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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.
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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
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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*
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5 JiO O
3066699696666 o '
I I 7 I 77 I T + + + + ^;
w o 8
fl rt o
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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
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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)
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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
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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
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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
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<s
Salaries
.2 3 9 *«i
3 .5 c <u b
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c|
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£ o> ^
05
2%
3<
t3
OJ
1«
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m :!
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c <ti T o <y
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•< 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
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g
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S-. W O
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l3 »H
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>-,
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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
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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
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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)
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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
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m CO ^73 ^
-iTl
pq
13
rt
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<W
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«M O
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- fi 5 3
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pq U pq
Bank
!!
Indiai
II
<
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Ma
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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
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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
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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,