and  Reserve  Bank  authorities  is  a  significant 
precedent.  It  is  a  proof  that  even  with  all  its  technical 
apparatus  and  its  great  resources,  moral  weight  and 
authority  such  as  the  Government  of  Madras  supplied  on 
this  occasion  are  no  mean  factor  in  the  successful  fulfilment 
of  the  mission  of  the  Reserve  Bank.  It  is  difficult  to  foresee 
when  and  in  what  manner  the  Reserve  Bank  will  win  the 
requisite  confidence  of  the  banks  and  especially  the  large 
public.  In  the  meanwhile,  it  is  a  grave  question  to  consider 
whether  expression  of  opinions  which  carries  with  it  no 
specific  responsibilities,  in  case  the  opinion  is  unfortunately 
disproved  by  events,  is  a  proper  means  to  meet  critical 
situations.  While  "widespread  and  insistent  demand  from 


328  BANKING  REFORM  AND  BANKING  LEGISLATION 

all  over  the  province  that  the  Madras  Government  should 
do  something  to  reduce  the  distress  caused  by  the  suspen- 
sion of  business"  is  a  natural  incidence  of  the  growth  of 
democracy  and  immaturity  of  the  Reserve  Bank  and  "con- 
gratulatory telegrams  and  letters  from  all  parts  of  the  pro- 
vince expressing  great  satisfaction  with  the  steps  taken  to 
restore  the  general  confidence  in  the  banks  of  the  province 
and  especially  with  the  steps  taken  in  regard  to  investiga- 
tion and  possible  re-construction  of  the  Travancore  National 
and  Quilon  Bank"  are  a  signal  admission  of  the  part  which 
moral  prestige  played  in  the  termination  of  the  crisis,  the 
spokesmanship  which  the  Government  assumed  on  this 
occasion  in  the  place  of  the  Reserve  Bank  may  well  prove 
more  than  a  passing  development  in  the  future. 

It  is  well  to  emphasize  that  it  is  not  a  question  of  mere 
initiative  and  spokesmanship  which  we  have  posed  above. 
At  some  stage,  in  a  crisis  like  this,  questions  of  judgment 
as  well  are  bound  to  be  involved.  In  an  early  stage  of  the 
crisis,  the  Prime  Minister  used  these  significant  words  : 
"Whatever  the  statutory  limitations  of  the  Reserve  Bank 
may  be  the  Government  of  Madras  will  exert  their  utmost 
influence  to  induce  the  Reserve  Bank  to  use  all  its  resources 
towards  re-construction."  In  other  words,  the  Government 
felt  themselves  sufficiently  seized  of  the  situation  to  indicate 
the  lines  along  which  the  crisis  should  be  met.  Indeed, 
the  Government  seem  to  have  even  overlooked  the  exist- 
ence of  another  authority  which  has  to  be  reckoned  with 
in  such  situations,  viz.  the  ordinary  law  and  law-courts  of  the 
land.  When  the  Courts  were  actually  seized  of  the  matter, 
the  Reserve  Bank  could  initiate  nothing  without  their  con- 
sent and  co-operation.  The  Madras  High  Court,  how- 
ever, neatly  disposed  of  the  status  of  the  conversations 
which  had  ensued  between  the  Reserve  Bank  and  the 
Government  in  these  words.  "I  am  afraid,"  said  the  judge, 

"I  do  not  concur in  calling  the  result  of  the  conversations 

which  have  taken  place  and  which  are  evidenced  by  the 
communique  of  the  Government  and  the  letters,  an 
agreement." 

While  these  events  were  taking  place,  the  Central  Gov- 
ernment practised  a  self-effacement  which  in  view  of  the 


ABSENCE  OP  CONFIDENCE  329 

then  recent  creation  of  the  Reserve  Bank  was  easily  account- 
able. More  significantly  still,  the  Government  of  the  Indian 
state  in  which  the  bank  was  domiciled  showed  no  desire  or 
movement  to  save  the  bank. 

(b)  Banking  laws  contribute  to  public  confidence  in  two 
ways.  In  the  first  place,  they  strive  to  insure,  if  not  sound 
management,  at  least  immunity  from  more  flagrant  abuse 
of  place  and  power.  Secondly,  they  aim  at  mitigating  harm 
and  distress  when  banks  find  themselves  in  difficulties  or 
have  actually  to  be  liquidated.  The  objective  of  sound 
management  so  far  as  legislation  can  secure  it  will  be  dis- 
cussed in  the  appropriate  section.  Here,  we  shall  be  con- 
cerned with  the  second  objective — the  post-mortem 
protection  laws  may  offer  to  and  the  confidence  they  may 
consequently  inspire  in  banks'  creditors. 

Protection  to  creditors  of  a  bank  could  take  several  forms, 
ranging  from  complete  to  partial  immunity  from  risks.  The 
appropriateness  of  any  form  must  be  judged,  not  from  the 
standpoint  of  private  interests  at  stake,  but  in  the  main  on 
the  basis  of  its  compatibility  with  banking  conditions  in  the 
country  and  its  conduciveness  to  future  banking  progress. 
Creditors  of  an  individual  bank  are  offered  protection  not 
because  of  any  special  claims  they  can  urge  as  compared 
with  investors  in  other  enterprises.  Such  protection  is  only 
justified  by  the  fact  that  the  failure  of  one  bank  is  apt  to 
set  in  motion  forces  which  endanger  the  whole  banking 
system  of  a  country.  The  failure  of  a  non-banking  enter- 
prise rarely  depreciates,  much  less  destroys  so  completely 
the  solid  assets  of  other  cognate  enterprises. 

The  most  obvious  form  of  protection  would  be  a  scheme 
to  guarantee  the  deposits  of  banks.  The  liabilities  under 
such  a  scheme  could  be  kept  within  manageable  limits  by 
several  precautions.  In  the  first  place,  it  is  clear  that  the 
scheduled  banks  do  not  stand  in  as  urgent  a  need  of  such  a 
scheme  as  those  others  which  are  not  scheduled  and  which 
for  a  long  time  must  remain  outside  the  direct 
influence  of  the  Reserve  Bank.  The  fact  of  schedul- 
ing is  itself  some  evidence  of  their  respectability 
and  fair  management.  On  the  other  hand,  the  main  danger 
to  the  structure  of  Indian  banking  is  likely  to  ensue  from 


330  BANKING  REFORM  AND  BANKING  LEGISLATION 

those  banks  which  are  individually  small  but  which  in  the 
aggregate  constitute  an  important  banking  problem  for  this 
country.  The  compulsory  inclusion  of  these  banks  in  such 
a  scheme  will  go  a  long  way  towards  introducing  some 
Central  control  and  regulation  for  these  banks,  and  at  the 
same  time,  limit  the  liabilities  of  the  scheme.  It  is  instruc- 
tive to  note  here  that  such  a  guarantee  of  deposits  by  the 
State  exists  in  Switzerland  for  the  cantonal  banks  which 
held  one-third  of  the  deposits  of  the  country,  catered  large- 
ly for  local  trades,  crafs,  and  agriculture,  and  invested  90 
per  cent  of  their  capital  and  time  deposits  in  one-half  the 
mortgage  loans  required  by  agriculture.  In  the  second 
place,  a  progressive  limitation  of  the  guarantee  for  depo- 
sits of  large  size  can  be  introduced.  Such  limitation  of 
guarantee  is  justified  by  the  obvious  fact  that  well-to-do 
persons  are  much  better  informed  about  the  relative  merits 
of  different  banks  and  that  our  future  progress  in  banking 
depends  very  largely  on  the  confidence  our  banking  system 
is  able  to  inspire  in  the  small  man.  So  limited,  it  should  be 
easy  to  build  up  a  sufficient  insurance  fund  by  compulsory 
contributions  from  the  included  banks  on  some  equitable 
basis.  A  certain  small  percentage  of  the  working  resources 
suggests  itself  as  a  device  free  from  odious  possibilities. 

The  most  cogent  argument  against  any  scheme  of  insur- 
ance is  that  the  stronger  and  better  managed  banks  do  not 
feel  the  need  of  it  and  tend  to  look  on  the  contribution  as  an 
unnecessary  tax  while  the  weaker  and  less  responsible  banks 
find  it  an  encouragement  to  their  incompetent  and  reckless 
methods  and  policies.  Recent  experience  in  other  coun- 
tries, however,  proves  that  countries  with  highly  concern- 
trated  banking  systems  are  no  less  vulnerable  to  panics  than 
those  with  diffused  banking  structures.  Apart  from  that 
fact,  our  proposal  for  insurance  of  deposits  covers  as  an 
initial  measure  only  those  small  banks  which  are  not 
deemed  at  present  as  worthy  of  the  status  of  scheduled 
banks.  In  the  course  of  time,  on  account  of  the  operation 
of  the  banking  sections  of  our  amended  Company  Law, 
these  banks  will  consist  entirely  of  such  as  have  capital 
and  reserves  between  1  and  5  lakhs. 

Another  form  of  protection  would  be  to  give,  in  case  of 


ABSENCE  OF  CONFIDENCE  331 

insolvency,  statutory  priority  of  repayment  to  a  special 
class  or  classes  of  banks,  creditors.  As  in  the  former  case, 
it  is  possible  to  delimit  on  a  progressive  scale  the  benefit 
of  priority  to  smaller  deposits.  Such  priority  may  be 
thought  of  for  instance  in  favour  of  fixed  deposits  and  sav- 
ings deposits.  It  is  true  that  the  loss  of  the  privilege  to 
protect  themselves  by  quick  withdrawals  in  case  of  danger 
is  supposed  to  be  counterbalanced  if  not  fully  indemnified 
by  the  higher  rates  which  are  offered  on  such  deposits.  It 
is  also  true  that  as  a  measure  for  restoring  public  confid- 
ence it  is  the  practice  of  sound  and  respectable  banks  not 
to  insist  on  their  undoubted  legal  rights  but  to  allow  with- 
drawals to  the  fullest  extent.  But  our  proposal  concerns 
only  the  smaller  banks  and  the  depositors  of  such  banks 
are  apt  to  be  persons  who  require  such  additional  safe- 
guards. Such  insurance  of  deposits  may  result  in  the  addi- 
tional benefit  that  these  banks  need  not  then  indulge  in 
highly  deleterious  competition  to  attract  deposits  by  the 
offer  of  imprudent  rates.  They  may  sustain  some  loss  on 
account  of  falling-off  of  current  deposits  but  as  things  are 
at  present,  their  dependence  on  these  deposits  is  limited. 

Another  form  of  protection  would  be  to  throw  the  respon- 
sibility for  it  on  each  individual  bank  by  stipulating  the 
building-up  of  a  reserve  fund  at  a  certain  pace  and  up  to 
a  certain  prescribed  maximum.  The  special  banking  sec- 
tion of  the  Indian  Company  Law  of  1936  has  incorporated 
this  form  of  protection.  Before  declaring  a  dividend  a 
banking  company  is  required  to  transfer  a  sum  out  of  the 
profits  equal  to  not  less  than  20  per  cent  of  such  profits  to 
its  reserve  fund  till  the  amount  of  the  fund  is  equal  to  the 
paid-up  capital  of  the  company.  This  reserve  fund  has  to 
be  invested  in  Government  or  trust  securities  or  kept  as  a 
deposit  with  any  scheduled  bank.  This  protection  is  illu- 
sory in  the  case  of  many  small  banks  which  have  a  record 
only  of  continuous  losses,  particularly  in  Bengal  where,  as 
we  have  seen,  they  tend  to  be  very  numerous.  In  the  case 
of  other  non-scheduled  banks,  it  may  be  an  advantage  to 
relate  the  maximum  reserve  prescribed  not  to  the  capital 
but  the  average  of  their  deposit-liabilities  for  the  three  pre- 
ceding years.  Such  a  stipulation  has  the  obvious  justifica- 


332  BANKING  REFORM  AND  BANKING  LEGISLATION 

tion  that  the  reserve  fund  is  largely  intended  for  the  pro- 
tection of  the  depositors  of  the  bank  and  may  ensue  in  a 
further  advantage  that  the  tendency  to  inflate  deposit  liabi- 
lities out  of  proportion  to  the  size  of  the  bank  will  receive  an 
automatic  check.  The  irksomeness  of  the  burden  could  be 
made  more  acceptable  if  in  the  case  of  new  banks,  the  pro- 
portion to  be  abstracted  out  of  profits  were  prescribed  low 
in  the  initial  years  and  increased  progressively  to  full  20 
per  cent  in  the  10th  or  20th  year. 

Indeed,  the  principle  of  reserve  funds  is  capable  of  further 
logical  extensions.  It  is  conceivable  that  separate  reserve 
funds  could  be  established  against  each  type  of  assets  accord- 
ing to  the  degree  of  risk  or  liquidity  involved.  The  idea  is 
attractive  as  putting  a  check  on  the  more  profitable  but  also 
less  desirable  banking  practices.  In  substance,  this  will  work 
as  an  elastic  kind  of  reserve  fund  the  legally  prescribed  size 
of  which  will  vary  according  to  the  degree  of  liquidity  of 
each  bank. 

It  would  of  course  be  possible  to  combine  these  several 
forms  of  protection  in  such  a  manner  as  to  throw  more  or 
less  burden  on  the  individual  bank,  on  a  special  class  or 
classes  of  creditors  and  depositors,  or  on  particular  groups  of 
banks.  A  distribution  of  burdens  in  this  manner  is  likely  to 
make  such  schemes  more  acceptable  to  the  banking  com- 
munity. 

(c)  The  Press  and  Public  Opinion — The  presence  of  a 
responsible  and  discriminating  public  opinion  is  one  of  the 
most  effective  safeguards  of  sound  banking.  The  responsi- 
bility of  the  Press  in  particular  in  matters  like  these  which 
are  highly  technical  to  appraise  and  yet  which  depend  in 
such  a  large  measure  on  the  opinion  and  behaviour  of  the 
ordinary  individual  is  very  grave.  In  normal  times,  the 
Press  should  be  able  to  exercise  a  constructive  influence  by 
giving  well-deserved  prominence  to  whatever  is  best  in  the 
banking  system  of  the  country  and  reproving,  more  by  con- 
trast than  by  words,  whatever  falls  short  of  the  desired 
standards.  In  times  of  crisis  and  disturbance,  the  nation  has 
a  right  to  look  to  the  Press  for  discriminating  self-restraint 
and  leadership.  The  value  of  these  qualities  has  been  for- 
cibly illustrated  by  recent  contrasting  events  in  the  United 


ABSENCE  OF  CONFIDENCE  333 

States  and  the  United  Kingdom.  It  would  be  difficult  to 
underestimate  the  part  which  incessant  patriotic  propa- 
ganda bore  in  creating  a  calm  confidence  in  the  British  de- 
positor in  the  crisis  of  September  1931.  As  a  climax  to  the 
bewilderment  caused  by  a  series  of  political  blunders  and 
discreditable  manoeuvring  for  party  advantage,  the  poli- 
ticians and  the  Press  successfully  hustled  the  ignorant  Bri- 
tisher into  an  emotion  that  the  gold  standard  and  the  British 
banking  system  were  of  the  same  sacred  order  as  the  Bri- 
tish Navy,  Royalty  and  Empire.5  In  the  banking  crisis 
which  followed  on  the  heels  of  England's  abandonment  of 
the  gold  standard,  the  heterogeneous  and  less  reverent  Press 
of  the  United  States  gave  a  different  account  of  itself.  Suc- 
cessive bank-failures  were  too  good  sensational  news  not  to 
be  exploited  to  increase  the  circulation.  When  there  were 
no  actual  failures  to  report,  dark  hints  foreshadowing 
failures  proved  no  less  serviceable.  Only  censorship  could 
arrest  the  progress  of  this  reckless,  irresponsible  and  anti- 
social activity. 

The  creation  of  a  well-informed,  accurate  and  weighty 
public  opinion  on  financial  and  economic  matters  is  one  of 
the  most  urgent  needs  of  this  country.  The  ultimate  basis 
of  sound  economic  and  financial  policies  must  be  a  public 
opinion  of  this  kind  rather  than  laws  and  constitutions. 
Some  progress  has  been  made  with  the  growth  of  a  few 
financial  journals  of  general  economic  interest  arid  a  few 
other  organs  representative  of  special  interests  like  the 
Indian  Textile  Journal,  the  Journal  of  the  Indian  Institute 
of  Bankers,  etc.  For  the  rest,  ill-staffed  newspapers, 
individual  businessmen,  economists  and  chambers  of  com- 
merce, etc.,  are  in  possession  of  this  field. 

We  have  already  had  occasion  to  notice  the  power  and 
danger  of  the  written  or  spoken  word,  well-founded  or  not.6 
Never  were  this  power  and  this  danger  better  illustrated 
than  in  the  banking  crisis  of  1913-14.  That  crisis  was  pre- 
ceded and  in  no  small  measure  caused  by  the  prolonged 
Anglo-Indian  newspaper  broadsides  to  which  Indian  joint- 

5.  The  Mechanism  of  Exchange,  by  J.  A.  Todd   (Oxford  University;   3rd  Ed.), 
pp.  190-3. 

6.  Ch.  VI  §  1,  2,  3,  5  &  6. 


334  BANKING  REFORM  AND  BANKING  LEGISLATION 

stock  banks  were  exposed  for  two  or  three  years  previously* 
The  lead  in  this  hot  onset  was  taken  by  "Bayard"  in  the 
columns  of  the  Commerce  which  published  week  after  week 
articles  from  that  vitriolic  pen,  each  more  spiteful  and  poi- 
sonous than  the  previous.  It  is  true  that  many  of  the  enter- 
prises criticised  by  "Bayard"  hardly  deserved  to  be  called 
"banks".  But  as  one  peruses  criticism  piled  on  criticism  by 
that  writer,  one  cannot  but  recognise  the  deliberate  venom 
spouted  at  all  'Swadeshi'  banks  as  a  class. 

Lala  Harkishan  Lai  was  undoubtedly  the  central  object 
of  the  hottest  fire  of  "Bayard".  His  contemptuous  notices  of 
the  "Napoleon  of  Punjab  Finance"  were  reinforced  by  the 
Arya  Patrika  of  Lahore  which  obliged  the  public  with  the 
information  that  the  directors  and  auditors  of  the  Peoples 
Bank  were  under  obligation  to  Harkishan  Lai.  When  the 
Peoples  Bank  fell,  Lala  Harkishan  Lai  ascribed  the  catas- 
trophe with  some  shadow  of  justification  to  the  agitation  of 
his  enemies  in  the  Press.7  Other  victims  of  the  incessant 
ridicule  and  attacks  of  "Bayard"  were  sometimes  moved  to 
protest  and  contradict.8  For  the  vindication  of  his  personal 
reputation,  Lala  Harkishan  Lai  himself  had  to  wait  till 
the  publication  of  the  official  report  of  the  liquidators. 

The  failure  of  the  Travancore  National  and  Quilon  Bank 
created  in  1938  an  equally  serious  situation  in  the  Madras 
Presidency.  The  Prime  Minister  of  Madras  described  the 
situation  in  these  words  :  "Consequent  on  the  suspension  of 
payment  by  the  Travancore  National  and  Quilon  Bank,  the 
confidence  in  the  banking  system  has  been  shaken  among 
the  people  of  the  city.  Everybody  is  inclined,  as  a  result, 
to  cash  his  deposits  in  whatever  bank  they  may  be."  Two 
months  later  despite  the  efforts  of  his  Government  to  restore 
confidence,  he  was  constrained  to  issue  a  more  direct  state- 
ment on  the  subject.  "The  reported  activities  of  some  mis- 
chievous persons  render  it  necessary  to  issue  this  statement 
emphasizing  the  fact  that  the  scheduled  banks  in  Madras 

7.  Commerce,  19th  and  24th  September,  1913. 

8.  Thus,  the  managing  director  of  the  Popular  Bank  of  Rawalpindi — "As  regards 
other  matters,  I  may  confidently  tell  you  that  either  the  writer  is  misinformed  or 
he  has  a  malice  against  the  personality  of  the  Managing  Director.    I  may  assure 
you  that  not  an  iota  of  what  your  correspondent  has  stated  is  based  on  fact."— 
Commerce,  17th  September.  1913. 


ABSENCE  OP  CONFIDENCE  335 

are  in  a  perfectly  sound  position." 

While  the  existence  of  the  evil  itself  cannot  admit  of  any 
doubt,  it  is  not  easy  to  suggest  a  remedy  which  will  be  effec- 
tive and  at  the  same  time  not  unduly  restrict  legitimate 
criticism.  But  while  a  special  law  of  libel  for  banks  may 
not  be  feasible,  it  is  within  the  range  of  the  practical  to 
make  punishments  specially  deterrent  in  the  case  of  banks. 
The  same  may  be  suggested  for  dealing  with  frivolous  legal 
proceedings  which  are  so  frequent  in  this  country. 

(d)  While  our  banks  have  a  right  to  expect  a  proper 
responsibility  in  the  expression  of  opinion  from  the  Press  and 
individuals,  and,  should  need  arise,  due  protection  from 
public  authorities,  they  owe  it  to  themselves  no  less  than 
to  the  country  that  they  should  take  every  precaution  to 
forestall  the  causes  and  moderate  the  effects  of  serious  situa- 
tions. There  are  three  possible  sources  of  embarrassment 
against  which  the  banks  will  be  wise  in  arming  themselves. 

Nothing  is  less  likely  to  hinder  the  enduring  interests  of 
a  bank  than  undue  obscurity  and  concealment  of  its  affairs. 
Confidence  is  no  doubt  slow  to  grow.  But  clear  and  infor- 
mative balance  sheets  are  certainly  a  good  means  to  create 
it.  In  our  analysis  of  balance  sheets,  we  shall  indicate  seve- 
ral directions  in  which  they  could  be  improved.  It  is  true 
that  the  public  is  as  a  rule  ill-qualified  to  appreciate  the 
merits  of  a  balance  sheet,  that  an  isolated  balance  sheet  is 
like  an  event  in  the  biography  of  an  individual  which  is  un- 
derstandable only  in  the  light  of  the  past,  that  the  public 
rarely  waits  to  compare  and  to  study,  particularly  when 
distress  and  adversity  are  feared.  But  this  only  means  that 
banks  must  endeavour  to  reach  down  to  the  level  of  public 
intelligence  and  that  efforts  must  be  sustained  over  long 
spells  of  time.  The  belief  that  credit  depends  on  trust  and 
therefore,  the  less  the  public  knows,  the  more  they  must 
trust,  belongs  to  the  more  crude  and  ungainly  phases  of 
capitalism  now  repudiated  by  all  sane  business. 

In  this  matter  of  confidence,  there  are  at  least  three 
parties  directly  involved,  the  shareholders  of  each  bank,  its 
depositors  and  the  whole  community  of  depositors  in 
general.  Present  practice  recognises  the  claims  for  infor- 
mation and  control  only  of  the  shareholders.  Yet  the  con- 


336  BANKING  REFORM  AND  BANKING  LEGISLATION 

fidence  of  the  other  two  classes  is  in  no  less  degree  a  vital 
condition  of  the  future  progress  of  banking  in  this  country. 

One  recently  established  bank  has  already  set  an  exam- 
ple by  making  room  on  the  Board  of  Directors  for  a  depo- 
sitors' director.  In  the  case  of  the  bigger  banks,  it  may 
not  perhaps  be  feasible  to  give  such  representation  to  all 
depositors  small  and  big.  But  if  representation  were 
given  to  those  who  maintain  an  average  balance  above  a 
certain  minimum  and  the  list  were  revised  every  three 
years,  the  step  should  go  a  long  way  towards  enhancement 
of  public  confidence.  It  would,  however,  be  unjustifiable 
to  exaggerate  the  virtue  of  such  representation.  It  is  the 
settled  practice  of  shareholders  to  take  no  interest  in  their 
concerns  when  profits  are  good  arid  to  reserve  their  com- 
bativeness  and  bellicosity  for  times  of  stress  and  difficulty. 
There  is  no  reason  to  presume  that  depositors  as  scattered 
through  the  several  branches  of  a  bank  as  shareholders 
will  be  better  able  to  discharge  their  responsibilities.  Their 
representation  is  more  likely  to  be  merely  symbolic  but 
even  symbolism  has  its  special  advantages  in  these  spheres 
of  human  life. 

It  is  when  we  think  of  the  confidence  of  the  public  and 
the  banking  community  in  the  banking  system  as  a  whole 
that  the  problem  presents  itself  in  its  proper  perspective. 
Public  confidence  can  rest  only  on  the  impartial  opinion 
of  some  public  authority  or,  in  ordinary  times,  on  the  be- 
lief of  the  public  that  their  interests  are  being  watched 
by  some  competent  authority.  There  are  only  two  autho- 
rites  which  we  could  conceive  of  in  this  connection — the 
Government  of  the  country  and  the  Reserve  Bank  of  India. 
The  intervention  of  Government  can  be,  as  we  have 
already  observed,  only  an  emergency  and  last-stage  resort. 
In  all  other  circumstances  and  stages,  the  power  and 
leadership  belong  naturally  to  the  Central  bank  of  the 
country.  Unfortunately,  the  recent  world-wide  crisis  has 
revealed  that  Central  banks  as  constituted  at  present  are 
incapable  of  helping  themselves  or  individual  banks.  The 
crisis  proved  that  the  more  recently  created  banks  have 
yet  to  acquire  the  authority  and  public  confidence  which 
are  the  outcome  of  slow  historical  evolution;  secondly,  that 


ABSENCE  OF  CONFIDENCE  337 

their  legal  powers  while  suited  for  ordinary  times,  could 
not  be  quickly  adapted  for  any  bold  or  heterodox  innova- 
tions; thirdly,  that  their  executive  is  not  qualified  to 
assume  the  full  weight  of  national  interest.  The  creation 
of  the  Reconstruction  Finance  Corporation  and  the  Federal 
Deposit  Insurance  Corporations  in  the  United  States,  the 
creation  of  special  authorities  like  the  Reich  Commissioner 
for  Credit  in  Germany,  Inspector  of  Banks  in  Italy,  etc., 
testify  to  the  loss  of  initiative  by  Central  banks  and  their 
subordination  to  Government  as  an  experienced  and  valu- 
able adviser.  In  the  creation  and  management  of  Exchange 
Equalisation  Funds,  the  Governments  have  actually  under- 
taken banking  functions  in  which  again  the  role  of 
Central  banks  is  largely  advisory  and  consultative. 
These  developments  should  warn  us  against  looking  to 
a  priori  principles  of  Central  banking  and  laws  based  on 
them  rather  than  to  expert  knowledge  and  devotion  to 
national  interests  in  the  executive  of  the  Reserve  Bank  for 
the  future  progress  of  our  banking  system.  The  powers  of 
the  Bank  may  have  to  be  extended  in  such  wise  that  it  has 
full  means  to  avert  more  extreme  developments  and  when 
they  cannot  be  averted,  to  meet  them  in  an  effective  manner. 
Ex-officio  representation  of  the  Reserve  Bank  as  observer  on 
the  Boards  of  Management  of  the  scheduled  banks,  powers  to 
obtain  compulsory  returns  and  institute  examinations  of 
affairs,  concentration  of  all  banking-audit  and  even  other 
audit  in  a  special  department  of  the  Bank — these  are  some 
of  the  directions  in  which  the  present  organisation  and 
powers  of  the  Reserve  Bank  could  well  be  expanded. 

If  the  public  in  this  country  has  yet  to  learn  to  look  on 
our  banks  as  national  institutions,  the  banks  on  their  part 
owe  it  to  the  country  no  less  than  to  themselves  that  they 
should  avoid  all  communal  or  sectarian  affiliations.  Bitter 
experience  has  proved  again  and  again  that  in  the  course 
of  these  conflicts  no  institution  escapes  their  ravages. 
The  contending  parties  carry  their  war  sooner  or  later  into 
every  institution  which  is  or  is  believed  to  be  a  stronghold 
of  the  opposing  parties.  By  their  very  nature,  the  clien- 
tele of  banks,  whether  depositors  or  borrowers,  is  very 
cosmopolitan  which  makes  their  position  delicate  and  vul- 
M.B.— 22 


338  BANKING  REFORM  AND  BANKING  LEGISLATION 

nerable.  A  run  on  a  bank  by  any  large  section  of  its  cre- 
ditors must  develop  sooner  or  later  into  a  general  run  in 
which  other  people  in  no  way  interested  in  the  conflicts,  in- 
deed, even  the  sectarian  supporters  of  the  banks  themselves, 
participate.  Sinister  warnings  on  this  point  are  not 
lacking  in  the  history  of  certain  institutions  and  even 
banking  furnishes  certain  examples.  A  close  connection 
between  British  political  power  and  British  commercial 
enterprise  is  a  postulate  of  Indian  attitude  on  many  econo- 
mic questions  and  in  banking  the  opinion  held  about  the 
past  policies  of  the  Imperial  Bank  or  about  the  real  motive 
behind  the  prompt  assistance  given  to  the  Alliance  Bank  of 
Simla  illustrates  the  point.  Several  other  examples  of  the 
same  kind  have  been  already  met  with  in  our  account  of 
the  history  of  Indian  banks  or  the  history  of  bank  failures. 

2.     Low  Level  of  Incomes 

No  other  single  cause  is  more  responsible  for  the  slow 
growth  of  the  banking  habit  than  the  general  poverty  of 
the  people.  Figures  relating  to  the  number  of  assessees 
of  income-tax  and  the  average  size  of  the  incomes,  the 
number  of  depositors  in  postal  savings  banks  and  the  aver- 
age deposit  per  head,  etc.,  testify  amply  to  the  narrow 
basis  on  which  the  banking  habit  has  to  be  reared.  The 
extension  of  branches,  it  has  been  already  recorded,  has 
caused  a  progressive  decline  in  the  average  volume  of  re- 
sources available  per  branch.  In  other  words,  every  advance 
in  the  creation  of  banking  facilities  must  in  future  be  secured 
in  spite  of  a  progressive  decline  '  in  the  income-level 
of  depositors.  It  is  indeed  a  common  experience  even  now 
that  many  people,  high  in  educational  or  social  status  have  to 
forgo  the  pride  or  convenience  of  a  bank-account  because 
of  sheer  inability  to  maintain  a  decent  balance  at  the  bank. 

The  banks  on  their  part  cannot  claim  that  they  have 
reached  a  proper  balance  between  income-levels  in  this 
country  and  their  conditions  for  opening  accounts  or  giving 
charge-free  use  of  banking  services.  In  prescribing  a 
minimum  initial  deposit,  banks  aim  at  assuring  a  certain 
financial  status  in  their  depositors.  In  stipulating  the 
maintenance  of  a  certain  minimum  average  balance,  they 


LOW  LEVEL  OF  INCOMES  339 

aim  at  securing  payment  for  the  costs  of  banking  business 
and  some  margin  of  profit.  It  seems  that  these  conditions 
tend  to  be  onerous  for  most  incomes  in  this  country.  Many 
important  banks  require  as  high  an  initial  deposit  as 
Rs.  300  to  500.  Some  banks  which  require  an  initial  deposit 
of  Rs.  300  or  more  expect  a  credit  balance  of  not  less  than 
Rs.  100  to  be  maintained  in  the  course  of  the  relationship. 
These  figures  appear  unduly  high  when  compared  with 
certain  stray  evidence  of  the  average  size  of  accounts  in 
this  country.  It  is  likely  that  even  for  the  bigger  banks 
the  average  volume  of  balance  per  current  account  is  no 
more  than  Rs.  1,000  at  the  most.  From  the  experience  of 
other  countries,  particularly  the  United  States,  it  may  be  pre- 
sumed that  the  bulk  of  current  deposits  of  a  bank  is  made  up 
by  a  few  big  accounts  while  the  greater  number  of  current- 
accounts  consists  of  small  and  even  unprofitable  accounts. 

Statistics  relating  to  postal  savings  bank  deposits  may 
be  helpful  in  fixing  the  range  of  our  estimates  on  this  sub- 
ject. The  postal  savings  bank  deposit  per  head  moved 
in  the  neighbourhood  of  Rs.  120  till  1920  and  with  the 
growth  of  wealth  in  recent  years,  the  figure  has  improved 
to  Rs.  190  in  the  last  few  years.  If  these  savings  were 
estimated  to  cover  a  period  of  life  of  ten  years  on  the  aver- 
age, it  gives  us  an  annual  contribution  of  about  Rs.  20  in 
round  figures.  Even  if  these  42  lakhs  and  odd  account 
holders  were  assumed  to  save  only  5  per  cent  of  their  in- 
comes in  this  manner,  this  should  mean  an  annual  income 
or  expenditure  per  family  of  about  Rs.  400.  It  is  probable 
that  postal  savings  bank  deposits  are  drawn  from  much 
poorer  strata  of  society  than  those  on  which  our  banking 
system  must  rely  for  the  supply  of  its  resources.  Never- 
theless, these  figures  illustrate  the  narrow  basis  of  banking 
in  this  country  and  the  need  for  revising  some  of  our  bank- 
ing practices  in  harmony  with  our  economic  environment.9 

9.  Central  Bank  of  India. 

Number  of  current        Current  and  Fixed  Average  Current 

Accounts.                   Deposits  (lakhs)  and  fixed  deposit 

per  current  Account. 

1914  December                   1,560                                   30  Rs.     1,900 

1915  June                              1,700                                    48  „       2,800 
1915  December                    2,000                                   50  „      2,500 

[Continued  overleaf. 


340  BANKING  REFORM  AND  BANKING  LEGISLATION 

Of  course,  banks  as  profit-earning  concerns  cannot  ap- 
proach the  subject  from  the  side  of  income-levels  alone. 
They  have  perforce  to  take  into  account  the  profitability 
of  each  individual  relationship.  The  direct  profitability  of 
an  account  must  vary  according  to  its  average  size  from 
year  to  year,  the  number  of  cheques  drawn  on  it  on  the 
average,  i.e.  its  activity,  and  the  cost  of  handling  each 
cheque.  It  is  clear  that  reliable  estimates  of  these  factors 
involve  elaborate  and  painstaking  accounting  analysis.  It 
has  been  estimated  in  the  United  States,  for  example,  that 
the  cost  of  landing  a  cheque  works  out  on  the  average 
at  3  cents.  It  would  be  strange  if  in  India  this  cost  is  above 
1  anna  per  cheque  and  most  probably,  it  is  nearer 
half  anna.  If  an  average  balance  of  Rs.  100  in  an  account 
earns  for  a  bank  2  per  cent  per  annum,  it  might  mean  loss 
to  the  bank  if  more  than  32  cheques  per  annum  or  more 
than  three  cheques  per  month  were  allowed  to  be  drawn 
on  it  free  of  charge.  Of  course,  for  a  final  estimate  of  the 
profitability  of  an  account,  other  incidental  advantages 
like  loans  borrowed  by  the  customer,  his  safe  custody 
business,  his  advertisement  value,  etc.,  have  also  to  be 
taken  into  account.  The  fact  that  as  high  a  percentage  as 
57  of  the  total  accounts  in  the  United  States  is  reported 
to  be  unprofitable  to  the  banks  proves  the  extent  to  which 

In  1912,  more  than  two-thirds  of  total  deposit  liabilities  were  accounted  for  by 
fixed  deposits — the  average  volume  per  account  of  which  is  generally  smaller 
than  in  the  case  of  current  accounts  and  the  bulk  is  made  up  fy  uany  small 
accounts.  By  1921,  fixed  and  saving  deposits  fell  to  about  half  of  total  deposit 
liabilities. 

Imperial  Bank.  Current  Accounts. 

(Branches  in  C.  P.  and  Berar) 
Number  Rs.  Total  (OOOs)  Average  amount 

per  Account. 

December    1925  1,584  3,331  2,100 

1929  2,190  5,158  2,300 

Of  30,000  and  odd  British  India  creditors  of  the  Travancore  National  and 
Quilon  Bank,  20,000  and  more  were  reported  to  be  for  Rs.  50  and  under.  Pre- 
sumably, most  of  these  accounts  were  fixed  deposits.  The  aggregate  liabilities, 
fixed  and  current,  amounted  to  Rs.  242  lakhs.  Assuming  that  the  bulk  of  cur- 
rent deposits  had  been  withdrawn  by  that  date,  this  works  out  at  Rs.  800  per 
account  for  fixed  deposits. 

In  1940,  another  bank  operating  in  the  same  area  disclosed  an  average  of 
Rs.  884  per  fixed  deposit  account,  Rs.  145  per  current  account  and  Rs.  46  per 
savings  account. 

In  1941,  the  Devkaran  Nanjee  Bank  of  Bombay  disclosed  an  average  of 
Rs.  1,150  per  fixed  and  current  account  taken  together. 


IGNORANCE  AND  ILLITERACY  341 

banking  facilities  may  be  based  on  considerations  other 
than  direct  profit.  It  may  be  perhaps  feasible  for  Indian 
banks  to  frame  schedules  of  the  number  of  cheques  they  are 
prepared  to  allow  free  of  charge  for  accounts  of  vary- 
ing sizes  and  to  make  a  service  charge  for  any  excess  above 
the  minimum  number.  The  present  insistence  on  a  large 
initial  deposit  seems  to  be  out  of  harmony  with  the  econo- 
mic conditions  of  a  country  in  which  gazetted  officers  of 
Government  start  with  salaries  of  less  than  Rs.  200  and  in 
a  few  cases  with  Rs.  300  to  Rs.  400.  The  changes  suggest- 
ed above  must  be  preceded  by  scientific  inquiries  and 
should,  when  effected,  go  a  long  way  towards  attracting 
smaller  folk  into  the  banking  system. 

3.     Ignorance  and  Illiteracy 

Illiteracy  and  absence  of  education  in  general  cannot  but 
be  grave  obstacles  to  the  growth  of  economic  habits  and 
modes  of  business  which  presuppose  ability  to  write  and 
affix  signature  to  cheques,  follow  the  purport  of  rules, 
documents,  etc.  It  is,  however,  possible  to  exaggerate  the 
significance  of  these  obstacles  to  the  spread  of  the  banking 
habit.  The  illiteracy  and  ignorance  which  are  relevant 
to  this  problem  are  the  illiteracy  and  ignorance  of  those 
only  who  reach  the  minimum  income-level  presupposed 
in  a  bank-account.  Considered  in  this  light,  it  is  very 
doubtful  whether  the  obstacle  really  operates  in  the  case 
of  more  than  an  insignificant  fraction  of  those  who  can 
afford  to  have  a  bank  account.  The  assessees  to  the 
income-tax  which  covers  all  non-agricultural  incomes  did 
not  exceed  7  lakhs  in  the  year  1935-36  when  the  mini- 
mum assessable  was  Rs.  1,000.  The  number  of  persons 
who  live  primarily  on  rent  of  agricultural  land  was  return- 
ed by  the  last  Census  at  32J  lakhs  only.10  If  the  Travancore 
National  and  Quilon  Bank  were  taken  to  represent  average 
banking  conditions  in  1937  and  Rs.  1,000  were  taken  sis  the 
mean  size  of  deposits  for  all  depositors  of  the  Indian  banking 
system,  the  aggregate  number  of  depositors  would  not 
exceed  30  lakhs  in  that  year.  This  number  may  be  compared 

10.    i.e.  "workers"  only. 


342  BANKING  REFORM  AND  BANKING  LEGISLATION 

with  the  number  of  account  holders  in  the  postal  savings 
banks  which  ran  into  about  35  lakhs  in  the  most  recent 
return.  The  number  of  literates  themselves  was  returned  in 
1931  at  281  lakhs  for  both  males  and  females.  These  figures 
and  the  general  experience  that  illiteracy  and  poverty  are 
as  a  rule  inseparable  twins  indicate  that  these  particular 
obstacles  are  much  overstated.  Nevertheless,  since  every 
effort  must  be  made  to  build  up  the  banking  habit,  the 
extension  of  the  use  of  vernaculars  for  all  banking  purposes 
deserves  to  be  attempted  in  all  favourable  circumstances.11 

II.    BANKING  LAWS 

The  causes  inspiring  banking  legislation  vary  according 
to  the  history  and  circumstances  of  each  country.  Much 
of  the  legislation  in  the  United  States,  and,  to  a  limited 
extent  in  England,  was  motivated  by  a  desire  to  regulate 
and  assure  the  redeemability  of  note-issues.  With  the 
assumption  of  the  note-issue  by  the  Government  in  1861, 
such  a  cause  for  banking  legislation  ceased  to  exist  in  India. 
The  monetary  and  exchange  difficulties  of  the  post-1920  era 
induced  many  countries,  new  and  old,  to  undertake  banking 
legislation  bearing  chiefly  on  the  powers  and  functions  of 
Central  banks.  It  was  not  till  the  Great  Depression  and 
banking  crisis  of  1929-33  that  the  law  was  invoked  almost 
everywhere  and  on  a  sweeping  scale  as  a  remedy  for  almost 
every  conceivable  banking  ill. 

The  desire  for  banking  legislation  in  India  is  to  be  traced 
to  the  one  great  banking  crisis  which  this  country  faced 
in  1913-14.  The  objective  aimed  at  has  been  the  protection 
of  the  public  against  its  own  ignorance,  protection  against 
the  ignorance  or  dishonesty  of  those  who  float  or  manage 
banks  and  finally  the  protection  of  Indian  banking  generally 
against  powerful  foreign  competition.  The  enactment  of  the 
Reserve  Bank  Act  was  due,  as  we  have  recorded,  to  the 
anxiety  of  British  commercial  and  political  interests  to 
remove  monetary  and  currency  questions  beyond  the  reach 
of  Indian  political  influence. 

11.  The  minimum  for  assessment  to  income-tax  from  1936-37  is  Rs.  2,000  per 
annum  and  in  that  year  the  assessees  were  373  thousand  only. 


BANKING  LAWS  343 

4.  Form  of  Legislation 

The  ends  of  banking  legislation  have  been  secured  in 
different  ways  in  different  countries.  Some  countries  have 
preferred  to  introduce  special  clauses  bearing  on  banks  in 
their  general  law  relating  to  joint-stock  enterprise.  Others 
have  promulgated  special  banking  laws.  A  few  have  special 
laws  which  include  in  their  purview  not  merely  banks  but 
other  allied  and  cognate  concerns  as  well. 

Till  1936,  India  had  no  banking  legislation  of  any  kind. 
Banks  like  other  concerns  had  to  conform  to  the  general 
requirements  of  Indian  company  laws.  The  Act  of  1936 
made  the  first  and  a  very  significant  departure.  Part  X-A 
was  devoted  exclusively  to  banks  and  was  meant  to  be 
merely  a  precursor  of  a  special  law  on  the  whole  subject. 

The  first  effort  at  legislation  on  the  subject  of  joint-stock 
enterprise  in  general  was  the  Joint  Stock  Companies  Act 
of  1850.  This  Act  made  members  of  a  company  registered 
under  the  Act  liable  for  the  debts  of  the  company  in  pro- 
portion to  their  holdings.  The  law  conferred  on  companies 
legal  personality,  prescribed  for  them  audited  balance- 
sheets  and  profit  and  loss  accounts  and  made  provision  for 
their  winding-up.  The  Act  of  1857  created  limited  liability 
for  all  companies  except  those  for  banking  and  insurance. 
The  Act  of  1860  removed  the  exceptions.  These  various 
enactments  were  later  consolidated  into  one  statute — the 
Companies  Act  of  1866.  Although  amendments  were  made 
now  and  then,  e.g.  in  1892,  a  reconstruction  of  the  statute 
was  executed  only  in  1913.  The  law  which  governs  this 
subject  at  present  is  the  great  enactment  of  1936,  the  Indian 
Companies  (Amendment)  Act  1936.12 

5.  Law  Relating  to  Balance  Sheets  of  Banks 13 

In  the  present  era  of  joint-stock  enterprise,  the  legally 

12,  To  understand  the  genesis  of  much  of  this  legislation,  it  is  necessary  to  bear 
in  mind  the  course  of  legislation  in  England.     The  Act  of  1826  allowed  partner- 
ships with  more  than  6  members  outside  a  radius  of  65  miles'  from  London  to 
issue  notes  and  to  sue  and  be  sued  in  the  name  of  the  bank.    The  Acts  of  1838-40 
and   1844   confer  corporate   character   on  all   joint-stock  banks  and  provide  for 
some  details  of  a  general  company  law.     In  1855,  limited  liability  was  permitted 
to  trading  companies,  but  not  to  banks.     In  1858  banks  were  allowed  to  register 
as  limited  liability  companies  after  notice  to  shareholders. 

13.  Fn.  overleaf. 


344 


BANKING  REFORM  AND  BANKING  LEGISLATION 


enforced  publication  of  balance  sheets  is  no  doubt  the  great- 
est safeguard  against  flagrant  types  of  financial  dishonesty 


13. 


A  Specimen  Balance-Sheet 


Liabilities 

Authorised,  Issued  &  Subscribed  Capital 
Paid-up  Capital  :— (1) 
Reserve  Fund  : — 
Reserve  for  Contingencies  : — 
(2) 
Deposits  : — 

Fixed,  Short  and  Savings 

Bank  :— (3) 
Current  and  Contingency 

Accounts  : — (4) 
Rebate  on  Bills  Discounted 
and  Treasury  bills, 
notes  due  : — (5) 
Profit  and  Loss  Account  : — 

(i)  Balance  from  last  year  : — 
(ii)  Profit   from  the    current 

year  :— 
(iii)  Less  income-tax,  etc.  : — 

Contingent   Liabilities  :— (6) 


(1) 
(2) 


(3) 
(4) 


(5) 


(6) 


(7) 


Assets  : 
Cash  Credits  and  Demand  Advances  : — 

Loans  (7)  : — 

Bills  Discounted  and  Purchased  :— 
Particulars    required    by    Act    VII    of 
1913  :— 

(i)  Debts  good  and  fully  secured  ; 
(in  which  Director  is  con- 
cerned). 

(Total  maximum  balances  in 
the  year) 

(ii)  Debts    good    and    secured    by 
liability   of   other   persons, 
(bills   discounted) 

(due     from     joint-stock     co. 
with     agent's     guarantee,     a 
bank     director     being     con- 
cerned) 
(iii)  Debts    good    but    secured    by 

debtor's   liability; 

(iv)  (v),  (vi),  (vii)  Debts  doubtful, 
bad,  to   directors     personally, 
due  from  other  officers,   etc. 
Landed  Property  below  cost  : — 
Investments      at      or      below      market 
rates  : — 

Bullion,  Government  security,  Im- 
provement Trust  and  Municipal 
bonds,  joint-stock  company  deben- 
tures and  shares; 

Government  of  India  Treasury  Bills  : — 
Cash,    in    hand    and    at    Bankers    in 

Current  Account  : — 

It  is  rarely  the  practice  of  Indian  banks  to  maintain  a  part  as  uncalled 
reserve  liability  to  be  called  up  in  case  of  liquidation  as  in  England. 
This  is  a  reserve  against  those  liabilities  which  may  materise  after  the 
preparation   of   the    balance-sheet,   e.g.   re:   bills   discounted,   guarantees; 
unfinished  contracts;   pending  actions. 

The  usual  period  for  fixed  deposits  is  1  year  !     'Short  deposits'     are  a 
feature  of  financial  centres  like  Bombay  and  Calcutta. 
Contingency    Accounts  : — These    are   hidden   reserves,    provision   for   bad 
and  doubtful  debts,  depreciation  of  investments,  and  many  other  unknown 
items. 

Rebate  is  allowance  made  for  discount  received  but  not  earned  since  the 
maturity  of  the  bills  concerned  extends  beyond  the  date  of  closing  the 
balance  sheet. 

These  are  liabilities  which  are  contingent  on,  the  happening  of  events 
which  may  or  may  not  happen,  e.g.  as  regards  bills  discounted,  guarantees, 
unfinished  contracts,  actions  in  court,  etc. 

A  cash  credit  is  fixed  as  a  maximum  against  promissory  notes,  two 
sureties,  hypothecation  of  stock.  Interest  is  charged  only  on  the  amount 
actually  used  but  interest  of  a  minimum)  balance  has  to  be  paid.  The 
facility  is  terminable  at  any  time.  Demand  advances  are  also  repayable 
at  any  time  but  as  a  rule  notice  is  given. 


LAW  RELATING  TO  BALANCE  SHEETS  345 

or  incompetence.  From  1866  onwards,  the  laws  relating  to 
joint-stock  enterprise  have  endeavoured  to  make  this  safe- 
guard as  strict  and  effective  as  possible.  Unfortunately, 
from  the  standpoint  of  banks,  these  efforts  have  laboured 
under  a  grave  drawback.  The  Indian  Company  Law  has 
always  adhered  to  one  general  form  of  balance-sheet  to 
which  all  companies  are  expected  to  conform.  Any  special 
provisions  for  banks  as  such  have  been  incidental  rather 
than  conceived  on  a  comprehensive  and  well-laid  plan.  This 
has  meant  a  good  deal  of  undesirable  latitude  and  a  good 
deal  of  unnecessary  obscurity.  As  Buckley  J.  defined  it  in 
Newton  v.  Birmingham  Small  Arms  Co.,  "the  purpose  of 
the  balance  sheet  is  primarily  to  show  that  the  financial 
position  of  the  company  is  at  least  as  good  as  there  stated, 
not  to  show  that  this  is  not  better".  It  is  doubtful  whether 
the  present  form  of  our  balance  sheets  achieves  this  desi- 
deratum of  cautious  prudence.  The  construction  of  a  special 
form  of  balance-sheet  for  banks  is  one  of'  the  most  urgently 
needed  reforms.14 

The  Indian  Companies  Act  1866  required  banks  and  other 
cognate  concerns  on  a  limited  basis  to  publish,  in  a  sum- 
mary form,  statements  of  their  assets  and  liabilities  twice  a 
year.  Except  for  inconsequential  alterations  of  dates,  the 
form  of  1866  has  been  rigidly  adhered  to  in  all  subsequent 
acts  and  amendments.15  As  avowed  summaries,  they  have 
significance  only  in  the  light  of  the  balance-sheets  of  which 
they  are  the  forerunners  or  successors. 

The  Act  of  1866  required  that  a  balance-sheet  of  the  'pro- 
perty and  liabilities  of  the  company  should  be  made  out16 
once  at  least  in  every  year.  The  Act  of  1913  amplified  the 
object  of  the  summary  which  must  give  particulars  so  as  to 
disclose  the  general  nature  of  the  liabilities  and  assets  and 
how  the  value  of  the  fixed  assets  has  been  arrived.17 


14.  Cf.  Macmillan  Report  Appendix  I. 

15.  Act  of  1866 — as  on  1st  day  of  January  or  July,  to  be  published  on  1st  Monday 
in  February  and   1st  Monday  in  August. 

Act  1913 — as  on  31st  day  of  December  or  30th  of  June — to  be  published  on  1st 
Monday  in  February  and  1st  Monday  in  August. 
Act  1936— same  as  1913-Act. 

16.  Act  1866,  S.  49. 

17.  Galloway  v,  Schill  &  Co.,  1912,    2KB  354  and  1927,  29  Bom.  L.  R.  722. 


346  BANKING  REFORM  AND  BANKING  LEGISLATION 

The  Act  of  1936  made  no  alterations  in  the  particulars 
stated  above.  But  it  made  one  important  addition.  When  a 
company  holds  shares  of  a  subsidiary  company,  the  balance- 
sheet  of  the  holding  company  must  contain  as  an  annexture 
the  last  audited  balance-sheet,  profit  and  loss  account  and 
auditor's  report  of  the  subsidiary  company  or  companies 
as  well. 

In  the  case  of  institutions  like  banks  whose  business  is 
much  influenced  by  the  course  of  the  seasons,  the  time  of 
publication  of  the  balance-sheets  is  obviously  a  very  im- 
portant matter.  Unfortunately,  there  is  no  uniformity  of 
practice  on  this  point  yet.  Most  Indian  joint-stock  banks 
publish  their  balance-sheets  as  at  the  end  of  June  and 
December.  But  there  are  some  exceptions.  The  Union 
Bank  of  India,  and  the  Allahabad  Bank  of  India  after  its 
affiliation  to  the  P.  &  O.  Banking  Corporation,  prefer  to 
state  their  accounts  as  on  31st  day  of  March.  Apart  from 
the  difficulties  of  compiling  a  general  statement  for  Indian 
banks  as  such,  there  is  also  the  danger  that  such  divergences 
of  practice  may  encourage  window  dressing  by  means  of 
temporary  transfers  of  cash  deposits  to  needy  banks. 

There  is  also  a  good  deal  of  varying  practice  about  the 
publication  of  profit  and  loss  accounts.  Many  Indian  banks 
e.g.,  Bank  of  India,  Allahabad  Bank,  Bank  of  Baroda,  Bank 
of  Mysore,  the  Central  Bank  of  India,  etc.,  publish  along 
with  their  December  balance-sheets  yearly  accounts  of 
profit  and  loss.  But  the  Indian  Bank  and  the  Punjab 
National  Bank  publish  only  half-yearly  accounts  at  a  time. 
The  Imperial  Bank  adhered  to  the  latter  practice  till  1933. 
From  that  year,  it  began  to  publish  its  aggregate  yearly 
profits  but  they  are  stated  unlike  other  banks  as  from  June 
to  June. 

The  Table  A  to  the  Act  of  1866  prescribed  the  form  of 
balance-sheet  which  companies  were  required  to  conform 
to  as  near  as  circumstances  admitted.  It  is  noteworthy  that 
while  in  England  the  form  was  omitted  in  the  subsequent 
Act  of  1908,  our  Act  of  1913  continued  to  adhere  to  the  form 
with  certain  amplifications.  These  amplifications  deserve 
to  be  noted  as  bringing  out  the  limitations  of  the  law  as  it 
existed  before  1913. 


CAPITAL,  RESERVE  FUNDS,  DEBTS  AND  LIABILITIES  347 

6.  Capital 

The  Indian  Companies  Act  1866  required  a  statement 
of  the  number  of  shares  and  the  amount  paid  per 
share.  The  1913  Act  changed  this  to  a  statement  per  share 
and  in  the  aggregate,  of  the  authorised,  issued,  subscribed 
and  paid-up  capital  under  each  separate  head.  The  change 
was  useful  not  merely  as  enabling  an  easier  understanding 
of  the  owned  resources  of  the  company  and  resources  which 
could  be  evoked  at  a  short  notice  but  served  also  as  a 
constant  reminder  of  the  proportions  which  the  three 
magnitudes  bore  to  each  other  and  therefore  as  a  check  on 
irresponsible  or  fraudulent  devices  meant  to  impress  public 
ignorance  with  mere  paper  figures. 

The  amendment  of  1936  distinguishes  between  various 
classes  of  capital.  Shares  issued  as  fully  paid-up  but  with- 
out receiving  any  cash  for  them  have  to  be  stated  separately 
from  those  for  which  cash  payments  are  to  be  realised. 
Under  the  head  "calls  unpaid"  the  amount  due  from  the 
managing  agents  has  to  be  separated  from  dues  to  be 
realised  from  others.  As  will  be  noted  presently,  the  Act 
prohibits  managing  agency  system  in  banking  business. 

7.  Reserve  Funds 

The  Indian  Companies  Act  1866  had  only  one  head — 
Reserve  Fund.  It  was  explained  as  showing  the  amount 
set  aside  from  profits  to  meet  contingencies.  The  1913 
successor  adds  several  other  funds  of  what  it  then 
described  as  "Reserve  Fund  or  Development  Funds."  These 
new  funds  were  :  any  sinking  funds,  and  any  other  fund 
created  out  of  net  profits. 

This  head  again  has  revealed  a  good  deal  of  divergent 
practice  in  balance-sheets.  The  Punjab  National  Bank,  for 
example,  states  separately  Funds  for  Contingencies  and 
Funds  against  Depreciation  of  Investments.  The  Indian 
Bank  follows  the  same  practice.  Other  banks  find  need  for 
other  ingenuities. 

8.  Debts  and  Liabilities 

The  Indian  Companies  Act  1866  had  an  omnibus  head 
"Debts  and  Liabilities"  to  show,  firstly,  amounts  of 


348  BANKING  REFORM  AND  BANKING  LEGISLATION 

loans  or  debentures  bonds,  and  secondly,  amount  of 
debts  owing  by  the  company  distinguished  under  several 
specific  and  one  miscellaneous  sub-head.  The  fixed  and 
other  deposits  of  banks  fell  naturally  under  the  last  mis- 
cellaneous sub-head  which  called  for  no  details. 

The  amendment  of  1913  split  the  second  part  of  the 
omnibus  "Debts  and  Liabilities"  mentioned  above  into 
several  independent  heads  with  slight  changes  of  descrip- 
tion. The  most  significant  change  was  the  creation  of  two 
new  independent  heads,  namely  loans  otherwise  secured 
(stating  the  nature  of  security)  and  loans  unsecured  which 
now  took  the  place  of  the  last  miscellaneous  sub-head  men- 
tioned above.  The  head  "unsecured  loans"  now  covered  the 
deposits  of  banks.  Again  no  specific  details  were  prescribed 
by  the  Act. 

The  1936  Act  specified  several  details  under  the  head 
Loans  (a)  secured  and  (b)  unsecured.  Under  the  latter 
head  occur  the  important  items — loans  from  banks,  fixed 
deposits,  short-term  loans,  liabilities  to  subsidiary  com- 
panies, etc. 

The  balance-sheets  of  Indian  banks  do  not  observe  any 
uniform  practice  regarding  deposits.  The  Imperial  Bank  of 
India  and  among  the  smaller  banks,  the  Indian  Bank  and 
the  Union  Bank  of  India  do  not  separate  fixed  and  current 
deposits.  Those  banks  which  separate  them  act  presumably 
on  no  uniform  definition  of  fixed  deposits  or  "short"  deposits. 

Again,  banks  which  state  current  and  fixed  deposits 
separately  are  not  agreed  on  the  status  of  savings  deposits. 
The  Allahabad  Bank  and  Bank  of  Mysore  have  adopted  the 
sensible  course  of  stating  their  savings  deposits  under  an 
independent  head.  In  view  of  the  rapid  growth  of  these 
deposits  in  recent  years,  this  practice  is  to  be  much  com- 
mended. Alone  among  important  banks,  the  Bank  of  India 
follows  the  less  objectionable  course  of  putting  savings 
deposits  together  with  fixed  deposits.  The  Central  Bank 
and  the  Bank  of  Baroda  lump  them  with  current  accounts. 
The  undesirability  of  such  varying  practices  is  thrown  into 
bold  relief  by  the  behaviour  of  the  Punjab  National  Bank 
on  this  point.  Till  1936,  savings  accounts  were  combined 
with  current  accounts.  For  unexplained  reasons,  they  were 


BOOK-DEBTS  349 

thereafter  placed  with  fixed  deposits. 

So  long  as  savings  deposits  formed  but  an  insignificant 
part  of  a  bank's  borrowed  resources,  this  variety  of  practice 
could  not  cause  much  misinterpretation  of  the  situation  of 
any  bank.  But  as  the  figures  relating  to  the  Allahabad 
Bank  and  Mysore  Bank  suggest,  their  importance  has  grown 
strikingly  in  recent  years.  Indeed,  this  development  is  not 
exceptional  to  India  but  has  been  observed  in  many  other 
countries  like  the  United  States,  etc.  It  must  conduce  to 
greater  clarity  and  more  accurate  interpretation  if  all  banks 
followed  the  practice  of  these  two  banks.  In  the  alternative, 
a  uniform  procedure  of  combining  them  with  fixed  deposits 
is  to  be  preferred  as  being  more  logical. 

The  changes  in  the  other  heads  of  the  1866  Act,  namely, 
Profit  and  Loss,  Contingent  Liabilities  and  creation  of  a 
new  head,  namely  Advanced  Payments  and  Unexpired 
Discount  do  not  need  any  special  comment. 

9.  Property  held  by  Company 

We  may  now  turn  to  the  assets  side.  The  first  head 
under  the  Act  of  1866  is  "property  held  by  company", 
which  is  distinguished  as  immovable  property  and 
movable  property.  The  cost  was  to  be  stated  with 
deductions  for  deterioration  in  value  as  charged  to 
the  Reserve  Fund  or  Profit  and  Loss.  The  1913  Act  drops 
the  distinction  between  movable  and  immovable  pro- 
perty, combining  the  two  as  "Fixed  capital  expenditure". 
The  Act  of  1936  added  a  significant  clause  that  once  sums 
have  been  written  off  on  a  reduction  of  capital  or  revaluation 
of  assets,  subsequent  balance-sheets  must  show  the  reduced 
figures. 

10.  Book-Debts 

A  very  important  head  in  the  Act  of  1866  was  "debts  owing 
to  the  company"  corresponding  to  the  head  "book-debts"  in 
the  Act  of  1913. 

The  Act  of  1866  distinguished  first  "debts  considered  good 
for  which  the  company  hold  bills  or  other  securities,"  In 
the  Bank  of  Burma  case,  Mr.  Justice  Twomey  explained  the 
wide  significance  of  the  clause  as  it  stood  in  the  Act.  The 


350  BANKING  REFORM  AND  BANKING  LEGISLATION 

sole  pro-note  of  the  debtor  was  enough  to  make  the  debt 
one  with  security  to  support  it.  It  did  not  matter  if  the 
security,  when  there  was  any,  was  grossly  inadequate — the 
Act  did  not  require  full  security  to  justify  inclusion  under 
this  head.  No  line  was  drawn  between  good  and  bad 
security  and  even  when  the  security  depreciated,  the  debt 
may  still  be  classed  under  this  head  as  a  secured  debt.  True, 
reputable  accountants  developed  a  practice  of  classing  under 
this  head  only  those  debts  or  those  portions  of  debts  which 
were  fully  secured.  But  the  Act  itself  did  not  lead  to  such 
a  construction. 

The  Indian  Companies  Act  of  1913  terminated  this  vague- 
ness. In  the  case  of  a  bank,  it  distinguished  those  debts 
which  are  fully  secured  from  those  which  are  good  but  for 
which  the  bank  holds  no  security  other  than  the  debtors' 
personal  security. 

The  next  head  under  the  Act  of  1866  was  debts  considered 
good  for  which  the  company  had  no  security.  The  Act  of 
1913  continues  this  head  of  "good  debts".  The  definition 
of  a  good  debt  is  obviously  a  difficult  point.  In  the  case 
cited  above,  the  judge  described  it  as  a  business  term  to  be 
interpreted  in  the  light  of  relevant  business  standards  and 
declined  to  lay  down  any  definition  of  his  own. 

The  third  sub-head  under  the  Act  of  1866  was  "debts 
considered  bad  and  doubtful". 

This  head  was  a  natural  embarrassment  to  banks. 
Acknowledgment  of  debts  of  this  kind  was  inevitably  looked 
on  as  an  invitation  to  suspicion  and  loss  of  confidence. 
Bankers  and  auditors  all  over  the  country  developed  prac- 
tices according  to  which  these  debts  were  placed  in  the  class 
'good  debts'  on  condition  that  a  secret  reserve  or  contingent 
fund  was  created  on  the  liabilities  side  to  the  full  amount 
of  the  debts.  As  was  emphasised  in  the  Bank  of  Burma 
case  cited  above,  absence  of  a  reserve  meant  that  the  debt 
must  be  specifically  shown  under  the  bad  and  doubtful 
category  either  to  the  full  extent  or  to  the  extent  of  the 
difference  between  the  amount  of  the  debt  and  the  amount 
of  the  provision  against  it. 

Although  no  dishonesty  could  be  imputed  to  such  a 
practice,  it  was  certainly  not  a  strict  and  correct  compliance 


BOOK-DEBTS  351 

with  the  law.  The  Act  of  1913  retained  this  sub-head  in  its 
original  form  F,  adding  the  significant  words  "in  all  cases," 
i.e.  in  the  case  of  all  companies  including  a  bank.  In  the 
Central  Bank  of  India  case  (1927) ,  the  question  of  interpre- 
tation was  disposed  of  in  the  only  valid  manner  possible. 
"Book-debts"  can  only  mean  debts  owing  to  the  company 
and  so  shown  in  the  books  of  the  company.  Unless  a  debt 
was  actually  written  off,  it  should  have  its  proper  place  on 
the  assets  side.  The  fact  that  chances  of  recovery  were 
non-existent  or  that  a  reserve  was  held  in  hand  against  it 
could  not  make  it  less  of  a  debt. 

The  Act  of  1913  had  added  in  this  connection  one  more 
obligation  on  the  liabilities  side  which  found  no  place  in  the 
Act  of  1866.  There  occurred  the  head  "Provision  for  Bad 
and  Doubtful  Debts"  which  again  made  it  necessary  that 
when  the  reserve  was  invoked  to  meet  such  debts,  the 
amount  should  be  revealed  under  this  head  and  not  hidden 
from  the  public  eye. 

After  the  decision  in  the  Central  Bank'  case,  a  notification 
of  1927  gave  legal  status  to  the  practice  of  bankers  and 
auditors  described  above.  Banks  were  now  relieved  of  the 
embarrassment  of  the  sub-head  "Provision  for  Bad  and 
Doubtful  Debts,"  on  the  liability  side  altogether  and  on  the 
assets  side  they  were  not  required  to  state  their  bad  and 
doubtful  debts  when  provision  was  made  against  them  to 
the  satisfaction  of  the  auditors.  It  is  clear  that  the  amend- 
ment throws  an  unambiguous  duty  on  the  auditors  to 
assure  themselves  that  all  bad  and  doubtful  debts  which  do 
not  appear  in  the  balance-sheet  are  reserved  against. 

The  Act  of  1936  cancelled  the  notification  of  1927.  Doubt- 
ful and  bad  debts  were  to  be  so  shown  and  "Provision  for 
Bad  and  Doubtful  Debts"  reappeared  once  more  on  the 
assets  side.  But  this  change  appears  to  have  been  due  to 
mere  inadvertence.  Early  in  1937,  the  Governor-General- 
in-Council  directed  that  alterations  be  made  in  Form  F  in 
the  III  Schedule  of  the  Company  Act  restoring  the  notifica- 
tion of  1927  and  the  law  was  subsequently  amended  in  the 
sense  of  this  notification  which  a  special  bench  of  the 
Bombay  High  Court  declared  ultra  vires  on  2-9-43.  In  the 
Column  headed  "Capital  and  Liabilities,"  banks  were  reliev- 


352  BANKING  REFORM  AND  BANKING  LEGISLATION 

ed  of  the  necessity  of  showing  "Provision  for  Bad  and 
Doubtful  Debts"  and  in  the  Column  "Property  and  Assets" 
the  sub-head  "Book  Debts"  was  qualified  with  the  addition 
of  the  words  and  brackets  "(Other  than  Bad  and  Doubtful 
Debts  of  a  Bank  for  which  Provision  has  been  made  to  the 
Satisfaction  of  the  Auditors.)" 

The  last  sub-head  is  "Debts  due  by  Directors  and  other 
Officers  etc."  The  Act  of  1866  had  a  head  which  ran  :  "Any 
debt  due  from  a  director  or  other  officer  of  the  company  to 
be  separately  stated."  In  order  to  include  debts  held  by 
these  parties  conjointly  with  others,  the  1913  Act  adopted 
the  more  comprehensive  description.  Under  the  old  sub- 
head each  individual  name  and  amount  were  required  to  be 
disclosed.  But  it  is  not  clear  whether  the  new  Act  pre- 
sumes a  continuation  of  the  old  practice  or  requires  only 
the  total  amounts  of  such  debts. 

11.     Cash  and  Investments 

With  regard  to  investments  the  1866  Act  required  a 
statement  merely  of  their  nature  and  rate  of  interest.  The 
1913  Act  separated  the  two  heads  "Cash"  and  "Investments" 
and  with  regard  to  the  latter  required  that  the  mode  of 
valuation,  e.g.,  whether  at  cost  or  market  value,  should  be 
stated.  The  Interest  on  Investments  was  placed  under  a 
separate  head  of  its  own. 

The  1936  Act  requires  details  under  the  head  "Invest- 
ments". Government  or  trust  securities,  investments  in 
shares,  debentures  and  bonds,  investments  in  scrips  of  sub- 
sidiary companies,  investments  in  immovable  properties 
have  to  be  separately  distinguished. 

The  treatment  of  "Cash"  varies  in  actual  practice  from 
bank  to  bank.  Some  banks,  e.g.  the  Allahabad  Bank,  include 
call-money  under  Cash.  The  Central  Bank  and  the  Bank 
of  Baroda  state  call-money  separately.  The  Punjab  Na- 
tional Bank  includes  under  Cash  drafts  in  hand  as  well.  It 
is  obvious  that  the  last  named  practice  tends  to  inflate  un- 
necessarily both  the  cash  and  deposits  of  the  aggregate 
banking  system.  With  less  scrupulous  banks,  the  practice 
may  lead  to  more  dangerous  consequence.  In  the  case  of 
the  Travancore  National  and  Quilon  Bank,  it  was  found 


ADVANCES,  INTEREST^  PROFIT  AND  LOSS  ACCOUNT  353 

that  "entries  in  bank  accounts  were  manipulated  at  the  end 
of  the  financial  year  by  drawing  bogus  cheques  and  then 
reversing  them  at  the  beginning  of  the  next  year  evidently 
with  the  object  of  concealing  the  real  financial  condition  of 
the  bank  and  to  make  it  appear  in  the  balance-sheet  that 
the  Bank  was  earning  a  profit." 

12.  Advances:  Bills  of  Exchange 

The  1913  Act  created  these  two  new  heads  which  had  no 
place  under  the  former  Act. 

-  Under  Advances,  the  1936  Act  distinguishes  loans  given 
to  subsidiary  companies  and  loans  to  directors  and  mana- 
gers. 

Most  Indian  joint-stock  banks  state  separately  Cash  Cre- 
dits, Demand  Advances  and  Overdrafts  on  the  one  hand 
and  loans  on  the  other.  But  the  Punjab  National  Bank  and 
the  Indian  Bank  put  these  items  under  one  omnibus  head. 
The  Union  Bank  which  followed  the  former  practice  till 
1936  began  to  lump  the  items  together  thereafter. 

13.  Interest  Accrued  on  Investment 

The  inclusion  of  a  sum  which  was  never  paid  and  was 
never  likely  to  be  paid  amounts  to  a  false  statement  involv- 
ing criminal  liability.  It  has  been  held  however  that  a 
bank  is  entitled  as  a  matter  of  course  "to  reckon  as  profit 
the  unpaid  interest  on  any  debt  which  is  honestly  consider- 
ed to  be  a  good  debt."18  In  another  case  of  this  kind  it  was 
laid  down  that  to  justify  payment  out  of  profits  of  this 
kind,  the  directors  should  have  satisfied  themselves  that  the 
debtor  "is  a  man  whose  liability  is  as  good  as  cash." 

14.  Profit  and  Loss  Account 

Banks  in  India  differ  very  much  in  the  amount  of  infor- 
mation they  give  in  their  Profit  and  Loss  Accounts.  The 
Bank  of  India,  Bank  of  Baroda,  Bank  of  Mysore,  Union 
Bank  and  the  Imperial  Bank  of  India  give  only  their  gross 
profits,  i.e.  the  difference  between  their  aggregate  earnings 
and  interest  paid  by  them  to  depositors  etc.  The  Allahabad 
Bank,  Indian  Bank,  the  Punjab  National  Bank,  etc.,  state 

18.    1930,     134  Ind.  Cas.  999  (Sind)  re:  Karachi  Bank. 
M.B.—23 


354  BANKING  REFORM  AND  BANKING  LEGISLATION 

both  the  aggregate  earnings  and  the  interest  paid.  All 
banks  give  of  course  their  expenses  and  their  net  profits. 
The  items  of  expenditure  are  not  however  arranged  on  the 
same  plan— although  fortunately  the  important  item 
"salaries"  is  invariably  stated  separately.  Alone  among 
the  leading  banks,  the  Central  Bank  of  India  gives,  in  addi- 
tion to  all  information,  the  interest  paid  on  fixed  and  cur- 
rent deposits  separately.  For  the  earlier  years,  it  used  to 
supply  the  aggregate  number  of  its  account-holders.  It 
is  clear  that  a  standardization  of  this  information  will  be 
a  great  aid  to  the  understanding  of  the  economy,  efficiency 
and  general  tendencies  both  of  individual  banks  and  the 
banking  system  as  a  whole.19 

15.    Law  relating  to  Officers  of  Banks 

The  law  holds  directors  and  officers  of  a  company  crimi- 
nally liable  for  false  statements  under  three  conditions.  In 
the  first  place,  the  statement  must  be  false  in  some  material 
particular.  Secondly,  the  statement  should  have  occurred 
in  one  of  the  documents  like  balance-sheet,  prospectus,  etc., 
required  for  the  purposes  of  the  Indian  Company  Law. 
Finally,  the  statement  should  have  been  made  wilfully, 
knowing  it  to  be  false.20 

The  falsity  of  a  document  may  lie  in  its  general  tenor, 
although  no  specific  statement  in  it  is  false.  When  mere 
technical  point  or  points  regarding  correct  or  incorrect  ac- 
counting are  involved,  no  wilful  dishonesty  can  be  imput- 
ed to  the  statements. 

The  civil  liability  of  officers  of  a  company  is  fixed  by 
Section  235  of  Act  1866,  Act  1913  and  Act  1936.  Officers  of  a 
company  are  made  answerable  for  misfeasance  or  breach 
of  trust  which  includes  breach  of  duty  whether  as  an  act 
of  commission  or  omission.  The  misfeasance  need  not  be 
a  fraud,  i.e.  involve  moral  censure.  To  fall  under  this  sec- 

19.  Cf.    "Now  the  figures  shown  in  the  bank  balance-sheets  are  neither  exhaus- 
tive nor  so  detailed  as  those  published  when  the  joint-stock  bankers  were  facing 
the  keen  competition  of  private  houses.     In  those  days  gross  profit,  net  profit, 
and  working  expenses  were  all  revealed  by  the  majority  of  joint-stock  banks. 
Now,  only  net  profits   are    shown."— The   Amalgamation   Movement   in   British 
Banking,  by  J.  Sykes,  p.  127. 

20.  1913,    22  I.  C.  432  (L.  Bur.)  Be:  Bank  of  Burma  Case. 


LAW  RELATING  TO  OFFICERS  355 

tion,  the  misfeasance  or  breach  of  duty  must  result  in  pecu- 
niary loss  and  the  applicant  must  have  a  direct  pecuniary 
interest  in  the  success  of  the  application.  For  purposes  of 
this  section  an  auditor  appointed  by  a  general  meeting  of 
the  shareholders  is  an  officer  in  the  company. 

Innocent  mistakes  or  mistakes  of  judgment  even  though 
they  may  be  so  gross  as  to  appear  absurd  and  ridiculous 
involve  no  liability.  To  make  officers  liable,  the  impru- 
dence must  amount  to  gross  negligence,  i.e.  absence  of  care 
such  as  a  reasonable  man  might  take  and  not  absence  of  all 
possible  care.  Non-attendance  at  board  meetings  would  not 
necessarily  be  negligence.  By  section  86  F  of  1936  Act, 
absence,  deliberate  and  without  the  leave  of  directors  from 
three  consecutive  meetings  or  for  a  period  of  3  months, 
whichever  is  longer,  is  reckoned  among  causes  requiring  the 
vacating  of  director's  office.  The  directors  are  justified  in 
trusting  the  accredited  officers  of  the  company  but  not  to 
the  exclusion  of  the  exercise  of  their  own  judgment. 

A  few  decided  cases  should  illustrate  the  kind  of  causes 
which  might  raise  the  issue  of  liability  with  special  refer- 
ence to  banking.  In  the  Union  Bank  case  it  was  held  that 
"acting  blindfold",  putting  "blind  faith"  in  the  ability  of  a 
manager,  "submitting  their  judgment  to  the  disposal  of  a 
manager"  made  directors  liable.  Further,  a  distinction  was 
drawn  between  banking  and  other  business.  In  other  busi- 
ness, to  keep  a  watch  and  check  on  a  fluctuating  stock  of 
goods  like  yarn  was  impracticable.  But  the  directors  of  a 
bank  could  and  should  see  that  bank  funds  are  not  offered 
to  worthless  debtors.  In  the  Sholapur  Bank  case21  th6 
directors  who  exercised  no  supervision  or  control  over  the 
managing  agents  were  held  recklessly  careless  and  grossly 
negligent.  The  1913  Act  permitted  articles  which  could  in- 
demnify directors  against  any  loss  or  damage  except  that 
caused  by  their  dishonesty.  But,  in  this  case,  such  articles 
though  enacted  did  not  avail  them.  An  overdraft  to  a  cus- 
tomer does  not  ordinarily  make  directors  liable  for  loss. 
But  if  a  part  of  the  overdraft  is  received  by  the  directors 
as  creditors  of  the  customers,  they  must  refund  it.  Direc- 
tors, it  has  been  suggested,  must  inform  themselves  of  the 

21.    1925,     47  All  669.     1929,     54  Bom.  226. 


356  BANKING  REFORM  AND  BANKING  LEGISLATION 

purpose  before  they  sign  cheques.  To  continue  to  carry  on 
business;  and  incur  debts  when  there  is  no  reasonable  pros- 
pect of  the  creditor  ever  receiving  repayment  has  been  sug* 
gested  as  proof  of  an  intent  to  defraud.  The  application 
of  such  a  principle  means  in  regard  to  receipt  of  deposits, 
etc.,  obvious  difficulties  for  officers  of  banks  which  are  on 
the  decline  but  not  quite  despaired  of. 
.  The  1913  Act  had  also  enacted  that  the  Indian  Limitation 
Act  applied  to  applications  made  under  this  section.  In 
actual  practice,  the  widest  divergence  of  opinion  prevailed 
as  to  the  date  from  which  the  limitation  began  to  run.  The 
date  of  liquidation,  date  of  misfeasance  or,  as  in  the  case  of 
Bombay,  date  of  the  first  ascertainment  of  the  loss  by  the 
company  were  taken  as  the  point  from  which  the  limitation 
began  to  run  and  the  period  was  variously  two  years,  three 
years  or  six  years  (Bombay)  under  different  sections  of  the 
Act.  The  Act  of  1936  terminated  the  confusion  by  pres- 
cribing 3  years  which  should  run  from  the  date  of  appoint- 
ment of  liquidator  or  misfeasance,  whichever  gives  the 
longer  period. 

No  single  cause  has  been  more  responsible  for  the  diffi- 
culties of  banks  in  India  than  the  dishonesty  or  incompe- 
tency  of  their  management,  particularly  the  directors.  Yet, 
no  cause  is  more  intractable  to  human  remedy.  The  law  can 
be  of  use  here  only  in  a  post-mortem  manner.  The  fact  is 
that  the  qualifications  to  be  sought  in  directors  are  of  such 
a  diverse  character  that  any  legal  definitions  or  disqualifica- 
tions are  impracticable.  General  or  administrative  experi- 
ence, technical  ability,  ability  to  introduce  business,  local 
knowledge  or  influence,  control  over  other  businesses — these 
are  some  of  the  qualities  which  open  the  way  to  director- 
ship. Yet,  there  can  be  little  doubt  that  much  less  worthy 
qualifications  play  too  often  a  decisive  part  in  the  selections. 
Concentration  of  power  in  a  few  hands  or  narrow  social 
groups  and  cliques,  interlocking  of  interests  to  a  dangerous 
extent,  predominance  of  old  age  or  the  hereditary  principle, 
these  are  some  of  the  crying  evils  of  company  management 
even  in  most  advanced  countries  like  England.  Unfortu- 
nately, while  it  is  easy  to  state  the  evils,  it  is  not  easy  to 
suggest  remedies.  The  vigilance  of  shareholders,  which  in 


LAW  RELATING  TO  OFFICERS  351? 

practice  is  only  a  counsel  of  perfection,  high  standard  of 
business  morality  and  public  character  which  are  always 
slow  to  take  root  and  grow,  particularly  in  a  confused  and 
heterogeneous  soil  like  that  of  India — these  are  the  only 
ultimate  basis  of  our  so-called  financial  democracy  of  joint- 
stock  enterprises.  In  the  meanwhile,  it  may  be  feasible  to 
give  the  Reserve  Bank  ex-officio  representation  on  the 
boards  of  scheduled  and  certain  non-scheduled  banks  as  a 
guardian  of  public  interests  without  the  right  to  vote. 

Till  1913,  no  qualifications  were  required  of  persons  who 
acted  as  auditors.  The  Act  of  1913  for  the  first  time  pres- 
cribed the  certificate  of  the  Governor-General  as  a  necessary 
qualification  in  the  case  of  all  public  companies.  The  Act 
of  1936  requires  the  same  qualification  of  auditors  for  those 
private  companies  which  are  subsidiaries  of  public  com- 
panies. 

The  rest  of  the  section  purports  to  ensure  the  indepen- 
dence of  the  auditors.  The  auditor  is  appointed  by  the 
general  meeting  of  the  shareholders.  In  order  to  prevent 
any  surprise  displacement  or  appointment  of  auditors,  a 
notice  of  14  days  prior  to  the  meeting  is  prescribed.  The 
directors  may  fill  a  casual  vacancy.  Unfortunately,  the 
judges  are  not  agreed  on  the  definition  of  a  casual  vacancy. 
The  remuneration  of  auditors  is  fixed  by  the  general  meeting 
which,  however,  may  and  does  delegate  the  task  to  the 
directors  with  the  words  "at  a  remuneration  to  be  agreed." 
A  director,  officer  of  company,  partner  of  director,  a  person 
in  employment  of  director  or  officer  cannot  be  appointed  as 
auditor.  The  Act  of  1936  disqualified  persons  indebted  to 
the  company  and  auditors  who  became  indebted  subsequent- 
ly to  their  appointment  to  the  office. 

By  Sub-section  3,  Section  145  of  the  Acts  of  1913  and 
1936,  the  auditor  is  relieved  of  the  responsibility  of  examin- 
ing the  accounts  of  branches  beyond  the  limits  of  India. 
It  would  appear  from  this  by  implication  that  he  must 
attend  and  audit  on  the  spot  all  branches  within  the  limits 
of  India.  Such  an  inference  is  regarded  as  valid  by  some 
authorities  on  the  subject. 

Experience  teaches  that  legal  precautions  to  ensure  the 
independence  of  auditors  or  wider  powers  conferred  on: 


358  BANKING  REFORM  AND  BANKING  LEGISLATION 

\ 

them  to  obtain  information  are  of  little  use  in  practice, 
Actual  appointments  are  always  made  by  the  directors 
and  there  are  forms  of  favour  and  bribery  so  subtle  that 
they  can  never  fall  within  the  clutches  of  law.  It  may  be 
that  bank-failures  are  more  due  to  the  laxity  of  supervi- 
sion and  management  than  to  inadequate  performance  of 
duty  by  auditors.22  Nevertheless,  no  steps  should  be 
omitted  which  can  make  directors  more  alert  and  the  public 
more  confident  about  the  security  of  their  funds.  Propo- 
sals have  been  made  to  arrange  for  an  outside  audit  and 
examination  which  will  extend  beyond  ascertainment  of 
facts  to  advice  and  criticism.  The  Indian  Companies  Act 
itself  empowers  shareholders  of  a  bank  holding  one-fifth  of 
the  shares  to  approach  the  local  Government  for  special 
investigation  and  report.  The  former  suggestion  has  been 
disapproved  as  opening  a  loophole  for  shoving  of  respon- 
sibility from  the  management  to  outside  examiners.  The 
latter  has  proved  futile  in  practice  and  incapable  of  im- 
provement.23 Other  proposals  like  association  of  a  share- 
holders' committee  with  audit,  more  frequent  reports,  etc.,, 
offer  no  better  solutions.  The  proposals  to  make  auditors 
liable  for  omission  to  state  material  facts  in  their  reports 
and  in  the  presentation  of  accounts  of  a  bank  are  at  best 
merely  a  post-mortem  consolation.  The  only  logical  and 
final  settlement  of  the  vexed  problem  is  to  look  on  the 
audit  of  public  companies  as  a  public  and  national  concern 
and  to  constitute  a  State  service  of  accountancy  for  the 
purpose.  A  first  step  towards  the  goal  would  be  to  begin 
with  banks,  money-lenders  and  others  cognate  concerns  and 
since  the  Reserve  Bank  is  in  direct  charge  of  our  banking 
welfare,  it  would  be  well  to  entrust  it  with  the  formation 
and  management  of  such  a  service.  Such  an  audit  power 
has  the  additional  merit  of  giving  the  Reserve  Bank  a 
closer  insight  into  the  banking  situation  from  time  to  time 
and  making  its  credit-control  to  that  extent  much  more 
effective.  The  expenses  of  this  audit  could  be  easily  raised 
from  the  banks  themselves  by  levying  a  certain  percentage 
on  their  resources. 

22.  Central  Banking  Inquiry  Committee  Report,  p.  470,  Para  723. 

23.  ibid.,  Paras  720,  723. 


LAW  RELATING  TO  ORGANIZATION  AND  MANAGEMENT       359 

16,    Law  relating  to  Organization  and  Management 

-  One  great  difficulty  of  banking  legislation  is  to  define 
what  a  bank  is.  In  the  absence  of  such  a  definition,  there 
must  always  be  some  doubt  as  to  the  exact  concerns  to 
which  its  provisions  should  apply. 

English  law  which  till  1936  governed  banking  practice 
in  this  country  as  much  as  in  England  makes  no  effort  to 
give  a  precise  definition  of  a  bank  or  banking  business. 
Nevertheless,  it  imposes  obligations  on  all  concerns  which 
claim  to  be  banks,  like  periodic  publication  of  balance 
sheets,  etc.24  It  has  even  created  a  penal  offence  in  making 
an  improper  use  of  the  phrase  "banking  business."25  But 
whether  a  particular  concern  is  a  bank  or  not,  English  law 
is  content  to  treat  as  a  question  of  fact,  to  be  determined 
in  each  particular  case  in  the  light  of  prevalent  beliefs, 
methods  and  practices.26 

The  Indian  Central  Banking  Enquiry  Committee,  1931, 
considered  suggestions  on  this  behalf  from  the  Government 
of  India,  the  Royal  Commission  on  Indian  Currency  and 
Finance,  1926,27  Provincial  Enquiry  Committees  and  several 
witnesses.  It  recorded  its  conclusion  that  "the  task  of  defin- 
ing the  term  'bank'  or  'banker*  which  has  been  regarded  as 
well-nigh  impossible  in  other  countries,  is  much  more  so 
in  India  where  a  definition  cannot  be  drawn  up  without 
excluding  many  firms  of  indigenous  bankers  and  individuals 
who  do  a  considerable  portion  of  the  financing  of  the 
country."28 

Many  countries  have  sought  to  meet  this  difficulty  by 
requiring  banks  to  incorporate  themselves  under  special 
laws  which  aim  at  the  regulation  of  the  organization  and 

24.  Companies   (Consolidated)  Act  1908.     Sec.  1;   108;   113;   251;  256. 

25.  Moneylenders  Act  1927.    Sec.  4  sub-sec.  3. 

26.  In  Todd  v.  World  of  Finance  Syndicate  Ltd.,  Mr.  Frederick  Strasser,  Assistant 
General  Manager  of  London  and  South  Western  Bank,  in  evidence  for  the  defen- 
dents,  stated  that  the  methods  of  the  John  Bull  Bank  were  not  those  ordinarily 
adopted  by  joint-stock  banks.     The  jury  found  the  verdict  for  the  defendents 
with  costs. 

27.  Para,  162  :     The  Commission  proposed  this  definition  :     "The  term  bank  or 
banker  should  be  interpreted  as  meaning  every  person,  firm  or  company  using 
in  its  description  or  title    bank'   or  'banking*  and  every     company     accepting 
deposits  of  money  subject  to  withdrawal  by  cheque,  draft,  or  order." 

28.  Majority  Report,  p.  453. 


360  BANKING  REFORM  AND  BANKING  LEGISLATION 

management  of  banks  and  their  supervision.  Other  coun- 
tries like  Italy  and  Germany  have  created  special  authori- 
ties to  license  banks  and  have  specified  grounds  on  which 
license  may  be  declined  or  banks  in  actual  operation  may 
be  closed.  In  Germany,  another  authority,  a  Supervision 
Board,  watches  and  regulates  the  practices  and  internal 
management  of  banks. 

The  Indian  Banking  Enquiry  Committee  made  a  com- 
mendable effort  to  combine  the  elasticity  of  British  practice 
with  the  certain  protection  of  law  on  specific  points.  As 
we  shall  presently  notice,  it  indicated  certain  points  on 
which  banking  legislation  was  desirable.  At  the  same 
time,  it  suggested  the  formation  of  a  Bankers'  Association 
whose  membership  should  automatically  create  in  a  cons- 
picuous manner  the  necessary  assurance  of  reputable  status 
and  practice.  Till  such  an  Association  came  into  existence, 
the  committee  proposed  that  banks  should  be  required  to 
take  out  licenses  from  the  Reserve  Bank  of  India,  which 
must  naturally  insist  on  conformity  to  certain  standards.29 

The  Indian  Companies  Act  of  1936  adopted  the  bolder 
but  more  doubtful  course.  Section  277F  defines  a  banking 
company  as  "a  company  which  carries  on  as  its  principal 
business  the  accepting  of  deposits  of  money  on  current 
account  or  otherwise,  subject  to  withdrawal  by  cheque, 
draft  or  order."  The  qualifying  word  "principal"  must 
itself  create  not  a  little  embarrassment  in  the  future.  But, 
not  content  with  this  ambiguity,  17  clauses  more  were 
added  to  catalogue  incidental  businesses  or  business  ope- 
rations which  banking  companies  may  undertake  within 
the  bounds  of  law.  The  catalogue  finds  place  for  activities 
as  widely  different  as  agency  business  other  than  that  of 
managing  agents  (unless  the  managing  agency  relates  to 
a  bank  itself)  at  the  one  end  and  financing  or  promoting 
a  business  undertaking  or  industry  at  the  other.  It  is 
obvious  that  if  precision  is  the  only  virtue  and  justification 
of  a  legal  definition,  the  definition  adopted  by  the  Indian 
Company  Law  cannot  be  accused  of  it. 

One  jriay  well  compare  this  essay  in  legal  ingenuity  with 

29.    Majority  Report,  pp.  455-6. 


6RGANISATION  361 

the  definition  offered  by  a  great  authority  on  banking  law 
and  practice  like  Sir  John  Paget.30  After  enumerating  each 
specific  characteristic,  Sir  John  Paget  finds  himself  com- 
pelled to  recognise  acceptance  by  public  opinion  as  one  if 
not  the  sole  mark  of  a  bank.  This  is  tantamount  to  a  con- 
fession that  banking  is  a  dynamic  process  and  that  reputable 
practice  as  understood  by  contemporary  bankers  is  the  final 
court  of  appeal  in  every  doubt. 

17.    Organisation 

The  Indian  Companies  Act,  1936  lays  down  that  no 
banking  company  incorporated  after  the  commencement 
of  the  Act  shall  commence  business  unless  shares  have 
been  allotted  to  an  amount  sufficient  to  yield  Rs.  50,000 
as  working  capital.  We  have  already  noted  how  the 
creation  of  banks  with  small,  insignificant  capital  was  a 
very  usual  device  with  charlatans  and  adventurers  to 
defraud  the  public  of  its  hard-earned  savings.  The  restric- 
tion introduced  by  this  Act  undoubtedly  terminates  one 
grave  scandal  in  the  field  of  banking. 

It  is  possible  to  claim  some  historical  or  logical  justifica- 
tion for  the  minimum  fixed.  During  the  four  periods  over 
which  we  have  studied  bank-failures  in  the  past,  more 
than  three-fourths  of  the  failures  are  accounted  for  by  banks 
with  a  paid-up  capital  of  1  lakh  and  less.  Of  these  defunct 
banks,  those  with  a  paid-up  capital  of  Rs.  50,000  to  1  lakh 
were  about  one-fourth  of  the  aggregate  in  1913-14,  about 
one-sixth  in  1915-20,  about  one-seventh  in  1921-30  and  one- 
tenth  in  1931-34.  Banks  with  paid-up  capital  of  Rs.  50,600  and 
less  no  doubt  constitute  the  bulk  of  the  problem  of  bank 
failures.  The  failures  of  those  in  the  class  immediately  above 
this  forms  also  a  substantial  though  fortunately  declining 
proportion  of  the  whole. 

Since  capital  and  reserve  constitute  the  guarantee  fund 
to  the  creditors  of  banks,  it  is  logical  that  the  fund  should 

30.  Sir  John  Paget  in  his  Law  of  Banking  sums  up  the  legal  decisions  on  this 
subject  in  the  following  manner  : — 

"No  one  and  no  body,  corporate  or  otherwise,  can  be  a  'banker*  who  does  not 
(i)  take  deposit  accounts,  (ii)  take  current  accounts,  (iii)  issue  and  pay  cheques 
drawn  on  himself,  (iv)  collect  cheques,  crossed  and  uncrossed,  for  his  customers. 
Banking  must  be  his  known  occupation  and  recognised  by  the  public  as  much." 


362  BANKING  REFORM  AND  BANKING  LEGISLATION 

bear  some  proportion  to  the  liabilities  of  banks.  The  fixing 
of  a  minimum  does  not  satisfy  this  logical  test  although 
it  eliminates  many  doubtful  and  obscure  ventures.  Some 
Countries  have  met  both  these  difficulties  by  prescribing 
the  minimum  according  to  the  population  of  the  place 
where  a  bank  is  intended  to  operate.  While  population  is 
no  doubt  a  good  index  generally  to  the  banking  potentiali- 
ties of  a  place,  the  criterion  is  obviously  unsuited  for 
countries  in  which  branch-banking  is  allowed  without 
restriction.  We  have  had  occasion  already  to  notice  how 
in  India  many  banks  with  small  resources  of  their  own  in- 
dulge in  the  creation  of  branches  which  cannot  be  justified 
by  any  canons  of  prudence  or  sound  banking  practice. 
It  would  not  be  feasible  either  to  prescribe  any  definite 
proportion  between  their  capital  and  reserves  and  their 
liabilities.  In  an  earlier  chapter,  we  have  analysed  how 
this  proportion  is  influenced  by  factors  outside  as  well  as 
within  the  control  of  banks  and  by  factors  some  of  which 
are  temporary  in  their  incidence  while  others  are  more  or 
less  permanent.31  Besides,  even  though  a  bank  may  decide 
to  make  changes  in  its  capital  structure,  banks  like  all 
other  enterprises  have  to  bide  for  opportune  moments  to 
appeal  to  the  capital  market.  Perhaps,  these  were  the  diffi- 
culties which,  in  Spain,  led  to  the  conclusion  that  each 
bank  should  have  its  minimum  fixed  according  to  its 
special  circumstances. 

The  Indian  Companies  (Amendment)  Act,  1936,  requires 
that  every  banking  company  should,  out  of  the  declared 
profits  of  each  year  and  before  any  dividend  is  declared, 
transfer  a  sum  equivalent  to  not  less  than  20  per  cent 
of  such  profits  to  the  reserve  fund  until  the  amount  of  the 
said  fund  is  equal  to  the  paid-up  capital.  In  other  words, 
provision  is  made  that  banks  with  less  than  1  lakh  of  owned 
resources  should  not  exist  in  the  future.  The  reserve  fund 
must  be  invested  in  Government  securities  or  kept  on 
deposit  in  a  special  account  in  a  scheduled  bank.32 

It  is  but  fair  that  a  part  at  least  of  the  profits  should  be 
used  to  increase  the  security  of  the  creditors  and  depositors 

31.  Ch.  V  §  1  &  2. 

32.  Sec.  277K. 


ORGANISATION  363 

who  supply  the  bank  the  bulk  of  its  resources.  20  per  cent 
of  the  profits  is  by  no  means  too  large  a  proportion.  In  view 
of  the  all  too  common  tendency  to  declare  high  dividends 
and  raise  the  value  of  bank  shares  to  fictitious  levels,  this 
clause  may  prove  a  very  healthy  influence  on  banking 
policies.  Nevertheless,  a  lower  percentage  during  the  first 
ten  years  of  a  bank's  life  with  gradual  increases  every  five 
years  might  have  been  a  justifiable  concession  in  favour 
of  new  banks. 

Concentration  of  banking  resources  in  a  few  banks  con- 
tributes materially  to  the  stability  of  a  banking  system.33 
In  India,  as  we  have  noticed,  banks  have  grown  in  size  less 
by  the  process  of  amalgamation  and  more  by  creation  of 
branches.  This  unrestricted  freedom  to  create  branches 
however  brings  with  it  its  own  special  evils  which  require 
to  be  carefully  inquired  into  and  firmly  dealt  with.  There 
can  be  little  doubt  that  branch  banking  appeals  to  many 
disreputable  concerns  as  a  mere  device  to  collect  resources. 
Small  and  backward  places  are  particularly  exposed  to  this 
kind  of  exploitation.34  It  is  also  to  be  feared  that  Indian 
banks  have  not  yet  developed  an  efficient  technique  of 
running  bank  branches.  This  efficiency  of  technique  rests 
on  a  four-fold  basis — recruitment  and  training  of  qualified 
staff,  a  strict  system  of  audit  and  inspection,  adequate  dis- 
cretion to  the  local  manager  combined  with  a  proper  degree 
of  regulation  from  the  headquarters,35  and  finally,  close 
contact  and  interchange  of  views  and  information  between 
the  local  branch  and  businessmen.  On  every  one  of  these 
points,  Indian  banks  have  yet  to  prove  their  capacity  to 
adapt  themselves  in  an  original  way  to  Indian  conditions 
and  limitations. 

Till  India  reaches  her  maximum  growth  in  banking  facili- 

33.  Ch.  II  §  5,  6,  7. 

34.  Ch.  II  §  6;  Ch.  IX  §  5,  6,  7,  8. 

35.  Cf.  "The  managers  of  the  big  branches  of  German  banks  before  the  crisis 
of  1930  were  highly  trained,  they  were  really  managers     and    -not  just  'clerks'. 
Incidentally,  this  was  also  reflected  in  their  remuneration  which  was  certainly 
far  above  that  of  a  manager  of  a  branch  of  a  British  bank.    Nevertheless,  the 
final  decision  had  to  rest  with  the  control  board  in  Berlin  and  in  that  way,  the 
machinery  had  become  unwieldy.    The  managers  in  Berlin  were  almost  invariably 
overworked  and  were  deprived  of  the  possibility  of  confining  themselves  to  big 
issues." 


364  BANKING  REFORM  AND  BANKING  LEGISLATION 

ties,  some  restrictions  on  the  freedom  to  create  branches 
seem  unavoidable.  The  minimum  conditions  as  to  paid-up 
capital  and  reserves  prescribed  by  the  law  of  1936  may  by 
themselves  act  as  a  check  on  this  evil.  Our  earlier  analysis 
however  has  established  how  difficult  it  is  to  define  or 
assure  ratios  of  capital  and  reserves  to  deposit  liabilities 
which  can  operate  effectively  in  different  places  and  at 
different  times.36  It  has  been  sometimes  suggested  or  pro- 
posed that  branches  in  the  bigger  places  should  be  under 
an  obligation  to  conform  to  certain  special  requirements  as 
to  capital.  In  other  words,  it  is  proposed  to  abandon  the 
present  principle  of  uniform  minimum  capital  for  the 
country  as  a  whole  and  to  introduce  for  the  benefit  of  certain 
places  the  principle  of  wealth  of  the  area  of  operation  as 
the  basis  of  capital  requirements.  It  is  arguable  against 
this  that  protection  is  more  required  for  the  smaller  and 
more  obscure  places  than  for  big  cities  which  always  con- 
tain banks  of  great  repute.  The  proposal  is  besides  a 
denial  by  implication  of  the  existence  of  business  in  the 
bigger  places  suitable  only  to  small  banks.  A  more  logical 
and  certainly  more  effective  alternative  would  be  to  prohi- 
bit the  expansion  of  individual  banks  to  such  an  extent  that 
the  average  of  resources  per  office  falls  below  a  certain 
minimum.  It  may  be  recalled  that  this  average  for  Indian 
banks  of  class  A  and  B  was  about  7.7  lakhs  in  1936.  When 
the  big  seven  banks  were  not  taken  into  account,  the  aver- 
age fell  to  about  3£  lakhs.37  It  should  be  no  hardship  for 
our  banks  which  are  required  in  future  to  show  a  minimum 
capital  and  reserve  of  Rs.  1  lakh,  to  have  to  produce  at 
least  a  minimum  of  3  lakhs  per  office  on  the  average  as 
proof  of  the  confidence  commanded  by  them. 

A  more  difficult  question  relates  to  wasteful  competition. 
It  is  probable  that  much  of  the  recent  branch  extension  is 
in  the  nature  of  a  struggle  among  bigger  banks  not  to  be 
out-distanced  by  each  other.  If  such  competition  lowers 
ultimately  the  cost  of  borrowing  to  the  public,  trade  and 
industry  are  no  doubt  benefited.  But  very  frequently,  the 
cost  of  uneconomic  competition  is  transferred  to  the  public 

36.  Ch.  V  §  1  and  2. 

37.  Ch.  II  §  6. 


ORGANISATION  365 

in  the  shape  of  lower  deposit-rates  and  higher  cost  of 
borrowing.  It  is  more  than  likely  that  some  of  the  bigger 
financial  centres  are  overcrowded  with  bank-branches  and 
that  in  other  places,  indiscriminate  competition  has  under- 
mined the  position  of  certain  old  and  well-established 
concerns. 

Within  broad  limits,  population  should  be  a  simple  and 
intelligible  index  to  the  banking  potentialities  of  a  place, 
If  a  greater  degree  of  exactness  were  desired,  the  index 
could  be  adjusted  so  as  to  discriminate  between  places 
which  are  mainly  industrial  and  possess  a  truly  urban 
character  and  those  which  are  mainly  markets  for  agricul- 
tural produce  and  on  that  account  retain  a  predominantly 
rural  character.  A  little  intensive  investigation  should  be 
sufficient  to  fix  appropriate  ratios  of  population  per  branch 
from  which  departure  should  be  permitted  only  under  ex- 
ceptional conditions.  It  is  natural  to  think  of  the  Reserve 
Bank  as  the  proper  agent  for  the  regulation  of  branches  on 
these  lines.  When  applications  for  licenses  to  open 
branches  exceed  the  maximum  fixed  by  the  population  ratio, 
preference  should  as  a  rule  be  given  to  those  banks  which 
show  a  large  volume  of  resources  per  office.  As  for 
exchange  banks  and  foreign  banks  generally,  their  unham- 
pered extension  into  the  interior  has  been  detrimental  to 
national  interests  and  their  further  encroachments  must  be 
prohibited  by  law.  The  small  economy  of  financing  move- 
ments of  goods  from  the  interior  to  the  ports  and  from  the 
ports  to  their  destinations  abroad  as  a  single  transaction  is 
nothing  as  compared  with  the  greatest  of  all  economies — 
the  creation  of  a  truly  national  banking  system. 

A  grave  defect  of  Indian  banks  at  present  is  the  unsatis- 
factory way  in  which  bank  staffs  are  generally  recruited, 
the  unsatisfactory  facilities  offered  for  training  and  self- 
improvement  and  the  unsatisfactory  incentives  held  out  to 
industry  and  ability.  It  is  not  possible  to  overstate  the 
grave  implications  of  this  situation  for  the  future  of  Indian 
banking.  If  the  creation  of  a  sense  of  national  pride  and 
confidence  in  our  banks  is  our  objective,  nothing  will 
achieve  it  more  quickly  than  a  well-founded  public  convic- 
tion that  system  and  standards  and  not  arbitrariness  and 


366  BANKING  REFORM  AND  BANKING  LEGISLATION 

disregard  of  merit  and  qualifications  weigh  in  the  selection 
and  promotion  of  our  bank  personnel.  The  time  has  arrived 
when  service  in  a  bank  should  carry  with  it  the  same 
degrees  of  stability,  assured  prospects  and  fair  deal  as 
service  in  a  State  Department.  In  the  matter  of  initial  re- 
cruitment at  least,  the  Reserve  Bank  and  the  scheduled 
banks  could  and  should  take  the  lead  to  devise  in  co-opera- 
tion a  common  machinery  on  the  lines  of  Public  Services 
Commission.  While  shareholders  may  well  claim  their 
profits  and  the  directors  their  power  over  the  management 
of  banks,  the  public  who  contribute  the  bulk  of  the  working 
resources  may  well  insist  on  employment  in  banks  being 
dealt  with  as  a  public  concern. 

Not  less  important  than  original  recruitment  is  the  ques- 
tion of  selection  for  higher  and  more  responsible  posts.  It 
is  to  be  feared  that  the  present  organisation  of  our  bank 
staffs  creates  a  pressure  of  vested  interests  which  does  not 
allow  any  distinction  to  be  made  between  abilities  suited 
for  routine  and  clerical  work  and  ability  required  for 
directive  and  responsible  work.  The  most  practical  escape 
from  this  corroding  and  intolerable  situation  would  be  to 
make  a  triple  division  of  banking  services,  to  prescribe  suit- 
able minimum  qualifications  for  each  service  and  finally 
to  institute  corresponding  examinations  to  confer  the 
requisite  qualifications. 

18.    Management  of  Banks 

We  have  insisted  in  various  places  that  certain  special 
features  of  banking  business  justify  safeguards  in  public 
interests  which  may  not  be  so  expedient  in  the  case  of 
joint-stock  enterprise  in  general.  This  argument  has 
sometimes  been  extended  to  support  a  very  strict  regula- 
tion of  the  internal,  day-to-day  management  of  a  bank  as 
well.  Indeed,  much  recent  legislation  in  many  countries 
seems  to  suggest  that  law  can  take  the  place  of  that  wisdom 
which  according  to  Gilbert  "implies  a  due  proportion  of  all 
the  faculties"  and  that  banking  talent  which  according  to 
the  same  authority  "consists  more  in  the  union  of  a  number 
of  qualities,  not  in  themselves  individually  of  a  striking 
character  but  rare  only  in  their  combination  in  the  same 


MANAGEMENT  367 

person."  If  to  the  already  formidable  list  of  Gilbert,  we 
add  one  more  virtue,  namely,  honesty,  the  absurdity  of 
seeking  in  law  a  means  to  banking  success  and  stability  be- 
comes at  once  self-evident.  As  a  matter  of  fact,  a  close 
examination  of  most  of  the  aforesaid  banking  legislation 
will  reveal  that  its  object  was  more  to  allay  panic  and 
restore  public  confidence  by  means  of  a  visible  gesture  than 
to  force  any  departures  on  actual  banking  practice.  In  the 
case  of  India,  certain  special  features  of  the  situation  make 
such  legislative  interference  highly  inexpedient. 

It  is  true  that  legislation  of  this  kind  does  not  lack  pre- 
cedent in  this  country.  The  various  charters  of  the 
Presidency  Banks  and  the  Imperial  Bank  of  India  furnish 
examples  of  regulation  on  almost  every  conceivable  point 
— cash  ratios,  period  and  currency  of  loans,  interest-rates, 
security,  limits  on  individual  loans,  etc.  But  it  must  be 
borne  in  mind  that  these  restrictions  had  one  specific  object 
in  view — the  safety  of  public  funds  which  also  constituted 
the  compensation  for  the  restrictions.  Banking  and  finan- 
cial needs  of  the  whole  country  are  however  incapable  of 
definition  with  reference  to  a  single  objective  and  could  not 
for  that  reason  be  fitted  into  the  framework  of  a  general  law. 

Banks  in  India  disclose  highly  regional  and  individual 
characteristics.  According  as  they  are  regional  or  country- 
wide, their  liabilities  and  assets  show  different  composition 
and  bear  the  mark  of  the  specialised  services  they  are  per- 
forming. Besides,  still  on  the  threshold  of  our  banking 
development,  we  have  yet  to  evolve  a  type  of  bank  or 
banking  system  which  really  answers  the  special  needs  and 
circumstances  of  the  country.  In  countries  like  Germany, 
legislation  was  comparatively  easier  and  harmless  as  banks 
had  already  reached  their  full  banking  development  and 
were  distinguished  by  a  certain  degree  of  homogeneity. 
Even  if  these  difficulties  were  absent,  k  is  difficult  to  con- 
ceive how  law  could  permit  the  large  degree  of  cyclical  and 
secular  adaptation  which  we  have  already  remarked  upon 
in  our  earlier  analysis.  The  inflation  of  war  years,  the 
high  interest-rates  and  reviving  trade  of  post-war  years, 
the  dramatic  fall  of  interest-rates  and  stagnation  of  trade 
after  the  crisis  of  1929-30 — these  caused  such  profound 


'368  BANKING  REFORM  AND  BANKING  LEGISLATION 

changes  in  the  cash  ratios,  investment  policies,  volume  of 
loans,  etc.  of  banks  that  it  is  difficult  to  make  out  how  law 
-could  cope  with  them.  Legislation  must  either  prove  futile 
or  invite  the  very  evils  and  disaster  which  it  is  intended  to 
forestall. 

19.     Liquidation  of  Banks 

Our  concern  till  now  has  been  with  the  good  manage- 
ment and  stability  of  banks  which  are  in  operation.  The 
special  difficulties  arising  out  of  legal  and  administrative 
procedure  concerning  banks  which  suspend  payment  are 
not  less  numerous,  vexatious  and  from  the  standpoint  of 
public  weal,  less  urgent.  Some  of  these  difficulties  have 
been  already  discussed  by  us  in  the  course  of  our  study. 
Liquidation  of  banks  and  disbursement  of  dividends  to 
creditors  engross  as  a  rule  not  less  than  ten  years  and  in 
some  cases,  much  longer  periods  even  have  been  recorded. 
Although  facilities  for  reconstruction  are  defined  in  law, 
practical  difficulties  almost  always  frustrate  such  efforts. 
In  many  cases,  indeed,  such  schemes  of  reconstruction  are 
mere  devices  either  to  secure  a  continued  lease  of  life  for 
abuse  of  public  confidence  or  to  evade  legal  consequences, 
which  await  a  public  investigation  incidental  to  compulsory 
winding-up.  Proposals  for  voluntary  winding-up  or  even 
amalgamations  are  more  often  than  not  inspired  by  similar 
motives.  It  is  clear  that  a  rehaul  of  the  law  to  suppress  these 
evils  cannot  be  deferred  for  long. 


CHAPTER    XI 

THE  LONG-TERM  CAPITAL  MARKET 

EVEN  IF  banks  attracted  nothing  but  temporary  savings  of 
the  public  and  placed  them  in  nothing  but  genuine  short- 
term  investments,  their  influence  on  the  long-term  capital 
market  would  not  be  less  real  or  less  than  considerable.1 
As  a  matter  of  fact,  however,  their  contacts  with  this  mar- 
ket are  in  certain  ways  quite  direct  and,  in  the  aggregate, 
as  decisive  as  those  of  other  similar  institutions.  In  the 
first  place,  banks  have  their  long-term  investments,  changes 
in  the  volume  and  character  of  which  are  important  factors 
bearing  on  the  course  of  interest-rates.  Secondly,  in  different 
banking  systems,  fixed  deposits  tend  to  be  either  a  larger 
or  smaller  proportion  of  total  deposits  and  run  either  into 
longer  or  shorter  periods.  In  this  country,  for  example, 
fixed  deposits  form  a  larger  proportion  and  cover  longer 
periods  of  time  than  in  England  or  the  United  States.  If 
the  banking  system  itself  holds  a  larger  proportion  of  the 
long-term  savings  of  a  country,  it  is  obvious  that  its  influ- 
ence over  long  and  short  rates  is  proportionately  enhanced. 
Thirdly,  when  banks  offer  their  advice  and  services  for 
security  dealings  or  place  their  funds  at  the  disposal  of 
industry  in  anticipation  of  public  investments  later,  or 
themselves  embark  their  funds  on  such  ventures,  they  be- 
come an  important  agency  in  the  working  of  this  market. 
Finally,  with  the  creation  of  a  Central  bank,  an  instrument 
is  forged  by  means  of  which  the  long  rate  can  be  controlled 
almost  as  directly  and  as  decisively  as  short  rates. 

The  basic  problems  of  long-term  investment  are  two.  In 
the  first  place,  there  is  the  problem  of  aggregate  investment 
which  should  be  such  that  it  corresponds  to  the  division  of 
their  incomes  by  consumers  between  saving  and  investment. 
In  the  second  place  investment  should  flow  into  different 
lines  of  production  in  accordance  with  the  index  or  profit- 
ability as  given  by  the  consumers'  demand.  As  the  first 
problem  is  generally  believed  to  be  one  of  monetary 

1.    Ch.  Ill,  Introductory  and  §  1  and  6. 
M.B.— 24. 


370  LONG-TERM  CAPITAL  MARKET 

management,  it  is  properly  held  to  be  within  the  sphere  and 
constitutes  the  responsibility  of  the  banking  system.  As  for 
the  second  great  task  of  the  investment  market,  the  respon- 
sibility is  at  present  shared  by  different  agencies  in  different 
ways.  Among  them,  the  stock  exchanges  are  looked  on  as 
the  main  mechanism  developed  by  the  capitalist  system. 
The  promoter  and  underwriter,  the  banks  and  issue-houses 
act  as  auxiliaries  or  supplementary  aids  to  the  stock 
exchanges. 

I.    STOCK  EXCHANGES  IN  INDIA* 

1.  Legal  Status 

Originally,  stock  exchanges  were  mere  voluntary  asso- 
ciations largely  for  the  purpose  of  regulating  fees  and 
charges.  It  was  not  till  after  great  lapse  of  time,  that 
these  associations  recognised  that  they  owed  certain  respon- 
sibilities towards  the  public.  In  the  case  of  more  recent 
bodies,  which  lacked  experience  and  tradition  to  keep  them 
in  the  straight  path,  law  has  had  to  step  in  as  a  substitute 
for  that  experience  and  tradition. 

The  London  Stock  Exchange  is  perhaps  the  only  example 
today  of  an  autonomous  exchange  unfettered  by  any  out- 
side restrictions.  But  the  history  of  "Britain's  Bourse  for 
stock  jobbing  and  securities"  goes  back  to  the  days  of 
Queen  Elizabeth  who  herself  inaugurated  it  amidst  great 
pomp  and  patriotic  fervour.  Even  today,  the  London  Stock 
Exchange  has  no  legal  monopoly  of  its  business.  The 
growth  of  Exchanges  outside  London  in  more  recent  times 
has  indeed  tended  to  create  some  acute  problems  for  the 
parent  body. 

The  New  York  Stock  Exchange  was  for  a  long  time  a 
voluntary  body  till  in  1933  financial  and  banking  collapse 
and  public  clamour  compelled  the  Government  to  impose 
on  it  statutory  regulation  and  registration.  The  Compagnie 
des  Agents  de  Change  of  Paris  is  a  privileged  body  created 
as  such  by  law  but  Government  tacitly  tolerates  breaches  of 

2.  For  analysis  of  actual  working  atid  possible  remedies  attention  is  invited  to 
the  author's  Economics  of  Post-War  India  (Hind  Kitabs)   and  The  Budget  and 
After  (Academicus;  Hind  Kitabs).      - 


STOCK  EXCHANGES  IN  INDIA  371 

its  monopoly.  The  Berlin  Stock  Exchange  was  subject  to  a 
dual  control,  firstly  by  the  Imperial  laws  of  1896  and  1908, 
and  secondly  by  the  Chambers  of  Commerce  and  State 
Departments. 

Business  in  stocks  and  shares  in  Bombay  appears  to  have 
begun  quite  long  ago.  Six  brokers  are  reported  as  doing 
this  business  between  1840  and  1850.  By  1860,  the  eve  of 
the  American  Civil  War,  they  had  increased  to  60.  Among 
them  was  one  Premchand  Roychand  whom  subsequent 
events  were  to  link  in  an  immortal  manner  with  the  finan- 
cial history  of  the  City  of  Bombay.  The  American  Civil 
War  brought  great  wealth  to  this  cotton  exporting  port, 
wealth  led  to  wild-cat  enterprises  and  ignorant  or  fraudu- 
lent speculation,  speculation  attracted  more  members  to  the 
business  of  stocks  and  shares — to  the  tune  of  200  to  250. 
The  inevitable  losses,  insolvencies,  exposures  of  fraud  and 
cupidity  do  not  seem  to  have  diminished  the  attractiveness 
of  the  profession  itself  which  reached  a  membership  of  300 
in  1877. 

The  formal  creation  of  an  association  had  however  to 
wait  till  1887.3  In  that  year,  the  Bombay  Stock  Exchange 
as  it  is  popularly  known  took  its  birth  as  "Native  Share 
and  Stock  Brokers  Association."  The  name  selected  caused 
some  difficulties.  The  members  of  the  association  have 
never  been  brokers  pure  and  simple.  The  inclusion  of  the 
word  "native"  gave  offence  to  patriotic  sentiment  and  in 
the  rules  of  1938  was  discreetly  omitted. 

2.  Membership  of  Stock  Exchange 

Conditions  attached  to  the  membership  of  a  stock 
exchange  flow  naturally  from  the  functions  which  such  an 
institution  is  meant  to  fulfil.  These  functions  may  be 
broadly  distinguished  under  two  heads.  When  a  member 
acts  as  a  broker  to  the  public,  he  undertakes  (i)  to  buy  the 
scrip  concerned  at  the  lowest  price  or  sell  it  at  the  highest 
price  obtainable,  (ii)  to  offer  his  expert  advice  and  guidance 

3.  An  informal  association  was  in  existence  from  9th  June  1875.     The  trysting 
place  of  these  worthy  people  was  for  a  long  time  a  famous  bunyan  tree  and  on 
many  an  occasion  the  police  had  to  intervene  to  disperse  the  enthusiastic  crowd 
in  one  place  only  to  find  them-  gathering  strong  in  another  place. 


372  LONG-TERM  CAPITAL  MARKET 

in  matters  of  investment,  according  to  the  temper  and 
inclinations  of  his  clients,  and  (iii)  to  establish  and  main- 
tain more  or  less  permanent  relations  with  his  clients  and 
their  families  as  their  ever-present  well-wisher  and  guide 
in  matters  financial.  It  is  clear  that  this  function  calls  not 
only  for  a  high  standard  of  skill  and  experience  but  what 
is  most  difficult  to  find,  a  high  standard  of  honour  and 
character  as  well.  In  the  absence  of  these  qualities,  the  in- 
dividual with  surplus  income  must  hold  back  in  distrust 
and  prefer  less  economic  forms  of  investment  with  great 
loss  or  waste  of  national  savings.  Every  practical  precau- 
tion has  therefore  to  be  taken  to  place  the  broker  above 
temptation  in  the  discharge  of  his  proper  duties.  Two 
obvious  principles  suggest  themselves.  The  broker's  remu- 
neration should  be  so  defined  that  firstly,  it  should  be  inde- 
pendent of  the  price  of  the  scrip  which  he  buys  or  sells  for 
his  client  and  secondly  he  should  have  no  personal  interest 
in  the  scrip  bought  or  sold.  The  first  point  is  met  if  the 
broker's  scale  of  remuneration  is  fixed  from  time  to  time 
with  reference  to  particular  scrips  or  classes  of  scrips 
according  to  the  status  and  prevailing  values  of  the  scrips. 
The  second  point  relates  to  the  second  main  function  of  the 
stock  exchange.  When  a  member  of  the  exchange  acts  as  a 
jobber,  i.e.  buys  scrips  on  his  own  account  or  sells  scrips  out 
of  his  own  stock,  he  is  acting  just  like  a  dealer  in  ordinary 
commodities.  His  willingness  to  buy  and  sell  at  all  times 
makes  the  supplies  of  the  market  more  regular  and  makes 
periodic  revisions  of  judgment  possible.  Since  buying  and 
selling  are  continuous,  the  jobber  does  not  hold  stocks  with 
a  view  to  speculate  on  likely  price-changes.  He  looks  for 
his  profit  and  remuneration  to  the  difference  between  his 
selling  and  buying  prices  and  his  skill  lies  in  keeping  stock 
from  time  to  time  just  sufficient  for  the  needs  of  the  market 
and  making  his  selections  in  such  a  way  that  fluctuations 
in  the  values  of  some  are  balanced  by  counter-fluctuations 
in  the  values  of  others. 

In  the  enrolment  of  members,  the  existing  practices  of 
leading  stock  exchanges  vary  much  in  the  emphasis  they 
lay  on  position  in  business,  financial  guarantees,  technical 
qualifications,  etc.  The  oldest  of  them,  London,  relies 


MEMBERSHIP  OF  STOCK-EXCHANGE  373 

chiefly  on  personal  introduction  or  membership,  of  a  reput- 
able stock  exchange  firm.  New  York  is  satisfied  chiefly 
with  the  financial  guarantee  and  status  implied  in  the  pur- 
chase of  the  seat.  The  Parquet  in  Paris  requires  over  and 
above  purchase  of  a  seat,  firstly,  a  large  contribution  to  the 
general  guarantee  fund  and  readiness  to  respond  to  further 
assessment  on  the  same  account  and,  secondly,  proved 
knowledge  of  business,  law  or  banking. 

Admission  to  the  Bombay  Stock  Exchange  is  preceded  by 
an  inquiry  into  character  by  the  managing  committee  and 
has  to  be  supported  by  two  existing  members.  By  a  rule 
which  has  been  in  existence  from  about  1927,  a  member  is 
not  permitted  to  deal  with  any  non-member  share  or  stock 
broker  within  a  radius  of  50  miles  from  Bombay,  The 
obvious  object  is  to  prevent  or  discourage  the  growth  of 
unauthorised  business  in  this  line. 

The  price  of  an  admission  card  was  originally  fixed  at 
Rs.  51  only  but  was  raised  subsequently  to  Rs.  1000.  By 
1909,  the  price  of  a  card  reached  Rs.  2500  and  after  the 
outbreak  of  World  War  I  to  Rs.  7,000  in  1917.  During  the 
great  speculation  waves  which  followed,  a  card  was  recorded 
to  have  fetched  as  high  a  price  as  Rs.  40,000.  Before  the 
outbreak  of  World  War  II,  the  value  of  a  card  was  placed 
at  about  Rs.  7,000  but  has  since  mounted  up  to  Rs.  40  to  50 
thousand.  It  is  clear  from  this  that  the  financial  guarantee 
implied  in  the  possession  of  a  card  fluctuates  much  from 
time  to  time.  Indeed  the  record  of  recent  defaults  proves 
that  most  of  the  defaults  lacked  the  financial  status  desirable 
in  a  member  of  a  stock  exchange  like  that  of  Bombay.  Of 
28  defaults  which  occurred  from  1927  to  1939,  seats  had  to 
be  forfeited  in  the  case  of  11  because  the  defaulters  could 
not  make  good  the  loss  sustained  by  members  even  though 
it  ranged  much  below  Rs.  50,000.  Four  other  defaulters 
could  pay  only  6i  to  lOf  annas  in  the  rupee  although  the 
loss  at  stake  was  on  the  same  scale.4  To  assure  a  better 
safeguard  against  defaults,  the  proposal  has  been  made 
that  in  addition  to  the  purchase  of  a  card,  the  new  member 
should  produce  two  sureties  or  make  a  deposit  of  Rs.  30,000 

4.     §  14. 


S74  LONG-TERM  CAPITAL  MARKET 

lor  a  period  of  2  years.  It  may  be  a  better  alternative  to 
create  a  guarantee  fund  to  which  all  members  have  to  con- 
tribute and  to  which  further  assessment  may  be  made  in 
case  of  need.  The  fear  that  other  members  may  have  to 
bear  the  consequences  of  the  recklessness  of  less  worthy 
members  will  tend  in  the  long  run  to  great  care  in  initial 
admission  and  the  creation  of  a  powerful  opinion  among 
the  members  themselves  against  undesirable  practices  and 
forms  of  dealings.5 

A  member  of  the  Bombay  Stock  Exchange  must  not 
engage  as  principal  or  employee  in  any  other  business.  It 
would  be  otherwise  very  difficult  for  the  public  or  for  his 
brother  members  to  judge  his  credit- worthiness  or  his 
financial  position  at  any  particular  time.  This  restriction 
has  been  unfortunately  felt  as  a  grievance  by  many  busi- 
nessmen who  are  anxious  to  add  stock  exchange  business  to 
their  other  existing  lines.  The  new  institution,  the  Indian 
Stock  Exchange,  is  the  outcome  of  this  desire. 

Till  1938,  an  admission  card  to  the  Stock  Exchange  was 
treated  very  much  as  an  invitation  card  to  an  Indian 
wedding.  Cousins,  nephews  and  other  relatives  were  held 
entitled  to  admission  over  and  above  authorised  clerks. 
Henceforward,  only  sons  of  brokers  and  authorised  clerks 
will  be  allowed  to  enter. 

3.    Sub-brokers 

In  addition  to  members,  we  have  the  institution  of  sub- 
brpkers  or  remesiers.  The  Atlay  Report  described  them  as 
mere  unauthorised  tipsters  and  touts  who  misled  the  public 
by  their  irresponsible  canvassing  and  added  to  the  demora- 
lisation. Their  status  is  now  proposed  to  be  regularised  by 
requiring  them  to  sever  their  connection  with  any  other 
lines  of  business  and  to  deposit  Rs.  5000  on  registration. 
The  amount  may  be  confiscated  for  reasons  for  which  a 
member  is  liable  to  be  expelled  and  his  ticket  confiscated. 
No  limit  is  proposed  on  their  number.  But  they  must  pay 


5.  In  1933,  when  Currimbhoy  Ebrahim  &  Sons  Ltd.,  crashed,  all  active  members 
whether  involved  or  not  in  the  dealings  of  Currimbhoy  group,  subscribed  to  a 
special  fund  to  the  extent  of  Rs.  3  lakhs  and  enabled  the  Exchange  to  meet  all 
its  liabilities. 


CLASSIFICATION  OF  MEMBERS  375 

an  annual  subscription  of  Rs.  100  and  when  leaving  one 
broker  for  another,  must  produce  a  clearance  certificate. 

The  1938  rule  limits  strictly  the  number  of  authorised 
clerks  allowed  to  each  broker.  It  is  doubtful  whether  any- 
thing short  of  abolition  of  this  element  will  eradicate  some 
of  the  notorious  evils  associated  with  their  activities. 

Till  almost  1938,  a  piquant  feature  of  the  general  disorder 
and  confusion  of  the  Stock  Exchange  used  to  be  the  pre- 
sence of  hawkers,  beggars  and  naturally  enough,  pick- 
pockets also.  The  Atlay  Committee  discovered  even  minors 
speculating  on  the  floor  of  the  Exchange.  The  difficulty, 
if  not  the  impossibility,  of  admission  to  the  central  floor  of 
the  London  Stock  Exchange  is  a  queer  contrast  to  the  in- 
formality and  even  charitableness  of  the  Bombay  City.  This 
evil  has  fortunately  disappeared  recently. 

There  were  about  6  brokers  in  1840-50.  By  1860,  there 
began  to  assemble,  no  doubt  under  the  famous  bunyan  tree 
near  the  University  tower,  as  many  as  60  under  the  leader- 
ship of  Premchand  Roychand.  The  hectic  speculation  of 
American  Civil  War  raised  the  number  to  about  200  to  250, 
many  of  whom  were  "broke"  by  the  close  of  the  war.  The 
membership  was  300  in  1877  and  478  in  1921.  But  of  these, 
only  225  to  250  were  active  when  the  Atlay  Report  was 
made  in  1924.  At  present  the  membership  is  about  the 
same — the  members  on  the  active  list  being  about  200. 

If  membership  is  any  index  to  the  size  of  an  exchange, 
we  may  contrast  this  figure  with  the  maximum  member- 
ship of  4,000  in  London  and  1,100  in  New  York.  The  Par- 
quet in  Paris  has  a  jealously  limited  membership  of  o$ly 
70  while  the  intruder  Coulisse  has  about  100.6 

4.     Classification  of  Members 

When  a  member  acts  as  a  broker,  he  is  working  as  an 
agent  of  the  public.  He  becomes  a  principal  towards  his 
customer  when  he  acts  as  a  jobber.  These  two  essential 
functions  of  an  orderly  and  trusted  stock  exchange  raise 

6.  For  the  year  ending  March  1945,  the  membership  of  the  London  Stock 
Exchange  was  3,565  while  the  population  on  the  "Floor  of  the  House"  was 
5,137,  nearly  1,000  less  than  in  1939.  The  market  valuation  of  securities  quoted 
rose  from  £18,520  m.  to  £24,375  m,,  the  increase  being  largely  due  to  Govern- 
ment Loans. 


376  LONG-TERM  CAPITAL  MARKET 

difficulties  when  the  same  member  is  allowed  to  act  in 
these  dual  capacities.  The  conflict  of  interest  and  the 
strain  on  honesty  are  obvious  and  the  extent  to  which  they 
are  resolved  is  a  measure  of  the  smoothness,  reliability  and 
effectiveness  of  the  investment  market  of  a  country. 

London  has  met  this  difficulty  by  a  clear  separation  of 
brokers  and  jobbers.7  As  a  matter  of  convenience,  a  broker 
who  receives  similar  orders  from  two  customers  is  allowed 
to  cross  them  but  then  he  may  charge  one  commission  only. 
Besides,  as  brokers  frequently  underwrite  issues  and  con- 
sequently hold  quantities  of  scrips  they  are  also  allowed 
to  sell  on  their  own  account.  But,  in  such  circumstances, 
the  brokers  are  expected  to  declare  the  fact  to  their  custo- 
mers and  are  not  allowed  to  charge  any  broker's  commis- 
sion. New  York  has  similar  classes  of  brokers  or  commis- 
sion houses,  specialists  or  specialist  dealers  but  as  there  are 
more  varieties  of  members,  the  distinction  is  very  much 
blurred  in  practice.  In  Paris,  the  Parquet  deals  only  with 
the  public  as  brokers  but  members  of  the  Coulisse  are 
allowed  to  trade  among  themselves  also. 

In  Bombay,  a  member  is  allowed  to  work  both  as  broker 
and  dealer.  There  is  little  doubt  that  this  double  capacity 
has  been  the  source  of  much  abuse  of  public  confidence  or 
at  least  public  suspicion.  It  is  not  easy,  however,  to  frame 
effective  remedies.  A  separation  of  brokers  and  jobbers 
such  as  prevails  in  London  depends  for  its  efficacy  largely 
on  traditions  of  the  profession.  Collusion  between  brokers 
and  jobbers  is  always  possible  and  a  separation  forced  on 
the  members  from  outside  is  most  likely  to  be  rendered 
nugatory  by  such  practices.  It  has  sometimes  been  suggest- 
ed, as  another  argument  against  separation,  that  the 
volume  of  business  is  not  sufficient  to  justify  such  a  step.8 
The  argument  lacks  clearness.  Since  separation  cannot  re- 
duce the  present  volume  of  business,  the  members  could 
not  be  affected  in  that  manner  by  such  a  measure.  For 


7.  "When  there  is  a  slump  in  the  market  and  a  rush  of  selling  orders  with  no 

support  as  happened  in  rubber  shares the  jobbers  are  apt  to  be  at)  lunch  all 

day  and  the  brokers  have  to  report  to  their  clients  that  they  simply  cannot  find 
a  purchaser." 

8.  See  f.n.  18. 


CLASSIFICATION  OF  MEMBERS  377 

every  broker's  transaction,  there  must  exist  as  its  counter- 
part a  jobber's  transaction  and  unless  losses  on  one  part 
are  sought  to  be  covered  by  manipulations  of  the  other 
part  of  the  transaction,  there  is  no  reason  why  members 
should  not  be  willing  to  enrol  themselves  for  prescribed 
periods  either  as  brokers  or  dealers.  It  might  be  conceded, 
however,  that  as  the  aggregate  of  scrips  listed  is  less  than 
150  as  against  the  enormous  numbers  appearing  on  the  lists 
of  London  and  Paris,  specialisation  does  not  offer  here  any 
proportionate  advantage.  Besides,  another  difficulty  lies  in 
the  fact  that  the  jobber's  trade  presupposes  a  large  amount 
of  capital  and  some  capacity  for  undertaking  risks  which 
appear  to  be  lacking  in  our  present  membership. 

In  the  absence  of  such  separation,  other  remedies  tending 
in  the  same  direction  have  to  be  sought.  In  the  first  place, 
lists  of  members  should  be  drawn  up  to  distinguish  such  of 
them  as  are  willing  to  act  only  in  one  capacity  from  others 
who  wish  to  adhere  to  the  old  practice.  In  any  case,  it 
should  be  presumed  that  in  every  transaction,  a  member 
first  declares  the  capacity  in  which  he  is  acting  towards  his 
client.  In  the  second  place,  the  contract  note  arising  out 
of  each  transaction  should  specify  the  capacity  in  which  he 
is  acting.  Till  now,  we  have  had  only  one  form  of  contract 
note,  the  principal's  contract  note.  A  contract  note, 
whether  principal's  or  agent's,  should  give  all  details  which 
explain  the  character  of  the  transaction.  The  name  and 
quantity  of  scrip  dealt  in,  the  rates  of  purchase  and  sale, 
the  rate  of  brokerage  charged — these  should  be  sufficient  to 
enable  each  transaction  to  be  sifted  and  judged,  should  there 
be  an  occasion  for  such  a  procedure.  In  the  third  place,  it 
has  to  be  recognised  that  much  the  greater  source  of  present 
evils  is  the  uneconomic  and  unfair  competition  which  pre- 
vails among  members  themselves  for  the  available  business. 
The  strict  regulation  of  rates  charged  is  the  only  conceivable 
check  on  such  competition.  Although  minimum  rates  have 
been  in  vogue  for  a  long  time,  it  is  to  be  feared  that  the 
levels  at  which  they  are  fixed  are  so  low  as  to  defeat  their 
main  purpose.  A  revision  has  now  been  effected  by  the 
rules  of  1938.  More  important  than  fixing  the  rates  is  their 
proper  enforcement,  which  raises  inevitably  questions  about 


378  LONG-TERM  CAPITAL  MARKET 

the  independence,  impartiality  and  courage  of  the  executive 
of  the  Stock  Exchange. 

5.    Listing  of  Scrips 

The  procedure  and  conditions  of  admission  of  scrips  to 
stock  exchange  dealings  are  a  very  pivotal  point  in  the 
technical  organisation  of  these  institutions.  It  may  perhaps 
be  thought  strange  that  restrictions  should  be  thought 
necessary  for  a  stock  exchange  when  they  are  not  to  be 
found  in  ordinary  commodity  markets.  A  little  reflection 
should,  however,  show  that  there  are  some  crucial  differ- 
ences between  the  two  markets.  In  the  first  place,  most 
commodities  in  ordinary  markets  are  self-defined  and  easy 
to  identify.  In  the  case  of  scrips,  frauds  are  far  more  easy. 
Even  in  the  case  of  ordinary  commodities,  precautions  have 
sometimes  to  be  prescribed  in  order  to  ensure  purity,  quality, 
etc.  The  usual  practice  of  stock  exchanges  is  to  prescribe 
a  certain  minimum  period  of  existence  before  the  scrip  of 
a  company  is  admitted  to  official  dealings.  The  minimum 
period  is  sufficient  to  prove  whether  the  enterprise  is 
seriously  intended  or  is  a  mere  kite  sent  up  by  designing 
promoters,  etc.  In  the  second  place,  most  commodities  are 
abundant  and  world-wide  in  their  supplies  and  what  is 
more,  there  is  a  large  scope  for  mutual  substitution.  The 
scrip  of  each  company  is  a  unique  commodity  by  itself  and 
its  supplies  are  more  or  less  rigidly  defined.  The  essential 
condition  of  a  free  market,  that  a  single  individual  or  a 
few  individuals  should  not  be  able  to  exercise  a  dispropor- 
tionate influence  on  price,  is  very  hard  to  satisfy  unless 
proper  precautions  are  enforced  from  the  very  start.  Stock 
exchanges  seek  to  create  such  a  free  market  by  stipulating 
firstly  that  the  company  concerned  should  have  a  certain 
minimum  of  capital  divided  into  shares  of  convenient 
denominations  and  secondly  that  a  sufficient  quantity  of 
shares  should  be  offered  initially  to  the  public  at  large.  In 
order  to  assure  the  quality  of  the  scrip,  stock  exchanges  are 
not  content  with  mere  conformity  to  the  Company  Law 
but  demand  many  more  details  before  admission  to  the 
privileges  of  the  exchanges.  London  maintains  two  lists, 
one  official  and  one  supplementary,  demanding  much  more 


LISTING  OF  SCRIPS  379 

information  in  the  case  of  the  former.9  Of  course,  it  must 
not  be  imagined  that  a  stock  exchange  can  or  even  pre- 
sumes to  sit  in  judgment  on  the  nature  of  prospects  of  any 
individual  enterprise.  The  assessment  of  the  ultimate 
qualities  and  risks  of  each  scrip  is  the  proper  function  of  the 
investor  which  the  stock  exchange  may  facilitate  but  can- 
not itself  assume. 

Till  1938,  the  Bombay  Stock  Exchange  restricted  admis- 
sion of  securities  by  a  rule  that  scrips  registered  outside 
the  province  of  Bombay  should  not  be  put  on  its  list. 
Besides,  companies  were  required  to  take  initiative  in  seek- 
ing admission  of  the  scrips.  The  effect  was  a  certain  limita- 
tion on  the  volume  of  their  business  and  a  certain  concen- 
tration on  a  few  scrips.  The  rule  regarding  the  main- 
tenance of  a  register  in  Bombay  has  now  been  widened  to 
cover  the  whole  country  while  the  prohibition  to  deal  in 
scrips  applies  now  to  those  companies  only  which  have 
been  positively  debarred  from  admission.  The  application 
for  admission  may  be  made  by  the  Company  or  by  a  mem- 
ber of  the  Exchange.  The  criteria  of  admission  are  "mag- 
nitude and  importance"  of  a  scrip  and  the  offer  except  in 
unusual  cases  of  at  least  50  per  cent  of  the  issue  to  the 
public. 

In  1944-45,  there  were  in  India  more  than  13  thousand 
companies  with  a  paid-up  capital  of  more  than  Rs.  360  crores. 
Out  of  these  companies,  about  a  thousand  with  a  paid-up 
capital  of  more  than  260  crores  had  their  shares  quoted 
on  the  different  stock-exchanges  of  this  country.  At  the 
war-inflated  values  of  that  year,  these  quoted  stocks  and 
shares  were  estimated  to  have  a  value  of  Rs.  1000  crores.10 

6.    Cash  and  Forward  Lists 

Deals  on  the  stock  exchanges  may  be  either  time  deals 
or  cash  deals.  Ordinarily,  it  should  lie  with  the  parties  to 

9.  In  Paris,   with  reference  to  mortgage  bonds  of  the  Memphis,     El  Faso  and 
Pacific  Railroad  (1869)  which  were  first  admitted  to  the  Parquet  and  latel  found 
by  it  te  be  fraudulent  the  Syndical  Chamber  was  held  negligent  by  the  Courts 
and  made  to  pay  one-fifteenth  of  the  damages. 

10.  The  following  statistics  show  how  the  ownership  of  shares     and     stocks  is 
distributed  between  small  and  big  holders.    It  will  be  noted  that  about  8  per  cent 
of  shareholders  own  more  than  60  per  cent  of  the  shares.         (Continued  overleaf.) 


380 


LONG-TERM  CAPITAL  MARKET 


the  contract  to  decide  whether  it  should  be  on  a  time  or 
cash  basis.  Although  time  deals  facilitate  speculation,  pure 
and  simple,  they  are  no  less  a  convenience  to  genuine  in- 
vestors who  may  desire  to  avail  themselves  of  particular 
favourable  opportunities  for  investment.  The  practice  of 
our  stock  exchange  in  regard  to  this  matter  is  rather  pecu- 
liar. It  maintains  two  separate  lists  for  scrips  for  which 
cash  and  forward  dealings  are  recognised.  This  places  a 
special  responsibility  on  the  management  of  the  body  and 
inevitably  raises  the  question  as  regards  the  appropriate 
considerations  to  be  taken  account  of  in  placing  a  scrip  on 
either  list.  So  far  as  the  rules  of  our  local  exchange  are 
concerned,  with  one  exception  which  we  shall  note  pre- 
sently, they  vest  unfettered  discretion  in  the  management 
both  for  initial  assignment  to  the  lists  and  subsequent 
changes. 

Cash  dealings  have  a  natural  tendency  to  be  confined  to 
those  who  are  genuine  investors  or  at  least  have  the  means 
to  hold  the  scrip  for  a  long  time.  Since  a  regular  stream 
of  investment  is  hardly  to  be  expected,  fluctuations  in  the 
values  of  scrips  which  figure  largely  in  cash  transactions 
tend  to  take  place  in  an  abrupt  or  sporadic  manner.  Time 
deals  take  place  from  day  to  day  in  terms  of  expected 
differences  and  as  such  appeal  naturally  to  the  speculator. 
Since  only  a  large  volume  can  give  adequate  profits  and 
income,  they  are  apt  to  be  undertaken  very  largely  with 
borrowed  money.  According  as  expectations  materialize 
or  the  opposed  groups  make  their  power  felt  one  way  or 
the  other,  prices  fluctuate  very  widely.  On  the  other  hand, 


Percentage  of 
shares  held 
by  small  & 

middle  sized 
holders  to 

total  shares. 

58.6 
25.4 
40.0 
45.6 
48.9 
54.1 
36.3 
39.2 


Name  of  Company 

Range  assumed 

Percentage  of 

(Paid-up  per 

for  small  and 

number  of 

share). 

middle  sized 

small  &  middle 

holdings. 

sized  holders 

to  total  no. 

of  holders. 

Tata  Iron  &  Steel  (75) 

1  to      50 

92 

Apollo  Mills  (2) 

1  to  2000 

98.5 

A.  C.  C.   (100) 

1  to      50 

82 

Belapur  Sugar  (50) 

1  to      50 

93 

Scindia   Steam   (15) 

1  to    300 

90 

Central  Bank   (25) 

1  to    200 

96 

New  India  Ins.   (15) 

1  to    100 

97.5 

Tata   Hydro    (100) 

1  to      50 

92 

All  8  Co.s 

_~ 

91.9 

CASH  AND  FORWARD  LISTS  381 

it  must  be  recognised  that  such  speculative  trading  by 
itself  acts  as  a  support  to  the  prices  of  scrips.  A  movement 
in  one  direction  cannot  proceed  very  far  before  a  contrary 
opinion  develops  and  counteracts  the  movement.  Each 
level  of  values  reached  by  a  scrip  tends  to  perpetuate  itself 
for  at  least  a  considerable  time.  In  the  case  of  cash  scrips, 
on  the  other  hand,  the  market  may  not  be  a  continuous 
one  as  judgments  are  revised  only  when  investors  turn  up. 
The  range  within  which  values  fluctuate  is  therefore  apt 
to  be  a  wide  one. 

This  difference  between  scrips  which  are  dealt  in  largely 
on  a  time  or  cash  basis  explains  the  positive  exclusion  of 
bank  shares  from  the  forward  list.  Banks  are  quite  unlike 
other  joint-stock  companies  in  that  the  resources  with  which 
they  operate  are  withdrawable  on  demand.  Fluctuations 
in  the  values  of  their  shares  are  highly  undesirable  as  likely 
to  provoke  unwarranted  inferences  and  mass  fears.  Even 
in  the  absence  of  forward  deals,  bank  managements  have 
to  keep  a  jealous  eye  on  the  values  of  their  shares  and 
many  a  time  adopt  policies  as  a  concession  to  popular 
prejudices  which  strict  prudence  and  long  foresight  would 
not  approve.  The  shares  of  assurance  companies  and  in 
a  less  accountable  manner,  the  shares  of  railway  companies 
also  are  placed  entirely  on  the  cash  list. 

In  1939,  there  were  placed  about  106  scrips  on  the  cash 
list  and  about  31  on  the  forward  list  of  the  Bombay  Stock 
Exchange.  The  31  scrips  on  the  forward  list  were  made 
up  of  three  Government  securities,  two  electricity  scrips, 
fifteen  spinning  and  weaving  scrips  and  eleven  miscella- 
neous scrips.  The  only  common  quality  of  these  scrips  is 
the  large  interest  which  the  public  and  particularly  the 
speculators  display  in  them. 

7.    Period  of  Settlement  and  Speculation 

The  time  interval  over  which  a  time  deal  is  spread  varies 
from  one  stock  exchange  to  another.  In  London  and  the 
Parquet  in  Paris,  the  settlements  are  fortnightly.  The 
bulk  of  transactions  on  the  latter  exchange,  however,  takes 
place  on  a  cash  basis.  On  the  Coulisse  in  Paris  and  in 
Berlin,  settlements  are  monthly.  On  the  New  York 


382  LONG-TERM  CAPITAL  MARKET 

Exchange,  settlements  used  to  take  place  every  next  day 
prior  to  the  crisis  of  1929  but  since  then  the  practice  has  been 
introduced  of  settling  accounts  every  third  day. 

On  the  Bombay  Stock  Exchange,  there  are  two  settle- 
ments a  month  for  dealings  in  Government  securities  and 
one  settlement  a  month  for  all  other  forward  deals. 

The  time  interval  over  which  forward  deals  are  permitted 
and  settlements  enforced  has  a  certain  limited  significance 
for  the  tone  and  character  of  a  market.  A  long  interval 
makes  assessment  of  the  future  more  difficult  and  gives 
irrational  calculations  much  larger  scope.  A  short  interval 
means  an  earlier  payment  of  differences  and  budla  charges 
and  therefore  an  earlier  inducement  to  revise  judgments 
and,  if  necessary,  to  withdraw  before  the  situation  deterio- 
rates much  further.  It  might  appear  that  this  is  a  rather 
dubious  advantage  since  transactions  can  always  be  carried 
over.  But  a  little  reflection  will  show  that  even  with  the 
facility  of  carrying  over,  the  shorter  interval  still  retains 
most  of  its  advantage.  Carrying  over  has  its  own  automatic 
check  in  that  it  involves  some  cost  as  contango  (  sjfsf  or  ifftfl 
^  )  or  backwardation  (  ^  3^3T  )  and  shorter  the  period, 
the  more  certain  is  the  incidence  of  these  costs.  It  is  of 
course  true  that  mere  imprudence  or  recklessness  cannot  be 
remedied  in  this  manner.  But  this  is  no  argument  against 
improvements  devised  to  diminish  defaults  arising  out  of 
honest  mistakes  or  misfortunes.  That  a  shortening  of  the 
interval  is  by  itself  incapable  of  moderating  extreme  fluc- 
tuations in  values,  speculation  and  wide-spread  defaults  is 
more  than  proved  by  the  frequent  experiences  of  the  New 
York  Exchange. 

It  has  been  sometimes  suggested  as  a  remedy  for  exces- 
sive speculation  that  forward  dealings  should  be  abolished 
as  in  Calcutta.  It  should  be  clear  however  that  what  such 
a  step  will  suppress  is  not  forward  sales  and  purchases  but 
only  organised  facilities  for  carrying  them  over  from  time 
to  time.  So  long  as  delivery  can  be  postponed  by  mutual 
agreement,  such  measures  will  have  only  one  effect,  the 
creation  of  irregular  markets. 


BUDLA  CHARGES  AND  OTHER  EXPENSES          383 

8.    Budla  Charges  and  Other  Expenses 

Expenses  which  have  to  be  incurred  in  time  deals  of  stocks 
and  shares  are  also  no  mean  factor  in  encouraging  or  dis- 
couraging speculation.  Movements  in  prices  of  certain 
scrips,  especially  seasonal  movements,  can  always  be  fore- 
seen with  a  fair  degree  of  accuracy.  No  advantage  can 
however  be  taken  of  them  since  these  movements  are  more 
than  offset  by  incidental  expenses  of  the  transactions.  It 
is  a  natural  extension  of  the  logic  of  this  fact  that  where 
incidental  expenses  are  heavy,  speculation  on  narrow  mar- 
gins of  price  fluctuations  is  effectively  repressed.  It  has 
been  suggested  of  the  London  Stock  Exchange  that  one 
cause  of  less  speculation  there  than  in  New  York  is  that 
the  incidence  of  brokerage,  transfer  fees,  stamp  duties, 
etc.,  is  markedly  heavier.  From  this  standpoint,  the  prac- 
tice of  blank  transfers  on  the  Bombay  market  must  be 
counted  as  another  factor  making  for  speculation  which 
has  no  social  or  economic  purpose. 

The  expenses  which  are  involved  in  time  deals  are  of 
two  kinds.  In  the  first  place,  there  is  brokerage  which  on 
the  Bombay  Stock  Exchange  is  officially  placed  at  half  the 
ordinary  scale.  As  a  matter  of  fact,  according  to  the  size 
of  the  deal  and  the  status  of  the  client,  the  actual  brokerage 
charged  is  much  less  so  that  if  the  budla  is  favourable,  the 
payment  of  the  brokerage  still  leaves  appreciable  profit  to 
the  operator  from  one  settlement  to  another.  Thus,  while 
the  carry-over  brokerage  may  act  as  a  deterrent  to  small 
or  occasional  operators  or  speculators,  it  is  no  discourage- 
ment to  the  big  operator  and  speculator.  This  is  a  very 
important  cause  of  the  unusual  prolongation  of  over- 
bought or  over-sold  positions  which  is  such  a  regular 
feature  of  the  Bombay  market. 

The  other  expense  whibh  should  incline  one  of  the  parties 
at  least  to  close  his  open  position  is  the  budla  or  contango 
and  backwardation.  Ultimately,  the  budla  is  only  a 
penalty  interest  which  the  bull  or  the  bear  has  to  pay  to 
the  other  party  for  carry-over.  When  bears  have  sold  more 
shares  than  they  can  deliver  at  the  settlement,  the  bulls 
have  the  chance  to  demand  delivery  and  thus  to  force 
bears  either  to  cover,  which  must  raise  the  price  against 


384  LONG-TERM  CAPITAL  MARKET 

themselves  or  to  pay  the  budla  at  the  level  to  which  the 
technical  situation  of  the  market  might  raise  it.  The  bear 
will  clearly  agree  to  pay  the  brokerage  and  the  budla  if  he 
is  convinced  that  forthcoming  events  must  cause  a  fall  of 
prices.  Similarly,  when  bulls  have  bought  more  shares 
than  they  have  resources  to  take  delivery  with,  the  bears 
get  their  chance  to  offer  delivery  and  force  the  bulls  either 
to  sell  out,  i.e.  pay  the  difference,  which  must  cause  a  fall 
of  prices  against  themselves  or  to  pay  the  reverse  budla. 
Of  course  the  threat  on  the  part  of  the  bulls  to  take  delivery 
or  on  the  part  of  the  bears  to  offer  delivery  is  apt  to  contain 
a  large  element  of  bluff,  the  bulls  having  no  money  to  take 
up  and  bears  having  no  scrip  to  deliver.  But  the  fact  that 
the  actual  position  of  the  market  has  turned  or  has  been 
manipulated  in  favour  of  bulls  or  bears  and  the  party  at 
disadvantage  believes  that  circumstances  must  ultimately 
favour  his  view  is  the  compelling  force  which  fixes  the 
level  of  the  budlas. 

As  a  measure  to  curb  War-time  speculation,  the  Govern- 
ment made  an  attempt  to  suppress  the  forward  market  and 
its  technical  means — the  budla.  Experience  should  con- 
vince by  now  all  observers  of  the  futility  of  the  attempt. 
Where  sellers  and  buyers  are  agreed  and  have  a  status  and 
reputation  to  maintain,  prohibition  of  budla  within  the  ring 
leads  only  to  arrangements  outside  the  ring.  Secondly, 
irregular  budlas  outside  deprive  the  market  of  a  more  or 
less  reliable  index  to  the  technical  situation  as  between 
sellers  and  buyers.  Finally,  it  is  an  elementary  principle 
of  exchange  value  that  fewer  and  more  ill-balanced  the 
buyers  and  sellers,  the  larger  is  the  number  of  possible 
points  of  equilibrium  and  greater  the  fluctuations  in 
demand  and  supply.  Because  of  their  long  and  intimate 
experience  of  the  market,  the  large  fringe  of  the  crowd 
which  speculates  on  differences  is  really  an  important 
factor  in  widening  the  multilateral  basis  of  the  market  and 
making  values  continuous  and  stable. 

9.    Margins  and  Speculation 

It  is  the  practice  in  certain  stock  exchanges  to  enforce 
margins  from  customers.  The  prime  object  of  such  margins 


MARGINS  AND  SPECULATION  385 

is  to  protect  the  broker  from  losses  since  his  is  the  ultimate 
responsibility  in  case  of  default  by  the  customer.  There 
are  no  margin  deals  on  an  organised  basis  in  London.  The 
tradition  there  has  been  to  depend  very  largely  on  the 
personal  knowledge  of  the  customer.  Margins  are  availed 
of  very  freely  on  the  New  York  Stock  Exchange.  On  the 
Parquet  in  Paris,  margins  of  20  and  30  per  cent  are  pre- 
scribed according  to  the  character  of  the  scrip  and  the 
broker  may  enhance  the  margins  in  case  of  need.  There  is 
no  practice  of  margins  on  the  Bombay  Stock  Exchange. 
The  Atlay  Report  described  it  as  undesirable  but  the 
Morrison  Report  has  suggested  its  adoption. 

The  main  effect  of  a  system  of  margins  on  the  outside 
public  is  to  repel  persons  with  inadequate  resources  from 
stock  exchange  deals  or  to  prevent  them  from  assuming 
burdens  out  of  proportion  to  their  means.  The  justification 
of  its  adoption  must  naturally  depend  on  the  extent  to 
which  such  persons  are  accustomed  to  participate  in  such 
adventurous  speculation.  It  has  been  claimed  on  behalf  of 
the  Exchange  that  cases  of  this  nature  are  very  few  and  far 
between.  It  is  not  improbable  that  there  is  some  substance 
in  this  claim.  Members  of  the  Stock  Exchange  cannot  be 
interested  in  assuming  financial  responsibilities  for  such 
clientele.  When,  however,  those  who  oppose  margins 
adduce  the  further  reason  that  their  adoption  must  eventu- 
ally create  irregular  and  illegitimate  markets  outside  the 
stock  exchange,  they  involve  themselves  in  an  obvious  con- 
tradiction. If  men  who  engage  in  time  deals  at  present  are 
as  a  rule  men  of  resources,  the  demand  for  margins  should 
not  have  any  such  effect  as  is  feared.  If  irregular  and  illegi- 
timate markets  do  emerge,  it  will  be  only  because  even  at 
present  there  is  a  large  number  of  financially  weak  parties 
who  participate  in  this  activity.  If  the  adoption  of  margins 
does  lead  to  this  result,  the  situation  will  be  on  a  par  with 
those  which  exist  on  account  of  the  prohibition  of  betting, 
gambling,  etc.,  and  should  have  to  be  dealt  with  in  an  iden- 
tical manner.  The  real  difficulty  will  be  the  effective 
enforcement  of  such  margins  since  they  can  be  easily  eluded 
by  mutual  collusion  or  by  the  broker  himself  furnishing 
the  required  funds  at  a  price.  The  innovation  could  be 

M.B.— 25. 


386  LONG-TERM  CAPITAL  MARKET 

given  a  trial  for  an  initial  period  of  ten  years  and  then 
finally,  disposed  of  in  the  light  of  actual  experience. 

10.    Prices  on  Stock  Exchanges 

It  is  generally  presumed  that  the  objective  expression  of 
the  existence  of  a  single  market  in  a  commodity  is  uniform 
price.  As  a  matter  of  fact,  uniform  price  for  a  commodity 
is  an  ideal  to  which  actual  conditions  rarely  show  even  an 
approximation.  The  ideal  price  when  analysed  really 
resolves  itself  into  a  number  of  objective  conditions  which 
may  be  briefly  stated  as  a  high  degree  of  standardisation  of 
the  commodity  dealt  in,  a  high  degree  of  concentration  in 
time  and  place,  a  relative  insignificance  of  the  influence 
which  any  individual  or  coterie  of  individuals  can  exert 
on  price. 

The  stock  exchange  as  a  market  in  titles  to  capital  is 
distinguished  by  certain  features  which  seem  to  run  counter 
to  these  conditions.  On  the  supply  side,  each  scrip  is  no 
doubt  a  highly  standardised  commodity  by  itself.  But,  at 
the  same  time,  each  scrip  is  unique  by  itself  and  cannot 
take  the  place  of  another.  It  would  hardly  be  an  exaggera- 
tion to  say  that  from  the  standpoint  of  aggregate  supply, 
there  are  as  many  markets  in  a  stock  exchange  as  there 
are  scrips  and  securities  traded  in.  This  has  a  very  impor- 
tant effect  on  daily  dealings  and  therefore  on  daily  prices. 
Offers  to  buy  and  sell  any  scrip  are  as  a  rule  sporadic  and 
separated  by  intervals  of  time.  Continuous  variations  in 
supply,  demand  and  prices  such  as  make  for  stabilisation 
in  other  markets  are  not  to  be  found  in  a  stock  exchange. 

Except  in  Berlin,  each  transaction  takes  place  on  all  other 
exchanges  as  a  separate  bargain,  which  results  for  reasons 
given  above  in  its  own  special  price.  This  creates  the 
problem  of  recording  daily  prices  in  such  a  manner  as  to 
make  them  intelligible  and  useful  as  indicators.  In  London, 
prices  are  marked  individually  while  for  listed  securities, 
the  closing  prices  of  the  last  half  an  hour  are  published. 
Paris  quotes  prices  in  the  order  of  actual  deals  while  dealings 
for  account  have  their  first  and  last  and  their  highest  and 
lowest  prices  only  published.  It  is  clear  that  such  records  are 
bound  to  be  too  inadequate  or  too  copious  to  indicate  the 


LEVELS  OF  VALUES  GENERALLY  387 

prices  at  which  the  bulk  of  transactions  takes  place. 

Fixed  prices  are  used  only  for  carry  over  transactions  in 
London.  New  York  uses  the  opening  price  of  the  day  for 
this  purpose,  which,  however,  is  frequently  revised.  Paris 
uses  the  average  of  actual  prices. 

Berlin  has  made  an  original,  profound  and  instructive 
effort  to  obviate  the  effects  of  lack  of  concentration  in 
time  to  which  all  stock  exchanges  are  subject.  Each  indi- 
vidual bargain  does  not  take  place  at  its  own  time  and  at 
its  own  price.  All  orders  for  sale  or  purchase  have  to  be 
submitted  in  the  first  instance  to  official  brokers.  At  the 
appointed  time,  the  official  brokers  start  to  make  bids  and 
counter  bids  and  out  of  these,  they  frame  regular  schedules 
of  demand,  supply  and  prices.  They  are  thus  enabled  to 
fix  that  unique  equilibrium  price  at  which  according  to  the 
strict  theory  of  competition  the  largest  offers  of  sale  coin- 
cide with  the  largest  offers  of  purchase.  It  is  clear  that  the 
system  is  justified  only  in  so  far  as  accuracy  in  price  fixing 
is  attained.  In  the  most  favourable  circumstances,  such  an 
achievement  presupposes  an  elaboration  of  technique  and 
degree  of  intelligence  which  are  not  easy  to  secure. 

11.    Level  of  Values  Generally 

Day  to  day  prices  or  cyclical  trends  in  values  are  in- 
telligible only  as  deviations  from  some  conceivable  basic 
level  of  values  when  considered  over  more  or  less  long 
periods.  Scrips  represent  ultimately  the  fixed  assets  or 
capital  goods  and  good-will  of  an  enterprise  and  it  appearsi 
natural  to  presume  that  their  prices  follow  the  general 
movements  of  prices.  Yet,  the  assessment  of  appropriate 
values  of  scrips  and  the  differences  between  them  involve 
more  complications  than  are  present  in  the  case  of  ordinary 
consumption  goods.  The  subject  may  be  analysed  under 
three  heads. 

(1)  The  profits  or  dividends  of  a  concern  or  industry 
are  the  most  obvious  factor  to  be  taken  into  account.  The 
assessment  of  their  true  meaning — how  far  they  represent 
the  fundamental  stability  and  soundness  of  a  concern  and 
how  far  they  are  merely  fictitious — is  however  not  an  easy 
task.  It  calls  for  much  experience  and  technical  knowledge 


388  LONG-TERM   CAPITAL  MARKET 

in   interpretation.    Extraneous   factors   like   taxation,    etc. 
have  also  to  be  allowed  for  in  degrees  of  varying  nicety. 

(2)  Any  particular  level  of  dividends  or  profits  has  a 
significance  only  in  relation  to  the  general  level  of  dividends 
or  profits.    The  best  representative  of  this  level  is  the  long- 
term  rate  of  interest  on  investments  which  are  free  from 
risks  and  therefore  typify  the  productivity  of  capital  in 
general.  It  is  clear  that  with  a  rising  trend  of  long-term  rate, 
the  values  of  scrips  will  tend  to  be  depressed  and  with  a  fall- 
ing trend,  they  will  show  a  certain  persistent  buoyance. 

(3)  All  investment  partakes  more  or  less  of  the  nature 
of  a  leap  into  the  unknown  future.    Expectations  of  future 
profits  are  for  this  reason  a  more  important  influence  on 
prices  than  the  attraction  of  past  profits.    These  expecta- 
tions necessarily  take  account  of  a  bewildering  number  of 
factors — the  potentialities  of  a  particular  concern,  the  pros- 
pects of  an  industry  in  general,  trends  of  currency  and 
banking  policies,  trends  of  interest-rates,  all  political  and 
non-political  incidents  which  affect  the  course  of  trade  and 
industry.    It  is  of  course  true  that  anticipation  of  the  future 
in  this  sense  is  inherent  in  every  economic  activity  and 
indeed  in  all  details  and  spheres  of  human  life.    Yet,  of  few 
other  markets  could  it  be  said  as  of  the  stock  market  that 
speculation  is  the  most  outstanding  influence  in  valuations 
and   sometimes   indeed   in    a  degree  which  is  little  distin- 
guishable from  gambling,  pure  and  simple. 

It  is  natural  that  all  the  weaknesses  of  human  psychology 
in  regard  to  the  unknown  should  be  exhibited  in  their  raw 
and  crude  form  in  the  field  of  investment.  Paradoxically, 
our  so-called  forecast  of  the  future  is  but  a  projection  of 
our  present  experiences  and  moods  and  it  is  not  surprising 
that  our  pre-occupation  with  the  incidents  of  the  living 
present,  however  trivial  and  insignificant  in  themselves, 
should  throw  out  of  perspective  our  view  of  the  future.11 
Fear  and  hope,  perhaps  fear  more  than  hope,  originating 
in  our  present  experiences  create  a  mental  state  in  which 
rational  computation  has  little  chance. 

Since  it  takes  more  than  one  person  to  speculate,  it  is 
clear  that  gambling  as  the  extreme  form  of  speculation  is 

11.    F.n.    overleaf. 


LEVELS  OF  VALUES  GENERALLY  389 

a  social  phenomenon.  The  standards  of  honour  and  respec- 
tability prevalent  in  any  social  group  have  therefore  an 
important  effect  on  the  extent  to  which  gambling  is  made 
a  source  of  individual  and  family  fortunes.  As  in  many 
other  lines,  it  happens  in  India  that  business  in  stocks  and 
shares  tends  generally  to  be  confined  to  certain  castes  and 
communities  of  the  Indian  society.  It  is  an  inevitable  out- 
come of  this  situation  that  an  economic  psychology  of  a 
self-perpetuating  character  and  impervious  to  new  influ- 
ences from  outside  should  have  grown  in  which  stricter 
judgment  of  character,  behaviour  and  modes  of  life  find 
little  place.  When  we  reflect  that  most  persons  are  virtuous 
not  because  like  Socrates  they  prefer  virtue  but  because 
of  penalties  of  detection  and  social  disapprobation,  the 
importance  of  this  factor  in  certain  regrettable  aspects  of 
our  dealings  in  stocks  and  shares  is  easily  discernible.  The 
infusion  of  new  and  better  educated  elements  into  the 
Stock  Exchange  should  in  the  course  of  time  prove  the 
solvent  of  many  of  our  present  evils. 

The  fool  cannot  be  prevented  from  his  follies — much  less 
the  gambler.  But  this  is  no  reason  why  opportunities  for 
such  behaviour,  particularly  when  it  ensues  in  anti-social 
consequences,  should  not  be  curtailed  to  the  minimum  com- 
patible with  the  free  flow  of  legitimate  business.  Still  less 
could  it  be  a  justification  for  placing  temptations  in  the  way 
of  persons  who  but  for  them  might  prefer  cautiousness  to 
recklessness.  It  is  to  be  feared  that  the  seamy  side  of  stock 

11.  The  Influence  of  interest-rate,  varying  demand  and  expectations  relating  to 
different  commodities,  the  course  of  inflation,  etc.  is  well  illustrated  by  the  course 
of  prices  of  scrips  during  the  first  World  War  : 

29th          26th  26th  27th  31st 

July         July  March  March        March 

1914          1917  1918  1919  1920 

5  Government  Securities                    100             70  67  74             62 
100  Port  Trust  and  Municipal 

Debentures                                           100              80  84  84              91 

10  Banks                                                   100            106  112  116  127 

32  Jute    Mills    (ordinary)                      100            311  467  383  563 

65  Cotton  Mills   (ordinary)                   100            132  162  157  386 

80  Coal   Mines    (ordinary)                    100            136  134  157  149 

1  Woollen   Mill                                         100            106  125  125  187 

87  Tea   Companies    (ordinary)             100            127  125  123  136 

4  Flour  Mills                                          100            137  206  238  406 

Tata  Iron  and  Steel  (oldinary)            100           332  295  284  207 

See  also  Ch.  Ill  f.n.  24  (p.  74)  for  effect  of  a  depression. 


390  LONG-TERM   CAPITAL   MARKET 

exchange  business  in  this  country  and  particularly  in 
Bombay  has  been  in  no  small  measure  due  to  certain  prac- 
tices which  weakened  deterrents  to  rashness  and  anti-social 
activities.  Affairs  have  been  administered  and  powers  have 
been  used  in  the  past  in  such  a  way  as  to  suggest  that  the 
institution  exists  only  for  the  benefit  of  its  members  and 
recognised  no  responsibility  to  the  investing  public  and  the 
country. 

12.  Default 

Till  recently,  the  penalties  of  default  were  seriously 
limited  in  their  deterrent  value.  Default  was  recognised 
only  against  a  fellow-member  and  not  against  a  member 
of  the  public.  Besides,  the  property  of  a  defaulter  outside 
the  stock  exchange  was  not  available  to  meet  his  liabilities 
incurred  in  deals  on  the  exchange.12  The  1938  rules  remove 
these  defects  in  both  these  respects.  A  defaulting  member 
is  not  to  be  re-admitted  to  membership  now  if  the  default 
was  caused  by  speculation  on  his  own  account.  In  other 
circumstances,  when  the  conduct  of  the  defaulter  has  been 
above  blame,  he  is  re-admissible  only  if  he  has  met  his 
liabilities  in  full.  Exceptions  may  be  made  in  case  of  clear 
misfortune.  It  is  self-evident  that  the  beneficial  effect  of 
these  amendments  will  be  in  proportion  to  their  proper 
enforcement. 

13.  Intervention  in  the  Ordinary  Course  of  the  Market 

Powers  of  intervention  in  the    ordinary    course    of    the 

12. 

Number  of  defaulters       Max.  and  min.  loss  to  Penalty 

members  (OOOs) 

1927  2  27  to  20  Seats    forfeited- 

1928  1  48 

1929  3  25  to  35  „ 

1930  1  38 

1933  7  16  to  377  3  seats  forfeited  and  others  pay 

5  to  102  annas  in  the  rupee. 

1934  2  144  to  280  1  seat    forfeited    and    one    pays 

5i  annas  in  the  rupee 

1935  1  6  Seat  forfeited. 

1936  3  11  to  109  2  seats   forfeited  and    one   pays 

12  annas  in  the  rupee. 

1937  3  74  to  146  0-10  annas  in  the  rupee  paid. 

1938  5  34  to  266  4  seats  forfeited     and  one  pays 

10  annas  in  the  rupee. 


SELLING-OUT  RULE  391 

market  can  only  be  justified  by  some  special  factors  which 
distinguish  deals  in  stocks  and  shares  from  deals  in  other 
commodities.  The  chief  usefulness  of  speculation,  it  will 
be  recalled,  lies  in  enabling  future  stocks  to  be  taken  into 
account  in  fixing  present  prices.  Whenever  possible,  spe- 
culation enables  supplies  to  be  adjusted  to  forthcoming 
changes  in  economic  circumstances.  In  the  case  of  stocks 
and  shares,  the  only  adjustment  in  supplies  relates  largely 
to  scrips  of  new  enterprises.  New  enterprises  and  their 
scrips  take,  however,  a  long  time  to  establish  themselves 
and  in  the  meanwhile,  holders  of  scrips  of  older  enterprises 
find  themselves  confronted  with  exceptional  opportunities 
of  gain,  when  the  demand  is  enlarged,  and  loss  if  the  decline 
of  demand  has  created  the  necessity  of  contraction  of  out- 
put. In  the  second  place,  since  the  market  for  each  indivi- 
dual scrip  is  unique  by  itself,  individuals  are  sometimes 
able  to  acquire  complete  control  over  supply  and  prices  and 
thus  terminate  the  existence  of  a  free  market.  This  indeed 
is  the  most  glaring  evil  of  a  small  market  like  the  Bombay 
stock  exchange.  Thirdly,  hedging  is  an  important  facility 
which  ordinary  markets  offer.  Speculation  is  the  means  to 
eliminate  speculative  risks  from  production  and  manufac- 
ture for  future  delivery.  In  the  case  of  stocks  and  shares, 
hedging  from  week  to  week  or  from  month  to  month  has 
clearly  no  economic  basis.  Intervention  in  the  ordinary 
course  of  the  Stock  Exchange  may  be  justified  to  the  extent 
that  these  special  features  lead  to  any  anti-social  conse- 
quences. 

14.     Selling-out  Rule 

The  suspension  of  the  selling-out  rule  is  intended  to 
arrest  a  bear  raid  and  prevent  further  falls  in  prices. 
Obviously,  the  power  is  invoked  to  protect  bulls  who  are 
confronted  with  heavier  and  heavier  losses  as  the  market 
drops  down.  Such  intervention  seems  however  to  have  only 
slender  justification  since  there  exists  an  automatic  check 
in  the  market  to  a  fall  which  is  not  warranted  by  inherent 
economic  facts.  When  prices  fall  so  low  that  yield  rises 
above  the  economic  level,  buyers  must  make  their  appear- 
ance in  large  numbers.  If  buyers  hold  off,  it  will  be  only 


392  LONG-TERM  CAPITAL  MARKET 

because  bulls  have  raised  prices  to  very  uneconomic  levels 
and  considerable  downward  movement  must  take  place  to 
reach  economic  levels.  The  establishment  of  economic 
levels  is  certainly  a  pre-requisite  of  healthy  investment  and 
the  penalties  borne  by  the  bulls  in  the  process  are  decidedly 
a  well-merited  chastisement  which  should  lead  to  more 
responsible  behaviour  in  the  future.  It  has  been  sometimes 
argued  that  depreciation  of  securities  might  embarrass 
legitimate  trade  and  business  which  use  them  for  raising 
loans.  It  is  improbable  that  such  counters  are  accepted  by 
lenders  as  security  except  at  very  safe  margins.  The 
existence  of  this  power  was  properly  condemned  by  the 
Morisson  Report.13 

13.  The  following  record  illustrates  the  intervention  of  the  authorities  in  the 
more  important  corners,  crises,  etc.  which  bring  out  incidentally  the  great  part 
played  by  causes  and  persons  outside  the  Stock  Exchange  in  most  of  its  difficulties. 

1893.  One  Raghunath  Mulji  cornered  the  shares  of  Lakhmidas  Mill  and  raised 
their  price  from  Rs.  1,000  to  1,300. 

A  little  later,  a  corner  raised  the  price  of  shares  of  Queen's  Mills  from 
Rs.  1,000  to  Rs.  1,200  and  then  in  a  single  day,  the  price  fell  to  Rs.  800. 

Jehangir  Byramji  Dalai  effected  a  corner  in  the  shares  of  the  China  Mill  and 
raised  the  price  from  Rs.  1,000  to  Rs  2,100.  Dalai  was  made  a  partner  in  the 
Managing  Agency. 

1896.  Chunilal  Saraiya,  assistant  in  the  Hundi  Department  of  the  Bank  of 
Bombay  and  others  intimately  connected  with  the  Mill  cornered  the  shares  of 
the  Sun  Mill  and  raised  their  price  from  Rs.  150  to  Rs.  650.  The  stock  sold  by 
the  bears  was  found  to  be  more  than  three  times  the  stock  issued.  The  President 
intervened  and  the  liabilities  were  settled  at  a  price  of  Rs.'  500. 

1910-12.  Rivalry  between  uncle  and  nephew  led  F.  Petit  to  buy  the  shares  of 
Manekji  Petit  Mills  at  a  price  of  Rs.  3,950  and  sell  them  for  the  next  settlement 
at  a  price  of  Rs.  3,300.  For  the  firat  time  in  its  history,  the  buying-in  rule  was 
suspended.  Petit  agreed  to  a  compromise  and  received  the  difference  on  the 
basis  of  Rs  3,800  per  share. 

1913.  The  aforesaid  J.  B.  Dalai  cornered  shares  of  Petit  Mills.  The  banking 
crisis  brought  matters  to  a  head.  Dalai  failed  with  the  collapse  of  the  Credit 
Bank.  On  the  earnest  representations  of  the  Board,  members  who  had  sold  shares 
at  Rs.  3,200  repurchased  them  at  Rs.  2,600  and  resold  at  Rs.  2,000 — thus  suffering 
a  loss  of  Rs.  1,200  per  share. 

In  1918,  a  corner  seems  to  have  been  prompted  in  the  shares  of  the  Standard 
Mills  on  account  of  a  rumoured  desire  of  certain  parties  to  obtain  control  over 
the  Mills.  The  situation  was  settled  amicably. 

1919.  The  managing  agents  in  concert  with  others  effected  a  corner  in  the 
shares  of  the  Madhavji  Mills.  Forward  deals  were  suspended  There  were  two 
defaults  by  members  in  the  year  and  four  more  in'  the  subsequent  year.  A  rule 
was  passed  empowering  the  Board  to  fix  such  rates  as  they  thought  proper. 

1919.  A  corner  in  the  deferred  shares  of  the  Katni  Cement  Co.  was  settled 
by  a  resolution  of  the  Board.  It  was  settled  that  till  further  notice,  no  one 
should  transact  business  for  June  settlement  or  for  cash  at  a  price  higher  than 
Rs.  1,900. 

1921.  Mathuradas  Gokuldas  and  his  Syndicate  ctrrnered  the  shares  of  Fazul- 
bhoy  Mills.  While  the  issued  shares  were  only  7,200,  14,000  Kaplis  were  applied 
for.  A  corner  was  declared  and  price  was  fixed  at  Rs.  2,155.  The  Syndicate  sold 

(Continued  on  next  page) 


BUYING-IN  RULE  393 

15.     Buying-in  Rule 

The  power  to  suspend  the  "buying-in  rule"  exists  to  ope- 
rate in  the  opposite  circumstances,  i.e.  when  bears  have 


6,000  shares  to  Sir  Fazulbhoy  Currimbhoy  at  Rs.  1,650  c.d  ,  i.e.  at  a  price  higher 
than  market  price  which  had  fallen  to  Rs.  1,400. 

Later,  a  partner  in  the  Agents'  Firm  and  others  connected  with  the  Mills 
effected  a  corner  in  the  shares  of  the  Finlay  Mills.  A  low  dividend  of  Rs.  25  was 
first  declared  and  shares  purchased  at  the  depressed  prices.  A  dividend  of  Rs. 
125  was  then  declared  and  although  the  shares  issued  were  only  8,000  the  pur- 
chases amounted  to  16,000  and  more.  After  the  corner,  the  price  fell  from 
Rs.  1,880  to  Rs.  950. 

1922.  Emboldened  by  their  previous  successes,  the  Syndicate  of  Mathuradas 
Gokuldas  attempted  a  corner  in  the  shares  of  many  concerns— Kohinoor,  David, 
Currim,  Bharucha,  Swadeshi,  Nagpur,  etc.     A  member  of  the  Syndicate  was  also 
involved  on  the  Cotton  Exchange.     Forward  deals  were  stopped  in  Nagpur  and 
Swadeshi  shares  and  prices  were  fixed.    For  the  first  time,  a  corner  failed  on  the 
Stock  Exchange  and  Mathuradas  Gokuldas  had  to  part  with  the  Managing  Agency 
of  as  many  as  five  mills.    One  of  the  directors  of  the  Stock  Exchange  was  broker 
to  the  Syndicate  and  as  such  did  not  vote  on  the  decisions  taken.     The  Board 
passed   a   resolution  that  such   directors   must  resign  or  may  be  removed  by  a 
two-third  majority  of  the  Board. 

1922  October.  A  corner  took  place  in  the  shares  of  the  Currim  and  David 
Mills.  While  the  shares  issued  were  only  16,600,  the  amount  sold  exceeded  43,000. 
The  Syndicate  sold  David  shares  at  Rs.  1,350  which  was  much  more  than  market 
price  to  Sir  Sassoon  who  thus  got  the  Managing  Agency  while  Currim  also  was 
mortgaged  to  the  same  parties. 

1923.  E.  D.  Sassoon  and  Co.  Mills  were  sold  to  a  Syndicate     for  6  crores. 
Preference  shares  were  reserved  for  E.  D.  Sassoon  and  Co.,  while  ordinary  shares 
of  Rs.  4  crores  were  loaded  on  the  gullible  public  at  good  premiums.    As  a  matter 
of  fact,  the  book-value  of  the.  concerns  was  about  22  crores  and  real  value  per- 
haps less  than  2  crores.     The  share  of  Rs.  10  nominal  value  collapsed  to  Rs.  3 
immediately  thereafter. 

1924.  Two  syndicates  attempted  to  corner  the  shares  of   (i)   Madhavji  Mills 
and  (ii)  Bombay  Dyeings  &  Centuries  respectively.    Dyeings  rose  from  Rs.  750-800 
to  Rs.  1,150  and  Madhavji's  from  Rs.  150  to  Rs.  400.     The  corners  failed  and  with 
them  tne  parties. 

1929,  June.  ^  The  exchange  suspends  all  dealings. 

July.  The  onset  of  the  crisis  and  depression  saw  all  deals  for  account  sus- 
pended and  resumption  was  delayed  till  October. 

1933.  The  old  Managing  Agency  Firm  of  Currimbhoy  Ebrahim  and  Sons  failed 
and  six  companies  were  involved.  Member:  whether  dealing  in  the  shares  or 
not  subscribed  to  a  special  fund  of  Rs.  3  lakhs  and  all  liabilities  were  duly 
discharged. 

1935.  Difficulties  were  caused  by  the  Italy-Abyssinian  war  and  dealings  for 
account  in  Government  securities  were  suspended.  The  step  was  approved  by 
banks,  businessmen,  etc. 

Men  who  lost  in  the  Bullion  Exchange  crash  tried  to  recover  by  a  great  bear 
raid  on  the  Stock  Exchange  where  the  realizations  to  meet  losses  on  the  Bullion 
Exchange  were  already  depressing  prices.  Forward  deals  were  suspended  but 
cash  deals  continued. 

1937.  The  currency  depreciation  and  cheap  money  boom  of  middle  thirties 
was  abruptly  reversed  by  rumours  of  return  to  the  gold  standard,  threat  of  penal 
legislation  in  the  U.  S.  A.,  etc.  There  was  a  general  collapse  of  prices  in 
April-May  on  the  Bombay  Exchange. 

1940.  An  expected  boom  was  suddenly  destroyed  by  Government  announce* 
ment  of  an  excess  profits  tax.  Four  defaults  were  announced. 


394  LONG-TERM  CAPITAL  MARKET 

sold  more  stock  than  is  available  in  the  market  and  the 
ensuing  concentration  of  supplies  in  the  hands  of  the  bulls 
enables  them  to  dictate  any  prices.  In  such  conditions  of 
a  corner,  the  automatic  check  of  an  increase  in  supplies  is 
no  longer  operative.  Suspension  of  the  rule  prevents  any 
further  rise  in  prices  and  has  a  tendency  to  attract  such 
supplies  as  are  still  floating  outside  the  market.  The  threat 
to  terminate  the  suspension,  when  prices  must  fall,  inclines 
bulls  to  propose  more  reasonable  terms  and  bears  to  accept 
them. 

16.     Holidays 

Arbitrary  declaration  of  holidays  has  been  a  very  com- 
mon device  on  the  Bombay  Stock  Exchange  to  evade  the 
consequences  of  critical  situations.  The  Atlay  inquiry 
revealed  that  in  a  certain  year  the  Exchange  was  closed 
completely  for  155  days,  was  open  for  two  hours  on  144  days 
and  recorded  full  working  on  66  days  only.  When  the 
authorities  of  the  Exchange  were  not  inclined  to  fall  in  with 
the  demand  for  closing,  brokers'  clerks  took  the  law  into 
their  own  hands  and  declared  holidays.  As  usual,  religion 
furnished  the  most  easily  available  excuse  for  this  anti- 
social behaviour.  Under  1938  rules,  these  holidays  are  now 
limited  to  Sundays,  December  27  to  30  and  not  more  than 
5  other  holidays  to  be  fixed  by  the  Association  at  its  dis- 
cretion.14 

The  Board  of  Directors  are  authorised  to  close  the  market 
at  their  discretion  for  not  more  than  24  hours.  It  is  made 
clear  that  this  authority  is  to  be  used  to  meet  country-wide 
emergencies  or  international  crisis  like  war,  etc.  A  domes- 
tic crisis  is  specifically  excluded  from  the  exercise  of  this 
power.  An  extension  of  the  closing  period  requires  the 
prior  consent  of  Government  through  its  appropriate 
department. 

14.  Many  holidays  are  an  amiable  weakness  of  the  Indian  people.  Early  in 
the  present  century,  bank  holidays  at  Abottabad  were  found  so  numerous  that 
the  clientele  protested  that  it  would  be  less  of  a  nuisance  to  them  if  postcards  sent 
to  them  intimated  working  days  instead  of  holidays  !  A  bank  manager  at 
Jullundar  keen  on  joining  a  cricket  team  at  Amritsar  promptly  put  up  a  holiday 
notice.  A  run  on  a  bank  which  required  48  hours  to  bring  cash  from  the  nearest 
big  town  was  staved  off  by  means  of  an  announcement  of  two  days'  holidays. 

— Commerce,  27th  May,  1933. 


REORGANIZATION   OF   THE   CAPITAL   MARKET  395 

17.     Reorganization  of  the  Capital  Market 

In  the  light  of  the  foregoing  analysis,  it  may  well  be 
doubted  whether  forward  deals  have  any  important  econo- 
mic function  to  perform  in  the  interests  of  the  economic 
system.  Most  of  the  situations  envisaged  above  and  the 
remedies  considered  seem  to  have  a  bearing  only  on  specu- 
lation among  members  and  operators  of  the  stock  exchange 
themselves.  The  broadening  of  forward  deals,  the  intro- 
duction of  banks  as  members  of  the  stock  exchange  as  in 
Berlin  and  elsewhere,  a  rigorous  enforcement  of  conditions 
of  admission  to  stock  exchange  quotation,  strict  restrictions 
on  the  proclivities  of  directors  and  officers  of  companies  to 
manipulate  and  speculate  in  their  own  scrips,15  initial  allot- 
ment of  shares  through  a  public  authority,  above  all  an  im- 
partial and  independent  executive  officer  responsible  to  the 
Government  to  watch  the  enforcement  of  rules — these  and 
other  measures  are  the  proper  means  to  solve  the  investment 
problems  of  this  country. 

Experience  establishes  very  clearly  that  the  main  deficien- 
cies of  the  investment  market  are  three:  namely,  the  stag- 
gering waste  of  mistaken  or  fraudulent  promotion;  high 
instability  of  values  and  consequent  deterrence  to  genuine 
investors;  and  finally,  the  tendency  to  waves  of  over-invest- 
ment and  under-investment  with  their  serious  reactions  on 
production  and  employment.  The  general  public,  it  is 
true,  is  apt  to  think  of  this  market  more  in  terms  of  frauds 
and  malpractices  than  any  technical  deficiencies,  but  it  will 
be  found  on  deeper  reflection  that  these  evils  are  largely 
traceable  to  the  three  defects  already  stated.  A  drastic 
overhaul  of  company  law  with  the  object  of  eliminating 
monopoly  or  minority  control  of  stocks  and  shares,  financial 
manipulations  by  office-bearers,  perversion  and  abuse  of 
audit  and  accounts,  the  enormous  losses  of  still-born  pro- 
motion and  fraudulent  management  etc.  might  mitigate  to 
an  extent  the  first  mentioned  evil.  The  Central  bank  of 
the  country  in  close  co-operation  with  the  Government  and 
the  banking  system  could  obtain  sufficient  control  over  the 


15.    Appendix     29.— Representation     of  the     Bombay     Exchange     to     Morisson 
Committee. 


396  LONG-TERM  CAPITAL  MARKET 

capital  market  to  enable  it  to  mitigate  if  not  eliminate  the 
third  evil. 

But  it  will  be  found  on  further  analysis  that  ultimately 
these  defects  proceed  from  the  central  fact  that  the  whole 
mechanism  of  the  market  rests  on  the  foundation  of  indivi- 
dual judgment  and  investment  enterprise.  Experience 
proves  that  the  existence  of  apparently  expert  and  specialis- 
ed intermediaries,  the  brokers,  does  not  modify  in  any 
substantial  manner  the  drawbacks  and  weaknesses  of  in- 
dividual judgment  which  is  always  lay  and  uninstructed 
judgment.  These  drawbacks  and  weaknesses  constitute 
the  real  basic  problem  of  the  capital  and  investment  mar- 
ket and  the  main  direction  of  reform  must  be  to  find  effec- 
tive means  to  protect  the  investor  against  himself. 

The  growth  of  insurance  in  recent  times  is  very  sugges- 
tive and  offers  an  instructive  precedent  for  such  protection. 
What  insurance  companies  achieve  in  the  field  of  protection 
against  the  uncertainties  of  life,  investment  trusts  whether 
of  the  general,  fixed,  or  unit  type,  could  achieve  in  the  field 
of  protection  against  the  uncertainties  of  investment.  For 
the  fulfilment  of  this  purpose,  two  fundamental  changes 
will  have  to  be  effected.  Individuals  should  be  legally  de- 
barred from  subscribing  to  or  holding  the  shares  and  stocks 
of  individual  companies,  all  contributions  to  capital  in 
future  being  allowed  only  through  investment  trusts. 
Secondly,  as  in  the  case  of  insurance  companies,  the  invest- 
ment of  funds  by  these  trusts  should  be  regulated  by  law. 
Trusts  of  this  kind  rather  than  industrial  banks,  as  suggested 
by  some,  offer  a  more  promising  solution  of  the  vexed 
problem  of  supply  of  long-term  or  medium-term  capital  to 
industry.16 

18.     Banking  Funds  and  Stock  Exchanges 

We  have  noted  that  the  character  of  each  money  market 
varies  according  as  there  is  a  smaller  or  larger  scope  for 
loans  to  bill-business,  business  in  stocks  and  shares,  and,  in 
countries  where  banks  are  more  or  less  localised, — inter- 
bank needs.  In  London,  the  larger  proportion  of  call  loans 

16.  For  full  details  of  this  proposal,  see  Ch.  V,  VI  and  VIII  of  the  Author's 
Economics  of  Post-War  India,  2nd  ed.  (Hind  Kitabs  :  Bombay). 


BANKING  FUNDS  AND   STOCK  EXCHANGES  397 

generally  finds  its  way  into  the  bill-market.  But  in  New 
York  where  the  banking  system  lacked  centralization  of 
reserves  and  central  banking  facilities  for  a  long  time,  the 
device  of  settlements  every  next  day  seems  to  have  been 
adopted  as  a  means  of  placing  funds  in  an  easily  withdraw- 
able manner.  Even  after  the  operation  of  the  Federal 
Reserve  System  for  more  than  a  quarter  of  a  century,  the 
stock  exchange  continues  to  absorb  the  bulk  of  available 
short-term  funds.  It  is  possible  that  these  sporadic  injec- 
tions and  withdrawals  of  funds  according  to  the  needs  of 
banks  is  an  important  factor  in  the  well-known  instability 
of  values  on  the  New  York  Stock  Exchange.  In  other 
countries,  loans  to  the  stock  exchanges  tend  to  approximate 
to  the  periods  of  settlement  while  the  bill  and  discount 
market  furnishes  the  banks  with  access  to  the  funds  of  the 
central  bank. 

It  has  been  sometimes  suggested  that  a  large  participa- 
tion in  loans  to  the  stock  exchanges  makes  the  banking 
system  vulnerable  to  the  ups  and  downs  of  security  mar- 
kets. The  belief  seems  hardly  well-founded.  When  banks 
make  such  loans,  it  is  their  practice  to  protect  themselves 
with  quite  conservative  margins.  So  long  as  this  precau- 
tion is  observed,  there  is  no  reason  why  banks  should  incur 
losses  on  this  account.  Experience  proves  that  brokers' 
loans  are  the  most  liquid  and  reliable  investments.  What 
difficulties  have  been  encountered  relate  to  loans  to  custo- 
mers for  that  purpose.  Looking  at  it  from  the  stand-point  of 
the  economic  system  as  a  whole,  it  is  the  irresponsible  and 
panicky  behaviour  of  funds  from  non-banking  sources  which 
has  caused  grave  embarrassments  on  the  stock  exchanges. 
Recent  legislation  in  the  United  States  is  partly  directed 
to  squeeze  out  these  non-banking  sources  from  at  least  the 
official  business  on  the  stock  exchange  and  to  concentrate 
loans  in  the  hands  of  banks. 

There  is  nevertheless  a  sense  in  which  loans  to  the  stock 
exchanges  are  a  weakness  to  the  management  of  the  bank- 
ing system  as  a  whole.  Speculation  on  stock  exchanges  is 
speculation  in  price-differences.  At  certain  times,  the  anti- 
cipated changes  relate  from  one  day  to  another  and  are  apt 
to  range  over  several  points.  Interest-rates  as  high  as  10 


398  LONG-TERM  CAPITAL  MARKET 

per  cent  and  even  more  mean  nothing  more  than  an  insigni- 
ficant fraction  of  a  rupee  for  a  day,  week  or  month  and  as 
such  are  hardly  calculated  to  check  the  course  of  events  on 
the  market.  No  effective  means  could  be  found  either  to 
enforce  any  special  rates  of  interest  for  the  stock  exchange 
which  will  not  be  evaded  or  will  not  impinge  on  other  parts 
of  the  economic  system.  This  inability  to  control  stock 
exchanges  is  a  contrast  to  the  ease  and  effectiveness  with 
which  interest-rates  reach  the  economic  system  through  the 
medium  of  the  bill  and  discount  market. 

It  is  sometimes  thought  that  loans  to  stock  exchanges 
imply  a  diversion  of  funds  from  legitimate  trade  and  in- 
dustry into  speculation.  The  belief  is  founded  on  a  mis- 
apprehension which  becomes  clear  when  we  follow  the 
trail  of  such  loans.  If  such  a  loan  is  used  to  buy  an  existing 
security,  one  of  two  things  must  happen.  The  receiver  of 
the  price  may  use  it  to  repay  a  loan  to  a  bank  in  which  case 
indebtedness  has  been  merely  shifted  from  one  person  to 
another.  Alternatively,  the  price  realised  may  be  used  by 
the  previous  holder  for  consumption  purposes  which  means 
that  the  borrower  must  ultimately  pass  the  scrip  to  some 
one  with  new  savings.  In  either  case  the  loan  to  the  stock 
exchange  has  not  affected  the  distribution  of  resources  be- 
tween saving  and  consumption.  If  the  loan  is  applied  to 
the  purchase  of  a  new  scrip  altogether,  the  bank  has  either 
supplied  capital  in  anticipation  of  new  savings  or  if  the 
new  scrip  does  not  turn  out  well  has  enabled  the  specula- 
tor to  finance  his  loss.  To  the  extent  the  investment  is 
justified,  funds  have  been  usefully  applied  to  trade  and  in- 
dustry. To  the  extent  that  the  judgment  has  miscarried, 
there  is  a  loss  of  new  savings  for  which  banks  cannot  in 
any  way  be  saddled  with  blame.  Unless  banks  undertake 
the  direction  of  investment  by  acting  as  brokers,  advisers 
or  underwriters,  their  responsibility  could  not  extend  be- 
yond making  funds  available  whenever  sound  and  reliable 
security  is  offered. 

No  statistics  are  available  of  the  extent  to  which  the 
Bombay  Stock  Exchange  is  dependent  on  funds  from  banks. 
It  is  probable  that  loans  from  banks  do  not  hold  as  impor- 
tant a  place  in  these  dealings  as  in  the  case  of  countries  like 


BOMBAY  BULLION  EXCHANGE  399 

U.S.A.17  Much  of  the  speculation  is  undertaken  by  mem- 
bers on  their  own  account  and  the  funds  are  derived  very 
largely  from  private  sources.18 

II.    THE  BOMBAY  BULLION  EXCHANGE 

Investment  in  precious  metals  has  always  held  a  great 
place  in  the  Indian  economy.  It  would  be  difficult  to  say 
whether  the  chief  motive  in  the  growth  of  this  practice  was 
the  desire  for  ornamentation  or  for  a  secure  store  of  value. 
It  may  be  presumed  that  for  all  practical  purposes  neither 
motive  could  have  grown  to  the  strength  it  has  without  the 
presence  of  the  other.  This  fact  gives  ground  for  the  hope 
that  if  either  of  them  is  weakened  on  account  of  social  or 
economic  changes,  the  practice  as  such  will  disappear  much 
more  quickly  than  many  people  have  dared  to  hope. 

Continuous  absorption  of  precious  metals  as  a  store  of 
value  is  indeed  inherent  in  the  economic  situation  of  India. 
In  highly  industrialised  countries,  the  alternative  to  pre- 
cious metals  is  house-ownership  which  holds  before  the  eyes 
of  the  ordinary  man  the  very  same  assurance  of  solidity  and 
tangibility  with  the  additional  attraction  of  some  income  as 
far  as  one  may  care  to  see.  Till  recently,  India  as  a  land 
of  villages  lacked  this  outlet  for  investment  of  savings  out 
of  moderate  incomes.  In  advanced  countries  like  England 
and  the  United  States,  house-building  is  estimated  to  ab- 
sorb as  much  as  half  the  annual  national  savings.  In  India, 
illiteracy,  ignorance,  insecurity,  etc.,  may  have  aggravated 
the  inclination  to  seek  shelter  in  precious  metals  but  the 
main  cause  has  been  the  absence  of  alternative  forms  of 
investment. 

17.  Reserve  Bank  Circular,  29th  Jan.  1947 

18.  Bombay  Stock  Exchange 

Value  of  Shares  bought  and  sold  as  per  Broker's  Lists. 

(figures  in  lakhs) 

Year.  Minimum  in  Maximum  in  Total  for  12 

12  months  12  months  months 

1932  5,20  10,99  91,77 

1933  9,94  33,62  256,14 

1934  16,17  58,86  400,17 

1935  41,25  84.66  621,35 

1936  28,61  83,30  585,82 

1937  67,06  141,25  1150,01 


400  LONG-TERM  CAPITAL  MARKET 

We  have  seen  already  that  in  more  recent  times,  other 
forms  of  investment  have  been  gaining  very  rapidly  over 
this  primitive  way  of  storing  value.  Of  total  visible  invest- 
ments, the  proportion  invested  in  gold  and  silver  has  declin- 
ed very  impressively — although  the  absolute  absorption  in 
normal  times  still  remains  very  large.19  Indeed  there  is 
ground  for  the  assertion  that  purely  economic  factors  and 
economic  consequences  relating  to  movements  in  and  out 
of  precious  metals  have  not  received  their  due  attention 
while  the  part  of  the  steady,  unvarying  social  factors  has 
been  correspondingly  exaggerated.  Of  course  harvests, 
agricultural  prices,  festive  and  marriage  seasons,  etc.  have 
been  always  reckoned  in  estimating  the  demand  for  metals 
and  profits  of  the  trade.  But  one  factor  has  been  generally 
left  out  of  account  and  its  economic  implications  not  pro- 
perly assessed,  namely,  the  course  of.  the  exchange  rate. 

A  rise  in  exchange  rate,  specially  under  a  currency 
system  like  ours,  is  tantamount  to  an  immediate  reduc- 
tion in  the  price  of  gold.  Many  people  are  tempted  to 
take  advantage  of  the  apparent  cheapness  by  their  convert- 
ing other  forms  of  savings  into  gold  and  silver  or  forgoing 
a  part  of  their  normal  consumption  in  order  to  add  to  their 
stocks  of  the  precious  metals.  These  artificially  stimulated 
imports  have  to  be  paid  for  and  actually  result  in  a  larger 
volume  of  exports  than  usual.  This  should  explain  how 
during  a  period  of  appreciation  of  the  rupee  like  1923-26, 
our  ordinary  imports  did  improve  but  exports  actually 
outstripped  them  in  a  paradoxical  manner. 

In  other  words,  the  harm  from  an  appreciating  ex- 
change may  not  be  visible  in  an  actual  striking  increase  in 
imports  and  a  reduction  in  exports.  The  harm  may  take 
the  shape  of  placing  a  premium  on  unproductive  investment 
in  precious  metals  and  causing  unnecessary  exports  in  order 
to  acquire  the  metals. 

A  fall  in  the  exchange  rate  reveals  itself  immediately  as 
an  increase  in  the  price  of  gold.  Two  different  develop- 
ments are  recorded  in  our  history. 

The  prolonged  fall  in  the  exchange  rate  between  1871  and 

19.    Ch.  n  §  2. 


BOMBAY  BULLION  EXCHANGE  401 

1893  illustrates  one  type  of  development.  The  rise  in  the 
price  of  gold  caused  a  perceptible  decline  in  the  imports  of 
gold.  While  a  part  of  the  resources  thus  saved  may  have 
gone  into  consumption,  much  the  larger  part  seems  to  have 
converted  itself  into  silver  rupees.  With  silver  as  our  stand- 
ard, the  price  of  silver  in  contrast  with  that  of  gold  remain- 
ed unchanged  and  thus  brought  it  into  favour.  Almost  all 
the  silver  imported  in  these  years  found  its  way  into  the 
mint  although  only  a  part  was  added  to  the  circulation. 
People  preferred  to  hold  their  savings  in  form  of  currency 
rather  than  as  ornaments. 

The  decline  in  imports  of  gold  and  an  increase  in  the 
expenditure  on  consumption  may  have  been  a  part  of  the 
explanation  of  the  striking  increase  of  imports  as  compared 
with  exports  which  was  noted  as  a  paradoxical  feature  of 
those  years  by  the  Herschell  Committee. 

When  sterling  and  with  it  the  rupee  left  their  gold  basis 
in  September  1931,  the  situation  was  materially  different. 
Among  other  changes  the  advance  of  price  of  gold  had 
come  after  a  long  period  of  30  years  of  relative  prosperity 
during  which  the  country  had  acquired  a  stock  of  gold  of 
more  than  Rs.  500  crores.  The  rupee  was  now  a  token  coin 
and  the  rupee  price  of  silver  followed  the  same  direction 
as  gold  price.  The  sensational  increase  in  the  price  of  gold 
and  some  increase  in  the  price  of  silver  were  no  ordinary 
temptations  to  make  profits  while  the  boom  lasted.  In  six 
years  after  the  abandonment  of  the  gold  standard,  gold 
averaging  to  Rs.  50  crores  per  annum  left  the  shores  of 
India. 

There  can  be  little  doubt  that  a  small  part  of  this  wind- 
fall was  used  for  consumption,  i.e.  to  support  the  volume  of 
imports.  A  large  part  found  its  way  into  investment. 
From  1931  to  1935,  imports  on  the  whole  show  much  less 
elasticity  than  exports.  There  is  nothing,  however,  in  the 
composition  of  our  imports  to  warrant  the  belief  that  we 
imported  more  capital  goods  in  these  years  than  formerly; 
the  imports  represent  the  usual  consumption  and  investment 
demand.  The  agricultural  classes  generally  seem  to  have 
lost  in  favour  of  those  classes  which  invest  their  savings 
in  banks,  postal  saving  deposits  and  cash  certificates,  life 

M.   *    I.— 36 


402  LONG-TERM   CAPITAL   MARKET 

assurance  policies,  etc.  Currency  made  redundant  by  the 
severe  fall  of  prices  may  also  have  replaced  the  former  gold 
hoards  on  quite  an  appreciable  scale. 

19.     The  Bullion  Exchange 

It  is  natural  that  a  market  should  have  developed  to 
facilitate  these  enormous  dealings  in  precious  metals.  The 
Bombay  Bullion  Exchange  originated  in  the  regular 
trading  which  used  to  take  place  once  on  the  pavements 
and  footpaths  of  the  Kalbadevi  area.  Systematic  trading 
began  with  the  foundation  as  late  as  1923  of  the  Bombay 
Bullion  Exchange.  As  in  the  case  of  other  markets,  the 
discipline  and  control  of  this  Exchange  cannot  be  described 
as  strict,  although  the  Association  has  its  manual  of  elabo- 
rate rules.  Arbitrary  closing  of  the  Exchange  has  some- 
times been  complained  of. 

Conditions  in  the  Bullion  Exchange  are  so  inherently 
different  from  those  on  the  Stock  Exchange  that  both  in 
organisation  and  in  general  atmosphere  the  former  presents 
quite  an  impressive  contrast.  In  the  first  place,  the  Bullion 
Exchange  deals  only  in  two  commodities,  the  qualities  of 
which  are  uniform  and  easily  ascertainable.  Secondly, 
price  of  these  commodities  are  determined  in  all  ordinary 
circumstances  by  international  conditions  and  sometimes, 
specific  laws  of  particular  countries.  As  a  rule,  they  fluctu- 
ate within  narrow  margins  or  in  a  manner  which  may  be 
accurately  foreseen  by  the  instructed.  It  has  been  also 
claimed  on  behalf  of  the  Exchange  that  members  have 
avoided  difficult  situations  by  refraining  from  undertaking 
operations  on  behalf  of  persons  of  doubtful  financial  stand- 
ing. These  conditions  made  for  a  more  even  tenor  of 
trade  as  also  a  less  elaborate  kind  of  organisation. 

Traders  in  the  Bullion  Exchange  fall  into  two  classes: 
members  and  brokers.  None  but  members  are  admissible  to 
the  forward  ring.  Another  difference  between  members 
and  brokers  is  that  when  a  party  to  a  contract  fails,  the 
member  is  bound  to  fulfil  the  contract.  A  broker  placed 
in  the  same  circumstances  need  only  forgo  his  commission 
and  has  no  further  penalties  to  incur.  Conditions  of  admis- 
sion to  the  Bullion  Exchange  are  hardly  onerous.  Apart 


BOMBAY  BULLION  EXCHANGE  403 

from  introduction  etc.,  membership  can  be  acquired  on  pay- 
ment of  Rs.  11  for  an  Associate  Member  and  Rs.  51  for  a 
member.  In  practice,  social  connections  and  apprentice- 
ship in  the  complicated  way  of  the  Exchange  from  early 
age  tend  to  limit  membership  to  certain  communities. 

Deals  are  undertaken  under  two  forms  of  agency.  In 
Katchi  Adat,  the  member  merely  brings  together  the  out- 
side client  and  the  bazaar  party,  charges  the  prescribed  com- 
mission and  incurs  no  liabilities  for  the  ulimate  ful- 
filment of  the  contract.  In  Pakki  Adat,  the  member,  although 
acting  on  behalf  of  an  outsider,  is  a  principal  to  the  contract. 
He  may  be  called  upon  to  buy  or  deliver  the  bullion  as  the 
case  may  be,  or  in  the  alternative  to  pay  the  difference. 
When  a  member  sells  bullion  on  behalf  of  a  client,  it  is 
customary  for  the  latter  to  draw  a  hundi  on  the  member. 

The  unit  of  transactions  on  the  exchange  is  the  same  for 
cash  as  for  forward  business,  namely,  250  tolas  for  gold  and 
2,800  tolas  for  silver.  In  the  case  of  gold,  the  fineness  pre- 
scribed is  90  fine  for  cash  and  100  fine  for  forward  business, 
a  margin  in  the  case  of  the  latter  up  to  94  being  allowed. 
In  case  of  unusual  difficulties  in  delivery,  however,  the  ex- 
change has  been  known  to  alter  the  fineness  to  facilitate 
fulfilment  of  contracts.  To  cite  an  example,  while  the  mar- 
gin for  fineness  of  silver  was  ordinarily  996-999,  it  was 
lowered  on  18th  Dec.  1939  to  as  much  as  916  owing  to  inabi- 
lity to  refine  the  silver  delivered  by  Government  according 
to  its  own  standard  of  ll/12th  fine.  Actually  the  rule  never 
went  into  operation.  According  to  the  change  in  the  degree 
of  fineness,  adjustments  are  made  in  the  price  of  bars. 

The  Exchange  has  a  fixed  scale  of  commission  for  all 
business.  For  ready  deals,  the  commission  is  3  pies  per 
tola  in  the  case  of  gold  and  1  anna  per  100  tolas  in  the  case 
of  silver.  For  forward  business,  the  scale  is  3  pies  per  tola 
for  gold  and  14  annas  per  2,800  tolas  for  silver. 

The  most  important  activity  of  the  Exchange  is  dealings 
in  options,  the  so-called  teji  and  mandi  transactions  of 
buyers  of  options  or  ^f  ^  ^  and  sellers  of  options  or 
<3  IT  ^  3T  *•  'Put'  as  us^al  is  the  right  to  sell  bullion  at 
the  agreed  price  at  some  future  date.  Obviously,  the  party 
which  buys  the  right  expects  that  the  price  on  that  specific 


404  LONG-TERM   CAPITAL   MARKET 

date  will  be  less  than  the  agreed  price.  'Call'  is  the  right 
to  buy  bullion  on  similar  conditions  and  is  founded  on  the 
expectation  that  the  price  on  the  future  date  will  rise.  The 
agreed  price  is  usually  the  market  price  of  the  day  and  the 
period  of  the  option  is  generally  between  a  fortnight  and 
two  months.  The  advantage  of  'put'  or  'call'  lies  in  this. 
If  the  expected  change  in  the  price  is  frustrated,  the  pur- 
chaser of  the  right  can  forgo  its  exercise  by  paying  down 
its  price  and  thus  limit  his  loss  to  the  price.  If  a  'put' 
were  purchased  at  a  price  of  annas  4  per  100  tolas,  the 
maximum  loss  per  unit,  i.e.  the  standard  bar  of  2,800  tolas 
could  be  only  280  x  4  annas,  i.e.,  Rs.  70.  If  the  change  in 
the  price  of  bullion  is  so  adverse  that  the  exercise  of  the 
right  will  mean  a  loss  of  more  than  Rs.  70,  it  would  be  ad- 
vantageous to  forgo  the  right  and  pay  the  penalty  of  Rs. 
70.  The  actual  deals  are  much  more  complicated  since 
'put*  and  'call*  are  combined  in  a  most  bewildering  number 
of  ways. 

The  Bank  of  India  is  in  charge  of  the  clearing  system  of 
the  Exchange.  At  the  close  of  each  account  period,  the 
Board  of  the  Exchange  fixes  the  making  up  price.  If  a 
member  fails  to  deliver  the  bullion,  the  buyer  buys  it  at 
the  auction  and  the  seller  has  to  bear  the  price  difference. 
The  loss  to  the  seller  is,  however,  limited  by  the  rule  that 
he  will  not  pay  per  100  tolas  more  than  Rs.  3-8-0  above  the 
market  price  fixed  at  the  auction  for  the  next  settlement. 
The  advantage  of  a  corner  to  raise  the  price  against  the  sell- 
er is  thus  severely  restricted.  Perhaps  the  fact  that  the 
price  of  the  commodities  cannot  under  normal  circumstances 
widen  very  much  makes  such  regulation  practicable  and 
effective. 

III.    LIFE  INSURANCE 

In  analysing  the  disposal  of  our  annual  savings  we  have 
recorded  how  life  assurance  funds  have  grown  in  a  remark- 
able manner  since  1920  and  how  the  pace  has  been  more 
rapid  since  1930.  The  figures  available  for  the  pre-War 
year  1937  reveal  that  aggregate  life  assurance  busi- 
ness in  force  was  277  crores  for  private  companies  and  19 


LIFE  INSURANCE  405 

crores  for  the  post  office  insurance  scheme.  The  aggregate 
premium  income  for  the  year,  i.e.  the  contribution  of  the 
public  towards  life  insurance  in  that  year  exceeded  Rs.  15 
crores  as  against  6-J  crores  in  192820  To  this  figure,  we 
must  add  about  5  crores  more  on  account  of  non-life  insur- 
ance and  post  office  life  assurance. 

There  is  little  doubt  that  there  is  still  a  good  deal  of  scope 
for  further  expansion  in  this  kind  of  investment.  Some 
indication  on  this  point  is  offered  by  the  average  sum  as- 
sured in  the  new  policies  from  one  year  to  another. 

Average   Sum  per   Policy 


Non-Indian 

Post  Office 

Indian   Companies 

Companies 

Insurance 

Rs 

Rs. 

Rs. 

1929 

1,628 

3,086 

1,890 

1931 

1,764 

3,400 

1,690 

1934 

1.528 

3,213 

1,690 

1936 

1,504 

3,148 

2,157 

1937 

1,485 

3,089 

2,150 

]  939 

1,460 

3,244 

1,940 

1941 

1,808 

4,781 

1945 

2,128 

5,727 

.... 

1946 

2,205 

6,114 

1947 

2,177 

6,170 

The  Indian  companies  are  obivously  supporting  the  main 
burden  of  reaching  the  less  well-to-do  classes  of  our  people. 
In  a  country  where  about  42  lakhs  of  account  holders  in 
the  postal  savings  banks  show  a  per  head  claim  of  Rs.  193 

20. 

1928  1929  1931  1936  1939  1941  1942  1943  1944  1945  1946  1947  1948 
Total  Assurance 

in  force  135     155     184     279     298     291     266     310     366     480     414     547     566 

Premium 
Income  68      7.9      9.2    18.9    15.6    145    12.6    15.4    31.2    38.4    44.6    485    51.5 

The  suggestion  to  establish  State  Life  Assurance  was  first  made  by  Sir  Richard 
Temple  the  Finance  Member  in  1872  but  was  rejected  after  a  great  deal  of 
discussion.  It  was  revised  by  the  Director-General  of  Post  Office  and  accepted  by 
the  Government  in  1881  and  a  scheme  was  introduced  in  1884. 

The  insurance  scheme  was  first  confined  to  the  employees  of  the  Post  Office. 
In  1887  the  privilege  was  extended  to  the  Telegraph  Department  and  in  1895 
to  employees  of  the  Indo-European  Telegraphs  and  to  women  employed  in  all 
departments.  In  1898,  the  benefit  was  extended  to  all  permanent  Government 
servants  as  also  certain  members  of  establishments  of  the  Military  Departments. 
Subsequent  extensions  covered  temporary  Government  servants  or  servants  in 
foreign  service  in  India. 

At  first  tables  of  premia  were  calculated  from  mortality  rates  from  experience 
of  the  uncovenanted  Service  Family  Pension  Fund — a  fund  confined  to  European 
residents  in  India.  In  1912,  the  Actuary  at  the  India  Office  revised  the  tables  from 
the  past  experience  of  the  Fund. 


406  LONG-TERM   CAPITAL   MARKET 

only,  an  average  sum  assured  of  about  Rs.  1,500  is  still  re- 
latively high.  Besides,  the  figures  for  the  last  few  years 
do  not  disclose  any  tendency  to  fall,  which  suggests  that 
new  and  lower  income-classes  have  yet  to  be  persuaded  to 
adopt  this  form  of  saving. 

The  manner  in  which  insurance  companies  invest  their 
funds  is  bound  to  be  a  factor  of  growing  importance  in  the 
long-term  capital  market.  The  following  distribution  of 
the  assets  of  Indian  life  assurance  companies  is  sufficiently 
illustrative  of  the  point.21 

Figures  in  crores 
1937     1941     1945 

Total  Business  in  Force  . .         .  .       29.6      29.1      55.1 

Total  Business  in  India  .  .         .  .       18.4      23.7      45.9 

Indian  Government  Securities  . .       28.2      46.7      87.2 

Municipal  Improvement  Trust  Boards  5.2        6.0        6.8 

Mortgages  on  Property  . .         . .         2.1        2.1         1.3 

Land  and  House  Property  .  .         . .         3.2        5.5        5.5 

Shares  in  Industrial  Companies  . .         4.1        7.2       13.0 

(Total)       32.8       67.5     113.8 

Other  Investments 23.1       16.8      24.0 

Grand  Total      55.9      84.3     137.8 

It  is  clear  that  insurance  companies  although  in  a  much 
stronger  position  than  banks  are  in  no  way  more  venture- 
some. While  investment  in  Government  securities  is 
essential  to  a  certain  extent,  these  concerns  could  easily 
cultivate  some  of  our  neglected  fields  of  investment  like 
industrial  debentures,  house  building  societies,  etc.  At 

21.     This  distribution  of  assets  does  not  give  an  accurate  picture  of  the  practice 
of    the    majority    of    Indian    Companies.       For,    the    figures    are    inclusive    of    the 
Oriental   Insurance  Company  which  accounts  for  about  half  the  investments.      It 
invests    very    largely    in    Government    securities    and    for    the    7^eason    quotes    the 
highest  premium  rates      The  exclusion  of  Oriental  Insurance  Company  alters  the 
percen'a^e  thare  of  each  type  of  investments  in  the  following  striking  manner. 

Percentage  to  Total   Investments 
All  Indian  All  Indian  Companies 

Companies  ex-Oriental  Insurance  Co. 

Loans  and  mortgages          ....  14  16 

Indian  Government  Securities         . .  51  35 

Other  Gilt-edged  Securities  12  15 

Shares  ......  6  10 

Landed  and  House  Property  5  7 

Miscellaneous          ......  12  17 

In  1940,  the  Oriental  Insuranie-Co.,  amended  its  rules  to  enable  investment 
in  mortgages. 


POSTAL  SAVINGS  BANKS  &  CASH  CERTIFICATES 


407 


present,  their  contribution  to  the  great  task  of  cultivating 
.new  investment  habits  lies  only  in  life  insurance  as  such. 

IV.     POSTAL  SAVINGS  BANKS 
AND  CASH  CERTIFICATES  21a 

Post  office  savings  banks  and  postal  cash  certificates  are 
the  most  far-reaching  agency  created  by  Government  to 
attract  the  small  investor  in  this  country.  First  established 
in  1882,  postal  savings  banks  supplanted  before  the  close  of 
the  century  the  pre-existing  district  savings  banks  and  the 
Presidency  towns  Government  savings  banks  and  today  they 
show  230  head  branches  and  11,879  sub-branches.  The  ex- 
tent of  their  operations  will  be  better  realised  when  it  is 
recalled  that  towns  with  a  population  of  5000  and  ove> 
aggregate  in  India  to  about  2300  only. 

The  limits  on  deposits  that  can  be  made  in  any  single 
year  and  the  total  balance  that  can  be  held  by  a  single  de- 
positor are  now  Rs.  750  and  Rs.  5000  respectively  while  the 
limit  for  balance  in  the  accounts  of  minors  is  Rs.  1000  only.22 
Various  suggestions  have  been  made  to  raise  the  limits, 


21a. 


Postal  Savings  Banks,  etc. 


0)  <U 

£>  ft 

*! 

"o 

2 

& 

3 

<L>  .j 

8  g 

S 

o 
CJ 

§  M 

O>  O 

SZ 

w 

43  o 

1  ^ 

CO 

•0 

3  *•« 

"9  " 
d  w 

'o 

%•-< 

0 

OJ  0 

«  g 

CO  O 

«^ 

w 

&  w 

«  OJ 

"c 

1^ 

nn  0 

->_ 

JH 

0)  r; 

o 
<u  a 

aj  ^ 
U  «   . 

§ 

s? 

"0  a 

TO   (J    . 

ll 

*  JG 

1| 

|| 

W)  t> 

gs 

tuo  <y 

03  P 

5>  . 

O  ^5 

a  -— 

3§| 

(/5  j_,  ^C 

c 

1 

1! 

tn 
£ 
JX 

^  o  « 

|l 

___  1  1 

<  s 

3  S 
<  a 

O  0)  W 

0-4  U   ~ 

o 
O 

1  S 

a 

IS  DO 

635 

1'iOO 

816 

123 

1004 

mo 

1430 

118 

1692 

_1(}20-2l 

1877 

121 

2286 

434 

459 

1925-LG 

2317 

117 

1927-2R 

211 

2706 

2">(5 

12070 

26502 

125 

3266 

J  928-29 

162  6 

25G 

12166 

27605 

170 

3449 

3230 

1929-30 

180.5 

256 

12512 

29081 

161 

3713 

3500 

1930-33 

192.8 

2477 

256 

12590 

28822 

149 

3702 

3843 

578 

1937-38 

2998 

230 

12401 

61350 

204 

7749 

6021 

1938-39 

0-50  2 

4241 

230 

11879 

67602 

193 

8186 

5957 

1077 

1939-40 

£86  1 

4583 

ZZQ 

11640 

65978 

171 

7832 

5702 

1945 

3095 

259 

8022 

3582 

1946 

G13.1 

3517 

232 

10970 

102703 

328 

11505 

3876 

1947 

355.0 

3973 

232 

10957 

127221 

358 

14235 

3922 

1948 

346.8 

3153 

188 

8902 

140934 

406 

12811 

3769 

307 

1949 

361.9 

3426 

192 

9273 

156879 

433 

14849 

749 

22.    Ch.  II  §  2;  Ch.  VI  §  6;  Tables  XXIV,  XXV,  XXVIII  and  XXIX. 


408  LONG-TERM   CAPITAL   MARKET 

allow  deposit  and  withdrawal  by  cheques,  facilitate  joint- 
accounts  and  payment  to  survivors,  increase  the  number  of 
offices,  extend  as  in  the  United  Kingdom  the  local  obligation 
to  pay  or  receive  into  a  general  obligation  valid  in  all  parts 
of  India,  etc.  As  we  have  already  stressed,  joint-stock  banks 
now  offer  similar  facilities  and  inducements  while  the 
growth  of  savings  deposits  has  been  most  remarkable.23 
The  limits,  for  example,  fixed  by  the  Imperial  Bank  of 
India  for  its  savings  bank  accounts  are  Rs.  5000  in  any  sin- 
gle year  and  Rs.  10,000  for  the  maximum  balance  permitted 
in  an  account.  Not  more  than  one  withdrawal  is  allowed 
per  week. 

We  have  had  occasion  to  remark  on  the  enormous  growth 
of  small  savings  which  has  occurred  since  1930.  The 
growth  in  the  case  of  postal  savings  has  occurred  very 
largely  by  an  increase  in  the  number  of  depositors.  About 
8  lakhs  in  1900,  the  figures  stood  at  10  lakhs  in  1920  and  24 
lakhs  in  1930.  Although  the  number  of  branches  has  not 
varied  much  since  1920,  the  number  of  depositors  rose  to 
more  than  42  lakhs  in  1938-39. 

The  average  balance  in  each  branch  has  naturally  kept 
pace  with  the  growth  of  the  number  of  depositors.  But  it 
is  noteworthy  that  the  deposit  per  head  which  was  fairly 
stable  or  slowly  progressing  till  1930  mounted  with  asto- 
nishing speed  in  the  depression  years  thereafter.  Several 
causes  of  varying  importance  have  been  at  work  to  bring 

23.  Max.    Deposit  Total    Max.  Interest 

per  annum  Deposit 

Rs.  Rs. 

1883-85  Govt.  Banks,  Presidency  Towns        500  300  4  p.c. 

1870  Dist.  Savings  Banks  „  3000  32 

1879  Dist.  &  Other  Govt.  Saving  Banks         „  5000  4  1/6     „ 

1880  „  „  „  „  3000  3t          p.c. 

Also  see  p.  127  f.n.   10. 
"There  is  nothing  to  prevent  a  man  having  any  number  of  imaginary  relative^ 

and  opening  accounts  in  all  their  names a  case  came  to  light  some  years 

ago  in  which  a  depositor  at  Dharwar  was  authorised  to  operate  on  eighty-three 

accounts   with  a   balance   of   nearly   Rs.   30,000 further  inquiries  made  at 

the   time   elicited   that   one   depositor   at   Bijapur   controlled  forty-two  accounts, 

another  at  Surat  thirty,  and  another  at  Karwar  nineteen These  deposits 

represent  a  very  high  proportion  of  the  total  in  India  so  that  the  action  of 
any  strong  body  of  depositors  in  Bombay  has  a  very  serious  effect  on  the  balance 
of  the  Savings  Bank." 

—The  Post  Office  of  India  &  Its  Story,  by  Geoffrey  Clark, 
(Bodley  Head),  p.  86 


RUPEE  DEBT  &  GOVERNMENT  BORROWING  POLICY  409 

about  this  result.  It  is  more  than  probable  that  fixed  depo- 
sits at  banks  have  lost  their  attraction  with  the  great  fall  of 
interest  rates.  A  part  of  the  improvement  is  accounted  for 
by  the  phenomental  exports  of  gold,  hoards  being  to  an  ex- 
tent converted  into  this  form  of  savings  deposit.  A  third  cause 
which  might  explain  the  contrast  between  the  behaviour  of 
fixed  deposits  and  postal  savings  deposits  is  that  with 
the  great  fall  of  prices,  the  number  of  well-to-do  persons, 
e.g.  assessees  to  the  income-tax  ceased  to  grow  while  the 
margin  for  saving  of  those  classes  which  depend  on  fixed 
or  relatively  inelastic  incomes  was  very  much  enlarged.24 

V.  THE  RUPEE  DEBT  AND  GOVERNMENT 
BORROWING  POLICY 

In  almost  all  countries  which  are  now  in  the  van  of 
industrial  and  economic  progress,  the  creation  of  public 
debt  led  the  way  to  the  investment  habit  which  became 
subsequently  the  foundation  of  their  commercial  and  indus- 
trial achievement.  Since  the  political  dependence  of  India 
These  remarks  hold  good  for  postal  cash  certificates  also.25 
on  England  made  this  country  an  outlet  for  the  investment  of 
British  capital,  it  was  hardly  to  be  expected  that  the 
growth  of  a  domestic  investment  habit  should  have  any 
place,  whether  as  the  most  important  bye-product  or  a  part 
of  the  main  objective  itself,  in  the  policy  of  public  loans.  As 
a  matter  of  fact,  it  was  the  settled  belief  and  policy  of  the 
Government  of  this  country  before  the  first  World  War  that 
not  more  than  5  crores  could  or  should  be  raised  in  the 
Indian  market  in  any  single  year.  It  was  only  under  the 
stress  and  compulsion  of  that  War  that  the  potentialities  of 
the  Indian  market  were  first  properly  assessed  and  in  the 
short  space  of  three  years  1917-1919,  loans  aggregating  to 
more  than  130  crores  were  raised.  In  the  ensuing  years  of 
deficit  budgets,  reconstruction  expenditure,  development  of 
railways,  irrigation,  forests,  reclamations  and  many  other 
miscellaneous  objects  of  provincial  concern,  the  experience 

24.  Ch.  Ill,  Part  II  (3). 

25.  Ch.  V  §   2. 


410  LONG-TERM   CAPITAL   MARKET 

of  the  War  proved  a  turning  point  in  policy  and  the  same 
steady  rate  of  borrowing,  about  30  crores  a  year,  was  main- 
tained till  the  onset  of  the  Great  Depression  in  1930. 

A  little  before  the  outbreak  of  World  War  I,  about  1910, 
an  important  change  took  place  in  the  relative  attractive- 
ness of  the  two  markets.  A  persistent  disparity  between 
the  prices  of  rupee  security  in  India  and  sterling  security 
in  England  made  it  clear  that  so  far  as  India  was  concerned, 
the  United  Kingdom  had  become  a  dearer  market  to  borrow 
in.  This  dearness,  explained  in  various  ways,  has  become 
even  more  marked  recently  and  is  bound  to  work  as  an 
overriding  factor  in  all  our  future  borrowing. 

World  War  I  initiated  a  trend  in  interest-rates  which 
has  changed  the  composition  of  our  public  debt.  It  was 
obvious  that  the  high  levels  caused  by  the  War  would  be 
only  temporary  and  must  in  due  course  be  followed  by  a 
more  or  less  long  period  of  falling  rates.  Funds  were  there- 
fore raised  by  means  of  terminable  loans  which  account 
today  for  the  bulk  of  our  public  indebtedness. 

As  the  bulk  of  our  public  debt  before  the  first  World 
War  was  covered  by  productive  assets  like  railways,  irriga- 
tion works,  etc.,  it  had  not  the  regrettable  meaning  which 
it  had  in  many  other  countries.  It  is  true  of  course  that  the 
expenditure  of  these  loans  could  have  been  so  managed  as 
to  expedite  the  creation  and  growth  of  Indian  industries  in 
place  of  British  industries.  And  apart  from  this  omission, 
it  could  be  argued  that  our  public  debt  deprived  private 
trade  and  industry  of  the  resources  it  needed  more  urgent- 
ly. It  would  be  more  legitimate,  however,  to  criticise  our 
borrowing  programme  on  the  ground  that  it  took  no  account 
of  market  conditions  and  the  state  of  trade  and  business 
generally.  Our  loans  and  programme  of  public  investments 
have  been  so  timed  that  they  have  sometimes  aggravated 
the  pressure  on  funds  and  at  other  times,  avoided  taking 
advantage  of  idle  savings  and  assisting  investment.  In  the 
years  of  abundant  funds,  1930-38,  for  example,  Government 
showed  themselves  keen  on  conversion  operations  and  in 
no  year  did  the  tender  of  cash  accepted  in  the  loans  exceed 
20  crores.  In  most  years,  the  tender  accepted  fell  much 
below  15  crores. 


AGRICULTURE  AND  LONG-TERM  CAPITAL  411 

So  long  as  borrowing  is  undertaken  for  productive  pur- 
poses and  the  credit  of  the  Government  is  high,  the  public 
debt  performs  an  important  service  towards  banking  and 
business.  It  supplies  the  market  with  the  most  market- 
able  kind  of  security.  Ordinary  banks  find  in  it  a  means 
of  cyclical  or  secular  adaptation  while  the  Central  bank 
depends  on  it  within  the  limits  of  its  character  or  law,  for 
open  market  operations.  Individuals  and  business  look  on 
it  as  an  investment  and  the  most  dependable  means  to  raise 
loans. 

On  31st  March  1939,  the  aggregate  rupee  debt  of  the  Gov- 
ernment of  India  and  provincial  Governments  stood  at  about 
440  crores  and  the  sterling  debt  at  about  £300m.  To 
the  rupee  debt,  we  must  add  the  loans  of  independent 
bodies  like  the  corporations  of  Bombay,  Calcutta,  etc.,  which 
have  statutory  powers  to  borrow  directly  on  their  own  ac- 
count. The  rupee  debt  of  Governments  thus  was  more  than 
twice  the  average  note-circulation  and  more  than  one  and 
a  half  times  the  fixed  and  current  deposits  of  banks  with  a 
paid-up  capital  of  1  lakh  and  more.  It  is  very  unlikely  that 
of  the  aggregate  public  debt  of  India,  more  than  150  crores 
of  the  rupee  debt  was  held  by  all  commercial  and  co-ope- 
rative banks  put  together.  During  World  War  II  the  export 
surplus  was  used  to  repatriate  our  foreign  debt,  and  to 
create  foreign  i.e.  British  obligations  towards  this  country 
to  the  extent  of  more  than  Rs.  1,200  crores.  The  addition  to 
the  domestic  unproductive  debt  itself  exceeds  600  crores.26 

VL    AGRICULTURE  AND  LONG-TERM  CAPITAL™* 

The  supply  of  long-term  capital  to  the  peasant  and  culti- 
vator is  one  of  those  economic  problems  of  India  which 
have  yet  to  be  dealt  with  on  any  significant  scale.  With  the 
money-lender  and  other  indigenous  agencies  of  rural  credit, 
there  hardly  exists  a  distinction  between  short-term  and 
long-term  finance.  In  spite  of  changes  of  law  and  status, 
their  mutual  relationships  still  retain  the  basic  elements  of 
a  hereditary  joint  enterprise.  Co-operation  which  aspires 
to  replace  these  ancient  agencies  has  avowedly  concentrat- 

26.  and  26a.     See  overleaf. 


412  LONG-TERM   CAPITAL   MARKET 

ed  itself  on  the  supply  of  seasonal  or  at  the  most  interme- 
diate credit.  There  is  a  general  agreement  that  long-term 
finance  must  be  undertaken  by  a  special  type  of  organiza- 
tion like  land-mortgage  banks. 

It  is  unlikely  that  one  uniform  type  of  credit  agency  will 
be  able  to  satisfy  the  long-term  needs  of  different  classes  of 
agriculturists.  The  big  landlord  or  zemindar  should  be 
able  in  all  ordinary  circumstances  to  raise  funds  from  com- 
mercial banks  in  the  country.  For  the  small  agriculturists, 
mutual  guarantee,  and  intimate  knowledge  and  association 
implied  in  co-operation  are  probably  the  only  basis  on  which 
funds  could  be  raised  and  banking  operations  managed 
with  success.  A  partial  modification  of  the  co-operative 
basis  may  be  necessary  to  the  extent  that  the  shortcoming 
of  agriculturists  in  business  ability,  knowledge,  etc.,  have 
to  be  remedied  by  the  admission  of  non-agricultural  persons 
into  the  management  and  organisation  of  such  institutions. 
As  the  Banking  Enquiry  Committee  well  observed  :  "While 
mutual  knowledge  of,  and  control  over,  one  another  among 

26.  OWNERSHIP  OF  CENTRAL  GOVERNMENT  RUPEE  LOANS 

1949   End. 

Central  Government  Percentage 

rupee  loans  io  total 
(in   croies) 

Reserve  Bank  of  India                                            2,16  *  15 
Scheduled  Banks  : 

Major  Indian                                                        2,31  16 

Other  Indian                                                            50  .1 

Exchange                                                                 41  3 

Non-scheduled  Banks                                                    10  1 

Co-operative  Banks                                                       27   **  2 

Insurance  Companies                                                 1,13  r  8 

Part   A   States                                                                   75  .,  5 

Part  B  States                                                               1,00   ;  7 

Held  by  the  Reserve  Bank  of   India 

on  account  of  others                                            1,83  13 

Held   by   non-residents                                                 50     ;  3 

Others                                                                               3,41  24 


Total  14,37  100 


*  The  total  of  rupee  securities  in  the  Issue  Department  and  investments  in  the 
Banking  Department  as  shown  in  the  weekly  statement  as  on  the  last  Friday  of 
1949,  less  holdings  of  treasury  bills. 

**  Including  Provincial  and  State  Government  Securities. 

t  Including  Securities  of  Part  A  States. 

$  Estimated. 

:j.t  End  of  June,  1948. 
26a.    See  Ch.  Ill  Part  V;  Ch.  VIII  §  10. 


AGRICULTURE  AND  LONG-TERM  CAPITAL  413 

members  is  the  insistent  feature  in  the  case  of  the 
unlimited  liability  credit  society,  the  insistence  in  the  case 
of  a  land-mortgage  credit  society  with  limited  liability  is  on 
the  capacity  and  business  habits  of  the  directorate  in  order 
to  ensure  sound  valuation  of  security,  careful  investiga- 
tion of  titles,  correct  assessment  of  the  borrower's  credit  and 
repaying  capacity,  and  efficient  management  of  affairs." 

In  1937-8,  there  were  166  land-mortgage  banks  in  British 
India  and  35  more  in  Native  States.  Only  a  few  provinces 
and  States  like  Bombay,  Madras  and  Mysore  have  central 
land-mortgage  banks  while  the  bulk  is  composed  of  primary 
land-mortgage  banks  or  societies.27  The  share  capital,  de- 
bentures, and  loans  received  from  central  banks  and  socie- 
ties of  the  aforesaid  166  societies  in  British  India  aggregate 
to  less  than  2J  crores.  Provincial  Governments  have  ap- 
pointed their  officers  on  the  managements  of  these  banks 
and  services  of  officers  of  the  revenue  or  co-operation  de- 
partments have  been  placed  at  their  disposal. 

In  defining  the  area  over  which  these  banks  or  societies 
have  to  operate,  physical  difficulties  of  transport  etc.  have 
to  be  carefully  weighed.  The  Punjab  and  Bombay  provinces 
have  adopted  the  same  territorial  unit,  the  tehsil  or 
taluka  and  more  often  the  district.  In  Madras,  a  radius  of 
5  miles  is  judged  more  appropriate  and  there  is  a  further 
tendency  to  limit  the  banks  to  fertile  areas.  Where  the 
district  is  selected  as  the  area  it  has  been  found  that  the 
bulk  of  applications  is  drawn  from  the  area  in  the  neigh- 
bourhood of  the  headquarters  of  the  bank,  the  more  dis- 
tant tehsils  or  taluka  finding  the  precedure  more  expen- 
sive or  not  easily  available. 

Equally  with  management,  finance  is  the  crux  of  the  pro- 
blem. It  is  clear  that  share  capital  cannot  furnish  more 
than  a  fraction  of  the  working  fund.  It  may  not  be  practi- 
cable or  indeed  desirable  to  depend  on  short-term  deposits 
for  investments  which  must  extend  over  10  to  20  years,  if 
not  indeed  longer.  In  Bengal,  deposits  running  from  2  to  5 
years  have  been  raised.  But  it  is  still  a  question  to  be  de- 

27.     (a)     Baroda  has  a   central  L.-M.  Bank,   but   it   deals  directly   with  agricul- 
turists.    So  also  some  other  States  like  Cochin  and  Travancore. 
(b)     In  Bengal,  the  Punjab  and  the  C.  P.  Provincial  Co-operative  Banks  act 
as  provincial  land-mortgage  banks. 


414  LONG-TERM   CAPITAL   MARKET 

cided  whether  it  would  not  be  wiser  in  the  long  run  to  pro- 
hibit the  acceptance  of  deposits  or  at  least  to  limit  them  as 
to  currency,  volume,  etc. 

The  flotation  of  debentures  must,  therefore,  be  the  chief 
means  of  raising  the  necessary  working  funds.  The  success 
of  debentures  depends  entirely  on  the  status  of  the  author- 
ity which  issues  them  or  on  the  guarantees  offered.  Since 
primary  banks  can  hardly  command  the  requisite  prestige 
and  credit,  the  central  land-mortgage  bank  as  in  Madras 
seems  to  be  best  qualified  to  undertake  the  responsibility. 
The  guarantees  in  vogue  are  of  two  kinds.  In  some  cases, 
the  provincial  Government  have  been  guarantees  as  to  either 
principal  or  interest  or  both  and  in  Bombay  and  else- 
where have  even  subscribed  to  them.  In  most  cases,  the 
debentures  enjoy  the  privilege  and  status  of  trustee  secu- 
rities. The  other  form  of  guarantee  consists  in  the  limita- 
tion of  the  issue  of  debentures.  It  has  been  suggested  that 
the  volume  of  debentures  should  not  exceed  15  to  20  times 
the  paid-up  capital  of  the  issuing  mortgage  banks  or  half  the 
value  of  property  mortgaged  to  them.  As  primary  societies 
cannot  float  debentures,  their  working  fund  is  composed 
largely  of  loans  from  central  land-mortgage  banks.28 

Safety  of  funds  is  sought  not  only  by  conservative  man- 
agement but  also  by  various  restrictions  on  lending.  It  has 
been  the  practice  in  Bombay  not  to  advance  more  than  half 

28.  Capital  and        Percentage        Percentage        Percentage 

other  of  paid-  of  Deben-  of  loans 

liabilities  capital  tures  from  C.  C. 

nn  OOOs)  to  1  to  ]  to  1 

Bombay  Provincial  Co-Op. 

Land   Mortgage   Bank   Ltd.          2100  19.6  771 

Nasik  Dist.  Co-Op  Land  Mort- 
gage Bank  Ltd.  19.38  June  118  10.9  ..  77.1 

Surat  Dist.  Co-Op.  Land  Mort- 
gage  Bank   Ltd.  158  189  . ,  7S.1 

Dharwar  Dist.   Co-Op    Land 

Mortgage   Bank   Lid.  230  4.7  ..  77.3 

Bclgaum   Dist.   Co-Op.   Land 

Mortgage    Bank   Ltd.  148  10.8  . .  83  1 

Pachora  Taluka  Co-Op.  Land 

Mortgage   Bank   Ltd.  259  4.9  ..  74.9 

Hubli  Co-Op.  Land  Mortgage 

Bank  Ltd.  173  8.7  ..  89.6 

Poona     Dist.     Co-Op.     Land 

Mortgage   Bank   Ltd.  260  80  . .  88.7 

East  Khondesh  Dist.   Co-Op. 

Land  Mortgage  Bank  Ltd.  153  167  ..  808 


AGRICULTURE   AND  LONG-TERM  CAPITAL 


415 


the  value  of  the  mortgaged  property.  In  Bombay  and 
Bengal,  loans  are  further  limited  to  10  to  20  times  the  share 
capital  of  the  borrower.  In  the  Punjab,  the  limit  prescrib- 
ed is  30  times  the  land  revenue  paid  by  the  borrower.  It  has 
been  suggested  that  the  maximum  advance  should  not  ex- 
ceed a  certain  figure,  two,  five  or  ten  thousand  being  men- 
tioned. Periods  for  which  loans  should  run  are  defined 
variously  in  different  provinces.  Equated  payments  are 
spread  over  16,1  years  in  Madras  while  periods  of  10  to  20 
years  or  20  to  30  years  are  either  suggested  or  in  vogue  in 
other  provinces. 

The  question  of  management  and  co-ordination  is,  as 
stressed  above,  not  less  important  than  that  of  finance. 
Default^,  accumulation  of  over-dues,  favouritism  in  the 
grant  of  loans,  the  misuse  of  their  position  by  directors  to 
secure  loans  for  themselves  are  evils  to  which  these  socie- 
ties are  as  prone  as  the  ordinary  co-operative  credit  socie- 
ties. The  spirit  and  working  of  central  co-operative  land- 


29. 


Nasik  Dist.  Co-Op.  Land 
Mortgage  Bank  Lid 


Sural  Dist  Co-Op  Land 
Mortgage  Bank  Ltd. 


Dharwar  Dist.  Co-Op. Land 
Mortgage  Bank  Ltd. 

Belgaum  Dist.  Co-Op  Land 
Mortgage  Bank  Ltd.         1930 

Panchora  Taluka  Co-Op. 
Land  Mortgage  Bank 
Ltd.  1939 

Hubli  Dist.  Co-Op.  Land 

Mortgage  Bank  Ltd.         1939 

Poona  Dist.  Co-Op.  Land 
Mortgage  Bank  Ltd. 


Percentage 

Loan  per 

of  applica- 

applicant 

tions  grant- 

ed to  total 

applications 

1936 

197 

1,418 

1937 

48.8 

1,118 

1938 

60.  S 

1,080 

1937 

26.7 

1,282 

1938 

21.9 

2,990 

1939 

2,164 

1936 

1,875 

1939 

147 

1,586 

Percentage      Cash  and 
of  loans  due      Bank 
from  mem-  Balances — 
bers  to        Percentage 
liabilities      liabilities 


82.4 
87.5 


1935 
to 

1939  34.8 

East  Khandesh  Dist.  Co-Op. 
Land  Mortgage  Bank 
Ltd.  1935 

to  14.5 

1939 


823 


1,170 


1,350 


907 

74.8 
89.6 

91.5 
86.6 


1  3 

OG 
69 

27 


3  7 


416  LONG-TERM   CAPITAL   MARKET 

mortgage  banks  no  less  than  the  needs  of  agriculture  would 
obviously  be  better  served  if  joint-stock  banks  were  per- 
suaded to  become  members  of  the  central  institutions.  A 
more  difficult  and  urgent  problem  is  to  co-ordinate  the 
working  of  mortgage  banks  and  ordinary  co-operative  cre- 
dit societies.  Their  mutual  co-operation  cannot  but  be  of 
mutual  advantage.  At  the  same  time,  every  precaution  has 
to  be  taken  in  order  that  only  solvent  and  well-managed 
societies  of  the  latter  class  should  be  admitted  to  such  par- 
ticipation in  the  activities  of  mortgage  banks. 

In  the  existing  circumstances,  the  main  service  of  land- 
mortgage  banks  must  be  to  release  the  small  land-owner 
and  cultivator  from  his  load  of  past  indebtedness.  In  other 
words,  the  debt  to  the  private  money-lender  with  its  high 
rate  of  interest  is  to  be  replaced  with  a  debt  to  the  land- 
mortgage  bank  at  a  lower  rate  of  interest30  and  an  arrange- 
ment for  systematic  repayment  has  to  be  enforced.  It  is 
obvious  that  this  alleviation  of  burdens  will  be  a  genuine 
service  to  agriculture  only  to  the  extent  that  high  rates  of 
interest  are  the  chief  cause  of  the  agriculturist's  continued 
indebtedness  and  he  is  willing  to  adopt  a  higher  standard 
of  business  ethics  towards  land-mortgage  banks.  Till  this 
vast  load  of  indebtedness  inherited  from  the  past  is  liqui- 
dated, questions  of  improvement  of  land,  technique  of  pro- 
duction, etc.,  must  stand  inevitably  postponed.  As  a  matter 
of  fact,  the  bulk  of  the  present  loans  of  land-mortgage  banks 
is  intended  for  liquidating  old  debts  incurred  largely  for 
non-productive  purposes.31  It  must  not  also  be  overlooked 
that  the  borrower  approaches  the  private  money-lender  as 

30.  The  primary  banks  in  Bombay  Province  lend  their  member  borrowers  at  6 
per  cent  while  the  Provincial  Land  Mortgage  Bank  lends  them  at  4^  per  cent. 

31.  In  Percentages  of  Total  Loans. 

Loans  for  Loans  for       Loans  for       Percentage 

repayment  Land  Pur       Land  Im-       of  recover- 

of  Old  chase  or        provement      ies  to  dues 

Debts  redemption 

The    Punjab,    1929-30                            46.8  46.8                    6.2 
Nasik    Dist.    Co-Op.    Land 

Mortgage  Bank   Ltd.    1936-38          94.3  41                      . .                    91.0 
Dhanvar  Dist.  Co-Op.  Land 

Mortgage    Bank    Ltd.    1936                 . .  . .                     . .                    91  Q 

Pachora  Taluka  Co-Op.  Land 

Mortgage    Bank    Ltd.                        94.8  5.3                     . .                    39.8 

|Co?7f jn?/ecl  on  opposite  page. 


AGRICULTURE  AND  LONG-TERM  CAPITAL  417 

an  initial  step  to  raise  loans  for  improvement  of  land  and 
other  quite  legitimate  objects.  When  the  improvements  are 
executed  and  the  security  proportionately  enhanced,  he 
applies  to  the  mortgage  banks  to  release  him  from  the  hold 
of  the  private  lender.  This  circumlocutory  and  therefore 
expensive  procedure  is  largely  due  to  the  dilatoriness  and 
inelasticity  inseparable  from  institutional  financial  opera- 
tions. 


Poona    Dist.    Co-Op.    Land 

Mortgage  Bank  Lid.  1935-39          87.3  0.9  4.8 

East  Khandesh  Dist.  Co-Op. 
Land  Mortgage  Bank  Ltd. 
1935 
to 
1939  ..  ..  ..  65.4 


TABLES 


TABLES  421 

TABLE    I 

(Figures  in  lakhs) 


Imperial  Bank  of  India 
(or  Presidency  Banks) 

Exchange 
Banks 

Indian  Jt- 
Stock  Banks 
A  Class 

Indian  Jt.- 
Stock  Banks 
B  Class 

TJ 

£ 

ci 

.£ 

Tf 
C 

•d 
c 

i  +  § 

ft  oj  <u 
P    > 

«s 

5  £ 

a  <5  S 

3    > 

c/j 

a  cc  oJ 

2 

0)  CO 

'  —t  JH 

73  «  CJ 

3  o 

>'o 

J<  >-« 

."ti  -2 

"T3  ""*  OJ 

o 

'   I-H   t-j 

S 

Q  ^  °» 

•^  -S  OT 

fi|fi 

g| 

C  a 

*p 

2ff 

<U 

(It  a  oi 

CO  ^ 

a 

<u 

p 

CO  •'H  <D 
*  &« 

a 
Q 

5-f 

u 

u  £ 

Q 

u 

U 

•tj  'C 

PH 

H  5  + 

1870 

361 

543 

639 

2.1 

52 

11 

14 

1880 

405 

291 

849 

3.0 

339 

21 

63 

1890 

447 

359 

359 

8.0 

753 

51 

210 

1990 

559 

280 

1288 

15.7 

1050 

127 

807 

1905 

623 

311 

2226 

22.4 

1704 

162 

1193 

1906 

640 

307 

2745 

24.3 

1808 

190 

1155 

1907 

655 

335 

2811 

26.0 

1917 

292 

1400 

1909 

678 

319 

3265 

30.1 

2479 

254 

2049 

1910 

691 

423 

3234 

34.3 

2816 

376 

2562 

1911 

700 

438 

3419 

35.6 

2816 

412 

2529 

1913 

748 

588 

3648 

37.8 

3103 

364 

2259 

50 

151 

91 

1914 

764 

561 

4004 

36.9 

3014 

393 

1710 

55 

126 

88 

1915 

747 

488 

3861 

36.8 

3354 

438 

1787 

55 

91 

89 

1917 

742 

771 

6771 

32.7 

5337 

466 

3177 

54 

99 

153 

1918 

719 

864 

5097 

39.4 

6185 

602 

4059 

63 

155 

154 

1919 

732 

772 

6821 

53.0 

7436 

764 

5899 

74 

228 

211 

1920 

752 

902 

7801 

90.2 

7480 

1092 

7114 

81 

233 

215 

1921 

976 

680 

6577 

111.6 

7519 

1239 

7689 

100 

326 

227 

1923 

.  .   1017 

856 

7419 

140.0 

6843 

973 

4442 

111 

326 

198 

1924 

1042 

750 

7671 

130.4 

7063 

1070 

5250 

108 

269 

210 

1926 

.  .   1072 

645 

7389 

147.9 

7153 

1084 

5961 

125 

347 

325 

1927   . 

1086 

720 

7207 

180.8 

6885 

1108 

6084 

112 

345 

212 

1928 

.  .   1101 

795 

7130 

187.9 

7113 

1109 

6285 

119 

349 

216 

1929 

,  .   1110 

760 

7164 

227.6 

6665 

1553 

6272 

115 

357 

204 

1930 

.  .   1151 

736 

7660 

193.6 

6811 

1190 

6325 

141 

439 

212 

1931 

.  .   1062 

832 

6385 

6747 

1208 

6226 

128 

392 

197 

1932 

.  .   1079 

706 

6863 

7306 

1221 

7234 

129 

392 

217 

1933 

.  .   1084 

644 

7412 

7078 

1234 

7167 

131 

474 

221 

1934 

.  .   1097 

672 

7427 

7136 

1267 

6977 

149 

511 

227 

1935 

.  .   1109 

7909 

6718 

1230 

8445 

150 

544 

245 

1936 

1112 

7879 

7503 

1395 

9814 

156 

522 

257 

1937 

1112 

1938 

1117 

1939 

.  .   1122 

8784 

7418 

2480 

18857 

232 

927 

19784 

1940 

8533 

2591 

21001 

244 

1104 

22105 

1941 

10621 

2744 

24656 

256 

1145 

25801 

1942 

.  .   1138 

16346 

11685 

3039 

36621 

271 

1560 

38181 

1943 

.  ,   1148 

21453 

14019 

3801 

55837 

317 

2090 

57927 

1944 

16741 

4837 

71431 

345 

2632 

74063 

1945 

.  .   1169 

25937 

142.1 

17900 

5712 

86485 

401 

3588 

90073 

1946 

16949 

6697 

94560 

393 

3217 

97777 

1947 

.  .   1188 

28659 

163.5 

16367 

7033 

95553 

387 

2727 

98280 

1948 

..   1190 

28029 

,  , 

16019 

7455 

92126 

407 

2399 

94525 

1949   , 

,  .   1193 

•• 

25046 

•• 

16206 

7498 

80412 

398 

2049 

82461 

422  TABLES 

Cheque  Clearances* 


Total 
clearances 
(crores) 

Corrected 
for  price- 
charges 

Index 
Numbet 

1914  ..  ..  ..                 538  538  100 

1916  . .  . .  . .                809  632  117 

1918  ..  ..  ..  1396  784  145 

1919  ..  ..  ..  1801  919  170 

1920  ..  ..  ..  3145  1565  290 

1921  ..  ..  ..  2024  1135  211 

1922  ..  ..  ..  2022  1148  213 

1923  . .  .  .  . .  1856  1079  200 

1923  ..  ..  ..  1770  1113                              207 

1929  . .  . .  . .  2038  1445  268 

1930  ..  ..  ..  1804  1555  289 

1931  .  .  . .  . .  1561  1626  309 

1935  ..  ..  ..  1860  2044                             380 

19371  ..  ..  ..  2061  

1938  ..  ..  ..  1903  

1939  ..  ..  ..  2120  

1940  ..  ..  ..  2143  

1941  ..  ..  ..  2535  

1942  ..  ..  ..  2713  

1943  ..  ..  ..  4229  

1944  ..  ..  ..  5402  

1945  . .  . .  . .  6272  

3946  ..  ..  ..  7262  

1947  ..  ..  ..  6459  

TABLE    II 


K%* 

m 

o 

i|. 

11 

*s« 

f" 

£       3 

E 

_  ( 

ilnSf  er    ^ 

! 

er  branch. 

^4 

^ 

0|. 

!    c  2 

WQQ 

W   >>„ 

r,"            % 

0  8  ^oS 

<U        "^  ffl  13        ^ 

ft-; 

||| 

,   1 
ill 

*§!" 

<>:«« 

*1j 

6«£ 

3  '£  C 
3    O  £0 

5    |£ 

IlilS 

"pq  Tswpq 

;li 
&a 

IS  11?  13 

o 

9 

|| 

Hiis 
ll§5 

£ 

H 

£  JH! 

£; 

£ 

W     £ 

*s 

H      5         Q 

P 

Q 

w     & 

1916 

140 

338 

57 

54 

..     228 



2.47 

25.5 

.  • 

1920 

185 

536 

60 

96 

69 

.  . 

.  .     127 

2.89 

43.8 

1921 

207 

94 

29.4 

1926 

339 

730 

t  f 

169 

67     484 

44 

93      13.0    63 

2.15 

1930 

393 

938 

67 

94 

164 

88     683 

47 

77        9.3    54 

2.38 

23.0 

.  .      »  • 

1934 

478 

1269 

.  . 

163 

98  1008 

45 

79        8.1    .. 

.  . 

.  .      .  . 

1936 

514 

1450 

80 

139 

166 

99  1185 

47 

76        8.7    50 

2.82 

18.1 

.  .      .  . 

1939 

736 

99 

1277      .  . 

1940 

4  9 

.. 

.. 

174 

101 

61.7 

.. 

1322      .  . 

1941 

.  . 

.  . 

.  . 

177 

99       .. 

67.9 

.  .       .  .       .  . 

.  . 

1454    717 

1942 

1033J 

,  . 

,  . 

179 

84 

97.7 

.  .       .  .       .  . 

.  . 

1450    898 

1943 

1279J 

3049 

84 

1882  1161 

1945 

1655 

4867 

t. 

81 

.  .       .  .       66 

.. 

2933  1934 

1946 

5521 

77 

3480  2081 

1947 

1458 

5532 

•• 

•• 

79       .. 

.  .       .  .       71 

3.26 

21.8 

3541  1991 

*  Journal  of  Royal  Statistical  Society,  Part  III,  1937,  pp.  381-83. 
t  Excluding  Rangoon. 

$  Banks  with  Capital  of  less  than  50  thousand  and  Co-op,  banks  with  capital 
of  less  than  Rs.  1  lakh  omitted. 


TABLES  423 

TABLE    HI 

Places  with  Banking  facilities  according  to  population. 


o    §          <§ 
'o     -o     oS     pP 


o          o 

00        +-    ^        ~    ' 


ii  1 1  iiiiif|i|i|iisiisi  I 

I— I  CQ         vr»         i—t          eo  o"          xf  IP  £••  t-J  cv?          vf*  *3 

1921  198  21  17  38  23  19  14  28  9  22  4  3 
As  Percentage 

of    Total 

number    i.e. 

198  10.6  8.5  19.2  11.6  9.6  7.0  14.1  4.5  11.1  2.0  1.5 

1936  507  126  60  91  72  35  35  36  15  27  7  3 
As  Percentage 

of    Total 

number    i.e. 

507  24.8    11.8    17.9     14.2       69      6.9      7.1      2.9      5.3       1.4      0.6 


1936  Big  Six   194       37        32   22   22   31   15     32      3 
1936  Impe- 
rial Bank   156      22       18   17   22   28   14     32      3 


1944         826   56  178  259   123   59   29   58   13   34   10    7 
As  Percentage 

of    Total 

number    i.e. 

826  6.7   21.5    31.3     14.8       t.l      3.5      7.0      1.5      5.4      1.2        .8 


1948        1534  171  360         662  84        50      207 

As  Percentage 

of   Total 

number    i.e. 

1534  11.1    23.4  43.1  5.4  3.4  13.4 


TABLE    IV 

Branches  of  Big  Seven  Distributed  according  to  Population  of 

Places  1396. 


3     $    s 


Number  63       42       32      36       46       28       37       25      12        5       15     341     194 

Percentage  >  ---  ^~>         -^ 

of  Total      18.4    12.3      9.3    10.5    13.4      8.2  23.1  4.3 


424 

TABLES 
TABLE    V 

? 

t-H 

0) 

.rf 

c 

d 

|o 

If 

o-g 

aa 

°c!£ 

*0  W 

•38 

tuo 

a»3 

3«S 

•V 

'oSS' 

pq 

•BS 
°t« 

a™ 

1 

,s£  . 

sj?«« 

$£§| 

f£ 

p 

wffl 

SJs« 

|L& 

^s^ 

S'O'H 

CA   C 

S^J 

73  ^ 

-W"<y  CJ 

£^,§ 

O^y    O  <J 

^'oJ 

H  <u 

a5< 

p'a) 

M    ^ 

-*e  Q 

frj  r]  PQ 

£-C« 

§  Xl  *^  ""-^ 

^43 

5J  xj 

&^- 

dJ  r^ 

QJ^J 

H 

0< 

o. 

k 

^ 

^ 

Q 

a. 

1900 

31 

40.9 

33.3 

25.6 

8 

28.9 

1913 

91 

40  0 

340 

26  0 

1914 

87 

458 

33.2 

21.0 

10.5 

18 

50.1 

1920 

226 

34.4 

33.2 

32.4 

73 

1926 

295 

22  1 

1930 

212 

36.0 

32.4 

316 

22.1 

25.7 

67 

74.6 

80.8 

1934 

227 

32.6 

31.4 

35.9 

26.5 

81 

73.7 

.. 

1935 

245 

32.2 

31.0 

36.6 

26.5 

89 

72.6 

1936 

257 

30.6 

29.1 

40.2 

27.2 

29.3 

103 

67.7 

72.8 

1939 

267 

34.9 

27.7 

37.4 

27.4 

30.1 

106 

69.2 

75.6 

1940 

293 

327 

29.1 

38.2 

28.0 

30.8 

115 

71.3 

78.5 

1941 

342 

30.1 

29.2 

40.7 

27.3 

30.0 

134 

73.7 

80.8 

1942 

474 

36.4 

24.6 

39.0 

30.0 

31.1 

172 

80.2 

85.7 

1943 

684 

29.4 

19.8 

45.8 

28.9 

31.0 

t346 

57.1 

61.4 

1945 

1091 

23.7 

16.4 

55.1 

25.9 

633 

43.3 

1946     (Ind.  Union) 

1025 

1947 

1207 

23.6 

14.9 

61.5 

24.6 

757 

39.3 

1948 

1058 

26.4 

151 

58.5 

618 

1949 

998 

1950 

1    All  scheduled  non-scheduled. 


TABLE  VI 
Towns  (Br.  India)  according  to  classes  of  Banks  1939 


Population. 

Scheduled 
Banks 
Represented 
in 

Non-Scheduled 
Banks  only 
Represented 
n           in 

Scheduled   and 
Non-Scheduled 
Banks 
Represented 
in 

Total  served 
by  all  classes 
of  Banks. 

1   Lakh   and  over 
50,000  to  1  Lakh 
20,000  to  50,000 
5,000  to  20,000 

29 

47 
118 
258 

1 
28 
255 

27 
31 
54 
80 
Total     .  . 

29 
48 
146 
513 
736 

TABLES 

TABLE  VI— (Continued) 
Towns  (Br.  India)  according  to  classes  of  Banks  1949 


425 


Scheduled 

Non-scheduled  Scheduled  and 

Banks 

Banks  only 

Non-scheduled  Total  served 

Represented 

Represented 

Banks 

by  all  class 

in 

in 

Represented 

Banks 

in 

10,00,000    and    over 

2 

2 

2 

5,00,000   to    10,00,000 

4 

3 

4 

2,00,000    to    5,00,000 

14 

14 

13 

1,00,000    to    2,00,000 

29 

1 

20 

30 

75,000    to    1,00,000 

17 

11 

17 

50,000    to       75,000 

62 

3 

34 

65 

25,000    to       50,000 

146 

21 

58 

167 

10,000    to       25,000 

363 

94 

131 

457 

5,000    to       10,000 

181 

110 

48 

291 

Below  5,000 

87 

91 

19 

178 

Unclassified 

32 

96 

1 

128 

TABLE  VII 

Number  of  Branches  and  Deposits  per  Branch  (Lakhs) 


Imnerial      Central         Bank  of      Allahabad 
Bank          Bank  India  Bank 

of  India  of  India 


Bank  of       Punjab 
Baroda       National 
Bank 


No.     De-      No.     De-      No.     De-      No.     De-      No.    De-      No.    De- 
posit posit  posit  posit  posit  posit 


1939 

173 

57.3 

114 

28.7 

20 

103.6 

55 

23.2 

24 

33.0 

66  11.7 

1940 

174 

61.7 

132 

26.9 

20 

122.2 

58 

22.9 

25 

33.2 

69  12.4 

1941 

177 

^7.9 

155 

29.9 

22 

127.5 

66 

24.0 

26 

41.3 

72  14.5 

1942 

179 

97.7 

163 

38.7 

22 

177.4 

67 

26.5 

26 

55.5 

71  19.9 

1943 

198 

24 

69 

28 

112 

1947 

32 

214.4 

70 

41.9 

39 

84.1 

Indian 
Bank 

Bank  of 
India 

Bank  of     Indo    Com-     United 
Bihar          mercial    Commercial 
Bank              Bank 

Devkaran 
Nanjee 
Bank 

No.    De- 

No. 

De- 

No. 

De- 

No. 

De- 

No. 

De-      No.    De- 

posit 
10.4 

posit 

13 

posit 

posit             posit 

posit 

1939 

40 

4 

49.3 

10.4 

29 

3.1 

3 

16.7 

1940 

45 

12.0 

4 

61.3 

15 

8.7 

29 

2.4 

4 

8.0 

1941 

49 

15.6 

4 

72.8 

17 

8.8 

28 

4.5 

5 

13.0 

1942 

39 

14.5 

4 

101.5 

19 

9.3 

24 

6.2 

10 

15.0 

1943 

4 

20 

23 

17 

.  . 

1947 

70 

25.9 

5 

106.5 

28 

17.3 

45 

9.1        82    42.1 

48 

13.9 

426  TABLES 

TABLE 
Indian  Money — Rate  Per  Cent 

(Figures  in  Brackets  indicate  the  approximate  number  of  months  for 
which  the  particular  rate  prevailed) 


v___               ' 

§   . 

Bank- 

Call-Money  Rates. 

| 
M+jj              Bazar  Bill 

Rate. 

x  ear. 

i 

Y 

fill 

Rate  • 

Bombay    Calcutta 

.2  4,             Calcutta      Bombay. 

1922     .  . 

6.4 





~W.^ 



1925     .  . 

5.1 

7(5)   5(4) 

3(8)         U  to  21(6) 

4*  to  5i     10 

to  11(9) 

81  to   10(7 

(6)   7(4) 

1927     .  . 

4.4 

1929      .  . 

4.9 

7(5)   5(4) 

11  to  2(6) 

2\  (4) 

7(4)  5(4) 

11(7)  10(3) 

9  1/16  (4 

6(3) 

5(4) 

5  5/16  (2 

1931      .  . 

5.5 

7(5)   6(4) 

5  to  6M9) 

4  to  4£(8) 

7(5)  8(3) 

7  to  8(8) 

3-4(4) 

5(4) 

6-7(6) 

1932      .  . 

5.7 

4(5)   6(2) 

1  to  2  (5) 

1  to  2  (6) 

4(6)  5(3) 

5  to  7(5) 

3-4(5) 

7  to  8(7) 

6(4) 

1933     .  . 

4.3 

.. 

.. 

•• 

•• 

1  (6)       2 

to  3M6) 

6  to  7   (4) 

62(6) 

1935     .  . 

..  31(11)  3(1) 

I    (6)       \ 

;~to   1(6)~ 

31(10) 

5-6   (4)~~ 

3  to  41(4) 

\  (6) 

1  (6) 

5  to  6(12) 

3  3/8|(6) 

1936 

3.5 

3 

3 

1  (2) 

1  (5) 

51   (4) 

I  (5) 

1 

7-8  (6) 

3 

1938 

3.5 

3 

3 

1 

1 

6-7   (6) 

5  5/8 

1939     .. 

3.79 

3 

2-221(5) 

2-231(5) 

3(10)  31(2) 

6-7 

5-51  (9) 

1-1  (6)' 

1-1  (6) 

1-2  (5) 

1-1  (10) 

01 

1940 

3.84 

1-1  (7) 

12  (2) 

35         (8)  9-?S          1-9 

1941     .  . 

3.67 

3 

1(11)  1(1)         1 

3 

6-7 

52-61(7) 

1942     .  . 

3.80 

3 

IdD  Id)         1 

3 

6-7 

6-62  (8) 

1944    .. 

.. 

3 

1         1 

1 

3 

6-7 

41-51 

1945     ,  . 

3.52 

3 

1         1 

1 

3 

6-7 

51 

1946     .  . 

3.39 

3 

1 

3 

6-10 

51-71 

1947     .  . 

2.96@ 

3 

1 

3 

9-10 

71 

1948     .. 

3.08 

3 

.  . 

1 

31(3) 

9-15 

71-81 

1949     .  . 

3.06 

3 

., 

1 

31 

10-15 

71-81 

@    3%   Paper,   1986. 


I  . 


'spuog    A\m 

(90BJ9AB)    £ 

2-gjms  ¥*Bg  -s 

^3  -O'd  ?2  u° 


'I  J9AO 
g  JO  IpIJQQ 
JO  -f"  SS9DX 


spuog 


•s  o  sina  ^a  'so 

•        I 


•o-d   \z  uo  ppu 

"I    J9AO 


J  (-2AV  -iuv) 


-o-d  fg  uo  ptai 


<tH       ooooooootoooinc 

H0>          OOOOOOOOr-lCOW* 


l    CM     B 
5  JiO    O 


3066699696666  o  ' 

I  I  7  I  77  I T +  +  +  +  ^; 


w     o  8 

fl       rt  o 

§       g  K 

I      1  1 

H 

IH       cn 

rt  a» 

12ȣ  1 

3  in  £  o  ^ 

'  °°  •§  »  52 


>2-S-^ 


l(CO«5rSCOirj^HOO5« 
3   Cl   M    Irt   C.O   00   Tj^    ,H   r-j    t>   C 


incoojcno5i>h-c75 


NJN<^N«OO'<J<«J» 

O5000>CM>-IO'-lrH 


Q  rH  W  O  **  O  ?H 

^  N  to  i>  w  r-j  \n 

UJ  W5  N  CSJ  M  ^  •<* 

M  T-H  CO  M  00  ^  T)< 

co  w  rij  co  w  -v  in 


4^5                                                             TABLES 
TABLE    X 

i 

a 

0) 
1/3 

Average   Rate   on   Fixed 
and  Current  Deposits. 

Central   Bank 

Average    Rate 
Earnings. 

of 

1910 

*>ta 
0^ 

o_ 

^1 

^N«J 

<n 

§§ 

2£ 
'§  '£ 

>* 
3.7 

1  Allahabad  Bank. 

Punjab  National 
i  Bank. 

i 

w 

£ 
2 
•3 

3.33 

<H 
O 

44 
C 
03 

PQ 

rc3  3 
£73 

.f 

Average  Rate  on 
!  Fixed  Deposits. 

i  Average  Rate  on 
Current  Deposits. 

'  Average  Bank  Rate. 

Allahabad  Bank. 

Punjab  National 
Bank. 

i 

05 

PQ 

s 
1 

5.69 

s-t 
O 

X 

I 

II 

c  c 

O;1"1 
O 

5.46 

1911 

3.6 

3.95 

5.50 

6.70 

1912 

36 

3.12 

3.50 

550 

6.57 

6.44 

412 

1913 

3.6 

4.1 

5.07 

4.75 

2  12 

6.24 

5.6 

7.59 

8.68 

13.9 

1914 

3.6 

4.4 

4.05 

4.78 

6.6 

5.58 

6.1 

8.14 

7.93 

7.14 

1915 

38 

2.5 

4.02 

362 

3.88 

5.65 

5.3 

5.89 

6.05 

5.47 

1916 

4.3 

34 

3.77 

3.09 

2.45 

5.65 

5.2 

6.24 

6.63 

4.13 

1917 

5.1 

4.30 

3.30 

2.40 

6.76 

6.99 

6.43 

3.58 

1918 

5.3 

2.5 

390 

3.48 

6.47 

5.0 

6.83 

5.31 

1919 

5.0 

3.6 

3.23 

2.90 

5.92 

5.2 

5.83 

4.17 

1920 

5.9 

4.9 

3.90 

4.28 

5.97 

7.0 

7.56 

6.71 

1921 

62 

3.75 

3.96 

520 

2.56 

5.56 

6.54 

5-86 

1922 

6.4 

2.3 

4.12 

423 

5.68 

2.45 

5.81 

3.2 

7.93 

633 

1923 

5.7 

4.7 

3.73 

4.18 

5.72 

2.32 

596 

6.6 

7.56 

6.01 

1924 

52 

4.9 

4.18 

4.78 

6-58 

2.46 

6.68 

8.4 

8.02 

7.04 

1925 

5.5 

4.4 

4.77 

4.02 

414 

5.82 

2.25 

5.64 

6.5 

6.87 

7.87 

6.10 

1926 

4.7 

4.9 

4.69 

3.95 

.'J63 

496 

2.17 

4.82 

6.9 

6.49 

5.81 

5.45 

1927 

4.4 

5.4 

4.96 

3.29 

4.02 

549 

2.39 

5.72 

7.3 

675 

5.73 

5.77 

1928 

4.6 

5.2 

4.59 

3.59 

398 

5.30 

2.46 

6.19 

7.1 

6.43 

6.66 

5.79 

1929 

4.9 

5.0 

5.35 

3.53 

4.17 

5.70 

2.53 

632 

6.8 

7.81 

6.51 

5.99 

1930 

5.1 

5.3 

4.43 

364 

3.23 

4.47 

2.01 

5.88 

7.1 

6.68 

6.32 

5.12 

1931 

5.5 

5.8 

5.38 

3.98 

3.51 

5.43 

2.42 

7.04 

7.7 

7.83 

6.6 

5.82 

1932 

5.7 

6.2 

4.30 

3.22 

2.66 

470 

1.98 

5.02 

8.1 

6.06 

5.44 

4.58 

1933 

4.3 

5.4 

3.86 

2.84 

2.71 

3.95 

1.69 

3.56 

7.1 

6.30 

5.60 

4.11 

1934 

3.9 

4.8 

3.20 

2.48 

2.09 

3.01 

1.35 

3.50 

6.8 

6.63 

5.63 

3.83 

1935 

3.52 

3.9 

2.68 

2.09 

2.05 

2.93 

1.29 

3.46 

6.0 

5.38 

4.88 

3.64 

1936 

3.63 

3.3 

2.37 

2.11 

1.60 

2.59 

0.93 

3.00 

5.5 

4.82 

3.75 

3.24 

1937 

3.55 

2.06 

1.89 

1.40 

2.22 

0.91 

3.00 

4.85 

3.77 

3.57 

1938 

2.18 

2.03 

1.31 

2.05 

0.77 

3.00 

4.94 

4.24 

3.37 

1939 

3.79 

1.38 

2.40 

0.73 

3.00 

1940 

3.84 

1.24 

1.70 

1.22 

2.37 

0.65 

3.00 

1941 

3.67 

1.14 

1.88 

0.94 

1.84 

0.57 

3.00 

1942 

3.80 

1.03 

1.46 

0.61 

1.80 

0.33 

3.00 

1943 

3.66 

0.07 

0.89 

0.51 

1.68 

0.26 

3.00 

1945 

0.69 

1.26 

1.41 

2.9 

2.7 

3.26 

1946 

0.99 

1.29 

1.60 

1947 

1.67 

(•SQOO) 
sasuadxa  Jaq)O 

in    in           r»    c- 

^ 
t~ 

2 

1  S 

§ 

m 

in 

1 

1 

cn 
in 

1 

!  1 

(SOGO)    sasuaclxg 

t-      r~l                CM       ^f 

m    in           oo    rH 

rH        rH                     rH        CM 

CO 

to 

1 

00 

en    in 

co    to 
en    o 

cn 
to 

rH 

CO 

CO 

CM 

1 

I 

t- 

t- 

to 

CM       CO 

CM     in 

CO      CM 

(SQOO)  'STtjo.id[  p.N 

N    to          cn    o 

10 

i? 

00      0 

in    in 

cn 

en 
ct 

in 

cn 

o 

CO 

in 

§ 

11 

(tOOO) 

CO     CO               CO      CM 

to    to          t-    oo 

CM 
CO 

1 
r- 

in    co 

00      O 

cn    CM 

cn 

8 

CO 
CM 

rH 

CM 

w 

CM 
CM 

rH 
00 
CO 
CM 

t-      O 

cn     co 

C\1 

CM 

CM      CO 

CO 

CO 

CO 

CO 

CO       CM 

•*>o,S  pTOQ 

o    \n          to    oo 
co    *tf           m    in 

s 

rt< 
CM 

CM      CM 

CO 
CM 

CM 

to 

CM 

rH 
00 
CM 

O 
CO 
CM 

^       00 

t-»    to 

CM      CM 

•s^uaiu 

IO      CM                tO      CM 

in 

CM 

00 

en 

to    to 

CM      to 

O 

r~ 

n« 
cn 

S 

oo 

to 

cn 

CM       CM 

cn     o 

siuouqscAUT 

cn    to           -*     in 
t~-    co          to    to 

00 
CM 

in 

CM 

00       rH 
CM      CM 

C\J 

CM 

m 
cn 

S 

CM 

CO 

00      t- 

to    to 

CM 

CM      CM 

cn 

rH 

CO 

roiuSo 

S  S     3s 

J^ 

i 

§8   12 

o    in 

s 

in 

cn 
t-- 

o 
to 

I 

to 

to     cn 
in     in 
in     r- 

CD 

rH 

co 

CM      CM 

's 

•3jung  je 
PUB  pueq  uo  qsB3 

S  S     Is 

§ 
CO 

r- 

o 
in 

S^    S 
in 

to 
i- 

g 

cn 

00 

fn 

1 

i*       CO 

2    ° 

CO       rH 

0 

p 

•sine 

i^    rH          in    to 

^f       tO                   TH       M 

CO 

cn 

cn 

2 

CO       00 

•«*     m 

00 

3 

t> 

5? 

in 

i 

i 

m     cn 
i>     in 

CO      ** 

0) 

rC          'W 

•S}!P9JO  qseo 

10      O                O      CM 

-1*     ca           co     in 

O5      00                00       CO 

r- 

CM 

in 

8 

CO 

CO      <* 

to    co 
r^     co 

in 

1 

S 

en 

s 

t- 

CO 

cn     •* 

co     in 
in    to 

CO          rCj 

1-1 

CM 

CM 

CO      CO 

CO 

CM 

CM 

CM 

CM 

CM       CM 

R    §  3 

•suctn 

o     ff>           in     co 

to 

oo 

% 

cn 

CM     cn 

0 

§ 

i 

S 

m 
cn 
to 

1  S 

3  3  's 
g  ta  s 

OZ+8-fS 
.  .  M  n  lEjox 

s 

rH 

oo    in 

CM      t> 

co 

s 

to 

O 

to 

cn 

o 

CO 

co    cn 

<      ~     3 

^ 

CO 

cn    a> 

cn 

en 

00 

S 

s 

cn    oo 

H       .^      UC 

^     £ 

•A'ouo.unQ 

0     S 

§ 

M      ^ 

.laded  UIO.TJ  SUBO^ 

00 

* 

'o 

'GJ;iI03  J3d   A*JU 

cn 

CO 

-noeg   jsuie^u  suecyj 

00 

rt 
CO 

•&iT"'S"7 

CM     t~    TH    o    oo 
«o     in     cn     iji     10 
t-    ro    cn    in    cn 

00 
CM 

to 

rH 

tO       rH 
£       5 

S 

CO 

o 

cn 

in 

i 

I  S 

VJ.     L     f    uj 

CM    ^f    ^    o    in 

t> 

t- 

00     00 

CO 

00 

? 

t- 

c- 

00      t^» 

.2 

*s 

•^              •;iso(33a 

rH       O       rH       O       in 

r-     tO     r»    t-    cn 

00 

§ 

Cn       rH 

s 

8 

t- 

0 

40 

g    in 

A 

w           S-BAu'd     ISJO£ 

N      CO      ^      5      S 

in 

to 

t- 

m 

5    5 
t-    t- 

t- 
t- 

1 

£i 

rH 

t- 

t-    to 

1 

O, 

S 

•ouqnj 

cn    h-    o    o    co 
oo    cn    CM    t>    to 
m    *3<     10    f    oo 

to 

1 

r-    o 

in    m 

CO      t- 

to 

s 

to 

?i 

g 

S 

tO      CM 

•WOJ. 

m    -q*     to    oo    in 

% 

cn 

i 

t»    cn 

0     CM 

O        ^ 

0 

£ 

o 

o 

O 

o 

CM      CM 

o    to 

rH       0 

™* 

O      C5       rH      CO       O 

co    to    to    to    -^ 

CO     CO      CO     CO      CO 

i 

i 

3        § 

CM 

9 

cn 

S 

CM 

in 

8 

CM 

m    m 

•I-Hd*  dn  P!BJ 

in    in    in    >n    in 
t»    r»    t-    t-    t> 

CO      CO      CO      CO      O 

§ 

i 

S  S 

in    »n 

S 

m 

i 

i 

1 

§ 

CM      CM 

§       S       S       S       rH       rH 

CM 

CM 

CM      3 

tn 

s 

CM 

CO 

cn 

0     ^ 

,3    cn    cn    cn    cn    en 

en 

cn 

0 

en 

en    en 

| 


w 
E 


VI 


cd     c 
ft    -S 

B 


(•SQOO) 


(SQOO) 


(SQOO) 


(*000) 


puoa 
•s;uoui 


-      r 

a  a  s  8 


6    ig 
o    o 


CM      CM      CM 


rH      CO      ITJ      rH      CM 

OIO^CON 


"*    o 

CM      IO 

in    o 


PUB   pue^   uo 


oi-fg+e 


IO      00      rH 


rHO«?OOiHOQOOt0r-«OCO 
CV]OO>rHCnrH(DO(MrHK} 
«Ol>rHC3O>CMN«ni>Q'«J1 
OOCOOlOJCCOiOJCftOCMt^ 


^      TH      00 
M     O      O 

S    f    N 


CO      00      t- 

113 

8  S  S 


jaded    uiojj 
aad 


•paxij 


dn 


evi    «o 
**    in 


-S 


^ 

O*DrHCO 
rH      rH      CM      CS) 


rH      <fl      ^      t- 
S      S      ^      § 


^ 
* 


N  «  P^W 

^ 

0  0  «  ^»  t-l 

"2* 

1  ..  •  .  . 

(6  o 

o  ri      o               m  «o  N  co  co  w  w  eo  o  n  n  n  n  n  w  N       w  N  *  H  ^  o  o  o  o 

eposits) 

.11 

S  *H.)H 

58  a    a=-=sa8a"s'"SS3S"sss"^ 

fi 

£^3 

o£3 

NW           N                           rHrH^rH^WNCOWMCOW^            OOrHOOOOO^rHCaCOW 

3 

COW 

.H 

c   5 

OOCO          TH                        MO>r-tff5CnCOOOOC005CMCOMU)MairHCvJtO<OOCMOO'^OCg 

C-B-5 

5 

<l) 

>  o>  3 
w 

bA 

pj 

TJ«                     CV) 

•3 

S 

do       w                 m  oo  co  n  u>  o»  oo  to  ^  <rf  »  N  N  n  eo  <fl  t^  co  t^  eo  <o  n  w  ^  eg  ^  ^ 

1 

CQ 

,,5 

s 

•Ste 

CQ  (U 

°0 

MrH            iH                            CO'<l"Tj*fO^COCOCOCCC^fOM»H»-(^tWWCMf'3N»H«H            iHr-lr-*'-* 

s 

S 

Mt»         0                      |.HfHIDOOMN^r.«fHH«Dqo«HttCOfCqn«01>A 

ecember 

5 

fca 

4)  OT 

G 

fiX 

c* 

°s 

S 

•d^ 

X  0 

"8 

fe  ft 

2  5  3  S  2 

M 

Q 

WWMNN 

1 

SH« 

^ 

.s  ^^ 

W               M                     «vj 

.rt 

"P; 

w           «*               rc 

I 

Public 
Deposits 

STHT-IT-I                                 rHrt                                 H                  iH 

^1 

„„ 

K 

3a.39a!iaai)I]HRgiMli«l«B88XMR|l|0a««M- 

| 

432  TABLES 

TABLE    XIII 

Imperial  Bank  of  India  (Percentage  to  Deposits) 


1921    1922    1923    1924    1925    1926    1927    1928    1929    1930 

Average  for 
1921-22 

Average  for 
1923-24 

Cash  : 

March       ..     26.8     22.9     17.1     15.2     16.9    24.5     18.3     12.1     11.9     18.9 

24.8 

16.5 

Sept.         ..     29.0     361     37.8    26.1     32.4    45.2     31.8     26.1     30.5     25.8 

32.5 

32.8 

Loans  : 

March       ..     19.1     20.1     22.2     22.7     192     17.3     18.0     12.7     12.0       9.7 

19.7 

17.8 

Sept.          ..     28.1     176     14.5     149     14.1     10.6     11.4     12.0       8.3     17.5 

22.8 

12.2 

Cash  Credits  : 

March       ..     27.1     32.7     37.1     35.0     30.6    34.8     33.2     32.8     35.7     31.4 

29.9 

34.1 

Sept.          ..     22.6     263     29.3     34.8     38.5     18.8     24.8     28.1     22.8     28.8 

24.4 

26.7 

Bills  : 

March       ..     11.7     10.1     10.5     12.9     16.3       5.9       7.4     16.5     12.8       7.3 

109 

11.7 

Sept.          ..       7.8      41       4.5      5.3      5.1       4.4      62       4.7       3.2       2.4 

5.9 

4.8 

Investments  : 

March       ..     16.0     11.5     11.2      9.8     14.0     15.5     20.0     226     24.1     29.3 

13.8 

16.7 

Sept.         ..     15.4      98     12.1     115     171     18.0     22.5     25.8     32.5     24.0 

12.6 

19.9 

TABLES  433 

TABLE    XIV 

Imperial  Bank  of  India  (Average  Percentage  to  Deposits) 


Cash  : 

Imperial 
Bank 

Bank  of     Central 
India      Bank  of 
India 

Punjab     ] 
National 
Bank 

Bank  of 
Mysore 

1915-20  June 

22.0            16.4 

16.1 

27.6 

Dec. 

27.4             16.4 

15.7 

28.4 

1921-25  June 

34.2 

21.2             16.2 

Dec. 

19.4 

20  3             19.4 

1926-30  June 

283 

17.4 

9.4 

15  3 

Dec. 

17.2 

15.8 

8.0 

10.4 

1931-35  June 

25.2 

17.3 

5.1 

154 

Dec. 

23.7 

14.7 

6.3 

14.4 

Loans,  Advances  Bills  : 

1915-20  June 

82.1             61  7 

.. 

Dec. 

81.1             62.4 

.. 

1921-25  June 

60.0 

81.3             64.0 

Dec 

74.7 

78  6             68.6 

1926-30  June 

52.6 

749 

63.5 

77.5 

Dec. 

63.4 

68.6 

65.2 

77.4 

1931-35  June 
Dec 

37.9 
35  1 

53.8 
51  3 

600 
63.4 

72.9 
70.0 

Investments  : 

1915-20  June 

12.6 

22.9 

Dec. 

12.8 

203 

1921-25  June 

13.4 

17.3 

Dec. 

17.1 

20.3 

1926-30  June 

24.9 

17.4 

30  9 

23.4 

Dec 

30.2 

27.8 

34.2 

25.3 

1931-35  June 

44.5 

31.5 

36.5 

30.1 

Dec. 

50.9 

22.9 

38.2 

35  3 

434 


TABLES 


TABLES 


435 


X 


•S 

H 


a 

0) 


y 

SJ  « 


1 


1 


53 


W   «  ffl 

31 

H   M 


2, 

Q> 

! 


bJD 


0  Q 


1  8 


a  < 

s< 


•ga« 


to    r*«     t->     co 


•**  A     t**  *•*         r"(    52    £2 

9*s       8     a  1  s  g 


35  5  53 


*H       CO      CM 


S  8  53  ^ 

00     tf      00      00 


ca    co-r*    ca 


W  W  W      Jp      CM      t-         .  W 

r-t  O  O       C>       rH       TH  CO^ 

in  o>  O'-'Ql^2  ^ 

oo  to  cit-iTHin'**  CM 

^t  O  OOf-THt-CO  CO 


^H       m       «O       00  v*       rj  CM 


<^         «H    to 

(O  00      00 


O>      t*      TJ<      CM 


I  • 


2  S  S  S  S 


8       2      CO      W       00      ^       " 

CM     m     m    »n     t^ 

CO      CO      CO      CO      CO 


., 

CM       ?H 
(O      O 


•- 
t^      00      00      OJ 


§    s  s 


N     oo    oo 

CO      CM      CM 


S  S  S  2 


co     jrt     «    to    co     t-     »H 

t<»      !>•      00      »H      CM      «*      m 


Oi     O>     Ci     Oi 


5  -M 

"1^- 

«s5  •§ 
c  2  g 


ill 


•o  i:  2 
ggl 


s .«  « 
£|3 

CO       . 

'•S  .9  S  . 

x  ^  n  i 


•s  .s 

El 


8s 


436 


TABLES 


TABLES 


437 


jj          sura      ;::::::::::: 

...........                        *            "         CO        t*         IO            '            " 

w  "£    J} 

>         OJ 

'-i,  o3  5 

F   « 

«TJ     £ 

M   W                                                                                        rH          CO 

rH-.-rH-CM------- 

O        SH      •£ 

w  to 

S||        a  SSBio  ;     '    8    S      '      '      '      :      :    35      :      : 

***'***CNJ'*'OS'OO***''*° 
CO                                                 CM                      CM 

i,"f 

(_)         *-3                ^'uTl'"'^                CDrHOSlOCO             •              -OSCOrHCM 

t^            •            •                     IO            -CM            .            •            •            •                     IO        O 

ers 

S  £H  ^ 

.^^""C               ^S2OtOOir~|rHCSlCSlrH                                         THrHrHrH 

S                             '                         S                         rH1                                                                                     t$          $ 

IO 

IO 

0 

O         ?                      '-'^THrH 

^  "°    > 

J-^CDrHCOCOOOCOOOt^OJrHOSpCM'^O^^CMrH 

CM 

|    6| 

ie|U3llI)SOALII                iCOt^OOOOt-OOrH           ^^'^^ 

o6r^COCOlOlOo6lOCDCOCO'«l'cOO^o6ct3COCMc6cD 

S 

0)      §      r>> 

III 

TTlOT+6              r-      t>»      co      o      co      to      rH       t-      os      CM      TH 
S)U3UJ^SaAUI           1      d       10       u)       CO       co       o       CM        oOrHirii* 

O1^tOS^rHCDCOCOCMTjilOCOrHCOO'^»HCOCOCOOO 

i 

T3     S     £J 

•sajm(s        i              ... 

OCMt-ri'^iCOT^'^CMWtOO^iCWCMCDrHCMO 

CO 

•^    .h      OJO 

-ipjo   'saaniuaciGQ 

oiCMCOCOCO^COCOTjtCMCO'^COlOlOIO^f'^CMd 

rH 

c  ?«« 

^ 

,-.          Q<     ^H 

o    «    a> 

•spuog 
'lHdui\[  pue              

.OCO^rH^IOCOCMt-COCOOt-l-t-CMCOlO 

•55 

t/i        £ 

e-s^ 

}u"maAOT°ciL      :      

" 

IO 

o 

G  73    g 

0 

Q 

01     ^    ^ 

>    5J    S 

•S«5lll.inO9Q                 |t--r^COOCOCOrHf~OSCMrH 
IIiail'TTI  TA  AOJTk         !        O           IO           IOCOCOOCM           OOrHlO1^ 

O^t-r^rHOOt^OOCOCD^fCOlOtOCOCMCMOOOOCM 
CMIOWt^lOThrHOSrHrHOt*dcMOsdo6cOCOdrH 

CM 
CM 

IO 

0 

•^»-» 

^  ^  ^ 

j 

F*H 

> 

0) 
t>JO 

OJ 

r^  -a  I 

'IISBO          "^       ^       coiowosor^CMooco 

!rHCM           CMCMCMcOCMolcMrHrH 

^t^cot^cqcft^corHCMOsoqooosiococooi'^cooo 
d'HdiocMcocococMCM'<j'ddioco<^iocMr>'doo 

CM 

IO 

w 

"2 

S  ^  -5 

«H    fl    M 

J 

o 
o 

'^'IltR                i        rH          OO            rH          CO          CM          CM           CO           CO          h-          CO          OS 

f.rHr^'^OOCOOOOCOIOrHCOt^OilOOSCSCOt^OOTH 

^ 

H 

o 

a. 

3     >     <L> 
tj)   flj    y    Wl 

•SOJUBAPV    'slieoT    |^S      88SSPS§gpiS 

COCOCOCOCPCOCOIO^COCO'*1<'<*I^»O'*IO^<<*CMCO 

g 

^  -^    a>  ffl 

> 

°   |   <u  | 

la~rF  rb           10       co       co       01       CM       os       crs       oc       d       rH       to 

OS         00          GO         C-J         t—         f-         CD         CD         I'-         I"         CO 

COCOOSCOCOCOCOIOi^CO^'^IO^lOIOIO'^'^fCMCM 

8 

& 

lf|^ 

blj 

3 

^    *§      OT      S 

"•*-*•       |       00         l~-         -T         rf         Ol         1C         OC          OS         O         OS         CO 

OSOOt-t^«I>C>-COCOCOrHrHCMCMCMCOCOCOCMTrCMCM 

CO 

q  PQ  S  3 

^  2  «  ^ 

!     t_     « 

t=                                   X 

|||f 

•SUBOT         °^      ^°      ^      o      10      ^      oo      co      10      rn"     d 

•^              OS         O         OS         CO         »O         »O         t-         C*i         L'-         VO         CO 
^COCOCOCMCMCMCMCMCOCM 

000>O>t-COTj<COrHOSt>.CDOOSOSCOCOlOCMCMb-00 
CMcMCMCMCMCMCMCMrHrHrHCMrHrHrHrHrHrHrH 

^ 

1  «  1  ^ 

fe=                                     X 

IO 

^    -  "n  ^ 

ft)        C      H-3      •<-> 

WJ  <3    3    * 

-PV     pueiuaa     '55S2;552fi^N 

pue    S}ipdJ3    t(SB3          cvj      co       co      co      co      01       eo       co      co      w      co 

^CMCMCMCOCOCOCMCMrHCMCMCOCMCOCOCOCMCOrHrH 

00 

5  '-3  "  ^ 

C   C    Si   qj 

X 

§   «>  ~   | 

IG)01    0)     sJrSOdla               i         ^'          Of         ^           -*           -!           C»           to            rH           W           ^           rH 

CO^oiCOOCOO^tCM^4CMCMOSOqiOCO'1«<lJ'<iJOSrH<if 
^^COXh'<^IOkOrH^CDI>>'*fdoSO>rHo6>OCOCO^ 

CD 

a,^  °  a 

sSttlAGg     JJ     p3Xlj[     |i--oot^'cr5tOT*'cococOiocb 

CM 

<u  'O  *-«    ji 

^    G  2 

7;     *    ^     g 

'S3A  I9S3^J              'oOooCOCOOOOS           -CO 

;cor*CMWoico^cMCftoqcMiocjrHoocooo^'i*io 

0» 

3     >    ^g     ?0 

PUB  m,d»3  ,«sS2Sd     •    s 

TfCOCOCMCMCOCMCModdoscOOSOOOioOl-lO'* 

rHrHrHrHrHrHrHrHrHrHrH 

•3  .B?  a;  oj 

iiii 

^f!Sr^r5^^oooo'^csl 

iigg§lslSiiiil§iilsSi 

1 

,H                        ^^rHrHrHrHrHrHrH 

438 


TABLES 


B-sjtS 

"00 

•4     Qi^ 


II-hOT+6 


-ipao 


•spuoa 
'lBdtrj\[   pus 


£ 
"S 


« 


-PV 
pue 


•S9DUBA 

UB 
s;ipa.io 


t~          rH          Op 

in      in      3* 


co      en 

CO         «H 


co      CD 

•H        CM 


O        to 
O        O 


,  S 


oo      co      in 


2  i  i 


5    •§ 

CO  «- 


*i 


S3      CO 

"1 


g  5 


1 


s  1 

o    * 


S   i 


,1    . 


?  I 

g  s 


IS 


5    o>    ^5    S    *S 

r^    ^     as  e 


T3  .-H 

S  J  g 


I'- 
ll 


"I        2 

£  4  s 


1  8 -a 
I  5  3 

oca 

S  5  .a 


£a 

?S 
11 


§      .H 


3  R 


2r   •*— 
.    «    p, 


<8      CO     ^« 

i?« 
5a  § 


i  s 

O  3 

«  - 

9  .3 


5      5 


99 


i- 

li 


§ 


TABLES 


439 


«>   (6+8) 


U? 

SOOUBAPV 


(9    +    S) 


S  S 

I  s 


fH    < 

JJI8 

21: 


(woo  pus 


•s^UBg 
?appai 

JO    *O 


20 


o 

^' 


oo       to       oo 
«       «5       ko 


M  CM   CM          -I          TH 


t^  5O  N  S  CVI  00 


£2  S  S3 


2  !2  ^  S2  ^ 


>  Q  00 

I    CO    r-l 


S     2     S     5 


I! 


•SQOO  jsan 

^     S     8     CO     8      CM      CO 

8 

$ 

5 

rf 

CM 

CO 

§ 

CO 

in 

CO 
0 

$ 

OO 

S 

CM 

ft 

3 

s 

58 

8 

% 

W 

$ 

s 

S 

s 

S 

ft 

o 

: 

t- 

"*! 

3 

co 

CO 

t— 

o    {g 

•SOOQ   sauBiBS     i 

-seGSSs 

rH 

s 

IO 

CM 

ft 

CM 
t- 

8 

a 

00 

CM 

CO 

to 

§3 

% 

CM 

to 

CM 

r- 

to 

00 

ft 

t- 

O] 

CO 

CO 
OS 
CO 

CO 
CO 

5 

to 

ffl 

9 

s 

rH 
IO 
OS 

Os 

OS 

to 
o 

05 

O 

CO 
CM 

OS 
00 
CM 

05 

co 

S 

8 

0 
CM 

r«-    os 

oo    •"* 
en    in 

•SOOO 

IO      00      rH      CM      00      1—      CM 

N    co    9    9    co    co    51 

10 

10 

CO 

§ 

CM 

CM 

S 
f- 

CO 
CM 
O 

CO 

to 

00 

to 

CO 

1— 

rH 

i 

§ 

s 

CM 

00 

% 

00 

to 

£ 

10 
CO 
CM 

s 

co 
t- 

CO 
CO 

o 

CM 

CO 

00 

g 

00 

to 
en 

CM 

rH 

CM 

a 

i 

CM 

CO 

CM      CO 

o    os 

CM      CO 

SOOO 

JO   puBii   ui    qsuo 

•JBd 
JB  sing  A'jnsBajj, 

•anjBA    la^jBui 

AVOpq         JO         }B 

•sajBiis  A\IBU 
-!PJO  ^  aouajaj 

00      CO      CO      rH      IO      CO      O 
Tj<      IO      IO      IO      •**      CO 

CM      CM      CO     CO      t      CO 
*      rH      CM      CM      5?     CM      CM 

CD 
£ 

s 

CO 

to 
r- 

en 

S 

t- 

co 

ft 

S 

o 

2 

CM 

S 

CO 

m 

Sl 

CO 

co 

CM 

IO 
CM 

CO 
rH 

CM 

O 
CO 

s 

00 

to 

to 

00 

rH 

S3 

o 

CM 

CO 
CM 

!>. 

en 

CO 
rH 

CM 

OS 

S 

CO 

CM 
CM 

00 
CM 

CM 

CM 

i 
s 

OS 
CM 

to 

§ 

o 

% 

CM 

rH 

OS 
CM 

CO 
CM 

S 

OS 
CM 

CO 

CM 

CM 

00 
CM 

o 

s 

to 

3 

rH 
CO 

CO 
CM 

rH 

CM 

rH 
CM 
CM 

to 

S 
CO 

00 

CM 

t- 

CM 

CM 

10 
CO 
CM 

0 

CM 

§ 

00 
CM 

OO 

l> 

0 

CO 

OS 

rH 

CM 

O 
O 
CO 

00 

o 

CO 

CM 

CO 
CM 

to 
to 

CO 

CO 

co 

CO 

CO 
CO 

CO 
IO 

CO 

to 

CO 

05 

oo 

CO 

§ 

CO 

% 

CM 
10 

CO 
CM 

"3< 
CO 

CM 

rH 

OS 

CO 

to 

CO 

CO 

CO 
CO 
IO 

t- 

s? 

CO 

to 

CO 

T»< 

to 

CO 

t-- 

CO 

r- 

00 
CO 

CO 

to 

OS 

CM 

CM 

00 

00 

s 

0 
05 

to 

CM 

CM 

CO 

00 

rH 

o 

CM 

CO 

rH 

CO 

to 

to 

CM 

to 

CM 

en 

GC 

CO 

CO 

to 

CM      CO 

OS      CO 

CO      to 

rH       10 
rH       CM 

OS      CM 
•      OS 

•    r— 

CM 

t-      00 

s  $ 

CO      00 

to    co 

-ajjj     'sajrmiaq 

-3Q    'O£)    ^3O^S-"^f 

•spuog    jBdiom 

CO 

<-"> 

CM 

on 

CM 

05 

OS 

CO 

in 

(75 

CO 

oo 

O 

0     CO 

C/5 
CO 

4}      ,—  s 
NH          "•—  '         »!p 

-njAl   ^   'jVcI   "X'l 
•jsoa  Avo^aq  jo  JB 

:    :    :  S  Q  §5  S3 
::•:::  1  1  S 

. 

Tt< 

CO 

CO 

OS 

OS 

O 

05 

CM 

00 

CM 

CM 
CM 
CM 

00 

to 

CM 

CO 

to 

CO 

S3 

CM 

IO 

CM 

£ 

CO 

CM 
t- 

to 

i 

t>- 

co 
r- 

OS 

S 

CO 

CO 
CM 

OS 

00 

o 

OS 

§ 

rH 

in 

S 

CO 

05 

t- 

1 

o 

CO 

CO 
0 

CO 

CO 
CM 

00 

CO 

IO 
CO 

00 

to 

CO 

to 

00 
CO 

o 

to    to 

CM      CO 

o    oo 

CO     CM 
rH       CO 

>          "3 

A'padoJd    papuBq 

r  >  § 

o 

o 

CM 

CO 

to 

•<* 

CO 

CO 

CM 

rH 

05 

t- 

rH 

0 

05 

1-H 

0 

0 

rH 

OS 

in 

T}< 

to 

CM 

t— 

CO 

CO 

CO 

CM     tO 

X    1    a 

«.S  6 

00      O      CO     ^      IO     T|<      ^« 

*• 

S    fi    S 
aa    ««    b 

s  ;  i 

a    fe 

S 

4> 

H 

pajunoDsiQ     SUT3 
suuoq 

•saauBA 
-PV      puBiuaa 
PUB  sjipajo  MSBO 

TJ<    t-    to    io    r-    co    r-- 

•^        CO       OS       CO       rH       O       -^ 
CO      t-      0      CM      10      CM 

CO     tO     CO     CO     •<*     00     co 
CM      CO      ^f      Tf      CO      io 

CO         •      CO      CO      CO      •<*«      tO 
CO                  O       CO       rH       CM       O 
CM      CM      CO      CO      CO 

cS 

05 
CO 

CM 

i 

CO 

to 

$ 

CM 

CO 

to 

1 

r- 

CO 

o 

00 
10 

o 

CO 

en 

CO 
10 

19 

rH 

en 

GO 
CO 

to 

CO 

s 
i 

00 

CO 

CM 

co 

CM 

CO 

rH 

S 
CO 

rH 

CO 

CO 

CO 
CO 

00 

CO 
CM 

OS 
CM 

OS 

CO 

0 

CO 

co 

o 

CM 
CM 

rH 

OS 

CO 

CM 

to 

05 

CO 

o 

IO 
CM 

CO 

CO 

1 

CO 

en 

CO 

CO 
00 
CM 

CO 
CM 

to 

CO 

00 
CO 

s 

CO 

to 

CO 
CO 

co 

CO 
OS 

CO 

CO 

rH 

CO 

CO 

00 

OS 

CO 

t> 

o 

CO 

to 

CM 

CM 

05 
CO 

CM 

t- 

lO 
CO 

IO 

co 

00 

to 

CO 

s? 

TC 

00 
00 

rH 
t- 

0 

CO 

i 

CO 

to 

CO 

§ 

to 

00 
OS 

CM 

CO 
CM 

CO 

s 

CM 

O 
CO 

CO 

CO 

r- 

10 

05 

o 

CO 

0 
o 

CO 

o 
o 

CO 

00 

o 

CM 

s 

CO 
10 

o 

8 

s 

o 

2 

s 

CO 
CO 

CO 
CO 

oo 

CO 

OS 
CO 
CM 

CM      0 
CM      CM 

CM        rH 

t-    o 

OS      CO 

t>.    co 

rH       rH 

r-    CM 

•m 

00      00      CO      tO      CM      rH      CM 
rH       rH       IO       rH       O       t^       IO 
rH       rH       CM       CM       CM       CM 

8 

CM 

o 
o 

CM 

CM 

CO 

s 

s 

00 
CO 

t— 

I 

O 

o 

0 

£ 

0 

to 

OS 

OS 
0 

00 

oo 

OS 

ft 

0 

CO 
0 

rH 

00 
CM 

CM 

i 

OS 

to 

CO 

CO 

CO 

CO 

rH 

f- 

Tj< 

CM 
t- 

OS 

to 

00 

s 

g 

CM 

28 

CO 
rH 

to 

i 

1 

O      CO 

TJI         tO 
T*        00 

•sjisodaQ   juajjno 

SSUTABS    i$    P^xfjl 
'Z4  I    ie)°I, 

•**      OS      OS      O      •*!»      O      Q 

•«*      OS     TJ<      to     00      rH      CM 
rH      t-      00      CO      CO      IO      CO 

,    oo    o    to    r*    t>    o    o 

'      ****      "*      O      rH      rH      CO      CO 

to 

CO 
IO 

q 

S 
10 

q 

rt* 

0 

CO 

o 

to 
to 

o 

00 

t* 

CO 
CM 

to 

s 

OS 

t— 

CM 

2 

CM 

IO 

rH 

CO 
CM 

IO 

I*1 

CM 

IO 

to 

CO 

CO 

to 

to 

CO 

CM 
CM 

to 

i 

to 

10 

s 

CO 

co 

CM 

CO 
CO 

10 
CO 

CO 

00 

00 

s 

10 
!>• 

S 

00 

CO 

00 

s 

c3 

CO 

t>- 

rH 

00 

o 
o 

CO 

o 

t- 

CO 

rH 

OS 
t- 

o 

00 
CM 

CM 

s 

00 

to 

00 

IO 
CO 
OS 

oo 
r- 

to 

OO 
00 

o 

0 

t~ 

rH 

CO 
0 

CO 

00 
CO 

00 

to 

CO 

t- 

10 

i 

rH 

t— 

CO 

c* 

IO 

os 

OS 

o 

1 
i 

os 

CM 

Si 

to 

00 

rH 

CM 

00 
CO 

rH        CO 

CO      O 
O      CM 

to    m 

OS      CO 
O      'O 

•5<    to 

rH       rH 
0      CO 

to    co 

•saAjasay 

!                          tO      tO      »O      tO      UO 

o 

o 

o 

0 

o 

O 

o 

0 

o 

0 

o 

o 

o 

o 

0 

0 

o 

0 

0 

0 

0 

0 

o 

o 

r> 

CM 

O 

CM 

0 

CM 

0 

CM 

o 

CM 

0 

CM 

10 

CO 

0 

CO 

o 

CO      CO 

o    o 

j                            0      rH      rH      CO      CO 

to 

to 

to 

t- 

0 

CM 

rH 

s 

co 

c- 
t- 

CM 

s 

Tj* 

*>• 

£ 

s 

OS 

t- 

% 

CO 
00 

i 

05 

o 

o 

§ 

§ 

CM 

O 

to 

o 

§ 

0 

CO 

to 

00 

o 

CM 

00 

s 

®      CM 

Q 

o 

"IBjideo    dn-ptBcj 

*cf    to    to    io    m    in    to 

to 

to 

10 

10 

05 

£ 

8 

o 

o 

o 

o 

o 

o 

o 

£ 

s 

O 

8 

8 

% 

£ 

8 

% 

o 

£ 

s 

% 

s 

s 

$ 

«* 

IO      IO 

!       tO      t"*      CO      C5      O       rH      CM 

CO 

to 

CO 

r- 

00 

en 

CM 

CO 

CO 

rH 

05 

rH 

CM 

to 

1  §  s  §  i  S  S  S 

OS 

OS 

O5 

05 

05 

OS 

OS 

05 

05 

O5 

05 

OS 

OS 

05 

05 

05 

05 

05 

M 

& 

05 

05 

05 

05 

05 

05 

8* 

05 

s 

£ 

en 

s 

O5 

55  * 

,£2 

i  s 

B  & 

Q 


«fl  a 

M    «M     cd 

3  *•£ 

<!      M      CD 


PUBI{    U{ 


^cor-4»>.i>.inoOrH^inpooco»niHp^fpino>o>pknoo          ^    «? 


c\i     «o     o     06 


>   w 

w 


aniBA  ;a^jBi\[ 
Motaq  jo  IB 
uaui^saAui 


l>       O       rH       "31       CO       rH 


—    H 
era     ko     10    o>    t^     oq    GO  too 


CO       rH       r-i      TH 


^op^p»Htopcocvit>c<i^rj«oqoq»Htqcopt^»Hcot-7rH          c?1'? 

rHrHCvJCVJCOCVJCNlC^CJC^C^COCOCJCOCOCOCJCNl'^IOCOkOlrt  ^     ^ 


CDOCJOOOOOOOOO 


•spuog 

Bdpmnw 
'isnjj, 


r-»       IO       W3       «O       kO       ^       1<       <«*       «O<OtOlOin-*jiTt«COOJr-l»HOO 


1 


•^unaas 


.     10     *#     u?     »H     Ci 
*     to     co    ci     r-^     oi 


T-jt-^ioi-Hf-iftcoiopppr-jkjQr-j,-! 


o>    t>    0)    p    ir>    oo  OTH 


}SOD    MOpq    JO 


00      «UJ 

o    cs 


pasBqDJnj  PUB 


PUBU13Q    pUB 

USBD 


sr^tsodaa 
o; 


PUB 


rHOfHr-(r-ICVJOCvlOO»HCO  COCM 


caco 
coco 


CO       r-t       10       CO       t^       O       O 


o»/5»-<o»'-«c«io  ooo>       ®^*^c?P?~!y:?0^cS!c?'ll!ir?''?o?^!'~!c?a?t<Tc?u:?l/?a?c^          "?*? 

SMMMMM^  SScO  COC^C«lNCNICOCOCONC^(NC4CA|C\lcgNCaCOr-lCvlr-<rHi-(^  CSICi 


f,      Irt 


evjeo^o»o»'HTrr-«o 
^SeoC'ir-iTHCMcaNC^ 


r^co^Ot^p^c^tOrHto          o> 
^-t*"3o6coo6o6cio«io6o          r4 


co    «o    co    10    in          m    *n 


S8SS5»S5»5»5SS55SSS   §  S  2S222S22§§222S2222 


444  TABLES 

TABLE  XX 

The  Central  Bank   (Dec.  31st) 


73 
C 

I 

i! 

rflfl 

73 

C  . 

to 

4- 

3 

73 

§ 

73 

7373      Jj 

C  C      £ 
<fl  OJ      53 
0 

P 

+2 

;>> 

73  S 

S'-M\ 

"~cC 

42 

."£ 

G  • 

°J  w     jg 

3 

1/3 

a 

•as 

§& 

<D.S 
fc| 

C73 

33 

.STJ   „ 

Ts 

u 

!$ 

73  "§ 

'w 
o 

I 

s 

.2 

!j 

3-  *s 

>rsl   -1 

3 

& 

CO 

|J 

|Mg 

73 

$5 

IS  3 

0;  03 

xu 

13 
"o 

|  + 

IN 

§•§«   §•« 

« 

2 

!«s 

* 

« 

(0    H 

u 

E 

H 

H 

u 

S    Q 

H 

H 

1912 

15 

i 

16   16 

22 

65 

87 

93 

10 

1913 

15 

i 

16 

6 

34 

40 

56 

5 

1914 

15 

i 

16 

30 

46 

8 

1915 

15 

i 

..   16 

50 

6G 

6 

3 

1916 

15 

i 

..   16 

146 

162 

38 

8 

1917 

25 

1.6 

..   26 

357 

383 

70 

11       14 

1918 

25 

6 

..   31 

489 

529 

120 

19 

1919 

50 

14 

..   64 

957 

1021 

148 

3 

1920 

50 

20 

..   70 

1093 

1163 

129 

53 

1921 

50 

25 

..   75 

627 

711 

1338 

1413 

222 

13 

1922 

50 

30 

..   80 

594 

728 

1322 

1402 

212 

8 

1923 

168 

100 

..  268 

685 

884 

1569 

1837 

294 

9 

1924 

168 

100 

..  268 

608 

777 

1385 

1653 

350 

19 

1925 

168 

100 

..  268 

673 

742 

1415 

1683 

290 

18 

1926 

168 

100 

..  268 

806 

883 

1689 

1957 

298 

22 

1927 

168 

100 

..  268 

758 

793 

1551 

1819 

166 

3 

1928 

168 

100 

..  268 

671 

772 

1443 

1711 

140 

1929 

168 

93 

..  261 

613 

650 

1263 

1524 

156 

14 

1930 

168 

86 

..  254 

763 

718 

1481 

1735 

170 

10       5 

196 

67 

+23 

1931 

168 

70 

2.7  238 

738 

782 

1520 

1758 

160 

10 

404 

198 

1932 

168 

70 

4.5  238 

1134 

876 

2010 

2248 

230 

15 

567 

30 

1933 

168 

70 

6.7  238 

1223 

999 

2222 

2460 

390 

11 

221 

72 

1934 

168 

70 

9.4  238 

1356 

1091 

2447 

2685 

224 

183  (i.b 

73 

86 

-146 

1935 

168 

70 

12.6  238 

1572 

1200 

2700 

2938 

839 

42  „ 

% 

1936 

168 

70 

15.8  238 

1873 

1275 

3148 

3386 

446 

25+51   113+19 

119 

163 

1937 

168 

75 

19.1  243 

1781 

1287 

3068 

3311 

482 

0+82    28+28 

7 

151 

1938 

168 

80 

21.4  248 

1791 

1311 

3102 

3350 

403 

6+  0      50 

122 

183 

1939 

168 

87 

25.3  255 

1825 

1161 

2946 

3241 

400 

2+26       5 

167 

1940 

168 

94 

30  262 

2163 

1085 

3249 

3511 

850 

2+20 

50 

99 

1941 

168 

101 

35  269 

2929 

1203 

4132 

4401 

662 

5+0       5 

23 

1942 

168 

108 

40  276 

4314 

1151 

5965 

6241 

1114 

8+  5      83 

185 

23 

1943 

168 

120 

48  289 

6755 

1408 

8163 

8451 

1663 

0.3       5 

66 

23 

1944 

251 

202 

52  453 

7587 

1861 

9448 

9901 

1514 

22      10 

66 

23 

1945 

251 

222 

52  473 

8272 

2251 

10523 

10996 

1560 

17      11 

66 

23 

1946 

262 

318 

52  580 

8517 

2835 

11352 

11931 

1851 

20      11 

23 

1947 

314 

300 

52  614 

9377 

2938 

12315 

12929 

2418 

130 

164 

TABLES  445 


TABLE     XX 

The  Central  Bank  (Dec.  31st) 


£?   S3 

It 

3&  - 

TJ  vi 

C 

•o 

c 

M«  38 

M^ 

S'O^J? 

(rt  O 

C 

03 

.  2 

o 

o  « 

•0    n 

<s 

Salaries 

.2  3  9  *«i 

3  .5  c  <u  b 

«7:§£3 

c| 

"o  5 

£  o>  ^ 

05 

2% 
3< 

t3 
OJ 

1« 

2  eg 

m  :! 

& 

^0 

•0° 
•3  w 

x£  *£ 
£§  o§ 

CO 

-  •  1 

c  <ti  T  o  <y 

!*««: 

*s§^s 

§*«§-£ 

?? 

•<  gj   >4 

7J  <o  £<£ 
OPn  COT 

ash  Crei 
Demand 

oans. 

ill  Discot 
Purchase! 

1  p 
i  & 

§  >« 

otal  earni; 

iterest  Pi 
Depositor 

iterest  on 
Deposits, 

iterest  on 
Deposits, 

<C 

o 

S-t 

& 
vi 

2 

e/i 
«C 
g 
& 

£* 

S-.     W     O 
O)  >•>  0>     0> 

SSf  1 
III  ! 

fc    0 

K 

S 

U   t-J 

PQ 

l3    »H 

H 

>-, 

M       >-< 

0 

£D     * 

18 

38   40 

2 

31 

197 

133   65 

122 

62 

30    10 

10 

6 

22   25 

0.5 

737 

442 

343   99 

295 

97 

44    25 

13 

5  4 

21   22 

0.5 

341 

136 

64   62 

205 

60 

62    14 

11 

4.1 

27   19 

2.3 

361 

194 

125   69 

167 

77 

43    21 

249 

1.5 

49   37 

83 

670 

359 

199  160 

311 

182 

62    35 

r>7 

08 

66  107 

78 

Io74 

858 

493  365 

516 

288 

102    70 

105  (incl 

T.  bis  ) 

2.7 

119  139 

23 

2810 

1040 

346  694 

1770 

522 

260    274 

324  („) 

1.2 

289  206 

47 

4262 

1516 

250  1266 

2746 

699 

443   200 

233  <„) 

1.3 

316  305 

99 

35  .. 

7815 

4688 

3146  1542 

3127 

1281 

713    175 

'226  (,,) 

3.0 

358  378 

184 

33  .. 

8286 

5307 

3701  1606 

2979 

1531 

1606   365 

285  i.j 

53 

( 

374  379 

102 

38  .. 

8884 

5595 

4135  1460 

3289 

1366 

1030   427 

640 

33 

18 

v  / 
966 

172 

48  35 

11039 

6567 

4975  1592 

4472 

2134 

1314   552 

691 

23 

18-1-5.7 

851 

143 

51  35 

11647 

6626 

5127  1499 

5021 

2257 

772  784  573 

673 

24 

19  |-1.1 

782 

139 

54  34 

10268 

5860 

4320  1520 

4408 

1891 

770  799508 

947 

62 

25 

738 

170 

55  ri 

10679 

6138 

4384  1754 

1983 

1983 

794  805  563 

1026 

57 

34 

805 

164 

55  37 

10512 

6247 

4358  1818 

4265 

1618 

482  856  580 

822 

49 

25 

866 

123 

i 

55  38 

3914 

5747 

4092  1655 

4167 

1552 

956  877  .. 

585 

51 

33 

692 

91 

104 

9K'2 

5287 

3711  1555 

3865 

1348 

877  841  .. 

3  512 

50 

25 

641 

56 

103 

8893 

47% 

3213  1582 

4097 

1763 

891  806  .  . 

1  447 

42 

26 

609 

44 

111 

10247 

5341 

4253  1786 

4906 

1761 

874  832  .. 

2  622 

52 

24 

576 

31 

110 

10299 

5366 

4119  2247 

4933 

1432 

894  859  .. 

38  851 

59 

42 

636 

39 

111 

10135 

6025 

3950  2075 

4110 

1468 

918  947  .. 

156  796 

105 

807 

73 

125 

10308 

5129 

3292  1837 

5179 

2384 

941  909  .  . 

76 

83  734 

63 

99 

869 

82 

127 

10711 

5564 

3522  2042 

5147 

1984 

1015  1128  .. 

96  827 

65 

162 

10?8 

160 

130 

10997 

5052 

3303  1749 

5945 

2236 

1003  1173  .  . 

68  732 

105 

205 

1178 

173 

126 

11841 

4325 

2889  1456 

7516 

2685 

1019  1343  .  . 

55  785 

97 

208 

1263 

150 

118 

11296 

4083 

2889  1394 

7213 

2759 

1018  1461  .  . 

49  730 

82 

222 

1395 

178 

117 

12273 

4135 

2795  1340 

8136 

3177 

1044  1580 

11  830 

73 

221 

1204 

138 

118 

12162 

3991 

2583  1408 

8171 

3047 

1181  1767  .. 

13  1702 

74 

264 

1615 

269 

119 

13210 

3888 

2215  1673 

9322 

4099 

1203  1966  .  . 

81  2918 

97 

252 

1382 

219 

111 

14274 

3695 

2080  1615 

10379 

4841 

1355  2297  .  . 

288  3747 

72 

302 

2281 

378 

104 

"2728 

4186 

2374  1812 

18547 

1071 

1911  3391  .  . 

301  4927 

48 

320 

2747 

496 

98 

27982 

5999 

21963 

11743 

2279  4474  .  . 

204  5747 

60 

339 

3374 

631 

93 

31545 

7365 

24180 

12213 

2728  5588  .  . 

10  4968 

48 

397 

5289 

735 

93 

38203 

9413 

28790 

14410 

3475  6791  .  . 

0.4  5430 

47 

414 

4305 

722 

100 

42942 

10028  .  . 

32914 

14994 

4048  8946  .  . 

446 


TABLES 


TABLES 


447 


a  a 


a  * 

a  a> 

5    2  I 

H 1  g 

u  I 

U  PH 


PUB  puBq  ui 


PUB 
jjous     }B 

JO    USD    JB    A9UOH 


•SOQ  apojs-'lf  J<> 

SdJBlfS      X.l 

PUB 

dn-piBd 
-' 


PUB 


o»    in    to    p    p    to 
cvi    cvi    to    cvi     to    oi 


^         iHOrHt^oirH^ine^cotbtooooco 

rH  TH       rH      rS      r-l  COrHtH<HtHCM<HrH(Mr-l 


rH        00        tO       CV|  .        tO        CO 


coco 


rlfHO  '       ©       »H       O       O       O 


»H         bbbbt>fHcabbbbbb       '    b    b 


i>;    cvi     o»       -in       •     TH     co    to    in 
co    b    co       'in       'cobbb 


^^^    ^ 
tot^to    in 


•     looooor-ibbbbbc         r-t     »-«        »HrHeMf-«         cvi         rHrHr-J^H 


J 


•SUBOI 


PUB 


ui 


pus 
sing 


•SUBO'I 
'S3DUBAPV 


4s8ui 


9AJ9S9H  PUB 


9S9H  P 

Q    dn- 


JO     tO   tO   tO   rH 

TH   r-i  co  ci  co 


•SUBOI  _  _ 

"     IJ9^S    UBipuj  vcoincocvit^in*-< 

BUIUIJ91-UOM        !  Cvj     M     •*      W      rH     r-i     N 


cvj     10        "*     o     co     «> 
cvj     oi        cvi     CM     cvi     cvi 


pto        oqcMinoq 

COCO  COCOCOCO 


Is 


t>rHr-ioq«stooooqcvipo>oqoq 


co       oo    p 


i>coint^o>pptooocAcoinintop  ^    p 


<=?  ^ 

in    to 


*    '     '    '  S  S 


pro       o>    co    cvj     in         to         *Htooqt« 
t>o»       J5^J^JIS         g         ^J5r^c' 


§  I  8 §1 


CJ 
V 

Q 


,     .  CTJ 

X    M 


* 


&  rt 

j  c 

M  .8 

<  1? 

H  5r 


Cp 

H 


•SOOO 
asuadxa  IBJOJ, 


•SOOO 
A\te[B 

•SOOO 


•SOOO 
SSOJQ 


SOOO  sjojtsodaQ 

OJ      piBd 


•SOOO 


•01  +  6+8 


JO 

pue    -jajcT   Pl^d 
Xij-iBd     jo     A'nn 

•SUBOT  -douni\[ 
pue 


•sum 

•APV  puBiuaa  ^ 
sing      'sajou-'j 

SUB01 


•s>isodaa 


3UTABS 


S 


"*  t-  CO  «O          • 

CM  rH  CM  CM 

O  O  T*  .          .          .          . 

CM  rH  rH 


S**  OOOPt^^in^tOOl 

^c        Tj«intoooooooi>in< 

rH    rH  rHCMCMt'-CMt-inm< 


co     m     oo 


inoocScoinoooooot^o 

inCMrHrHrHrHrHrHCMin 


rH  co        gsoseptotoinoscof 


•ssfc 

10   t-   00 

CM   §   S 

•  r-    rH    O 

•  c-  to  f- 


CM      O      t^ 

CO       TH       CM 
CO         rH         rH 


rH        rH        rH        CM 


CM       CM       CM 


CO          '       «O 
CO  CO 


to     to       .to 


CM          '      CM 


rH        CM  CM 


?:  S3  S   § 


OJ      «*      t-^      CM      O 
"  ~ 


iO      O 

CM     o 


t>       OS      t»      CM      O 

t>^        IO        rH        CO        <O       t^ 

O        rH        •*        00        00        OS 


N       «?  OS 

«O      t-       CO  OS 

CM      CM       CM          .CM 


OS        rH        CO        tO  .        ^* 

O        O        rH        rH  •        CTJ 


O        rH        rH        CO        -^ 

d    co    <c    «o    to 


co  •«*<  in  to  b-  co  o» 
os  os  os  os  os  ot  os 


CO  CO     CM  CO 

co  t^    d'  d 


>  CM  CM  OS  OS  (O  tO  rH 


in  in       totototocotococMcocMO- 


y- 


I  CO       OS  r- 


Sg 


CO  ^  OO  CM  ( 

t-  m  CM  t>-  ' 

^  c-o  co  CM  ( 


CM  CO  CO  < 

t>.  m  in  ' 


COrHb-OSCOrHf-rHOOCO 


Ic^Sc^So^ 

rH  rH  M  < 


OS   CO  O   CO  tOCMCMT^^^MOOpO 

"•;   '     -"  CO    in  CO  O  CM  CM  c»i  CM  CM  rH  CM  CM  to  CO  CO  < 


CM   <*« 
»0   10 


CO    IO  ^?   ^  ITS   O    O   CM   CM    CM    O 

CMpO  C-3CM  ^t»OSrHrHrHrHrHO'-HrHI 


coco         coco        cocococowcococococococococoeocoinoooooo 


450 


TABLES 

TABLE    XXIII 

The   Punjab   National   Bank 

(Percentage   to   Deposits) 


1896 

If 

cxp? 

i  T3 

"3  * 
cu 

Q  w 

H^  §: 

tmcates. 

Loans,  Cash  Cre- 
dits, Pronotes, 
Bills,  Demand 
i  Advances. 

Govt.  Securities.  1 

Govt.  guaranteed 
Debentures  and 
M'pal  Loans. 

i 

£d 

JH  rt  . 
£jg 

Investments  I 

4+5+6.  I 

Lands,  Buildings,  1 
Machinery.  1 

i 

16.6 

1900 

14.0 

1906 

13.0 

1910 

12.2 

1911 

12.0 

1912 

12.3 

83.6 

93.8 

10.6 

5.3 

15.9 

1.0 

7.2 

1913 

15.4 

90.9 

68.9 

11.8 

9.6 

21.4 

1.4 

25.1 

1914 

31.1 

83.1 

87.1 

19.6 

16.6 

36.2 

2.5 

14.2 

1915 

31.3 

77.1 

89.1 

13.3 

15.1 

28.4 

2.3 

15.3 

1916 

14.5 

77.2 

83.6 

14.7 

11.4 

26.1 

1.8 

17.7 

1917 

25.6 

72.4 

89.9 

18.9 

11.5 

30.4 

1.8 

14.3 

1918 

1919 

11.5 

74.6 

840 

9.6 

5.0 

14.6 

0.9 

15.4 

1920 

1921 

1922 

1923 

•• 

•• 

1924 

8.4 

80.9 

73.9 

^— 

—  v—  —  ' 
20.2 

20.1 

2.2 

12.4 

1925 

7.6 

82.3 

72.8 

26.0 

2.5 

12.7 

1926 

6.8 

792 

64.8 

28.9 

2.2 

0.8 

31.9 

3.8 

7.3 

1927 

7.2 

80.1 

68.4 

29.0 

2.8 

1.0 

32.8 

5.5 

7.3 

1928 

6.1 

74.7 

64.9 

27.3 

2.6 

0.9 

30.8 

7.6 

11.6 

1929 

8.9 

75.8 

65.7 

342 

3.5 

1.1 

38.8 

10.5 

6.1 

1930 

9.3 

70.7 

61.0 

34.0 

3.5 

0.6 

38.1 

10.9 

6.8 

1931 

12.9 

75.4 

67.4 

45.4 

4.6 

0.6 

50.6 

18.3 

4.7 

1932 

12.0 

672 

60.7 

32.9 

4.3 

0.6 

37.8 

18.0 

4.8 

1933 

11.4 

66.5 

63.9 

33.4 

4.0 

0.5 

37.9 

15.1 

5.9 

1934 

11.0 

64.1 

69.0 

27.5 

2.2 

2.0 

31.7 

17.3 

5.7 

1935 

9.5 

63.4 

52.1 

31.4 

1.9 

1.8 

35.1 

16.2 

9.6 

1936 

8.3 

65.0 

60.0 

23.8 

4.1 

3.0 

30.9 

15.1 

8.7 

1937 

7.4 

81.1 

56.7 

21.8 

45 

1.8 

28.1 

13.9 

8.3 

1938 

7.6 

79.7 

62.8 

18.7 

5.7 

2.0 

26.6 

14.1 

7.6 

1939 

6.4 

77.5 

61.2 

22.0 

6.0 

2.0 

32.1 

12.9 

9.0 

1940 

6.0 

70.9 

43.7 

35.6 

4.7 

1.6 

41.9 

8.5 

9.2 

1941 

4.9 

62.7 

40.4 

442 

4.9 

1.6 

50.7 

7.4 

11.5 

1942 

3.4 

48.7 

31.9 

57.2 

3.1 

1.2 

61.5 

2.9 

10.3 

1943 

2.4 

53.5 

31.1 

49.5 

0.6 

1.5 

51.6 

1.1 

7.6 

1944 

3.2 

34.8 

27.3 

59.2 

0.3 

06 

60.1 

0.5 

15.5 

1945 

3.1 

59.4 

28.1 

64.7 

0.2 

0.8 

65.7 

0.3 

10.8 

1946 

3.04 

60.6 

42.4 

56.0 

0.9 

0.2 

57.1 

0.3 

13.4 

1947 

3.2 

62.0 

40.3 

51.9 

1.4 

53.3 

0.8 

13.7 

TABLES  451 

TABLE  XXIV 

The  Allahabad  Bank  of  India 

(Figures  in  OOOs  till  1890  inclusive  and  in  lakhs  thereafter) 


1 

? 

73 
1 

;al  &  Reserve  1 
nd.  1 

d  Deposits.  I 

1    | 

&   2* 

s  & 

i  Deposits. 
L  Liabilities 

w 

T) 
C 

CO  l/i 

Discounted.  I 

;e  Property.  1 

?rnment 
curities. 

sr  Trust 
curities. 

TJ 

"Q.P 

OJ 

1  i 

3   3 

C 
co 

"Sn 

42 

3 

>  <u  J^^ 

;d 
S3 

*co 

1 

U 

£ 

5   u 

&   & 

a 

(0 

U 

W 

o 

6  S 

a 

1865  190 

190 

37 

35 

72   262 

59 

38 

33 

33 

1866  282 

282 

14 

34 

48   330 

98 

112 

29 

12 

1867  285 

3 

288 

39 

39 

78   366 

140 

95 

38 

25 

1868  285 

6 

291 

111 

% 

207   498 

202 

91 

118 

10 

74 

1869  286 

10 

2% 

203 

96 

299   595 

349 

129 

66 

11 

39 

1870  300 

13 

313 

373 

..   104 

477   790 

402 

141 

72 

11 

12  .. 

1871  300 

17 

317 

453 

..   173 

626   943 

423 

90 

68 

11 

8  .. 

89 

1872  300 

22 

322 

534 

..   160 

694  1016 

570 

103 

93 

11 

13  .. 

106 

1873  300 

28 

328 

573 

..   174 

737  10G5 

550 

196 

48 

11 

25  .. 

153 

1874  300 

35 

335 

617 

..   186 

803  1138 

502 

201 

31 

11 

35  .. 

246 

1875  300 

40 

340 

675 

..   272 

947  1237 

507 

321 

80 

11 

40  .. 

248 

1876  300 

46 

348 

880 

..   244 

1124  1470 

664 

462 

72 

22 

47  .. 

138 

1877  300 

58 

358 

1087 

..   303 

1390  1748 

687 

429 

81 

47 

58  .. 

221 

1878  300 

67 

376 

1159 

..   333 

1492  1859 

724 

296 

84 

37 

69  .. 

338 

1879  300 

78 

378 

1382 

..   293 

1675  2053 

1046 

318 

119 

37 

79  .. 

370 

1880  300 

91 

391 

1631 

..   328 

1959  2350 

1196 

254 

189 

32 

91  .. 

441 

1881  300 

104 

404 

1915 

..   404 

2319  2723 

1310 

286 

399 

32 

104  .. 

374 

1882  300 

116 

416 

2115 

..   483 

2608  3024 

1296 

359 

247 

32 

117  .. 

985 

1883  300 

129 

429 

2252 

..   475 

2727  3156 

1599 

550 

164 

33 

128  .. 

536 

1884  300 

145 

445 

2532 

..   338 

2870  3315 

1G91 

634 

135 

33 

144  .. 

563 

1885  300 

163 

463 

2824 

..   424 

3248  3711 

1838 

513 

178 

33 

162  .. 

868 

1886  330 

183 

483 

3109 

..   542 

3651  4134 

2058 

533 

191 

33 

179  .. 

949 

1887  300 

205 

505 

3275 

..   510 

3765  4270 

1951 

462 

149 

33 

200  .. 

1164 

1888  300 

229 

529 

3803 

..   749 

4552  5081 

2430 

645 

590 

56 

229  .. 

788 

1889  300 

255 

555 

4676 

..   818 

5494  5949 

2979 

838 

813 

67 

254  .. 

731 

1890  400 

336 

736 

5909 

.  .  1094 

7003  7739 

3517 

941 

801 

91 

324  ., 

1544 

1891    4 

3.6 

7.6 

73.4 

..  13.22 

86.6  93.2 

37.4 

10.2 

19.0 

09 

3.7  .. 

12.1 

1892   4 

4.0 

8.0 

87.7 

..  14.3 

102.0  110.0 

51.9 

11.4 

18.5 

1.6 

4.0  .. 

13.2 

1893    4 

4.4 

84 

98.1 

..  16.3 

114.4  122.8 

52.4 

11.6 

262 

1.7 

4.3  .. 

16.6 

1894    4 

4.8 

88 

112.7 

..  15.9 

28.6  137.4 

57.1 

17.8 

28.3 

1.6 

4.7  .. 

15.1 

1895    4 

5.1 

9.1 

141 

..  18.3 

159.3  168  4 

61.5 

26.1 

39.3 

1.6 

5.1  .. 

20.3 

1898    5 

5.6 

10.6 

158 

..  20.9 

178.9  189.5 

71.3 

34.1 

44 

1.7 

5.6  .. 

23.8 

1897    5 

6.7 

11.7 

163 

..  22.4 

185.4  197.1 

64.7 

40.9 

51.6 

1.8 

6.5  .. 

23 

1898    5 

7.8 

12.8 

169 

..  21.4 

190.4  203.2 

70.2 

42.8 

39.2 

2.1 

7.7  .. 

328 

1899    5 

8.6 

13.6 

191 

..  25.8 

216.8  230.4 

82.3 

69.6 

35.5 

23 

8.7  .. 

19.9 

1900    5 

9.5 

14.5 

216 

..  32.4 

248.4  262.9 

88.7 

76.3 

42.4 

2.2 

9.6  .. 

306 

1901   10 

10.5 

20.5 

241 

..  31.6 

272.5  293.1 

88.4 

89.9 

65.2 

2.7 

11.7  .. 

58.7 

1902   10 

11.5 

21.5 

259 

..  37.8 

296.8  318.3 

104 

75.3 

62.3 

2.7 

12.6  .  . 

40.9 

1903   10 

12.3 

22.3 

294 

..  39.4 

333.4  355  7 

115 

68 

81 

2.7 

13.7  .  . 

37.0 

1904   15 

13 

28 

312 

..  39.1 

351.1  379  1 

133 

85 

67 

2.6 

14.6  .. 

38.1 

1905   15 

14 

29 

332 

..  43.5 

375  5  404.5 

145 

115 

61 

2.8 

15.9  .. 

36.3 

1906   15 

16 

31 

361 

..  43 

404  435 

138 

140 

59 

2.5 

18.1  .  . 

49.1 

1907   20 

23 

43 

380 

..  49 

429  472 

141 

156 

84 

2.8 

25 

47.1 

1908   20 

25 

45 

387 

2.1  44.8 

433.9  478 

147 

158 

67 

3.2 

27.6  .  . 

50.9 

1909   20 

29 

49 

424 

4.6  49.2 

477.8  526 

157 

136 

94 

4.3 

31.8  .. 

61.7 

1910   20 

30 

50 

490 

7.6  54.9 

552.5  602 

154 

169 

141 

9.1 

32.8  .  , 

68.3 

sdsuaclxa 
SQOO 


•sooo 


.  uoijnq 
>  safjBiBj: 

•SQOO 
>•»<!  PIS 

•SOOO 


•sooo 


pted 


•Xauoui 


ll»O 


O  to-}- 
HgJ 


t-  CO  "*  00  •  CO  CO  CO  •© 
O  rH  rH  CM  •  CO  CO  O>  -CM 
rH  r*  rH  rH  rHrHrH  rH 


t-      00      tO      CM         •      04      CO      <O 
IO      IO      UO      IO  CO      l>      O> 


§•        O        rH        O 
CO      (0      O 


b-  cn  oo  in   •  to  b-  co 

in   CM   ©   rH     •   CO   rH   •<# 
CM   CO   CO   •**       CO   00   ^*» 


•  9 


»o    co 

rH       O 
CM        CM 


CO       rH       rH 

So  8  3 


©  •       rH 


s  § 


**  "*  O  m 

ID      t-      C5      rH 

in     in    in    co 


g    8 

CM      CM 


rH  IO 


CM  co  o  co  in 
in  in  m  co  co 

CM   CM   CM   CM   CM 


C7»  00  CM  rH  T)* 

"3<  b-  ©  CM  CD 

^  <?->  b-  ©  M< 

in  in  m  co  CD 


CM      CM      CM      CM 


CM         •      O 

cn       •     co 


©   OO   CO 

in  co  -^ 


£      10      CM      O 

OS       ©       rH       '- 


2  S 


»-H       r-»      fH       r-»       CM       CM 


rH  crt  in  cj> 
in  in  o>  eo 

in  CD  £  oo 


-*   —   CM   CO   OS   '-^ 

oo  ^  co  oo  CM  in 

••^   CM   rH   rH   rH   in 


^     co     irt     co       •     ^     »H     t* 

r-«       »H       r-«       r-«          •       CO       CO       «-« 


t-<      r^     ^J      CM 


§5  g  £ 


rH       rH       CM 
CO      CO      00 

irj     irt     m 


rH  in  ©  o 
in  in  ©  in 

CM   CM   CO   CO 


§ 


g 

C3 

PO 


w  I 

£  « 


PUB 


'8+8 


•sjisodaQ 


dn-pmj 


r*oooocM 

rHrHCMCMCM 


CMrHCM 


©OOCOOOt*»0>«*©CMt— 

oqcM,cooooot~oo©©o> 

i   CO   00 

rH   t» 

©  eo  o  ^  to  O>  CM 

t-   CO   CM   O   O»   00   00 


!  &  ¥* 

I   rH   CO 


CM    rH   rH   rH 


CO   OO   ©   rH   !*«• 

co  m  <o  <o  rt« 


S  9 


t-  ©  co 


CM   tO 


«n  in  co  co 


I  co  O  t~  co  t-  oo  r- 
i  b-  co  in  co  o>  co  ** 


rH  in  oo 

00   rH   rH 

in  co  co 


O>       CM       O»       b-       rH 


i   CM   CO 

i   b-   © 

in  co 


g  s 

O>  o 

CO  «* 

§  § 

s  s 

co  in 

s  s 


in  co  i> 

rH   00   © 


r-  co  © 


O©rHrHCMrH©rHrHO©rHrHrHCMtOCO 


CO   t>   O4   CO   CM 


©   °0  O5 
CO   CM  CM 

21  f2  cr» 


OO   CM   rH   b- 
©   ©   ©   ~ 


©   ©   © 


in  co  oo  t> 


8  2 


O   in   t-   rH 

CM  ^  co  in  oj  en 

CM   CM   CM   CM   CM   CM 


O4t>OOrHTj*COCO'^4 

-     --cococooo©in 

CO   -tf   in   O>   rH   rH 


CO   b-   b-   l> 


oo  oo  r- 


b-   CO   OJ   rH   CO 


CO       CO 

t-    t- 

b-      t- 


CM  eo 


E3  ^  ^ 

S  5  g 


5  £ 

t>   00 


rH  m  co  in 


:»  CM 

CM   CO 
CO   CO 


en 


•^corHcomw^'V©© 
inincot-b-r-r-cotot- 


5 
£ 


in    in    in 


CMCOinb-OrHrHCOb-rHin 

oooboooooooiOcno^t1'* 
mininioinininininmin 


454 


TABLES 


TABLE    XXV 

The  Allahabad  Bank  of  India 

(Percentage    to    Deposits) 


S, 

Deposits.  1 

o 

I 

Credits  and 
rdrafts. 

Discounted. 

»  Property.  I 

fill 

Z*  4> 

T) 

1      a 

<u 
jC  > 

M 

3 

<y  0            %  0 

j* 

t?" 

fc 

1     3 

3° 

3 

gw      £w 
0         0 

3 

Dec.    31. 

18G5 

2638 

51.3 

81.9 

52.7 

45.8 

45.8 

1866 

587.5 

29.1 

204.1 

233.3 

60.4 

25.8 

1867 

365.3 

50.0 

179.4 

121.7 

48.7 

32.0 

1868 

137.6 

53.6 

97.5 

439 

57.0 

4.8 

35.7 

1869 

989 

67.8 

85.6 

43.1 

22.0 

0.6 

13.0 

1870 

65.6 

78.1 

84.2 

29.5 

15  1 

2  3 

2.5 

20.5 

1871 

506 

72.3 

67.5 

143 

10.8 

1.7, 

1.2 

14.3 

1872 

46.3 

76.9 

82.1 

14.8 

13.4 

1.5' 

1.8 

152 

1873 

44.5 

77.7 

74.6 

28.5 

58 

1.4 

3.3 

20.7 

1874 

41.7 

76.3 

62.5 

250 

3.8 

1.3 

4.3 

30.6 

1875 

35.9 

712 

53.5 

33.8 

84 

1.1 

4.2 

26.1 

1876 

30.7 

78.2 

59.0 

41  2 

6.4 

1.9 

4.1 

12.2 

1877 

25.7 

78.2 

49.4 

no.  8 

5.8 

3.3 

4.1 

15.0 

1878 

24.5 

77.6 

48.5 

19.8 

5.6 

2.4 

4.6 

22.6 

1879 

225 

82.5 

62.4 

189 

7.1 

22 

4.7 

22.0 

1880 

19.9 

83.2 

61.0 

129 

96 

1.6 

4.6 

22.5 

1881 

17.4 

82.5 

56.4 

12.3 

17.2 

1.3 

4.4 

16.1 

1882 

15.9 

81.0 

49.6 

137 

9.4 

1.2 

4.4 

37.7 

1883 

15.7 

825 

58.6 

20.1 

6.0 

1.2 

4.6 

19.7 

1884 

15.5 

88.2 

58.9 

22.0 

4.7 

1.1 

5.0 

19.6 

1885 

142 

86.9 

56.5 

158 

54 

1.0 

4.9 

26.7 

1886 

13.2 

85.1 

56.3 

14.5 

5.1 

1.0 

4.9 

25.9 

1887 

13.4 

869 

51.8 

12.2 

3.9 

0.9 

5.3 

30.9 

1888 

11.6 

83.5 

53.3 

142 

12.9 

0.8 

5.0 

17.3 

1889 

10.1 

85.1 

54.2 

152 

14.8 

1.2 

4.6 

13.3 

1890 

10.5 

84.3 

50.2 

13.4 

11.4 

12 

4.6 

22.0 

1891 

8.7 

84.7 

43.1 

11  7 

21.9 

1.0 

4.3 

14.0 

1892 

7.8 

859 

50.8 

11.1 

18.0 

1.5 

3.9 

12.9 

1893 

7.3 

85.7 

45.8 

10.1 

22.9 

1.4 

3.7 

14.5 

1£94 

6.8 

87.6 

44.4 

138 

22.0 

1.2 

3.6 

11.7 

1895 

5.7 

88.5 

38.6 

16.3 

24.6 

1.0 

3.2 

12.7 

1896 

59 

88.3 

39.8 

19.0 

24.9 

0.9 

3.1 

13.3 

1897 

6.3 

87.9 

34.8 

220 

27.8 

0.9 

3.5 

12.4 

1898 

6.7 

88.7 

36.8 

22.4 

20.5 

1.1 

4.0 

17.2 

1899 

6.2 

88.1 

37.9 

32.1 

16.3 

1.0 

4.0 

9.2 

1900 

5.8 

869 

35.7 

30.7 

17.0 

0.8 

3.8 

12.3 

1901 

7.5 

88.4 

32.4 

25.6 

23.9 

0.9 

4.3        .. 

21.5 

1902 

7.2 

87.2 

35.1 

25.3 

20.9 

0.9 

4.2        .. 

133 

1903 

6.6 

88.1 

34.5 

204 

24.2 

0.8 

4.1 

11.1 

1904 

7.8 

88.8 

37.8 

24.2 

19.0 

0.7 

4.1 

10.8 

1905 

7.7 

88.4 

38.6 

306 

16.2 

0.7 

4.2 

9.6 

1906 

7.6 

89.3 

34.1 

34.6 

14.6 

0.6 

4.4 

12.1 

1907 

10.0 

88.5 

32.8 

36.3 

19.5 

0.6 

5.8 

11.1 

1908 

10.3 

89.1 

0.4          33.8 

364 

15.4 

0.7 

6.3 

11.4 

1909 

10.2 

88.7 

0.9          32.9 

28.5 

19.6 

0.9 

6.6 

12.9 

1910 

9.0 

88.6 

8.8          27.8 

30.6 

25.5 

1.6 

5.9 

12.3 

TABLES 

TABLE    XXV— (Continued) 
The  Allahabad  Bank  of  India 

(Percentage    to    Deposits) 


455 


vi 

£ 

M 

CUD 

1 

•M    <U 

t; 

1 

s 

l| 

aoj 

s" 

»d 

0) 

o 

I 

1 

Fixed  &  Sav: 
Deposits. 

I 

Cash  Credits 
Overdrafts. 

s 

3 

S 
0) 

§ 

W 

Government 
i  Securities. 

i 

i 
Other  Trust 
Securities. 

L 

i* 

! 
'  Treasury  Bilk 

0 

1& 

i1 

1911 

8  8 

1912 

8.6 

1913 

9.0 

90 

1.3 

91.3 

24.8 

36.3 

20.1 

2.5 

2.0 

2.0 

18.3 

1914 

14.0 

85.7 

1.3 

87 

32.6 

34.7 

168 

3.4 

2.3 

3.0 

15.7 

1915 

14.5 

78.9 

2.1 

81 

263 

31.9 

16.8 

3.8 

2.1 

2.9 

24.9 

1916 

13.7 

72.1 

2.5 

74.6 

23.2 

34.4 

14.4 

3.6 

2.1 

2.9 

27.8 

1917 

1918 

8.8 

743 

2.2 

76.5 

13.2 

44.6 

13.8 

2.7 

4.1 

46 

25.9 

1919 

6.4 

75.4 

2.1 

77.5 

9.5 

55.1 

10.8 

2.0 

28 

3.3 

22.8 

1920 

7.4 

73.3 

2.2 

75.5 

8.7 

51.1 

10.3 

2.2 

1.1 

1.8 

0.2 

25.6 

1921 

March 

31st 

1922 

6.6 

736 

2.5 

76.1 

7.9 

46.7 

8.8 

2.6 

7.8 

18.0t 

6.3 

19.5 

(38) 

1923 

6.4 

66.2 

2.5 

68.7 

7.9 

40.4 

11.6 

3.0 

9.7 

16.7 

24.8 

(28) 

1924 

8.3 

72.4 

2.8 

732 

9.4 

43.6 

9.1 

4.1 

141 

17.0 

22.7 

(2.3) 

1925 

8.7 

72.3 

3.4 

75.7 

8.2 

42.0 

8.4 

3.9 

16.0 

172 

23.9 

(0.2) 

1926 

8.5 

712 

4.5 

75.7 

7.2 

42.4 

8.5 

4.0 

21.6 

26.4 

15.8 

(42) 

1927 

7.9 

69.3 

5.0 

74.3 

6.5 

42.1 

6.6 

3.8 

24.0 

.  . 

28.9 

16.0 

(2.2) 

1928 

7.7 

72.0 

5.6 

776 

5.6 

40.2 

7.1 

3.8 

26.2 

292 

4.6 

18.5 

1929 

7.1 

746 

5.9 

80.5 

5.3 

41.9 

7.9 

3.9 

260 

28.7 

2.1 

13.9 

1930 

7.0 

70.6 

6.6 

77.2 

5.3 

34.2 

60 

3.7 

28.7 

30.6 

11.6 

16.1 

1931 

7.2 

71.0 

7.4 

784 

4.2 

31.4 

6.7 

4.0 

32.1 

30.8 

16.6 

10.8 

1932 

8.0 

72.5 

7.7 

80.2 

7.9 

26.5 

4.0 

4.5 

38.1 

405 

12.9 

12.7 

1933 

7.4 

698 

8.8 

78.6 

6.5 

30.0 

2.4 

4.4 

46.6 

48.8 

5.0 

11.3 

1934 

7.8 

65.6 

10.3 

754 

6.5 

35.6 

18 

4.5 

44.6 

47.4 

.  . 

13.4 

1935 

7.9 

65.7 

10.5 

762 

6.1 

46.0 

1.8 

4.2 

32.5 

35.1 

.  . 

16.3 

1936 

8.1 

62.9 

11.1 

74.0 

5.7 

30.7 

1.5 

4.2 

39.4 

41.7 

t  . 

26.1 

1937 

7.8 

599 

11.8 

71.7 

5.2 

51.0 

1.4 

3.9 

31.8 

32.6 

15.9 

1938 

7.7 

58.6 

13.5 

72.2 

5.2 

46.1 

13 

3.7 

34.3 

4.1 

38.3 

14.7 

1939 

7.7 

55.5 

14.5 

70.0 

5.4 

42.1 

1.2 

4.2 

36.8 

4.0 

40.8 

0.1 

14.7 

1940 

7.9 

55.8 

13.1 

68.9 

4.0 

51.8 

2.3 

4.7 

240 

4.3 

38.3 

.  . 

16.8 

1941 

7.1 

51.2 

11.4 

62.6 

3.6 

39.3 

2.1 

4.5 

35.5 

3.7 

39.2 

t  . 

18.5 

1942 

5.9 

48.1 

9.8 

57.9 

2.9 

33.4 

2.0 

43 

42.1 

2.8 

44.9 

19.3 

1943 

5.0 

31.9 

9.5 

4.14 

2.1 

30.4 

3.0 

3.3 

43.6 

1.9 

45.5 

.  , 

15.1 

1944 

4.4 

37.7 

9.1 

46.8 

1.6 

32.6 

3.7 

2.2 

48.0 

1.1 

49.1 

1  t 

14.1 

1945 

4.2 

39.8 

9.7 

49.5 

1.3 

35.4 

5.5 

2.9 

44.5 

0.9 

45.4 

t  1 

15.6 

1946 

4.9 

46.5 

9.7 

56.2 

1.1 

46.4 

2.5 

1.6 

40.7 

06 

41.3 

.. 

13.2 

1947 

5.5 

45.0 

11.4 

54.5 

1.1 

48.1 

1.1 

1.5 

38.2 

0.7 

38.9 

•• 

16.3 

i 

si 


i 

^ 


•sasuadxa 


BpOJBH 

jo    uojjnqiJiuoo 
-xa)  siyoaj  SSQJO 


PUB  puBq  ur 


Mopq 
jo   ;B   8/03    otf 

9      sajn^uaqaQ 
aaii;o     pus     -AIH 

Avopq      jo      ;B 


•suBoq 


PUB 


PUB 


'2-1-  1   IB;OX 


-jqnop  JQJ 


m     t-     oo     w 


2§     S     S 


CO  CO 

5      S 


s 

1 


8  i 


£   %   3 

s   *   8 

CO         CO         CO 


8  3  8  I  8  8  h 

5  §  3  8  i  S  § 


CM         o       r-       oo 


:      :    S 


S   3   S   S   3   § 

^»         t-         l/>                           «O  .  ...  CO  CM         CM  "^  CO  to 

:    :    =    =  H  2  i  8  8  8  8  8   3  S  S  S  2   S  2  3  8  «  2  «  I  S  3 

8388888  S  §  I  S  §  §  i  §  §  §  S  H  i  S  §  ^  §  g  § 


g 


S3      : 


jo   uoi^nqiijuoo 
-xa)  sjyoj 


pus  pueq  ur  USBO 


'Zl+Zl 


CO         CO         rH 

§S     58     8 


s   i 

in      t» 


jo  JB  s,  03  DH 

-qn«j  ui  sajBqs 


jsq-^o    put?     -X 

•;SOD 
MOpq      Jto      ;B 


g      S 
co      m 

8    S 


O         O          00 


8     9 


P3;unoosia    sine 


PUB 


N         CO         OO 


rH  rH          CM  CM 


CO         CO         CO 


J3U.-JO       pus 


•s;isodaa 


-jqnop  JQJ 
-' 


S?     S     g 

O)         CO         O 


S 


JH          g  g>  g 


1   I  1  i  i 

s   §  §  §  § 

rH  rH  rH  rH 

co     ^«  in  «^  ^; 

o>      o»  S  o>  3 


TABLES  459 

TABLE    XXVII 

The  Bank  of  Baroda 

(Percentage    to    Deposits) 


It 

II 

U 

w 

O 
& 

Q 

I 

Cash  Credit  and 
Overdrafts. 

1 

1 
Bills  Discounted. 

Immovable  1 
Property.  I 

II 
I2 

&  M 
O 

.  A 

1*8 

O 

!?!  t 

£e   S 

•OS""*  . 

«g£6  & 

-£>  03       W 

.  o>,C  o   co 
^»Qw^J   £ 
«       H 

a 

CO 
U 

"c3 
>> 

<y 

§    U 

1910 

1911 

1912 
1913 

11.9 

82 

:.6 

0.6 

13.0 

1914 
1915 

13.9 
13.7 

63.4 
59.8 

95 
91 

5.4 

L.I 

2.3 
4.2 

21.5 
18.9 

1916 

10.6 

65.2 

9* 

5.7 

33 

..   12.8 

1917 

9.0 

61.0 

81 

1.3 

3.1 

24.3 

1918 

15.6 

560 

,-—  .—* 
5.3 

'  —  "•  \ 
74.1 

0.2 

7.0 

29.7 

1919 

82 

62.5 

5.7 

48.5 

10.1 

19.1 

25.0 

1920 

7.5 

69.2 

7.6 

506 

9.2 

0.1 

156 

1.5 

.  .   23.9 

1921 

9.8 

64.1 

6.3 

47.2 

9.3 

0.1 

24.5 

1.4 

..   21.3 

1922 

10.3 

67.0 

8.4 

468 

0.9 

2.8 

24.5 

3.5 

16.0 

1923 

9.6 

63.0 

6.5 

43.8 

1.1 

2.6 

32.1 

3.4 

7.3   16.7 

1924 

10.4 

66.1 

4.1 

42.4 

0.8 

28 

39.5 

3.9 

4.0   17.6 

1925 

9.5 

67.3 

2.8 

41.4 

0.2 

2.6 

39.2 

63 

17.4 

1926 

9.0 

59.1 

6.1 

37.1 

1.3 

2.6 

31.2 

12.0 

17.6 

1927 

9.4 

58.9 

9.0 

30.1 

8.3 

3  1 

36.7 

14.1 

.  .   16.7 

1928 

9.4 

63.1 

10.5 

33.2 

11  6 

3.0 

31.4 

15.9 

15.5 

1929 

9.2 

63.2 

12.5 

34.2 

4.8 

3.0 

26.5 

19.4 

14.1 

1930 

90 

61.7 

10.0 

35.4 

2.8 

20.8 

14.7 

..   11.4 

1931 

7.3 

65.6 

10.5 

24.9 

2.6 

26.7 

13.7    1.7 

12.5 

1932 

6.8 

57.7 

7.7 

19.3 

2.4 

41.6 

11.2    1.2 

.  .   12.5 

1933 

9.2 

54.7 

11.1 

19.4 

3.8 

47.3 

14.6 

12.3 

1934 

8.1 

49.6 

12.1 

25.4 

3.3 

41.8 

10.8 

..   15.6 

1935 

9.1 

39.6 

16.2 

15.4 

05 

3.6 

35.1 

16.9 

.  .   22.5 

1936 

7.6 

44.0 

15.1 

20.3 

0.2 

3.2 

35.3 

16.4 

176 

1937 

8.1 

41.8 

27.5 

14.5 

1.7 

3.1 

30.7 

15.1 

.  .   15.7 

1938 

7.8 

42.9 

25.9 

14.0 

1.9 

2.7 

28.3 

15.0    3.5 

.  .   16.7 

1939 

14.1 

37.6 

33.3 

15.5 

1.8 

2.8 

27.1 

16.7    1.8 

17.7 

1940 

14.9 

33.8 

25.6 

20.6 

0.6 

2.8 

29.2 

15.9    4.1 

.  .   19.8 

1941 

12.7 

35.2 

33.0 

15.2 

2.3 

1.9 

3.4 

10.8    4.4 

17.9 

1942 

9.2 

21.4 

21.1 

6.4 

0.2 

1.4 

49.2 

8.3   15.6 

.  .   22.1 

1943 

8.3 

24.5 

24.6 

5.7 

0.3 

0.8 

36.2 

5.9   15.8 

.  .   19.4 

1944 

7.5 

23.3 

20.4 

59 

1.4 

0.6 

50.2 

4.6    6.8 

.  .   18.3 

1945 

6.8 

26.5 

26.0 

9.7 

3.4 

5.8 

48.6 

3.3 

.  .   15.8 

1946 

6.3 

30.4 

38.0 

6.1 

2.4 

0.5 

39.9 

3.4 

.  .   16.9 

1947 

6.2 

27.5 

32.6 

2.1 

3.7 

0.5 

45.1 

3.6 

.  .   19.7 

•SOOO        f 


•SOOO 
•sjuoid  jajN 

•SOOO 
ssoi*) 


- 

-t-O 
MCO 


2  S  8  3 


I  *?        I          I  <M  0  O      O      O 

4-  s>iuBa        !  +4-4-  .     .    4-     :     i      .     .    4-  4-   4- 

i  04      U3         ••      O      tO      (•<;••  •'  I         C»  ''O  *i         '         *      l>      **3      »H 

r-i       tO       *0«          *          '       **•          '  '       ®  *  O«J       r-4 

9i4~si4-H      i        :::    :^?^::^,««i^cM22      S22SffiSiSS3&55 

PUB 

-SIJ/\[     *ff      t/ww^vtu-  i  Q        gj 

jo   -;AOO     |          •      '      '      '    CM    <*    to      •      •    JH    jo    ca    co 

42  ! 

2  •UBO'T  oeow^jt^ob  cooco  w         ^^wiftwio^oot-koot-^crjcoifttooovnifs 

j5{  91B1Q      aJOSATAT  !  ^^tO^^POr-J  THr-HrHr-<eM'-*CMC4Cv5CVieOC7PQCOlOOevJ»O 

cc  ^  ^ 

o  -/:H  ui 

ay    pUBq 

•s3pig    pUB    PUB*!  ;      •       ;      ;      ;      ;      \      ;      ;      ;      •      I    2    !2      ^        ^eoeo«*eoeocr>c6^Tji^it>^t*.irtcooowt<-o6 

to     »S  'pasBqajnd  puB 

^     *%         pa^unoosip      snta 

M    Q     ""*  -suBoq       ^  f05    S   2 

3  ^  s  I  J 

3     u 

^     S     bi         -suBoq  puBtuaa 

H     w    g         PUH  s;ipaao 

s 

o  'A+e  d   c^   oo   Q   co   <p   r. :        :     :     :     :     :     :     :     :     :     :     :   x   CD   «.   s   w   ^   <s   ^   w 

M 
9 

jg  19+S+t 

5 

g  -soouBtBg  -vvoo  dSSSS^J^..S         u,    «    10     «       J   !f  ^ 

—    4-    sjtsodaQ  _f__j__|_4__f-4._|..      ._}_         _|__|_4-^r       c7'Hcii"t^ 

jaifto  pus  ^uaaano          ^^^UEliSiJ?  SSeSSISI'^       u-j^ot- 

t^eooo""*^^3  w-^rfc*^^ 

^t«    o    *H  oo    co     e> 

T-(»HWCO'VW5  I  *OOOO>OOC5          r-t  rH'-«r-4rHi-H'-l»Hr-»^(»Hr-4»-<r-(«H»-ie«IC»lCaCl''** 

«ot»^-t^oo»-<co5ji 

r^evicrjUO          *          •      O      O      ?H      «-<       **        r-i  <-(r-*»-4r-tr-<»-'CVICNCVJCNjevj<NJCVlMC«ICa<OWtO00 

io<±»ooooo.     •:;•••      •        .'•iii'i^*'ic58888§S5« 

5»5»5»0»Of»«>0>0>C52?!i^2S        ^  rtr-lfHlH?H»-lrHr-lr-lr-t^r-(fHrH1HrH^r^'H'-< 


Myore 

Deposits 


s  -a « 
Sis? 
«s  c 

H    2    g 

*-• 

d> 

PH 


Th 


*sll!H 


00         •         •      «         •         •      CVJ  O 


t<i        rH 
CM       »H 


plus 


uj 


•sanunoag 


o    in    t^    N    q 

rH        rH       O       CO       in 


.     cn    t^     oo    o»    oo 

'      0      O      O      O      CD 


pajunoosip 


pus 


O>       00       Cvi       «O       10      1/3      CO 
t^       CN|       O       O>       r-       C*5      <N 

CM         r-t         ^M 


•suBoq 


•suBoq  puBiuaa 
PUB   ;tpaao 


CM     ca     <o     q     «*     co    e» 

CO       N        tH       CM        rH       rH       O 


PUB- 


°*   N   «   <=> 

tO      Tf      «o      CM 


..<J>..MOOCO 

'      *    c>      *      *    eo    o    •* 


O^^OOJCM       •       .^jjiocxirHq        in 
rHCsJ^^irir^       '       'dSS^K        J8 


CM  co  q  o>  to   oo 
os  in  co  w  d   ^ 

»H   d   CM   TH   ?5     M 


oooooooo^toto^^cvierjin^jtoinevieoco^in 


e&iniHfHCOoOb.'^ooo^rHqinp^ca'N!0? 


*       CO<0  W  tONrHcsitHr^^rHrHrHrHCvicvicvi^od000 


»H    en    *&    in 
c>i    <o    oo    in 


«o        )          ** 

c     | 

(  s  ^ 


t»-eorH       <i>cooqi>»rH^cotooqootoco«o 


' 


tor^cMtoq       **:  o>i-j^ijqt^esiwcooqo>rHinino>crjqcy>coin«o 

o     d     r-<     i-H    c\i        N  N^coinint>ooc7>o>d^cvicoc4drHdrHa)cvi 


ig  $  Z  Z  $  S 


464 


TABLES 

TABLE    XXX 

The   Indian   Bank  (Dec.  31st) 

(Figures  in  Lakhs) 


3 

! 
9 

i 
U 

d  * 
>  «  ° 

Is 

1  $ 
0  «3 

•o-S  3 

3 

Q 
»' 

t 

3 
5 

i 

8    > 

$  *  o 

Savings 
:  account.  | 

i 

8  «  s 

III 

\l 

III 

ii 

(3  * 

i|  a 

d  G  W 

I 

**  o   3  c> 

o     Is 

O  tS    3  OQ 

^1 
CQ  PQ 

i 

2 

3 

4 

5 

( 

>     7 

8 

9     10 

11 

IQflft 

9.8 

0.12 

10 

8 

19 

XtfUO 

i  on  ft 

If)  A 

0.27 

10 

24 

JLtfUa 

1910 

JLv.U 

20 

0.37 

27 

21 

33 

r— 

^—  -  s 
28 

1.3 

0.9 

1911 

10 

0.50 

10.5 

23 

34 

27 

1.5 

1.1 

1912 

10 

0.75 

10.7 

28 

38 

29 

1.5 

0.9 

1913 

10 

1 

11 

24 

35 

30 

1.4 

0.9 

1914 

10 

1.5 

11.5 

19 

31 

23 

1.4 

0.9 

.. 

1915 

10 

1.7 

11.7 

24.8 

36 

27.8 

1.3 

0.9 

1916 

10 

2.0 

12.0 

32.3 

44 

33.9 

1.3 

2.0 

1917 

10 

2.5 

12.5 

41.1 

53 

40.9 

1.3 

2.0 

1918 

10 

3 

13 

42 

55 

35 

1.2 

2.0 

1919 

10 

3.5 

13.5 

58.2 

71.7 

56.7 

1.2 

2.4 

1920 

10 

4.0 

14.0 

58.2 

72.2 

56.3 

1.2 

2.5 

1921 

12.5 

5.0 

17.5 

76.4 

93.9 

80.0 

1.2 

5.0 

1922 

12.7 

5.5 

18.2 

63.3 

81.5 

68.6 

1.2 

5.0 

1923 

12.7 

6.2 

18 

68 

86 

73 

1.1 

5.0 

1924 

12.7 

6.2 

18.9 

75.5 

94.4 

96 

1.1 

5.0 

1925 

12.7 

7 

20 

99 

119 

85 

1.0 

16.0 

1926 

12.7 

7 

20 

113 

133 

83 

1.0 

26.0 

1927 

12.7 

7 

20 

144 

164 

127 

1.0 

22.0 

1928 

12.7 

7 

20 

158 

178 

136 

1.0 

16.0 

1929 

12.7 

9 

22 

186 

208 

125 

10 

31.0 

1930 

12.7 

10 

22 

192 

214 

114 

1.0 

46.0 

1931 

12.7 

11 

23 

172 

195 

103 

0.8 

46.0 

1932 

12.8 

12 

25 

199 

224 

71 

0.8 

78.7 

1933 

12.8 

12 

25 

226 

251 

101 

0.8 

92.8 

1.5 

1934 

12.8 

13.0 

25.8 

220 

245.8 

138 

0.8 

71 

1935 

12.8 

13 

26 

262 

288 

133 

1.0 

46.4 

8 

1936 

12 

16 

28 

298 

344 

/—  —  • 
167 

^—  •—  N 
40 

1.0 

1937 

12.7 

13 

26 

330 

356 

169 

52 

1.9 

62       9 

3 

1938 

12.7 

13 

26 

336 

362 

183 

30 

18 

68       6 

1939 

12.7 

14 

26.7 

385.6 

412 

256 

1.8 

75       5 

0 

1940 

12.8 

15 

27.8 

511 

539 

297 

1.8 

92       6 

4 

1941 

12.8 

17 

29.8 

643 

673 

477 

1.7 

195      10 

1942 

15.2 

16.5 

31.7 

523 

555 

212 

1.6 

155       4 

5.5 

1943 

28.9 

29.0 

57.9 

813 

870 

323 

1.8 

411       7 

1.3 

1944 

33.5 

32.0 

65.5 

1052 

1117 

526 

2.2 

535      34 

.27 

1945 

44.4 

48 

92.4 

1371 

1463 

652 

1.9 

734      19 

.09 

1946 

51 

59 

110 

1746 

1856 

804 

204 

1.8 

751      73 

.09 

1947 

53 

63 

116 

1814 

1930 

834 

136 

1.7 

621     212 

0.9 

TABLES  465 


TABLE   XXX— (Continued) 
The  Indian  Bank    (Dec.  31st) 

(Figures  in  Lakhs) 


•e  Is  „  A  Is   «  |« 

l°"|il  ^is  &  *!„ 
Hi*  11  11+  1  1«» 

!  ^ 

c  w 

CO 

U  S 

!  Total  Earnings 
OOOs. 

Interest  to 
Depositors. 

1 

a 

3 

o 

1. 

Salaries  OOOs. 

Total  expenses 
OOOs. 

12     13     14     15     16 

17 

18 

19 

20 

21 

22 

23 

100 
140 

5 
64 

1.4 

188 

70 

,118 

74 

21 

35 

4.4 
7,2 

228 
245 

91 
98 

137 
147 

83 
92 

26 
31 

45 
51 

46 

304 

114 

190 

96 

32 

51 

.. 

6.0 

246 

91 

145 

139 

34 

46 

•  » 

6.8 

218 

88 

130 

99 

34 

55 

•  « 

8.1 

292 

100 

192 

75 

37 

61 

10.5 

341 

136 

205 

131 

39 

69 

17.0 

376 

164 

212 

136 

49 

84 

12.4 

420 

188 

232 

128 

56 

93 

13.6 

545 

227 

318 

139 

74 

120 

8.3 

615 

287 

328 

198 

99 

168 

7.9 

643 

261 

382 

160 

106 

173 

7.8 

651 

254 

397 

209 

119 

193 

6.2 

754 

316 

437 

204 

118 

196 

16.0 

780 

398 

382 

342 

123 

107 

22.0 

773 

447 

326 

175 

120- 

200 

12.0 

941 

475 

466 

126 

149 

253 

26.0 

1186 

568 

618 

213 

151 

248 

14 

38.0 

1355 

657 

698 

370 

156 

303 

21 

33.0 

1354 

700 

654 

395 

166 

354 

15      8 

22.0 

1287 

685 

602 

300 

179 

356 

15     10 

47.0 

1219 

641 

578 

246 

169 

385 

0.5     .  .      10 

44.0 

1407 

643 

764 

193 

179 

357 

32 

1386 

546 

840 

427 

186 

413 

5     .  .      .  .     21 

58 

1175 

550 

635 

258 

204 

367 

70 

64 

1290 

631 

659 

239 

247 

420 

3     .  .     77     62 

63 

1344 

625 

719 

242 

287 

477 

5     ..     79     79 

53 

1535 

683 

852 

285 

326 

567 

3     .  .     91     .  .     39 

35 

1738 

1436 

1119 

317 

388 

2     ..    104     70      4/6 

1081 

2037 

837 

1164 

418 

399 

5     .  .    210     .  .      6.1 

117 

2913 

1212 

1701 

409 

488 

164     48      2.6 

155 

1765 

737 

972 

202 

415 

1.1    ..    421      8      2.8 

150 

2883 

729 

2059 

1084 

664 

1070 

3.7    ..    513     ..      2.7 

232 

3330 

1312 

4375 

1465 

1106 

.46   ..    753     ..      3.0 

293 

4075 

1939 

2136 

1602 

1351 

1.55   ..    825     ..      1.6 

380 

7699 

2796 

4903 

2345 

1770 

13     ..    646     ..      1.0 

206 

7775 

3045 

4730 

1578 

2059 

M.  B  30 


466 


TABLES 

TABLE   XXXI 

The    Indian    Bank    (Dec.    31st) 

(Percentage    to    Deposits) 


Capital  and 
Reserve. 

Loans  Overdrafts 
Bills 

Buildings. 

Govt.  of  India 
Securities. 

> 
1 

«H 
°W 

B* 

3" 

State  Savings 
Bank 
Accounts. 

Shares  of  Reserve 
Bank  and  Jt.~ 
Stock  Cos. 

Total  Invest- 
ments. 

8« 
li- 
|PM 

•d 
5 

1- 

1908 

125.0 

1909 

1910 

49.0 

133.3 

6.2 

4.3 

4.3 

66 

1911 

45.6 

117.3 

6.5 

4.4 

4.4 

19  1 

1912 

38.2 

103.5 

5.3 

3.2 

3.2 

25.7 

1913 

45.8 

135.0 

5.8 

3.7 

3.7 

16  6 

1914 
1915 

60.5 
42.0 

121.0 
114.4 

7.3 
5.3 

4.7 
3.7 

•• 

4.7 

3.7 

•• 

31.6 
27.9 

1916 
1917 

37.1 
30.4 

104.9 
99.5 

4.0 
3.1 

6.5 

4.8 

.. 

6.1 
4.8 

25.0 
25.5 

1918 

25.0 

85.7 

2.8 

4.7 

4.7 

40.4 

1919 
1920 
1921 
1922 
1923 
1924 

23.1 
24.0 
22.9 
28.7 
27.5 
25.0 

97.4 
96.7 
104.7 
108  3 
126.8 
127.1 

2.0 
2.0 
1.5 
1.8 
1.6 
1.4 

4.1 
4.2 
6.6 
8.3 
7.3 
6.6 

., 

4.1 
4.2 
6.6 
8.3 
7.3 
6.6 

21.3 
23.3 
10.8 
12.4 
10.3 
8.2 

1925 

19.8 

858 

1.0 

16.1 

16.1 

16.1 

1926 

17.5 

73.4 

0.7 

23.0 

23.0 

19.4 

1927 

13.6 

88.1 

0.7 

15.2 

15.2 

8.3 

1928 
1929 
1930 
1931 

12.4 
11.6 
10.2 
13.7 

86.0 
67.2 
59.3 
59.8 

0.6 
0.5 
0.1 

10.1 
166 
23.9 
26.7 

10.1 
16.6 
23.9 
26.7 

7.5 
10.9 
4.6 

16.4 
20.4 
17.1 
12.7 

1932 
1933 
1934 
1935 
1936 

124 
10.9 
11.7 
9.8 
9.4 

35.8 
44.6 
62.7 
50.7 
69.4 

0.3 
0.4 

39.5 
41.0 

1.7 

39.5 
41.0 
32.3 
17.7 
23  A 

5.0 

23.6 
19.4 
32.7 
22.1 
21.4 

1937 
1938 
1939 
1940 
1941 
1942 
1943 
1944 
1945 
1946 
1947 

7.7 
7.6 
6.9 
5.7 
4.7 
7.9 
6.6 
6.2 
6.7 
6.4 
6.4 

66.9 
63.3 
66.5 
58.1 
70.8 
40.5 
39.5 
50.0 
47.5 
46.0   11.7 
46.0    7.5 

0.5 
0.5 
0.4 
1.0 
1.5 
0.7 
0.8 
0.1 
0.13 
0.1 
0.1 

18.7 
20.2 
18.7 
18.0 
30.3 
29.6 
50.3 
50.8 
53.5 
40.8 
39.9 

2.7 
1.7 
1.3 
1.1 
1.5 
0.7 
08 
3.2 
1.3 

0.9   0.9 
1.4 
0.7 
0.7   0.3 
0.8 
1.0 
0.1   0.1 
0.1 

0.1   7.2 
1.0   6.8 

23.2 
23.3 
23.6 
30.0 
33.6 
30.7 
51.3 
54.1 
54.8 
48.1 
47.7 

•• 

19.0 
16.0 
19.2 
21.1 
17.3 
29.6 
18.4 
22.0 
21.3 
21.8 
16.3 

•«000         S  ! 
saraeiBS  . 

•SOGO     I  ^  t 


•SOOO      I 
I  SSQJO  i  ; 


ww       : 

CM    CM    M  CJ    C 


•sooo  - 


;;;          '.'.'.'..         oS  £          •CM-^ior-o^ooeM 

-tfiJI^UU          !  r-t    o    CO    CM    CM 

l{S    pUB     iiB3        I  o>  oo  r-  to  10     -oiocn         CMI-        •Hoo^wCDrrto^^i 

XaUOUI         USBf)  •*~<T-lCM  CM^-i  CMrJ<eO»OCOlO<OU3l> 

(  ><J''«*4TJ*CO       'COCOOO  COCO  COCOCOCOCMCvicM'eMeM 

PUB    -sip    S[irg   jwocoocD     'ui     'CM         »-l  ^*        ^£>^f>^int^tocot^to 
00  I  oo  t>;  en 

|         pue^Tu1?     ---«s:-aa 

!  CO    CM    CO    ^    CM 

jo    "sajBus^  «a  «  «  -• 

M       <l> 

3     -luiOfTo'^nl      i ^vo  «-^ooo 

[     2y     'J9Jd  !     •     •     •     •          ....        CM  CM 

8 

o  'sai^ianoas  ^         _  co  -^j  t>  CM 

*s 

p  •"•^CMCMCOCOCM 

5 

H 

""""       ,  J§ 

! 
^ 

h 

•spunj[   dAjasan  CMOIOWWCMCVI 

rH    CM  lrt    CO    O 

I    ^ 
I    t* 

let 


468 


TABLES 

TABLE   XXXIII 

The    Union    Bank   of   India 

(Percentage    to    Deposits) 


w 

S3J2 

8-8 

T3  O 

Q  v           w 

r^ 

CD 

«p3 

*§ 

rt^ 

'CXM                 *W 
(Q  0)                O 

U3         8" 
o<W         Q 

£    g 

g§§ 

uog 

73  >              M 

1 

rC  &  -4  .J 
Wg°? 

oj^-y 
o  <u  C 

8°^ 

S? 

"S 

&§. 

Invest  - 
it. 

** 

•§s    | 

1s3     1 

Q                        jjj 

42 

§ 

i 

1^-sS 

1.6 

O 

|s 

.c  Ji  § 
gr/)S 

1928 

110.8 

15.6         65.2 

86  9 

13.0 

1,929 

143.7 

29.9         75.0 

31.2 

87.3 

25.0 

11930 

170.0 

29.6       125  9 

125.9 

77  7 

25.9 

1931 

170.0 

29.6         70.3 

2.2 

1480 

22.2 

1&32 

167.8 

35.7         64  2 

1.7 

142.8 

17.8 

1933 

1934 

921 

17.6         31.3 

98 

107.? 

196 

1935 

712 

34.8         25  7 

84.8 

22.7 

1936 

47.4 

23.2         17  1 

12.1 

393 

19.1 

585 

29.2 

1937 

45.1 

42.3 

10.5 

32.6 

20.1 

17,3 

70.0 

226 

1938 

405 

46.2 

13.2 

26.4 

23.5 

17.9 

67.8 

16.0 

1939 

33.4 

61.8 

4.1 

326 

0.6 

15.2 

48.4 

14.5 

1940 

25.2 

32.0 

2.1 

40.4 

10.1 

16.4 

66.9 

24.5 

1941 

22.7 

41.9 

6.5 

41.3 

8.0 

16.0 

67.3 

15.0 

1942 

14.0 

31  5 

1.4 

47.3 

7.9 

11.4 

66.6 

15.9 

1943 

11.5 

29.6 

1.7 

51.1 

5  6 

88 

655 

15.1 

1944 

12.2 

21.9 

3.8 

61.8 

5.4 

10.0 

77.2 

12.7 

1945 

10.8 

23.0 

5.5 

61.7 

4.7 

8.1 

74.5 

130 

1946 

11.3 

26.5 

3.3 

60.0 

14.4 

0.2 

74.8 

12.3 

! 

1947 

11.5 

25.9 

3.3 

53.8 

14.5 

2.4 

70.7 

13.3 

pue 


jo 


•    <N    CM    CM    CM 

' 


•sueoq  pue 


I 

J 


•sine 


,-,    r-1    CM    C-1 


I>»O(OO' 
T-l    CJ    CM    CM 


pue 


JO 


-P-»O 


IP 


(ft 

CO 


§   S 
u 

II  •• 

a  «   s 


sueoq  pue 


»  i^  n  < 

>  •<*  >/>  < 


|t|P1 


^^88 


TABLES  471 

TABLE   XXXV 

The  Bank  of  Behar 

(Percentage   to   Deposits) 


3s 
§•3 

Demand  Ad- 
vances, Cash 
Credits,  Loans 
and  Bills. 

W       If 

i  J* 

Preference  and 
Ord.  Shares. 

Total  Invest- 
ments. 

i 

1911 

9.5 

3.4 

1912 

5.3 

91.7 

0.5 

0.5 

9.8 

1913 

7.1 

73.7 

4.0       0.3 

4.3 

19.4 

1914 

7.6 

76.2 

1.8       0.3 

2.1 

19.4 

1915 

11.1 

80.7 

2.0       0.2 

2.2 

24.0 

1916 

12.2 

78.7 

1.4 

2.5 

3.9 

29.0 

1917 

17.1 

93.4 

0.7 

1.9 

2.6 

18.1 

1918 

17.0 

91.6 

1.3 

1.8 

3.1 

20.0 

1919 

16.3 

70.7 

4.1 

2.9 

7.0 

34.0 

1920 

19.5 

81.3 

3.5 

2.7 

6.2 

29.5 

1921 

17.6 

90.5 

2.4 

1.7 

4.1 

21.5 

1922 

17.5 

81.1 

1.8 

1.3 

3.1 

28.4 

1923 

21.3 

40.3 

1.9 

1.2 

3.1 

12.4 

1924 

26.9 

107.1 

2.4 

1.5 

3.9 

14.3 

1925 

22.8 

195.7 

2.6 

1.1 

3.7 

16.6 

1926 

20.0 

96.5 

2.6 

1.2 

3.8 

15.3 

1927 

21.2 

121.1 

7.0 

1.3 

8.3 

31.4 

1928 

13.7 

77.1 

6.3 

1.1 

7.4 

21.3 

1929 

13.0 

80.3 

5.5 

1.7 

7.2 

13.5 

1930 

11.5 

77.3 

9.4 

1.5 

10.9 

13.6 

1931 

12.0 

86.7 

3.7        ... 

1.5 

5.2 

11.6 

1932 

10.8 

73.5 

6.2 

1.7 

7.9 

19.3 

1933 

9.4 

80.1 

8.4 

1.3 

9.7 

15.6 

1934 

9.1 

79.3 

7.2 

0.6 

7.8 

13.3 

1935 

9.7 

78.5 

8.3 

1.7 

10.0 

17.9 

1936 

9.4 

69.8 

8.3 

1.1 

9.4 

29.0 

1937 

11.5 

73.4 

9.7 

2.8 

12.5 

23.9 

1938 

11.4 

76.9 

8.7 

2.5 

11.2 

21.9 

1939 

12.8 

80.5 

8.7 

3.0 

11.7 

17.6 

1940 

16.8 

78.5 

8.9 

0.7 

11.3 

21.4 

1941 

17.2 

66.1 

11.8 

1.5 

15.6 

33.0 

1942 

14.2 

38.7 

20.0 

1.3 

25.1 

49.0 

1943 

10.3 

38.4 

16.9 

0.8 

20.1 

50.8 

1944 

10.7 

49.4 

14.8 

0.6 

18.4 

44.1 

1945 

9.3 

38.0 

24.5 

0.4 

28.3 

42.5 

1946 

10.8 

49.9 

23.2       4.5 

0.6 

28.3 

28.8 

1947 

11.4 

56.0 

22.2       3.8 

0.8 

26.8 

25.4 

•punj    ^uapiA 
-oad    o;    uoi;nq 

cr*  rH  oo  co  «o 

ssojg     jo     -D  d 

en  oo  t^  to  t^ 

-|j;uoa  2?  saouB 
II     **      . 

SB      'Op      'S3TJBIBS 

e>  co  rn  co  •* 

•a;BJ 

tO    rH    H    0 
CD    00    O    "T    rH 

•piBd   |saaa;ui 

CO    ^    rH    C^    g 

^saaa^ui    aouBApv 

C>    0    rH    rH    rH 

rH    CM    CO   CM 

eg  t-  in  m  co 

CO    tO   CO    CO    Cft 

in  co  oo  o  ^ 

rH    iH   N    CM    S 

a^Bi  lyojd  ^N 

d  6  d  rH  d 

5SSSS 

to  CM  Q  en  ^ 
co  oo  So  m  as 

jyOJd    SSOJO 

tH    rH    rH 

•a^BJ  ^yoJd  SSOJQ 

CM    CO   CO   «   ^ 

•HBO  IB  A"auoi\[ 
PUB  puBq  ui  qsBO 

JIHII 

PUB  pusq  u\  qsBQ 

I    O   O>   oo   CM    CO 

P  <O     rH    03    tO    tO 

J   CM  eg  CM  co  eg 

•siuaui 

SSSo-SS 

•s;uaui 

J?  «?  o  6  d 

-^aAui  m°X 

*-« 

-^S3AUJ    IB^O.1, 

^^  '  ^ 

PUB    sojn;uaqaa 

<J5    tD   h-   tO   CO 

in  «o  in  to  to 

•saaBqs 
PUB    sajn;uaqaa 

tO    tO    O    CO    rH 

33-"'* 

en 

rH 

CO 

luauJu^oAoo 

tO    00    rH    in    I*- 

luauuuaAoo 

^  SJ  £3  £;  J§ 

*€ 

,wjd 

•  <y>  co  to  in 

^1 

•^.odoM 

TABLE  XXXI 

Sharat  Bank  (Mi 

(Figures  in  laid 

•pasBqDjnd  PUB 
•SUBOT;  puB1 

'    CD   CM    rH    rH 

to  co  to  to  eg 

rH    rH    CM    rH 

•«*  -^  rf  eo  in 
in  t-  o>  co  to 

TABLE  XXXVI 

The  Bharat  Bai 

ercentage  to  Dep< 

•pasBqojnd   puB 
pa^unoosip    sing 

•suBoq  PUB 
's^ipaao   'qsBQ 

in  o  CM  to  •** 
d  o>  to  co  06 

t~   CM   CM    rH   tO 

d  oS  erf  to  CM 
"*  co  in  co  "** 

••4 

d. 

4) 

"s3niIIQ®n  IBJOJ, 

en  co  eft  o  S3 
in  eg  oo  ^  «H 

^^ 

•sai^itiqBiT  IBIOJ, 

i-t  eg  CM  eg  CM 

H 

CO    O    tO    rH    00 
rH    CM    CM   CM   rH 

'S|ISOd9Q    [B^OX 

•SgUTABS    V    P3XIJ 

ii  §  H  §  B 

rH    rH 

'sSujABg  2y  paxij[ 

t-  t»  0>   00  l> 

(2+1)    l^o  j, 

t^    ^4    0>    rH    rH 

(Z+T)    Wox 

0>  -^    10   t-   t- 

O    rH    rH    CO   "^ 
CM    CM   CM   CM   CM 

*6  d  d  CM  in 

•3AaaSaH 

to  o  oo  o  o 

•^B^dB3   dn-p|B<£ 

88888 

.»,  . 

o  o>  o>  o>  en 

32H1 

£ 


'(000) 


•(ooo) 


PUB  saouB 


3 


pjBd 


•(ooo) 


•(ooo) 


UOW  *? 
'pUBq  ui   qseo 

-1S3AUT    IB^OX 


•sam-inDas 
•*AI>O    -H    'A 


•sairviuaqaa 
PUB   saaBq 


sine 


UBCTI  PUB 

PUBUJ9Q 


o;   ana 


•sjisodaa 


ami,!  PUB 


ABS  PUB 


to  CM  rH  in 

CM    f^   00   CM 

co  to  en  CM 


SO    00 
t^    UD 


do'' 


rH  r-i    CM    CO 


CM  00  rH  1 

CM  00  O 

t>-  CO  CV]  •< 

rH  CM  CO  C 


CO   S   0 


:t-5§ 

So  o  o 
o  o  o 

rH   CM   CM    CM 


TAB 

United 

Percent 


.  ^  i  *"? 

ssoiS    jo  "-o-d     j  rn 


CO    rH  CM    t^ 


SSQJO 


auoj/\[  39 

B   'pUBq   uj   qSB 


'H    'H 


•;AOO    'S    'Hi^ 


rH  rH    CM  CO    CM 


CO  CM    rH 


0        in  o         co  i* 


PUB 


en  to 
do 


00  O    O  CO 


ay 


•sasituaJd  j    : 

i 
•pasBqojnj     !  ^ 


panmoosia 


•SUBOT;  pus 
•Apv  puButaa       o» 


co  to         co  co 


'  SgUTABS 


dn-ptBd 


l>    O  CO     rH 


00    «? 

in  co 


474 


TABLES 
TABLE    XXXVIII 


Imperial                      Central 
bank    of                        Bank  of 
India                            India 

Bank  of                      Bank  of 
India                            Baroda 

1       8g|          |       !&$ 

"8         l£g        |      IBS 

*O              ^  2                           73                 ?£  ctf 

t?              ^  2               *o          ^  3 

I    ;^      1     JJ* 

3          «««!!           3       «sC 

O             g  Jg  3                     *O               "S»      3 

SM  oA                 ^3            ;3  oA 
w                       K            W  "* 

o                Sw^1             *°           cJo3 
^              -ftg-d             -2          -a'C-d 

£         '&**        &      x°* 

1928 

10             103  -  87          12          93  -  824 

1929 

10            105  -  974        10          82  -  76 

1930 

10              95  -  794        10          77  -  69 

1931 

10               90  -  72?        10          72  -  584 

1932 

11              96£-  74          10          754-  60 

1933 

10             1064-  964        10        1011-  754 

1937 

11             147  -1364 

1939 

11             149  -1184        10        166  -  88 

1946            14        3235-2115        6  B.S-        158-104| 

14            295  -1%          12        2274-1644 

1948             14        2295-1720          14               99-  804 

14            2564-1874        12        175  -1404 

1949            14        1905-1710          14            90J-  73* 

14            200  -166          12        148  -112 

TABLES 
TABLE   XXXVIII— (Continued) 


475 


Allahabad 
Bank 

Punjab                   Uni 
National                 Com 
Bank                     Ban 

ted                  Bank    of 

mercial          Mysore 

Indian 
Bank 

1      P 
1     13 

Q                e^ 

£                (D   QJ  U"J               (H                <j 

Q           c8«n                Q           c$ 

i  i  !| 

1   is 
1   !i 

P                «8«M 

*0                ^  <u  §* 

*0           to       P           *Q           1 

§*              *o              "w       ^ 

o        "g° 

1     PS 

S           *§*           3           * 

A     Sa^     S      g 

i  aOi          jg         S  ft 

•S      ifrn 
S      £ft 

18         325-281 

4            75 

14         215  -185 

12 

18         306-291 

5          55-51 

14         220  -212i 

12 

18         315-285 

5         80-55 

14         220  -200 

12 

18         285-249 

6         82-80 

12         220J-162J 

12 

18         250-228 

6        125-82 

13         198  -160 

12 

18         327-220 

6        125-99J 

13         222  -193 

12 

18         388-372 

6          103 

14         301  -283 

9 

18         390-377 

14         289  -235 

10 

18 
18 


139  -91   16    520  -420 
3    80  -59   16       ..       14 
35   62^-38   16       ..       11J 


476 

TABLES 

TABLE  XXXIX 

Rate  of  earning 

Gross  Profit  Rate 

Expense  Ratio 

Total  Earnings 

Gross 

Profits 

Total 

Expenses 

Total  Liabilities 

Total 

Liabilities 

Total 

Liabilities 

0         1             £ 

OS 

2 

1       ° 

M 

Rj 

(0 

«H 

0 

•g         I              * 

X 

o 

•8 

r\ 

0          M 

1 

i 

X 

§             ? 

R 

•s 

c 

PQ      &         -a 

5 

ca 

PQ 

fl 

«H 

«        rt 
Z       M 

TJ 

ca 
PQ 

| 

3              M 

W 

CO 

M 

M 

CO 

PQ 

<H 

0 

0 

#X    73* 

i 

3 

<u         ° 

o 

"3  .2 

73 

Si  £«     1 

I 

T5 

! 

5 

fl    || 

A 
co 

§, 

•3 

0           A 
w          C 

>i              frt 

c 

rt 

P 

£ 

& 

u     S       <5 

& 

a 

M 

fc       U 

§j      S     &     S      «      « 

u 

1910          

5.69 

3.57 
4.03 

1911          

6.70 

1.50 

..    0.52 

1912       4.12    6.57 

6.44 

2.41 

1.96 

4.32    1.31 

3.86 

..    0.55 

1.52 

0.6 

1913     13.9      7.59    5.6 

8.68 

240 

..    526 

1.70 

542 

..    0.68 

3.5 

1914       7.41    8.14    6.1 

7.93 

2.52 

2.20 

4.10    445 

2.23 

4.67 

.  .    0.82 

1.76 

3.15 

1915       5.47    5.89    5.3 

605 

256 

2.41 

3.00    2.53 

2.20 

3.61 

.  .     0.72 

1.08 

1.36 

1916       4.13    6.24    5.2 

6.63 

2.16 

2.40 

3.21    2.21 

2.27 

436 

.  .     0.65 

0.75 

0.79 

1917       3.58    6.99     .. 

6.43 

2.21 

1.98 

3.56    1.34 

3.86 

..     0.64 

0.83 

0.59 

1918       5.31       ..     5.0 

6.83 

2.08 

2.39 

.,     3.34 

207 

385 

..    095 

060 

2.10 

1919       4.17       ..    5.2 

5.83 

1.45 

1.66 

..    268 

1.82 

3.36 

..     0.52 

0.56 

2.00 

1920       6.71       ..     7.0 

7.56 

1.59 

2.92 

..     268 

243 

4.41 

..     048 

0.55 

1.58 

1921       586       ..      .. 

6.54 

1.99 

2.28 

..     2.10 

3.19 

3.48 

.  .     0.60 

0.74 

1.02 

1.39 

1922       6.33       ..     3.2 

7.93 

1.98 

2.60 

.  .     2  34 

107 

334 

4.71 

..     0.75 

0.78 

1.37 

1.55 

1923       6.01       ..     6.6 

7.56 

189 

2.29 

.  .     2.43 

2.14 

3.21 

4.61 

.  .    0.61 

0.81 

1.27 

154 

1924       704       ..     8.4 

8.02 

1.86 

243 

..     303 

2.98 

329 

4.65 

.  .    0.66 

0.86 

1.61 

1.65 

1925       6.10    6.87    6.5 

7.87 

1.65 

1.95 

2.43    2.61 

2.50 

3.36 

3.21 

.  .     0.66 

082 

1.49 

1.84 

1926       5.45    6.49    6.9 

5.81 

163 

1.76 

2.12    232 

2.41 

3.53 

3.45 

.  .     0.68 

0.83 

1.30 

1.89 

1927       5.77    6.75    7.3 

5.73 

1.71 

2.09 

2.11    234 

232 

3.81 

284 

..     0.72 

0.90 

1.45 

1.96 

1928       5.79    6-43    7.1 

666 

1.55 

2.26 

2.10    3.43 

231 

3.57 

3.41 

.  .     0.78 

1.02 

1.52 

1.87 

1929       5.99    7.81    6.8 

6.51 

143 

2.25 

2.89    2.53 

2.09 

3.59 

3.75 

.  .     0.81 

0.80 

1.65 

1.92 

1930       5.12    6.68    7.1 

632 

1.37 

1.85 

2.62    2.36 

219 

3.36 

3.05 

.  .     0.77 

0.82 

1.34 

1.84 

1931       5.82    7.83    7.7 

66 

1.28 

2.16 

3.06    2.78 

2.24 

3.33 

3.08 

..    0.83 

0.73 

1.78 

1.97 

1932       4.58   6.06    8.1 

5.44 

121 

1.47 

2.21    2.19 

232 

3.41 

2.58 

..    075 

0.69 

1.55 

1.81 

1933       4.11    6.30    7.1 

5.60 

154 

1.65 

2.84    167 

211 

2.82 

304 

.  .     0.85 

0.87 

1.07 

1.69 

1934       3.83    6.63    6.8 

5.63 

1.40 

1.92 

3.75    1.92 

244 

2.76 

3.42 

.  .    0.86 

0.84 

1.04 

1.61 

1935       3.64    5.38    6.0 

4.08 

1.56 

2.05 

2.93    1-75 

2.44 

3.13 

217 

.  .    0.86 

0.88 

107 

1-74 

1936       3.24    4.82    5.5 

3.75 

1.40 

1.90 

2.63    1-75 

2.47 

2.68 

1.91 

..     0.82 

0.79 

1.09 

1.50 

1937       3.57    4.85     .. 

3.77 

1.81 

196 

2.79    2.27 

2.52 

2.02 

..     0.83 

1.00 

1.45 

1.42 

1938       337    4.94     .. 

4.24 

1.74 

201 

2.91    2.15 

2.64 

2.35 

..    0.88 

1.08 

1.33 

1.48 

1939       378       ..      .. 

4.21 

1.9 

198 

2.8     2.5 

2.6 

2.2 

2.71    2.6      0.94 

1.3 

1.5 

1.4 

1940       3.46       ..     3.6 

3.77 

2.1 

1.45 

30     2.3 

2.5 

2.1 

22 

..     0.65 

1.2 

1.4 

1.4 

1941       3.00       ..     3.4 

4.32 

1.7 

1.6 

1.6     20 

2.7 

1.87 

2.2 

..    0.7 

0.9 

1.1 

1.24 

1942       2.28       ..     3.5 

3.12 

1.4 

1.3 

25      1-7 

23 

1.4 

1.7 

..    0.6 

0.9 

0.9 

0.9 

1943       267       ..     2.9 

2.49 

1.4 

1.2 

..      2.1 

2.2 

3.3 

..     0-5 

0.6 

0.9 

1944       2.82       ..     3.10 

2.98 

1.43 

1.8 

..      2.21 

2.46 

3.91 

..     0.65 

0.6 

1.03 

1945       3.26    3.24    2.9 

2.7 

1.68 

2.0 

..      2.9 

1.46 

,.    0.86 

0.68 

1.09 

1946       3.20    3.56    2.9 

4.14 

1.50 

20 

2.02    2.41 

..     1.26    1.49    0.89 

0.67 

1.30 

1947       3.32       ..    3.63 
1948                        3.23 

4.02 

2.24 

2.08 

2.30    2.54 

..     1.00    199    1.02 

1.44 

1.48 

*    19(17—058:    1907— 

t  1906—19.  1907 

2.63;     1908-2.22; 

—68 

1908-66; 

1909—2.14;  1910— 

1909—  .56; 

1910 

1.77. 

-.52. 

TABLES 


477 


TABLE   XXXIX— (Continued) 


Expense  Ratio 

Total  Expenses. 

Net  Profits  Rate 
-  Gross  Profits  Rate—  Expense  Ratio 

Salaries  as  percentage  of 
gross  profits. 

Total  Liabilities. 

__ 



1 

"cd 

S 

re 

! 

, 

•5 

J 

TJ       "Jjj          d 

03 

CO 

£ 

WcS 

cC 

« 

c 

3   to 

A        %           m      lij 

fc 

m  CO     ^73            ^ 

-iTl 

pq 

13 
rt 

^ 

•3   <w  * 

<W 

«   & 

<U 

^44    jsX               &v 

#J* 

O'g     ~<fi        OO 

0 

.5$ 

(H 

,Qu 

*  M 

rH  £         O'O 
«M               O 

o 

§•2^ 

0  0 

3pq  Sw    £   apq 
-     fi      5    3 

CO  C 

aS 
g 

pq       U        pq 

Bank 

!! 

Indiai 

II 

< 

j! 

Ma 

U       PQ 

Bank 

..  §a 

"2   §w 

s  & 

ffl 

1  06 

251 

17.7 

1  33 

0.98 

205 

18.9     .  . 

..     252    1.34       .. 

1.80    0.89    0.71 

1.41 

252 

24.5    15.6 

18.8 

21.0      .  . 

92       ..     1.45    0.78 

..     1.76       .. 

2.28 

397 

41.9 

14.9       .  . 

17.1 

16.8      .. 

3.35    2.37    128    0.88 

1.73 

0.76    1.30 

138 

3.19 

41.2 

30.2    192 

22.4 

23.4      .  . 

1.30    1.50    1.53    0.90 

1.50 

148    1.17 

1.69 

208 

40.9 

25.7    19.4 

17.9 

26.1      .  . 

1.31    1.72    139    0.96 

1.49 

1.41    1.42       .. 

1.75 

2.97 

39.0 

19.9    19.2 

13.1 

19.2      .  . 

..     1.90    130 

1.66 

1.38    0.75       .. 

134 

2.56 

,. 

19.7    17.0 

14.0 

19.0      .  . 

1.30       ..     1.53    0.77 

1.48    1.24       .. 

1.44 

232 

39.0 

14.6    16.8 

13.2 

23.1      .  . 

1.21       ..     1.33    0.61 

0.89    0.68 

114 

193 

42.5 

16.1    20.4 

14.6 

24.1      .  . 

1.43       ..     1.66    1.00 

1.04    1.10       .. 

2.44 

275 

39.1 

22.8    19.4 

9.7 

23.2      .  . 

..     1.78 

025    1.18 

1.68 

2.0 

1.70 

28.7 

539    21.8 

15.6 

30.0      .  . 

.86       ..     2.13    0.21 

1.20    0.97 

1.85 

1.79 

2.58 

52.1 

30.9 

31.3    25.8 

18.0 

27.7      .  . 

1.72       ..     2.24    0.42 

1.08    1.16       .. 

1.68 

1.71 

237 

53-5 

31.4 

29.3    26.1 

17.3 

29.9     .  . 

2.14       ..    208    0.84 

1.00    1  42 

1.77 

1.64 

2.57 

488 

33.1 

30.9    28.7 

17.6 

26.9     .  . 

2.00    1.22    1.75    0.50 

1.21 

0.83    1.12       .. 

129 

1.52 

146 

52.2 

37.1 

35.5    30.7 

21.1 

32.1      .  . 

1.89    1.22    190    0.52 

0.90 

0.80    1.02       .. 

1.08 

1.64 

194 

52.8 

38.6 

35.1    30.8 

24.9 

37.5      .. 

1.79    1.40    1.55    0.53 

0.71 

0.81    0.89 

1.37 

1.85 

1.29 

53.3 

382 

39.7    32.2 

20.6 

31.9     .. 

1.80    1.47    1.40    0.51 

0.63 

0.53    0.91       .. 

1.48 

1.70 

2.07 

55.7 

38.3 

43.9    35.8 

19.4 

24.4      .  . 

1.61    1.95    1.46    0.48 

0.94 

0.63    0.88       .. 

1.44 

1.67 

1.89 

56.8 

39.1 

44.6    38.2 

21.3 

22.3      .  . 

1.69    214    2.28    0.50 

0.48 

0.55    1.02       .. 

1.08 

1.52 

0.77 

56.0 

40.6 

41.3    38.9 

25.4 

25.3      .  . 

1.77    2.78    1.82    0.47 

0.28 

0.55    1.00       .. 

1.33 

1.36 

1.26 

571 

44.5 

35.1    37.3 

22.8 

29.7      .  . 

1.81    204    1.72    0.51 

0.17 

0.52    0.64       .. 

072 

1.60 

0.86 

57.3 

38.9 

35.5    35.6 

31.2 

29.2      .  . 

1.62    2.53    1.82    0.49 

0.31 

0.67    0.60       .. 

082 

1.13 

1.22 

55.9 

44.4 

45.3    39.2 

30.2 

23.4     .  . 

1.90    340    1.69    0.54 

0.35 

0.56    0.88       .. 

1.06 

1.15 

1.73 

51.2 

43.5 

37.2    31.1 

26.3 

22.1      .  . 

193    2.62    1.28    0.51 

0.31 

0.68    0.68       .. 

1.19 

1.39 

0.89 

51.7 

41.5 

41.6    31.7 

26.3 

32.6     .  . 

1.94    2.34    1.22    0.53 

0.29 

0.61    0.66       .. 

1.08 

1.18 

0.69 

55.0 

41.7 

36.5    32.0 

26.2 

37.5      .  . 

..    2.44    1.35       .. 

0.25 

0.81    0.82       .. 

1.13 

110 

0.67 

41.7 

31.3    29.8 

26.4 

399     .. 

..    2.22    1.57       .. 

069 

0.66    0.82       .. 

1.13 

1.16 

0.78 

41.2 

34.3    32.5 

27.1 

57.1      .  . 

1.8     2.0      1.94    0.8 

0.8 

0.6      1.0      1.3 

1.04 

0.8 

076 

32.2    33.4 

26.8 

34.6     .  . 

1.8      2.1      14     0.7 

0.9 

0.9     0.9 

0.80 

0.7 

0.8 

36.0    30.6 

34.2 

34.2      .. 

1.9      1.9     1.7     0.8 

0.8 

0.8     0.9 

0.9 

0.63 

0.5 

48.5 

33.9    34.0 

29.1 

28.6     .  . 

1.7      2.1      1.4     0.6 

0.4 

0.6     0.8 

0.7 

0.5 

03 

45.8 

34.5    33.7 

29.0 

22.7     .  , 

1.6        ..    2.1      0.6 

1.5 

0.8      1.2 

0.7 

1.2 

420 

28.1    25.6 

24.1 

23.0     .. 

1.7         ..    2.10    069 

0.85 

0.83    1.18       .. 

1.31 

36.4 

30.7    26.5 

16.8 

332     .. 

0.7 

0.43 

.50    1.11       .. 

1.14 

0.69 

1.09 

34.3    43.4 

17.6 

.  .      •  t 

0.83    1.20    0.08 

1.11 

0-38 

1.26 

35.6    28.5 

..  54.8 

30.5 

0  75 

0.7 

0.80    1.15    1.11 

1.06 

0.41 

.81 

32.7 

39.4 

..  48.5 

33.8 

063 

1  31 

37.6 

1906—  .39:  1907 

§  1906—15.7;   1907 

1  95;  1908-1.56; 

-49,3:    1908— 

1909—1.58;  1910 

4;  1909-15.2; 

-1.24. 

1910—17.2. 

478 


TABLES 


CCTJ 

w           co                        r» 

°4 

ajosX^[ 

JO     3^UBg 

88                S 

-.13 

jo  3{UBg 

in               oo                   m 

n 

ia 

BpoiBg 
jo   Jflueg 

f-  oo                        to 

Ja 

pBqBi{Bnv 

to           co               to      ^1 

—  - 

pUBfjazjjMS 

wo-w^^coenin. 

Profits 

891818  P3)™ 

[  Gross 

sajBAv 
PUB   puBiJtug 

oo  en       cncncooo<x>oo 
en  in           •«*               rn  t» 

00   ^   tO    rH 

0 

S 

*rea  U8!PUI 

..:.:..:..::.  .g«j  .  .5  ..  .as 

O  CO            .  CO      .      .  CM  -^  b- 

•^  CO  CM  CM 

in  co  o  IH 

,  1 

>ercen 

JO    3(UBg 

000.."*..COt-CM 

rH  to  t»  en 

* 

w 
3 

ft 

BTPUI  jo 
spiBg  iBj;uaQ 

COCM..CO..tO^(O 

•  o  in  co  in 

.  CO  CM  00  O 

9 

cd 
o 

£ 

Bjpui  jo  3iUBg 

S  So           rj«           in  in  in 
•*  rH    .    .  in    •    .  oo  ^t  oo 

'88BS5 

,  CM  in  t*  in 

H 

« 
& 

nmo,™^ 

88  '  §S  '  'S^S 

o  in    >    •  co    •    •  in    .    . 

•  •«*    00   rH   tO 

.  o  rH  to  en 

»WmV 

CO    CM        '            CO                    rH       *        * 

CM  CM                CM                CM 

'    O    CO   CM    rH 
CO  CM  CM  CM 

— 

BDOJBCT 

t 

JO    2{UBg 

i>               6           co                    r<i                                     o  oi 

vH                       rH                 rH                                                                                          rH 

,    rH  CO  H  CM 

^  co  co  in 

rH   rH  H   rH 

0 

IE 

Btpui  J° 

oo      t*  oo                           b»      o                                    in  en 

8S°>* 

n,_- 

3{UBg    IBJ|U33 

tO           rH           O                          00                 '          in                          tO                                  rH 

•  00  <*  O  CO 
^  JJ  CM   00 
CM  CM  CM  rH 

a! 

42 

PGq8wv 

enoo           o^co'd                   t«^t«i 

^  CM  CM   00 
rH   H   rH 

2 

2 

apIBg    UBTpUJ 

co           co  o                        CM                    en 

rH                 H   rH                                     rH 

•  t*  co  o  co 
en  d  d  d 

rH   JH  rH 
CO  rH  tO  00  ** 

£ 

06  06  CM  d    ••'<*•    '  CM  06    *  w.  06  co    '  ^  *?    '    *    '    *  °? 

rH  rH                       rH                 rH                CO    rH  rH          rH  M                              O 
rH                       H  rH                              rH 

rH   rH   CO   o   O 
rH  CM  rH  H  rH 

S2rHrHrtSrH2rHSrH2rHrHrHrHSrHrHrHrHrHrH 

§   2   rH   rH   rH 

TABLES 


479 


H    W 
P 

J/5 


utoo 


panssj 


UT 


uj 


*       S? 

8     S3 


g 


3     8 


8  §  S  §  S  8"  8  -  8  K 


S"     S" 


3«; 


8 


£ 


480 


TABLES 


H 
Q 


£  5 

03    < 
H    W 


sTassy 


-AGO   O;   S9DUBA 


pBOJtqy 


pue 


sfjossy 


00      t-      O>      |> 


S  55 


r-l      CJ       W 


**•      ^     Q      O      W?      C»f 

m    «o    Jft    2S    55    o 


CHAPTER    XII 

WAR   AND  POST-WAR  YEARS 

1.     The  Reserve  Bank  of  India 

On  January  1st  1949,  the  Reserve  Bank  of  India  ceased  to 
be  privately  owned  and  became  a  State-owned  central  bank. 
The  share-holders  received  compensation  by  no  means  on 
a  generous  scale  in  the  shape  partly  of  3  per  cent  securities 
and  partly  in  cash.  The  object  of  the  change  was  stated 
to  be  "greater  co-ordination  of  the  monetary,  economic  and 
financial  policies".  The  Central  Government  is  specifically 
authorised  to  issue  in  consultation  with  the  Governor  such 
directions  from  time  to  time  as  it  deems  necessary.  The 
Board  of  Governors  is  now  to  consist  of  11  persons  including 
one  Government  official  nominated  entirely  by  the  Govern- 
ment for  a  period  of  four  years.  The  four  local  Boards 
similarly  nominated  are  to  be  representative  of  territorial 
and  economic  interests  as  well  as  the  interests  of  co-operative 
and  indigenous  banking. 

The  central  bank  of  every  country  is  avowedly  entrusted 
with  a  national  responsibility  and  to  enable  its  proper  execu- 
tion is  vested  with  important  special  privileges  and  mono- 
poly powers.  It  is  true  that  in  too  many  cases,  this  national 
responsibility  was  materially  qualified  in  the  past  by  the 
fact  that  high  finance  and  commerce  were  allowed  to  have 
a  preponderating  influence  in  the  day-to-day  management 
and  formulation  of  policies  of  central  banks.  This  essentially 
narrow  and  mistaken  view  of  their  national  responsibilities 
is  to  be  chiefly  attributed  to  the  fact  that  till  recently  the 
nature  and  importance  of  monetary  management  for  the 
economic  welfare  of  all  classes  and  sections  of  society  were 
not  properly  understood.  There  was  a  general  tendency  to 
assume  without  much  examination  that,  what  was  expedient 
from  the  viewpoint  of  high  finance  and  commerce  could  not 
be  opposed  to  the  general  interests  of  employment  and  good 
incomes.  Apart  from  this  rather  perverse  and  class-blind 
approach  to  the  principle  of  national  responsibility,  the 
unwillingness  to  subordinate  the  central  bank  to  the  autho- 

MB.  31 


482  WAR  AND  POST-WAR  YEARS 

rity  of  the  Government  sprang  not  from  denial  of  its  national 
function,  but  from  a  fear  that  Governments  were  most 
unlikely  to  have  the  capacity  to  appreciate  the  technical 
skill  and  knowledge  required  for  its  efficient  discharge.  A 
veritable  revolution  in  economic  thought  and  ideology  and 
two  world  wars  with  an  interim  period  of  fearful  depression 
and  unemployment  have  enlarged  the  economic  initiative 
and  authority  of  Governments  beyond  all  imagination. 
Central  banking  has  now  become  one  among  several  means 
by  which  the  Government  is  expected  to  maintain  stability 
of  income  and  employment  for  the  community  at  large.  It 
is  hardly  surprising  if  in  this  new  orientation  of  State  respon- 
sibilities, the  old-world  idea  of  the  so-called  independence  of 
central  banks  has  been  swept  out  of  existence. 

It  is  well  known  that  Indian  public  opinion  was  entirely 
for  the  creation  of  a  State-owned  and  State-managed  central 
bank  and  events  have  proved  that  it  judged  world  trends 
more  accurately  than  Whitehall  and  London  which  forced 
on  this  country  a  contrary  decision.  The  probable  or 
ostensible  grounds  on  which  the  Labour  Government  has 
nationalized  the  Bank  of  England  should  now  enable  us  to 
judge  how  far  the  British  dictated  Reserve  Bank  of  India 
interposed  obstacles  in  the  way  of  the  economic  progress  of 
this  country.  It  is  clear  that  the  common  objection  that  the 
assured  profits  of  special  privileges  and  monopoly  business 
should  not  be  appropriated  by  private  investors  did  not 
hold  good  in  the  case  of  our  Reserve  Bank.  Unlike  the  Bank 
of  England,  the  Reserve  Bank  had  to  share  all  profits  in 
excess  of  a  certain  minimum  with  the  Central  Government 
on  a  scale  which  was  heavily  in  favour  of  the  latter.  At  the 
very  least,  it  could  be  claimed  that  the  urgency  of  this 
ground  did  not  exist  to  the  same  high  degree  as  could  be 
alleged  in  the  case  of  the  United  Kingdom.  A  much  more 
compelling  circumstance  which  has  expedited  nationalisa- 
tion in  England  is  the  experience  during  the  financial  crisis 
of  1931  when  a  rift  is  supposed  to  have  occurred  between  the 
policy  of  the  Labour  Government  and  the  self-interest  or 
financial  judgment  of  the  banking  system  in  general.  The 
need  for  a  full  alignment  between  the  policies  of  the  Govern- 
ment and  trends  of  money  and  banking  has  become  even 


THE  RESERVE  BANK  OF  INDIA  483 

more  acute  as  important  industries  are  singled  out  one  after 
another  for  nationalisation.  This  new  factor  raises  the 
general  question  of  policy  from  the  sphere  of  monetary  con- 
trol and  incentives  into  the  sphere  of  credit  supplied  by 
commercial  banks. 

Actually,  the  most  heated  controversy  arose  not  over 
the  acquisition  of  ownership  of  the  Bank  of  England  by  the 
State  but  over  the  clause  which  appears  to  extend  its  autho- 
rity over  the  business  of  commercial  banks  with  the  inroads 
it  implies  on  the  time-honoured  secrecy  of  banking  business. 
So  far  as  the  argument  relates  to  monetary  policy  and  credit 
control,  it  applies  with  as  much  force  to  this  country  as  to 
the  United  Kingdom.  But  what  it  necessitates  in  this  coun- 
try is  not  so  much  a  change  in  the  law  of  the  Reserve  Bank 
as  a  new  orientation  of  practice.  The  law  already  vests  the 
power  of  appointing  the  executive  in  the  President 
whose  responsible  ministers  could  be  trusted  to  bear  in  mind 
the  national  stake  involved  in  the  appointments.  As  for  the 
equilibrium  of  power  between  the  Central  bank's  executive 
and  the  Central  Board  of  the  Bank,  this  again  is  largely  a 
matter  of  the  skill,  capacity  and  moral  authority  of  the 
individual  on  whom  the  mantle  of  Governorship  is  con- 
ferred. 

The  question  of  the  authority  of  the  State-owned  and 
State-managed  Central  bank  over  commercial  banking  is 
more  complicated.  Although  there  is  a  large  volume  of 
individual  opinion  on  the  planned  economy  or  economic 
planning  of  the  future,  no  political  party  likely  to  assume 
power  in  the  near  future  has  yet  adopted  a  programme 
which  is  definite  beyond  doubt,  sufficient  in  its  detail,  rea- 
sonably authoritative  in  its  Economics  or  Technology.  Even 
though  the  extraneous  issue  of  Indo-British  relationship  is 
cleared  out  of  the  way,  a  stable  realignment  of  political  and 
economic  forces  is  bound  to  take  several  years.  Till  then, 
it  would  be  highly  premature  to  adopt  measures  likely  to 
interfere  with  the  judgment  of  commercial  banks  in  their 
normal  activities.  Another  very  important  element  in  the 
rapid  drift  towards  nationalisation  of  banking  was  the 
accusation  which  was  very  freely  made  that  Montagu- 
Norman,  and  under  his  influence  the  banks,  had  a  "foreign 


484  WAR  AND  POST-WAR  YEARS 

policy"  of  their  own  during  inter-War  years  which  ran 
counter  to  the  official  foreign  policy.  It  is  not  necessary  for 
our  purposes  to  examine  the  character  or  veracity  of  this 
belief.  It  must  be  recognised  however  that  with  the  orga- 
nisation of  international  organs  for  management  of  money 
and  trade  relations,  economic  decisions  are  today  made  as 
much  on  the  plane  of  power  politics  as  financial  and  econo- 
mic expertise.  A  Central  bank  which  lacks  the  authority  of 
the  Government  behind  its  opinions  and  policies  has  no  place 
in  the  world  as  it  is  emerging  from  World  War  II.  As  a 
matter  of  fact,  the  Central  bank  is  becoming  one  among 
many  organs  through  which  the  State  seeks  to  co-ordinate 
national  economic  policies  in  relation  to  the  outside  world. 

2.    The  Chief  Executive 

It  is  hardly  necessary  to  dwell  on  the  significance  of  the 
personality  of  the  chief  executive  of  a  central  bank.  The 
names  of  Montagu-Norman,  Governor  Strong  and  Dr. 
Schacht  are  indeed  writ  large  on  the  economic  history  of 
the  last  half  century.  It  is  true  that  the  balance  of  power 
in  financial  and  monetary  leadership  has  never  been  very 
stable.  Political  and  economic  events  unprecedented  in 
human  history  have  recently  raised  the  Finance  Ministry  of 
every  country  to  the  status  of  a  dominant  partner  in  monetary 
matters  and  policies;  and  money  and  business  power  has  for 
its  part  retreated  and  contented  itself  with  pressure  and 
influence  through  unobtrusive  channels.  Nevertheless, 
according  as  wisdom  dwells  in  him,  the  chief  executive  of 
the  central  bank  must  continue  to  be  a  power  for  weal  or 
woe  in  every  country.  The  successive  governorships  of  the 
Reserve  Bank  are  therefore  a  field  of  study  deserving  close 
attention. 

Sir  Osborne  Smith  the  first  Governor  of  the  Reserve  Bank 
was  the  creation  of  British  financial  and  banking  interests. 
To  prepare  his  way  to  the  Governorship,  he  was  planted  in 
the  Imperial  Bank  as  its  Managing  Director  from  1926  to 
1935.  When  Sir  Osborne  sought  however  to  lower  bank  rate 
and  to  manage  the  Bank's  investments  in  his  own  way,  he 
found  himself  face  to  face  with  the  most  forceful  and  self- 
willed  Finance  Member  England  had  ever  sent  out  to  India. 


RESERVE  BANK  POLICIES  485 

He  resigned  in  1937. 

Sir  James  Taylor  the  second  Governor  had  served  his 
apprenticeship  in  Money  and  Finance  from  1921  to  1931  as 
Deputy  Controller  and  Controller  of  Currency.  His  Gover- 
norship covered  the  fateful  years  of  war  till  February  1943. 
The  most  notable  event  of  the  pre-war  years  of  his  Governor- 
ship occurred  in  1937  when  the  elected  members  of  the 
Central  Board  recorded  their  opinion  in  favour  of  lowering 
the  exchange  rate  against  a  minority  composed  entirely  of 
the  Governor  and  the  nominated  members.  It  appears  that 
the  Government  hinted  at  supersession  of  the  Board  itself. 
The  hint  was  enough  to  allay  the  agitation. 

The  first  Indian  Governor  and  the  third  in  succession  was 
Shri  Chintaman  D.  Deshmukh.  A  distinguished  civil 
servant,  he  began  life  in  the  Reserve  Bank  as  its  liaison 
officer  in  July  1939  and  was  raised  to  be  a  Deputy  Governor 
towards  1941  end.  According  to  him,  what  was  sought  in 
the  liaison  officer  or  Deputy  Governor  was  a  man  "primarily 
of  energy  and  administrative  capacity  and  presence"  with 
"good  general  financial  knowledge  and  experience".  In  his 
view,  knowledge  of  "Government  finance  is  as  useful  as 
banking  or  commercial  experience".  While  the  Bank  of 
England  and  the  Government  of  India  were  holding  out  for 
a  Governor  from  England  and  the  latter  suggested  such  a 
compromise  arrangement  for  at  least  three  years,  it  was 
curiously  enough  the  Secretary  of  State  who  decided  that 
Shri  Deshmukh  should  succeed  Sir  James  Taylor  on  his 
death  in  February  1943.  It  is  not  without  significance  that 
initially  the  Finance  Department  requested  the  Governor 
to  furnish  in  every  important  case  not  only  his  views  but 
also  the  views  of  the  Managing  Director  of  the  Imperial 
Bank. 

3.     Reserve  Bank  Policies 

When  World  War  II  broke  out  and  sterling  began  to 
accumulate,  India  was  faced  with  a  difficult  choice.  One 
alternative  before  her  was  internal  inflation — with  an 
economy  which  had  no  unused  capacity  and  little  chance  of 
expansion  of  capacity.  The  other  alternative  was  high  in- 
terest rates  coupled  with  maximum  canalisation  of  savings. 


486  WAR  AND  POST-WAR  YEARS 

There  is  nothing  on  record  to  show  whether  the  latter  alter- 
native was  ever  properly  examined.  When  sterling  began 
to  accumulate,  the  Reserve  Bank  renewed  in  1940  its  sugges- 
tion which  was  first  made  as  early  as  1937  to  repatriate  the 
sterling  debt  and  London  received  the  suggestion  quite 
favourably.  When  in  July  1942  a  senior  Director  mooted 
conversion  of  excess  sterling  into  gold,  the  proposal  found 
no  support  from  the  Bank  of  England  or  even  the  Governor 
of  the  Reserve  Bank  who  argued  that  dollar  accruals  were 
vital  to  the  U.K.  for  war  and  that  in  case  of  ultimate  victory, 
sterling  would  not  be  in  any  way  inferior  to  gold.  The 
Directors  contented  themselves  with  an  expression  of  hope 
that  India's  dollar  requirements  would  receive  special  con- 
sideration when  the  war  was  over.  In  1942  August,  both  the 
Finance  Member  and  the  Governor  resisted  successfully  all 
attempts  from  the  U.K.  to  bring  about  a  revision  of  the 
financial  burden  and  liabilities  of  the  war.  In  1943  February, 
the  Central  Board  of  Directors  passed  a  significant  resolution 
pressing  the  Government  to  be  prepared  with  a  post-war 
programme  of  reconstruction  and  development  and  to  devise 
safeguards  against  loss  in  value  of  the  accumulated  sterling. 
When  inflation  showed  no  signs  of  abatement,  the  Board 
placed  on  record  in  December  1944  another  resolution 
suggesting  reduction  in  the  volume  of  exports,  sale  of  gold 
and  silver  and  supply  of  capital  goods  at  fair  prices.  Again 
after  the  end  of  the  war,  in  February  1946,  the  Directors 
returned  to  the  charge  with  the  proposal  that  sterling  might 
now  give  place  to  free  foreign  currencies  and  the  supply  of 
consumer  and  capital  goods  might  be  expedited.  During  the 
year,  a  suggestion  was  made  for  termination  of  the  dollar 
pool  which  the  Government  of  India  simply  ignored. 

The  bank  rate  was  reduced  for  the  last  time  from  3J  per 
cent  to  3  per  cent  in  November  1935.  In  1936,  the  Directors 
proposed  a  further  reduction  to  2£  per  cent.  The  Govern- 
ment opposed  the  suggestion  and  the  Directors  did  not 
press  it.  Early  in  1946,  it  was  the  Government's  turn  to 
press  for  reduction  but  the  idea  was  abandoned  on  opposition 
from  the  Committee  of  the  Central  Board.  It  is  relevant  to 
record  here  that  the  then  Finance  Member  based  his  policy 
on  the  possibility  of  a  post-war  depression  while  the  Reserve 


RESERVE  BANK  POLICIES  487 

Bank  appears  to  have  held  the  view  that  the  depression 
would  not  set  in  just  then.  In  pursuit  of  his  cheap  money 
policy,  the  Finance  Member  next  suggested  the  conversion 
of  3J  per  cent  into  3  per  cent  security.  The  Reserve  Bank 
appears  to  have  discountenanced  it  at  first  but  gave  way 
when  the  market  became  buoyant  later.  In  August  1947,  the 
Governor  expressed  the  cautious  opinion  that  "a  consolida- 
tion of  the  progress  already  made  towards  cheap  money  was 
very  essential  before  making  any  attempt  further  to  cheapen 
money." 

In  1946  January,  the  Government  demonetised  1000  Rupee 
notes,  a  measure  with  which  the  Reserve  Bank  was  naturally 
closely  associated.  The  step  proved  futile  because  it  was 
half-hearted  and  took  little  account  of  difficulties  which 
were  not  unforeseeable.  Towards  the  end  of  1947,  the 
Reserve  Bank  is  known  to  have  advised  against  the  incipient 
de-control — a  conclusion  which  was  based  on  no  special 
knowledge  or  analysis  not  known  to  all  serious  students  of 
the  subject.  It  is  not  known  whether  the  Bank  developed 
or  suggested  any  counterplan  to  cope  with  the  consequences. 
With  the  partition  of  the  country  a  period  of  great  dislocation 
in  trade,  industry  and  finance  ensued.  It  is  not  known  to 
what  extent  the  Reserve  Bank  was  able  to  anticipate  and 
bring  to  the  attention  of  the  Government  the  consequences 
which  were  implicit  in  the  partition.  The  most  recent  and 
fateful  decision  of  the  Indian  Union  was  made  when  the 
rupee  was  devalued  in  the  wake  of  the  British  £ .  There  is 
no  evidence  to  show  whether  the  alternative  of  partial  de- 
valuation or  non-devaluation  received  proper  examination. 
What  is  far  more  important,  it  is  not  known  where  the  res- 
ponsibility for  our  monetary  relations  with  Pakistan  rested 
on  that  crucial  day. 

The  foregoing  brief  review  brings  out  a  few  noteworthy 
points.  Till  the  retirement  of  the  British  from  this  country, 
the  final  authority  always  rested  with  the  Finance  Member 
and  the  Bank  of  England.  The  Central  Board  of  Directors 
exerted  itself  well  to  safeguard  the  economic  interests  of 
this  country  but  was  powerless.  So  long  as  a  British 
Governor  from  Home  was  assured,  the  qualifications  of  the 
Indian  officers  near  him  were  a  matter  of  little  concern.  The 


488  WAR  AND  POST-WAR  YEARS 

situation  changed  for  India  though  not  for  the  British  when 
after  the  Partition  the  expert  finance  member  had  to  give 
place  to  the  political  amateurs  of  the  new  democracy.  It 
was  not  that  the  ability  to  recognise  the  needs  of  the  situa- 
tion was  lacking.  In  August  1947,  a  few  days  before  the 
Partition  the  Governor  declared  quite  clearly  that  "inflation 
must  be  put  down  with  a  firm  hand  and  must  not  be  resorted 
to  even  for  schemes  of  development  or  industrialisation 
which  are  not  likely  to  be  productive  within  a  reasonable 
period".  This  was  coupled  at  the  same  time  with  the  plea 
noted  above  for  consolidation  of  cheap  money.  What  hap- 
pened to  the  country  after  this  declaration  needs  no  exposi- 
tion or  exposure. 

4.    Assets  and  Liabilities  of  the  Bank 

The  movements  in  the  balance  sheets  of  the  Reserve  Bank 
reflect  these  policies  and  decisions  but  partially.  The  balance 
sheets  themselves  are  but  a  fragmentary  record  of  move- 
ments in  the  total  money  supply  and  behaviour  of  money 
generally.  Till  about  March  1942,  the  annual  additions  to 
notes  in  circulation  are  appreciably  ahead  of  the  accumula- 
tions of  sterling  in  the  Bank.  This  was  largely  because  the 
incoming  sterling  was  availed  of  to  liquidate  the  pre-war 
sterling  debt  of  the  country  which  stood  at  about  £  300  m. 
The  short-fall  caused  in  the  sterling  cover  of  the  note-issue 
by  this  disbursal  of  sterling  was  made  good  with  created 
rupee  securities  the  total  of  which  accordingly  shows 
additions. 

From  that  time  till  about  March  1946,  notes  in  circulation 
do  not  keep  pace  with  the  fast  rising  tide  of  sterling  accu- 
mulations. For  meeting  rupee  payments  corresponding  to 
sterling  receipts,  the  Government  made  great  exertions  to 
raise  money  by  taxation  and  loans.  A  part  of  what  the 
Government  raised  by  these  means  was  impounded  as 
balances  with  the  Reserve  Bank  and  to  that  extent  did  not 
add  to  the  volume  of  inflationary  money  supply.  The 
excess  sterling  which  ensued  was  availed  of  to  cancel  rupee 
securities  as  in  1943-44. 

After  1946  March,  notes  in  circulation  continued  to  expand 
but  moderately  and  after  1948  March,  began  to  decline. 


THE  GROWTH  OF  DEPOSITS — ITS  MEANING  489 

Adverse  trade  balances  began  to  cause  a  great  drain  on  the 
sterling  assets  of  the  Reserve  Bank  and  but  for  the  simulta- 
neous spate  of  expenditure  out  of  Government  balances  after 
the  Partition  of  1947,  the  decline  in  notes  might  have  set 
in  much  earlier  than  1948.  The  decline  in  notes  was  also 
moderated  by  the  policy  of  the  Reserve  Bank  to  support 
the  security  market  which  meant  an  appreciable  net  pur- 
chase of  and  addition  to  Government  Securities  in  the  Bank- 
ing Department.  With  the  devaluation  of  1949  and  the 
drastic  cut  imposed  on  imports  earlier,  the  strain  on  the 
trade-balance  ceased  at  least  temporarily  and  that  defla- 
tionary force  was  halted. 

5.    Legal  Powers 

With  the  acceptance  by  the  Indian  Union  of  the  member- 
ship of  the  International  Monetary  Fund,  the  rupee-sterling 
link  ceased  in  the  legal  sense  and  the  rupee  as  a  unit  of  gold 
became  an  independent  currency  within  the  limits  of  the 
obligations  defined  by  the  Fund.  The  membership  of  the 
Fund  places  within  the  reach  of  the  Indian  Union  additional 
resources  in  foreign  exchange  as  and  when  needed.  The 
Reserve  Bank  Act  was  amended  in  1951  to  remove  restric- 
tions on  the  holding,  by  the  Banking  Department  of  the 
Bank,  of  Government  securities  as  to  the  aggregate  amount 
and  maturity.  With  additional  foreign  exchange  at  its  dis- 
posal, it  is  but  to  be  desired  that  the  capacity  of  the  Bank 
to  operate  in  the  domestic  market  should  be  widened  as  far 
as  possible.  Another  significant  amendment  extends  the 
privilege  of  eligibility  to  bills  bearing  the  signature  of  a 
State  co-operative  bank  and  the  period  of  maturity  of  eligible 
bills  drawn  for  the  finance  of  seasonal  agricultural  opera- 
tions or  the  marketing  of  crops,  from  9  months  to  15  months. 

6.    The  Growth  of  Deposits — Its  Meaning1 

From  1939  end  to  1945  end,  notes  in  circulation  rose  from 
183  crores  to  1210  crores.  This  was  very  nearly  a  sevenfold 
rise.  In  contrast,  the  deposits  of  scheduled  and  non-scheduled 
banks  show  about  a  four-fold  increase  only.  In  actual 
figures,  the  increase  was  from  263  crores  to  1031  crores.  The 

1.    F.n.  overleaf. 


490  WAR  AND  POST-WAR  YEARS 

growth  of  deposits  was  in  keeping  with  the  movement  in  the 
cash-reserves  of  banks.  The  relatively  smaller  growth  of 
deposits  is  thus  a  remarkable  fact  which  deserves  some 
attention. 

There  were  indeed  some  causes  other  than  inflation  which 
were  accelerating  the  growth  of  deposits  as  compared  with 
notes.  In  ordinary  times,  a  good  part  of  surplus  incomes 
and  profits  finds  direct  investment  in  trade,  industry  and 
house-building.  During  the  war,  all  private  investment  was 
suppressed  except  where  it  served  the  purposes  of  war 
supplies.  Even  when  savings  were  applied  to  the  purchase 
of  public  loans  or  were  placed  in  other  ways  at  the  disposal 
of  the  Government,  they  returned  very  speedily  as  current 
deposits  in  payment  of  Government  purchases.  Even  if  the 
pre-war  annual  surplus  of  short-term  and  long-term  savings 
were  estimated  at  the  then  prevailing  low  prices  at  a  mode- 
rate figure  of  Rs.  100  crores,  the  possible  augmentation  of 
bank  deposits  from  this  source  alone  could  well  range 
between  25  to  50  per  cent  of  their  pre-war  volume. 

A  much  more  important  source  of  accretion  to  deposits 
was  the  unimpeded  expansion  of  banking  facilities  geogra- 
phically and  otherwise.  At  the  end  of  1939,  places  with 
some  kind  of  banking  facilities  numbered  less  than  750.  By 
1945  end,  the  number  exceeded  1650 — a  substantial  expan- 
sion indeed  of  the  area  of  banking  operations.  As  is  to  be 
expected,  the  intensity  of  exploitation  was  even  greater. 
The  scheduled  banks  increased  their  network  of  branches 
from  1178  to  2957 — a  much  higher  proportion  of  increase  as 
compared  to  the  expansion  of  geographical  area.  The  non- 
scheduled  banks  mostly  of  the  unit  type  returned  at  1945 

1.                 Time  and  Demand  Branches  Places  with 

Deposits  (Crores)  Notes   in           Sche-     Non-Sche-       One   Office 

Sche-  Non-Sche-  Circulation           duled     duled                or  more, 

duled  duled 
End  of 

1939                  248  15  183                       1178            673                       736 

1945                  958  73  1210                       2957          2381                      1655 

1947t              1074  47  3541          1991 
(107) 

1948  963  47  1188                      2963          1711                     1534 

(234)  (58)  (238) 

1949  803  40  1097  2852          1589 

1950  894  37  1174  2779          1574 
t  From  1947,  Indian  Union  only.     Pakistan  in  brackets. 


NOTES  AND  DEPOSITS — RELATIVE  POSITION  491 

end  more  than  1900  banking  offices. 

The  growth  in  deposits  during  the  war  period  therefore  is 
not  to  be  ascribed  entirely  or  even  to  a  major  extent  to  in- 
flation as  such.  It  is  arguable  of  course  that  inflation  enabled 
places  to  reach  the  minimum  level  of  banking  potentialities 
presumed  in  the  creation  of  a  banking  office  or  that  the 
inflation  of  incomes  and  prices  raised  the  depositing  capa- 
city of  existing  customers.  Making  every  allowance  for 
these  factors,  it  would  be  still  true  that  geographical  expan- 
sion of  the  magnitude  indicated  above  could  not  but  result 
in  the  mobilisation  of  new  savings  and  new  depositors 
hitherto  dormant  from  the  banking  stand-point. 

7.    Notes  and  Deposits — Relative  Position 

If  in  spite  of  favourable  factors  recorded  above,  the 
volume  of  deposits  lagged  very  much  behind  the  expansion 
of  currency  notes,  it  indicates  a  remarkable  change  in  the 
monetary  habits  of  the  people.  Currency  notes  have  clearly 
gained  ground  at  the  expense  of  bank  deposits  and  cheques. 
The  causes  of  this  marked  preference  for  notes  are  not  far 
to  seek.  Deposits  are  conspicuous  in  their  ownership — 
particularly  to  the  taxation  authorities;  notes  pass  from  hand 
to  hand  and  leave  no  inconvenient  traces  behind.  The  in- 
ability of  deposits  to  keep  pace  with  currency  notes  is  a 
measure  of  the  extent  to  which  trade  and  business  fell  into 
the  habit  of  unrecorded  transactions  by  means  of  currency 
notes. 

It  is  probable  though  extremely  difficult  to  prove  that  the 
relative  fall  in  public  and  business  preference  in  the  case 
of  deposits  was  not  perhaps  as  great  as  absolute  figures  indi- 
cate. As  the  volume  of  deposits  grew,  their  turn-over  fell 
very  rapidly.  The  ratio  of  cheque-clearings  to  demand- 
deposits  was  about  15-16  per  annum  at  the  outbreak  of  war. 
When  inflation  started  in  earnest  during  1942-43,  the  ratio 
collapsed  and  for  the  rest  of  the  war  and  post-war  years 
fluctuated  between  9  and  9£.  We  have  no  evidence  about 
the  turn-over  of  notes.  The  fact  that  for  a  seven-fold  in- 
crease in  volume,  the  rise  in  the  partially  controlled  price- 
level  was  not  more  than  two  and  half  times  the  pre-war 
level  does  suggest  that  the  turn-over  of  notes  also  must  have 


492  WAR  AND  POST-WAR  YEARS 

declined.  In  the  case  of  notes  again  physical  hoarding  pure 
and  simple  must  have  taken  place  on  a  much  greater  scale. 
If  and  to  the  extent  that  the  decline  in  turn-over  of  notes 
was  greater,  it  means  restoration  of  the  balance  as  between 
use  of  notes  and  deposits. 

8.     Geographical  Expansion  2 

It  has  been  shown  above  how  the  banking  map  of  India 
covers  today  many  more  places  than  it  did  before  the  out- 
break of  World  War  II.  The  character  of  the  places  to  which 
banking  has  now  spread  deserves  some  notice.  Analysis  of 
these  places  by  population  shows  that  about  a  third  of  the 
new  places  fall  in  the  category  of  towns  with  populations 
between  5  and  10  thousand  while  more  than  half  the  remain- 
ing places  have  a  population  between  10  and  50  thousand. 
Although  the  number  of  places  which  have  larger  popula- 
tions and  banking  facilities  still  continues  to  grow,  it  is  clear 
that  banking  is  now  spreading  to  progressively  smaller  and 
smaller  places.- 

The  eagerness  to  create  new  banks  or  extend  branches  to 
new  places  was  not  all  due  to  inflation  and  the  attraction  of 
higher  money  incomes.  It  was  clear  some  years  before 
World  War  II  that  sooner  or  later  legal  restrictions  on  crea- 
tion of  new  banks  or  branches  were  to  be  imposed.  A  good 
deal  of  the  phenomenal  expansion  of  banking  during  these 
years  was  undoubtedly  prompted  by  the  natural  desire  to 
forestall  the  threatened  legislation  which  materialised  after- 
wards in  1949.  It  is  also  likely  that  when  military  develop- 
ments removed  machinery  and  capital  equipment  beyond 
the  reach  of  India,  enterprise  largely  financial  in  motive  and 
outlook  began  to  look  about  for  other  avenues  which  were 
not  barred  by  such  prerequisites.  It  was  not  difficult  to 

2.  Towns  with  Banking  Facilities  by  Population 


Total 

Below 

5,000  to 

10,000  to 

50,000  to 

1  lakh  & 

Unclassi- 

Number 

5,000 

10.000 

50,000 

1  lakh 

above 

fied 

1936 

507 

126 

60 

233 

51 

37 



1948f 

1534 

171 

360 

662 

84 

50 

207 

1949* 

1512 

38 

159 

434 

79 

51 

749 

f  Indian  Union  only. 
*  The  discrepancies  between  1948  and  1949  are  obviously  due  to  variations  of 
unclassified  towns. 


CONCENTRATION  OF  BANKING  POWER  493 

discover  that  banking  requires  as  little  machinery  and  capi- 
tal goods  as  insurance  companies  and  certainly  very  much 
less  than  farms,  dairies  or  rubber  and  tea  plantations. 

9,     Concentration  of  Banking  Power  3 

The  forces  which  caused  the  growth  in  deposits  are  well 
reflected  in  the  structure  and  degree  of  concentration  of 
Indian  banking.  The  exchange  banks  and  the  Imperial  Bank 
did  not  participate  much  in  the  creation  of  new  branches. 
The  exchange  banks  suffered  also  from  the  events  of  war 
in  their  home  countries.  In  the  result,  the  share  of  the  ex- 
change banks  in  the  total  deposits  declined  from  27.7  per 
cent  at  the  outbreak  of  war  to  a  little  less  than  15  per  cent 
by  1947.  The  Imperial  Bank's  percentage  share  fell  from 
about  35  to  less  than  23.6.  The  Big  Five  of  Indian  joint-stock 
banks  which  created  a  number  of  branches  during  these 
years  lost  ground  but  only  from  27£  per  cent  to  about  24J 
per  cent.  The  other  banks  which  included  two  new-comers, 
the  United  Commercial  Bank  and  the  Bharat  Bank  with  de- 
posits equal  to  those  of  the  smaller  ones  among  the  Big  Five, 
recorded  a  rise  from  10  to  about  37  per  cent. 

If  the  Imperial  Bank,  exchange  banks  and  the  Big  Five  of 
Indian  joint-stock  banks  have  all  lost  ground  relatively,  it  is 
clearly  to  the  advantage  of  other  Indian  joint-stock  banks. 
Taking  the  deposits  of  Indian  joint-stock  banks  together 
which  include  the  two  big  new-comers,  the  United  Com- 
mercial Bank  and  the  Bharat  Bank,  the  structure  presents  as 
a  whole  the  following  appearance  in  the  post-war  years. 

In  1948,  seven  Indian  joint-stock  banks  which  had  deposits 
exceeding  Rs.  25  crores  accounted  for  66.8  per  cent  of  the 
country's  deposits.  What  is  more  significant,  their  share  of 
the  total  has  been  improving  in  years  when  the  total  itself 

3.  Classification  of  Banks  by  Deposits 

(Figures  in  Crores) 

Over  25  Crores  Between  5  &  25  Crores  Total 

No.        Deposits  No.  Deposits  No.          Deposits 

1946  7        602        21*        199        620        986 

1947  7        634        18        174        625        989 

1948  7        635        14        147        619        950 

*  Of  which  only  one  is  non -scheduled. 


494  WAR  AND  POST-WAR  YEARS 

is  declining.  Joint-stock  banks  with  deposits  falling 
between  Rs.  5  to  25  crores  are  declining  in  number  and  in 
their  deposits  both  absolutely  and  relatively.  The  rest  of 
the  smaller  crowd  is  steady  in  number  at  about  600  with  a 
per  head  volume  of  deposits  of  a  little  over  Rs.  31  lakhs  in 
1946  and  Rs.  28  lakhs  in  1948.  The  percentage  shares  of  the 
last  two  categories  of  banks  were  15.6  and  17.6. 

10.    Branch-banking 4 

The  extent  to  which  deposits  were  raised  to  four  times 
their  pre-war  level  by  the  creation  of  branches  is  made  clear 
by  the  much  smaller  growth  of  deposits  per  branch.  The 
volume  of  deposits  per  branch  in  the  case  of  the  Bank  of 
India  and  the  Union  Bank  is  today  a  little  more  than  twice 
as  high  as  in  the  pre-war  year,  while  in  the  case  of  the  Alla- 
habad Bank  it  is  not  even  as  high.  The  Bank  of  Baroda  and 
the  Indian  Bank  found  their  deposits  per  branch  a  little 
higher — about  2£  times  as  high  as  in  the  pre-war  year. 

Between  1939  and  1948,  the  scheduled  banks  alone  added 
more  than  1700  new  branches.  As  against  new  branches, 
the  number  of  new  places  added  to  the  banking  map  of  India 
was  almost  800.  Analysis  of  these  places  by  population 
shows  a  strong  trend  to  extend  operations  to  smaller  places. 
Of  one  thousand  and  odd  new  places  to  which  banking  facili- 
ties become  available  during  the  12  years  1936-1948,  about 
300  have  a  population  between  5  and  10  thousand 
and  about  430  have  a  population  between  10  and  50  thou- 
sand. When  we  remember  that  about  600  small  banks  with 
total  deposits  of  more  than  150  crores  and  a  per  head  volume 

4.  Deposits  per  Branch 

(Figures  in  Lakhs) 


•g       g          s   "3   ft 

I  '  l  i  i  i  *  M 


1930   57.3   28.7   103.6   23.2   33    11.7   10.4   49.3   10.4   3.1   16.7 

1947  214.4   41.9   84.1        25.9  106.5   17.3   9.1   13.9   42.1 


SIZE  AND  NUMBER  OF  ACCOUNTS 


495 


of  deposits  of  Rs.  30  lakhs  are  operating  very  largely  in  these 
smaller  places,  the  character  of  the  recent  growth  of  deposits 
becomes  clearer. 

11.     Size  and  Number  of  Accounts  5 

In  1950,  the  scheduled  banks  had  on  their  books  33  lakhs 
of  account-holders  and  the  average  size  of  their  deposits, 
fixed,  current  and  savings  was  Rs.  2,655. 

More  than  half  of  these  account-holders  held  savings 
deposits  with  a  per  capita  deposit  of  Rs.  710.  The  aggregate 
savings  deposits  were  much  less  than  one-fifth  of  all  deposits, 
while  their  average  size  was  one-sixth  of  the  demand  depo- 
sits and  one-tenth  of  the  fixed  deposits.  The  Post  Office  Sav- 
ings Banks  had  twice  as  many  accounts  of  this  kind  as  these 
banks  but  the  average  size  of  the  deposit  was  much  smaller 
— Rs.  439. 

Among  holders  of  current  and  fixed  accounts,  current 
account  holders  are  more  than  thrice  as  many  but  it  is  a 
significant  fact  that  the  average  fixed  account  is  substantially 
larger.  After  the  hectic  growth  of  current  deposits  during 
war  years,  fixed  deposits  have  staged  quite  a  remarkable 
recovery.  But  it  would  be  difficult  to  say  on  available  evi- 
dence to  what  extent  the  change  represents  a  tendency  to 
withdraw  funds  from  active  business. 

Among  current  deposits,  about  half  represents  business 
deposits  and  a  quarter  personal  deposits.  These  proportions 
have  remained  fairly  stable  though  both  demand  and  time 
deposits  have  been  falling  since  1948. 


Average  Deposit  per  Account,  Dec.  1950 
Scheduled  Banks 


Demand 
Deposit 


Time 
Deposit 


Business 

14,152 

41,756 

Personal 

5,804 

6,415 

All  Others          .... 

26,036 

33,373 

General  Average  .. 

4,620 

7,253 

Account-holders 

(number) 

10,51,182 

3,12,597 

Total 

Deposits    (Crores)  .  . 

485 

226 

Savings 
Deposit 

764 

703 

1,085 

710 

19,28,055 
137 


All       Post  Office 
Deposits        Savings 
Banks 


2,655  439 

32,91,834     38,07,977 

849.4  167 


496  WAR  AND  POST-WAR  YEARS 

12.    Profit  and  Loss — War  and  Post-war  Years  6 
Rate  of  Earning 


Indian 

Year 

Scheduled 

Central 

Punjab 

Allaha- 

Indian 

Banks 

National 

bad 

1 

2 

3 

4 

5 

1939  or 

nearest  year 

— 

3.78 

4.94 

3.6 

4.21 

1944 

— 

2.82 

— 

3.1 

2.98 

1945 

— 

3.26 

3.24 

2.9 

2.7 

1946 

3.34 

3.20 

3.56 

2.9 

4.14 

1947 

3.45 

3.32 

— 

3.13 

4.02 

1948 

3.55 

— 

— 

3.23 

1949 

3.23 

1950 

3.10 

During  the  war  the  rate  of  earning  declined  on  the  whole. 
This  is  due  only  in  a  small  measure  to  the  movements  of 
interest  rates.  After  reaching  a  psychological  peak  in  March 
1942,  the  point  of  the  lowest  ebb  of  Allied  military  fortunes, 
the  yield  of  Government  Security  began  to  fall  in  conformity 
with  the  cheap  money  policy  of  the  Indian  Government.  A 
more  important  factor  which  affected  the  earnings  of  banks 
adversely  was  the  continuous  decline  of  loans  and  advances 
throughout  the  war.  For  scheduled  banks  and  the  Big  Five 
the  proportion  of  this  asset  to  deposits  fell  from  about  53 
per  cent  to  30  per  cent.  For  all  banks  for  which  we  have 
statistics  available,  the  level  of  earning  rate  touched  was 
the  lowest  in  their  history.  A  recovery  set  in  about  the  end 
of  the  war  when  the  most  lucrative  asset  of  bank  balance 
sheets,  loans  and  advances,  began  to  expand  and  inflation 
became  worse.  The  recovery  was  aided  also  by  the  turn 
in  the  tide  of  interest  rates.  About  July  1946,  the  yield  of 
Government  Security  began  to  rise  and  monetary  stringency 
began  to  be  felt  for  the  first  time.  By  1947  and  1948,  the 
earning  rates  approached  though  they  did  not  equal  pre-war 
levels. 

During  the  earlier  years  of  the  war  few  banks  could  avoid 

6.    Table — Interest  Rates. 


PROFIT  AND  LOSS — WAR  AND  POST-WAR  YEARS  497 

a  fall  in  their  gross  profit  rate  by  passing  the  burden  of 
lower  earnings  to  the  deposit-holders  by  reducing  the  rates 
on  deposits.  The  rates  were  already  too  low  to  admit  of 
further  lowering.  But  by  the  end  of  the  war  and  there- 
after, the  cheap  money  policy  of  the  Government  bore  some 
fruit.  The  gross  profit  rate  not  only  recovered  but  passed 
above  the  pre-war  level. 

About  the  outbreak  of  the  war,  the  Bank  of  India  offered 
for  one  year's  deposit  a  rate  of  14  or  If  per  cent  and  from 
1942  onwards  adhered  to  the  lower  rate.  The  Central  Bank 
of  India  offered  for  the  same  category  of  deposits  11  per  cent 
and  joined  the  Bank  of  India  in  its  lower  rate  only  in  1949. 
At  the  other  extreme,  we  have  the  Punjab  National  Bank 
which  started  at  as  high  as  2£  and  2|  per  cent  and  after  1945 
adhered  to  2£  per  cent  level.  The  Indian  Bank  which  at  first 
kept  company  with  the  Punjab  National  Bank  discloses 
greater  instability  but  in  1946  and  after  adhered  to  2i  per 
cent.  The  rates  of  the  Allahabad  Bank  fall  as  a  rule  between 
these  two  extremes.  On  the  whole,  the  tendency  of  rates 
for  this  category  of  deposits  has  been  to  move  towards  the 
lower  planes. 

On  six  months'  deposits,  the  Central  Bank  of  India  has 
on  the  whole  adhered  to  li  to  1  per  cent.  The  Allahabad 
Bank  maintained  a  steady  rate  of  1^  per  cent  and  from  the 
end  of  the  war,  offered  sometimes  1  per  cent  also.  The 
Punjab  National  Bank  started  on  the  outbreak  of  the  war 
with  If  per  cent,  reduced  it  to  li  per  cent  for  a  short  period 
at  the  end  of  the  war  and  again  reverted  to  the  higher  rate 
in  1948,  1949.  The  Bank  of  India  falls  between  the  two 
extremes  with  the  more  usual  rate  of  1J  per  cent. 

As  may  well  be  surmised  from  the  extremely  low  pre- 
war rates  on  current  deposits,  banks  found  no  further 
margin  for  economy.  The  Bank  of  India,  the  Central  Bank 
of  India,  the  Allahabad  Bank  of  India  and  even  the  Indian 
Bank  continued  at  the  nominal  level  of  J  per  cent.  The 
Imperial  Bank  as  heretofore  offered  nothing  on  this  class 
of  deposits.  The  Punjab  National  Bank  could  not  do  with- 
out a  rate  of  1  per  cent,  the  diversionary  effects  of  which 
in  times  of  inflation  and  high  profits  must  be  problematic. 

M.B.  32 


498  WAR  AND  POST-WAR  YEARS 

13.    Salaries  as  Percentages  of  Gross  Profits  7 

From  the  standpoint  of  profitability  of  banking  business, 
the  course  of  expenses  is  a  very  important  matter.  The 
most  important  element  in  these  expenses  is  salaries  of 
employees. 

Except  for  the  Central  Bank  of  India,  wages  and  salaries 
as  proportion  of  gross  profits  show  a  more  or  less  well- 
marked  fall.  This  is  indeed  very  remarkable.  As  observed 
above,  almost  all  banks  have  added  materially  to  their 
branches  and  the  area  of  their  operations.  Fortunately  for 
them,  their  increased  expenses  were  more  than  counter- 
balanced by  the  rise  in  working  resources  per  branch.  The 
Bank  of  India  which  returns  the  highest  volume  of  deposits 
per  branch  worked  with  a  little  more  than  a  crore  in  1939 
and  had  raised  this  figure  in  1947  to  2  crores  and  odd. 
During  the  same  years,  the  Bank  of  Baroda  raised  its  per 
branch  resources  from  33  lakhs  to  84  lakhs,  the  Allahabad 
Bank  from  23  lakhs  to  42  lakhs,  the  Imperial  Bank  from 
57  lakhs  to  much  more  than  a  crore.  Among  the  smaller 
Banks,  the  Indian  Bank,  the  Union  Bank  of  India  and  the 
Indo-Commercial  Bank  doubled  and  even  trebled  the 
volume  of  deposits  per  branch.  The  Central  Bank  of  India 
and  other  smaller  banks  do  not  record  such  outpacing  of 
branch-creation  by  growth  of  deposits,  which  explains  in 
the  case  of  the  former  the  rising  trend  of  expenses.  Even 
more  than  the  rising  trend  of  resources  per  branch,  expenses 
have  been  kept  down  by  the  inability  of  the  clerical  pro- 
fession till  recently  to  enforce  a  revision  of  wages  against 
the  rising  costs  of  living.  The  benefit  of  the  acute  competi- 

7.  Salaries  as  Percentage  of  Gross  Profits 

Indian  Sche-  Punjab 

duled  Banks  Imperial    Central    India     Baroda  Allahabad  National  Indian 

1939  or  41~2  32L2 34.6  33.4  55^0  Su 

nearest 

year 

1944  30.7     33.2     26.5     36.4  33.2 

1945  34.3  23.4 

1946  35.8       *     35.6  28.5  54.8 

1947  38.0  39.4  48.5 

1948  49.9 

1949  46.0 

1950  50.0 


NET  PROFIT  RATE  499 

tion  for  more  hands  which  distinguished  the  war  years  was 
largely  reaped  by  the  higher  ranks  of  bank  workers  while 
the  lower  ranks  had  to  content  themselves  with  full  employ- 
ment. The  first  outbreak  of  discontent  occurred  in  Bombay 
and  ensued  in  the  Bombay  Award  which  covered  12  'big 
banks'  and  a  number  of  small  banks.8 

14.    Net  Profit  Rate  9 

The  fall  in  the  earning  rates  in  the  early  years  of  the  war 
was  reflected  in  the  falling  rates  of  gross  and  net  profits  of 
those  years.  When  the  earning  rates  recovered,  the  gross 

8.  The    Industrial    Tribunal    Award    of    August    1950    which    related  to  banks 
operating  in  more  than  one  State  and  thus  covered  69  scheduled  and  78  non- 
scheduled  banks  started   a  new   chapter  in  the  efficiency   and   development  of 
banking  in  India.    The  basic  principles  of  the  award  deserve  careful  attention. 
The  country  was   divided  into  three  areas— the  four   cities  of  Bombay,   Delhi, 
Calcutta  and  Ahmedabad;    cities  with  populations  of  one  lakh  and  more*  and 
the  rest  of  the  country.    The  scales  of  pay  for  each  area  were  framed  on  a 
uniform  triple  classification  of  banks— those  with  deposits  of  Rs.  25  crores  and 
more,  those  whose  deposits  fall  between  7i  to  25  crores  and  the  rest.    For  the 
clerical  staff,  the  scales  were  framed  on  the  basis  of  the  cost  of  living  of  a 
"consumption    unit"    of    the    lower    middle    class    and    on    the    assumption    that 
saving  should   begin  only  after   15   years   of   service.    The  scales  varied   within 
the   limits  Rs.   70-290   for   class   A   banks,    Rs.    66-265   for   class   B   banks   and 
Rs.    62-265   for   class   C   banks.    Bonus   payments   were   linked   to   the    dividend 
level  in  excess  of  4  per  cent.    Leave,  provident  fund,  pension  and  gratuity,  hours 
of    work,    overtime    work    and    pay    were    also    defined.    Allowances    on    rather 
moderate   scales   were   prescribed   for   differences   in   qualifications  and   respon- 
sibilities.   To  abate  the  rigour  of  the  impact  on  the  C  class  i.e.  smaller  banks, 
certain   exemptions   as   to   allowances   and   medical   aid   and   abatements   as   to 
locally    recruited    employees    were    conceded.    This    award    holds    good    in    the 
first  instance  for  one  year. 

*  except  Punjab  where  the  limit  was  lowered  to  50,000. 

9.  Net  Profit  Rate 


"8 


Is 

Tt    to             C                    W 

*!    £      is 
z$    S      3 

.5 
1 

1 

CQ 

i 

as     s 

§3    i 

£&      5 

1939  or 

0.85        0.8          1.0 

1.04 

0.6 

0.8 

0.8          0.76 

nearest 

year. 
1941 

0.75 

1942 

0.62 

1944 

0.69        1.18 

0.80 

0.83 

0.69 

0.85        1.31 

1945 

0.38        1.11 

1.14 

0.50 

0.7 

0.43        1.09 

1946 

1.14 

0.41        1.20 

1.11 

0.83 

1.21 

1947 

1.09 

1.15 

1.06 

0.80 

0.75 

0.70        0.81 

1948 

0.96 

1.31 

0.63 

1949 

0.86 

1950 

0.70 

500  WAR  AND  POST-WAR  YEARS 

and  net  profits  rates  began  to  mount  and  in  a  few  cases 
exceeded  pre-war  level.  The  Allahabad  Bank  and  more 
conspicuously  the  Imperial  Bank  are  exceptions  to  the 
general  trend. 

In  the  conditions  of  Indian  banking,  it  is  indeed  very 
difficult  to  say  where  the  profitability  of  banking  business 
begins  or  where  it  ends.  We  have  seen  above  how  the 
smaller  banks  with  resources  on  the  average  of  less  than 
Rs.  30  lakhs  are  maintaining  their  ground  against  banks 
'with  deposits  of  Rs.  5  to  25  crores.  Before  the  outbreak  of 
war,  the  Indo-Commercial  Bank  operated  with  about  Rs.  3 
lakhs  of  deposits  on  the  average  in  each  branch  while  in 
1949  the  figure  was  a  little  near  7  lakhs.  The  pre-war 
volume  deposits  per  branch  was  about  Rs.  10  lakhs  for  the 
Punjab  National  Bank,  the  Indian  Bank  and  the  Bank  of 
Behar.  The  1949  figures  for  these  banks  vary  between 
Rs.  17  lakhs  and  Rs.  21  lakhs.  The  biggest  Indian  joint-stock 
banks  show  an  even  greater  variation  ranging  from  Rs.  25 
lakhs  for  Allahabad  Bank  to  Rs.  103  lakhs  for  Bank  of  India 
in  the  pre-war  year  and  in  the  post-war  year  1949,  from 
Rs.  36  lakhs  for  the  Allahabad  Bank  to  Rs.  169  lakhs  for  the 
Bank  of  India.  The  smallest  banks  sometimes  show 
unusually  high  earning  rates — a  reflection  perhaps  of  their 
areas  of  operation  and  kind  of  business  undertaken,  in  parti- 
cular the  high  level  of  loans  and  advances.  What  is  more 
intriguing,  these  show  equally  high  expense  ratios — an 
effect  obviously  of  the  low  level  of  resources  per  branch 
they  have  to  operate  with. 

15.    Fixed  and  Current  Deposits  10 

jFor  many  causes  which  cannot  be  discussed  here,  people 

10.  Fixed  Deposits— Proportion  To  Total  Deposits 

Scheduled     Non-Scheduled        Scheduled  &        Big  Five 

Banks  Banks  Non-Scheduled    — year-end 

Last  Friday        Last  Friday    — Indian  year-end 

1939  41.8          69.5f         43.7          48.4 

1940  36.5         68.6         38.7          — 

1944  24.6  53.2  26.5          27.6 

1945  2&.4  53.9  31.2          32.5 

1946  31.1  58.2  33.0          36.5 

1947  32.T  57.9  34.0         35.5 

1948  30.7  58.8  33.0 

1949  31  61.6  33.6 

1950  32.8  659  <"  ? 


FIXED  AND  CURRENT  DEPOSITS  501 

were  induced  during  the  war  to  save  more  of  their  money 
incomes  than  before,  to  hold  a  larger  proportion  of  their 
savings  in  notes  than  in  deposits  and  generally  to  lower  the 
rate  of  expenditure  relatively  to  their  incomes. 

Inflation  of  course  raised  the  level  of  money-incomes. 
One  estimate  places  our  national  money  income  from  less 
than  Rs.  2000  crores  in  1939  to  about  Rs.  4000  crores  in  1945 
and  Rs.  8730  crores  in  1948-49. 

Rationing,  price-controls  and  unavailability  of  goods 
enlarged  the  margin  between  incomes  and  expenditure — at 
least  for  certain  classes  of  people.  The  absence  of  striking 
lags  between  prices  and  cost  of  living  is  no  adequate  index 
to  this  margin  as  the  particular  incomes  in  view  bore  but 
little  relationship  to  price-levels  as  such.  Inflation  worked 
entirely  in  favour  of  higher  incomes  which  according  to 
income  tax  statistics  form  a  much  higher  proportion  of  all 
non-agricultural  incomes  than  before  the  war. 

While  the  volume  of  money  savings  rose,  other  causes 
were  at  work  to  increase  the  proportion  held  in  the  form 
of  notes  and  deposits.  Capital  issues  and  investment  in  new 
plants  generally  were  strictly  licensed.  House  construction 
which  is  the  greatest  outlet  for  investment  in  normal  times 
and  was  in  a  boom  phase  before  the  war  came  almost  to  a 
stand-still.  Prohibition  of  imports  of  precious  metals  choked 
off  another  channel  into  which  savings  would  have  cer- 
tainly flowed.  Government  loans,  small  savings  which  is 
but  another  form  of  Government  borrowing,  and  insurance 
were  the  only  forms  of  long-term  investment  now  open  to 
the  public.  What  was  not  attracted  into  these  forms  took 
the  shape  of  notes  and  deposits. 

While  the  volume  of  savings  held  in  the  form  of  notes 
and  deposits  rose  to  unprecedented  levels,  forces  were  at 
work  which  encouraged  the  fraction  in  actual  circulation 
to  be  held  in  more  liquid  rather  than  less  liquid  forms. 

There  is  little  doubt  that  these  floating  savings  have 
sought  conversion  into  such  durable  assets  as  were  available. 
Precious  metals,  however,  were  not  allowed  to  be  imported, 
except  towards  the  end  for  a  short  time.  Stocks  of  land  and 
houses  have  remained  more  or  less  stable.  Scrips  of  public 
companies  have  not  received  appreciable  augmentation. 


502  WAR  AND  POST-WAR  YEARS 

Thus  the  search  for  safety  merely  raised  the  prices  of 
these  assets  and  shifted  the  onus  of  applying  the  new  savings 
from  those  who  purchased  to  those  who  sold.  It  is  probable 
that  a  large  part  of  these  sale  proceeds  exists  in  the  form 
of  mere  idle  hoards  of  currency  notes  but  the  much  larger 
part  has,  it  is  to  be  feared,  found  its  way  ultimately  into  the 
hands  of  those  whom  the  distress,  famine  and  privations  of 
war  have  compelled  to  consume  their  past  savings.  In  other 
words,  disinvestment  or  dissipation  of  capital  on  a  scale 
never  seen  before  in  this  country  took  place  during  those 
years. 

Overshadowing  by  far  this  private  disinvestment  of 
capital  was  the  colossal  process  set  in  motion  by  the  finance 
of  war — of  converting  ordinary,  genuine  savings  into  con- 
sumption and  destruction  goods.  The  Government  tried  to 
seize  public  savings  in  the  first  instance  by  taxation  and 
borrowing  on  an  unprecedented  scale  and  when  these  proved 
inadequate  to  meet  the  growing  bill  of  Indian  and  Allied 
war  expenditure,  by  the  easy  device  of  inflation  against 
sterling  securities. 

A  war  economy  has  to  cope  with  shortages  in  many 
requirements  not  all  of  which  have  any  comparable  signi- 
ficance for  life  in  peace  time.  Ship-building,  machinery  of 
various  kinds,  chemicals  of  all  kinds  are  examples  of  indus- 
tries which  have  as  much  significance  for  peace  as  for  war. 
Prudence  should  have  made  it  obvious  that  India  should 
concentrate  on  the  creation  of  these  industries  rather  than 
the  exploitation  of  existing  industries  in  pursuit  of  profits 
arising  from  war.  Such  a  policy  presents  a  two-fold  prob- 
lem. A  part  of  the  flow  of  economic  resources  into  produc- 
tion of  commodities  which  offer  immediate  profits  but  have 
little  significance  for  the  future,  had  to  be  diverted  into 
these  new  industries  as  long-term  investment.  Control  of 
capital  issues,  excess  profits  tax,  etc.  are  the  obvious  means 
to  achieve  such  an  objective.  Secondly,  as  private  enter- 
prise is  not  always  prepared  to  launch  into  such  new  ven- 
tures, particularly  during  a  war,  it  has  to  be  considered 
whether  the  State  itself  should  take  the  initiative,  or  depend 
on  subsidies,  administrative  action  and  control,  to  secure  the 
objectives.  Unfortunately,  such  a  long-range  view  does  not 


FIXED  AND  CURRENT  DEPOSITS  503 

appear  to  have  commended  itself  to  those  who  took  charge 
of  the  financial  helm  of  the  country.  Instead,  the  concen- 
tration on  ordinary  consumption  industries  to  which  all 
expenditure  was  directed,  while  long-term  investment  or 
creation  and  acquisition  of  capital  goods  fell  more  or  less 
into  complete  abeyance,  multiplied  several-fold  the  demand 
for  working  capital  in  general.  There  took  place  thus  a 
corresponding  unprecedented  shift  of  funds  from  long-term 
to  short-term  employment,  whether  directly  or  via  the 
Government.  The  profits  of  trade  and  industry  were  no 
longer  useful  as  investment  funds  to  create  or  extend  capital 
equipment.  They  were  more  profitable  when  employed  to 
enlarge  the  output  from  the  existing  scale  of  equipment.  The 
operation  of  this  influence  not  only  in  India  but  also  in  other 
countries  is  clearly  reflected  in  the  changes  of  ownership  of 
demand  deposits  reported  as  a  remarkable  development  from 
the  United  States  and  elsewhere.  In  the  former  country,  an 
inquiry  by  the  Federal  Reserve  authorities  revealed  that 
two-thirds  of  demand  deposits  were  then  owned  by  business, 
while  income  deposits  fell  in  relative  importance.  Similar 
investigation  into  ownership  made  in  India  shows  tendencies 
not  materially  different. 

Other  reinforcing  causes,  but  of  minor  degrees  of  impor- 
tance, may  be  compendiously  epitomized  as  the  tendency  to 
seek  increased  liquidity.  Low  rates  of  interest  generally 
weaken  the  inducement  to  hold  fixed  deposits  and  enhance 
the  preference  for  liquid  forms  of  wealth.  Low  interest 
rates  are,  however,  an  inheritance  from  the  post-depression 
era.  The  non-availability  of  durable  assets  at  prices  which 
are  deemed  safe  has  also  enhanced  the  safety  value  of 
current  deposits. 

For  scheduled  banks,  the  percentage  of  savings  and  time 
deposits  was  a  little  more  than  40  per  cent  when  the  war 
began.  For  the  Big  Five,  the  fraction  of  fixed  deposits  was 
much  more — 48.4  per  cent.  During  the  six  years  of  war, 
fixed  deposits  showed  but  slow  growth.  When  the  war 
ended,  the  proportion  for  scheduled  banks  had  fallen  to  a 
little  more  than  29  per  cent;  for  the  Big  Five  with  their 
operations  in  the  financial  centres  of  the  country,  the  frac- 
tion was — 32.5  per  cent. 


504  WAR  AND  POST-WAR  YEARS 

When  the  war  ended  the  desire  for  liquidity  and  the  need 
for  liquid  resources  received  a  distinct  check.  The  total 
money  supply  indeed  continued  to  rise  slowly  during  1946 
and  the  greater  part  of  1947  and  then  rapidly  till  1948  end. 
The  proportion  of  fixed  deposits  to  total  deposits  however 
recovered  in  spite  of  the  upward  trend  of  prices.  For  the 
Big  Five,  it  touched  35  per  cent  and  more.  For  scheduled 
banks  as  a  whole  the  recovery  was  about  the  same — the  pro- 
portion of  fixed  and  savings  deposits  exceeding  32  per  cent. 

The  recovery  in  fixed  deposits  appears  to  be  a  part  of  a 
general  recovery  in  the  normal  long-term  savings  of  the 
people.  Small  savings,  paid-up  capital  of  joint-stock  com- 
panies, premium  income  of  insurance  companies  which 
were  all  languishing  during  war  began  to  show  a  remark- 
able buoyancy  during  1946  and  1947. 

From  about  the  middle  of  1948  there  set  in  a  slow  but 
remarkable  fall  in  the  volume  of  bank  deposits.  The  fall 
is  remarkable  because  the  total  money  supply  is  falling  in 
spite  of  an  upward  price  level  and  it  is  more  conspicuous  in 
bank  money  than  in  note  circulation.  It  is  not  easy  to  say 
how  far  this  is  due  to  a  fall  in  the  aggregate  volume  of 
savings  or  to  mere  change  of  form  in  which  savings  are 
held.  Small  savings  staged  a  great  recovery  during  1946 
and  1947  from  their  severe  collapse  during  war  years.  The 
subsequent  two  or  three  years  disclose  some  shrinkage. 
The  premium  income  of  insurance  companies  rose  to  a  boom 
in  1946,  1947  and  even  1948.  The  days  which  followed 
brought  tales  of  lapsed  policies  particularly  from  areas  of 
partition  migrations  and  disturbances;  the  sum  assured 
reached  its  peak  in  1946-47  and  then  began  to  decline  per- 
ceptibly. As  against  this,  the  much  higher  rates  of  interest 
in  the  unofficial  and  indigenous  markets  are  attracting  funds 
from  the  other  quarters,  and  house  building  has  shown  a 
marked  revival  during  1949  and  1950.  To  this  diversion  of 
funds,  we  have  no  concrete  index  available. 

The  absolute  fall  in  current  deposits  was  much  greater 
than  in  time  deposits.  Taking  1948  September  which  marked 
the  peak  of  the  decontrol  spurt  of  prices  as  the  base,  the 
deposits  of  scheduled  and  non-scheduled  banks  fell  by  March 
1950  by  more  than  Rs.  60  crores  of  which  Rs.  56  crores  was 


BANK  ASSETS  505 

accounted  for  by  current  deposits.  In  the  case  of  scheduled 
banks  the  two  years  from  1948  March  to  1950  March  dis- 
close a  much  heavier  aggregate  fall  of  about  130  crores. 
The  proportion  of  fixed  deposits  remained  almost  the  same, 
at  about  31-32  per  cent  of  the  total. 

16.    Bank  Assets  u 

During  the  six  years  of  war,  Loans  and  Advances  the  most 
lucrative  asset  of  banks  could  not  keep  pace  with  the  expan- 
sion of  deposits.  As  percentage  of  deposits,  this  asset  de- 
clined between  1938-1946  from  52.0  to  40.8  in  the  case  of 
scheduled  banks  excluding  exchange  banks  and  from  48.9 
to  37.1  in  the  case  of  the  Big  Five.  In  the  case  of  the  Imperial 
Bank,  the  decline  was  from  46.5  to  37.9.  The  fall  had  been 
much  more  severe  by  1942  when  the  military  fortunes  of  the 
Allies  touched  their  nadir.  A  recovery  set  in  thereafter — 

11.  In  Percentage  of  Deposits 

1938      1939        1945        1946      1947      1948        1949      1950 
Capital  &  Reserves  : 

Imperial    Bank  ..  13.7  4.5  4.3  4.1        4.25        4.76        5.17 

Other  Scheduled  Banks 

ex.  Exchange  Banks   ..  11.9  7.1  7.1  7.3        8.54      10.04       9.64 

Big    Five  ..  9,3          4.51  5.12  5.08 

Non-Scheduled    Banks..  25.2  10.9  11.3  13.5      16.88      18.99      19.52 

Immovable  Property  : 

Imperial  Bank  ..  0.57  0.53  0.48 

Other  Scheduled  Banks 

ex.    Exchange    Banks    . .  0.69  0.66  0.75 

Non-Scheduled    Banks..  1.49  1.05  H-38 

Loans,  Advances,  Bills  : 

Imperial    Bank  ..  47.0  28.1  34.7  31.1 

Other  Scheduled  Banks  (  44.14      46.54      46.68 

ex.  Exchange  Banks    ..  520  40.8  49.3  44.8  ) 

Big  Five  ..  53.0        37.1  45.5  43.1 

Non-Scheduled    Banks..  81.9  51.1  56.1  65.5      68.5        11.6        64.5 

Investments  : 

Imperial    Bank  ..  53.6  59.4  56.9  57.3 

Other  Scheduled  Banks  £  50.38      45.91      47.9 

ex.  Exchange  Banks    ..  43.8  51.4  44.7  46.5  ) 

Big  Five  ..  40.4        38.1        56.3  51.9  48.9 

Non-Scheduled    Banks..  23.0  29.5  32.5  30.4      31.85      30.9        39.1 

Cash  in  Hand  &  at  Banks  : 

Imperial  Bank  ..  11.0  16.0  15.6  15.0 

Other  Scheduled  Banks  C  16.79      16.98      14.83 

ex.  Exchange  Banks   ..  14.7  19.6  19.3  20.7  ) 

Big  Five  ..  15.6        13.8  15.8  18.5 

Non-Scheduled   Banks..  12.2  31.0  26.2  22.0      13.24      16.84      16-46 


506  WAR  AND  POST-WAR  YEARS 

largely  a  reflection  of  the  expanding  war  effort  of  the 
country  and  the  inflation  which  went  with  it. 

The  funds  released  from  Loans  and  Advances  flowed  very 
largely  into  investments  and  to  a  small  extent  into  cash. 
The  expansion  of  investments  was  an  economic  choice  no 
more  than  the  rising  cash  was  a  felt  need  for  greater 
liquidity.  As  the  Government  floated  loans  of  shorter  and 
shorter  maturity  at  lower  and  lower  rates,  investments 
became  actually  less  and  not  more  profitable.  A  return  for 
June  1948  indicates  that  the  rates  charged  on  Loans  and 
Advances  varied  at  that  time  from  3  to  9  per  cent  in  most 
cases.  The  circumstances  could  not  have  been  very  different 
during  war  years.  The  expansion  of  investments  was  an 
economic  compulsion  since  prohibitions  on  floatations  of  new 
enterprises,  restrictions  on  market  activities,  assumption  by 
Government  of  intermediary  trading  functions  eliminated 
or  severely  curtailed  private  borrowing.  The  interruption 
of  normal  channels  of  foreign  trade  worked  in  the  same 
direction. 

As  new  loans  were  of  shorter  and  shorter  maturity,  it  is 
not  surprising  that  short-term  securities  predominated  in 
the  investments  of  banks.  Even  as  early  as  1943,  securities 
maturing  after  15  years  did  not  reach  even  15  per  cent  of 
Capital  and  Deposits  in  the  case  of  the  bigger  banks.  The 
only  notable  exception  is  the  Punjab  National  Bank  which 
reported  a  percentage  of  34.0.  The  Imperial  Bank  and  the 
Bank  of  India  held  at  times  quantities  of  Treasury  Bills 
not  far  short  of  their  other  investments.  From  the  end  of 
the  war,  banks  have  been  busy  reducing  the  proportion  of 
securities  of  longer  maturities. 

World  War  II  left  for  India  a  legacy  not  only  of  mounting 
economic  difficulties  but  also  political  difficulties  of  the 
utmost  gravity.  The  Partition  of  August  15th,  1947  caused 
great  difficulties  to  banks  that  had  offices  and  assets  in 
Pakistan  and  were  confronted  or  besieged  with  emigrant 
account-holders  to  the  Indian  Union.  Fortunately,  the  diffi- 
culties proved  temporary  and  were  met  with  partial  mora- 
torium and  emergency  measures.  But  for  the  removal  and 
closing  down  of  offices  and  branches  in  the  Pakistan  area — 
about  150  offices  and  branches  of  scheduled  banks  and  350 


POST-WAR  MOVEMENTS  IN  DEPOSITS  507 

of  non-scheduled  banks  appear  to  have  been  involved  in 
this  great  mishap— the  banking  structure  as  a  whole  retains 
but  little  impress  of  the  events.  The  assets  and  liabilities  of 
the  Reserve  Bank  were  scaled  down  in  proportion  simulta- 
neously with  the  creation  of  the  State  Bank  of  Pakistan  on 
1st  July  1948. 

17     Post-war  Movements  in  Deposits 

Post-war  monetary  and  price  trends  present  not  a  few 
analytical  intricacies.  The  inflationary  causes  unleashed 
by  war  continued  to  operate  during  the  rest  of  the  year  1945 
and  the  first  half  of  1946.  The  money  supply,  i.e.  currency 
and  demand  deposits  with  the  public  recorded  a  further 
notable  addition  and  the  index-number  of  prices  rose  by 
more  than  40  points.  During  the  rest  of  1946  and  the  greater 
part  of  1947,  the  most  important  inflationary  force  was  the 
unbalance  of  Government  revenue  and  expenditure  which 
caused  a  great  drain  on  the  accumulated  balances.  It  was 
however  partially  neutralised  by  a  growing  unfavourable 
balance  of  trade  and  by  public  loans.  The  money  supply 
showed  a  very  modest  rise  and  the  index-number  of  prices 
was  held  within  10  points.  After  August  1947  and  till  the 
middle  of  1948,  the  great  drain  on  the  Government  balances 
with  the  Reserve  Bank  caused  a  sudden  spurt  in  the  money 
supply  and  the  index-number  mounted  by  80  points.  The 
upsurge  of  prices  was  aggravated  by  the  marked  collapse  in 
various  forms  of  savings  like  small  savings,  premium  income 
of  insurance  companies,  fixed  deposits  of  banks,  etc.  which 
had  staged  a  remarkable  post-war  recovery  during  1945, 
1946  and  1947.  The  years  1948  to  1950  saw  further  great 
falls  in  Government  balances  with  the  Reserve  Bank  counter- 
balanced by  greater  adverse  trade  balances.  The  money 
supply  fell  moderately  year  by  year  but  the  index-number 
of  prices  mounted  up  by  20  to  30  points. 

The  deposits  of  banks  show  a  close  parallelism.  From  the 
end  of  war  till  middle  of  1946,  demand  deposits  rose  by  more 
than  100  crores.  Thereafter  till  about  1947  end,  demand 
deposits  actually  declined  although  time  deposits  made  a 
notable  gain.  During  the  seasonal  and  de-control  upsurge 
of  1948,  demand  deposits  showed  a  fairly  large  gain  but 


508  WAR  AND  POST-WAR  YEARS 

thereafter  continued  consistently  to  decline  with  time  de- 
posits following  tardily. 

It  is  not  improbable  that  the  era  of  easy  expansion  and 
profits  for  banks  came  to  an  abrupt  termination  with  the 
great  outbreak  of  murder  and  rapine  in  Calcutta  in  August 
1946.  After  the  pre-war  Travancore  and  Quilon  Bank 
disaster,  banking  failures  were  confined  to  small  and  insigni- 
ficant banks  and  even  their  rate  of  mortality  estimated  in 
terms  of  paid-up  capital  and  deposits  tended  to  fall  through- 
out the  war  period.  The  year-end  in  1946  saw  scores  of 
small  Calcutta  banks  in  difficulties  and  the  Partition  of  the 
succeeding  year  added  to  the  mortality.  Before  1946  the 
aggregate  paid-up  capital  of  banks  in  liquidation  rarely 
exceeded  Rs.  10  lakhs  in  any  single  year  and  fell  very  much 
below  that  mark  during  the  latter  half  of  the  war  period. 
The  total  paid-up  capital  of  banks  reported  annually  as 
closed  well  exceeded  Rs.  1  crore  in  the  years  1948-1950.  From 
1946  onwards,  the  zeal  for  launching  new  banks  seems  to 
have  died  out  completely. 

18.    Post-war  Assets  Policy12 

When  the  war  ended  the  banks  were  bound  to  exploit  to 
the  full  every  opportunity  to  liquidate  investments  and 
expand  their  more  lucrative  asset — Loans  and  Advances. 
Their  search  for  more  profits  was  reinforced  by  the  precau- 
tionary motive  when  the  Calcutta  riots  of  August  1946 
initiated  a  slow  fall  in  the  prices  of  Government  securities. 


12.                                       Advances   (Percentage  of  Total)  t 

June  1948 

June  1949 

June  1949 

June 

1950 

39  Sche- 

Scheduled 

Non- 

Sche- 

Non- 

duled  Banks 

and  Non- 

Scheduled 

duled  Scheduled 

Scheduled 

Banks 

Banks 

Industry 

30.3 

31.5 

17.7 

32.6 

16.0 

Commerce 

53.14 

47.2 

41.6 

50.1 

45.4 

Agriculture 

3.8 

4.7 

3.2 

5.2 

Personal 

8.6 

21.4 

7.5 

24.6 

Professional 

8.28 

0.8 

1.9 

0.7 

3.0 

All  Others 

8.21 

81 

12.4 

6.0 

5.S 

Total 

Advances  (Crores)    .  .           379 

506 

30 

475 

42 

t  Reserve  Bank  of  India  Bulletin,  April  1949  P.  208. 

Annual  Report  on  Trend  and  Progress  of  Banking  in 
India  for  1949.     Pp.  172-173. 

.    (Continued   on  opposite  page) 


POST-WAR  ASSETS  POLICY 


509 


The  yield  of  3  per  cent  security  then  stood  at  2.84.  An 
almost  unbroken  rise  took  it  to  3.10  in  May  1950. 

The  level  of  investments  of  scheduled  banks  fell  from  54 
per  cent  of  deposits  in  1945  to  about  43  per  cent  in  1950. 
This  fall  was  paralleled  by  a  rise  in  Loans,  Cash  Credits  and 
Bills  from  40.8  per  cent  to  53.3  per  cent.  The  cash  ratio 
also  discloses  a  tendency  to  return  to  the  normal  lower  level. 
Similar  movements  are  observable  in  the  balance  sheets  of 
the  Big  Five  and  Indian  banks  generally. 

Even  more  significant  is  the  reaction  of  banks  to  the  fall 
in  deposits  which  materialised  during  1948,  1949  and  1950. 
Throughout  these  years,  the  banks  were  liquidating  their 
investments  to  meet  this  fall  and  to  raise  further  funds  to 
expand  their  Loans  and  Advances.  Thus  both  when  deposits 
were  falling  till  the  devaluation  of  September  1949  and 
when  they  began  to  recover  somewhat  thereafter,  the 
volume  of  Loans  and  Advances  continued  to  expand  without 
any  pause.  Taking  scheduled  and  non-scheduled  banking 
companies  together,  the  fall  in  deposits  from  September  of 
1948  to  September  of  1949  was  of  the  order  of  75  crores 
while  during  the  same  period  investments  fell  by  92  crores 
and  Loans  and  Advances  rose  by  33  crores.  It  is  clear  that 
the  banks  are  gradually  resuming  their  normal  role  as  the 
main  purveyors  of  working  capital  which  the  Government 
had  usurped  during  the  war. 

Sample  surveys  of  advances  of  scheduled  banks  for  1948-50 
June  are  very  suggestive  in  their  broad  features.  More  than 
half  the  advances  of  our  banks  are  appropriated  by  Trade 
and  Finance.  Industry  ranks  next  with  a  little  less  than 


Advances  According  to  Security 
Scheduled  Banks 


June  1948 


Government   &   Trustee   Securities 

Bullion,  Gold  &  Silver  Ornaments 

Shares  of  Joint-Stock   Cos. 

Merchandise-pledged 

Merchandise-hypothecated 

Real  Estate 

Fixed  Deposits 

Others 

Secured  Advances — Total 

Unsecured  Advances 

Total   Advances    (Crores) 


39  Scheduled  Banks 
1949  Dec.      1950  Dec. 


88.0 

12.0 

379.0 


11.5 

2.2 

12.0 

15.2 

25.7 

5.2 

3.0 

11.8 

86.6 

13.4 

437.9 


9.5 

3.1 

11.2 

16.5 

28.2 

4.7 

2.4 

10.2 

85.7 

14.3 

475.6 


510  WAR  AND  POST-WAR  YEARS 

one-third  of  the  total  advances.  The  balance  of  the  advances 
was  shared  equally  between  the  categories  "Personal  and 
Professional"  and  "All  other".  Although  "Personal  and 
Professional"  advances  are  relatively  small  by  the  standards 
of  the  United  Kingdom  and  elsewhere,  it  must  not  be  over- 
looked that  they  are  apt  to  form  a  much  higher  proportion 
with  the  smaller  banks.  The  average  size  of  advances  was 
Rs.  30,000  and  varied  from  Rs.  3£  lakhs  for  Industry  and 
Rs.  38,000  for  Trade  and  Finance  to  Rs.  6,000  only  for  Per- 
sonal Advances.  As  observed  above,  the  rates  charged  show 
great  variety  ranging  from  3  to  9  per  cent  generally  and 
even  beyond  in  particular  cases. 

Advances  to  stock  exchanges,  and  to  forward  markets 
generally  have  proved  a  source  of  grave  embarrassment  to 
many  banking  systems.  In  the  absence  of  large  and  well- 
organised  bill-markets  however  these  banking  systems  have 
found  it  difficult  to  avoid  a  certain  degree  of  dependence  on 
these  markets  as  outlets  for  their  surplus,  short-term  funds. 
From  this  standpoint  it  is  very  suggestive  that  the  advances 
of  Indian  banks  to  stock-  and  sharebrokers  aggregated  to 
about  3.79  per  cent  of  the  total  and  in  the  case  of  bullion 
dealers,  the  percentage  was  0.96.  In  other  words,  out  of 
every  100  crores  of  advances,  4  to  5  crores  found  their  way 
to  these  two  markets  in  this  particular  manner.  This  fact 
invites  comparison  with  the  total  advances  of  scheduled 
banks  on  stocks  and  shares  which  were  reported  to  be  Rs.  31 
crores  in  November  1945  and  Rs.  49  crores  in  May  1946.  It 
should  be  remembered  that  these  two  dates  marked  the 
peak  of  share  and  stock  values  and  that  by  October  1948, 
the  average  depreciation  of  share  and  stock  values  was  about 
50  per  cent  of  these  peak  values. 

A  significant  feature  of  this  survey  is  that  secured 
advances  predominate  overwhelmingly  over  clean  advances 
and  run  into  as  high  as  85  to  90  per  cent  of  the  total. 

Significant  differences  of  course  continued  to  persist 
between  the  environment  and  therefore  the  business  of 
bigger  and  smaller  banks.  The  smaller  banks  are  as  a  rule 
of  the  unit  banking  type  and  what  is  equally  important,  they 
have  in  recent  years  proved  their  capacity  to  hold  their 
ground  against  their  bigger  rivals. 


BALANCE  SHEETS  511 

During  the  whole  period  of  the  war,  smaller  banks  on  the 
whole  preferred  to  hold  more  and  more  cash  rather  than 
compensate  themselves  for  the  severe  fall  in  loans  and 
advances  by  larger  investments.  With  the  end  of  the  war, 
they  reverted  very  quickly  to  their  accustomed  pattern  of 
assets.  Their  cash  ratio  fell  to  the  normal  level  of  7-8  per 
cent,  while  their  Loans  and  Advances  approached  more 
often  than  not  80  per  cent.  Their  advances  to  industry  are 
insignificant  while  the  proportion  of  Personal  and  Profes- 
sional Advances  reach  a  quarter  of  the  total  and  even  much 
higher. 

19.  The  Banking  Companies  Act 

The  Banking  Companies  Act  of  1949  brought  to  a  close 
the  long  period  of  doubt  about  the  wisdom  and  scope  of 
regulation  of  commercial  banking  and  endowed  the  country 
with  one  of  the  most  comprehensive  pieces  of  banking  legis- 
lation to  be  found  in  any  country.  The  original  proposals 
were  circulated  before  the  outbreak  of  World  War  II  and 
the  final  bill  was  reached  only  after  many  delays,  changes 
and  revisions. 

20.  Balance  Sheets 

According  to  the  Act,  the  balance  sheet  and  profit  and 
loss  account  must  conform  to  the  special  forms  devised  in 
the  schedule  under  the  Act  and  also,  when  not  inconsistent 
with  the  special  forms,  to  the  form  F  of  the  Indian  Com- 
panies Act.  The  authority  to  amend  the  forms  with  due 
notice  is  vested  in  the  Central  Government. 

The  powers  and  functions  of  the  Auditors  continue  as 
under  the  Indian  Companies  Act.  In  addition,  the  Auditor 
is  required  to  state  whether  the  information  and  explana- 
tion required  by  him  were  satisfactory,  the  transactions  of 
the  Company  were  within  its  power  or  otherwise,  the 
returns  from  branch  offices  were  adequate  and  the  profit 
and  loss  account  shows  a  true  balance  of  profit  and  loss. 
The  Auditor  is  also  required  to  state  in  his  report  any  other 
matters  which  he  considers  deserving  of  the  notice  of 
shareholders. 

The  Act  requires  every  banking  company  to  make  monthly 


512  WAR  AND  POST-WAR  YEARS 

returns  of  assets  and  liabilities  to  the  Reserve  Bank  which 
is  empowered  to  call  for  further  statements  and  information 
about  their  business  including  a  half-yearly  classification  of 
advances  and  investments  in  respect  of  industry,  commerce 
and  agriculture.  The  Reserve  Bank  is  authorised  to  publish 
such  information  in  a  consolidated  form. 

21.  Officers  of  Banks 

No  banking  company  is  to  be  managed  by  a  managing 
agent.  Remuneration  in  the  form  of  commission  or  share 
in  the  profits  of  a  bank  or  remuneration  disproportionate  to 
the  resources  of  the  bank  and  contrary  to  prevalent  normal 
standards  is  not  to  be  paid  to  a  bank's  employees.  The  direc- 
tor of  a  company  not  being  a  subsidiary  company  of  the 
bank,  persons  engaged  in  other  businesses  or  vocations  are 
disqualified  for  managerships  of  banks.  A  contract  with  a 
bank  for  its  management  must  not  exceed  a  period  of  five 
years  at  a  time.  A  director  of  one  bank  cannot  become  the 
director  of  another  bank.  Unsecured  loans  and  advances  to 
directors  or  to  businesses  in  which  a  director  has  interest  as 
partner,  managing  agent,  or  guarantor  are  prohibited. 

22.  Definition  and  Licensing  of  Banking 

Banking  is  defined  as  accepting  for  the  purpose  of  lending 
or  investment  of  deposits  of  money  from  the  public,  repay- 
able on  demand  or  otherwise,  and  withdrawable  by  cheque, 
draft,  order,  or  otherwise.  The  business  in  which  a  bank 
may  engage  is  then  amplified  under  fifteen  heads  and  in- 
cludes management  etc.  of  issues,  trustees  and  executor 
work,  etc.  Business  not  specified  under  these  fifteen  heads  is 
prohibited.  In  particular  trading,  i.e.  buying,  selling  and 
bartering  of  goods  is  expressly  excluded  from  allowable 
business.  Non-banking  assets,  i.e.  immovable  property  fall- 
ing into  the  hands  of  a  bank  by  way  of  security  etc.  must 
be  disposed  of  within  seven  years  of  acquisition,  unless  the 
Reserve  Bank  extends  the  period  for  another  five  years.  A 
company  which  carries  on  banking  as  thus  defined  must  use 
the  words  'bank*  or  'banker*  in  its  name  and  other  com- 
panies must  avoid  these  words  in  their  description. 

No  company  can  carry  on  banking  business  without  a 


ORGANISATION  513 

license  from  the  Reserve  Bank.  Before  granting  the  license, 
the  Reserve  Bank  must  satisfy  itself  on  an  inspection  if 
necessary  that  the  company  is  in  a  position  to  pay  its  depo- 
sitors in  full  and  that  affairs  are  not  being  conducted  to  the 
detriment  of  the  depositors.  Foreign  banks  have  to  satisfy 
the  additional  condition  that  Indian  banks  are  not  being 
discriminated  against  in  their  home  country.  A  license 
granted  may  be  withdrawn  by  the  Reserve  Bank  when  the 
aforesaid  conditions  cease  to  be  fulfilled,  subject  however 
to  appeal  to  the  Central  Government. 

23.     Organisation 

The  paid-up  capital  and  reserves  of  a  foreign  bank  with 
an  office  or  offices  in  Bombay  and/or  Calcutta  must  be  not 
less  than  20  lakhs  and  in  the  case  of  others  not  less  than  15 
lakhs.  These  minimum  amounts  must  be  kept  in  cash 
and/or  unencumbered  securities  with  the  Reserve  Bank. 

Indian  banks  with  offices  in  more  than  one  province  must 
have  a  minimum  of  capital  and  reserves  ef  10  lakhs  when 
such  offices  are  in  Bombay  and/or  Calcutta  and  5  lakhs 
otherwise.  Subject  to  a  maximum  of  5  lakhs,  the  minimum 
paid  up  capital  and  reserves  for  an  Indian  bank  operating 
within  a  province  but  outside  Bombay  or  Calcutta  are 
prescribed  as  1  lakh  for  its  principal  place  of  business  plus 
Rs.  10,000  for  each  place  outside  the  home  district  and  else- 
where in  the  province.  A  district  bank  with  only  one  place 
of  business  need  not  have  paid-up  capital  and  reserves 
exceeding  Rs.  50,000.  Subject  to  a  maximum  of  10  lakhs,  an 
Indian  bank  operating  within  a  province  and  with  an  office 
or  offices  in  Bombay  or  Calcutta  must  have  minimum  paid 
up  capital  and  reserves  of  5  lakhs  plus  Rs.  25,000  for  each 
place  of  business  outside  cities. 

The  subscribed  capital  of  a  banking  company  must  be  not 
less  than  half  the  authorised  capital  and  the  paid  up  capital 
not  less  than  half  the  subscribed  capital.  Capital  will  in 
future  consist  of  ordinary  shares  only,  existing  companies 
only  being  allowed  continuation  of  their  existing  prefer- 
ence shares. 

Voting  rights  of  a  shareholder  must  be  in  proportion  to 
his  shareholding  subject  to  a  maximum  of  five  per  cent  of 
M.  B.  33 


514  WAR  AND  POST-WAR  YEARS 

the  total  voting  rights. 

For  opening  a  new  place  of  business  or  changing  to  a  new 
place,  the  permission  of  the  Reserve  Bank  is  necessary.  Such 
permission  is  made  dependent  on  the  financial  adequacy  and 
soundness  of  the  applying  bank  and  conduciveness  to  public 
interests. 

On  a  request  by  the  banking  companies  concerned,  the 
Reserve  Bank  may  assist  as  intermediary  or  otherwise  the 
amalgamation  of  such  companies.  No  amalgamation  can 
take  place  without  the  previous  sanction  of  the  Reserve 
Bank. 

24.    Management  of  Banks 

Out  of  the  net  profits  of  each  year  a  sum  equivalent  to  20 
per  cent  must  be  transferred  to  the  Reserve  Fund  till  the 
fund  equals  the  paid-up  capital.  A  non-scheduled  bank  has 
to  maintain  a  cash  reserve  equal  to  two  per  cent  of  its  time 
liabilities  and  five  per  cent  of  its  demand  liabilities.  Section 
42  of  the  Reserve  Bank  Act  imposed  the  same  obligation  on 
the  scheduled  banks. 

Loans  and  advances  on  its  own  shares,  and  as  stated  before, 
unsecured  loans  to  directors  etc.  are  prohibited.  Every 
banking  company  must  maintain  at  the  end  of  the  day  not 
less  than  20  per  cent  of  its  time  and  demand  liabilities  in 
cash,  gold  or  unencumbered  approved  securities  inclusive 
of  the  compulsory  deposit  with  the  Reserve  Bank.  Foreign 
banks  have  to  keep  not  less  than  75  per  cent  of 
their  assets  in  India.  The  Reserve  Bank  is  vested  with 
power  to  give  direction  to  a  particular  banking  company 
or  banking  companies  in  general  as  to  the  purpose  of 
advances,  margins  to  be  maintained  and  rates  of  interest  to 
be  charged  and  to  determine  the  policy  in  relation  to 
advances  in  general. 

A  banking  company  is  not  allowed  to  form  a  subsidiary 
company  except  for  the  purposes  of  trustee  and  executor 
work  or  safe  deposit  vault.  It  must  not  hold  shares  in  a 
company  in  excess  of  30  per  cent  of  the  paid  up  capital  and 
reserves  whichever  is  less.  Holding  of  shares  in  a  business 
in  which  the  managing  director  or  manager  of  a  bank  is 
interested  is  prohibited  absolutely. 


INSPECTION   AND  EMERGENCY  POWERS  515 

25.  Inspection  and  Emergency  Powers 

The  Reserve  Bank  on  its  own  initiative  or  when  so  ordered 
by  the  Central  Government  can  hold  an  inspection  of  any 
banking  company.  The  law  compels  the  bank  to  produce 
all  books  and  furnish  all  information  to  the  inspecting  offi- 
cers, and  the  directors  to  give  information  on  oath.  On 
receiving  the  inspection  report,  and  after  considering  the 
representation  of  the  bank  on  it  if  any,  the  Central  Govern- 
ment may  on  the  ground  that  its  affairs  are  being  conducted 
to  the  detriment  of  its  depositors  prohibit  it  from  receiving 
fresh  deposits  or  order  its  winding  up. 

The  Reserve  Bank  is  authorised  to  caution  a  bank  or  banks 
generally  against  a  particular  transaction  or  a  class  of  trans- 
actions or  to  offer  advice.  It  can  call  a  meeting  of  directors 
of  a  bank  or  change  its  management  when  disclosures  etc. 
arising  out  of  an  inspection  make  such  a  step  advisable. 

The  Central  Government  on  representation  by  the  Re- 
serve Bank  of  India  may  suspend  for  sixty  days  at  a  time 
and  for  one  year  in  the  aggregate  all  or  any  of  the  provisions 
of  this  Act  either  generally  or  in  relation  to  a  specified 
banking  company.  The  Governor  or  Deputy  Governor  of 
the  Reserve  Bank  can  also  exercise  this  power  in  case  of 
special  emergency  but  subject  to  a  limited  period  of  30  days. 

26.  Suspension  and  Winding-up 

The  Courts  are  authorised  to  grant  on  application  and 
ordinarily  a  report  of  the  Reserve  Bank  a  moratorium  not 
exceeding  six  months.  The  Courts  must  order  the  winding- 
up  of  a  banking  company  unable  to  pay  its  debts.  The 
application  for  winding-up  may  be  initiated  on  such  direc- 
tion of  the  Central  Government  by  the  Reserve  Bank  also, 
in  which  case  the  Reserve  Bank  is  appointed  as  the  official 
liquidator.  The  official  liquidator  is  required  to  submit  a 
preliminary  report  within  two  months  of  the  winding-up 
order.  The  Courts  can  dispense  with  meetings  of  creditors, 
inspection  committees,  etc.  in  their  discretion.  No  stay  of 
proceedings  or  voluntary  winding-up  is  to  be  allowed  unless 
the  bank  is  in  a  position  to  pay  in  full  all  its  debts. 


516  WAR  AND  POST-WAR  YEARS 

27.     Conclusion 

From  this  survey  of  war-  and  post-war  years,  it  is  not 
easy  to  foresee  future  trends.  Indeed,  even  before  the  world 
has  regained  its  feet  after  the  World  War  II  disaster,  the 
ominous  shadows  of  another  world  war  are  already  upon  us. 
Shortages  of  key  raw  materials,  diversion  of  natural  chan- 
nels of  trade,  omnipresent  and  deepening  peril  of  further 
inflation — these  forebode  no  early  return  to  prosperity  and 
abundance.  Yet  war  or  no  war,  World  War  II  has  released 
forces  which  must  continue  to  operate  and  dominate  banking 
and  finance  for  many  years  to  come. 

The  Great  Depression  had  indeed  initiated  the  change. 
Till  then  the  Central  Bank  was  regarded  as  concerned  mainly 
with  changes  in  the  aggregate  volume  of  money  and  credit. 
It  was  the  function  of  commercial  banks  to  allocate  the 
available  credit  to  various  purposes  of  trade  and  produc- 
tion. The  Great  Depression  made  inroads  on  the  traditional 
conception  of  central  banking  sphere  by  installing  full 
employment  as  the  goal  of  monetary  policy  and  public 
expenditure  as  a  factor  in  employment  not  inferior  to  mone- 
tary policy.  Thus,  when  the  Central  Bank  and  the  Public 
Exchequer  were  invited  to  share  the  responsibility  for  the 
national  economic  well-being,  it  is  hardly  surprising  if  the 
Public  Exchequer  became  the  dominant  partner. 

The  war  and  post-war  years  intensified  the  trend.  As  the 
Government  borrowed  or  created  in  its  own  favour  the  bulk 
of  available  funds  and  the  Government  Security  portfolios 
of  commercial  banks  displaced  Loans  and  Advances  to  the 
private  sector,  the  control  of  volume  of  money  and  credit  be- 
came the  concern  of  the  Government.  The  Government 
decided  the  cheap  money  policy  of  war  years  and  in  its  own 
interests  adhered  to  it  obstinately  during  post-war  years. 
The  nationalisation  of  the  Central  Bank  was  only  a  public 
admission  of  the  transfer  of  responsibility  for  credit  and 
employment  policies  from  the  Central  Bank  to  the 
Exchequer. 

The  war-  and  post-war  years  made  even  greater  encroach- 
ments on  the  traditional  sphere  of  commercial  banking.  The 
inflation  of  Government  Securities  at  the  expense  of  Loans 


CONCLUSION  517 

and  Advances  was  a  coup-de-grace  to  the  time-honoured 
"self -liquidating  loan".  The  purposes  of  Government  expen- 
diture are  as  likely  to  be  mere  war  and  destruction  as  invest- 
ment and  production.  Credit  offered  to  the  Government  is 
not  to  be  expected  to  create  its  own  means  of  repayment. 
Even  more  important  were  the  consequences  of  the  measures 
initiated  by  the  Government  to  protect  the  community 
against  the  effects  of  its  own  inflationary  finance.  As  ration- 
ing and  price-control  spread  from  one  commodity  to  another, 
the  allocation  of  credit  by  commercial  banks  had  to  follow 
closely  the  lines  of  Government  controls.  Instructions  as 
to  loans  to  speculative  markets,  particularly  the  stock 
exchanges  and  generally  the  legitimate  purposes  of  loans  in 
general  were  not  slow  to  follow.  Policies  of  dividend  con- 
trol, allocations  of  raw  materials,  restrictions  on  imports, 
exports  and  foreign  exchange  narrow  still  further  the  dis- 
cretion and  latitude  of  the  traditional  credit  authorities. 

The  cheap  money  policies  and  the  fall  in  Loans  and  Assets 
create  an  acute  problem  of  profitability  of  banking  funds. 
Low  rates  on  deposits  and  service  changes  of  all  kinds  have 
limits  of  their  own.  Labour  is  still  too  cheap  in  India  to 
admit  of  labour-saving  devices.  A  further  expansion  of 
new  activities  on  the  part  of  banks  offers  possibilities  hardly 
yet  explored  in  this  country. 

The  year  1951  closed  with  almost  a  portent  of  reversal  in 
the  post-war  trends  of  money  and  credit.  It  required  a 
change  of  government  in  the  United  Kingdom  to  make  an 
official  acknowledgement  of  what  was  already  an  accom- 
plished fact  in  the  capital  market — a  substantial  rise  in  the 
long  term  rate  of  interest.  London  hoisted  the  signal  with 
a  raising  of  the  bank  rate.  Within  a  few  days,  the  Reserve 
Bank  of  India  found  the  courage  if  not  the  originating  inspi- 
ration to  raise  its  rate  from  3  to  3£  per  cent  and  issue  a 
caution  of  practical  discontinuation  of  support  to  the  security 
market.  The  borrowing  and  lending  rates  of  commercial 
banks  with  the  seasonal  credit  squeeze  of  the  previous  year 
still  fresh  in  their  memory  followed  suit.  For  any  drastic 
effects  on  prices,  stocks,  output  and  employment,  high 
interest  rates  are  a  weapon  of  but  limited  efficiency  in  an 
economy  suffering  from  such  obstinate  shortages  and  physical 


518  WAR  AND  POST-WAR  YEARS 

bottle-necks  and  inflexible  with  such  varied  price-consump- 
tion controls  and  import-export-production  restrictions.  For 
narrowing  the  yawning  gulf  between  the  private  and  official 
money  markets,  the  disparities  are  too  wide  to  be  covered 
by  a  change  of  1  to  1J  per  cent.  But  the  Rubicon  has  been 
crossed  albeit  with  loud  protestations  and  save  for  the 
unpredictable  factor  of  expectation  and  currency  hoards, 
significant  changes  should  ensue  via  more  successful  public 
loans  and  expanding  volume  of  public  savings.  Once  again, 
the  ruthless  course  of  economic  forces  brings  to  the  fore 
the  inherent  contradiction  between  central  banking  with  its 
regulation  of  credit  and  interest  and  a  planned  or  controlled 
economy  which  avoids  equalisation  of  incomes  in  order  to 
retain  money  incentives  and  yet  prescribes  priorities  of 
production  in  disregard  of  profitability. 


TABLES                                                           519 

1  & 

*  ~  » 

J, 

3{tIBa    8U3Q 

Q 

S  S  S  S 

s  'S         o  S 

•3     ^                    CM     rt 

6 

5  5  S  8 

& 

ci 

»H    co    u?    cr> 

0) 

p 

IBiojsuraioo 

'pajuifi 

g 

oo    to    ^     oo 
u>    to    oo    oo 

•S 



. 

rt     g    ^ 

to    to 

3TTJB$T 

& 

o»    co    "**!    oo 

o 

leioaaiuuioo 

Q 

^H    oi    t^    «o 

'  -opui 

. 

< 

J§ 

•^    ^f     oo    oo 

& 

oq    oo    w    N 

O           o 

Q 

JS  J5  *5  ^ 

^    ^    § 

^        ^4 

jsqaa  jo  ^iBa 

6 

a 

»-?            in 

M      N      W      CM 

.2 

A 

I 

BtpUI    JO 

I 

i  i  i  s 

A 

to 
,0 

iiue'a  tiomn 

^ 

a 

i  3  1 

f* 

85 

*•      W      U»      <D 

3 

S                0 

^      CM 

OO      OO 

P. 

d 

T-? 

^UB3    UmpUI 

S 

^     S     §     cl 

a 

'rP 

%**S 

H         w 
3    w    o> 

H  J§    3 
o   tuo 

|5 

-WB~ 

i 

i 

& 

Q 

CM      CM      «^«       r-t 
CM       O>      rH       t^ 
CM      CM      «M       rH 

S  i  S  0 

i  S  §  S 

TABLE  XLIH 

iking  Facilities  accorc 

o          *•* 

Is! 

88 

«*H 

2 

»n    ^    o 

O 

—     —  --     ~~~- 

& 

»H 

(i 

»-j    o     ~*     in 

1 

XUBS    P«qBtt*IlV 

s 

c^    ^    g    c4 

S 

§ 

6 

^ 

5? 

« 

?2   ^  K   22 

W) 

S 

O     § 

& 

S>  2  S  S 

(3 

TJ    c> 

S  S 

•ipwi  jo  ^TUBa 

Q 

§  i  s  § 

S 

«    »n 

1 

«    w    m    « 

A 

2    S    ^    ^ 

s 

o 

0 

£££§> 

3  's, 

§<o 
CM 
in 

p* 

0      O      «H      tO 

6 

3tu«a    IBuadiui 

1 

«  S  S  S 

i 

3  S  S  S 

^ 

jo    pua    9if).    9v 

jg    Ej    2    2 

2  2  2  S 

rt 

11 

3! 


t    t   |  1 1  t    t   1 1 1   \     t  !   1 1 1  1 1 


ich 
llow 


3 

TH 

t 

t 

t 

t 

|     i    f  T     T      T    T  T  T    T        r         1  1  T   1  1 

§                                       *H                                                                                                                     ,Q                                                                                                rH 

•s* 

*l 

J3                                                                                                                                                                '"» 

€l 

i 

t 

t 
! 

t 

t  1 

S                                t                   t                          * 

i  .1  f   1  1  1  1        t  |  1  1  1     T 

13              *                                                     -g 

ij 

3 

"3  3                                t-                                        "c 

i  ^ 

i 

rH 

t 

t 

t 

& 

(0 

•    t     1 

04 

a         sit        »  t  •          t       1  1*   s  t 

i    ss  i    TTi         :  i 

si 

§ 

TH 

t 

t 

t 

t  1  1 

S                                        *2                                     9 

0     t    1  1      5                 1 

t       {  <    lf  j{  *  t  1  1  jt 

la 

fl 

O    PU 

8 

1 

t 

t 

t 

1    ' 

t  i        3  t       it           t     t          t     I  t  t 

I                t3                                     rH 

II 

s 

TH 

t 

r 

t 

t   1  1 

t    ,    t    s  t        it           t     t         tt     M  t 

'                  S     *3 

II 

TH 

t 
U 

tl 
iS  I 

t 

t 

2       1 

ft                                                                                                                                                               A 
f                       |            N       |                       t|        ^                      ]               1                           f|         f|        t        t 

ij 

t 

5  % 

1       1 

*i                             w 

§5 

1 

t 

5       1 

3 

ll 

•'•» 

11 

I! 

I! 


sg 


g     8 


t.        <D        (O       O 

S    53    8    % 


§     2 


CO         to        «H 


3 

s 


o       o      o      o 


r-t        O  O         O         O 


*        O  6 

CM         O  "» 

O         00  O 


« 

o 

s 


**     s? 
2    S 


O        O         i-t 

s   ~   s 


CO          ft          CM 


CM         CM          rH 


§ 


I 


2   " 

S         to 


s   s 


rt         O         O  »-l         r-»         r4 


CM      CM        ro       co      co 


CM         CM         CM  CO         CM         CO 


W 


S        «      in 

S     -;    CM- 


CM      CM      CM 


rH  CM         CM         CM 


rH  r^          CM 


2    S 


CO         CM         CM 


t-  Tjt         CO 

oo        »*      t- 


CM         CM  CO 


CO 

R 


I 

•8 


3    1 

I  i 

£      O 


1 


^       «      w      ^ 


OH 


TABLES 


523 


43 
S 

ut      u?      TH      <n      ^ 

C5          TH         P4         tH         *3< 

in       •*       i>       cJ      ^i« 

2       in       S       TH       TH 

«o      »]      oo      rj       <* 

a 

8 
> 

£ 

09  M 

^      ca      TH      t>>      t» 

IO        00        CO         *?         °i 

i 

83 

gs 

r-T         TH         l^         OS         00 

TH          TH          TH          TH          TH 

9    S    9    9    « 

o 

£  -d 

<g 

•s 

CO          TH          TH          00          b- 

<*        CO         »C         t-         O 

8 

c>_      co^      to      so^      ^ 

0 

-*r       in      m      5       ^* 

TH         rH         TH         TH         fH 

3 

4S 

1 

s 

i 

CO         CM         O         O>         ^ 

o»      to      o>      co      ^ 

OO         CO         <O         CO         O> 
CM          C3         CO         CM         CsJ 

f  1 

s 

S  ft 

«      /"*N 

5;  «  1 

i      w»       flj 

8 

0> 

N          CO         l>         TH         00 

»O          l^>          t*.          rH          00 

§  p 

0>         CO         09         ^,         « 

10       irj       ui      *°      ^* 

TABLE  XI 

ve  Aggregate! 

(Figures  in  1 

g 

w 

§ 

C5 

<u 

t*          *O         00         00         CM 

Sen      eo      TH      oC 
«3         C»         5<         «0 

TlJ  cd 

dj  -4-> 

•&  0 

d  fn 

E  ° 

5f  <u 

<  tJO 

OJ 

>  1 

oo       o       e»       O>       TH 

si   s  s  ^  9 

£ 

io 

O 

8 

O 

»L^  CD 

£  ° 

3 

'S  ^ 

V 

s 

CA 

§) 

<S    8    S    S    w 

*C3 

CO          00          <0         CM          TH 

H 

S 

00         iO         00         t-         OO 
•««        U3       S        W       « 

"8 

«         K         §         U5         CM 

O        OO        00        kO        O) 

^ 

*H       TH       ui      «e      oi 

|>         f         C0         «0         «0 

W        CM        N        c3        CM 

^ 

3 

T 

S3    ?:    S    S3    S 

,H      o      *o      »-j     9 
vi      to      us      to      v 

1 

§0; 
S 

i/9      ui      t«r      c«      t^ 

TH        TH        rn         TH         TH 

O 

K 

S 

X 

S3      £      oo      m      o 
2:      2J      2      2      © 

O*        O>        CA        wi        O) 

i  §  i  i  i 

*^ 

-fll 


s 


(SOOO) 


(8000) 
oad  ;ai 

(SOOO) 


PUB      sdJBu.s 


v   PUB 
ptreq  uo  U.SB3 


sine 


Wtt 


8355      SS^J 

in  cp  r»         eg  m   * 
«k  o  in        en  eg  .,-j 


m  «.» 

2  ^  *  -  * 

*  ^  **•  ^  in  fc 

K  S  8  a  8 


I   IP   CO  CO   CM 

>  oo  o        o  *£ 

•    O  CO    CO 


55  B  g      £  S" 


I    W    CO  t-  00 

I  -^  "if  tD  <M 

I    00   CO  O>  f-t 

i  o  CM  co  in 

I  ej  oi  in  r^ 


"  83  8 


co  od  in         CM"  M 

W   CM   W  CSI   N 

§   :§       :   : 

0  CO 

- 


»H    CO   C3  O    »H 

CM   CM   C4  C4   C4 


I  s  g  i  g" 

t-  in  "*  oo  t- 

cq  in  <«j<  o»  •<* 

CJ    CM  CO  CO  CO 


oo  in  oo  o  co 

tH  W  CJ  CO  CO 

CD  CO  CO  CO  CD 

CM  CM  N  CM  W 

Cp  CD  CD  CO  ID 


Imperial 

rcentage 


pire 


8UBO1 


BJ^UOO 

SB   SUBOI 


SgUTfABS 


pax^ 


PUB 


3S 

0  O 


»-t  M  o>        in 

O»   O   «3  C<|    t 


0  0   O 


t-  00  rH      IT*  t-t 
0>  CM.  00     vi  CO 


§§8 
§  §  § 

-       - 


sss? 

J353d 


S  S 


Q  00  O 
CO  CM  O> 
rH  O»  r-1 
CD  U»  CO 


O   § 


»  ^    ea  ri 

!-»        «~<  »H 


o^c^ 

CO  t»  ^S" 


• 

4 

CO 


wfi" 


(SOOO) 


(SOOO) 
}S9) 

(SQOO) 
sauBiB< 

(SQOO) 


(*000) 
d   ssoao 


pue  pueii  ui 


SUBCXI 


SGOUBA 

PV       pumiiaQ 
PUB 


SSUTABg 

PUB  'pexij 


c?>  co  ( 

t*-  t»  < 

r4    t*  < 

CO  CO  ' 


m  co  rs"        co  to 

i-^  O-)    CO  CO   ^ 


r-i  m  CM 
ri  CM  in 
o"  CM  t> 


JJ'* 

ca  S 


w  o  »H        wo 

" 


CvJ   CO   ^J« 

r<  <o  »~j 

M   tO  00 


t^  o  o  ^ 

tC  o  t>."  I 

/  I 

05   00  W  (    C 

O    tO    rH  I 

t^   tD    05  J 

tH    r-4    rH 


Q    r-   rH 
O   CM   O 


?-1   Ift 

Ci     Csl 


o>  «c  o       o  in 

O    UO   CO  CO   rH 


O  Tt<   W  00  rH 

in  (fi  u?        ^  in 


O    O    O>  O5    < 

in  in  o>        cs  < 


<    "5P    ^T  T^    I 

>  O)   0)  0)  ( 


II 

la 

TJ    § 
C  5 

V  "w 

i* 

'C  ^* 

ss 
ii? 

O    4* 

0« 


sing 


s-juaiu 


PUB 


ptiu 


-PV 
PUB 


o; 
-ABS    PUB 


B8A.I8S3H   PUB 


M  in  in 
oi  t^  co 

• 


O  r-t  fr-  0)  CO 


en        £,  r-- 

«  «  « 


O  (D  U> 

w  ^'  o 

»H   r-t  r-t 

[i 

^!2^  J 


0   rl   <£>  ^  Wj 

WWW  §)  CO 


TABLES 


527 


USB1      ^   t"   Ol    rH   tf> 

co  co  o»  N  ^ji 

i 

Jg    CO    00   O>   CO 

oq  r-  t^  -«*<  to 

S9UBIBS 

o  f*  ot  ui  oo 

t-    00   00   C»   00 

X^jadOJjJ     co  oq  co  <M  ea 

(HKIO) 

800  o  to  i— 
O>    !>•    CD   Ol 

O   O  O    <—  i   i—  < 

W°*d  ;3N 

g  8  S5  ^  « 

S  g  ?  S  8 

1 

I 

(SOOO) 

ifi*  ^  25  22  °^ 

^  «0    O    ^   UJ 

(BOOO) 

Og    tD   g    rH    M 

B|U3UX            ^  ^   °*  *   °P, 

01   p'Sl  -^aJgu! 

O>    •*    IO    Cvl    »H 
b*   00   (O   CO   CO 

(SOOO) 

3  S§  S  So  S 

«O    CO   ^**    O    r-T 
Ct    CO   CM    rH   CM 

< 

^ 

N  CM  W  CM  N 

OQ 

cjain/^i      ^      *      •   M   tD 

M 

S  g  S  S  53 

O      "           9   CO 

. 

USGO 

od  oo  o  tn  co 

1 

A^adoid 

s^^ass 

!» 

^  xj 

es^cKSs 

^   0 

ptre      saj^ns    6  rn  «  «  w 

w                  l 

38  S"  23  S3  of 

SQ 

p 

flS*""1 

;z 

O       •   CO    CO    rH 

.s 

TABLE 

National 

'igures  in 

g       pus  sajeifs 

irt  o  to  o  r. 

iO    t(0   •**   CO   o> 

co  oo  «>  o  o 
IO    O>  -^  IO   o 

J*    0    t^    rH*    O) 

|o 

II 

^*    Qj 

Wn«nD9S       )A00     S22*| 

43^ 

PK  u 

f 

•ins 

CN  t-  »a  <o  o> 

^f    ^«   VJ    \f>   00 

^-< 

' 

P* 

•oja  's^pajo 

2OT   l>   <N   O 
CM    f-    CM    OO 

i 

<D 

qg«O    "SUGOT 

CM    ?3    S    M    rH 

saoueApv        ^j  c*  o  N  us 

J3 

put?    ^n^Q    'sureoT    ^1  ^S  S  2  2i 

pH 

O    IO    t-    rH    O 

co  i—  *  ^j*  ITS  M 

in                   IGJOJj 

cu 

w 

«*  C4  v*  t~  r- 

H   CM  C4    rH   rH 

rH  in  co  '"J1  r*« 

CO    CO   0>   OJ    CO 

D   -O   PUB   paxtji    S  S  w  5  « 

pue  'p9xl^[ 

t-    «>    OO    V*    CO 
CO   CO   M   M   CM 

i 

unoj. 

t^    r-    O*    CO    rH 

00   OO   O    Ol    O 

rH    rH    rH    rH    CM" 

S3AJOSOH 

O    O   CM  C»   ^ 
O    O    rH    O_   rH 

, 

TB^]dBQ    dn-pic<j  i  M  <*s  co  ^  -^ 

IB^dCO 

00    00   00   00   00 

i 

i 

rj 

y      «?  o!   0   0»  0> 

1 

^>        rH    rH    rH    rH    rH 

Q 

CO    t-»    00    O»    O 

S  e?>  en  '  S 

TABLES 


827 


2 

C4 

I 


§s-9 
SP 

Z  tuO 


C 

I 


(SOOO) 


(SOOO) 

[<I  S90J 

(SOOO) 


(SOOO) 


USED 


siaqiO 
3qaa 

S9JBIIS 


«ina 


juauno 


pire 


- 

t»  00  «O  O  S 


QD  CO  Cl  N  CO 

H  ^  •*  irt  \n 


8  w  E:  S|  S 

W   N   N    i-4    r-4 


O  O 
Q  O  r 


CO  CO  0>  CJ  ^ 

A)jadoi(j 

01  00   00  CM  N 

6  d  o  i-i  *4 

siuaui 

rH  W  00   Ok   CO 
UJ  U>  JO  U7  5? 

«aq,0 

N      •      .  «  (O 
O      '      '  0»  CO 

fH 

National  Bai 

to  Deposits 

ptre     sajBijs 

°i  t  ^  "i  w 

0  H  pi  to  ei 

Punjab 

rcentage 

ssmmMS  ''A0° 

s=ai§ 

«* 

PUB  sfna  'streoT 

"t  M  o  W  W? 

•0  -o  PUB  paxu 

to  q  1-4  ^  h. 

O  N  p>  Ok  0> 

to  to  to  w  ITS 

saAiasau  pue 

q  cvi  t-  to  irt 

11111 

3*- 
wjj.5 

3*82 

Hl§ 


(SOOO) 
sosuadxa 


(SOOO) 

sauBiBg 

(SOOO) 
>Jd  &N 

(SOOO)^ 

(SOOO) 
'*«!   IBJOJ 

(SOOO) 


piiB  pufiq  UT 

^ 


PUB 


S3JBXJS 


SUBCXJ 


O    Cl    «O 

ira  -^  «S 


t»  r-  oo 
^.  S  ?? 

«3    IfS    wi 

CM  w  CM 

gJ2S 

sss 

:^S 

r^^S 


W  CM 


a  s  5? 

0   CO   »-4 


gs? 

9S 
IS       £3. 


got- 
OO   OS 
O  CI   O 


w  o 

"H   C5 
CO   O> 


r-4    00    t- 

CO   CM  CM 

r-«   O   CM 
00    O5   t» 


3  «  19  ^  S 

co  eo  eo  co  <»3 

0>     O     T-t  T-4     ^ 

2-33  S3 

5§S  §-§ 


PUB 


g?i     9i 


oo  (36  o        %e 
o  d  «o        CM 


'^00 


pue 


co  co  en         IH 


4   O9    in  CO    i 

i  o  »-<         CM  co 


^  -?  » 


«  N 


o  o  «o        -•<  to 


u5  ui  10         in  in 


<n  o 

Sc§ 


TABLES 


529 


(SOOO) 
ss&uadxa 


(SOOO) 
sail  GIG 

(9000) 


(9000) 
IUO.TC!  ssoio 


PUB  PUBII  ui  useo 


I          e^uaui 

]  -1S3AUI 


PUB 


S  ft  3     8  8 

(C  t»  CO  O)  iH 


M  N  WJ 


J5s; 


in  rt  in        t-  t>. 

o  oo  co         t>  »H 

CO  V  "*  •"«  «" 


co  o        S3  "< 
ca  co        o  r^ 


SUBCTI  j      ,H  c 


PUB 


PUB 

SUTAOS 


/co"^" 

CO   »H    f»      I     »H   iH 

IsSJ 


l-^  00  N  O4   O 

•^  -«t  t>  W   "* 

CO  CO  CO  CO  CO 

<0   00  W  00   00 


krt   W    «  ^    r-( 

O   O   O,  iH   M 


8« 

i  Q 


o 


w  *-;  o       oo 

9  9  5     99 


PUB       sajsqs    «  »  5       HI  2 


99 


"5   W   «  04   0) 

o  o  o        o  o 


""«    225       S2 


!  ( 

SyBJpJdAQ  P  *  **      I 

s^ipajQ  qsB3    SS  J3  5 


s^isodaQ 


PUB 


CO  N  «Q          Ci 

<o  10  rj        to 


530 


TABLES 


tO    >n     rH  f»    t" 

OS   CM   CO  05   O 

cd  co  cr>        oj  r-T 


s^ycu  j  SSQJO  i       g  g  ^       «i 

CM    CM    CM  CM    CM 

rf   O   O>  00   "I4 

M   If   O>  to  o 

CM    CM   CM  CM    CO 

suaino 

-      1  ooacux  CM    CM    CM  CM 

w 

5P  co  10         «* 
eft  in  co         in 
r  CM"  CM         CM" 

[  a  a    ss  s 

^_  CM     rH 

JH  ^uadoj^r !       oo  cr>  o 

CQ 

'-I  '  """i  s  |  a 

L,  ^Q 

fs' 

SUBOT  ggg    \  *  »      -50 

M 

r3     0^ 

CM     CO     •*  rH     £  ^       CO 

§J|S3 

*  i 

rH    O    CO  i-H    (s. 

>          «e  o  f         m  S 

i        co  •*  ift        -*    -r 

6gUtA«S  !         S3  CM  S? 

[  i     g  8  S      18 

CM  CM" 

J    rH    CO  ,      , 

O   CO    CO  CO    CO 

I 

p 


sine  - 


sueoq 


jtsodaa 
paxi.i 


i>  to  cvj         in  «> 

CO    t-t   CM  CM    *~< 


t»  oq  en         in  CM 

5  8  »    &  < 


CM    CM   CM  CM 

0   0   GJ  C5   ° 


00    i-H   «3  C5 

Tj<  »n  m         oci 

tH    CM    CM  CM 


!D    O>   Ch  O   * 

odd         TH 


TH    CM   O>  CO    "^1 

" 


U5   r}»   CO 
rH   CM   CM 


f,, 


CO   IO   CM 
' 


in  to  o»         us  in 


Q    rH    Xf  l>     "5 

CM   "if   CM  CM    N 


o»  o  oo         CM  CM 

t*i    CO     rH  in    ** 


CTJ  eft  as         O)  i 


TABLES 


531 


00   CO   00   CM   9M 

O    O    S    t-    rH 

t—  to  oo  en  uo 

CM    rH    rH    rH    rH 

t^  o  CM"  co"  to 

in  oo  i2  t*  CM 
<4^  i>  en  m  to 

CO    10    CM    CM    in" 

s^isodaQ    )saja|ui 

en  t>  oo  en  t> 

t-.  o  ^  to  10 

CM    CO   CO   CM   CM 

en  10  ^  CM  CM 

CTJ     t-    rH_    Cp    CO 

tn       3   I  l  ,1 

to  t«;  O  in  co 
t»  t«  oo  oo  oo 

-^SOAUJ     IB10JL 

»-j  t-  CM  m  oo 

00   t>   Q    O   ^ 

•*  W<  ti&  S  in 

tSB 

rH    tp    CO    00    tO 

oo  en  -^  CM  o 

I      .J 

CO    CM    CM    CM    CO 

Cn    tO    CM    rH    CM 

co  to  to  t^  i> 

c/3                    T^oj, 

H 

oo  oo"  o  en  en 

s.iaq;o 

CM  oo  en  CM  oo 

t^  to  m  CM  o 

1                       SWIM) 

m  co  ^  m  ^j» 

CM    CM    O    CO    rH 
rH    rH    TH" 

C/5 
CO 

£                 saaeqs 

CM  en  to  m  10 

rH    CM    CM    CM 

5 

rH  o  in  to  ^ 

55  S 

5         wttunaas^ 

CM   Tl<    CM   rH   CO 

rH    CM    CO    rH    C^ 

•S  ° 

0     rH    rH     rH     ^ 

^fi^ 

b-  t-  en  en  en 

S     (D 

2^5 

A^jadoJd 

CM    CM    rH    rH    rH 

w  p 

M|.s 

sine 

in  to  to  t-  in 
o  w  CM  en  CM 

fl    O 

C5     Hr* 

iiiil 

ls§ 

sueoi 

TJ<  m  oo  co  CM 
S>  co  in  to  cp 

00    00   t-    to  tO 

2f 

*3£ 

i>  rn  co  in  r*. 

-d  § 

S^ 

s»miwm    TWL 

oo"  en  oo  t^  oo" 

H  S 

v 

PH 

A^jadoaj 

O   0   CD   C>   o 

g 

™ 

Unoj, 

to  in  co  ^«  ^ 

3*    rH    tO    O    t» 

t>  oo  t*  to  t- 

rH    rH    rH    rH    rH 

g                «*«0 

co  S  m  en  to 
CM"  CM"  csf  CM"  CM" 

s,na 

t^  m  CM  o  o 

CO 

O             lua-uno 

8SSSen 

^ 

t»  to  to  ui  to 

p 

10  >H  CM  oo  en 
oo  en  CM  CM  10 

I 
I 

CM  CM"  co  co"  co 

sueoq 

p  q  p  co  en 

i               paxi.i 

JS    2    rH    CM    $5 

•«*  t  -T  ^  o 

rf  to  in  «*  ^ 

1^1 

rH    (O    O    rH    CO 
rH    rH    CM    CM    CM^ 

rH    rH    rH    rH    rH 

saAtasa 

Sj  2  to  S  ^ 

soAjasan 

^*  *««  oo  m  en 

1  t.      D 

to  to  to  t>  to 

m|d"° 

S55SKSI 

jigm 

tg  i>  oo  en  Q 

Q 

rH    rH    rH    rH    rH 

532 


TABLES 


USBO 


saaueApv 
PUB  suBo 


>* 


JO  ^ 

H§: 


'3 


598gS 

00  00  00  l>  00 


»  W  rH  0  ^ 

W  rj  0>  O  t» 

t^  (A  00  O  (S 

r-«  r-l  rH  CVJ  <M 


h-  jo  10  r,  N 


•;AOD  i    s  S  5  8  8 

eo  CM  e4  CM"  CM 


01  eo  «o  oo  9) 
i".  qj  -H  SJ  55 
in  10  to  tn  u-5 


. 

in  w  <* 
i  in  eo  »-•  « 


«  5  ^  9  £ 


IH,  us  ea  co  o> 


eft  »-4  eo  w  »H 

«-t  IN  N  N  W 


CO  CO   CO  CO   ^ 

c\i  CQ  <n  i>  ^q* 

H   rH    rH    rH    rH 


«0  »0  O  O  O 

"*  b  -^  in  6 
t-»  t^»  «o  co  co 


Ol   ^    CO   O    rH 
C9    CVJ    «*    in    rH 


saanjuaqaa       i 

PUB  ---        ' 


sina        co  o  ^  ^  o 

I        co  eo  CM  co  co 


\  »0  O  CO  CM   -^ 

(Sc^icl 


saouBApy 


S9AJOS9H         I          q  10  ^  o  •* 

UB     TB1IOB3      i  rH   rH    rH    Ijt   CO 


PUB 


TABLES 


533 


1 

i                       to  «d 

i                   «*>  CM 

s^yoJtj  ssoao              *    '  <o  ^  c*J 

MSB° 

iS^ds 

>™*"~™          ::5J8 

SSU!UjBam0i     :  :ISI 

WOX 

aasH 

|                 ^o            „..- 

00 

HI           S3i^t.ino3<3             co  oo  o  o  to 

•JAO£)                 r~i  *^  ®  P.  * 

««, 

<O   00   f   CM   00 
O    0    0    r-i    O* 

If 

S3DUCAPV          i            $3  ?2  CM  S  S 

pue     sueoT            ^  w  CM"  CM"  tn 

cJ  '53 

^Ifl 

SIlig-                      £    t*    0    rH    CO 

<S° 

saaBqs 

to  t»  o  ^«  t«* 

w-s.s 

-*-> 

^  co  co  t>-  r- 

I*  I 

O    ^    CO    «O   IO 

USIBO            ^  °i  *t  °°  w 

»-4    t-^    r4 

if 

s 

uf  in  **  -^f  ^T 
|                                                 r—  t-~  oo  TJ*  Oi 

•                 ie;ox    i         °^  °°'  *i  ?  ". 

ii 

C<l    CM    ^    OO   CM 
CO   CM   CO    -^   t^ 
CM   CM   CM    CM   CM 

O              ^uajjna    |        So  oo  S  g  vj 

Q 
O   CM   O>   O   OO 
SSUIABg      !            »rt  <0  ^*   »rt  -3^ 

SIUH    PUB 

0*   0    »0   10   «0 

navt  j    '         O  t-  <o  o  «o 
H^x!d.              co  CM  *  oo  10 

I               rH    *H 

iw       a  s  R  9  is 

SOAJ3S3H    PUB 

O    r-i    CO    t-»   T-H 

tB^idBQ    '         n  m  m  in  m 

\ 

j     rj 

liisi 

534 


TABLES 


s 

all 


1          CO   CO   CO 


us  to  ^T       pi  i-i 


N   CM   CM  CO   CO 


CO   00   OQ          CO  ( 
L    >          CO   CO   CM  O5   < 


kfl  CM       eo  o» 
oo  in       en  t- 

" 


eo  kfl  CM 
o  oo  in 

CO   CO  CO" 


O   0>   CO 
04   00*  IC5 


8T)I     00 
CO  CO 
I         00"  O  00 


sguiABS  I      3  |g  5 


N  CO 

in  co 
CM"  CM 


to        N  r» 


o  o  o       o  o 


M  o 

jj  rt 


Oj   0> 
A  OJC 


fig 

H  a> 


S9.TBUQ  I  e.  W  rH  0»  t» 

10     co  eo  *  »o  co 


;AOO  « 

CM  n  *  eo  ij« 


sine    M  <o  ^  «ft  co 

CO  CO  00  W  CJ 


w  '-j  to  N  co 


«  oq  t^  o  eq 


SHuiAeg 
' 


S9AJ[dS9H  "?  ^  ^  "t  ^ 

PUB  iBiideo   S  2  2  8  w 


TABLES 


535 


S 


S-  r-H 


as; 


3  3  5  3  o 
8  8  »  8  S 


s)UOJd  ssojo    I 


3O\    l>    CM    t^ 
c\i  10  o  to 

rH    CM    W    rH    rH 


CM    W    CO    W    N 


!        »o  oo  cJi  <J>  r» 

stua  i     ^  ^i  p.  ^  ^ 


co  CM"  ca  e\i  co 


S9DUBAPV          !         o  rS  oo  O   W 

pus    SUBOI    [       co  »H  o  CM"  co" 


c^^^c^cl 

OO    CO    OS    CTJ    CM 

rH     00     tO    CO     rH 

CM    «O    Tf    IO    N 
O    to    CM    t>»    CM 


«     O?    fc»    00     rH 
rH    rH    CM"  CM    CO 


O  CM    CM  00  O 

rH  rH    rH  rH 

00  Q    10  CO  CD 

rH  ^    *«IJ  IO  & 

CM  CM    CM  CV1  CM* 


8  8  §  §  § 

CM"  CM"  CM  CM  CM 


Q%,: 

^j   Cw   flb   i 


•as 

1! 

Is 

O 


1  5  2  §  S 


SI3U1O   1   °9  *•?  "*!  ^ 

I    CM    M    CM   -V    " 


«?  ^  w  «>  p 


STTIH 

"llJtl 


. 

o    l>    kO    t*    0 


SUBOT;         00    CO    CO    rH    rH 

pue    jrpa.13    qseo  |  §  8  cS  8  5 


1    O    00    CM    Is-    *~* 

suaqjO     <o  in  ni  u>  « 


lO  10  »0  -^ 


CM  «*  CM  CM  «fi 

^  in  t^  oi  crJ 


,-      ^ 

CO  CO  CO  CM  CO 


SdAJ3SdH      i  oo 
PUB   IBJIOBO     «u? 


INDEX 


Advances,  loans  and  cash-credits, 
131-37,  153-54;  and  bad  and 
doubtful  debts,  136;  Bank  of 
India,  209;  Bank  of  Baroda,  224- 
25;  Bank  of  Behar,  234;  Big 
Five,  131;  Bank  of  Mysore,  227; 
Allahabad  Bank  of  India,  242; 
Imperial  Bank  of  India,  105-05; 
Indian  Bank,  229;  and  real 
estate,  35;  and  Reserve  Bank  of 
India,  266;  and  Indian  Indus- 
tries, 179-88;  seasonal,  113-16; 
during  and  after  war  506,  509; 
classification  of,  135,  137,  162, 
165,  509-10;  distribution  of,  175, 
176  n.  49;  in  foreign  countries, 
133  n.  19;  unsecured,  135,  510. 

Agency  Houses,  members  of,  1; 
and  banking  1-2;  of  Calcutta, 
3,  7,  17  n.  9;  of  Bombay,  5-12; 
Capital  of,  5;  borrowing  and 
lending  rates  of,  6;  failures  of, 
7. 

Agriculture,  and  seasonal  finance, 
203-07,  281-83;  and  long  term 
finance,  489;  and  banks,  207. 

Alexander  &  Co.,  35. 

Allahabad  Union  Bank,  292. 

Alliance  Bank  of  Simla,  28,  107, 
111,  292,  314,  324. 

Amalgamation,  119,  212;  effect  on 
capitalisation  of,  119,  120-2;  see 
also  under  Capital  &  Reserves; 
of  Imperial  Bank,  97  n.  4. 

American  Civil  War,  effects  on 
banking  of,  25,  371-375. 

Amritsar  Bank  of  Lahore,  306. 

Amritsar  National  Bank,  296. 

Arjunji  Nathji,  11,  12,  14,  16,  18. 

Assets  and  liabilities  of  banks, 
505,  508;  mutual  interaction  of, 
118. 

Atlay  Committee,  374. 

Audit  of  banks,  357-58. 

Bagehot,  Walter,  27  n.  30. 

Balance  of  trade,  and  prices  and 
income — structure,  254. 

Balance  sheets,  law  relating  to, 
343;  advances,  353;  debts  and 
liabilities,  347-48;  debts,  bad 
and  doubtful,  350;  capital,  347; 
book  debts,  349;  cash-invest- 
ments, 352-53;  interest,  353; 
profit  and  loss,  353;  property, 
349;  reserve  fund,  347. 


Balance-sheets  of  banks,  Allaha- 
bad Bank  of  India,  Tables 
XXIV-XXV;  Bank  of  Baroda, 
Tables  XXVI-XXVII;  Bank  of 
Behar,  Tables  XXXIV-XXXXV; 
Big  Five,  Tables  XV-XVI;  Bank 
of  India,  Tables  XVIII-XIX; 
Bank  of  Mysore,  Tables 
XXVIII-XXIX;  Central  Bank  of 
India,  Tables  XX-XXI;  Imperial 
Bank,  Tables  XI-XII;  Indian 
Bank,  Tables  XXX-XXXI;  Pun- 
jab National  Bank,  Tables 
XXII-XXIII;  Union  Bank  of 
India,  Tables  XXXII-XXXIII; 
Reserve  Bank  of  India,  Table 
XLI;  Scheduled  Banks,  Tables 
XVII,  XXIII. 

Bank  and  Banking  business,  defi- 
nition of,  359  n.  27;  359-61; 
361  n.  30;  512;  and  Government 
of  India,  323-26;  and  Banking 
Inquiry  Committee,  360-61; 
Hilton-Young  Commission,  359 
n.  27;  and  English  Law,  359,  359 
n.  26;  Indian  Companies  Act, 
361-62;  511;  and  Sir  John  Paget, 
361  n.  30;  and  other  countries, 
359-60. 

Bank  D'Affairs,  183,  183  n.  60,  188, 
190. 

Bank — Deposits,  progress  of,  25, 
25  n.  24,  29  n.  34,  489,  507;  and 
exchange  rate  25-6;  and  other 
forms  of  investment,  32-35;  dis- 
tribution among  banks,  of,  36- 
37;  as  a  measure  of  banking  pro- 
gress, 30,  31  n.  2;  fixed,  current 
and  saving,  34-35,  125-26,  164, 
168,  500-04,  500-10;  of  Imperial 
Bank,  109  n.  20;  definition  of 
fixed  deposits,  125  n.  8;  and 
other  funds,  32-33,  35;  and  other 
forms  of  money,  250-52,  491;  in- 
surance of,  329-30;  ownership  of, 
495;  priority  of  payment,  330-31; 
profitability  of,  340-41;  average 
size  of,  128;  339  n.  9;  495;  urban 
and  rural,  39-40;  smaller  places, 
40;  see  also  under  Interest  rates. 

Bank  employees — recruitment  of, 
365-66;  salaries,  498-9;  salaries 
and  gross  profits,  239,  498-99; 
salaries  in  foreign  countries, 
240-41. 


544 


INDEX 


Bankers'    Clearing    House,    and 

Reserve  Bank,  280. 
Bank  failures,  by  age,  290-91;  by 
resources,  294;    and    industrial 
finance,  303-08;    and    manage- 
ment, 295-303;  and  misfortune, 
313;  and  speculation,  308-12. 
Bank  income,  sources  of,  77. 
Banking  and  loan  companies,  58 

n.  36,  170-71. 
Banking    Companies    Act,    1949, 

511-lS. 

Banking  facilities,  extent  of,  38; 
distribution  by  towns,  39,  40-41, 
492  n.  2;  and  bigger  joint  stock 
banks,  41-42;  war-time  growth 
of  492-93;  and  Native  States,  see 
under  Native  States;  distribu- 
tion by  provinces,  42-43;  inter- 
national comparison,  56. 
Banking  funds,  and  other  funds, 

32-33,  490. 

Banking  habit,  and  public  confid- 
ence, 322-38;  and  level  of  in- 
come, 338-41;    and  literacy  341- 
42. 
Banking  Inquiry  Committee,  174, 

177-78,  188,  202,  203,  359. 
Banking  legislation,  form  of,  343, 
causes  of,  342,  definition  of 
bank,  see  under  bank  and 
banking  business,  capital  and 
reserves,  361-62;  management 
366-68,  514;  and  audit,  357-58; 
and  branches,  363-64,  363  n.  35; 
and  investment  of  funds,  367-68; 
and  liquidation,  368,  515;  and 
Officers,  512;  and  Organisation 
of  bank,  513;  representation  of 
interests,  335-36;  and  insurance 
of  deposits,  329-31. 
Bank  of  Baroda,  41,  43,  55,  152, 

224-26,  237,  241. 
Bank  of  Behar,  233-34. 
Bank  of  Bengal,  7,  95  n.  3,  253-54. 
Bank  of  Bombay,  25,  96,  254. 
Bank  of  Burma,  308. 
Bank  of  Calcutta,  3. 
Bank  of  England,  65-66,  103,  107 
n.  15,  110,  112,  257-58,  262  n.  12, 
267  n.  14. 
Bank  of  France,  101,  103,  104,  105, 

155,  249,  265,  267  n.  14. 
Bank  of  Hindustan,  3,  7  n.  14. 
Bank  of  India,  41,  55,  85,  208-11; 

and  Bullion-exchange,  404. 
Bank  of  Madras,  4. 
Bank  of  Mysore,  35,  55,  226  n.  28. 
Bank  of  Upper  India,  313  n.  14. 


Bank  rate,  486-87;  average,  66  n. 
13,  264;  effectiveness  of,  102, 
264-67;  and  other  rates,  264;  and 
foreign  obligations,  103. 

Bank  references,  197. 

Bank  X,  82-3,  160-62. 

Bank  Y,  162,  166. 

Barclays  Bank,  175,  176  n.  49,  240. 

Bazaar  hundi  rate,  89,  262-63. 

Benares  Bank,  3. 

Bengal  National  Bank,  111,  129, 
301-03. 

Berlin  Stock  Exchange,  387. 

Bhargava  B.,  14  n.  21. 

Big  Five,  505  n.  11;  capital  and  re- 
serves of,  123;  time  and  deposits 
of,  125;  loans  and  advances  of, 
130-33,  505;  bills  and  hundis, 
147,  149;  investments,  150-51, 
154;  net  profit  rate,  240-41; 
499  n.  9;  Tables  XV-XVI. 

Bills  of  exchange,  function  of,  137- 
38;  and  hundis,  13,  143-47;  and 
banks  elsewhere,  148  n.  30;  and 
Big  Five,  147-48;  decline  of,  148- 
49;  and  indigenous  bankers,  13, 
262-63;  bill  market,  141,  143-46; 
and  export  trade,  193-94;  funds 
employed,  145  n.  28;  and  import 
trade,  193  in  France,  141  n.  24; 
in  U.S.A.,  141  n.  24. 

Bombay  Banking  Company,  299- 
300. 

Bombay  Stock  Exchange,  early 
origins,  371,  membership  of, 
373-74;  admission  of  securities, 
379;  classification  of  members, 
376-77;  time  and  cash  deals,  381; 
cash  and  forward  lists,  380-81; 
settlement  period,  381-82;  mar- 
gins, 384-86;  prices  on,  386-87; 
389  n.  121;  buying  in  rate,  394- 
95;  selling  out  rate,  391-92;  de- 
fault and  disciplinary  action, 
390,  390  n.  12;  corners,  392  n.  13; 
bill-brokers,  374-75;  and  specu- 
lation, 384  n.  84;  and  bullion 
exchange,  402;  and  banks,  158; 
and  banking  funds,  396-99,  510; 
and  open  market  operations, 
274;  foreign  exchanges — see 
under  London,  Paris,  New 
York,  Berlin. 

Branch  banking  and  banking  ex- 
pansion, 39-40,  43-45,  364,  494- 
95;  and  exchange  banks,  44-45, 
45  n,  26;  199;  see  also  under  ex- 
change banks;  and  bigger  joint 
stock  banks,  45;  deposit  per 


INDEX 


545 


branch,  49,  494  n.  4;  and  finan- 
cial implications,  47-8,  50-51,  51 
n.  29,  57,  363;  and  overcrowding, 
46-47;  and  personnel  365-66;  and 
management,  366-68,  363  n.  35; 
expense  of  242-43,  n.  7;  and  Im- 
perial Bank,  39,  41,  42,  44,  48; 
and  competition,  41,  45,  45-46; 
and  smaller  places,  43;  and  non- 
scheduled  banks,  46-47;  and 
profits,  50;  by  provinces,  42-43; 
deficit  or  surplus  branches,  53 
n.  34. 

British  India  Bank,  298-99,  345. 
Bukanji  Kasidas,   10. 
Bullion  Exchange,  399;  Clearing, 
404;  Commission  on,  403;  Loca- 
tion of,  402;  members  and  tra- 
ders,    402-03;     and     stock-ex- 
change 402;  and  options,  403-04. 
Calcutta    Industrial    Bank,    Cal- 
cutta, 89  n.  67. 

Call  money  in  India  and  Eng- 
land, 89-91. 

Call  money  rate,  89,  91. 
Capital  and  reserves,  function  of, 
118-19,     122-23;    influences    on 
proportion  to   deposits,    119-21; 
and  smaller  banks,  123;  Impe- 
rial Bank,  122;  Big  Five,  122;  in 
foreign  countries,  123  n.  3;  sta- 
tutory, 331-32. 
Cash,  control  of,  251-52. 
Cash  credits,  136-37. 
Cash    ratio,    132-33,    154-55,    155 

n.  38. 

Central  Bank  for  India,  2,  7,  10, 
12-13,  95;  profit  and  losses  of, 
104. 

Central  Bank  of  India,  41,  79,  84, 
85,  92-93,  110,  123,  152,  182,  241. 
Chamberlain      Commission,      39 
n.  15,  81  n.  30,  82  n.  32,  n.  33, 
112-13,  245. 
Champa  Shah,  8. 
Charter  Act  of  1833,  1. 
Cheques,      see      under     banking 

habit,  and  clearance,  280-81. 
Chettys,  10,  145,  152,  230,  231. 
Chits,   171-72. 
Chunilal  Saraiya,  309-10. 
Comilla  Bank,  171.' 
Concentration  in  banking,  52-55; 

493  and  493-3. 
Credit  Bank  of  India,  301. 
Currency    and    Banking  schools, 

28  n.  31,  258. 
Deccan  Bank,  291-1. 
Demand  loans,  136-37. 


Deposits — see  under  Bank  Depo- 
sits. 

Depositors  and  deposit  accounts, 
339-40,  339  n.  9;  conditions  for, 
338-39;  see  under  Bank  deposits, 
size,  339-9. 

Deposit  rates,  78-81,  83  n.  35,  84- 
85,  497-98;  regulation  of,  86-88; 
on  current  account,  78-79;  on 
fixed  deposits,  80-3;  on  postal, 
127  n.  10;  and  control  of  long 
term  rates,  85,  90-91,  91  n.  46, 
262-63,  262  n.  12, 
Dividends  of  banks  and  share 
prices,  278-79;  of  federal  Re- 
serve System,  104  n.  10;  of 
Bank  of  England,  104  n.  10. 
Earning  rates,  87,  92-93;  of  Cen- 
tral Bank  of  India,  93;  of  Impe- 
rial Bank,  93;  of  Punjab 
National  Bank,  93;  of  Allaha- 
bad Bank,  93;  of  Indian  Bank, 
93,  Table  XXIX. 

Eligibility  rules  and  Reserve 
Bank,  262-67,  489;  loans  266-67. 

Exchange  Banks,  relative  position 
36;  fixed  and  current  deposits 
of,  197  n.  79;  and  branches  in 
the  interior,  45;  45  n.  26,  199- 
200;  import  and  export  business 
of,  199;  and  domestic  trade,  199- 
200;  complaints  against  197  n. 
78,  199,  200;  exchange  clause, 
194-95;  restriction  on,  199-200; 
Import  and  export  business  of, 
see  under  Bills;  Indian  partici- 
pation in,  200-01;  and,  Imperial 
Bank,  201-02;  and  London 
Banks,  199. 

Exchange  rate,  effects  on  banking, 
26. 

Executor  and  Trustee  work,  158- 
59. 

Expense  ratio  of  banks,  242;  and 
salaries,  239,  242;  and  gross 
profits,  see  under  gross  profits; 
and  British  banks,  273  n.  4. 

Fattechand,  9. 

Federal  Reserve  System,  137-38, 
264-65,  273-74;  dividends  of, 
110  n.  10,  105  n. 

Finance,  for  war,  485-87;  and  in- 
flation .  .  .  .;  and  loans  .  .  . 

Fixed  assets,  156,  156  n.  39. 

Foreign  trade,  finance  of,  191-92; 
Indian  share  in  finance  of,  192, 
199-200;  and  German  Banks, 
201-02. 

Fowler  Committee,  26. 


546 


INDEX 


France,  banking  in,  86,  101  n.  18, 
141  n.  24,  155,  249,  250-51;  Bank 
of,  see  under  Bank  of  France. 
24,  155,  249,  250-51,  Bank  of,  see 
under  Bank  of  France. 

General  Bank  of  Bengal  and 
Behar,  2  n.  6. 

General  Bank  of  India,  2,  3. 

German  Banking,  182  n.  58,  183- 
84. 

Gold  and  silver,  see  under  Bullion 
Exchange;  imports  and  ex- 
change rate,  400-01;  advances 
against,  165-66. 

Gopaldas  Sahu,  10,  11,  16-17,  18. 

Government  and  banking,  323 
n.  29. 

Government  Bank  of  Bombay, 
4  n.  10. 

Grant,  A.  T.  .,  61  n.  2. 

Gray,  Sir  Alexander,  on  branch 
expenses,  242  n.  7. 

Grindlay  &  Co.,  315. 

Gross  rate  of  profit,  496-98;  of 
Imperial  Bank,  105,  108-9. 

Gross  rate  of  earning,  92-3,  236. 

Ear  Kishan  Lall,  304,  334-35. 

Hastings,  Warren  2,    15. 

Hawtrey,  R.  G.  60,  75  n.  25. 

Herschell  Commission,  26. 

Hilton  Young  Commission,  107, 
129,  252  n.  6,  261  n.  10,  263  n.  13. 

Hindustan  Bank,  Multan,  297. 

Holland,  120. 

Hundis,  Mudati,  143;  negotiability 
of,  144;  varieties  of,  144-47; 
dealers  in,  146;  discounting  of, 
146-47;  see  also  under  bills  of 
exchange. 

Imperial  Bank  of  India,  38,  95, 
133,  142-43;  Presidency  Banks 
amalgamation,  95-96;  causes  of 
amalgamation,  95;  and  bills  of 
exchange,  147-48,  122;  legal  res- 
triction on,  96,  98-99,  100  n.  6, 
116;  competition  with  other 
banks,  41-42,  106-07,  142;  com- 
position of  ownership,  112  n.  24; 
and  aid  to  other  banks,  110-11; 
demand  loan  rate,  88;  Hundi 
rate  of,  88;  expense  ratio  of, 
106;  and  central  banking  func- 
tion, 102-112;  privileged  posi- 
tion of  100;  and  public  balances, 
100-01,  104,  108;  and  public 
debts,  97-98;  and  seasonal 
finance,  113-16,  114-27;  and 
branch  banking,  39,  41,  42,  44, 
48,  99-100;  and  rates  policy, 


81-2;  and  Reserve  Bank  of 
India,  115;  balance  sheets  of, 
Tables  XI,  XII;  profit  and  loss 
account,  50,  105,  108-10,  236-37; 
size  and  power,  105-06. 

Imports,  finance  of,  see  under 
foreign  trade. 

Incomes,  see  under  banking  faci- 
lities. 

Indian  Bank,  Madras,  41-42,  55, 
82,  93,  110,  228-33;  deposit  rates 
of,  82-3;  83  n.  35. 

Indian  Company  Law,  119,  of 
1850,  343;  of  1866,  345. 

Indian  joint  stock  banks,  progress 
of,  30-31,  49-50;  relative  posi- 
tion of,  see  bank  deposits;  con- 
centration of,  see  under  that 
head;  class  A  banks,  32,  42,  58 
n.  36,  123,  159-60,  167. 

Indian  Specie  Bank,   309. 

Indigenous  bankers,  7-25;  and 
agriculture,  206-07;  Arjunji 
Nathji,  11,  16;  Bukanji  Kasidas, 
10;  Champa  Shah,  8;  Gopaldas 
Sahu,  16-17;  Jagatseths,  8-10, 
15-16;  Parracks,  8;  Virji  Vora, 
11;  area  of  operation  of,  11-12; 
intelligence  system  of,  13;  and 
trade,  14;  accounts  of,  14-15; 
and  politics,  15-17,  17-19;  and 
revenue  collection,  19;  and 
mints,  19-23. 

Industry  and  banks,  188-91. 

Industrial  banking,  173;  and 
major  industries,  173  n.  14;  and 
medium  industries  174-75;  diffi- 
culties and  precautions  of,  177- 
78,  179-88,  184-88;  and  liqui- 
dity, 179-81;  and  shiftability, 
181;  in  Great  Britain,  179,  187- 
88;  in  France,  183  n.  60;  190-91, 
in  Germany,  182  n.  58;  in  India, 
187-90;  189  n.  66;  funds  for,  183- 
84. 

Industrial  and  Exchange  Bank  of 
India,  189  n.  66. 

Insurance,  405  n.  20;  relative  posi- 
tion, 32,  127;  investment  of  406, 
406  n.  21;  average  size  of  policy, 
405;  of  deposits,  see  under  bank- 
ing legislation  and  bank  depo- 
sits. 

Interest  rates,  5-6;  long  and  short, 
61-65;  63  n.  6;  in  England,  63,  in 
U.S.A.  63;  episodes  of,  5-6,  65- 
74;  differentials  between,  75-77; 
borrowing  rates,  78-85;  lending 
rates,  81,  86-88,  88  n.  38;  and 


INDEX 


547 


agriculture,  77;  customers  rates, 
87-88;  open  market  rate,  88-92, 
88  n.  38;  on  demand  loans,  88-9; 
of  Imperial  Bank,  113  n.  26; 
Hundi  rates,  territorial  dispari- 
ties of,  87,  109-11,  264;  and  war 
finance,  486,  post-war — see  also 
deposit  rates. 

Investments,  Big  Five,  150-54,  152 
n.  35,  154  n.  37;  British,  103  n.  9; 
Seasonal,  115-16;  of  Imperial 
Bank  of  India,  151,  152  n.  35, 
154  n.  37;  long  term,  176-179;  in 
precious  metals,  33. 

Jaffer  Joosab,  301. 

Jagatseths,  8-10,  14,  15-16,  18-19, 
20-21. 

Joint  stock  banks,  origin  of,  1-2. 

Karachi  Bank,  293  n.  3. 

Kashmiri  Mai,  24. 

Kathiawar  and  Ahmedabad  cor- 
poration, 297. 

Kemmerer,  66  n.  13. 

Keynes,  J.  M.,  60-68. 

Khushalchand,  9. 

Kayastha  Trading  and  Banking 
corporation,  291-1. 

Land  mortgage  banks — central, 
411;  management  of,  415,  and 
debentures  414-15;  sources  of 
funds  of,  414-15;  application  of 
funds  of,  414-15;  purposes  of 
loans,  415  n.  29. 

Life  assurance,  see  under  Insur- 
ance. 

Liquidation  and  reconstruction, 
41,  368. 

Liquidity,  see  under  Industrial 
Banking. 

Lloyds  Bank,  176  n.  49. 

Loans,  131-37;  see  under  Ad- 
vances. 

Loan  offices,  170-71. 

London  Stock  Exchange,  370, 
373-74,  376,  383,  385. 

Laxmi  Bank,  171. 

McMillan  Committee,  177,  182 
n.  59,  258,  260. 

Manikchand,  9,   12. 

Mints,  19. 

Mistri,    301. 

Money  market,  17,  137-50;  bill 
market,  see  Bills  of  Exchange, 
and  stock  exchange,  396-99;  and 
interbank  loans,  263-64. 

Money  order  transfers,  269  n.  15. 

Mortgage  banks,  412-15,  see 
under  Land  Mortgage  Banks. 

Mulla,  J.  298  n.  5. 


Multanis,  145  n.  28,  262. 

Nanabhai  &  Co.,  310. 

National  Bank  of  Lahore,  298  n.  5. 

Nationalisation  of  banks,  481-82; 
of  central  bank,  481;  of  com- 
mercial bank,  483. 

Native  States  and  banking,  40-41, 
40  n.  20. 

Net  profits  rate,  238-39,  499-500r 
499  n.  9;  Bank  of  India,  211; 
Allahabad  Bank,  223;  Indian 
Bank,  232;  and  distribution  of 
dividends,  243-44;  of  London 
Bank,  234  n.  4,  240-41. 

New  York,  bill  market  of,  63-64, 
141  n.  24. 

New  York  stock  exchange,  370-71, 
373,  376,  381,  382,  385,  397, 

Nidhis,  171-73. 

Note  issues,  early,  3-5;  and  bank- 
ing progress,  27-28,  28  n.  31;  ann 
reserves,  250-61,  260;  and  other 
forms  of  currency,  250,  252  n.  6, 
253  n.  7,  253;  and  crenit  control, 
255-56,  see  under  Reserve  Bank. 

Open  Market  operations,  effec- 
tiveness, of,  267-74;  resources 
for,  268-71;  ann  permitted 
assets,  271-74;  and  size  of  mar- 
kets, 274;  see  also  under  Re- 
serve Bank. 

Oudh  Commercial  Bank,  28. 

Overdrafts,  see  under  Demand 
Loans. 

P.  &  O.  Corporation,  346. 

Paget,  Sir  John,  361  n.  30. 

Palmer  &  Co.,  3. 

Paracks,  8. 

Paris  Stock  Exchange,  373,  376, 
379-9,  385,  386. 

Peoples  Bank  of  Lahore,  304-06. 

Pioneer  Bank,  297. 

Planned  economy  and  banking. 

Poona  Bank,  296. 

Post  office  Savings  banks  and 
postal  cash  certificates,  32,  33, 
127;  number  of,  407  n.  21;  per 
head  deposit,  407  n.  21;  rates 
paid  on  deposit,  29,  127  n.  10; 
and  elsewhere,  35  n.  8. 

Presidency  Banks,  7,  25,  29,  66; 
table  IX,  70-71,  95;  relative  posi- 
tion of,  36,  121;  and  Act  of  1876, 
96. 

Press  and  banking,  332-38. 
Prices,  and  banking  progress,  26- 

27,  30-1. 
Profits  of  banking,  496-97;     see 


548 


INDEX 


also  under  gross     profits,     net 
profits,  dividends,  profits     and 
loss  accounts,   353-54. 
Public  debts,  and  savings,  33,  409- 

Punjab  National  Bank,  28,  84-85, 
93,  110,  122,  134,  152,  155,  157, 
217-20,  240. 

Rates  structure  in  India  and  else- 
where, 90,  91,  91  n.  46;  sea- 
sonal, 115-16. 

Real  estate  loans,  135. 

Regionalisation  of  banking,  55, 
influences  on,  55-6. 

Reichbank,  103. 

Reserve  Bank  of  India,  245;  Assets 
and  liabilities,  488-89;  Tables 
XL-XLI;  and  Imperial  Bank, 
247-48;  early  efforts  for,  247; 
causes  leading  to,  246-47; 
conditions  postulated  for,  247; 
constitution  of,  248;  and, 
monopoly  of  note-issue,  250; 
and  bank  rate,  250;  and 
bank  rate,  264-67,  486-8;  and 
banking  reserves,  255-56;  and 
open  market  operations,  267; 
see  also  under  open  mar- 
ket operations  and  banking 
practice,  277;  as  clearing  house, 
280;  capital  and  reserves,  248; 
dividend  of,  274-75;  executive 
of,  249-50,  464-5;  share  distribu- 
tion, 248-49;  separation  of  issue 
and  banking  debts,  257-58;  and 
money-markets,  262;  effective- 
ness of,  485-88;  scheduling  of 
banks  to,  278-79;  and  commer- 
cial functions,  274-75;  and  sea- 
sonal finance,  207-,  281;  and 
banking  practices,  277-78;  and 
credit  rationing,  see  under 
credit  rationing;  balance-sheets; 
and  agriculture,  see  under  agri- 
culture; see  also  under  Central 
Bank  for  India;  nationalisation, 
481-84. 

Reserves — see  under  capital  and 
reserves;  return  of,  347. 

Runs  on  banks,  208,  210  n.  2,  213 
n.  6;  and  government,  323;  and 
press,  332. 

Safe  custody,  14,  157,  157  n.  41. 

Salaries,  see  under  bank  employ- 
ees. 


Savings  and  banking  funds,  see 
under  bank  deposits. 

Savings  deposits,  growth  of,  34-6, 
35  n.  8;  return  of,  348;  of  sche- 
duled banks,  35  n.  2;  see  also 
under  bank  deposits. 

Scheduled  banks,  see  under  Re- 
serve Bank. 

Services  of  Banks,  other,  157. 

Stocks,  as  Investments,  see 
under  Investment;  prices  of,  74 
n.  24,  389  n.  11,  see  also  under 
Bombay  Stock  Exchange. 

Shiftability,  see  under  Industrial 
Banking. 

Short  and  long  rates,  see  under 
Rates  and  Interest  rates. 

Shroffs,  262. 

Sinha  H.,  2  n.  5. 

Sivarama  Ayyar  Bank,  Madras, 
299. 

Smaller  banks,  159,  510-11. 

Sonalkar,  195-75. 

Spalding,  193  n.  70,  194  n.  71  and 
72,  196  n.  74. 

Stempelvarinijung,  86. 

Stock  Exchange,  see  under  Bom- 
bay, Berlin,  London,  Paris,  New 
York. 

Stuart,  Sir  James,  2. 

Surgee  Ingedas,  23. 

Swiss  National  Bank,  103. 

Tapidas,   18. 

Tatas,  House  of,  307. 

Tata  Industrial  Bank,  123,  182, 
189,  212,  306. 

Tavernier,  22. 

Telegraphic  transfers,  269. 

Time  or  notice  deposits,  see  under 
back  deposits. 

Trade  depression,  6,  29,  68,  72, 
214,  237. 

Transfer  of  funds,  269-70. 

Travancore  National  and  Quilon 
Bank,  41,  286,  315,  341. 

Treasury  bills,   149-50. 

Trust  receipt,  196,  196  n.  74. 

Union  Bank,  355. 

Union  Bank  of  India,  7-16,  233. 

U.  S.  A.,  Banking  in,  3-4,  242. 

Vakil  and  Muranjan,  26-28,  26-29. 

Virji  Vora,  11. 

Wicksell,  60. 

Wilson,  James  28  n.  31,