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Full text of "Modern Banking In India"

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WITHIN THE 
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03 

OU 162071 >m 



OtTJ 4330. 1 -7 1 5,000 

OSMANIA UNIVERSITY LIBRARY 

CallNo.3 > 2>a'\0 C \S' t i Accession No. 

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



TO 
OUR MOTHER 

DEDICATED 
ON BEHALF OF HER CHILDREN 



PREFACE 

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

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

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



VI 

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

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

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

Sydenham College, S. K. MURANJAN 

1st August 1940. 



PREFACE TO SECOND EDITION 

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

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

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



viii 

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

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

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

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

Sydenham College, S. K. MURANJAN 

1st August 1945. 



PREFACE TO THIRD EDITION 

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

Sydenham College, S. K. MURANJAN 

1st January 1952 



BY THE SAME AUTHOR 



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

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



JOINTLY WITH PROF. C. N. VAKIL 



CURRENCY & PRICES IN INDIA (Longmans) 



CONTENTS 

PAGE 

1. EARLY BEGINNINGS 1 

I. BEFORE 1860 1 

II. THE INDIGENOUS BANKING SYSTEM . . 8 

1. Some Figures from the Past . . 8 

2. Area of Operations . . . . 12 

3. System of Intelligence . . . , 12 

4. Transfer of Funds and Hundi . . 13 

5. Trade 14 

6. The System of Accounts . . , . 14 

7. Loans to Political Powers . . 15 

8. Their Place in High Politics . . 17 

9. Bankers & Revenue Collectors to 

Government 19 

10. Mint-masters and Money-changers 19 

11. Sanctions of Commercial Obliga- 

tions 22 

III. 1860-1900 24 

2. PRESENT CENTURY PROGRESS 30 

1. Absolute Progress of Banking 

Resources 30 

2. Place of Banking Funds Relatively 

to Other Funds . . . . 32 

3. Constituents of Indian Banking 

System : Their Contribution to 

Growth 36 

4. Nature and Character of the 

Growth : Geographical Expansion 38 

5. Branch Expansion as a Factor in 

Growth 43 

6. Structural and Financial Implica- 

tions of Geographical and Branch 

Expansion . . . . . . 47 

7. Degree of Concentration . . 51 

8. Causes of Concentration . . 52 

9. Diffusion and Regionalization of 

Indian Banking Structure . . 54 

10. International Comparisons of 

Banking Progress . . . . 56 

11. Other Banks 57 

3. THE STRUCTURE OF INTEREST-RATES .. 60 

I. SOME HISTORICAL EPISODES . . . . 65 

1. Relationship Between Short-Term 

and Long-Term Interest-Rates 61 



Xll 

2. Episode of the Nineties . . . . 65 

3. World War I and the Years Follow- 

ing 69 

4. The Aftermath of the Great 

Depression 72 

II. DIFFERENTIALS BETWEEN SHORT AND LONG 

RATES 75 

III. RATES PAID ON DEPOSITS 78 

5. Demand Deposits 78 

6. Rates on Fixed Deposits . . 80 

7. Average Rate on All Deposits 84 

8. Regulation of Deposit-Rates . . 86 

9. Rates Earned on Investments . . 86 

10. Open Market Rates . . . . 88 

11. The Gross Rate of Earning of 

Banks Generally . . . . 92 

4. THE IMPERIAL BANK OF INDIA 95 

1. The Presidency Banks . . . . 95 

2. The Imperial Bank of India : 1921 

to 1934 97 

3. Size and Power of Imperial Bank 99 

4. Conflict of Commercial and Central 

Banking Functions . . . . 102 

5. High Liquidity of Imperial Bank 

Assets 104 

6. Profit and Loss Account . . 105 

7. Imperial Bank and Competition 

with other Banks 106 

8. Character of Executive, Owner- 

ship and Personnel . . . . 112 

9. Seasonal Character of its Business 

and Rate Variations .. .. 113 

10. Imperial Bank after 1934 .. 116 

5. STRUCTURE OF ASSETS & LIABILITIES . . 118 

I. STRUCTURE OF LIABILITIES 118 

1. Capital and Reserves . . . . 118 

2. Deposits-Liabilities of Banks . . 124 

II. STRUCTURE OF ASSETS 129 

3. Loans and Advances . . . . 131 

4. Loans to the Money Market . . 137 

5. Investments 150 

6. Cash 154 

7. Fixed Assets 156 

8. Other Services of Banks in 

India 157 

9. Smaller Banks 159 



Xlll 

10. Bank X 160 

11. Bank Y 162 

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

13. Nidhis and Chits of South India 171 

III. BANKS AND INDUSTRIAL FINANCE . . 173 

14. Major Industries 173 

15. Medium-sized and Small Enter- 

prises 174 

16. Provision of Long-term Capital 176 

17. Commercial Banks a,nd Industry 179 

18. Industrial Banks and Small 

Industries 188 

IV. FINANCE OF FOREIGN TRADE AND EXCHANGE 

BANKS 191 

19. Foreign Banks Generally . . 197 

20. Status of Foreign Banks . . 198 

V. FINANCE OF AGRICULTURE 203 

6. THE LEADING INDIAN JOINT-STOCK 

BANKS 208 



1. 


The Bank of India 


.. 208 


2. 


The Central Bank of India 


.. 211 


3. 


The Punjab National Bank 


. . 217 


4. 


The Allahabad Bank 


.. 220 


5. 


The Bank of Baroda 


.. 224 


6. 


The Bank of Mysore 


.. 226 


7. 


The Indian Bank 


.. 228 


8. 


The Union Bank of India . . 


. . 233 


9. 


The Bank of Behar 


.. 233 


10. 


The Bharat Bank 


.. 234 


11. 


The United Commercial Bank 


.. 235 



7. ECONOMY AND EFFICIENCY OF INDIAN 

BANKS 236 

1. Gross Profits 236 

2. Net Profits 238 

3. Expenses 239 

4. Examples from other countries 240 

5. Organization and Practices . . 242 

6. Dividends 243 

8. THE RESERVE BANK OF INDIA 245 

1. Constitution 248 

2. Monopoly and Management of 

Note Issue 250 

3. Central Banking Control Its 

Technique and Relation to the 
Money Market 262 

4. The Bank-Rate 264 



XIV 

5. Open Market Operations . . 267 

6. Direct Relations with Trade and 

Commerce 274 

7. The Reserve Bank and Banking 

Standards and Practices . . . , 277 

8. Definition of Scheduled Banks 278 

9. Reserve Bank as Clearing House 280 

10. Reserve Bank and Agriculture 281 

11. Reserve Bank in Action . . 283 

9, A BANKING CRISIS AND MANY "BANK 

FAILURES" 289 

1. Failures According to Age . . 290 

2. Failures According to Paid-up 

Capital 293 

3. Lax Laws, Public Ignorance and 

Bad or Dishonest Management 295 

4. Poona Bank, Poona . . . . 296 

5. Amritsar National Bank . . 296 

6. The Pioneer Bank . . . . 297 

7. The Hindustan Bank, Multan . . 297 

8. Kathiawar and Ahmedabad Cor- 

poration 297 

9. The British India Bank . . . . 298 

10. The Sivarama Ayyar Bank, Madras 299 

11. Bombay Banking Company . . 299 

12. The Pioneer Bank, Bombay . . 300 

13. The Credit Bank of India . . 301 

14. The Bengal National Bank . . 301 

15. Dangers of Industrial Finance . . 303 

16. The Peoples Bank of Lahore . . 304 

17. The Amritsar Bank, Lahore . . 306 

18. The Tata Industrial Bank . . 306 

19. The Bank of Burma . . . . 308 

20. Dangers of Speculation . . 308 

21. The Indian Specie Bank, 

March 1914 309 

22. Victims of Misfortune . . . . 31.3 

23. The Bank of Upper India, Meerut 313 

24. The Alliance Bank of Simla . . 314 

25. Travancore National and Quilon 

Bank 315 

10. BANKING REFORM AND BANKING 

LEGISLATION 322 

I. BANKING REFORM 322 

1. Absence of Confidence . . . . 322 

2. Low Level of Incomes . . . . 338 



XV 

U BANKING LAWS 342 

3. Ignorance and Illiteracy . . 341 

4. Form of Legislation . . . . 343 

5. Law Relating to Balance Sheets 

of Banks 343 

6. Capital 347 

7. Reserve Funds 347 

8. Debts and Liabilities . . . . 347 

9. Property held by Company . . 349 

10. Book-Debts 349 

11. Cash and Investments . . . . 352 

12. Advances : Bills of Exchange . . 353 

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

15. Law relating to Officers of Banks . . 354 

16. Law relating to Organization and 

Management 359 

17. Organisation 361 

18. Management of Banks . . . . 366 

19. Liquidation of Banks . . . . 368 

11. THE LONG TERM CAPITAL MARKET .. 369 

I. STOCK EXCHANGES IN INDIA 370 

1. Legal Status 370 

2. Membership of Stock Exchange 371 

3. Sub-brokers 374 

4. Classification of Members . . 375 

5. Listing of Scrips 378 

6. Cash and Forward Lists , . 379 

7. Period of Settlement and Specu- 

lation 381 

8. Budla Charges and Other Expenses 383 

9. Margins and Speculation . . . . 384 

10. Prices on Stock Exchanges . . 386 

11. Level of Values Generally . . 387 

12. Default 390 

13. Intervention in the Ordinary 

Course of the Market . . . . 390 

14. Selling-out Rule 391 

15. Buying-in Rule . . . . 393 

16. Holidays 394 

17. Reorganization of the Capital 

Market 395 

18. Banking Funds and Stock Ex- 

changes 396 

II. THE BOMBAY BULLION EXCHANGE . . 399 

19. The Bullion Exchange . . . . 402 



XVI 



III. LIFE INSURANCE 404 

IV. POSTAL SAVINGS BANKS AND CASH 

CERTIFICATES 407 

V, THE RUPEE DEBT AND GOVERNMENT 

BORROWING POLICY 409 

VI. AGRICULTURE AND LONG-TERM CAPITAL . . 411 



TABLES 

12 WAR AND POST-WAR YEARS 

1. The Reserve Bank of India 

2. The Chief Executive 

3. Reserve Bank Policies 

4. Assets and Liabilities of the 

Bank 

5. Legal Powers 

6. The Growth of Deposits Its 

Meaning 

7. Notes and Deposits Relative 

Position 

8. Geographical Expansion 

9. Concentration of Banking Power 

10. Branch Banking 

11. Size and Number of Accounts 

12. Profit and Loss War and Post- 

war Years 

13. Salaries and Percentages of Gross 

Profits 

14. Net Profit Rate 

15. Fixed and Current Deposits 

16. Bank Assets 

17. Post-war Movements in Deposits 

18. Post-war Assets Policy 

19. The Banking Companies Act 

20. Balance Sheets 

21. Officers of Banks 

22. Definition and Licensing of 

Banking 

23. Organisation 

24. Management of Banks 

25. Inspection and Emergency Powers 

26. Suspension and Winding-up 

27. Conclusion 

TABLES 

CHARTS 

INDEX 



481 
484 
485 

488 
489 

489 

491 
492 
493 
494 
495 

496 

498 
499 
500 
505 
507 
508 
511 
511 
512 

512 
513 
514 
515 
515 
516 



419 
481 



519 
537 
543 



CHAPTER I 

EARLY BEGINNINGS 

I. BEFORE 1860 

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

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

The Company's services were the main recruiting ground 
of these "merchant princes of India". Many of them were 
men who abjured the limited prospects of the Company's 
employment for the incalculable prizes of private trade and 
commerce. Some drifted into these avocations under less 
praiseworthy circumstances. Indeed, for some time, men 
in the employment of the Company even were allowed to 
engage in private trade and finance. The situation changed 
a little after 1813 when entry of private persons from abroad 
was permitted under a strict licensing system. Rights of 
residence and property 2 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 India 4 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 Indiaas 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 deposits 32 
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 Expansion 14 

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 tendency 15 to exploit more 
and more intensively the 5 big up-country centres of trade 
and commerce 16 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 

7 ft 

^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 demand 8 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 u a 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 $ 

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 


139119 


1930 


67 


232 


47 


95.6- 75.0 


75 


121 


12290 


1931 


29 


285 


27 


74.5- 63.2 


82 


102 


84-69 


1932 


30 


285 


34 


58.1- 77.6 


98 


100 


6970 


1933 


50 


300 


44 


81.4- 92.8 


115 


93 


6472 


1934 


36 


303 


62 


95.5-120.8 


123 


95 


7774 


1935 


46 


302 


69 


112.4-102.7 


132 


94 


7579 


1936 


109 




63 


105.8-137.0 




104 


8384 


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 effectiveness 32 
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 


12 

23 
1 415 


111 
21 

113 
31 

4-41 
451 
3141 


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 2 r 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 


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 89 1 

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 rates 44 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 

224 335 



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 Generally 47 

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 bankpenal 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; 11957Minutes 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-rates 26 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 Banks 7 

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 
8m. 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 Market 22 

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 Assets 39 

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 

BanksA 
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 months 7 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 



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 ^H 



1 



"8 I" 

co (3 



CM J 



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 ^d 4 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 


11562 


Nira 


Valley Sugar Co. 


100 


1 




828 


Tata 


Power Co. 


800 


95 


1376 4 












(Pd.-up 1000) 


19250 


New 


India Assurance 


25 


11-12-0 


35 2 












(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 Committee 65 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 foreign v 
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 months 7 
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 

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 Generally 79 

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 the 1 
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 place 90 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 BANKS 1 

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 
incident 2 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 India 3 

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 Bank 7 

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 Bank 10 

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 Baroda 11 

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 Mysore 12 

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 Bank 13 

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 India 16 

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 Behar 17 

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 Bank 18 

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 Bank 19 

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 BANKS 1 

1. Gross Profits 

THE GROSS PROFITS OF A BANK are the difference between 
its total earnings 2 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 business 13 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 INDIA 1 

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 Committee 3 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-Issue 5 

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 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 country 23 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 dividends 24 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 shows 27 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 Agriculture 28 

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) 









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 Simla 8 

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 Bank 4 
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 out 16 
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 case 21 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 35 1 ? 

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 1928 20 To this figure, we 
must add about 5 crores more on account of non-life insur- 
ance and post office life assurance. 

There is little doubt that there is still a good deal of scope 
for further expansion in this kind of investment. Some 
indication on this point is offered by the average sum as- 
sured in the new policies from one year to another. 

Average Sum per Policy 







Non-Indian 


Post Office 




Indian Companies 


Companies 


Insurance 




Rs 


Rs. 


Rs. 


1929 


1,628 


3,086 


1,890 


1931 


1,764 


3,400 


1,690 


1934 


1.528 


3,213 


1,690 


1936 


1,504 


3,148 


2,157 


1937 


1,485 


3,089 


2,150 


] 939 


1,460 


3,244 


1,940 


1941 


1,808 


4,781 




1945 


2,128 


5,727 


.... 


1946 


2,205 


6,114 




1947 


2,177 


6,170 





The Indian companies are obivously supporting the main 
burden of reaching the less well-to-do classes of our people. 
In a country where about 42 lakhs of account holders in 
the postal savings banks show a per head claim of Rs. 193 

20. 

1928 1929 1931 1936 1939 1941 1942 1943 1944 1945 1946 1947 1948 
Total Assurance 

in force 135 155 184 279 298 291 266 310 366 480 414 547 566 

Premium 
Income 68 7.9 9.2 18.9 15.6 145 12.6 15.4 31.2 38.4 44.6 485 51.5 

The suggestion to establish State Life Assurance was first made by Sir Richard 
Temple the Finance Member in 1872 but was rejected after a great deal of 
discussion. It was revised by the Director-General of Post Office and accepted by 
the Government in 1881 and a scheme was introduced in 1884. 

The insurance scheme was first confined to the employees of the Post Office. 
In 1887 the privilege was extended to the Telegraph Department and in 1895 
to employees of the Indo-European Telegraphs and to women employed in all 
departments. In 1898, the benefit was extended to all permanent Government 
servants as also certain members of establishments of the Military Departments. 
Subsequent extensions covered temporary Government servants or servants in 
foreign service in India. 

At first tables of premia were calculated from mortality rates from experience 
of the uncovenanted Service Family Pension Fund a fund confined to European 
residents in India. In 1912, the Actuary at the India Office revised the tables from 
the past experience of the Fund. 



406 LONG-TERM CAPITAL MARKET 

only, an average sum assured of about Rs. 1,500 is still re- 
latively high. Besides, the figures for the last few years 
do not disclose any tendency to fall, which suggests that 
new and lower income-classes have yet to be persuaded to 
adopt this form of saving. 

The manner in which insurance companies invest their 
funds is bound to be a factor of growing importance in the 
long-term capital market. The following distribution of 
the assets of Indian life assurance companies is sufficiently 
illustrative of the point. 21 

Figures in crores 
1937 1941 1945 

Total Business in Force . . . . 29.6 29.1 55.1 

Total Business in India . . . . 18.4 23.7 45.9 

Indian Government Securities . . 28.2 46.7 87.2 

Municipal Improvement Trust Boards 5.2 6.0 6.8 

Mortgages on Property . . . . 2.1 2.1 1.3 

Land and House Property . . . . 3.2 5.5 5.5 

Shares in Industrial Companies . . 4.1 7.2 13.0 

(Total) 32.8 67.5 113.8 

Other Investments 23.1 16.8 24.0 

Grand Total 55.9 84.3 137.8 

It is clear that insurance companies although in a much 
stronger position than banks are in no way more venture- 
some. While investment in Government securities is 
essential to a certain extent, these concerns could easily 
cultivate some of our neglected fields of investment like 
industrial debentures, house building societies, etc. At 

21. This distribution of assets does not give an accurate picture of the practice 
of the majority of Indian Companies. For, the figures are inclusive of the 
Oriental Insurance Company which accounts for about half the investments. It 
invests very largely in Government securities and for the 7^eason quotes the 
highest premium rates The exclusion of Oriental Insurance Company alters the 
percen'a^e thare of each type of investments in the following striking manner. 

Percentage to Total Investments 
All Indian All Indian Companies 

Companies ex-Oriental Insurance Co. 

Loans and mortgages .... 14 16 

Indian Government Securities . . 51 35 

Other Gilt-edged Securities 12 15 

Shares ...... 6 10 

Landed and House Property 5 7 

Miscellaneous ...... 12 17 

In 1940, the Oriental Insuranie-Co., amended its rules to enable investment 
in mortgages. 



POSTAL SAVINGS BANKS & CASH CERTIFICATES 



407 



present, their contribution to the great task of cultivating 
.new investment habits lies only in life insurance as such. 

IV. POSTAL SAVINGS BANKS 
AND CASH CERTIFICATES 21a 

Post office savings banks and postal cash certificates are 
the most far-reaching agency created by Government to 
attract the small investor in this country. First established 
in 1882, postal savings banks supplanted before the close of 
the century the pre-existing district savings banks and the 
Presidency towns Government savings banks and today they 
show 230 head branches and 11,879 sub-branches. The ex- 
tent of their operations will be better realised when it is 
recalled that towns with a population of 5000 and ove> 
aggregate in India to about 2300 only. 

The limits on deposits that can be made in any single 
year and the total balance that can be held by a single de- 
positor are now Rs. 750 and Rs. 5000 respectively while the 
limit for balance in the accounts of minors is Rs. 1000 only. 22 
Various suggestions have been made to raise the limits, 



21a. 



Postal Savings Banks, etc. 





0) <U 

> ft 


*! 


"o 

2 


& 

3 


<L> .j 

8 g 


S 


o 
CJ 












M 


O> O 


SZ 


w 


43 o 


1 ^ 


CO 













3 * 


"9 " 
d w 


'o 


%-< 




OJ 

g 


CO O 

^ 


w 


& w 

OJ 


"c 


1^ 






nn 




->_ 


JH 


0) r; 


o 
<u a 




aj ^ 
U . 





s? 






"0 a 

TO (J . 


ll 


* JG 

1| 


|| 


W) t> 

gs 


tuo <y 

03 P 

5> . 


O ^5 


a - 

3| 

( /5 j_, ^C 


c 

1 


1! 


tn 

JX 




^ o 




|l 


___ 1 1 


< s 


3 S 
< a 




O 0) W 

0-4 U ~ 


o 
O 


1 S 


a 


IS DO 














635 










1'iOO 




816 








123 


1004 










mo 




1430 








118 


1692 










_1 ( }20-2l 




1877 








121 


2286 


434 




459 




1925-LG 




2317 








117 












1927-2R 


211 


2706 


2">(5 


12070 


26502 


125 


3266 










J 928-29 


162 6 




25G 


12166 


27605 


170 


3449 


3230 








1929-30 


180.5 




256 


12512 


29081 


161 


3713 


3500 








1930-33 


192.8 


2477 


256 


12590 


28822 


149 


3702 


3843 




578 




1937-38 


2998 




230 


12401 


61350 


204 


7749 


6021 








1938-39 


0-50 2 


4241 


230 


11879 


67602 


193 


8186 


5957 


1077 


1939-40 


86 1 


4583 


ZZQ 


11640 


65978 


171 


7832 


5702 








1945 




3095 








259 


8022 


3582 








1946 


G13.1 


3517 


232 


10970 


102703 


328 


11505 


3876 








1947 


355.0 


3973 


232 


10957 


127221 


358 


14235 


3922 








1948 


346.8 


3153 


188 


8902 


140934 


406 


12811 


3769 




307 




1949 


361.9 


3426 


192 


9273 


156879 


433 


14849 


749 









22. Ch. II 2; Ch. VI 6; Tables XXIV, XXV, XXVIII and XXIX. 



408 LONG-TERM CAPITAL MARKET 

allow deposit and withdrawal by cheques, facilitate joint- 
accounts and payment to survivors, increase the number of 
offices, extend as in the United Kingdom the local obligation 
to pay or receive into a general obligation valid in all parts 
of India, etc. As we have already stressed, joint-stock banks 
now offer similar facilities and inducements while the 
growth of savings deposits has been most remarkable. 23 
The limits, for example, fixed by the Imperial Bank of 
India for its savings bank accounts are Rs. 5000 in any sin- 
gle year and Rs. 10,000 for the maximum balance permitted 
in an account. Not more than one withdrawal is allowed 
per week. 

We have had occasion to remark on the enormous growth 
of small savings which has occurred since 1930. The 
growth in the case of postal savings has occurred very 
largely by an increase in the number of depositors. About 
8 lakhs in 1900, the figures stood at 10 lakhs in 1920 and 24 
lakhs in 1930. Although the number of branches has not 
varied much since 1920, the number of depositors rose to 
more than 42 lakhs in 1938-39. 

The average balance in each branch has naturally kept 
pace with the growth of the number of depositors. But it 
is noteworthy that the deposit per head which was fairly 
stable or slowly progressing till 1930 mounted with asto- 
nishing speed in the depression years thereafter. Several 
causes of varying importance have been at work to bring 

23. Max. Deposit Total Max. Interest 

per annum Deposit 

Rs. Rs. 

1883-85 Govt. Banks, Presidency Towns 500 300 4 p.c. 

1870 Dist. Savings Banks 3000 32 

1879 Dist. & Other Govt. Saving Banks 5000 4 1/6 

1880 3000 3t p.c. 

Also see p. 127 f.n. 10. 
"There is nothing to prevent a man having any number of imaginary relative^ 

and opening accounts in all their names a case came to light some years 

ago in which a depositor at Dharwar was authorised to operate on eighty-three 

accounts with a balance of nearly Rs. 30,000 further inquiries made at 

the time elicited that one depositor at Bijapur controlled forty-two accounts, 

another at Surat thirty, and another at Karwar nineteen These deposits 

represent a very high proportion of the total in India so that the action of 
any strong body of depositors in Bombay has a very serious effect on the balance 
of the Savings Bank." 

The Post Office of India & Its Story, by Geoffrey Clark, 
(Bodley Head), p. 86 



RUPEE DEBT & GOVERNMENT BORROWING POLICY 409 

about this result. It is more than probable that fixed depo- 
sits at banks have lost their attraction with the great fall of 
interest rates. A part of the improvement is accounted for 
by the phenomental exports of gold, hoards being to an ex- 
tent converted into this form of savings deposit. A third cause 
which might explain the contrast between the behaviour of 
fixed deposits and postal savings deposits is that with 
the great fall of prices, the number of well-to-do persons, 
e.g. assessees to the income-tax ceased to grow while the 
margin for saving of those classes which depend on fixed 
or relatively inelastic incomes was very much enlarged. 24 

V. THE RUPEE DEBT AND GOVERNMENT 
BORROWING POLICY 

In almost all countries which are now in the van of 
industrial and economic progress, the creation of public 
debt led the way to the investment habit which became 
subsequently the foundation of their commercial and indus- 
trial achievement. Since the political dependence of India 
These remarks hold good for postal cash certificates also. 25 
on England made this country an outlet for the investment of 
British capital, it was hardly to be expected that the 
growth of a domestic investment habit should have any 
place, whether as the most important bye-product or a part 
of the main objective itself, in the policy of public loans. As 
a matter of fact, it was the settled belief and policy of the 
Government of this country before the first World War that 
not more than 5 crores could or should be raised in the 
Indian market in any single year. It was only under the 
stress and compulsion of that War that the potentialities of 
the Indian market were first properly assessed and in the 
short space of three years 1917-1919, loans aggregating to 
more than 130 crores were raised. In the ensuing years of 
deficit budgets, reconstruction expenditure, development of 
railways, irrigation, forests, reclamations and many other 
miscellaneous objects of provincial concern, the experience 

24. Ch. Ill, Part II (3). 

25. Ch. V 2. 



410 LONG-TERM CAPITAL MARKET 

of the War proved a turning point in policy and the same 
steady rate of borrowing, about 30 crores a year, was main- 
tained till the onset of the Great Depression in 1930. 

A little before the outbreak of World War I, about 1910, 
an important change took place in the relative attractive- 
ness of the two markets. A persistent disparity between 
the prices of rupee security in India and sterling security 
in England made it clear that so far as India was concerned, 
the United Kingdom had become a dearer market to borrow 
in. This dearness, explained in various ways, has become 
even more marked recently and is bound to work as an 
overriding factor in all our future borrowing. 

World War I initiated a trend in interest-rates which 
has changed the composition of our public debt. It was 
obvious that the high levels caused by the War would be 
only temporary and must in due course be followed by a 
more or less long period of falling rates. Funds were there- 
fore raised by means of terminable loans which account 
today for the bulk of our public indebtedness. 

As the bulk of our public debt before the first World 
War was covered by productive assets like railways, irriga- 
tion works, etc., it had not the regrettable meaning which 
it had in many other countries. It is true of course that the 
expenditure of these loans could have been so managed as 
to expedite the creation and growth of Indian industries in 
place of British industries. And apart from this omission, 
it could be argued that our public debt deprived private 
trade and industry of the resources it needed more urgent- 
ly. It would be more legitimate, however, to criticise our 
borrowing programme on the ground that it took no account 
of market conditions and the state of trade and business 
generally. Our loans and programme of public investments 
have been so timed that they have sometimes aggravated 
the pressure on funds and at other times, avoided taking 
advantage of idle savings and assisting investment. In the 
years of abundant funds, 1930-38, for example, Government 
showed themselves keen on conversion operations and in 
no year did the tender of cash accepted in the loans exceed 
20 crores. In most years, the tender accepted fell much 
below 15 crores. 



AGRICULTURE AND LONG-TERM CAPITAL 411 

So long as borrowing is undertaken for productive pur- 
poses and the credit of the Government is high, the public 
debt performs an important service towards banking and 
business. It supplies the market with the most market- 
able kind of security. Ordinary banks find in it a means 
of cyclical or secular adaptation while the Central bank 
depends on it within the limits of its character or law, for 
open market operations. Individuals and business look on 
it as an investment and the most dependable means to raise 
loans. 

On 31st March 1939, the aggregate rupee debt of the Gov- 
ernment of India and provincial Governments stood at about 
440 crores and the sterling debt at about 300m. To 
the rupee debt, we must add the loans of independent 
bodies like the corporations of Bombay, Calcutta, etc., which 
have statutory powers to borrow directly on their own ac- 
count. The rupee debt of Governments thus was more than 
twice the average note-circulation and more than one and 
a half times the fixed and current deposits of banks with a 
paid-up capital of 1 lakh and more. It is very unlikely that 
of the aggregate public debt of India, more than 150 crores 
of the rupee debt was held by all commercial and co-ope- 
rative banks put together. During World War II the export 
surplus was used to repatriate our foreign debt, and to 
create foreign i.e. British obligations towards this country 
to the extent of more than Rs. 1,200 crores. The addition to 
the domestic unproductive debt itself exceeds 600 crores. 26 

VL AGRICULTURE AND LONG-TERM CAPITAL* 

The supply of long-term capital to the peasant and culti- 
vator is one of those economic problems of India which 
have yet to be dealt with on any significant scale. With the 
money-lender and other indigenous agencies of rural credit, 
there hardly exists a distinction between short-term and 
long-term finance. In spite of changes of law and status, 
their mutual relationships still retain the basic elements of 
a hereditary joint enterprise. Co-operation which aspires 
to replace these ancient agencies has avowedly concentrat- 

26. and 26a. See overleaf. 



412 LONG-TERM CAPITAL MARKET 

ed itself on the supply of seasonal or at the most interme- 
diate credit. There is a general agreement that long-term 
finance must be undertaken by a special type of organiza- 
tion like land-mortgage banks. 

It is unlikely that one uniform type of credit agency will 
be able to satisfy the long-term needs of different classes of 
agriculturists. The big landlord or zemindar should be 
able in all ordinary circumstances to raise funds from com- 
mercial banks in the country. For the small agriculturists, 
mutual guarantee, and intimate knowledge and association 
implied in co-operation are probably the only basis on which 
funds could be raised and banking operations managed 
with success. A partial modification of the co-operative 
basis may be necessary to the extent that the shortcoming 
of agriculturists in business ability, knowledge, etc., have 
to be remedied by the admission of non-agricultural persons 
into the management and organisation of such institutions. 
As the Banking Enquiry Committee well observed : "While 
mutual knowledge of, and control over, one another among 

26. OWNERSHIP OF CENTRAL GOVERNMENT RUPEE LOANS 

1949 End. 

Central Government Percentage 

rupee loans io total 
(in croies) 

Reserve Bank of India 2,16 * 15 
Scheduled Banks : 

Major Indian 2,31 16 

Other Indian 50 .1 

Exchange 41 3 

Non-scheduled Banks 10 1 

Co-operative Banks 27 ** 2 

Insurance Companies 1,13 r 8 

Part A States 75 ., 5 

Part B States 1,00 ; 7 

Held by the Reserve Bank of India 

on account of others 1,83 13 

Held by non-residents 50 ; 3 

Others 3,41 24 



Total 14,37 100 



* The total of rupee securities in the Issue Department and investments in the 
Banking Department as shown in the weekly statement as on the last Friday of 
1949, less holdings of treasury bills. 

** Including Provincial and State Government Securities. 

t Including Securities of Part A States. 

$ Estimated. 

:j.t End of June, 1948. 
26a. See Ch. Ill Part V; Ch. VIII 10. 



AGRICULTURE AND LONG-TERM CAPITAL 413 

members is the insistent feature in the case of the 
unlimited liability credit society, the insistence in the case 
of a land-mortgage credit society with limited liability is on 
the capacity and business habits of the directorate in order 
to ensure sound valuation of security, careful investiga- 
tion of titles, correct assessment of the borrower's credit and 
repaying capacity, and efficient management of affairs." 

In 1937-8, there were 166 land-mortgage banks in British 
India and 35 more in Native States. Only a few provinces 
and States like Bombay, Madras and Mysore have central 
land-mortgage banks while the bulk is composed of primary 
land-mortgage banks or societies. 27 The share capital, de- 
bentures, and loans received from central banks and socie- 
ties of the aforesaid 166 societies in British India aggregate 
to less than 2J crores. Provincial Governments have ap- 
pointed their officers on the managements of these banks 
and services of officers of the revenue or co-operation de- 
partments have been placed at their disposal. 

In defining the area over which these banks or societies 
have to operate, physical difficulties of transport etc. have 
to be carefully weighed. The Punjab and Bombay provinces 
have adopted the same territorial unit, the tehsil or 
taluka and more often the district. In Madras, a radius of 
5 miles is judged more appropriate and there is a further 
tendency to limit the banks to fertile areas. Where the 
district is selected as the area it has been found that the 
bulk of applications is drawn from the area in the neigh- 
bourhood of the headquarters of the bank, the more dis- 
tant tehsils or taluka finding the precedure more expen- 
sive or not easily available. 

Equally with management, finance is the crux of the pro- 
blem. It is clear that share capital cannot furnish more 
than a fraction of the working fund. It may not be practi- 
cable or indeed desirable to depend on short-term deposits 
for investments which must extend over 10 to 20 years, if 
not indeed longer. In Bengal, deposits running from 2 to 5 
years have been raised. But it is still a question to be de- 

27. (a) Baroda has a central L.-M. Bank, but it deals directly with agricul- 
turists. So also some other States like Cochin and Travancore. 
(b) In Bengal, the Punjab and the C. P. Provincial Co-operative Banks act 
as provincial land-mortgage banks. 



414 LONG-TERM CAPITAL MARKET 

cided whether it would not be wiser in the long run to pro- 
hibit the acceptance of deposits or at least to limit them as 
to currency, volume, etc. 

The flotation of debentures must, therefore, be the chief 
means of raising the necessary working funds. The success 
of debentures depends entirely on the status of the author- 
ity which issues them or on the guarantees offered. Since 
primary banks can hardly command the requisite prestige 
and credit, the central land-mortgage bank as in Madras 
seems to be best qualified to undertake the responsibility. 
The guarantees in vogue are of two kinds. In some cases, 
the provincial Government have been guarantees as to either 
principal or interest or both and in Bombay and else- 
where have even subscribed to them. In most cases, the 
debentures enjoy the privilege and status of trustee secu- 
rities. The other form of guarantee consists in the limita- 
tion of the issue of debentures. It has been suggested that 
the volume of debentures should not exceed 15 to 20 times 
the paid-up capital of the issuing mortgage banks or half the 
value of property mortgaged to them. As primary societies 
cannot float debentures, their working fund is composed 
largely of loans from central land-mortgage banks. 28 

Safety of funds is sought not only by conservative man- 
agement but also by various restrictions on lending. It has 
been the practice in Bombay not to advance more than half 

28. Capital and Percentage Percentage Percentage 

other of paid- of Deben- of loans 

liabilities capital tures from C. C. 

nn OOOs) to 1 to ] to 1 

Bombay Provincial Co-Op. 

Land Mortgage Bank Ltd. 2100 19.6 771 

Nasik Dist. Co-Op Land Mort- 
gage Bank Ltd. 19.38 June 118 10.9 .. 77.1 

Surat Dist. Co-Op. Land Mort- 
gage Bank Ltd. 158 189 . , 7S.1 

Dharwar Dist. Co-Op Land 

Mortgage Bank Lid. 230 4.7 .. 77.3 

Bclgaum Dist. Co-Op. Land 

Mortgage Bank Ltd. 148 10.8 . . 83 1 

Pachora Taluka Co-Op. Land 

Mortgage Bank Ltd. 259 4.9 .. 74.9 

Hubli Co-Op. Land Mortgage 

Bank Ltd. 173 8.7 .. 89.6 

Poona Dist. Co-Op. Land 

Mortgage Bank Ltd. 260 80 . . 88.7 

East Khondesh Dist. Co-Op. 

Land Mortgage Bank Ltd. 153 167 .. 808 



AGRICULTURE AND LONG-TERM CAPITAL 



415 



the value of the mortgaged property. In Bombay and 
Bengal, loans are further limited to 10 to 20 times the share 
capital of the borrower. In the Punjab, the limit prescrib- 
ed is 30 times the land revenue paid by the borrower. It has 
been suggested that the maximum advance should not ex- 
ceed a certain figure, two, five or ten thousand being men- 
tioned. Periods for which loans should run are defined 
variously in different provinces. Equated payments are 
spread over 16,1 years in Madras while periods of 10 to 20 
years or 20 to 30 years are either suggested or in vogue in 
other provinces. 

The question of management and co-ordination is, as 
stressed above, not less important than that of finance. 
Default^, accumulation of over-dues, favouritism in the 
grant of loans, the misuse of their position by directors to 
secure loans for themselves are evils to which these socie- 
ties are as prone as the ordinary co-operative credit socie- 
ties. The spirit and working of central co-operative land- 



29. 



Nasik Dist. Co-Op. Land 
Mortgage Bank Lid 



Sural Dist Co-Op Land 
Mortgage Bank Ltd. 



Dharwar Dist. Co-Op. Land 
Mortgage Bank Ltd. 

Belgaum Dist. Co-Op Land 
Mortgage Bank Ltd. 1930 

Panchora Taluka Co-Op. 
Land Mortgage Bank 
Ltd. 1939 

Hubli Dist. Co-Op. Land 

Mortgage Bank Ltd. 1939 

Poona Dist. Co-Op. Land 
Mortgage Bank Ltd. 





Percentage 


Loan per 




of applica- 


applicant 




tions grant- 






ed to total 






applications 




1936 


197 


1,418 


1937 


48.8 


1,118 


1938 


60. S 


1,080 


1937 


26.7 


1,282 


1938 


21.9 


2,990 


1939 




2,164 


1936 




1,875 


1939 


147 


1,586 



Percentage Cash and 
of loans due Bank 
from mem- Balances 
bers to Percentage 
liabilities liabilities 



82.4 
87.5 



1935 
to 

1939 34.8 

East Khandesh Dist. Co-Op. 
Land Mortgage Bank 
Ltd. 1935 

to 14.5 

1939 



823 



1,170 



1,350 



907 

74.8 
89.6 

91.5 
86.6 



1 3 

OG 
69 

27 



3 7 



416 LONG-TERM CAPITAL MARKET 

mortgage banks no less than the needs of agriculture would 
obviously be better served if joint-stock banks were per- 
suaded to become members of the central institutions. A 
more difficult and urgent problem is to co-ordinate the 
working of mortgage banks and ordinary co-operative cre- 
dit societies. Their mutual co-operation cannot but be of 
mutual advantage. At the same time, every precaution has 
to be taken in order that only solvent and well-managed 
societies of the latter class should be admitted to such par- 
ticipation in the activities of mortgage banks. 

In the existing circumstances, the main service of land- 
mortgage banks must be to release the small land-owner 
and cultivator from his load of past indebtedness. In other 
words, the debt to the private money-lender with its high 
rate of interest is to be replaced with a debt to the land- 
mortgage bank at a lower rate of interest 30 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," % 


8 ^oS 




<U "^ ffl 13 ^ 




ft-; 






||| 


, 1 
ill 


*!" 

<>: 


*1j 

6 


3 ' C 
3 O 

5 | 


IlilS 

"pq Tswpq 


; li 
&a 


IS 11? 13 


o 

9 


|| 


Hiis 
ll5 







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 it 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 

a a 


c! 


*0 W 


38 

tuo 

a3 


3S 

V 

'oSS' 


pq 


B S 
t 

a 




1 


,s . 


sj? 


$| 


f 


p 


w ffl 

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 


340 


26 












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. 



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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 

^NJ 

<n 



2 
' ' 

>* 
3.7 


1 Allahabad Bank. 


Punjab National 
i Bank. 


i 

w 


2 
3 

3.33 


<H 
O 

44 
C 
03 

PQ 

r c3 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 





















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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 



TABLES 



435 



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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 





P 




+2 


;>> 


73 S 


S'-M\ 


"~cC 


42 


." 


G 


J w jg 


3 


1/3 




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as 

& 

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33 

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73 " 


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3- *s 

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3 

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73 


$5 


IS 3 




0; 03 

xu 


13 
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| + 


IN 







2 


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* 





(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+ 50 


122 


183 


1939 


168 


87 


25.3 255 


1825 


1161 


2946 


3241 


400 


2+26 5 




167 


1940 


168 


94 


30 262 


2163 


1085 


3249 


3511 


850 


2+20 


50 


99 


1941 


168 


101 


35 269 


2929 


1203 


4132 


4401 


662 


5+0 5 




23 


1942 


168 


108 


40 276 


4314 


1151 


5965 


6241 


1114 


8+ 5 83 


185 


23 


1943 


168 


120 


48 289 


6755 


1408 


8163 


8451 


1663 


0.3 5 


66 


23 


1944 


251 


202 


52 453 


7587 


1861 


9448 


9901 


1514 


22 10 


66 


23 


1945 


251 


222 


52 473 


8272 


2251 


10523 


10996 


1560 


17 11 


66 


23 


1946 


262 


318 


52 580 


8517 


2835 


11352 


11931 


1851 


20 11 




23 


1947 


314 


300 


52 614 


9377 


2938 


12315 


12929 


2418 


130 




164 



TABLES 445 



TABLE XX 

The Central Bank (Dec. 31st) 



? S3 


It 


3 & - 


TJ vi 


C 


o 

c 














M 38 


M^ 


S'O^J? 


(rt O 

C 


03 


. 2 


o 


o 


n 


<s 




Salaries 


.2 3 9 *i 

3 .5 c <u b 

7:3 


c| 


"o 5 

o> ^ 


05 

2% 
3< 


t3 
OJ 

1 


2 eg 

m :! 


& 


^0 


3 w 


x * 
o 


CO 




- 1 


c <ti T o <y 

!*: 

*s^s 

*- 


?? 


< gj >4 

7J <o < 
OPn COT 


ash Crei 
Demand 

oans. 


ill Discot 
Purchase! 


1 p 
i & 

> 


otal earni; 


iterest Pi 
Depositor 


iterest on 
Deposits, 

iterest on 
Deposits, 


<C 

o 

S-t 

& 
vi 

2 


e/i 
C 
g 
& 

* 


S-. W O 
O) >> 0> 0> 

SSf 1 
III ! 


fc 


K 


S 


U t-J 


PQ 


l3 H 


H 


>-, 


M >-< 







D * 


18 






38 40 


2 




31 


197 


133 65 


122 


62 


30 10 


10 




6 


22 25 


0.5 




737 


442 


343 99 


295 


97 


44 25 


13 




5 4 


21 22 


0.5 




341 


136 


64 62 


205 


60 


62 14 


11 




4.1 


27 19 


2.3 




361 


194 


125 69 


167 


77 


43 21 


249 




1.5 


49 37 


83 




670 


359 


199 160 


311 


182 


62 35 


r>7 




08 


66 107 


78 




Io74 


858 


493 365 


516 


288 


102 70 


105 (incl 
























T. bis ) 




2.7 


119 139 


23 




2810 


1040 


346 694 


1770 


522 


260 274 


324 () 




1.2 


289 206 


47 




4262 


1516 


250 1266 


2746 


699 


443 200 


233 <) 




1.3 


316 305 


99 


35 .. 


7815 


4688 


3146 1542 


3127 


1281 


713 175 


'226 (,,) 




3.0 


358 378 


184 


33 .. 


8286 


5307 


3701 1606 


2979 


1531 


1606 365 


285 i.j 




53 

( 


374 379 


102 


38 .. 


8884 


5595 


4135 1460 


3289 


1366 


1030 427 


640 


33 


18 


v / 
966 


172 


48 35 


11039 


6567 


4975 1592 


4472 


2134 


1314 552 


691 


23 


18-1-5.7 


851 


143 


51 35 


11647 


6626 


5127 1499 


5021 


2257 


772 784 573 


673 


24 


19 |-1.1 


782 


139 


54 34 


10268 


5860 


4320 1520 


4408 


1891 


770 799508 


947 


62 


25 


738 


170 


55 ri 


10679 


6138 


4384 1754 


1983 


1983 


794 805 563 


1026 


57 


34 


805 


164 


55 37 


10512 


6247 


4358 1818 


4265 


1618 


482 856 580 


822 


49 


25 


866 


123 

i 


55 38 


3914 


5747 


4092 1655 


4167 


1552 


956 877 .. 


585 


51 


33 


692 


91 


104 


9K'2 


5287 


3711 1555 


3865 


1348 


877 841 .. 


3 512 


50 


25 


641 


56 


103 


8893 


47% 


3213 1582 


4097 


1763 


891 806 . . 


1 447 


42 


26 


609 


44 


111 


10247 


5341 


4253 1786 


4906 


1761 


874 832 .. 


2 622 


52 


24 


576 


31 


110 


10299 


5366 


4119 2247 


4933 


1432 


894 859 .. 


38 851 


59 


42 


636 


39 


111 


10135 


6025 


3950 2075 


4110 


1468 


918 947 .. 


156 796 




105 


807 


73 


125 


10308 


5129 


3292 1837 


5179 


2384 


941 909 . . 




76 






















83 734 


63 


99 


869 


82 


127 


10711 


5564 


3522 2042 


5147 


1984 


1015 1128 .. 


96 827 


65 


162 


10?8 


160 


130 


10997 


5052 


3303 1749 


5945 


2236 


1003 1173 . . 


68 732 


105 


205 


1178 


173 


126 


11841 


4325 


2889 1456 


7516 


2685 


1019 1343 . . 


55 785 


97 


208 


1263 


150 


118 


11296 


4083 


2889 1394 


7213 


2759 


1018 1461 . . 


49 730 


82 


222 


1395 


178 


117 


12273 


4135 


2795 1340 


8136 


3177 


1044 1580 


11 830 


73 


221 


1204 


138 


118 


12162 


3991 


2583 1408 


8171 


3047 


1181 1767 .. 


13 1702 


74 


264 


1615 


269 


119 


13210 


3888 


2215 1673 


9322 


4099 


1203 1966 . . 


81 2918 


97 


252 


1382 


219 


111 


14274 


3695 


2080 1615 


10379 


4841 


1355 2297 . . 


288 3747 


72 


302 


2281 


378 


104 


"2728 


4186 


2374 1812 


18547 


1071 


1911 3391 . . 


301 4927 


48 


320 


2747 


496 


98 


27982 


5999 




21963 


11743 


2279 4474 . . 


204 5747 


60 


339 


3374 


631 


93 


31545 


7365 




24180 


12213 


2728 5588 . . 


10 4968 


48 


397 


5289 


735 


93 


38203 


9413 




28790 


14410 


3475 6791 . . 


0.4 5430 


47 


414 


4305 


722 


100 


42942 


10028 . . 


32914 


14994 


4048 8946 . . 



446 



TABLES 



TABLES 



447 



a a 



a * 

a a> 

5 2 I 

H 1 g 

u I 

U PH 



PUB puBq ui 



PUB 
jjous }B 

JO USD JB A9UOH 



SOQ apojs-'lf J<> 

SdJBlfS X.l 

PUB 

dn-piBd 
-' 



PUB 



o in to p p to 
cvi cvi to cvi to oi 



^ iHOrHt^oirH^ine^cotbtooooco 

rH TH rH rS r-l COrHtH<HtHCM<HrH(Mr-l 



rH 00 tO CV| . tO CO 



coco 



rlfHO ' H O O O 



H bbbbt>fHcabbbbbb ' b b 



i>; cvi o -in TH co to in 
co b co 'in 'cobbb 



^^^ ^ 
tot^to in 



looooor-ibbbbbc r-t - HrHeMf- cvi rHrHr-J^H 



J 



SUBOI 



PUB 



ui 



pus 
sing 



SUBO'I 
'S3DUBAPV 



4 s8ui 



9AJ9S9H PUB 



9S9H P 

Q dn- 



JO tO tO tO rH 

TH r-i co ci co 



SUBOI _ _ 

" IJ9^S UBipuj v coincocvit^in*-< 

BUIUIJ91-UOM ! Cvj M * W rH r-i N 



cvj 10 "* o co > 
cvj oi cvi CM cvi cvi 



pto oqcMinoq 

COCO COCOCOCO 



I s 



t>rHr-ioqstooooqcvipo>oqoq 



co oo p 



i>coint^o>pptooocAcoinintop ^ p 



<=? ^ 

in to 



* ' ' ' S S 



pro o> co cvj in to *Htooqt 
t>o J5^J^JIS g ^J5 r ^ c ' 



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V 

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asuadxa IBJOJ, 



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A\te[B 

SOOO 



SOOO 
SSOJQ 



SOOO sjojtsodaQ 

OJ piBd 



SOOO 



01 + 6+8 



JO 

pue -jajcT Pl^d 
Xij-iBd jo A'nn 

SUBOT -douni\[ 
pue 



sum 

APV puBiuaa ^ 
sing 'sajou-'j 

SUB01 



s>isodaa 



3UTABS 



S 



"* t- CO O 

CM rH CM CM 

O O T* . . . . 

CM rH rH 



S** OOOPt^^in^tOOl 

^c Tjintoooooooi>in< 

rH rH rHCMCMt'-CMt-inm< 



co m oo 



inoocScoinoooooot^o 

inCMrHrHrHrHrHrHCMin 



rH co gsoseptotoinoscof 



ssfc 

10 t- 00 

CM S 

r- rH O 

c- to f- 



CM O t^ 

CO TH CM 
CO rH rH 



rH rH rH CM 



CM CM CM 



CO ' O 
CO CO 



to to .to 



CM ' CM 



rH CM CM 



?: S3 S 



OJ * t-^ CM O 
" ~ 



iO O 

CM o 



t> OS t CM O 

t>^ IO rH CO <O t^ 

O rH * 00 00 OS 



N ? OS 

O t- CO OS 

CM CM CM .CM 



OS rH CO tO . ^* 

O O rH rH CTJ 



O rH rH CO -^ 

d co <c o to 



co *< in to b- co o 
os os os os os ot os 



CO CO CM CO 

co t^ d' d 



> CM CM OS OS (O tO rH 



in in totototocotococMcocMO- 



y- 



I CO OS r- 



Sg 



CO ^ OO CM ( 

t- m CM t>- ' 

^ c-o co CM ( 



CM CO CO < 

t>. m in ' 



COrHb-OSCOrHf-rHOOCO 



Ic^Sc^So^ 

rH rH M < 



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" ; ' -" CO in CO O CM CM ci CM CM rH CM CM to CO CO < 



CM <* 
10 



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CMpO C-3CM ^tOSrHrHrHrHrHO'-HrHI 



coco coco cocococowcococococococococoeocoinoooooo 






450 



TABLES 

TABLE XXIII 

The Punjab National Bank 

(Percentage to Deposits) 



1896 


If 

cxp? 

i T3 

"3 * 
cu 


Q w 

H^ : 


tmcates. 

Loans, Cash Cre- 
dits, Pronotes, 
Bills, Demand 
i Advances. 


Govt. Securities. 1 


Govt. guaranteed 
Debentures and 
M'pal Loans. 

i 


d 

JH rt . 
jg 


Investments I 

4+5+6. I 


Lands, Buildings, 1 
Machinery. 1 


i 


16.6 














1900 


14.0 


















1906 


13.0 


















1910 


12.2 


















1911 


12.0 


















1912 


12.3 


83.6 


93.8 


10.6 


5.3 




15.9 


1.0 


7.2 


1913 


15.4 


90.9 


68.9 


11.8 


9.6 




21.4 


1.4 


25.1 


1914 


31.1 


83.1 


87.1 


19.6 


16.6 




36.2 


2.5 


14.2 


1915 


31.3 


77.1 


89.1 


13.3 


15.1 




28.4 


2.3 


15.3 


1916 


14.5 


77.2 


83.6 


14.7 


11.4 




26.1 


1.8 


17.7 


1917 


25.6 


72.4 


89.9 


18.9 


11.5 




30.4 


1.8 


14.3 


1918 




















1919 


11.5 


74.6 


840 


9.6 


5.0 




14.6 


0.9 


15.4 


1920 




















1921 




















1922 




















1923 






















1924 


8.4 


80.9 


73.9 


^ 


v ' 
20.2 




20.1 


2.2 


12.4 


1925 


7.6 


82.3 


72.8 








26.0 


2.5 


12.7 


1926 


6.8 


792 


64.8 


28.9 


2.2 


0.8 


31.9 


3.8 


7.3 


1927 


7.2 


80.1 


68.4 


29.0 


2.8 


1.0 


32.8 


5.5 


7.3 


1928 


6.1 


74.7 


64.9 


27.3 


2.6 


0.9 


30.8 


7.6 


11.6 


1929 


8.9 


75.8 


65.7 


342 


3.5 


1.1 


38.8 


10.5 


6.1 


1930 


9.3 


70.7 


61.0 


34.0 


3.5 


0.6 


38.1 


10.9 


6.8 


1931 


12.9 


75.4 


67.4 


45.4 


4.6 


0.6 


50.6 


18.3 


4.7 


1932 


12.0 


672 


60.7 


32.9 


4.3 


0.6 


37.8 


18.0 


4.8 


1933 


11.4 


66.5 


63.9 


33.4 


4.0 


0.5 


37.9 


15.1 


5.9 


1934 


11.0 


64.1 


69.0 


27.5 


2.2 


2.0 


31.7 


17.3 


5.7 


1935 


9.5 


63.4 


52.1 


31.4 


1.9 


1.8 


35.1 


16.2 


9.6 


1936 


8.3 


65.0 


60.0 


23.8 


4.1 


3.0 


30.9 


15.1 


8.7 


1937 


7.4 


81.1 


56.7 


21.8 


45 


1.8 


28.1 


13.9 


8.3 


1938 


7.6 


79.7 


62.8 


18.7 


5.7 


2.0 


26.6 


14.1 


7.6 


1939 


6.4 


77.5 


61.2 


22.0 


6.0 


2.0 


32.1 


12.9 


9.0 


1940 


6.0 


70.9 


43.7 


35.6 


4.7 


1.6 


41.9 


8.5 


9.2 


1941 


4.9 


62.7 


40.4 


442 


4.9 


1.6 


50.7 


7.4 


11.5 


1942 


3.4 


48.7 


31.9 


57.2 


3.1 


1.2 


61.5 


2.9 


10.3 


1943 


2.4 


53.5 


31.1 


49.5 


0.6 


1.5 


51.6 


1.1 


7.6 


1944 


3.2 


34.8 


27.3 


59.2 


0.3 


06 


60.1 


0.5 


15.5 


1945 


3.1 


59.4 


28.1 


64.7 


0.2 


0.8 


65.7 


0.3 


10.8 


1946 


3.04 


60.6 


42.4 


56.0 


0.9 


0.2 


57.1 


0.3 


13.4 


1947 


3.2 


62.0 


40.3 


51.9 


1.4 




53.3 


0.8 


13.7 



TABLES 451 

TABLE XXIV 

The Allahabad Bank of India 

(Figures in OOOs till 1890 inclusive and in lakhs thereafter) 



1 

? 


73 
1 


;al & Reserve 1 
nd. 1 


d Deposits. I 


1 | 

& 2* 

s & 


i Deposits. 
L Liabilities 


w 


T) 
C 

CO l/i 


Discounted. I 


;e Property. 1 


?rnment 
curities. 

sr Trust 
curities. 




TJ 




"Q.P 


OJ 


1 i 


3 3 


C 
co 


"Sn 


42 


3 


> <u J^^ 


;d 
S3 


*co 


1 


U 





5 u 


& & 


a 


(0 

U 


W 


o 


6 S 


a 


1865 190 




190 


37 


35 


72 262 


59 


38 


33 






33 


1866 282 




282 


14 


34 


48 330 


98 


112 


29 






12 


1867 285 


3 


288 


39 


39 


78 366 


140 


95 


38 






25 


1868 285 


6 


291 


111 


% 


207 498 


202 


91 


118 


10 




74 


1869 286 


10 


2% 


203 


96 


299 595 


349 


129 


66 


11 




39 


1870 300 


13 


313 


373 


.. 104 


477 790 


402 


141 


72 


11 


12 .. 




1871 300 


17 


317 


453 


.. 173 


626 943 


423 


90 


68 


11 


8 .. 


89 


1872 300 


22 


322 


534 


.. 160 


694 1016 


570 


103 


93 


11 


13 .. 


106 


1873 300 


28 


328 


573 


.. 174 


737 10G5 


550 


196 


48 


11 


25 .. 


153 


1874 300 


35 


335 


617 


.. 186 


803 1138 


502 


201 


31 


11 


35 .. 


246 


1875 300 


40 


340 


675 


.. 272 


947 1237 


507 


321 


80 


11 


40 .. 


248 


1876 300 


46 


348 


880 


.. 244 


1124 1470 


664 


462 


72 


22 


47 .. 


138 


1877 300 


58 


358 


1087 


.. 303 


1390 1748 


687 


429 


81 


47 


58 .. 


221 


1878 300 


67 


376 


1159 


.. 333 


1492 1859 


724 


296 


84 


37 


69 .. 


338 


1879 300 


78 


378 


1382 


.. 293 


1675 2053 


1046 


318 


119 


37 


79 .. 


370 


1880 300 


91 


391 


1631 


.. 328 


1959 2350 


1196 


254 


189 


32 


91 .. 


441 


1881 300 


104 


404 


1915 


.. 404 


2319 2723 


1310 


286 


399 


32 


104 .. 


374 


1882 300 


116 


416 


2115 


.. 483 


2608 3024 


1296 


359 


247 


32 


117 .. 


985 


1883 300 


129 


429 


2252 


.. 475 


2727 3156 


1599 


550 


164 


33 


128 .. 


536 


1884 300 


145 


445 


2532 


.. 338 


2870 3315 


1G91 


634 


135 


33 


144 .. 


563 


1885 300 


163 


463 


2824 


.. 424 


3248 3711 


1838 


513 


178 


33 


162 .. 


868 


1886 330 


183 


483 


3109 


.. 542 


3651 4134 


2058 


533 


191 


33 


179 .. 


949 


1887 300 


205 


505 


3275 


.. 510 


3765 4270 


1951 


462 


149 


33 


200 .. 


1164 


1888 300 


229 


529 


3803 


.. 749 


4552 5081 


2430 


645 


590 


56 


229 .. 


788 


1889 300 


255 


555 


4676 


.. 818 


5494 5949 


2979 


838 


813 


67 


254 .. 


731 


1890 400 


336 


736 


5909 


. . 1094 


7003 7739 


3517 


941 


801 


91 


324 ., 


1544 


1891 4 


3.6 


7.6 


73.4 


.. 13.22 


86.6 93.2 


37.4 


10.2 


19.0 


09 


3.7 .. 


12.1 


1892 4 


4.0 


8.0 


87.7 


.. 14.3 


102.0 110.0 


51.9 


11.4 


18.5 


1.6 


4.0 .. 


13.2 


1893 4 


4.4 


84 


98.1 


.. 16.3 


114.4 122.8 


52.4 


11.6 


262 


1.7 


4.3 .. 


16.6 


1894 4 


4.8 


88 


112.7 


.. 15.9 


28.6 137.4 


57.1 


17.8 


28.3 


1.6 


4.7 .. 


15.1 


1895 4 


5.1 


9.1 


141 


.. 18.3 


159.3 168 4 


61.5 


26.1 


39.3 


1.6 


5.1 .. 


20.3 


1898 5 


5.6 


10.6 


158 


.. 20.9 


178.9 189.5 


71.3 


34.1 


44 


1.7 


5.6 .. 


23.8 


1897 5 


6.7 


11.7 


163 


.. 22.4 


185.4 197.1 


64.7 


40.9 


51.6 


1.8 


6.5 .. 


23 


1898 5 


7.8 


12.8 


169 


.. 21.4 


190.4 203.2 


70.2 


42.8 


39.2 


2.1 


7.7 .. 


328 


1899 5 


8.6 


13.6 


191 


.. 25.8 


216.8 230.4 


82.3 


69.6 


35.5 


23 


8.7 .. 


19.9 


1900 5 


9.5 


14.5 


216 


.. 32.4 


248.4 262.9 


88.7 


76.3 


42.4 


2.2 


9.6 .. 


306 


1901 10 


10.5 


20.5 


241 


.. 31.6 


272.5 293.1 


88.4 


89.9 


65.2 


2.7 


11.7 .. 


58.7 


1902 10 


11.5 


21.5 


259 


.. 37.8 


296.8 318.3 


104 


75.3 


62.3 


2.7 


12.6 . . 


40.9 


1903 10 


12.3 


22.3 


294 


.. 39.4 


333.4 355 7 


115 


68 


81 


2.7 


13.7 . . 


37.0 


1904 15 


13 


28 


312 


.. 39.1 


351.1 379 1 


133 


85 


67 


2.6 


14.6 .. 


38.1 


1905 15 


14 


29 


332 


.. 43.5 


375 5 404.5 


145 


115 


61 


2.8 


15.9 .. 


36.3 


1906 15 


16 


31 


361 


.. 43 


404 435 


138 


140 


59 


2.5 


18.1 . . 


49.1 


1907 20 


23 


43 


380 


.. 49 


429 472 


141 


156 


84 


2.8 


25 


47.1 


1908 20 


25 


45 


387 


2.1 44.8 


433.9 478 


147 


158 


67 


3.2 


27.6 . . 


50.9 


1909 20 


29 


49 


424 


4.6 49.2 


477.8 526 


157 


136 


94 


4.3 


31.8 .. 


61.7 


1910 20 


30 


50 


490 


7.6 54.9 


552.5 602 


154 


169 


141 


9.1 


32.8 . , 


68.3 



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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 % 


j* 




t ?" 


fc 


1 3 


3 


3 




gw w 



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 


194 


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 




1& 

i 1 


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 





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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 

-qnj 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 
I 2 

& M 
O 

. A 

1*8 

O 


!?! t 

e S 

OS""* . 

g6 & 

-> 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 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 * ' ** ' ' * OJ 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'-*CMC4C v 5CVieOC7PQCOlOOe v JO 

cc ^ ^ 

o -/:H u i 

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 ^ f 05 S 2 

3 ^ s I J 

3 u 

^ S bi -suBoq puBtuaa 

H w g P UH 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'-lHr-^(Hr-4-<r-(H-ieIClCa Cl ''** 

ot^-t^oo-<co5ji 

r^evicrjUO * O O ?H -< ** r-i <-(r-*-4r-tr-<-'CVICNCVJCNjevj<NJCVlMCICa<OW t O 

io<ooooo. :; .'iii'i^*'ic58888S5 

5550Of>0>0>C52?!i^2S ^ rt r-l f H lH? H-l r Hr-lr-lr-t^r-(fHrH 1 HrH^r^' H '-< 



Myore 

Deposits 



s -a 
Sis? 
s c 

H 2 g 

*- 

d> 

PH 



Th 



* s ll!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 

' 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! ? 



* CO<0 W tONrHcsitHr^^rHrHrHrHCvicvicvi^od 000 



H en *& in 
c>i <o oo in 



o ) ** 

c | 

( s ^ 



t-eorH <i>cooqi>rH^cotooqootocoo 



' 



tor^cMtoq **: o>i-j^ijqt^esiwcooqo>rHinino>crjqcy>coino 

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 $ 
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 





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 



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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 

U 3 8" 
o<W Q 


g 

g 

uog 

73 > M 




1 


rC & -4 .J 
W g? 

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 
g r /)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.