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UBC Theses and Dissertations

Banking in India : development and structure. Upal, Swarn Singh 1963

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BANKING IN INDIA  -  DEVELOPMENT AND STRUCTURE  by Swam Singh Upal  B.A., University of B r i t i s h  Columbia.  A thesis submitted i n p a r t i a l f u l f i l m e n t of the requirements f o r the degree of MASTER OF ARTS i n the Department of Economics and P o l i t i c a l , Science  We accept t h i s thesis as conforming to the standard required from candidates f o r the degree o f MASTER OF ARTS  Members of the Department of Economics and P o l i t i c a l Science  The University of. B r i t i s h October, 1963.  Columbia  In presenting this thesis in p a r t i a l fulfilment of the requirements for an advanced degree at the University of . B r i t i s h Columbia, I agree that the Library s h a l l make i t available for reference and study.  freely  I further agree that per-  mission for extensive copying of this thesis for.scholarly purposes may be granted by the Head of my Department or by his representatives.,  I t i s understood that copying, or publi-  cation of this thesis for financial gain shall not be allowed without my written permission.  Department of  / ^ ^ ^ f f Y T U ^  The University of B r i t i s h Columbia,. Vancouver 8, Canada.  ^te  &CU$M  V , ff{3  BANKING I N INDIA - DEVELOPMENT AND  STRUCTURE  By  SWARN SINGH UPAL  (ABSTRACT)  I n s p i t e o f t h e f a c t t h a t I n d i a n c i v i l i z a t i o n was a t t h e h e i g h t o f i t s g l o r y when W e s t e r n c i v i l i z a t i o n h a d n o t y e t s e e n t h e l i g h t o f day,  and I n d i a was once f a r more a d v a n c e d i n d u s t r i a l l y  the present had  i n d u s t r i a l i z e d n a t i o n s , the Country  t h a n any; oneoo'f  u n t i l very r e c e n t l y  l o n g been t h e f o r g o t t e n N a t i o n o f t h e E a s t bec'ause h e r a f f a i r s  were c o n t r o l l e d f o r some two h u n d r e d y e a r s by a f o r e i g n c o l o n i a l I t ' was o n l y a s r e c e n t l y a s 19^7 and  that India f i n a l l y  got h e r independence  t h e n a t i o n a l Government was a b l e t o t a k e s t e p s t o i m p r o v e t h e  economic c o n d i t i o n o f i t s p e o p l e .  T h i s was t o be a c c o m p l i s h e d  a broad  developmental  plans.  I n t h i s herculean undertaking the Country's  Country's  currency, f i n a n c e s i t s c u r r e n t output  form o r another expansion  banking  and m o b i l i z e s i n one  t h e s a v i n g s so d e s p e r a t e l y n e e d e d f o r t h e i n d u s t r i a l  p r o g r a m now underway i n I n d i a .  e x p a n d i n g I n d i a n economy t h e a u t h o r  development o f the I n d i a n b a n k i n g The  system  I t provides the  In view of i t s importance i n undertook,  as a t h e s i s , t h e  t a s k o f s e t t i n g f o r t h b o t h h i s t o r i c a l l y and a n a l y t i c a l l y and  through  program, c o n s i s t i n g of a s u c c e s s i o n o f F i v e Year  has. p l a y e d and c o n t i n u e s t o p l a y a l e a d i n g r o l e .  the  power.  System i t s e l f  the s t r u c t u r e  system.  c o n s i s t s o f two l a r g e n o n - c o m p e t i n g ,  though  not completely dis-associated,  parts usually referred to as the  "organized" and "unorganized" sectors of the Indian money market. The l i n k between the two sectors i s so weak and tenuous that changes i n one are seldom reflected i n the other.  The unorganized sector  consists of a large number of Indigenous bankers and money lenders who, since time immemorial, have catered to the banking and credit needs of the Indian economy. banks i n India the a c t i v i t i e s  With the i n s t i t u t i o n of the European of these bankers were mainly r e s t r i c t e d  to financing the i n t e r n a l trade of the Country and to providing for the credit needs of a g r i c u l t u r i s t s , artisans, small tradesmen,etc., and save for l o c a l trade associations,  national trade organizations and  such correspondents as outside collections  and remittances make necessary,  these bankers operate independently.without any direction or control by the Reserve'Bank.  So far a l l attempts of the Reserve Bank to bring  them within i t s province and thus regulate their banking business have borne no f r u i t . It has long been held, with some element of truth, that the members of the unorganized sector of Indian money market tend to charge exhorbitant rates of interest on their loans, and have long stood i n the way of the economic progress of the Country.  Moreover i t  is  contended that they have further complicated and compounded the problems of their usually impoverished borrowers.  However, this extremely one-  sided view seems to overlook their r e a l contribution to Indian banking needs and the important role they play i n financing the i n t e r n a l trade of the Country.  They provide credit f a c i l i t i e s to those who can provide  no tangible security and thus finance many undertakings which could not otherwise be carried out.  3  The so called organized sector of the Indian money market consists of:  i)  a substantial number of privately owned Joint  Stock banks incorporated under Indian laws and manned primarily by Indian nationals;  ii)  a number of branches of foreign banks popularly  known as Exchange Banks which are managed almost entirely by foreigners; iii)  a  State sponsored System of Cooperative and Land Mortgage banks  designed ultimately to support the Indigenous bankers and money lenders;  iv)  a rather unique postal savings system which provides  savings f a c i l i t i e s  to the lower income group of the Indian population  and channel these savings into productive enterprises through the purchase of Government securities;  v)  the now p u b l i c l y owned State  Bank of India which even as a foreign owned and operated i n s t i t u t i o n , serving an immense private banking c l i e n t e l e ,  functioned for many years  as a semi-central bank of India, and s t i l l .'retains many of i t s banking functions;  and f i n a l l y , vi)  central  the recently established and  now nationalized Reserve Bank of India around which have been arranged a number of public and semi-public f i n a n c i a l i n s t i t u t i o n s which i n one way or another are designed to help f u l f i l the twin groals of the National Government - i . e . , based on a s o c i a l i s t i c  a modern self-sustaining  i n d u s t r i a l economy  pattern.  In addition to the Reserve Bank i t s e l f  the l a t t e r group includes  among others the aforementioned State Bank of India, the Industrial Finance Corporation, the National Industrial Development Corporation and the L i f e Insurance Corporation of India.  The l a t t e r has been  given a monopoly of a l l l i f e insurance business within India and thus c o l l e c t s and makes available to the Government a large part of the  4  voluntary The one.  savings  of the  Indian  author's task i n t h i s  By  t h e s i s i s a l a r g e yet  t r a c i n g t h e g r o w t h and  c l a s s e s o f i n s t i t u t i o n s he audience not  only  people.  has  development of each of the sought to b r i n g before  the r e l a t e d problems s t i l l  C o u n t r y i s t o a c h i e v e the u l t i m a t e i n a s e l f s u s t a i n i n g and  to the  above  a Western  t h e n a t u r e o f t h e b a n k i n g s t r u c t u r e and  p r a c t i c e s i n I n d i a but  o f b a n k s has  unpretentious  been a n a l y s e d  t o be s o l v e d  g o a l of a h i g h e r  d y n a m i c economy.  banking  standard  Each of the  d e v e l o p m e n t o f I n d i a and  the  of  several  w i t h a view to e s t a b l i s h i t s p a s t  i f the living classes  contribution  r o l e i t i s designed to play f o r  the  f u t u r e g r o w t h o f I n d i a n economy. Most of the C o u n t r y ' s f i n a n c i a l p l a n n i n g alities  o r i g i n a t e i n the  Bank w i t h t h e l a t t e r that  of a s e r v a n t  sense the part  and  planning  j o i n t a c t i o n o f t h e Government and  i n the  r o l e of a c o n s u l t a n t  t o c a r r y out  advisor  t h e p l a n n e d programme.  e x p a n d i n g r o l e o f t h e R e s e r v e Bank p r o v i d e s  of t h i s t h e s i s .  instrument-  This  i n s t i t u t i o n has  and  the  Reserve  finally  I n an o v e r a l l the most r e v e a l i n g  developed i n t o a strong, a l l  e m b r a c i n g c e n t r a l bank e m p l o y i n g t h e most modern c r e d i t c o n t r o l d i r e c t i o n measures. any  undue i n c r e a s e  planned productive  The  bank h a s  i n bank c r e d i t but enterprises.  a u t h o r i t y o v e r a l l p u b l i c and banking i n s t i t u t i o n s . Indian  banking'structure  o f s m a l l b a n k s and inspections.  used these measures not  has  to channel i t i n t o  private,  s c h e d u l e d and the  e n c o u r a g i n g and  improved t h e i r  Bank has  check  regulatory  non-scheduled strengthened  i n s i s t i n g on  operations  to  various  M o r e o v e r i t f u n c t i o n s as a  In t h i s c a p a c i t y by  only  and  the  the  consolidation  by a s y s t e m o f  regular  I t s achievements s i n c e i t s n a t i o n a l i z a t i o n both i n  the  5  f i e l d of monetary management and.the development of a sound and efficient  banking system provide a new chapter i n the history of  Central banks.  - - v i •" TABLE OF CONTENTS Chapter  Page  Preface. ,  i  Table o f Contents List I  v i  of Tables  x i i  ORIGINS AND A N T E C E D E N T S OF E X I S T I N G BANKING INSTITUTIONS P a r t 1. 2.  Indigenous  B a n k e r s a n d Money L e n d e r s  I n d i a n J o i n t S t o c k Banks Development t o  i860  E a r l y Growth  Development  3«  k/  5.  6. II.  1 1 10 10 11  B e t w e e n 1860-1935  13  I n d i a n Banks and t h e Upsurge o f Nationalism  15  The P r e s i d e n c y Banks  20  Capitalization  20  Functions  21  P r o g r e s s t o 1935  23  Exchange Banks  26  Functions  27  C o o p e r a t i v e Banks  30  Establishment  31  The C o o p e r a t i v e S o c i e t i e s A c t  31  P r o g r e s s t o 1935  3^  P o s t a l Savings  38  Banks  THE RESERVE BANK OF INDIA  ^0  P a r t 1.  ^1  Antecedents,  P r o p o s a l s and I n s t i t u t i o n s  I m p e r i a l Bank E x p e r i m e n t F i n d i n g s o f t h e H i l t o n - Y o u n g Commission  ^2 kj>  -v i i  P a r t 2.  3.  The Round T a b l e C o n f e r e n c e a n d t h e Emergence o f t h e R e s e r v e Bank o f I n d i a  46  P r o v i s i o n of the Enabling Act  47  C a p i t a l i z a t i o n and Ownership  48  A d m i n i s t r a t i o n and C o n t r o l  49  P r e r o g a t i v e s and F u n c t i o n s  51  Note I s s u e  51  Exchange C o n t r o l  53  F i s c a l Agent  54  f o r Government  R e s e r v e Bank a s a B a n k e r ' s Bank  55  Membership Q u a l i f i c a t i o n s  55  C l e a r i n g and C o l l e c t i n g F a c i l i t i e s  56  Legal Reserve Depository  57  Lender o f Last Resort  58  The R o l e o f t h e R e s e r v e Bank, 1935-49  59  As a M o n e t a r y A u t h o r i t y •  6l  As a B a n k e r ' s  III.  Page  Bank  64  As a B a n k e r b y Government  65  R e s e r v e Bank C r e d i t a n d P r i c e s  69  DEVELOPMENT I N THE PRIVATE BANKING SECTOR, 1935-49 P a r t 1.  _ I n d i g e n o u s B a n k e r s a n d Money L e n d e r s  75  Proposed I n c l u s i o n i n Reserve System  75  Money L e n d e r s and R a t e s o f I n t e r e s t  78  C h a r a c t e r Loans  79  - P r o f e s s i o n a l Money L e n d e r s  C h a r a c t e r o f Loans  - Non-Professional  Money L e n d e r s  2.  74  79  Rates o f I n t e r e s t  80  Government R e g u l a t i o n s  81  I n d i a n J o i n t S t o c k Banks  82  Amendments t o 1913 C o m p a n i e s A c t  84  O t h e r L e g i s l a t i o n P r i o r t o 1949  87  Growth a n d O p e r a t i o n s .  1935-49  Comparative Importance - Scheduled and ' N o n - S c h e d u l e d Banks  88 90  - viii  -  mm P a r t 3'  Imperial  Bank o f I n d i a  96  R e l a t i o n s w i t h Government  and  R e s e r v e Bank o f I n d i a  96  N a t u r e and S i z e o f O p e r a t i o n s 4.  100  The E x c h a n g e B a n k s  102  Nature of C r i t i c i s m  102  1935-49  104  The C o o p e r a t i v e Banks  106  R e s t r i c t i o n s and R e g u l a t i o n s  106  The L a n d M o r t g a g e Banks  108  Growth 5.  1935-49  Membership and O p e r a t i o n s Credit Societies  Cooperative  Cooperative Credit S o c i e t i e s  110  The C e n t r a l C o o p e r a t i v e B a n k s  111  The S t a t e  C o o p e r a t i v e Banks  115  Number and O p e r a t i o n o f L a n d M o r t g a g e Banks '  117  Combined O p e r a t i o n s , P r i m a r y C e n t r a l Banks  117  and  R e l a t i v e Importance o f P r i m a r y and  6. IV.  C e n t r a l L a n d M o r t g a g e Banks  119  The P o s t a l S a v i n g S y s t e m  121  NATIONALIZATION AND P a r t 1.  EXTENSION OF CENTRAL AUTHORITY  124  N a t i o n a l i z a t i o n o f t h e R e s e r v e Bank  126  Changes i n A d m i n i s t r a t i v e  131  Structure  J u r i s d i c t i o n a l Changes  132  Extension of Regulatory Authority  133  The L i c e n s i n g o f Banks  134  D i r e c t i v e s t o L o a n s and I n t e r e s t R a t e s  135  M e r g e r and A m a l g a m a t i o n  135  Appointment of O f f i c i a l s  13,6  Inspection,  Supervision  and S u s p e n s i o n  137  - ix -  Additions  t o I n s t r u m e n t s of  Monetary P o l i c y  138  Selective Credit Control  2.  Credit Rationing  138  I n t e r e s t R a t e s on D e p o s i t s  139  Reserve R a t i o Manipulation  140  Moral Suasion  l4l  N a t i o n a l i z a t i o n of the I m p e r i a l Ownership o f the S t a t e Administration  3.  and  Bank  l4l  Bank o f I n d i a  144  and Management  145  I n d u s t r i a l B a n k s and t h e L i f e I n s u r a n c e C o r p o r a t i o n of I n d i a  145  The I n d u s t r i a l F i n a n c e C o r p o r a t i o n  146  C a p i t a l i z a t i o n and O w n e r s h i p Administration  146  and C o n t r o l  148  Source of Working C a p i t a l  148  The S t a t e F i n a n c i a l C o r p o r a t i o n s  149  C a p i t a l i z a t i o n and O w n e r s h i p  150  Administration  151  and C o n t r o l  Source of Working C a p i t a l The N a t i o n a l  Industrial  152  Development  Corporation  152  C a p i t a l i z a t i o n and o w n e r s h i p  153  Administration  153  and C o n t r o l  The I n d u s t r i a l C r e d i t Corporation  and.Investment 154  C a p i t a l i z a t i o n and O w n e r s h i p  155  Administration  156  and C o n t r o l  The R e f i n a n c e C o r p o r a t i o n  . 157  C a p i t a l i z a t i o n and O w n e r s h i p  157  Administration  and C o n t r o l  158  The N a t i o n a l S m a l l I n d u s t r i e s C o r p o r a t i o n  159  C a p i t a l i z a t i o n and O w n e r s h i p  l6o  Administration The L i f e  and C o n t r o l  Insurance Corporation  C a p i t a l i s a t i o n and O w n e r s h i p  l6l of India  l6l 162  - X -  Page CHAPTER V.  P a r t 1.  OPERATIONS OF THE RESERVE BANES, THE STATE BANK AND OTHER F I N A N C I A L INSTITUTIONS 1949 ONWARD Operations The  o f t h e R e s e r v e Bank, 1949 onward  165  E x e r c i s e of Monetary A u t h o r i t y  165  C o u n t e r M e a s u r e s f o r t h e K o r e a n War I n f l a t i o n  l66  Bank R a t e  167  The  169  B i l l M a r k e t Scheme  Extension of B i l l The  M a r k e t Scheme  170  Containment o f Budgetary I n f l a t i o n  172  Bank R a t e and Open M a r k e t O p e r a t i o n s  173  Selective Credit Control i n A g r i c u l t u r a l Products  174  On P a d d y and R i c e  174  Ground N u t s  '  Raw J u t e and J u t e goods and S h a r e s  l80  Credit Rationing  l82  Reserve R a t i o V a r i a t i o n  184  Moral Suasion  187  Accomplishments of t h e Monetary C o n t r o l  l88  R e s e r v e Bank O p e r a t i o n s  191  The S t a t e Bank o f I n d i a - O p e r a t i o n s  and Growth  E x t e n s i o n o f D u t i e s and F a c i l i t i e s S t a t e Bank a n d F i n a n c i n g o f S m a l l  The  S t a t e Bank a n d A g r i c u l t u r a l F i n a n c e  Operations  195 196  The  Magnitude of Operations P a r t 3.  178 179  S e l e c t i v e C o n t r o l on S t o c k s  P a r t 2/  164  Industries  1949-61  o f I n d u s t r i a l Banks and L i f e I n s u r a n c e  197 199  200 203  Corporation of India. The  Industrial  Finance  Corporations  The  State Financial  Corporations  208  The  I n d u s t r i a l C r e d i t and I n v e s t m e n t C o r p o r a t i o n  211  The  N a t i o n a l I n d u s t r i a l Development C o r p o r a t i o n  2l4  The  Refinance  217  The  National Small Industries Corporation  219  The  L i f e Insurance  222  Corporation  Corporation - Operations  203  - x ijoage CHAPTER V I • P a r t 1.  PROGRESS I N PRIVATE SECTOR 1949 ONWARD  227  The I n d i g e n o u s  228  Indigenous  P a r t 2.  Bankers  B a n k e r s and t h e R e s e r v e  System  Formulae f o r C o n s i d e r a t i o n  230  J o i n t S t o c k Banks  233  P r o v i s i o n s of the Banking Impact o f t h e B a n k i n g  Companies A c t , 1949  237  On t h e C o n d u c t o f t h e s e Banks  237  On J o i n t S t o c k B a n k ' s O p e r a t i o n s 1949 Onward  241  Scheduled  244  a n d N o n - S c h e d u l e d Banks  Concentration of Banking  Business  251  E f f e c t s o f t h e 1949 B a n k i n g C o m p a n i e s A c t  251  Trend  253  i n Operations Growth  CHAPTER V I I .  255  The C o o p e r a t i v e B a n k s  257  M e a s u r e s R e l a t i n g t o C o o p e r a t i v e Banks  258  I n s p e c t i o n and T r a i n i n g o f P e r s o n n e l  26l  O p e r a t i o n s o f C o o p e r a t i v e Banks  262  Primary Credit S o c i e t i e s  262  The C e n t r a l C o o p e r a t i v e B a n k s  P a r t 5-  246  The E x c h a n g e B a n k s  Comparative P a r t 4.  233  Companies A c t on I n d i a n  J o i n t S t o c k Banks  P a r t 3.  229  1  263  The S t a t e C o o p e r a t i v e Banks  266  O p e r a t i o n s o f t h e L a n d M o r t g a g e Banks  268  P r i m a r y L a n d M o r t g a g e Banks  269  C e n t r a l L a n d M o r t g a g e Banks  269  M e a s u r e s R e l a t i n g t o L a n d M o r t g a g e Banks  272  P o s t a l S a v i n g s Banks  273  SUMMARY AND CONCLUDING OBSERVATIONS  276  1  - xii<-  ^ .  List of Tables Number, Principal Assets and L i a b i l i t i e s of Indian Joint Stock Banking Enterprises Between 1870 and 1935  Page 18  Principal Assets and L i a b i l i t i e s of the Presidency Banks - 1870-20, and the Imperial Bank, 1920-35 Inc.  25  Number, Deposits, Cash in Hand and Earning Assets of Exchange Banks, 1870-1935  29  Number, Membership and Working Capital of Cooperative Credit Institutions i n India, 1907-1935  37  Number, Deposits and Balances Outstanding of Postal Saving System Between 1885-1935  40  Short-term Operations of the Reserve Bank 1936-1949 Inc.  63  Operations of the Issue Department of the Reserve B ank, 1935-194-9 Inc. 67 Operations of the Banking Dep artment of the Reserve Bank 1935-4-9 Inc. 68 Combined Operation of the Reserve Bank of India 1936-49 Inc.  70  Government Debt, Reserve Banks' Credit and Purchasing Power of the Rupee 1936-1949 Inc.  72  Number, Principal Assets and L i a b i l i t i e s of Indian Joint Stock Banks (Excluding Imperial Bank) 1935-1949 Inc.  91  Number, Principal Assets and L i a b i l i t i e s of Non-scheduled Ba ks 1935-49 Inc.  92  Number, Principal Assets and L i a b i l i t i e s of Scheduled Banks (excluding Imperial Bank) 1935-49 Inc.  93  Comparative Number, Deposits and Earning Assets of Indian Scheduled and Non-scheduled Banks 1936, 1940, 1945 and 1949  95  Branches, Principal Sssets and L i a b i l i t i e s , Imperials Bank of India, 1935-49 Inc. .  105  Number, Deposits and Earning Assets of Exchange Banks i n India, 1935-49 Inc.  105  Number and Business of Primary Cooperative Credit Societies, 19351949 Inc.  112  Number and Business of Central Cooperative Banks,  134  1935*49 Inc.  -  X1X1-  Page Number and Business of State Cooperative Banks, 1935-49 Inc.  116  Number and Business of Central and Primary Land-Mortgage.Banks (Separately), 1945-1949 Inc.  118  Number, Deposits and Balances Outstanding Postal Savings System  122  Comparative Percentage Increase i n Employment by Industries, Periods 1934-1939 and 1939-1945  126  Regional Distribution of Ownership of Reserve Bank Shares, 1935-1948 Inc.  128  Regional Distribution of Share-Holders, 1935-1948 Inc.  128  Comparable Rates of Growth of Public Debt, Reserve Banks Credit and National Income, 1949-1961 Inc.  190  Principal Assets and L i a b i l i t i e s of the Reserve Bank (Issue and Banking Departments) of India, 1949-1961 Inc.  192  Principal Assets and L i a b i l i t i e s , Reserve Bank (Issue Department) of India, 1949-1961 Inc.  193  Principal Assets and L i a b i l i t i e s , Reserve Bank (Banking Department) of India, 1949-61 Inc.  194  Branches, Principal Assets and L i a b i l i t i e s , State Bank of India 1949-61 Inc.  202  Operations of the Industrial Finance Corporations 1950-61  205  Business of State Financial Corporations, 1955-61 Inc.  2l0  Loans, Guarantees and Underwriting Operations of Industrial Credit and Investment Corporation, 1956-61 New Business of the Life Insurance Corporation and i t s Predecessor Insurance Companies 1954-61  223  Distribution of Investment Portfolio of the Life Insurance Corporation 1957-60  226  Number, Capital and Deposits of Banks, Liquidated or Otherwise Closed, 1953-61  239  212  Number, Principal Assets and Liabilities of Private Indian Joint Stock Banks  243 Comparative Number, Deposits and Earning Assets of Indian Scheduled and Non-scheduled Banks, 1950-1955 and I960  245  -  xlv'- —  Number, Principal Assets and L i a b i l i t i e s of Non-scheduled banks 1949-61  247  Number, Principal assets and L i a b i l i t i e s of Privately owned Indian Scheduled Banks 1949-61  248  Relative Importance of Ten largest Indian Banks at the end of 1961  250  Number, Principal Assets and L i a b i l i t i e s of Exchange Banks, 1949-61  254  Relative Importance of Exchange Banks and other Primary lenders i n Indian Banking Structure, 1950-1599 and i960  256  Number, l@ans and Working Capital of Primary Credit to Societies 1949-1960  264  Number and Business of Central Cooperative Banks 1949-61  267  Number and Business of State Cooperative Banks 1949-61  267  Number, Loans and Working Capital of Primary Land-Mortgage Banks  270  Number, Loans and Working Capital of Central Land-Mortgage Banks  271  Number and Deposits of Postal Savings offices 1949-61  274  PREFACE India, l i k e many other developing countries, i s i n the process of attempting to accomplish through a succession of five year plans the enormously complicated task of modernizing her economy through the establishment of new i n d u s t r i a l enterprises and the improvement of the Country's a g r i c u l t u r a l operations with a view to r a i s i n g i n so far as possible the l i v i n g standard of the people which i s one of the lowest i n the world today.  In this mountainous task great  reliance has been placed on f i n a n c i a l i n s t i t u t i o n s , some of the more important of which have emerged as a part of the planned development itself.  Others are not of such recent origin yet s t i l l make very  important contributions to the Indian banking structure and to the Indian economy i n general.  The author of this thesis has undertaken  as his taskt'b present to a Western audience the origins and development of the several main categories of banking institutions i n India, and i n the process of doing so to analyse the problems that banks have encountered both i n the past and more recently i n connection with the projection of the Country's modernization program.... For purposes of exposition the development of Indian banking system i s divided into three main periods:  1) developments from the  e a r l i e s t times down to 1935 when Reserve Bank of India was established as a private i n s t i t u t i o n ;  2) developments between 1935 and 19^9 when  the Reserve Bank was nationalized - a period which includes not only the problems incidentto India's p a r t i c i p a t i o n i n World War I I , but those as well that arose i n connection with the p a r t i t i o n of India and the Country's ultimate assumption of Sovereign authority over i t s own  destiny;  3)  developments after 19^9 the more important of which  took place under the vigilance of the nationalized Reserve Bank now working hand i n hand with the Government to expedite the planned economic development of the Country on a s o c i a l i s t i c  pattern.  India how has five p r i n c i p a l categories of banking i n s t i t u t i o n s namely:  Indigenous banks and money lenders;  Indian Joint Stock banks  organized and operated under. Indian banking laws and regulations; owned and operated Exchange banks; sponsored by the respective  States;  forei  Cooperative banking i n s t i t u t i o n s a postal savings system, and  f i n a l l y a group of public and quasi-public banks arranged around the nexus provided by the Reserve Bank of India. Reserve Bank i t s e l f  In addition to the  .• considerable importance i s attached to the State  Bank of India which as the Imperial Bank of India has s;erved to a l l intents and purposes as the Country's semi-central bank u n t i l 1935; and.continues•to  serve i n that capacity at places where the Reserve  Bank has.no competing branches.  The State Bank and i t s  play an important role i n spreading banking f a c i l i t i e s  subsidiaries to the remote  corners of the Country and in providing short and medium term loans to a g r i c u l t u r i s t s and to small i n d u s t r i a l enterprises.  Significant  roles  are also played by the Industrial Finance Corporation, the State Financial Corporations, the National Industrial Development Corporation, etc.,  which are designed to handle the financial needs of i n d u s t r i a l  enterprises;  and by the L i f e Insurance Corporation which has a monopoly  of a l l the l i f e insurance business of the Country and thus can make available to the Government,for investment,most savings of the Indian people.  of the voluntary  - iii The material on each class of these banking i n s t i t u t i o n s  is  so arranged that the reader may trace i t s development through each of the periods adopted for the o v e r a l l plan of the thesis.  Yet one  may also concentrate on the comparative developments affecting each class i n any one period.  Thus i t follows that the o r i g i n of a l l  constituents of Indian banking system save the recently established public and quasi-public banking i n s t i t u t i o n s w i l l be found i n Chapter One which brings their development down to 1935-  Chapter Tivo i s  devoted to the establishment and performance of the Reserve Bank of India between 1935 and 19^9.  Chapter Three i s given over to the  changes i n laws affecting the private banks including the then Imperial Bank of India and to the performance of the various categories of banks between 1935 and 19^9.  Chapter Four i s given over to the  nationalization of the Reserve Bank of India;,, the Imperial bank, the l i f e insurance business i n India and to the establishment of several p u b l i c , semi-public and private f i n a n c i a l i n s t i t u t i o n s designed to expedite the financing incident to the carrying out of the successive five year plans.  Chapter Five traces the performance of each of these  categories of f i n a n c i a l i n s t i t u t i o n s between 19^9 and 1961. Chapter Six we have presented the important l e g i s l a t i v e  In  measures  affecting the operation of banking i n s t i t u t i o n s s t i l l i n the private sector.  Here the growth and expansion of these banks and t h e i r  r e l a t i v e importance i n the Indian banking system Have been emphasized. In Chapter Seven the author has attempted to bring together such pertinent conclusions and observations as may properly be made from the analyses which have already been made i n connection with the  - iv -  progress of each categories of banks p a r t i c u l a r l y i n respect of the Reserve Bank i t e e l f  to which, save for the Indigenous bankers and  money lenders, a l l other banking enterprises have been made more or less subordinate.. The study of the Indian banking system i s fraught with more than the usual d i f f i c u l t i e s character. material. itself  encountered i n undertaking a work of this  There i s a considerable scarcity of o r i g i n a l source The author had to .depend on i n t e r - l i b r a r y loans which i n  was an arduous task and involved considerable delay.More often  than not i t provided him with material that did not prove to pertain to the subject.  The documentation of the l i t t l e material that  is  available i n the Asian Studies Library has not yet been completed?. F i n a l l y such information as i s available i s extremely fragmentary and often d i f f i c u l t to translate into Western usage.  The s t a t i s t i c a l  data usually need more explanation before one can compieh'eaad, compare and interpret them i n t e l l i g e n t l y .  The data are sometimes changed  from year to year without sufficient  explanation.  Moreover data even  from the same source are sometimes c o n f l i c t i n g . This study was undertaken at the suggestion of Professor Joseph A. Crumb and has been carried through under his constant and often unrelenting c r i t i c i s m .  guidance  While I am wholly responsible for  the demerits of the work, these would have been far greater but for his vigilance.  In fact this work would have been impossible without his  generous help.  I am deeply indebted to other persons who have helped  me i n many ways to complete this work.  I would l i k e to thank the  staff of the Social Sciences Division and the Humanities D i v i s i o n of  the University l i b r a r y who kindly arranged a large number of books on i n t e r - l i b r a r y loans for me and f u l l y cooperated i n obtaining other needed material.  I would also l i k e to thank Professor William  L . Holland, Head of the Asian Studies Department, who so kindly arrang to lend me many useful books from his personal l i b r a r y and also made the Asian Studies l i b r a r y available to me.  The Bank of Canada proved  most cooperative i n providing a copy of the Reserve Bank of India Act, 1934, and the Reserve Bank of India's Reportes on Currency and Finance without which a part of the information included i n the thesis would • have been far less complete.  CHAPTER I  ORIGINS AND  ANTECEDENTS OF  EXISTING'BANKING INSTITUTIONS  Though a t r a n s f o r m a t i o n o f c o n s i d e r a b l e c o n s e q u e n c e h a s been made i n t h e s t r u c t u r e , o w n e r s h i p and  c o n t r o l of banking i n I n d i a ,  t h e u n d e r l y i n g p a t t e r n o f t h e s e i n s t i t u t i o n s and  their practices,  many o f w h i c h a r e o f v e r y e a r l y o r i g i n , r e m a i n s b a s i c a l l y I t c o n s i s t s of n a t i v e or indigenous  b a n k e r s and  s p o n s o r e d by  classified  as I n d i a n j o i n t s t o c k b a n k s ;  cooperative  b a n k s and  f o r e i g n i n t e r e s t s and  the p o s t a l savings  Part  catered  indigenous  significant no  b a n k e r s and  resident aliens;  the p r e s i d e n c y  now  banks;  the  system.  money l e n d e r s , who a r t i s a n s and  e n t e r p r i s e s i n I n d i a , make up p a r t of the c o u n t r y ' s  have t r a d i t i o n a l l y  small trading  the o l d e s t i f not  banking s t r u c t u r e .  c l e a r d e m a r c a t i o n between i n d i g e n o u s  b a n k e r s and  f o r m e r , a s a r u l e combine t h e i r b a n k i n g b u s i n e s s t r a d i n g e n t e r p r i s e s , and  institutions  Money L e n d e r s  to the needs of peasants,  manufacturing  branches  1  I n d i g e n o u s B a n k e r s and The  unchanged.  money l e n d e r s ;  o f f o r e i g n b a n k s known as e x c h a n g e b a n k s , l o c a l b a n k i n g originally  recently-  and t h e most  Although  money l e n d e r s ,  with mercantile  do n o t n e c e s s a r i l y d i s t i n g u i s h t h e one  undertaking  from the o t h e r .  p e r s o n and  characteristically  they o f t e n advance secured  They a c c e p t  type  small industries.  t h e i r c l i e n t s are punctual  the  and  time d e p o s i t s withdrawable  f i n a n c e t r a d e and  l o a n s and  there i s  in  of by  As  repaying  t h e i r loans  the indigenous  bankers g e n e r a l l y charge a lower  r a t e o f i n t e r e s t t h a n t h e money l e n d e r s . d e p o s i t s and m o s t l y f i n a n c e  The l a t t e r do n o t a c c e p t  consumption and i n d e b t e d n e s s .  The p r o f e s s -  i o n a l money l e n d e r s known a s M a h a j a n s , S a h u k a r s a n d i t i n e r a n t lenders  money  s u c h a s PATHANS, NAGAS, GOSSAINS, QUISTWALAS, e t c . , a r e g e n e r a l l y  known t o be a v a i l a b l e t o a n y o n e who d e s i r e s t o n e g o t i a t e non-professional pensioners,  money l e n d e r s , who a r e m o s t l y w e l l - t o - d o  widows, p r i e s t s ,  shopkeepers, labour  a loan.  The  agriculturists,  foremen a r e not g e n e r a l l y  known t o be money l e n d e r s , b u t l e n d a s a r u l e t o t h e i r f r i e n d s a n d acquaintances.  The n o n - p r o f e s s i o n a l  more g r e e d y a n d c h a r g e h i g h e r lenders.  business  castes Vedic the  to improvident  and impov-  borrowers.  I f we were t o l o o k i n t o a n c i e n t  Vaisyas  are often  r a t e o f i n t e r e s t t h a n t h e p r o f e s s i o n a l money  They g e n e r a l l y make u n s e c u r e d l o a n s  erished  the  a n d i t i n e r a n t money l e n d e r s  I n d i a n h i s t o r y , we w o u l d f i n d  that  o f f i n a n c i n g a n d money l e n d i n g were f o l l o w e d o r i g i n a l l y b y  a n d l a t e r o n by B a n i y a n s , S h r o f f s , M u l t a n i s , C h e t t i a r s , e t c . , u s u a l l y i d e n t i f i e d w i t h commerce a n d t r a d e .  Age, w h i c h a p p r o x i m a t e l y  granting of loans  covers  Even d u r i n g t h e  t h e p e r i o d f r o m 2 0 0 0 B.C. t o ikOO B.C.  and c r e d i t s i n one f o r m o r a n o t h e r was c a r r i e d o n  by I n d i a n m e r c h a n t s , t r a d e r s a n d money l e n d e r s Debt ( R n a ) i s r e p e a t e d l y m e n t i o n e d i n t h e R i g Veda - t h e s a c r e d having  book o f t h e H i n d u i s m -  been a n o r m a l c o n d i t i o n among t h e V e d i c  Indians.^  i s known a b o u t e i t h e r t h e method o f r e c o r d i n g t h e l o a n s ,  apparently  However,  the period of  payment o r t h e r a t e o f i n t e r e s t .  L.C.  J a i n , Indigenous Banking i n I n d i a , L o n d o n , 1929, p . 3 .  little  Macmillan & Co.Ltd.,  - 3 After the sixth century B.C. Budhist writings reveal to some extent the nature of the p r e v a i l i n g lending practices and the heavy burden of interest borne by the debtor.  According to  Professor J a i n , who obtained his information from the Budhist s t o r i e s (Jatkas),  the l e g a l rate of interest was usually set  life at  2 15 per cent per annum, upper l i m i t .  but this does not appear to have been an  In Kautalyas Arthashastra, an important compilation  of rules governing among other things the liending of money, of rent, rate of i n t e r e s t , e t c . ,  fixing  which were current from about 400  to 200 B . C . , i t was held "that 15 per cent should be the maximum legal rate of interest on secured loans.  On unsecured loans the  nominal maximum was 60 per cent, but the actual rate could go as high as 240 per cent i f the r i s k element was also very high".^ Between 200 B . C . to 200 A.D. trade and industry flourished i n India and Indian merchant bankers, i n addition to accepting deposits and making loans, engaged i n financing internal trade.  According to  Professor M. Taylor both the art and science of banking was compara t i v e l y well developed at t h i s time.  He reaches this conclusion  after f a m i l i a r i s i n g himself with the writings of Manu - an leainent contemporary law-giver and advisor to the crown.  The laws of Manu,  2. 3LVC-. Jain'? .op. c i t . , p. 5 ;  3.  4.  '  S. G. Panandikar, Banking i n India, Orient Longmans L t d . , Calcutta, 1948, p . l . M. Taylor, Student's Manual of the History of India, as cited by G.B. Jather and S. G. B e r i , Indian Economics, V o l . I I . Humphrey Milford, Oxford University Press, Madras, 1937, p. 440.  - 4 he s t a t e s , " d i s c l o s e how t h o r o u g h l y  the a r t o f banking  2000 y e a r s a g o .  Then b a n k e r s u n d e r s t o o d  o f money v a l u e .  They k e p t  double bills  entry.  They charged  account  was known  and f o l l o w e d t h e f l u c t u a t i o n  b o o k s and l e d g e r s by s i m p l e a n d  interest  a n d compound .... t h e y  granted  o f exchange and, i n s h o r t , they f o l l o w e d t h e p r a c t i c e s o f  modern t i m e s w h i c h a r e l i t t l e The  changed from a n c i e n t  rules".  Muslim i n v a s i o n s of I n d i a during the 10th century  brought a p e r i o d o f u n c e r t a i n t y and i n s e c u r i t y .  A.D.  As t h e i n v a d e r s  were m a i n l y i n t e r e s t e d i n I n d i a n r i c h e s , t h e y l o o t e d a n d p l u n d e r e d everywhere t h e y went.  Baniyans,  c o m m u n i t i e s were h a r d e s t h i t . invasions virtually business savings.  S h r o f f s , M u l t a n i s and o t h e r  In a d d i t i o n to personal  losses,  brought t o an end t h e i r d e p o s i t o r s a f e  because t h e people  banking  keeping  no l o n g e r t r u s t e d t h e b a n k e r s w i t h  The g e n e r a l p u b l i c b e g a n t o h o a r d  i.the  their  i t s money s a v i n g s b y  b u r y i n g p r e c i o u s m e t a l and c o i n , e i t h e r i n t h e ground, o r i n t h e w a l l o r i n some o t h e r i n c o n s p i c u o u s  p l a c e i n t h e i r homes - h a b i t s  w h i c h h a v e p e r s i s t e d t o some e x t e n t among I n d i a n s down t o t h e p r e s e n t time. Even though t h a t o f a conqueror and  order throughout  and  commerce.  Muslim r u l e e s t a b l i s h e d law  t h e c o u n t r y a n d t h u s gave a n i m p e t u s t o t r a d e  Eventually the country again prospered.  L o c a l bankers  t o o k advantage o f t h e o p p o r t u n i t y a n d a g a i n added t h e f i n a n c i n g o f trade t o t h e i r business continued with l i t t l e 5.  activities.  The money l e n d e r s p r e s u m a b l y  i n t e r r u p t i o n t h e i r age-old usurious  • (3V-'Bs.,Ja>her-Va»d S.G. B e r i , pjo^ c i t . , p. 440  practices.  - 5 It  was d u r i n g t h i s p e r i o d t h a t t h e b i l l  we know i t t o d a y ,  o f exchange ( H u n d i )  6 f  as  came i n t o common u s e .  R e f e r r i n g t o t h e d i s c o u n t r a t e s c h a r g e d on b i l l s o f e x c h a n g e J.B.  T a t e r n i e r , a French  traveller,  Surat  t h e e x c h a n g e goes up t o 6.1/4  4.1/4  to 5 per cent;  Sironj, at  to 3 per cent;  r e p o r t e d t h a t " a t L a h o r e on per cent;  a t Agra  a t Ahmadabad, f r o m 1 t o 1.1/2 a t B u r h a n P u r , f r o m 2.1/2  D a c c a , t o 10 p e r c e n t ;  at Patna,  from  per cent; at to 3 per cent;  from 7 t o 8 p e r cent  and a t  7 B e n a r a s up t o 6 p e r c e n t " . to  Apparently  these  rates varied according  t h e e x t e n t o f c o m p e t i t i o n i n t h e r e s p e c t i v e exchange market;  a l s o a c c o r d i n g t o t h e d e g r e e r i s k i n v o l v e d i n t h e movement o f b o t h . Coins  and goods between d i f f e r e n t  trading centres.  f i n a n c i n g o f t r a d e h a s s i n c e become a n i m p o r t a n t to  the Indigenous  T r a d i n g and  source  o f income  bankers.  6. A H u n d i may be d e f i n e d a s a w r i t t e n o r d e r ( u s u a l l y u n c o n d i t i o n a l ) made b y one p e r s o n o r a n o t h e r f o r t h e p a y m e n t , o n demand o r a f t e r a c e r t a i n s p e c i f i e d time (mentioned i n the Hundi) o f a c e r t a i n sum o f money t o a p e r s o n m e n t i o n e d i n t h a t o r d e r . In the f o r m e r c a s e i t i s c a l l e d a D a r s h a n i H u n d i (demand b i l l o f e x c h a n g e ) and i n t h e l a t t e r c a s e , M u d d a t i H u n d i ( u s a n c e o r t i m e b i l l o f e x c h a n g e ) . These h u n d i s i. ii. iii. iv. v.  7. .  c a n f u r t h e r be s u b - d i v i d e d i n t o t h e f o l l o w i n g c a t e g o r i e s : Dhanijog Hundi - payable t o a Dhani o r a person.(commonly used) S h a h j o g H u n d i - p a y a b l e , t o a Shah o r a r e s p e c t a b l e p e r s o n , Firmanjog Hundi - payable t o o r d e r , Dekhanhai Hundi - payable t o the p r e s e n t e r o r b e a r e r , J o k h a m i H u n d i - t h i s h u n d i i s drawn a g a i n s t t h e g o o d s d i s p a t c h e d and c o n t a i n s c e r t a i n c o n d i t i o n s a c c o r d i n g t o which i f t h e goods a r e l o s t o r destroyed i n t r a n s i t , t h e drawer o r h o l d e r o f t h e hundi has t o s u f f e r t h e l o s s . It i s i n the nature of a p o l i c y insurance.  T r a v e l s i n I n d i a a s q u o t e d b y L.C. J a i n . o p . c i t . p. 14.  - 6 -  Money changing was also an important source of income for the indigenous bankers during the period of Muslim r u l e .  The  Muslim rulers set up numerous mints i n India and each succeeding ruler issued his own coins.  Later issues were generally of  weight and design than were those minted e a r l i e r .  different  At that time only  bankers were qualified to handle the exchange and assaying business and reconstitution of the coinage provided them with an added source of income.  Moreover many bankers were appointed as the o f f i c e r s of  the mint by the state.  In t h i s capacity they bought the metal,  minted coins and shared the p r o f i t s with the Muslim r u l e r s .  During  the reign of the Mughal Emporer, Akbar the Great, there were four gold mints and the number of s i l v e r and copper coin mints were 8  estimated at fourteen.  The market price of a coin, at that  time,  was determined not only by i t s face value but by the year and the reign during which i t was coined, also the wear and tear suffered during i t s use.  Discontinued coins were frequently valued at considerably less  than,their b u l l i o n value.  The money changers melted down these' coins  and got them recoined at a p r o f i t . Referring to the chicanery of these money changers, J . B . Tavernier stated,  " A l l the Jews who occupy themselves with money and exchange  i n the Empire of the Grand Seigneur pass for being very sharp;  but  i n India they would scarecely be apprentices to these Indian Money " 9 changers .  However, the money changing business came to an end  i n 1 8 3 5 when the currency of B r i t i s h India was unified by the East India Company. ^* N.K. Sinha, 9-  The Economic History of Bengal, v o l . 1 . S r i Lalchandroy Gossain and Co. Calcutta, 1 9 5 6 . p . l l 8 .  Travels i n India as quoted by L . C. J a i n , o p . c i t . p. 1 1 .  - 7 I n a d d i t i o n t o t h e i r l e n d i n g and money c h a n g i n g n a t i v e I n d i a n bankers  rendered important s e r v i c e s to the  s u c h a s l e n d i n g money t o t h e s t a t e , of these bankers fact  t h e r e was  activities,  c o l l e c t i n g revenue,  state, etc.  h e l d priminent p o s i t i o n s i n the Royal C o u r t s .  no C o u r t w i t h o u t a s t a t e b a n k e r  - a position  h e l d by a w e l l - e s t a b l i s h e d and w e l l known m e r c h a n t b a n k e r . the l o c a l bankers  a priviliged position.  f u n c t i o n s o f a modern s t a t e  t h e most p r o m i n e n t .  One  generally T h i s gave  most o f  the  i n I n d i a , t h e House o f J a g a t S e t h  was  may  compare the p o s i t i o n o f t h i s b a n k i n g  w i t h t h a t o f t h e Bank o f E n g l a n d  banker  a p p a r e n t l y managed a l l t h e s t a t e l o a n s a s w e l l a s h i s  sunstantial business.  P r o f e s s o r Muranja  When r e f e r r i n g t o t h i s b a n k i n g  t e l l s us t h a t i n 1722  c o n f e r r e d on F a t e h Chand t h e t i t l e heriditary distinction;  of Jagat Seth or world banker  to the Jagat  to handle domestic  a  T h e r e a f t e r no  t o t h e Nizam, o f B e n g a l  without  Seth.  When t h e E u r o p e a n t r a d e r s came t o I n d i a d u r i n g t h e f i r s t Century  as  ( i n s i g n i a of the m a g n i f i c e n t  a p e a r l ear-ring."*"^  Emperor o f D e l h i ever s e n t the K h i l l a t a l s o s e n d i n g one  house,  t h e E m p e r o r Mohamad S h a h  a l s o , the K h i l l a t  r o b e s o f h o n o u r ) , an e l e p h a n t and  o f t h e 17th  house  i n i t s e a r l i e r stages of development.  t h e h e i g h t o f i t s g l o r y under F a t e h Chand, a m e r c h a n t  o f B e n g a l , who own  They p e r f o r m e d  In  bank.  Of a l l t h e n a t i v e b a n k e r s  I t reached  Some  they found i n d i g e n o u s bankers  t o be w e l l  half equipped  b a n k i n g needs but i n c a p a b l e o f h a n d l i n g the  r e q u i r e d to finance e i t h e r the newly imported products or the  credit exports  10. S.K.  Muranjan,  Modern B a n k i n g I n I n d i a , Kamla P u b l i s h i n g House, Bombay, 1952. p. 9.  1  - 8 necessary through  t o p a y f o r them.  T h e r e w e r e no m e r c a n t i l e  w h i c h e x t e r n a l t r a d e c o u l d be c h a n n e l e d  b a n k e r s and merchants had l i t t l e practices. hostility  establishments  because  Indian  knowledge o f e x t e r n a l t r a d e  M o r e o v e r t h e r e was a l a n g u a g e b a r r i e r and p r o b a b l y towards f o r e i g n p r o f i t  In order  t o overcome t h e s e  some  seekers. difficulties  the European t r a d e r s  e m p l o y e d , f i r s t , I n d i a n bankers i n t h e i r s e r v i c e s but u l t i m a t e l y s e t up  t h e i r own m e r c h a n t h o u s e s .  The E a s t  I n d i a Company e m p l o y e d  I n d i a n b a n k e r s a t i t s t r a d i n g c e n t e r s i n S u r a t , A g r a and C a l c u t t a . An  indigenous  b a n k e r b y t h e name o f B u r g e e P a r a c k  f i n a n c i e r o f t h e company a t S u r a t . and  interpreter  (Baniya)  was t h e b a n k e r arid  I n 1685 he was v o t e d  the treasurer  a t S u r a t , a g o l d medal and a c h a i n o f t h e  Professor Sina states that "the  l8th  Century  B e n g a l i b a n i y a was i n t e r p r e t e r , h e a d b o o k - k e e p e r , h e a d s e c r e t a r y ,  12 t h e s u p p l i e r o f e a e h and cash k e e p e r  head b r o k e r ,  .  About  a c e n t u r y l a t e r when t h e r e v e n u e c o l l e c t i o n o f B e n g a l was h a n d e d over  t o the East  I n d i a Company, I n d i a n b a n k e r s s e r v e d  as c o l l e c t o r s  f o r t h e Company. By  t h e end o f t h e  l 8 t h c e n t u r y t h e M u s l i m r u l e a t D e l h i had  become weak, c o r r u p t a n d i n e f f e c t i v e a n d t h e B r i t i s h i n f l u e n c e i n B e n g a l was b e i n g e s t a b l i s h e d . the d i f f e r e n t East  11. 12.  Under these  unsettled conditions trade  and a l o n g w i t h i t t h e b u s i n e s s  S.K. M u r a n j a i i , op_. c i t . , p .  N.K.  wars between  s t a t e s o f I n d i a and between the I n d i a n S t a t e s and t h e  I n d i a Company.  disappeared  T h e r e were c o n t i n u o u s  S i n h a , o£. c i t  9.  Vol.1,  p.118.  of n a t i v e Indian  practically bankers.  Many o f them l o s t t h e i r p e r s o n a l f o r t u n e s b e c a u s e e v e n t h e o w n e r s of p r i n c e l y s t a t e s could not repay borrowers  t h e i r l o a n s . Many o t h e r  f a i l e d t o honour t h e i r o b l i g a t i o n s .  The r a n k s o f t h e  I n d i a n b a n k e r s were f u r t h e r t h i n n e d b y t h e e m e r g i n g c o m p e t i t i o n o f the former and  e m p l o y e e s o f t h e Company who meantime e n t e r e d  the banking  t r a d i n g business i n the more'important commercial c e n t e r s .  These  company s e r v a n t s were g i v e n s p e c i a l p r i v i l i g e s s u c h a s e x e m p t i o n f r o m excise taxes; officers.  they a l s o enjoyed  c o r d i a l r e l a t i o n s w i t h Company  Sometimes t h e y even d o u b l e d  b e t t e r p r i c e s from I n d i a n d e a l e r s .  a s Company o f f i c i a l s  to get  Through these d e v i c e s and o t h e r s  t h e y w e r e a b l e i n many i n s t a n c e s t o t a k e o v e r t h e b u s i n e s s o f I n d i a n merchants. The  l o s s o f b u s i n e s s and p e r s o n a l f o r t u n e s b u i l t  u n d e r t h e Company's p a t r o n a g e b y t h e I n d i g e n o u s f u l l y recovered. and  With  the establishment  up  earlier  b a n k e r s was n e v e r  o f Company's r u l e i n B e n g a l ,  t h e c o n s e q u e n t i n c r e a s e i n i t s t r a d e , i t became e x p e d i e n t t o  r e p l a c e t h e n a t i v e b a n k e r s e i t h e r w i t h A g e n c y H o u s e s o r Company e n t e r p r i s e s under i t s s p o n s e r s h i p .  Company t r e a s u r y o f f i c e r s  s e t up a t C a l c u t t a , Bombay and M a d r a s .  were  E u r o p e a n t r a d i n g f i r m s were  a l l o w e d t o e s t a b l i s h A g e n c y h o u s e s i n Bombay, C a l c u t t a a n d p r o b a b l y 13 i n Madras.  Thereafter indigenuous  bankers tended  to revert to  t h e i r s t a t u s as merchant bankers i n t h e i n t e r i o r p a r t s o f I n d i a a role  they have c o n t i n u e d  t o p l a y down t o t h e p r e s e n t  time.  No  d a t a a r e a v a i l a b l e o n t h e s i z e and e x t e n t o f t h e i r o p e r a t i o n s b u t they, nevertheless, c o n s t i t u t e a s i g n i f i c a n t part of Indian  banking  enterprises.  later  The A l l I n d i a S u r a l C r e d i t S u r v e y R e p o r t  of a  13. M.V.  Subba Rao.  An O u t l i n e o f Banking System i n I n d i a . V o r a & Co. P u b l i s h e r s L t d , Bombay, 19^8,  p. 18.  -10date  (195^) e s t i m a t e s t h a t t h e I n d i g e n o u s  bankers  a n d t h e money-  l e n d e r s p r o v i d e a s much a s 76 p e r c e n t o f a l l r u r a l c r e d i t s  in  . 14 India.  granted  They a r e a l s o v e r y i m p o r t a n t i n t h e s m a l l u r b a n Part  citie  2.  Indian J o i n t Stock  Banks  C o r p o r a t e B a n k i n g v e n t u r e s i n I n d i a grew o u t o f t h e t r a d i n g a c t i v i t i e s o f b o t h European and n a t i v e I n d i a n s .  As i n d i c a t e d  t h e E a s t I n d i a Company a l l o w e d E u r o p e a n t r a d i n g f i r m s ±0 Agency Houses i n t h e C o u n t r y ' s  establish  i m p o r t a n t t r a d i n g c e n t r e s - Bombay  and C a l c u t t a - a n d t o combine b a n k i n g f a c i l i t i e s activities.  above  with their  trading  T h e s e A g e n c y Houses were manned f o r t h e most p a r t b y  f o r m e r Company s e r v a n t s who were o f t e n a b l e t o g a i n s p e c i a l c o n c e s s i o n s f r o m t h e Company a n d o c c a s i o n a l l y d o u b l e d a s Company a g e n t s , i . e . , Government local  Agents.  customs, indigenuous bankers  Because o f t h e i r knowledge o f and money l e n d e r s were  employed  by t h e A g e n c y H o u s e s a n d n o t i n f r e q u e n t l y became p r i n c i p a l s i n t h e s e b a n k i n g and t r a d i n g v e n t u r e s . Development t o i860 The f i r s t o f t h e s e B a n k i n g - t r a d i n g e n t e r p r i s e s , k n o w n a s t h e Bank o f H i n d o s t a n , was e s t a b l i s h e d b y M e s s r s . ' A l e x a n d e r and Company in  1770 a t C a l c u t t a .  By t h e e n d o f l 8 0 3 i t w e n t y n i n e s u c h  banking-  t r a d i n g v e n t u r e s were i n o p e r a t i o n i n I n d i a .  14. Reserve Report  Bank o f I n d i a , A l l - I n d i a R u r a l C r e d i t S u r v e y , o f t h e Committee p f d i r e c t i o n .  p.  .: .  V o l . I I . Bombay, 1954. p .  15. N.K. S i n h a ,  E c o n o m i c H i s t o r y o f B e n g a l , V o l . 1 . S r i L a i Chand Roy G o s s a i n a n d Co., C a l c u t t a , 1956, p. 90.  - 11 Early  Growth Some o f t h e b a n k i n g  e n t e r p r i s e s , w h i c h grew o u t o f t h e  A g e n c y H o u s e s , i s s u e d t h e i r own c u r r e n c y n o t e s . Hindostan had  Bank, t h o u g h n o t a c c e p t e d  Those o f t h e  b y t h e Company G o v e r n m e n t ,  a l o c a l c i r c u l a t i o n w h i c h o c c a s i o n a l l y r o s e t o a s much a s  Rs 5»000,000."^  The e x t e n t t o w h i c h t h e n o t e s  acquired  circulation  depended on t h e i r a c c e p t a b i l i t y a t t h e Governments' l o c a l t r e a s u r i e s and b y t h e l o c a l m e r c a n t i l e a n d t r a d i n g e s t a b l i s h m e n t s i n t h e u r b a n centers.  However, r e g a r d l e s s o f t h e e x t e n t o f t h e i r  t h e s e notes had l i t t l e people  acceptability,  o r no c i r c u l a t i o n i n t h e c o u n t r y s i d e where  c u s t o m a r i l y used m e t a l l i c  money.  T h e r e was k e e n c o m p e t i t i o n among t h e s e b a n k i n g - t r a d i n g h o u s e s to secure banking  t h e s t a t u s and p r i v i l i g e s  o f Government b a n k e r s .  Each  e n t e r p r i s e t r i e d t o make i t s n o t e s l e g a l t e n d e r a t G o v e r n m e n t  t r e a s u r i e s b e c a u s e w i t h t h i s p r e r o g a t i v e i t c o u l d l e n d more t h a n i t s p r o p r i e t o r y a s s e t s and t h u s e x p a n d i t s o p e r a t i o n s .  The E a s t  India  Company r e c o g n i z e d t h e a d v a n t a g e s o f t h e b a n k n o t e s i n t h e i n t e r n a l payment m e c h a n i s m a n d e v e n t u a l l y a c c e p t e d of I n d i a .  B u t t h i s Bank went i n t o  those o f the General  Bank  l i q u i d a t i o n d u r i n g the l a t e  17 1780's and t h e Government t h e n t u r n e d which, taken  t o t h e Bank o f C a l c u t t a  with  p r e s u m a b l y , i t c o n t i n u e d t o d e a l u n t i l 1806 when s t e p s were t o e s t a b l i s h a sfeate p a r t n e r e d b a n k c o m p l e t e l y  trading  d i v o r c e d from  activities.  16.  17.  N.K. R o y ,  I n d i a n B a n k i n g a n d Money M a r k e t , M.C. L t d , C a l c u t t a , 1952, p. 8.  L.C.  Indigenous  Jain,  Banking  In India,  S a r k a r and S o n s  Macmillan  L o n d o n , 1929, p . l 4 l .  a n d Company, L t d .  S i n c e t h e s e b a n k i n g e n t e r p r i s e s were c a r r y i n g t r a d i n g  activities  a l o n g w i t h b a n k i n g , a n d t h e i r m a i n m o t i v e was t r a d e p r o m o t i o n , r a t h e r t h a n t h e s t a b i l i t y o f t h e i r b a n k i n g e n t e r p r i s e s , a number o f t h e s e so c a l l e d b a n k s o v e r - e x t e n d e d  themselves  and f a i l e d  s i n c e b e e n c a l l e d t h e 1829-32 b a n k i n g c r i s i s .  d u r i n g what h a s  In a c r i t i c i s m of the  banking p r a c t i c e s of t h i s period P r o f e s s o r J a i n s a i d , "thanks to the combination of banking w i t h s p e c u l a t i v e t r a d i n g ventures, and a p o l i c y o f p l a c i n g p r o f i t s b e f o r e s a f e t y , t h e i n e v i t a b l e happened d u r i n g t h e 1829-331 when c o m m e r c i a l brought  d i s a s t e r o v e r t o o k t h e t r a d i n g f i r m s and  s e v e r a l o f them a l o n g w i t h t h e i r b a n k i n g u n d e r t a k i n g s t o r u i n " .  A l t h o u g h t h e Company g a v e some a s s i s t a n c e t o t h e s e b a n k s , sufficient  t o s a v e them f r o m b a n k r u p t c y .  t h e p e r i o d 1829-33 a p p e a r s  The c o m m e r c i a l  i t was n o t disaster of  t o show t h a t , i f bank f a i l u r e s a r e t o be  a v e r t e d , b a n k i n g b u s i n e s s s h o u l d n o t be m i x e d w i t h c o m m e r c i a l  under-  takings. D u r i n g t h e p e r i o d f r o m 1833 t o i860 t h e r e were f e w a d d i t i o n s a n d little  expansion of j o i n t  s t o c k b a n k i n g and t r a d i n g v e n t u r e s .  Large  s c a l e f a i l u r e d u r i n g t h e 1829-32 c r i s i s h a d s h a k e n t h e p u b l i c  con-  f i d e n c e i n t h e agency house b a n k i n g i n s t i t u t i o n s and t h e E a s t  India  Company s u b s e q u e n t l y t o o k s t e p s t o e s t a b l i s h and s u p p o r t i n s t i t u t i o n s - the P r e s i d e n c y Banks - which devoted e x c l u s i v e l y t o t h e b a n k i n g b u s i n e s s ."^  banking  themselves  D u r i n g t h e l840's a n d  early  l850's s e v e r a l j o i n t s t o c k t r a d i n g b a n k s were e s t a b l i s h e d b u t most o f them e i t h e r f a i l e d o r were s u b s e q u e n t l y a m a l g a m a t e d w i t h o t h e r institutions.  18. L.C. J a i n , op_. c i t ,p. (  19-  See p a r t 3 page 18.  ikl. infra.  - 13 The  slow progress of the I n d i a n banking d u r i n g t h i s  may  a l s o be a t t r i b u t e d  The  Afghan  War  t o a t t e n d a n t e c o n o m i c and p o l i t i c a l  R e v o l u t i o n o f 1857  kept the c o u n t r y i n a continuous  t u r m o i l and i t s economy, u n s e t t l e d a n d  o r d e r was  made t o e s t a b l i s h b a n k i n g and Developments between year  i860  trading  I t was  only the  attempts  were  enterprises.  i860 - 1935  i s an i m p o r t a n t one  banking enterprises.  political  transferred to  r e s t o r e d , t h a t new  fourties,  the I n d i a n  disorganized.  when t h e g o v e r n m e n t o f I n d i a was  B r i t i s h P a r l i a m e n t and  The  conditions.  o f t h e l a t e t h i r t i e s ^ t h e S i k h Wars d u r i n g t h e  the. e v e r p r e s e n t a n t i - B r i t i s h f e e l i n g , a n d , f i n a l l y ,  a f t e r 1858,  period  i n the h i s t o r y of I n d i a n  In t h a t y e a r , under the Act V I I ,  p r i v i l e g e o f l i m i t e d l i a b i l i t y was  i860,  i n t r o d u c e d i n I n d i a and  to the j o i n t s t o c k t r a d i n g b a n k s . ^  the  extended  Because o f t h i s p r i v i l i g e  many  i n s t i t u t i o n s were e s t a b l i s h e d i n t h e y e a r s i m m e d i a t e l y f o l l o w i n g t h e n a t u r e o f t h e i r u n d e r t a k i n g s w e r e s u c h t h a t o n l y a few I n most c a s e s f a i l u r e t o s u r v i v e was  due  o u t b r e a k o f t h i s war  had  survived.  to investment i n the I n d i a n  c o t t o n boom w h i c h r e s u l t e d f r o m t h e A m e r i c a n The  but  Civil  War.  cut o f f the main source o f  s u p p l y o f c o t t o n f o r E n g l a n d ' s L a n c a s h i r e m i l l s and t h e  the  British  c o t t o n goods i n d u s t r y had t u r n e d t o I n d i a , h i t h e r t o o n l y a s u p p l e m e n t a l s o u r c e o f ee&ton. f i b r e .  As an i m m e d i a t e  consequence  21 c o t t o n p r i c e s i n I n d i a rose t o about  20. 21.  10  times t h e i r normal  level.  S.G. O r i e n t C Longmans, Bombay, A F i n a Pn ac ni aa nl d iC kh aa rp ,t e rB a ni kni nH gi s tI on r yI n do if a ,Bombay, i t e d by L.C. Jain, p. op. 11. c i t . , pp. lk'j>-kk.  19^8.  - Ik  T h i s s u d d e n and  -  u n e x p e c t e d r i s e l e d t o an e x t e n s i v e i n c r e a s e i n  the p r o d u c t i o n of c o t t o n i n I n d i a .  The  f i n a n c e d by t h e n e w l y e s t a b l i s h e d j o i n t ventures.  The  usual procedure,  i n c r e a s e was stock  mostly  banking-trading  according to P r o f e s s o r J a i n ,  was  22 as f o l l o w s .  A l a n d r e c l a m a t i o n company w o u l d be f o r m e d a n d  c a p i t a l r e q u i r e d f o r p r e p a r i n g the l a n d f o r c u l t i v a t i o n would s u p p l i e d by a f i n a n c i a l c o n s o r t i u m newly e s t a n l i s h e d t r a d i n g banks. were n o t w e l l c o n c e i v e d ,  the be  made up o f a g r o u p o f o w n e r s o f Many o f t h e s e r e c l a m a t i o n p r o j e c t s  o t h e r s w e r e mismanaged and  probably  burdened w i t h h e a v i e r f i n a n c i a l charges than they c o u l d c a r r y . M o r e o v e r , t h e end  o f C i v i l War  i n the U n i t e d S t a t e s of A m e r i c a  b r o u g h t even the s u c c e s s f u l v e n t u r e s s u p p l i e r s i n the U n i t e d S t a t e s . failure  d u r i n g t h e y e a r s 19^5  original  T h i s r e s u l t e d i n the l a r g e s c a l e  and  as w e l l as t h e c o t t o n e n t e r p r i s e s During  into competition with  1966,  i n v o l v i n g the t r a d i n g banks  themselves.  t h e y e a r s w h i c h f o l l o w e d t h e c o t t o n boom t h e p r o g r e s s  Indian banking  e n t e r p r i s e s was  u n d o u b t e d l y r e t a r d e d by  c o n f u s i o n t h a t e x i s t e d i n I n d i a between of the world's  l e a d i n g c o u n t r i e s had  i n favour of g o l d .  1870  and  l893>  currency  187O  By  abandoned b i m e t a l i c  Unfortunately f o r s i l v e r standard  I n d i a , almost immediately  the  countries  t h e r e a f t e r huge d e p o s i t s o f s i l v e r  t o t h e W o r l d m a r k e t s and  the s t e r l i n g  c o n s i d e r a b l y import  T h i s had  t h e e f f e c t of  e q u i v a l e n t o f I n d i a n r u p e e s and  prices i n India.  22. L';Q.. . J a i n , .bp.  c i t . , p.  like  were of  depressing i t s price considerably  below i t s mint p a r i t y w i t h g o l d . depressing  most  standards  d i s c o v e r e d i n the A m e r i c a ' s , s u b s t a n t i a l l y i n c r e a s i n g the f l o w silver  of  IV?  For the time  seriously  thus  being at  raising least,  -  it  a l s o lowered  comitted  15  -  the s t e r l i n g r e c o v e r i e s of Indian  t o Rupee c o n t r a c t s .  f r e e c o i n a g e o f s i l v e r and  -exporters  U n d e r t h e C o i n a g e A c t o f 1893,  o f g o l d was  abandoned and  the  the r a t e  on  23 s t e r l i n g was  fixed  1  at  e x c h a n g e i n s t a b i l i t y and it,  i t seems r e a s o n a b l e  b a n k i n g and  = Rs.15-  Had  i t not been f o r  t h e a b o r t i v e c o t t o n boom w h i c h p r e c e e d e d t o assume t h a t t h e g r o w t h o f j o i n t  stock  t r a d i n g e n t e r p r i s e s would have been s u b s t a n t i a l d u r i n g 24  l a t t e r p a r t of the 19th  century.  As  a result  of these  a  r e s e r v e s o f R s . 5 0 0 , 0 0 0 o r o v e r a t t h e end o f t h e 1 9 t h I n d i a n B a n k s and t h e u p s u r g e o f N a t i o n a l i s m During  the f i r s t  decade o f the 2 0 t h c e n t u r y  the  the  unhealthy  d e v e l o p m e n t s t h e r e were o n l y n i n e s u c h t r a d i n g b a n k s w i t h and  the  capital century.  Nationalist  ( S w a d e s h i ) Movement i n I n d i a made c o n s i d e r a b l e p r o g r e s s .  Among  o t h e r a c c o m p l i s h m e n t s t h i s movement gave a s t i m u l u s t o t h e g r o w t h o f joint  s t o c k bank and  almost completely 1906  and  1913  t r a d i n g c o m p a n i e s w h i c h a t t h i s t i m e had  i d e n t i f i e d with native Indian ventures.  t h e number o f b a n k s w i t h c a p i t a l and  Rs.500,000 or over increased t o t a l paid-up c a p i t a l  and  from 9 t o 18.  reserves  On  Reserves  become  Between of  the l a t t e r d a t e  were Rs .40 m i l l i o n s ,  and  their  their  25 t o t a l d e p o s i t s amounted t o R s . 2 2 0 m i l l i o n s .  Such  important  i n s t i t u t i o n s a s t h e Bank o f I n d i a , t h e C e n t r a l Bank o f I n d i a , Bank o f B a r o d a , t h e  I n d i a n Bank o f M a d r a s and  were e s t a b l i s h e d d u r i n g t h i s p e r i o d .  The  the  t h e Bank o f M y s o r e  number o f s m a l l e r  banks  t h a t w e r e e s t a b l i s h e d was much g r e a t e r . 23B.E. D a d a c h a n j i , M o n e t a r y S y s t e m o f I n d i a . , D.B. Taraporewala Sons & Co. L t d . Bombay, 1 9 4 8 , p. 223. 24. fl.B. J a t h e r and 25.  S.G.  Panandiker,  S.J. B e r i . I n d i a n Economics. V o l . I I , Oxford U n i v e r s i t y P r e s s , M a d r a s , 1937t P« 450. op_.  c i t . ,pp.  11-12.  - 16 -  T h e s e b a n k s were t h e i n s t r u m e n t s b y w h i c h I n d i a n n a t i o n a l i s t s h o p e d e v e n t u a l l y t o compete on e v e n t e r m s w i t h institutions.  the f o r e i g n  However, t h e o w n e r - m a n a g e r s o f t h e n e w l y e s t a b l i s h e d  banking enterprises often lacked  the experience  and f o r e s i g h t  w h i c h w o u l d h a v e s a v e d them f r o m a good many s u b s e q u e n t d i s a s t e r s . They i n v e s t e d t h e i r f u n d s i n h i g h y i e l d i n g , n o n - l i q u i d s e c u r i t i e s and  o f t e n kept low cash reserves  to, a t t r a c t d e p o s i t s b e f o r e  and p a i d h i g h i n t e r e s t r a t e s  a n d d u r i n g W o r l d War I .  Many o f t h e  b a n k s l e n t money on what e v e n t u a l l y p r o v e d t o be u n s o u n d undertakings.  They a l s o f i n a n c e d  t r a d i n g and m e r c a n t i l e  t h e i r own o f t e n  1913  speculative  e n t e r p r i s e s w i t h t h e r e s u l t t h a t most o f t h e  s m a l l banks and a few l a r g e ones f a i l e d Professor J a i n places  business  t o s u r v i v e t h e war p e r i o d .  t h e number o f f a i l u r e s w h i c h o c c u r r e d  and 1 9 1 8 a t 87 w i t h  between  a combined paid-up c a p i t a l o f Rs. 1 7 , 5 0 0 , 0 0 0 .  T h i s l a t t e r sum r e p r e s e n t e d  more t h a n h a l f o f t h e t o t a l  paid-up  c a p i t a l o f a l l j o i n t s t o c k b a n k s t h a t were o p e r a t i n g a t t h e  beginning  26 of  this  period.  The  p o s t W o r l d War I r e c o v e r y  and t h e e s t a b l i s h m e n t  I m p e r i a l Bank o f I n d i a i n 1 9 2 1 i n i t i a t e d of I n d i a n  joint  banking i n s t i t u t i o n s .  of the  another period of expansion  Many new b a n k i n g t r a d i n g  v e n t u r e s s p r a n g up i n U t t a r P a r d e s h , P u n j a b a n d W e s t e r n I n d i a , during  the f o l l o w i n g ten years;  were e i t h e r p o o r l y them f a i l e d Jather  conceived  b u t , l i k e some o f t h e i r  o r mismanaged.  during the Great Depression.  predecessors,  C o n s e q u e n t l y many o f  According  to Professors  a n d B e r i t h e f a i l u r e s h a d many d i f f e r e n t c a u s e s .  They  list  26.  J.P.  Jain^  Indian Banking Analysed, D e l h i , 1 9 4 9 , pp- 1 9 - 2 0 .  Rajhan P u b l i c a t i o n s ,  i)  the absence of a strong central bank;  legislation; iv)  iii)  lack of experience among the Indian bankers;  high rates of interest  i n speculative a c t i v i t i e s ; vii)  i i ) inadequate banking •  to attract deposits; (vi)  dishonesty,  v)  indulgence  fraud and mismanagement  c y c l i c a l fluctuations i n Indian agriculture and business  activity;  and f i n a l l y v i i i )  the negligence of the Indian  Government i t s e l f . In spite of failures and other shortcomings' there was a substantial increase i n the number and deposits of the Joint Stock banking enterprises between 1920 and ±935>  The number of reporting  Indian Joint Stock Banks increased from 2 to 38 and their deposits from Rs. 1,400,000 to Rs. 844,500,000.  A summary of their  development i s presented i n table 1 on page 18.  18 Table 1 Number, Principal Assets and L i a b i l i t i e s of Indian Joint Stock Banking enterprises Between 1870-1935 No. of Reporting Banksl  Year  Capital Funds  Deposits  Cash i n hand and at Banks^  Loans and Investments  1870  2  1.2  1.4  0.5  0.9  1875  3  1.7.  2.8  0.7  2.1  1880  3  2.1  6.3  1.7  4.6  1885  4  2.4  9.4  2.1  7.3  1890  5  5.1  27.1  5.6  21.5  1895  8  9.4  56.5  9.7  46.8  1900  9  12.8  80.8  11.9  69.9  190C5  9  16.2  119.9  17.4  102.5  1910  16  37.6  256.6  28.0  228.6  1912  18  42.6  272.6  40.0  232.6  39.3  171.1  35.3  135.8  17  1914 1915  20  43.8  178.7  39.9  138.8  1916  28  46.1  247.1  60.3  186.8  1918  19  60.2  405.9  84.9  311.0  1920  25  109.2  711.5  163.1  548.4  1925  28  106.0  544.9  101.0  443.9  1930  31  119.0  632.6  76.8  555.8  1935  38  132.0  844.5  191.2  653.3  Source:  Adapted from Reserve Bank of India, Monetary and Banking Statistics of India, Bombay, 1954, p. 14.  1 Banks with Capital funds of Rs 500,000 or over. 2 Including gold bullion. Note:  Loans and Investment column i s derived by subtracting cash, etc. from total deposits.  - 19 The  d a t a i n t h i s t a b l e r e v e a l t h a t u n t i l 1900 t h e p r o g r e s s o f  these 19th Rs.  banking century  e n t e r p r i s e s was r e l a t i v e l y s l o w .  By t h e e n d o f t h e  t h e r e were o n l y 9 r e p o r t i n g b a n k s w i t h d e p o s i t s o f  80,800,000 a n d e a r n i n g a s s e t s a m o u n t i n g t o R s . 69,900,000.  H o w e v e r , a f t e r 1905, when t h e N a t i o n a l i s t s movement s t a r t e d , t h e s e b a n k s made c o n s i d e r a b l e headway.  B e t w e e n 1905 a n d 1912 t h e i r  number i n c r e a s e d f r o m 9 t o 18 a n d t h e i r d e p o s i t s , f r o m R s . 119,900,000 t o R s . 272,600,000 - a b o u t 100 a n d 240 p e r c e n t , r e s p e c t i v e l y . During to  t h e same p e r i o d t h e i r  R s . 232,600,000.  e a r n i n g a s s e t s i n c r e a s e d f r o m R s . 102,500,000  B e t w e e n 1912 a n d 1 9 l 8 t h e number o f t h e s e  remained r e l a t i v e l y unchanged; number o f bank f a i l u r e s .  banks  i . e . , new b a n k s d i d n o t e x c e e d t h e  H o w e v e r , t h e r e was a s h a r p  decline i n their  d e p o s i t s f r o m R s . 273,000,000 t o R s . 171,000,000 b e t w e e n 1912 a n d 1914. and  A f t e r t h el a t t e r year reached  time  their  their  deposits substantially  R s . 406,000,000 b y t h e e n d o f 1918.  During  t h e same  e a r n i n g a s s e t s i n c r e a s e d b y a b o u t 240 p e r c e n t .  i n c r e a s e i n t h e i r d e p o s i t s and e a r n i n g a s s e t s , without t h e i r number, may be a t t r i b u t e d t o t h e e x p a n s i o n i n d u s t r y d u r i n g W o r l d War I . sharp  increased  This  an i n c r e a s e i n  o f I n d i a n t r a d e and  B e t w e e n 1918 a n d 1920 t h e r e was a  i n c r e a s e i n t h e i r number, d e p o s i s t s , c a p i t a l  funds and earning  a s s e t s - a b o u t 33%, 80%, 90%, a n d 77%, r e s p e c t i v e l y . A f t e r t h e y e a r 1920 t h e i r number c o n t i n u e d 38 b y t h e end o f 1935. However t h e i r  t o r i s e and reached  deposits decreased  between  1920 a n d 1925 f r o m R s . 712,000,000 t o R s . 544,000,000 b u t r o s e t o Rs.  844,500,000 b y t h e e n d o f 1935-  e a r n i n g assets dipped  B e t w e e n 1920 a n d 1925 t h e i r  f r o m R s . 548,400,000 t o R s . 444,000,000, a n d  t h e n i n c r e a s e d t o R s . 653,300,000 b y t h e end o f 1935-  - 20 -  Part  3.  The P r e s i d e n c y B a n k s U n t i l t h e end o f t h e l 8 t h c e n t u r y t h e b a n k i n g b u s i n e s s o f t h e E a s t I n d i a Company was h a n d l e d b y a g e n c y - h o u s e b a n k s a n d I n d i g e n u o u s bankers.  The Company i t s e l f  appears  engage i n b a n k i n g e n t e r p r i s e s . bankers  t o have been r e l u c t a n t t o  However, t h e s e r v i c e s o f t h e I n d i a n  and t h e a g e n c y - h o u s e b a n k s were o f t e n i n a d e q u a t e a n d , a t  times, u n r e l i a b l e .  M o r e o v e r t h e f a i l u r e o f t h e B e n g a l Bank and t h e  G e n e r a l Bank o f , I n d i a - i n s t i t u t i o n s t h a t h a d h a n d l e d t h e Company's b a n k i n g b u s i n e s s i n t h e e a r l y 1790's-and v  the u n c e r t a i n f u t u r e o f  more r e c e n t l y e s t a b l i s h e d b a n k s l e d t h e Company t o s p o n s o r  and t o  i n v e s t i n banking i n s t i t u t i o n s designed t o handle i t s banking b u s i n e s s a n d , a t t h e same t i m e , t o s u p p o r t t h e a g e n c y - h o u s e b a n k s still  i nexistence. The f i r s t o f t h e s e v e n t u r e s was e s t a b l i s h e d i n I 8 0 6 .  in  L a t e r on  J a n u a r y 1809, i t was i n c o r p o r a t e d b y t h e Company a s t h e P r e s i d e n c y  Bank o f B e n g a l .  (The w o r d P r e s i d e n c y i s t h e I n d i a n e q u i v a l e n t o f a  province or state).  Two o t h e r p r o v i n c i a l b a n k i n g i n s t i t u t i o n s , t h e  P r e s i d e n c y Bank o f Bombay a n d t h e P r e s i d e n c y Bank o f M a d r a s were e s t a b l i s h e d i n 1840 a n d 18V5, r e s p e c t i v e l y . Capitalisation The P r e s i d e n c y Bank o f B e n g a l s t a r t e d i t s o p e r a t i o n s w i t h a f u l l y p a i d - u p c a p i t a l o f R s . 5,000,000 e q u a l l y d i v i d e d i n t o shares.  500  Of t h i s c a p i t a l R s . 1,000,000 was s u p p l i e d b y t h e Company :  and t h e b a l a n c e , m o s t l y b y E u r o p e a n s .  The s h a r e c a p i t a l o f t h e  - 21 P r e s i d e n c y Bank o f Bombay was Rs. Bank o f M a d r a s was R s . Bengal,  5~ 000,000; t h a t o f t h e P r e s i d e n c y !  3,000,000*  A s i n t h e P r e s i d e n c y Bank o f  t h e Company h e l d s u b s t a n t i a l i n v e s t m e n t s  latter institutions.  The Company h a d t h e r i g h t  of t h e d i r e c t o r s of each o f these banks. trained personnel  i n both of the t o appoint  three  I n order t o ensure  t h e i r s e c r e t a r i e s a n d t r e a s u r e r s were d r a w n f r o m 27  the I n d i a n C i v i l S e r v i c e . Functions The P r e s i d e n c y B a n k s a c c e p t e d advances t o merchants and t r a d e r s . bills  They a l s o n e g o t i a t e d  silver,  They were a l l o w e d t o b u y and s e l l  the f i s c a l  T h e y were a l s o a l l o w e d t o manage  a f f a i r s o f some o f t h e m u n i c i p a l i t i e s .  T h e s e b a n k s d i d n o t compete w i t h o t h e r b a n k i n g the f i e l d  of international finance.  the f i n a n c i n g of e x t e r n a l  They were n o t a l l o w e d t o r a i s e money o u t s i d e o f I n d i a o r  open b r a n c h e s i n any o t h e r In  enterprises i n  They were f o r b i d d e n t o t r a d e  i n c o i n s or precious metal o r t o undertake trade.  gold  and were a u t h o r i s e d t o a c t a s t h e Company's f i s c a l  agent i n t h e P r e s i d e n c y c a p i t a l s .  to  domestic  o f e x c h a n g e and i n v e s t e d i n s e c u r i t i e s o f t h e Company a n d  o t h e r government b o d i e s . and  d e p o s i t s a n d made l o a n s a n d  country.  addition to their f i s c a l  operations, the Presidency  Banks  undertook o t h e r d u t i e s u s u a l l y a s s o c i a t e d w i t h a c e n t r a l bank. i m p l i e d above, they acted as f i s c a l I n d i a - the East in  the Presidency  I n d i a Company. towns.  agents f o r t h e government o f  They a l s o h e l d government  Panandikar,  balances  As a b a n k e r ' s banks, they f r e q u e n t l y h e l d  27S.G.  As  o p . c i t . p . 5.  - 22 the in  -  cash balances of other banking i n s t i t u t i o n s times of s t r e s s .  and a s s i s t e d  them  D u r i n g t h e 1829-33 c o m m e r c i a l d i s a s t e r ,  when  many b a n k i n g e n t e r p r i s e s f a i l e d , t h e p r e s i d e n c y Bank o f  Bengal  28 advanced  R s . 300,000 t o t h e H i n d o s t a n Bank.  U n d e r i t s c h a r t e r t h e P r e s i d e n c y Bank o f B e n g a l was  empowered  to i s s u e c u r r e n c y notes p r o v i d e d t h a t i t s t o t a l nore l i a b i l i t y d i d not exceed i t s c a p i t a l  o f Rs. 5 0 0 , 0 0 0 ;  provided a l s o , that i t s cash  29 on h a n d d i d n o t f a l l  s h o r t o f o n e - t h i r d o f i t s demand  As t h e Bank g a i n e d e x p e r i e n c e and d e m o n s t r a t e d latter of  restrictions  were g r a d u a l l y r e l a x e d .  liabilities.  i t s s t a b i l i t y , these  The P r e s i d e n c y B a n k s  Bombay and M a d r a s , w h i c h were e s t a b l i s h e d somewhat l a t e r , were  also granted p r i v i l i g e s s i m i l a r  t o t h o s e o f t h e P r e s i d e n c y Bank o f  Bengal. On M a r c h 1,  1862,  when t h e management o f a l l p a p e r c u r r e n c y  t a k e n o v e r by t h e I m p e r i a l G o v e r n m e n t o f I n d i a , t h e n o t e p r i v i l i g e s o f t h e P r e s i d e n c y B a n k s were w i t h d r a w n . l e n d i n g a c t i v i t i e s of t h e s e banks were governed capital  f u n d s and t h e d e p o s i t s o f t h e i r  compensation interest  f o r the r e s t r i c t i o n  fiscal  by t h e e x t e n t o f As a  banks would  partial  set aside.  I n I876 t h e g o v e r n m e n t o f I n d i a s o l d i t s i n t e r e s t f r o m t h e i r management.  their  a c t i v i t i e s , the  payment r e q u i r e d on g o v e r n m e n t b a l a n c e s was  and w i t h d r e w  issuing  T h e r e a f t e r , the  customeers.  on t h e i r  was  i n t h e s e banks  However t o e n s u r e t h a t  these  not compete w i t h t h e e x c h a n g e b a n k s , w h i c h m e a n t i m e had  28. Vera Antsey, 2 9  *  The E c o n o m i c D e v e l o p m e n t o f I n d i a , Longmans, G r e e n and Company, L o n d o n , 193&, p. 405.  R e s e r v e Bank o f I n d i a , B a n k i n g and M o n e t a r y Bombay, 1954, p. 3«  S t a t i s t i c s of  India., )  - 23 e s t a b l i s h e d themselves i n I n d i a , a n d activities o f 1876.  the  indulge  in  speculative  government o f I n d i a p a s s e d the P r e s i d e n c y  U n d e r t h i s m e a s u r e i t was  s t i p u l a t e d that these  Act  banks^  1.  c o u l d n o t . d r a w , d i s c o u n t , buy o r s e l l b i l l s o f u n l e s s t h e y were p a y a b l e i n I n d i a o r C e y l o n ;  2.  t h a t t h e y c o u l d n o t b o r r o w money o r r e c e i v e d e p o s i t s p a y a b l e o u t s i d e I n d i a or m a i n t a i n a f o r e i g n b a l a n c e o r a g e n c y f o r t h i s and s i m i l a r p u r p o s e s .  In order  to assure the  provided  that the P r e s i d e n c y  3-  1  exchange  s a f e t y of these banks' d e p o s i t s ,  t h i s Act  also  Banks  c o u l d n o t l e n d f o r a p e r i o d l o n g e r t h a n 6 m o n t h s , and c o u l d n o t a d v a n c e f u n d s , on t h e s e c u r i t y o f i m m o v e a b l e p r o p e r t y , o r p r o m i s o r y n o t e s b e a r i n g l e s s t h a n two names; o r on personal s e c u r i t y . With these s t a t u t o r y safeguards i n f o r c e , the  entrusted  government o f  some o f i t s b a n k i n g b u s i n e s s t o t h e s e b a n k s .  p a t r o n a g e enhanced t h e i r p o s i t i o n i n t h e i r r e s p e c t i v e helped to a t t r a c t private  This  India  government  communities  t o them a l a r g e amount o f b u s i n e s s f r o m  and  purely  enterprises.  Progress to  1935  I n s p i t e of the Presidency  s e v e r a l r e s t r i c t i o n s i m p o s e d upon them,  B a n k s e n j o y e d no  inconsiderable  increase' i n t h e i r banking operations the  Bank  Indian  was  g r o w t h and  prosperity.  e q u a l l y as g r e a t  j o i n t s t o c k b a n k i n g e n t e r p r i s e s as w e l l as  the  as  that  that of  The of  the  32 Exchange Banks*  Neither  the  joint  stock  banks nor  the  Exchange  30. infra.,  31. 32.  see  part  k.  p.g6  J.M. K e y n e s , I n d i a n C u r r e n c y and F i n a n c e M a c m i l l a n and L t d , L o n d o n , 1913. pp. 201-02. See P a r t 4, p. 26 N  Company  - 2k banks were r e s t r i c t e d i n their operations.  In fact the  limitations  imposed on the Presidency banks proved to be a blessing i n They were shielded from the speculative  activities  disguise.  which sounded the  death-knell of many less r e s t r i c t e d banking i n s t i t u t i o n s .  As  Professor Keynes r i g h t l y pointed out "the r e s t r i c t i o n s under which they work have i n the past contributed beyond doubt, to their stability".  In 1920 these banks were amalgamated under the name  of the Imperial Bank of India. activities  Inaridition to ordinary banking  the l a t t e r i n s t i t u t i o n served as the country's only  c e n t r a l bank u n t i l the establishment in 1935«  of the Reserve Bank of India  The progress made by the Presidency Banks before  their  amalgamation i n 1920, and by t h e i r successor the Imperial Bank, between 1922 and 193^ i s shown i n table 2 on page 25. The data i n this table disclose that, while Government deposits of the Presidency Banks increased by about 60 per cent between 1870 and 1920, their private deposits increased by almost 1200 per cent during the same period.  Even the banking d i f f i c u l t i e s  of World War I,  during which almost one-half of the Indian Joint Stock Banks f a i l e d , had l i t t l e  ill-effect  on the operation of the Presidency Banks.  In  fact their private deposits almost doubled, increasing from Rs. 358,000,000 millions i n 1912 to Rs. 509,000,000 i n 1918.  This shows that the  Presidency Banks continued to hold the confidence of their  customers  and thus came through the 1913^18 banking c r i s i s unscathed. This table also reveals a decline i n the Presidency Banks' Cash/deposit r a t i o , indicating the extent to which these Banks were  33-  J.M. Keynes, op. c i t . , p. 203-  25 Table 2 P r i n c i p a l A s s e t s and L i a b i l i t i e s o f t h e P r e s i d e n c y Banks 1870-1920, a n d t h e I m p e r i a l B a n k , 1920-1935 (Rs.000,000)  Private Deposits  Cash and Due f r o m Banks  j Reserves  Gov't. Deposits  —  Investment  Loans  Year  Capital  1870  33.6  2.6  54.3  64.0  99.7  13.0  5.6  1875  37.6  4.2  49.8  50.7  69.5  24.9  6.1  1880  35.0 < '  5.5  29.1  84.9  74.1  25.5  14.4  1885  35.0  7.7  23.1  76.9  59.7  18.2  22.1  1890  35.0  9.8  35.9  147.6  129.7  33.4  20.4  1895  35.0  14.0  33.3  131.2  77.0  27.8  59.7  1900  36.0  20.0  28.1  128.8  50.4  30.3  76.2  1905  36.0 ,  26.3  31.2  222.6  82.3  41.0  130.5  1910  36.0  33.1  42.4  323.0  113.5  61.0  190.9  1912  37.5  36.4  42.7  358.0  117.8  64.3  21816  19U  37.5  38.9  56.2  400.4  208.4  96.2  152.0  1915 1916 1918  37.5 37.5 37.5  37.3 36.1 34.5  48.9 52.1 86.4  386.1 447.1 509.8  146.5 172.5 170.8  125.8 124.5 127.4  162.7 202.0 298.0  1920  37.5  37.8  90.3  772.6  260.3  142.4  460.2  1922  56.2  40.6  156.3  617.8  259.4  109.4  490.6  1924  56.3  45.1  184.3  738.6  200.2  138.4  697.5  1925  56.3  47.2  168.4  727.1  255.2  155.5  591.5  1926  56.3  48.8  169.6  748.7  541.8  185.4  471.6  1928  56.3  51.5  66.5  713.1  146.4  225.2  530.1  1930  56.3  53.5  144.9  717.7  185.4  292.9  478.5  1932  56.3  50.9  96.7  633.1  178.6  266.4  381.1  1934  56.3  52.5  72.2  7481  199.4  460.2  250.8  1935  56.3  53.9  749.9  177.6  421.3  258.8  Source:  Note:  r  1  —  Reserve Bank o f i n d i a , B a n k i n g and Monetary S t a t i s t i c s o f I n d i a . 1954, p p . 10-11, a n d 30-31. The Loans andAdvances column i s d e r i v e d b y s u b t r a c t i n g t o t a l p l u s Cash b a l a n c e s from t h e t o t a l d e p o s i t s .  Bombay,  investment  - 26 a b l e t o put t h e C o u n t r y ' s l i q u i d a s s e t s t o good u s e .  Whereas  t h i s r a t i o was a s h i g h a s 80% d u r i n g t h e l 8 7 0 ' s , i t h a d t o a s l o w a s 30% by 1920. portfolio,  The b a l a n c e h a d gone i n t o  a n d i n t o l o a n s and a d v a n c e s .  dropped  investment  The f o r m e r i n c r e a s e d f r o m  Rs. 13,000,000 i n 1870 t o R s . 41,000,000 i n 1910 a n d h a d r e a c h e d Rs. 142,000,000 m i l l i o n s by 1920.  The l a t t e r i n c r e a s e d f r o m  Rs. 5,600,000 i n I870 t o R s . 76,000,000 i n 1900 and h a d r i s e n t o R s . 460,000,000 b y 1920 - a s u b s t a n t i a l sum i n d e e d . The  p r o g r e s s made b y t h e s u c c e s s o r ^ ..Imperial Bank  s u b s t a n t i a l was n o t so s p e c t a c u l a r .  though  I n s p i t e o f i t s r o l e as a  s e m i - c e n t r a l bank, i t s g o v e r n m e n t d e p o s i t s a c t u a l l y  decreased  and t h e g a i n s made i n p r i v a t e d e p o s i t s - f r o m Rs.617,000,000 i n 1922 t o R s . 717,000,000 i n 1930 - was n o t p h e n o m e n a l .  During the  G r e a t D e p r e s s i o n o f t h e 1930's b o t h p u b l i c and p r i v a t e d e p o s i t s declined substantially.  I n 1935 p r i v a t e d e p o s i t s were s t i l l  below  t h e p e a k r e c o r d e d i n 1926.  Part 4  . '  The E x c h a n g e B a n k s A l t h o u g h ' a student o f banking would  g e n e r a l l y d e f i n e an e x c h a n g e  bank a s a b a n k i n g i n s t i t u t i o n t h a t s p e c i a l i z e s i n f i n a n c i n g  foreign  t r a d e o r d e a l s i n f o r e i g n e x c h a n g e , t h i s i s n o t so i n I n d i a .  To t h e  n a t i v e I n d i a n an exchange bank s i g n i f i e s a bank t h a t h a s i t s h e a d  office  o u t s i d e I n d i a a n d i s owned a n d o p e r a t e d b y f o r e i g n e r s .  date  The e x a c t  of  the establishemnt of the f i r s t  o f t h e s e b a n k s i s n o t known.  it  i s g e n e r a l l y agreed t h a t they s t a r t e d o p e r a t i o n s d u r i n g the e a r l y  1850's s h o r t l y b e f o r e t h e Government o f I n d i a was t r a n s f e r r e d  However,  to the  - 27 B r i t i s h Parliament. to  S i n c e t h e P r e s i d e n c y B a n k s were n o t  allowed  d e a l i n f o r e i g n exchange o r t o f i n a n c e e x t e r n a l t r a d e , and  n a t i v e bankers for  34  had  little  experience i n t h i s f i e l d ,  t h e s u c c e s s o f f o r e i g n banks were u n d o u b t e d l y  the  l e a d i n g B r i t i s h b a n k s came f i r s t , s o o n t o be  of  t h e i m p o r t a n t banks of o t h e r European c o u n t r i e s .  were 10  exchange banks o p e r a t i n g b r a n c h e s  prospects  bright.  of  Branches  f o l l o w e d by  branches  By 1917  i n most o f t h e  the  there  important  35 trading centres. The which had  E x c h a n g e Banks may  categories -  d i d a l a r g e p o r t i o n o f t h e i r b u s i n e s s i n I n d i a , and  small business transactions i n India.  A u s t r a l i a and of  be d i v i d e d i n t o two  India;  China;  t h e E a s t e r n Bank, and M e s s r s Cox The  those  which  C h a r t e r e d Bank o f  t h e N a t i o n a l Bank o f I n d i a ;  t h e i r foreign business i n India i t s e l f . Banking  The  those  and  India,  t h e M e r c a n t i l e Bank  Company d i d most o f  Hong K o n g and  Shangai  C o r p o r a t i o n , the I n t e r n a t i o n a l Banking C o r p o r a t i o n , the  Yokohama B a n k , t h e C o m p t o i r N a t i o n a l d'Escompte de P a r i s and R u s s o - A s i a t i c Bank had  branches  a l l o v e r A s i a and  the  i n the Western  36 h e m i s p h e r e as  well.  Functions; In vital  s p i t e of t h e i r  f o r e i g n o r i g i n , exchange banks p l a y e d  r o l e i n t h e d e v e l o p m e n t o f I n d i a n t r a d e and  an i m p o r t a n t p l a c e i n t h e I n d i a n b a n k i n g  structure.  t h e i r operations to i n c l u d e every important a v a i l a b l e t o Commercial banks i n I n d i a .  commerce and They s o o n  type of banking  By 1935  a  occupied extended  business  when t h e R e s e r v e  Bank  34. G.F.  Shirras,,  The  I n d i a n B a n k i n g and F i n a n c e L o n d o n , 1920, p. 344.  t  M a c m i l l a n & Co, L t d . ,  35. Vera Autsey, 36.  G.F.  Shirras.,  The  E c o n o m i c D e v e l o p m e n t o f I n d i a , Longmans, G r e e n Company, L o n d o n , 1936. p. 4o8. op_. c i t . ' p. 384.  and  - 28 was formed they had not only acquired a monopoly of the Country's foreign exchange and external traded financing business;  they were  also important competitors of the Presidency and the Joint stock banks i n the purely domestic banking sphere. They financed much of the inland movement and d i s t r i b u t i o n of important merchandise.  They also financed much of the outward  movement of Indian export products.  For this purpose they either  maintained sub branches i n most of the important' trading and commercial centres or obtained controlling interests i n existing joint stock banks through the purchase of share c a p i t a l . had 4 6 branch offices i n India.  In 1 9 1 7 , the Exchange Banks  The Presidency banks had 69 and the  joint stock banks had 199« The deposits of the Exchange banks amounted to Rs. 3^,000,000 as against the Rs. 50,000,000 of the  37 Presidency Banks and Rs. 21,000,000 of the I n d i a n Joint Stock Banks. Their progress i s presented i n table 3 on page 29. Progress 1870-1935 The,data i n table 3 reveal a gradual increase i n the number, deposits a n d earning assets of (foreign) Exchange Banks from 187O to 1915.  During this 45 years i n t e r v a l , their number increased from  only 3 to 11 but their deposits,  from Rs. 5,200,000 to Rs. 335,500,000  and their estimated earning assets, from Rs. 5,000,000 to Rs. 260,000,000. Durkng the next five years there was r e l a t i v e l y rapid increase from 11 to 15 i n their number, a doubling of their deposits and earning assets.  Between 1920 and 1930, while the number i n operation increased  from 1 5 to 18, their deposits had declined from Rs. 748,000,000 to Rs. 37.  681,100,000.  During this, time their earning assets had increased  G.F. Shirras, op. c i t . , p. 384.  29 Table 3 Number, Deposits, Cash on Hand and Earning Assets of Exchange Banks i n India, 1870 to 1935 (Rs.000,000) Cash in Hand . No. of & at banks Estimated foreign Banks (including) Earning ( bullion ) Assets Deposits Represented Year 1870  3  5.2  6.1  —  1875  3  10.7  5.7  5.0  1880  4  34.0  18.0  16.0  1885  4  47.6  13.1  34.5  1890  5  75.4  35.0  40.4  1895  7  103.1  27.6  75.5  1900  8  105.0  24.0  81.0  1905  10  170.4  37.8  132.6  1910  11  247.9  43.9  204.0  1915  11  335.5  76.0  259.5  1920  15  748.1  251.8  496.3  1925  18  705.5  94.2  611.3  1930  18  681.1  77.1  604.0  1935  17  761.8  125.5  636.3  Source:  Adapted from Reserve Bank of India, Banking and Monetary Statistics of India. Bombay, 1954, p. 14.  Note: Earning Assets are estimated as the difference between deposits and Cash balances.  from Rs. 496,300,000 had  30 -  t o Rs. 6 0 4 , 0 0 0 , 0 0 0 .  By 1 9 3 5 , t h e i r number<  d e c l i n e d t o 17 b u t t h e i r d e p o s i t s h a d r i s e n t o R s . 7 6 1 , 8 0 0 , 0 0 0 ,  -  somewhat i n e x c e s s o f t h e p r e v i o u s 1 9 2 0 p e a k , a n d e a r n i n g a s s e t s , t o Rs.  636,000,000. that of the  .  L i k e / t h e P r e s i d e n c y Banks, t h e cash-deposit r a t i o banks decreased  o f these  s u b s t a n t i a l l y d u r i n g the p e r i o d under review,  i n d i c a t i n g , a more e f f e c t i v e u s e o f t h e i r l o a n a b l e f u n d s . t h i s r a t i o was 1 t o 4 .  I n 1900  By 1935 i t h a d d e c l i n e d t o a b o u t 1 t o 6 .  M e a n w h i l e t h e i r e a r n i n g a s s e t s h a d grown f r o m a n e s t i m a t e d amount o f Rs. 8 1 , 0 0 0 , 0 0 0  t o Rs.  636,300,000.  The N a t i o n a l P l a n n i n g C o m m i t t e e o f I n d i a a t t r i b u t e d t h e v e r y c o n s i d e r a b l e s u c c e s s o f f o r e i g n owned a n d o p e r a t e d  exchange banks  t o t h e c o m p e t e n c e a n d e x p e r i e n c e o f t h e i r management, a l s o t o t h e f a c t t h a t down t o 1935 t h e y e n c o u n t e r e d  little  domestic  competition.  The P r e s i d e n c y B a n k s were n o t a l l o w e d t o engage i n t h e f i n a n c i n g o f e x t e r n a l trade and t h e Joint Stock  Banks, c o u l d n o t match t h e Exchange  Banks i n e i t h e r r e s o u r c e s o r e x p e r i e n c e .  Part 5. Cooperative In an attempt  Banks  t o s o l v e the problems o f r u r a l indebtedness and  u s u r i o u s e x a c t i o n s b y t h e money l e n d e r s , t h e I m p e r i a l Government o f I n d i a enacted  from time t o time l e g i s l a t i o n designed  a g r i c u l t u r a l communities.  The f i r s t  to assist the  o f such measures, the Land  Improvement L o a n s A c t , I883 a n d t h e A g r i c u l t u r i s t s L o a n s A c t , 1 8 8 4 , 38.  ;K..T> Shaw, j. Cur r e n c j -and,; Banking ,- {Nat ional- PI a nn ing. Committee Series) Vora and C o . , Bombay,' 1 9 4 8 . p. 115?  c  ;r  „  - 31 gave t h e f a r m e r ' s t h e r i g h t  to n e g o t i a t e secured loans at the  G o v e r n m e n t s L a n d Revenue O f f i c e s a t r e a s o n a b l y l o w r a t e s o f i n t e r e s t . U n f o r t u n a t e l y t h e s e m e a s u r e s d i d n o t b e a r much f r u i t . people  f o r whom t h e s e p r i v i l i g e s w e r e i n t e n d e d s t i l l  c r e d i t b e c a u s e t h e y had l i t t l e  Most o f the could not obtain  o r no s e c u r i t y t o o f f e r .  Establishment T o w a r d s t h e end o f N i n e t e e n t h C e n t u r y S i r F. N i c h o l s o n c o n d u c t e d . an e x t e n s i v e e n q u i r y i n t o t h e p r o b l e m s t a t e o f Madras.  As a r e s u l t  of r u r a l indebtedness i n the  o f t h e e n q u i r y he recommended t h e  i n s t i t u t i o n of C o o p e r a t i v e C r e d i t S o c i e t i e s , b e l i e v i n g t h a t they would meet t h e c r e d i t n e e d s o f t h e r u r a l p e o p l e a s w e l l a s i n c u l c a t e h a b i t s of  thrift  and s e l f h e l p among them.  "The b e s t way t o do t h i s "  he  39 said,  "was  to find Raiffeisen"  meaning t o e s t a b l i s h c o o p e r a t i v e banks  p a t t e r n e d a f t e r t h e R a i f f e i s e n b a n k s t h e n o p e r a t i n g i n Germany. s o l u t i o n was a l s o a d v o c a t e d  This  by P r o f e s s o r D u p e r n e x , a t e a c h e r i n one hi  of  t h e A n g l o - I n d i a n c o l l e g e s , i n h i s P e o p l e ' s Bank i n N o r t h e r n  India.  The C o o p e r a t i v e S o c i e t i e s A c t In  k e e p i n g w i t h t h e N i c h o l s o n and D u p e r n e x r e c o m m e n d a t i o n s and  r e a l i s i n g t h e need f o r s u c h banks i n I n d i a , the I m p e r i a l Government passed  t h e C o o p e r a t i v e S o c i e t i e s A c t i n 190k.  The o b j e c t o f t h i s A c t  was " t o e n c o u r a g e s e l f h e l p a n d c o o p e r a t i o n among a g r i c u l t u r i s t s , kl a r t i s a n s and p e r s o n s o f l i m i t e d  means".  39. Vera Anstey, ko. ibid.  p.  The E c o n o m i c D e v e l o p m e n t o f I n d i a , Longmans, G r e e n and Company, L o n d o n , 1936. p. 190.  192.  kl. P.A.  W a d i a and K.T. M e r c h a n t . Our E c o n o m i c P r o b l e m s , V o r a a n d Company p. 295. P u b l i s h e r s (PVT) L t d . , Bombay, 1957-  - 32 It  provided  f o rthe establishment o f a Cooperative  each p r o v i n c e under w h i c h C o o p e r a t i v e a u t h o r i s e d and r e g i s t e r e d .  Department i n  C r e d i t S o c i e t i e s w o u l d be  I t s e t f o r t h the arrangements under which  t h e S o c i e t i e s were t o be f o r m e d a n d t h e b u s i n e s s p r o c e d u r e s followed.  E a c h s o c i e t y was t o c o n s i s t o f p e r s o n s  t o be  l i v i n g i n t h e same  v i l l a g e o r l o c a l i t y so t h a t t h e members s h o u l d know e a c h o t h e r s ' p o s i t i o n s and  character.  The w o r k i n g  c a p i t a l o f t h e s e S o c i e t i e s was t o be o b t a i n e d  f r o m m e m b e r s h i p s u b s c r i p t i o n s , from i n t e r e s t b e a r i n g t i m e from government g r a n t s . to  L o a n s c o u l d be made o n l y t o members a n d were  be g i v e n f o r p r o d u c t i v e p u r p o s e s o n l y .  either real or personal The "urban"  Cooperative  They were t o be s e c u r e d b y  property.  C r e d i t S o c i e t i e s were c l a s s i f i e d a s " r u r a l " o r  a c c o r d i n g t o t h e i r l o c a t i o n and t h e n a t u r e o f t h e l i a b i l i t y o f  t h e i r members.  The r u r a l s o c i e t i e s c o n f o r m e d t o t h e  Utopian  t h e R a i f f e i s e n S o c i e t i e s a n d t h e i r members h a d u n l i m i t e d The  d e p o s i t s and  ideals of  liability.  u r b a n s o c i e t i e s f o l l o w e d S c h u l z e - D e l i t z s c h model and g e n e r a l l y had  limited  liability.  B e c a u s e o f t h e p o v e r t y o f t h e i r members a n d a r e s u l t a n t s h o r t a g e of working  capital,  e a r l y c o o p e r a t i v e c r e d i t s o c i e t i e s d i d n o t make much  headway.  I n o r d e r t o e n l a r g e t h e scope o f t h e i r u s e f u l n e s s t h e  Government o f I n d i a p a s s e d  the Cooperative  S o c i e t i e s A c t o f 1912  amejif o t h e r t h i n g s , p r o v i d e d f o r t h e e s t a b l i s h m e n t district  c o o p e r a t i v e banks;  c o o p e r a t i v e banks.  which,  of Central or l o c a l  also f o r the establishment  of State  The C e n t r a l c o o p e r a t i v e b a n k s were d e s i g n e d t o  coordinate the a c t i v i t i e s e r a t i v e bankswere designed  of the primary  s o c i e t i e s , and S t a t e  coop-  t o s u p e r v i s e and t o promote t h e e x p a n s i o n o f  - 33 -  the whole system; and Primary banks.  also to provide a channel for State grants to Control The Primary credit societies c h a r a c t e r i s t i c a l l y  became members of the Central Cooperative banks and the l a t t e r i n turn became members of the State Cooperative banks.  Both the State and  Central cooperative banks also had some individual members. The working capital of the Central cooperative banks i s b u i l t up from deposits of Primary credit § o c i e t i e s ;  also from individuals both  members and non-members, membership fees and from advances from the State cooperative banks.  The working capital of State cooperative banks  i s b u i l t up from deposits of Sentral cooperative banks and individuals both members or non members; State Governments.  from membership fees and advances from  On occasion commercial banks find i t convenient to  maintain deposit accounts i n the State cooperative banks. The management of the-.Cooperative banks i s quite simple and d i r e c t . The operations of the Primary credit societies are i n the hands of the members themselves and are generally recorded by a paid secretary who may or may not be a member of the society.  The operations of the  Central and the State cooperative banks are delegated to a paid secretary manager designated by the Registrar of the Cooperative Departments of the respective States.  U n t i l 1917 the Cooperative banks were under the  supervision of the Central Government of India.  During that year their  supervision was transferred to their respective State Governments with the result that there has since been no particular uniformity i n their conduc t.  - 34 I n t e r e s t r a t e s charged  by each t i e r i n t h e s t r u c t u r e v a r y  s t a t e t o s t a t e a s does t h e c h a r a c t e r o f t h e l o a n s g r a n t e d . interest  r a t e s g e n e r a l l y a r e much l o w e r t h a n t h o s e c h a r g e d  money l e n d e r s and i n d i g e n o u s b a n k e r s . have c h a r g e d to  from  Even s o , by c o m p e t i n g  Cooperative Credit S o c i e t i e s  a s a r u l e b e t w e e n 6% a n d 25% f o r t h e i r l o a n s i n c o n t r a s t  t h e 15% t o a s much a s 240%  t h e more b e n e f i c i a l  results  charged  b y t h e money l e n d e r s .  o f the establishment o f the Cooperative  b a n k s was t h e s u b s e q u e n t r e d u c t i o n i n t h e r a t e s c h a r g e d money l e n d e r s .  One o f  by t h e l o c a l  42  P r o g r e s s t o 1935 A l t h o u g h b y 1935 had  C o o p e r a t i v e C r e d i t S o c i e t i e s and C o o p e r a t i v e  banks  T !.;:•..,/ been e s t a b l i s h e d o n l y i n t h e s t a t e s o f M a d r a s , Bombay, a n d  Uttar Pardesh,  their  o p e r a t i o n s h a d become, n e v e r - t h e - l e s s , q u i t e  significant  f o r t h e ds>untry a s a w h o l e .  the Reserve  Bank o f I n d i a i n d i c a t e t h a t a b o u t 800 P r i m a r y C r e d i t  S o c i e t i e s w i t h a membership o f about  S t u d i e s made b y t h e s t a f f o f  90,800  T h e i r c a p i t a l a n d r e s e r v e s amounted t o R s . funds  and d e p o s i t s t o R s .  l i s h m e n t o f t h e Reserve  1,800,000.  By  were i n o p e r a t i o n i n  600,000  1935,  and t h e i r  1907»  borrowed  t h e time o f t h e e s t a b -  Bank o f I n d i a , t h e number o f P r i m a r y C r e d i t  S o c i e t i e s h a d grown t o  104,974  t h i s l a t t e r date t h e i r  c a p i t a l a n d r e s e r v e amounted t o R s . 292,000,000;  their  borrowed funds  and t h e i r m e m b e r s h i p t o  and d e p o s i t s , t o R s .  Dafai, s h o w i n g t h e i r p r o g r e s s b e t w e e n 1907 of  t a b l e 4./on page  37.  42. Vera.Anstey,  op_. c i t . , p p .  195-96.  4,592,448.  On  676,800,000. .. ., ?•'<: a n d 1935  are given i n section A  - 35 D a t a f o r t h e C e n t r a l C o o p e r a t i v e banks a r e a v a i l a b l e  f r o m 1916  onward a n d r e v e a l t h a t t h e number o f t h e s e i n s t i t u t i o n s c o n t i n u o u s l y i n c r e a s e d f r o m 239 o n t h a t d a t e t o 615 i n 1935. c o n t i n u o u s growth  However, a p a r a l l e l  was n o t r e c o r d e d i n t h e number o f t h e i r  members, a n d P r i m a r y C r e d i t S o c i e t i e s .  individual  The number o f i n d i v i d u a l  members r o s e f r o m 33,000 i n 19l6 t o a peak o f 112,000 i n 1925, a n d s u b s e q u e n t l y d e c l i n e d t o 85,000 i n 1935. societies  The number o f member  i n c r e a s e d f r o m 11,800 i n 19l6 t o 101,500 i n 1930, t h e n  d e c l i n e d t o 89,100 i n 1935•  I  n  spite  o f the decline i n t h e i r  membership,  the w o r k i n g c a p i t a l o f t h e C e n t r a l C o o p e r a t i v e banks c o n t i n u e d t o i n c r e a s e a n d r e a c h e d R s . 61,000,000 i n 1935. No d o u b t ,  because o f the  i n c r e a s e d a v a i l a b i l i t y o f m e m b e r s h i p f u n d s t h e amount o f b o r r o w e d funds and d e p o s i t s decreased  m e a n w h i l e f r o m a p e a k o f R s . 261,900,000  i n 1930 t o R s . 233,000,000 i n 1935.  The a v e r a g e  working  capital per  C e n t r a l C o o p e r a t i v e bank,made up o f m e m b e r s h i p s , d e p o s i t s a n d b o r r o w e d f u n d s , i n c r e a s e d f r o m a p p r o x i m a t e l y R s . 136,000 t o R s . 478,000 d u r i n g t h e same t i m e .  / .' .'.ve y- - r " " D a t a s h o w i n g t h e i r g r o w t h  b e t w e e n 19l6  and 1935 a r e g i v e n i n S e c t i o n B o f T a b l e 4.on page 37. B e t w e e n 1916 a n d 1935 t h e number o f S t a t e C o o p e r a t i v e b a n k s i n c r e a s e d from f i v e t o e l e v e n ; f r o m 2,000 t o 3,000;  t h e number o f t h e i r i n d i v i d u a l  members  a n d t h e number o f P r i m a r y C r e d i t S o c i e t i e s a n d  C e n t r a l b a n k s , f r o m l600 t o 19,400.  Their working c a p i t a l rose  from  R s . 7,700,000 i n 1916 t o R s . 116,400,000 i n 1935, r e v e a l i n g a n average  p e r s t a t e c o o p e r a t i v e b a n k o f R s . 1,540,000 i n 19l6 a n d  R s . 10,580,000 i n 1935.  I n 1916, t h e i r b o r r o w e d f u n d s a n d d e p o s i t s  h e l d amounted t o R s . 6,400,000.  By 19351 t h e amount h a d r i s e n t o  - 36 • -jV.  Rs. 100,900,000.  ij-j  Data, showing t h e i r  progress  b e t w e e n 1916 a n d 1935 a r e g i v e n i n S e c t i o n C o f T a b l e '4,on page 37. I n - a s - m u c h a s t h e d a t a a v a i l a b l e u n t i l 1935 do n o t r e v e a l t h e t o t a l amount o f l o a n s o u t s t a n d i n g t o members as o f a n y p a r t i c u l a r t h i s i n f o r m a t i o n c o u l d n o t be i n c l u d e d i n t h e t a b l e .  One c o u l d assume,  h o w e v e r , t h a t a b o u t 90 p e r c e n t o f t h e w o r k i n g c a p i t a l o f t h e s e '.was. a t a l l t i m e s e m p l o y e d .  date.,  These i n s t i t u t i o n s always  banks  a p p e a r t o have had  a g r e a t e r demand f o r l o a n s f r o m members t h a n t h e i r a v a i l a b l e  working  c a p i t a l would p r o v i d e . I t s h o u l d p e r h a p s be n o t e d t h a t one o f t h e c o n t i n u i n g p r o b l e m s of  t h e C o o p e r a t i v e b a n k s was a s h o r t a g e o f f u n d s w h i c h c o u l d s a f e l y be  lent  on a g r i c u l t u r a l  l a n d improvements.  A l l I n d i a n s t a t e s h a d made  some p r o v i s i o n f o r l o a n s f o r s u c h p u r p o s e s  underthe  Agriculturists  L o a n s A c t , l884,and t h e L a n d I m p r o v e m e n t s L o a n A c t , 1883. e a r l y d a t a on t h e e x t e n t o f s u c h l o a n s a r e n o t a v a i l a b l e ,  Although their  volume  i n 1954 was a p p r o x i m a t e l y t h e same a s t h a t r e p o r t e d by t h e C o o p e r a t i v e  44 banks.  . I n 1929 t h e S t a t e s o f M a d r a s a n d Bombay u n d e r t o o k  t o encourage  such l o a n s by t h e e s t a b l i s h m e n t o f Land Mortgage Banks under t h e s u p e r v i s i o n o f t h e i r r e s p e c t i v e Cooperative Departments.  However d a t a  on t h e o p e r a t i o n s o f t h e s e i n s t i t u t i o n s a r e n o t a v a i l a b l e u n t i l which  t a k e s us beyond t h e b o u n d a r i e s  of t h i s  1938,  chapter.  43. S.G. P a n a n d i k a r ,  44.  Reserve  o p . c i t . ,p. 139.  Bank o f I n d i a , A l l I n d i a R u r a l Credit.Survey« V o l . I I . G e n e r a l R e p o r t , Bombay.,,,1954, p. 169.  Table 4 Number, Membership and Working Capital of Cooperative Credit Institutions in India, 1907-1935. Primary Credit Societies Central Coop. Banks (a) Members ~ Working Cap, (b) No. Membs. Working Cap.(b) Captl. Depsts. Year MemCaptl. Depsts. and Ending No. bers and & bor. No. of Indiv. Soc. & hoTi 000 000 Banks Resrvs. money in June 000 000 Reserve money  State Coop. Banks (a) Members Working Cap.(b) Captl. Depsts. Indiv. Soc. and & bor. 000 Resrvs. money 000  1907  0.8 90.8  0.6  1.8  1910  3.5 230.7 2.6  9.8  1915  17.1 831.7 20.1  68.7  239  33  11.8  5.7  26.6  5  2  1.6  1.3  6.4  1920  39.4 1641.9 52.0  162.1  393  93  29.1  12.2  52.1  7  2  2.8  3.0  21.2  1925  69.9 2814.2 110.8 371.1  546  112  65.4  26.9  135.1  9  2  10.8  6.0  44.4  1930  102.6 4388.1 212.3 682.9  588  90  101.5  47.1  261.9  10  2  18.6  10.1  76.1  1935  105.0 4592.4 292.0 676.8  615  85  89.1  61.0  233.0 11  3  19.4  15.5  100.9  N  Source:  Adapted from Reserve Bank of India, Banking and Monetary Statistics of India. Bombay, 1954. Pp. 410, 422, and 384.  (a) Figures for Central Coop Banks and State Coop Banks start from the year 1916. (b) Working capital of these banks consists of capital and Reserve funds and deposits and money borrowed from other banks.  ^  - 38 Part 6 Postal Savings Banks A discussion of the ramifications of Indian banking enterprises would not be complete without taking into account the development of the Country's postal saving system, which was instituted to encourage saving habits among the lower income group of Indian population. time after the establishment  Some  of Imperial rule i n India, the Indian  Government instituted small d i s t r i c t savings banks i n various admini s t r a t i v e d i s t r i c t s of B r i t i s h India.  The Presidency Banks had also  established savings offices i n their respective Presidency towns.  No  authentic information is available on either the size of these i n s t i tutions or their number.  It i s known that these e a r l i e r savings  were eventually absorbed into the Country's postal•savings was established in 1882.^  T  h  e  offices  system which  j g t t e r differs i n some respects from  the t y p i c a l postal system of the Western World i n that funds may be accumulated either by direct deposits at the post office or by the purchase of' savings c e r t i f i c a t e s  from rural mail couriers.  In the early  years of i t s operation the minimum deposit was 4 annas (a Anna = l / l 6 of a Rupee) or approximately 5 cents.  This has since been raised to  one Rupee or approximately 21 cents. The o r i g i n a l l e g i s l a t i o n governing the operation of these postal banks limited the amount that any i n d i v i d u a l may deposit i n a single year to Rs. 750; the t o t a l of the accumulated deposits to Rs. 5000 for an adult and to Rs. 1000 for a c h i l d . ^  45 ^*  Reserve Bank of India, Banking and Monetary S t a t i s t i c s of India, Bombay, 1954, p. 366. S.G. Panandiker, Banking i n India, 6th ed.- Orient Longmans L t d . , Calcutta, 1934, p. 148.  - 39 T h i s l i m i t h a s been r a i s e d f r o m t i m e t o t i m e . was  The most r e c e n t i n c r e a s e  i n 1956 when t h e N a t i o n a l Government o f I n d i a , i n o r d e r t o m o b i l i s e  the s a v i n g s o f l o w e r and m i d d l e c l a s s people f o r t h e Second F i v e Year P l a n , r a i s e d t h e maximum t o 15,000 f o r an i n d i v i d u a l ; Rs. 30,000 f o r a j o i n t a c c o u n t .  I n t e r e s t a t t h e r a t e o f ZWo was  a l l o w e d o n d e p o s i t s up t o R s . 10,000 a n d above t h a t , Except  f o r temporary  2%.  s e t b a c k s , t h e Post O f f i c e Savings System has  expanded i t s b u s i n e s s c o n t i n u o u s l y . has b e e n a c c u m u l a t e d  and, t o  The v e r y c o n s i d e r a b l e amount t h a t thought  by p e o p l e , g e n e r a l l y / t o be t o o i m p o v e r s i h e d t o be  c a p a b l e o f any t h r i f t whatever,  i s t r u e l y remarkable.  B e t w e e n 1885  and 1900 b a l a n c e s i n P o s t a l s a v i n g s b a n k s grew f r o m R s . 13,^00,000tto R s . 96,500,000 - a n i n c r e a s e o f a b o u t had  700%.  By M a r c h , 1935 b a l a n c e s  grown t o R s . 583,000,000 a n d l a t e r i n f o r m a t i o n r e v e a l s t h a t d u r i n g  i 9 6 0 t h e f i g u r e was i n e x c e s s o f R s . 2,600,000,000. showing  The f i v e y e a r l y  data  t h e d e v e l o p m e n t o f P o s t a l S a v i n g s b a n k s i s s h o w n , i n t a b l e 5.  on page ho.  hi. K.K. D e w e t t , J . C . S i n g h , I n d i a n E c o n o m i c s , P r e m i e r P u b l i s h i n g Co., D e l h i , 1959, p. 522. \  AO Table 5 Number, Deposits and Balances Outstanding of Postal Saving System Between 1885-1935 (Rs.000,000) Year Ended March  Number of Banks  Deposits  Int.  1885  5A99  16.6  O.A  13. A  1890  6350  32.8  2.1  58.7  1900  6A79  A7.0  2.8  96.5  1905  7855  66.7  3.8  134.1  1910  8767  73.7  A.5  158.7  1915  10,161  116.1  5.A  1A8.9  1920  10,670  203.8  5.6  213.5  1925  10,727  205.5  7.1  256.A  1930  12,768  295.9  10.3  371.3  1935  12,679  430.6  13.5  583.0  Sources  Balances Outstanding  Adapted from Reserve Bank of India, Banking and Monetary Statistics of India. Bombay, 195A. p. 369.  Note: Deposits include Transfer transactions from one Post Office to another from 1900 onward.  - ko CHAPTER I I  THE RESERVE BANK OF INDIA  The due  f a i r l y l a t e establishment  t o a r e l a t i v e l y l a t e awakening o f t h e Country  of a c e n t r a l banking a g e n c y was f e l t  areas  of the Country.  Bank o f B e n g a l reasons, upon.  institution.  The n e e d f o r a c e n t r a l  I n d i a Company s p r e a d I n 1809  fiscal  s h o u l d t a k e on t h e s e  L a t e r , i n 1836  o v e r t h e v a s t and d i v e r g e n t  i t was s u g g e s t e d functions.  economic as w e l l a s p o l i t i c a l ,  fiscal  t o the advantages  a s e a r l y a s t h e b e g i n n i n g o f t h e 19th c e n t u r y when  the r u l e o f the East  for  o f t h e R e s e r v e Bank o f I n d i a was n o t  that the P r e s i d e n c y But f o r v a r i o u s  t h e s u g g e s t i o n was n o t a c t e d  t h e i d e a o f e s t a b l i s h i n g a c e n t r a l bank  o p e r a t i o n s was a g a i n b r o u g h t up among Company  officials.  A c c o r d i n g t o P r o f e s s o r S h i r r a s , a p r o p o s a l was p u t f o r w a r d year f o r a "great banking  establishment  during that  f o rBritish India" to  the r e c e i p t o f revenue and i t s subsequent d i f f u s i o n through channels  primarily  facilitate  the various  o f p u b l i c expenditure, t o f u r n i s h the remittance t o Great  B r i t a i n o f t h e sums r e q u i r e d t h e r e f o r t h e Home Charges,"*" a n d t o enable  t h e East  I n d i a Company t o a c t up t o t h e i n t e n t i o n s o f t h e  B r i t i s h P a r l i a m e n t by k e e p i n g  t h e government o f I n d i a e n t i r e l y a l o o f  f r o m t h a t i n t e r f e r e n c e w i t h t h e Commerce o f I n d i a w h i c h t h e p r e s e n t system o f remittance i n v o l v e s . and  l830's  t h e S i k h Wars d u r i n g t h e l 8 4 0 ' s d i v e r t e d t h e Company's a t t e n t i o n  from p r o p o s a l s f o r banking a u t h o r i t y over  1  B u t t h e A f g h a n War o f t h e l a t e  reform  to the establishment  of i t s p o l i t i c a l  the Country.  ' Home c h a r g e s were t h e .payments t h a t I n d i a made t o t h e U n i t e d K i n g d o m f o r m a i n t e n c e o f l a w and o r d e r , P e n s i o n s t o B r i t i s h o f f i c e r s and t h e e x p a t r i a t i o n of B r i t i s h c a p i t a l investment i n I n d i a .  p * G.F. S h i r r a s , I n d i a n B a n k i n g  pp.  350-51.  and F i n a n c e , M a c m i l l a n , London,  1920,  - 41 After  t h e t r a n s f e r o f Government  i h I n d i a from the E a s t  Company t o t h e B r i t i s h P a r l i a m e n t i n 1858,  India  a succession of noteworthy  p r o p o s a l s f o r t h e e s t a b l i s h m e n t o f a c e n t r a l bank i n I n d i a were made. In these p r o p o s a l s t h e s t r u c t u r a l needs o f a banking system, as w e l l as  t h o s e o f g o v e r n m e n t t r e a s u r i e s were e m p h a s i z e d .  T h e r e were  also  some d e v e l o p m e n t s i n t h e c e n t r a l b a n k i n g f a c i l i t i e s p r o v i d e d b y p r i v a t e banks b e f o r e a f u l l  fledged  c e n t r a l bank was a u t h o r i s e d  Part  and  established.  1  A n t e c e d e n t P r o p o s a l s and I n s t i t u t i o n s  James W i l s o n , t h e f o u n d e r o f t h e " E c o n o m i s t " , a n d t h e f i r s t finance  member o f t h e I m p e r i a l  g o v e r n m e n t o f I n d i a , was a l s o  advocate of the establishment of a f u l l I n 1858,  c e n t r a l bank i n I n d i a .  he p r o p o s e d t h e i n s t i t u t i o n o f a n a t i o n a l bank c a p a b l e o f  gradually its  fledged  the f i r s t  e m b r a c i n g a l l b a n k i n g o p e r a t i o n s i n I n d i a , and o f e x t e n d i n g  branches to the i n t e r i o r  A s i m i l a r proposal,  trading  c i t i e s as o p p o r t u n i t y  might o f f e r . ^  i n c l u d i n g the c o n s t i t u t i o n of the proposed  central  bank a l o n g l i n e s s i m i l a r t o t h o s e o f t h e Bank o f F r a n c e , was p u t f o r w a r d in  1870  but neither  uncertainty  p r o p o s a l bore f r u i t .  B e t w e e n 1870  a n d 1899  o v e r s i l v e r p r i c e s and consequent changes i n t h e exchange  v a l u e o f t h e Rupee was a more p r e s s i n g  question than that of a c e n t r a l  b a n k , a n d no a t t e m p t was made t o e s t a b l i s h s u c h a n i n s t i t u t i o n this  the  during  period. The  q u e s t i o n o f a c e n t r a l bank came up b e f o r e t h e F o w l e r C o m m i t t e e  w h i c h was s e t up i n 1899  to enquire i n t o the f e a s i b i l i t y of  G.F. S h i r r a s , "A C e n t r a l  introducing  Bank f o r I n d i a " , E c o n o m i c J o u r n a l , 1928, p. 573.  Vol.38,  - k2 -  a gold standard i n India.  S i r Everard Hambro of that Committee  emphasized, as indeed did the witness Mr. Alfred de Rothschild, the advantages of having a strong central bank to assist i n the exercise of current policy and i n the development of banking i n s t i t u t i o n s India.  in  Professor Panandikar claims that a witness before the Fowler  Committee,presumably Alfred de Rothschild,advocated the establishment of a central bank but the Government of India, under Lord Curzon, did not favour the proposal.^ In 1913,  when the Royal Commission on Indian Finance and Currency,  usually known as Chamberlain Commission, was appointed, the proposal for i n s t i t u t i n g a central bank i n India again came under discussion; this time with greater vigour.  The Report of the Commission contained  a submission by J . M . Keynes in which a comprehensive plan for a central bank was set out.  His proposed i n s t i t u t i o n resembled the Bank of France  i n that i t combined central and commercial banking functions i n the same institution.  Owing no doubt to the outbreak of World War I, this plan  as well as other recommendations of the Commission were put aside i n definitely,  contributing l i t t l e i f anything to the central banking  i n s t i t u t i o n which ultimately  emerged.  The Imperial Bank Jbciperiment . The large scale bank failures during the World War I and the uncertain exchange value of Indian Rupee thereafter  c l e a r l y showed the  defects and dangers of India's i n d i v i d u a l i s t i c banking structure where  G.F.-; Shirras, op. c i t . , p. 5 7 4  5.  S.G. Panandikar, Banking i n India,  Bombay, 1959, Orient Longmans, p. 7.  - 43 each bank c o n d u c t e d i t s b u s i n e s s a central institution.  very  i n i t s own  Moreover the  c a r r i e d on by t h e P r e s i d e n c y support  -  c l e a r i n g and  r e a l advantages of a f u l l y  thus enlarged  modern s e n s e .  of the  country's  m o n e t a r y and  their  no  B a n k s u n d e r one  c o i n a g e and  currency  This  control,  was  still  official  c o n t r o l over  T h e r e was  lender of l a s t r e s o r t  and The  the issued  n e i t h e r that department  conscious  banking s t r u c t u r e .  absence of adequate r e d i s c o u n t  the l i q u i d  the  I m p e r i a l Bank o f I n d i a w h i c h  no  the  developed  market through which I n d i a n banks c o u l d o b t a i n s h o r t  c r e d i t and  order  I and  c o n s t i t u t e a c e n t r a l bank i n  I m p e r i a l Bank e x e r c i s e d any  country's  The  The  of  activities  empowered c e n t r a l i n s t i t u t i o n .  t h e C o n t r o l l e r o f C u r r e n c y D e p a r t m e n t , and  discount  collecting  the scope of t h e i r c e n t r a l b a n k i n g a c t i v i t i e s .  I m p e r i a l Bank, h o w e v e r , d i d n o t  the  the h e l p  o f o t h e r b a n k i n g i n s t i t u t i o n s b r o u g h t t o l i g h t some o f  i n e f f e c t brought the t h r e e P r e s i d e n c y  nor  without  B a n k s d u r i n g t h e W o r l d War  undoubtedly l e d to the f o r m a t i o n  by  way  1  i n times  of  term  emergency.  f a c i l i t i e s unnecessarily tied  f u n d s o f I n d i a n b a n k s refunds w h i c h t h e y had  to maintain  t o meet u n c e r t a i n c a s h demands o f t h e i r d e p o s i t o r s .  There  up in was  no m a c h i n e r y e i t h e r f o r r e g u l a t i n g t h e i n t e r e s t r a t e s o r - f o r p r o v i d i n g a m e a s u r e o f u n i f o r m i t y i n them. collect  d a t a on b a n k i n g o p e r a t i o n s  c o n d i t i o n s i n the  T h e r e was  c e n t r a l a u t h o r i t y to  o r t o p u b l i s h i n f o r m a t i o n on  the  I n d i a n money m a r k e t .  F i n d i n g s of the Hilton-Young In October 1 9 2 0 ,  not  Commission  long a f t e r formation  o f I n d i a as a s e m i - c e n t r a l bank, the was  no  h e l d at Brussels to study  o f t h e I m p e r i a l Bank  I n t e r n a t i o n a l F i n a n c i a l Conference^,  financial  c r i s e s and  t h e means o f  -  m i t i g a t i n g t h e i r consequences. need f o r the  institution  bank e x i s t e d . ^ t a k e n up  by  the  the  and  report  c u r r e n c y s y s t e m and  i n t e r e s t of  blueprint  advocacy of  Government of  C o m m i s s i o n t o i n v e s t i g a t e and  in  Among i t s o t h e r f i n d i n g s was  the  Indian  to  the  people.  be  unlike  departments.  But  but  the  feared  that  of  the  among I n d i a n  burden of the  new  Moreover the  insisted  n a t i o n a l i s t s who that  the  political  shareholders.  latter  i n t e r e s t s w i t h i n and  then  a higher  India's  banking  exchange  who  not  subject  w i t h o u t the  was  likely  the  onljr to the  C o u n t r y and  not  to  Reserve  counter to the  t o be  debit  instrument  desires and  control  a s s e m b l y r a t h e r t h a n t o a body o f  they held  only  sterling  f a v o u r e d a p u b l i c owned i n s t i t u t i o n  fehe r e p r e s e n t a t i v e The  down a  o f i s s u e and  C o m m i s s i o n had .recommended t h a t  c e n t r a l bank s h o u l d be  a  modifications  i t was  u s e d as an  This ran  As  organization  nationals  r a t e on  c e n t r a l bank m i g h t a l s o be  a p r i v a t e l y owned i n s t i t u t i o n .  Indian  separation  l i n k i n g of t h i s p r o p o s a l A i t h  increased  enforce i t . Bank be  the  s t e r l i n g aroused s u s p i c i o n  realised  changes o r  Bank o f E n g l a n d as  i . e , p r i v a t e o w n e r s h i p and  was  Indian  T h i s Commission l a i d  the  such  Hilton-Young  w o r k i n g of the  recommend any  constituted;  r a t e on  bankers.  f o r a c e n t r a l bank i n I n d i a , a bank w h i c h i n  s t r u c t u r e w o u l d not  w h e r e no  I n d i a a p p o i n t e d the on  the  a c e n t r a l bank f o r I n d i a  n a t i o n a l i s t s i n c l u d i n g many I n d i a n  c o n s e q u e n c e , i n 1926  e x c h a n g e and  -  o f a c e n t r a l bank i n c o u n t r i e s  This implied  Indian  hh  of  private  c a p t u r e d by  vested  operated i n the  public  7 interest.  6. League of N a t i o n s ,  7.  K.N.  Raj,  The  The M o n e t a r y and E c o n o m i c C o n f e r e n c e , I n f o r m a t i o n S e c t i o n S e c r e t a r i a t e of League N a t i o n s , G e n e v a , 1933P« 36.  of  M o n e t a r y P o l i c y and R e s e r v e Bank o f I n d i a , N a t i o n a l , I n f o r m a t i o n and P u b l i s h i n g Co.,Bombay, 19^8, p. 6h.  - ^5  -  In s p i t e of the o p p o s i t i o n of the I m p e r i a l Government o f I n d i a a c c e p t e d HJiit on-Young Commission. the Gold  S t a n d a r d and  i s l a t i v e Assembly.  Indian n a t i o n a l i s t s , the recommendations of  A c c o r d i n g l y , i n January 1927  R e s e r v e Bank o f I n d i a B i l l  The  commended t h i s B i l l a s  the the  i t introduced  i n the  Indian  leg-  t h e n f i n a n c e member o f t h e Government o f the g r e a t e s t measure of f i n a n c i a l  India  liberalism  8  ever o f f e r e d t o the I n d i a n people. stone  u n t u r n e d t o p o i n t out  The  Government o f I n d i a l e f t  the advantages of the B i l l  I n d i a n o p i n i o n i n i t s f a v o u r , y e t when t h e B i l l S e l e c t Committ o f the Assembly, the  was  and  no  to i n f l u e n c e  referred to  the  l a t t e r recommended t h e f o l l o w i n g f a r  r e a c h i n g c h a n g e s w h i c h w o u l d h a v e had  the e f f e c t of c r e a t i n g a  truly  9 national institution. 1. E i t h e r the Governor or Deputy Governor should national.  be an  Indian  2.  The m a j o r i t y o f t h e members on t h e B o a r d o f D i r e c t o r s be o f I n d i a n n a t i o n a l i t y .  3.  The C a p i t a l o f t h e bank s h o u l d the s t a t e .  4.  Members o f s t a t e o r f e d e r a l l e g i s l a t u r e s s h o u l d n o t f r o m m e m b e r s h i p on t h e B o a r d o f D i r e c t o r s .  be owned and  should  subscribed be  by barred  T h e s e r e c o m m e n d a t i o n s were q u i t e c o n t r a r y t o b o t h Government and • c o m m i s s i o n p o l i c y as e x p r e s s e d private shareholders,  i n the B i l l  - a p o l i c y which  p r e s u m a b l y o p e r a t i n g t h e bank f o r p r i v a t e g a i n  the arrangements then p r e v a i l i n g i n the U n i t e d Kingdom. itself  favoured  o v e r w h e l m i n g l y B r i t i s h , was  n a t i o n a l bank would p l a c e  not  prepared  The  -  Commission,  t o assume t h a t a  t h e i n t e g r i t y o f money a b o v e t h e f i s c a l  truly needs  8.  K-.N.  Rati,-op. c i t . ,  p.  64  S.K.  M u r a n j a n , Modern B a n k i n g i n I n d i a , Kamala P u b l i s h i n g House, Bombay, 1952, p. 2 4 6 .  9-  - 46 of government.  The  -  e c o n o m i c i n t e r e s t o f t h e members o f t h e  d i c t a t e d at l e a s t monetary n e u t r a l i t y ; country,  t h e y were concerned w i t h  t h e n g r e a t l y i n debt t o B r i t a i n . political  pressure,  p o l i c y and  Bill  o f i d e a s and  i n F e b r u a r y 1928  I n d i a f o r a few The  more  I n 1931i  p e o p l e and  the  bank was  r a i s e d o n c e more;  action.  To  begin with,  question  purely  look  representatives  domestic a f f a i r s , l o n g as  the  favourable  including  y e t , as  less  the  the l a t t e r appeared t o  Moreover there  management o f t h e i r p u b l i c d e b t ;  for  forward with assurance to  fall  established  appears to have been  the p e o p l e o f I n d i a a g r e a t e r measure of  responsibility  shown l a t e r o n ,  n a t i o n a l i s t s f o r a s t a t e - o w n e d and  went u n h e e d e d .  India  of e s t a b l i s h i n g a c e n t r a l  t h i s t i m e w i t h good p r o s p e c t s  commonwealth c o u n t r i e s .  bank s t i l l  the  B r i t i s h g o v e r n m e n t were h e l d t o d e c i d e  o f a c e n t r a l bank.,, as  d e s i r e of Indian  this  t h e i d e a o f a c e n t r a l bank f o r  w i t h i n t h e p a t t e r n o f s i m i l a r i n s t i t u t i o n s t h a t were b e i n g  i n the  monetary  E m e r g e n c e o f t h e R e s e r v e Bank o f  India could  B r i t i s h i n t e r f e r e n c e i n her  a d e s i r e to give  on  years.  f u t u r e p o l i t i c a l s t a t u s of I n d i a , the  i n other  financial  a r e s u l t of  when t h e Round T a b l e C o n f e r e n c e s b e t w e e n t h e  Indian  establishment  As  ideas  from  Government o f I n d i a w i t h d r e w  thus shelved  Round T a b l e C o n f e r e n c e and  of the  traditional British  i n academic c i r c l e s .  i n t e r e s t s the and  India,  I f t h e R e s e r v e Bank were f r e e  i t would f o l l o w the  discussed  a creditor  f i n a n c i a l p o l i c i e s of  w o u l d h e s i t a t e t o e x p e r i m e n t w i t h t h e new  reform then being conflict  the  for, representing  Commission  operated  the  central  - k? At the time the Round Table Conference was called, the world appeared to be r a p i d l y sinking into the great Depression of the 1 9 3 0 ' s . B r i t a i n had just gone off the gold standard and the United States appeared to be contemplating a similar action.  Then too there was  uncertainty over the future of some of the established central banks and misgivings on the prudence of establishment of a new i n s t i t u t i o n when the outlook was s t i l l so uncertain.  Even so, the complementary  nature of the economies.: of the B r i t i s h Empire countries, and a need for Imperial cooperation appeared to c a l l for the early of central banks i n a l l Commonwealth countries.  establishment  It was f i n a l l y decided  that while the new i n s t i t u t i o n should be established i t s actual opening should be postponed u n t i l after the depression had at least indicated i t s course and the country had achieved a favourable balance of trade and a balanced budget. These conditions were realized i n 1933•  In the Autumn of that  year the Government of India introduced the Reserve Bank of India B i l l i n the Central Legislative Assembly and piloted i t successfully both Houses.  through  The B i l l received the assent of the Governor General i n  March 193^ and became the Reserve Bank of India Act of that date.  The  Reserve Bank, emerging from this A c t , started i t s operations on A p r i l 1 s t , 1935. Subsequent amendments to the Reserve Bank Act have not  significantly  altered the basic structure and administration of theReserve Bank i t s e l f . Part 2 Provisions of the Enabling Act The Reseeve Bank of India has i t s head office i n Bombay and i t s main branches i n Calcutta, Delhi, Madras, Karachi, Lahore, u n t i l 19^8  - 48 i n Rangoon, and a branch, i n London."^"  It i s authorised, subject  to  government approval, to establish branches or agencies i n any other place i n India. bank of Burma.  After 1942,  the Reserve Bank ceased to be the central  Like the o r i g i n a l Bank of England, the Reserve Bank's  Issue and Banking Departments are operated as separate e n t i t i e s .  Although  the Bank i s authorised to deal with the public i n emergency cases, the Act generally r e s t r i c t s the Banks'operations to banking i n s t i t u t i o n s  only.  Cap i t a l jjzat i o n 'an"d 0 wfle r s hi p'- . -''... Under the enabling Act, the Bank began i t s operations as a private shareholders' i n s t i t u t i o n with a paid-up c a p i t a l of Rs. 50,000*000. c a p i t a l was divided into 500,000 shares of Rs. 100 each. excess of 900,000 shares were subscribed.  This  However, i n  In order to ensure a wide and 12  representative  d i s t r i b u t i o n of these shares throughout B r i t i s h Indxa,  the government divided the country into five regional allotment Bombay, Delhi, Calcutta, Madras and Rangoon. a l l o t t e d to these centers were 140,000; 30,000 respectively.  The number of  115,000;  The Government i t s e l f  145,000;  centers;  shares 70,000 and  purchases 2200 shares to be  held for such directors as might be short of the minimum qualifications of 50 shares. ^ 1  The share c a p i t a l of the Reserve Bank could not be  increased without the prior approval of the Governor-General i n Council and the Central Legislature of India.  The extent and manner of such an  increase was to be decided by the Bank's shareholders ina general meeting. 11. Government of India. Reserve Bank of India Act, 1934 (as modified up to November 1, 1956.) Section 6, New Delhi, 1957. P - 3 . 12. At the time of the inception of the Reserve Bank, Burma was also a part of India. 13. In addition to this purchase of share c a p i t a l , the Government of India transferred to the Bank Rs. 50,000,000 worth of govefnment securities which were to serve as additional backing for the treasury note currency taken over by the Bank.  - 49  -  To k e e p t h e Bank i n I n d i a n h a n d s , t h e A c t holder  o f t h e Bank must be  India. in  A concession  I n d i a , but  provided  share-  Indian or a person domiciled i n  made t o a B r i t i s h s u b j e c t o r d i n a r i l y  t e m p o r a r i l y d o m i c i l e d i n any  t h e r e was  or a g a i n s t  was  e i t h e r an  s t i p u l a t e d that a  resident  p a r t o f the B r i t i s h  Empire,  no l o c a l g o v e r n m e n t d i s c r i m i n a t i o n a g a i n s t  Indians  I n d i a n companies e i t h e r r e g i s t e r e d under the I n d i a n  Companies  14 A c t o r i n c o r p o r a t e d u n d e r t h e l a w o f any In order the A c t  to f o r e s t a l l put  p a r t of the B r i t i s h  t h e c o n c e n t r a t i o n o f Bank s h a r e s  Empire.  i n a few  hands,  t h e maximum i n d i v i d u a l h o l d i n g s o r i g i n a l l y a t f i f t y  Somewhat l a t e r t h i s maximum was ship of f i v e shares  entitled  c a s t more t h a n t e n v o t e s  r a i s e d t o 200  shares.  t h e h o l d e r t o v o t e , no  shares.  While the  share-holder  i r r e s p e c t i v e o f t h e number o f s h a r e s  These p r o v i s i o n s r e m a i n e d s u b s t a n t i a l l y unchanged u n t i l  ownercould  held.  t h e R e s e r v e Bank  was n a t i o n a l i z e d i n 1948. A d m i n i s t r a t i o n and C o n t r o l The  a d m i n i s t r a t i o n o f t h e R e s e r v e B a n k , s u b j e c t t o any d i r e c t i o n s  f r o m t h e G o v e r n o r - G e n e r a l - i n - C o u n c i l , w&.s up o f a C e n t r a l B o a r d o f D i r e c t o r s and Boards. and  two  The  Local  Regional  f o r m e r c o n s i s t s d o f s i x t e e n members i n c l u d i n g t h e  Governor  deputy governors.  operations  e n t r u s t e d t o a m a i n b o d y made  In order  f i v e subordinate  t o keep a c l o s e watch over  o f t h e Bank, t h e G o v e r n o r - G e n e r a l - i n - C o u n c i l  t o n o m i n a t e t h e G o v e r n o r o f t h e B a n k and  h i s two  was empowered  deputies,  c o n s i d e r i n g the recommendation of the C e n t r a l Board.  the  The  after Governor  G e n e r a l was a l s o a u t h o r i z e d t o n o m i n a t e f i v e o f t h e t h i r t e e n o t h e r d i r e c t o r s , f o u r o f whom r e p r e s e n t  14.  S.G.  Panandikar,  important  elements of I n d i a n  B a n k i n g i n I n d i a , 6 Ed. 1948, p. 341.  economy, i . e ,  O r i e n t L o n g m a n s , Bombay,  - 50 agriculturists, industrialists, etc., on. the Board. holders;  and.the Government representative  .The remaining eight directors were elected by the share  two each from the regions of Bombay, Calcutta and Delhi, and  one each from the regions of Madras and Rangoon.  The balance of  power s t i l l rested with the elected members of the Central Board because the Deputy Governors and the Governments representative on the Board are not authorized to vote.  However the Governor-General-in-Council  had the p r i v i l e g e of disapproving any action of the Central Board deemed not to be i n the public i n t e r e s t . The Central Board of Directors was associated by Local Regional Boards representing each of the five regions.  The Local Boards consist  of eight directors five of whom were elected by the share-holders of the region.  The remaining - three were nominated by the Central Board and  represented the t e r r i t o r i a l and economic interest of their respective areas. The Governor and the two Deputy Governors held office for five years and were e l i g i b l e for re-appointment.  The elected members of the  Central Board as well as those of the Local Boards held office for five years and were e l i g i b l e for r e - e l e c t i o n .  However, the term of office  of the appointed directors, both on the Central Board and the. Local Boards, depended on the pleasure of the nominating authority. Ro change was made i n this set up u n t i l the Bank was- nationalized in 19^8.  - 51 Prerogatives  and  Functions  L i k e c e n t r a l banks i n o t h e r was  e s t a b l i s h e d to s t a b i l i z e  the o p e r a t i o n s  of the  the i s s u e of  a view to securing  the v a l u e  o f money and  Country's u n d e r l y i n g  terms of the preamble to the "to regulate  c o u n t r i e s , t h e R e s e r v e Bank o f  enabling  to o p e r a t e the currency  and  coordinate  banking s t r u c t u r e .  In  A c t , i t s main o b j e c t i v e s  bank n o t e s and  monetary s t a b i l i t y  to  India  were  the k e e p i n g of r e s e r v e s  in British  c r e d i t system of the  I n d i a and  with  generally  Country to i t s  15 advantage".  In order  t o a c h i e v e t h e s e ends t h e Bank was  r e s p o n s i b i l i t y f o r t h e i s s u e and currency  and  designated  the maintenance of i t s e x t e r n a l v a l u e .  as the  t o f u n c t i o n as and  G o v e r n m e n t s ' b a n k e r and  a b a n k e r ' s bank.  prerogatives  well. Note The  In the  fiscal  I n some r e s p e c t s  Country's paper I t was  also  a g e n t , and  exercise of these  t h e R e s e r v e Bank became t h e  monetary a u t h o r i t y . as  r e g u l a t i o n of the  given  Country's  equipped functions  official  i t became a r e g u l a t o r y  authority  Issue first official  over of the  o f t h e R e s e r v e Bank was  the  take-  r e s p o n s i b i l i t y f o r note i s s u e from the C o n t r o l l e r of  Currency Department. outstanding  operation  was  Rs.  I n c i d e n t a l l y , t h e amount o f n o t e - i s s u e 1,861,000,000^  Under the  enabling Act  then the  sole  15Government o f I n d i a , R e s e r v e Bank o f I n d i a A c t , 1934, m o d i f i e d up t o November 1, 1956). P r e a m b l e , New R e s e r v e Bank o f I n d i a , B a n k i n g and Bombay, 1954, p. 648.  Monetary S t a t i s t i c s  (as Delhi, of  1957.  India,  - 52 r i g h t o f c u r r e n c y n o t e i s s u e was c o n f e r r e d on t h e R e s e r v e  Bank  b u t t h e T r e a s u r y D e p a r t m e n t c o n t i n u e d t o i s s u e one r u p e e n o t e s , s e c u r e d by d e p o s i t s o f c o i n s , f o r t h e convenience o f p u b l i c . O r i g i n a l l y t h e Bank i s s u e d n o t e s i n t h e d e n o m i n a t i o n o f R s . 2, 5, 10, 100, 1000 and 10,000. were w i t h d r a w n i n 1946.  The l a t t e r two d e n o m i n a t i o n  The n o t e s o f t h e R e s e r v e Bank a r e l e g a l  tender throughout B r i t i s h I n d i a .  A t the time o f the Reserve  Bank's  17 n a t i o n a l x z a t i o n t h e o u t s t a n d i n g n o t e i s s u e was R s . 11,250,000,000. U n d e r S e c t i o n 33(1) o f t h e o r i g i n a l A c t , i t was l a i d down t h a t the a s s e t s o f t h e Issue Department s h a l l c o n s i s t o f g o l d c o i n ,  gold  b u l l i o n , s t e r l i n g s e c u r i t i e s , rupee c o i n , rupee s e c u r i t i e s , and such bills  o f e x c h a n g e and p r o m i s o r y n o t e s p a y a b l e i n I n d i a a s a r e e l i g i b l e  l8 f o r p u r c h a s e b y t h e Bank.  Of t h e t o t a l a s s e t s 40 p e r c e n t t o a  minimum o f R s . 400,000 w i t h o u t s p e c i a l p e r m i s s i o n must c o n s i s t o f g o l d , g o l d c o i n , and s t e r l i n g s e c u r i t i e s .  ( G o l d was v a l u e d a t t h e  r a t e o f 8.47512 g r a i n s o f p u r e g o l d p e r r u p e e ) .  I t was f u r t h e r  p r o v i d e d t h a t t h e v a l u e o f Government s e c u r i t i e s s h o u l d n o t be more t h a n 2 5 , p e r c e n t o f t h e t o t a l a s s e t s o f R s . 500,000,000 w h i c h e v e r was 19 greater.  I n t i m e s o f emergency a n d s h o r t a g e o f money i n c i r c u l a t i o n ,  government s e c u r i t y h o l d i n g s c o u l d w i t h t h e consent o f t h e government go up t o R s . 600,000,000 a n d s t e r l i n g s e c u r i t i e s c o u l d f a l l  below  40 p e r c e n t o f t h e t o t a l a s s e t s . I n t h e l a t t e r e v e n t t h e Bank was 17. R e s e r v e Bank o f I n d i a , op_. c i t . , p. 648. 18. • , Government,of.-.India, ..op. citl.i,v S e c t i o n 33.-':.  19. P.O. J a i n , C u r r e n c y B a n k i n g a n d F i n a n c e i n I n d i a , C h a i t a n y a P u b l i s h i n g H o u s e , A l l a h a b a d , i 9 6 0 , p. 193.  - 53 r e q u i r e d t o pay  a p e n a l t y on t h e amount o f t h e d e f i c i e n c y , s t a r t i n g  a t one  above t h e B a n k ' s l e n d i n g f a t e and  per cent  c e n t w i t h e a c h 2.1/2  r i s i n g by one  per cent i n c r e a s e i n the d e f i c i e n c y .  In c o n t r a s t to the r i g i d t h e Bank o f E n g l a n d o p e r a t e d  f i d u c i a r y r e s e r v e system under which d u r i n g most o f i t s h i s t o r y , t h e  ability  o f t h e R e s e r v e Bank t o t a k e a d v a n t a g e o f i n c r e a s e s i n g o l d and s e c u r i t i e s t o i n c r e a s e i t s n o t e i s s u e adds c o n s i d e r a b l e to  i t s currency  operations  D e p a r t m e n t s g o l d and  of  A given i n c r e a s e i n the  s t e r l i n g s e c u r i t y holdings could result  t h a t much c u r r e n c y  sterling  flexibility  and, i n d i r e c t l y , t o t h e o p e r a t i o n s  l e n d e r s i n the C o u n t r y ' s money m a r k e t .  times  per  b e i n g added t o the c o u n t r y ' s  money  primary Issue  in  2.1/2  supply.  As  t h e R e s e r v e Bank c o u l d a l s o i s s u e bank n o t e s a g a i n s t t h e s e c u r i t y  of  ' e l i g i b l e ' b i l l s of exchange, any  l a t t e r c o u l d be u s e d t o s u p p o r t the p a r t of primary  i n c r e a s e i n the volume of  the  an i n c r e a s e d demand f o r bank c r e d i t  l e n d i n g b a n k s a s l o n g a s 60 p e r c e n t  a s s e t s o f t h e I s s u e D e p a r t m e n t were n o t  of the  on  total  exceeded.  Exchange C o n t r o l U n d e r t h e p r o v i s i o n s o f t h e R e s e r v e Bank A c t , 1934,  t h e Bank  charged w i t h the r e s p o n s i b i l i t y of m a i n t a i n i n g the e x t e r n a l value t h e Rupee a t l 8 d . w i t h u p p e r and  lower  l i m i t s o f 183  d-and 1 7 ^  In order to minimise  f u n d s on t h e p a r t o f w e l l - t o - d o empowered t o l i m i t  the s p e c u l a t i v e h o l d i n g of f o r e i g n .  s a l e of s t e r l i n g funds to  b a n k s w h i c h i n c l u d e d a l l E x c h a n g e B a n k s and Stock  Banks.  d •  I n d i a n r e s i d e n t s , t h e R e s e r v e Bank  t h e p u r c h a s e and  a few  T h e s e B a n k s were e n t i t l e d t o buy  a t t h e R e s e r v e Bank i n amounts n o t  of  6k  iZ respectively.  was  authorized  large Indian Joint  and  l e s s than Rs.  was  sell  f o r e i g n exchange  200,000,the  equivalent  -  of  <5^ 3>333« °  all  1  2  54 -  T h i s c o n t r o l was e x t e n d e d d u r i n g W o r l d War I I , a n d  f o r e i g n exchange t r a n s a c t i o n s were h a n d l e d t h r o u g h the  Exchange  C o n t r o l D e p a r t m e n t o f t h e Bank t h a t was s e t up u n d e r t h e D e f e n c e o f India Regulations.  Since  t h e e x c h a n g e c o n t r o l was m a i n t a i n e d  t h e War i n o r d e r t o c o n s e r v e f o r e i g n e x c h a n g e f u n d s , o f c a p i t a l and  t o operate  even t o d a y .  d u r i n g t h e War were c o n t i n u e d  When I n d i a became a member o f t h e 1945,  flight  t o check s p e c u l a t i v e d e a l i n g s i n f o r e i g n funds,  Department c o n t i n u e s introduced  prevent  after  this  The e x c h a n g e r e g u l a t i o n s  u n t i l 1948.  I n t e r n a t i o n a l M o n e t a r y Fund i n  t h e R e s e r v e Bank was a u t h o r i s e d t o d e a l i n c u r r e n c i e s o f a l l  member c o u n t r i e s o f t h e F u n d . t r a n s a c t i o n s were m o s t l y  However t h e R e s e r v e B a n k ' s e x c h a n g e  confined  t o s t e r l i n g a s I n d i a n t r a d e was  c a r r i e d on p r i m a r i l y w i t h c o u n t r i e s i n the s t e r l i n g a r e a . r e s t o f the  Even  the  t r a d e was f i n a n c e d t h r o u g h t h e L o n d o n Money M a r k e t .  F i s c a l Agent f o r Governments As  the  c e n t r a l Bank o f I n d i a , t h e R e s e r v e Bank t o o k o v e r  c e n t r a l Government's b a n k i n g b u s i n e s s designated  l a t e r on,  the  f r o m t h e I m p e r i a l Bank and was  a s banker f o r S t a t e governments.  Unlike  the  I m p e r i a l Bank, t h e R e s e r v e Bank r e c e i v e s some s p e c i a l b e n e f i t s f r o m handling  the governments b a n k i n g b u s i n e s s .  i n t e r e s t on government b a l a n c e s floating i t s securities.  and  Although  I t does not  have t o p a y  r e c e i v e s some c o m p e n s a t i o n f o r t h e r e i s no l o w e r  limit  t o the  d e p o s i t s w h i c h t h e C e n t r a l g o v e r n m e n t may k e e p w i t h t h e B a n k , t h e P r o v i n c i a l o r S t a t e governments have t o m a i n t a i n  20.  Government o f I n d i a , op_. c i t . , S e c .  40.  s u c h minimum  balances  -  5 5  -  as are agreed upon between them and the Bank.  If the amount of  a Provincial Government's balance f a l l s below this minimum, the deficiency must be made good either by s e l l i n g treasury b i l l s to the Bank or by negotiating a loan at rates which do. not exceed the 21  Bank rate. The Reserve Bank was also given r e s p o n s i b i l i t y for managing the public debt of the Central and Provincial governments.  For this  purpose the Bank set up a Public Debt Office through which the floatations of government bonds, interest payments, conversions, consolidations, renewals, and redemptions may be handled.  For these  services the Bank i s entitled to receive a commission of 0 . 0 2 per cent of the amount of loans involved. Reserve' Bank as 'a Banker-'-s- Bank .... ': In order to ensure that the Reserve Bank would be a banker's bank as well as a monetary authority - and thus systematize  the  country's banking structure - the Reserve Bank Act, i t s e l f ,  designated  i n i t s second schedule or appendix the private banks which were to become  . p a r t i c i p a t i n g member i n s t i t u t i o n .  Membership Qualifications The scheduled banks, as members of the Reserve System are known i n India, had., to be primarily engaged i n the banking business and to maintain c a p i t a l and reserves of not less than Rs. then equivalent to about  $150,000.  5 0 0 , 0 0 0  These requirements eliminated  from membership a l l r e l a t i v e l y small joint stock banking ventures,  21.  S.G. Panandikar, op_. c i t . , 9 ed., p. 389-  -  - 56 and,  of course, alllindigenous bankers and money lenders.  The  schedule, as o r i g i n a l l y drawn, l i s t e d the Imperial Bank, twenty-nine joint stock banks and twenty exchange banks - a t o t a l of f i f t y ,  with  aggregate c a p i t a l and reserves estimated at Rs. 230,000,000 and aggregate deposits of s l i g h t l y less than Rs. 2,500,000,000.  The:  f i f t y banks included i n the schedule constituted about 38 per cent of the 132 corporate banking i n s t i t u t i o n s then reporting i n India. They held an estimated 87 per cent of the capital and reserves of  22 reporting banks and 95 per cent of t h e i r deposits.  By the end  of 19^8, when the Reserve Bank was nationalised, the number of scheduled banks had increased to 94.  At this l a t t e r date the  scheduled banks constituted only 15 per cent of a l l reporting corporate banking i n s t i t u t i o n s but these banks held 92 per cent of the t o t a l deposits of a l l reporting commercial banks.  Of the t o t a l  deposits of Rs. 11,182,200,000, the share of scheduled banks was about  Rs. 10,354,000,000. Clearing and Collection F a c i l i t i e s The Reserve Bank and i t s branches were made reserve  depositories  and clearing agents for Indian banks, and. were equipped to transfer money (cash currency) from one part of the Country to another.  In  the exercise of i t s clearing functions, the Bank was empowered to take over the clearing houses which e a r l i e r had been established by the Government of India.  The Imperial Bank of India was designated  the Reserve Banks agent at places where the l a t t e r had no branches.  22. Reserve Bank of India,  Banking and Monetary S t a t i s t i c s of India, Bombay, 1954, pp. 8 - 9; 14 - l £ .  - 57 The  b r a n c h e s o f t h e R e s e r v e Bank n o t o n l y p r o v i d e  d e p o s i t o r i e s and c l e a r i n g f a c i l i t i e s R e s e r v e Banks j u r i s d i c t i o n , l o c a l branch  t h e r e o f between any o f t h e branch  Rs.  f o r l o c a l banks under t h e  but r e m i t t a n c e f a c i l i t i e s as w e l l .  can t r a n s f e r , without  m a i n o f f i c e a t Bombay.  o f f i c e s o f t h e R e s e r v e Bank a n d t h e  A l o c a l b a n k c a n make w e e k l y r e m i t t a n c e s o f cost t o i t s p r i n c i p a l  w i t h t h e R e s e r v e Bank p r o v i d i n g t h e l a t t e r h a s a l o c a l  or agency.  F o r non-multiple remittances i n excess  office  o f R s . 10,000 t h e  R e s e r v e Bank r e c e i v e s a c o m m i s s i o n o f l / g i ^ . o f one p e r c e n t . w e e k l y r e m i t t a n c e s b e l o w R s . 5,000 t h e c o m m i s s i o n i s I/32 °^ per  A  c o s t , R s . 10,000 o r a n y m u l t i p l e  5,000, o r a n y m u l t i p l e t h e r e o f , w i t h o u t  account  reserve  For o  n  e  cent. L e g a l Reserve In  Depository  common w i t h o t h e r more r e c e n t l y e s t a b l i s h e d c e n t r a l  institutions,  t h e R e s e r v e Bank was made t h e s o l e d e p o s i t o r y o f t h e l e g a l r e s e r v e s o f the scheduled  banks.  U n d e r S e c t i o n kZ o f t h e 193^ A c t a l l s c h e d u l e d  banks a r e r e q u i r e d t o m a i n t a i n o r d e p o s i t a t t h e R e s e r v e Bank a t l e a s t 5 p e r c e n t o f t h e i r demand d e p o s i t s a n d 2 p e r c e n t o f t h e i r t i m e d e p o s i t s . If  a bank f a i l e d  hibited charge.  to maintain the r e q u i r e d l e g a l reserves, i t i s pro-  from a c c e p t i n g a d d i t i o n a l d e p o s i t s and i s s u b j e c t e d t o a p e n a l t y The l a t t e r i s computed a t 3 p e r c e n t a b o v e t h e Bank r a t e on  t h e d e f i c i e n t amount f o r p e r i o d s up t o one week, and a t 5 p e r c e n t  above  25 t h e Bank r a t e f o r p e r i o d s i n e x c e s s  23.  S.G. P a n a n d i k a r ,  op. c i t  p. 353-  2k.  25.  o f one week.  Government o f I n d i a , o p . c i t  S e c t i o n k2.  Government o f I n d i a , op_. c i t  Sec.  k2 ( 3 ) .  The R e s e r v e B a n k  - 58 -  determines whether or not the reserve requirements have been maintained by the scheduled banks from the weekly statements which the Under section 42 ( 2 ) of the Reserve  l a t t e r are required to submit.  Act, f a i l u r e to submit a weekly statement i s subject to a penalty of Rs. 1 0 0 per day of d e f a u l t . ' In addition to information on reserves these weekly statements provide the Reserve Bank with the basic data published i n i t s weekly, monthly and annual reports. Lender of Last Resort In i t s role as a 'lender of l a s t resort* the Reserve Bank under Section 1 7 ( 2 ) of the enabling Act, i s empowered to purchase, s e l l or discount b i l l s of exchange and promisory-notes, which arise out of bona fide trade transactions and are drawn on and payable i n India. These credit instruments must bear two or more good signatures, one of which s h a l l be that of a scheduled bank, and mature within 90 days. On b i l l s covering the marketing of a g r i c u l t u r a l products the time l i m i t may be extended to nine months ( l a t e r on increased to 15 months) and 26  the bank signature may be that of a cooperative bank.  Although the  scheduled banks seldom took advantage of these rediscounting f a c i l i t i e s before the nationalization of the Reserve Bank, such f a c i l i t i e s are, nevertheless, an essential part of a properly conceived central banking mechanism.  In addition to rediscounting the schedule banks may, under  Section 17 (4) of the Reserve Act, borrow d i r e c t l y from the Bank on the security of gold, s i l v e r , and other marketable securities 27  periods not exceeding 9 0 days.  2 67 .  Ibid. Sec. 17(4) Bbvernment, of/Jndia,  op. c i t . , Sec. 1 7 ( 2 )  for  - 59  -  Part J  The  Role  o f t h e R e s e r v e Bank, 1935 - 1948  In-as-much as t h e c e n t r a l b a n k i n g  o p e r a t i o n s of the I m p e r i a l  Bank o f I n d i a h a d n o t b e e n e n t i r e l y r e s t r i c t e d i n t h e o r i g i n a l  Reserve  Bank A c t , a n d t h e p a r t i c i p a t i o n i n t h e R e s e r v e S y s t e m h a d b e e n  restricted  to  l a r g e and t h e r e f o r e u s u a l l y s e l f r e l i a n t s c h e d u l e d  o f t h e R e s e r v e Bank d u r i n g t h e f i r s t  t h i r t e e n years  banks, the r o l e  of i t s existence,  was n o t p r e d e s t i n e d t o be a p a r t i c u l a r l y i m p r e s s i v e o n e . executed  The Bank  t h e more o r l e s s r o u t i n e t a s k s i n v o l v e d i n t h e management o f  t h e C o u n t r y ' s money s u p p l y a n d i n t h e h a n d l i n g o f s u c h c l e a r i n g a n d cash  t r a n s f e r s as t h e l o c a t i o n o f i t s p r i n c i p a l o f f i c e s and b r a n c h e s  made p o s s i b l e . scheduled  W h i l e i t h e l d c o n s i d e r a b l y more o f t h e d e p o s i t s o f t h e  b a n k t h a n p r e s c r i b e d u n d e r t h e R e s e r v e Bank A c t , t h e l a t t e r  i n s t i t u t i o n s made o n l y o c c a s i o n a l u s e o f t h e R e s e r v e B a n k s ' c o u n t i n g and l e n d i n g f a c i l i t i e s . purchased or rediscounted b i l l s  redis-  B e t w e e n 1936 a n d 1948 t h e B a n k o f exchange amounting o n l y t o  28 Rs.  200,000.  E v e n i t s o t h e r l o a n s and a d v a n c e s n e v e r  Rs.  1,500,000 b e t w e e n 1936 a n d 1946.  exceeded  I t was o n l y i n 1947 a n d 1948  t h a t t h e amounts h a d i n c r e a s e d t o R s . 8,200,000 a n d R s . 12,100,000, 29  respectively.  The s c h e d u l e d  advantageous' correspondent I m p e r i ^ i Bank. t h e i r business  banks had a l r e a d y e s t a b l i s h e d m u t u a l l y  r e l a t i o n s h i p s with the well established  These b a n k s c o u l d n o t h a v e b e e n e x p e c t e d  to transfer  t o t h e new a n d i n e x p e r i e n c e d R e s e r v e Bank a n d go  through  28. R e s e r v e Bank o f I n d i a . 29.  B a n k i n g and M o n e t a r y S t a t i s t i c s Bombay, 1954, p . 561.  . I n f r a . T a b l e No. 6, p. 63.  of India,  - 60 -  all  the formalities that were involved i n securing a loan from the  Bank.  Meanwhile no extraordinary conditions had arisen that would  make an exercise of the Reserve Bank's emergency powers and duties necessary.  As a consequence the p o l i c y makers of the Bank concerned  themselves for the most part with measures designed to unify and regulate the operations of the indigenous bankers and thus to expand the scope of the Reserve Banks' j u r i s d i c t i o n to both the organized 30 and  unorganized sectors of the banking system of India. With the outbreak of World War I I , and India's very considerable  direct as well as indirect p a r t i c i p a t i o n on behalf of the United Kingdom, the role of the Reserve Bank became singularly important. The  Indian Government had undertaken to t r a i n and equip a native army  not only to free the B r i t i s h garrisons for duty elsewhere but to take active part i n defence of the freedom and the l i b e r a t i o n of other countries - a c t i v i t i e s  which i n c i d e n t a l l y India herself had been denied.  This involved considerable expense to the Indian Treasury. of  conflict  As the areas  expanded India undertook to provide troops, equipment, and  other supplies for the Asian and African theatre.  Although most of  these l a t t e r undertakings were underwritten by the United Kingdom Government, they s t i l l had to be financed i n India.  The t o t a l cost of  supplying these war requirements amounted to a staggering sum of n 31 Rs.  1 7 , 0 0 0 , 0 0 0 0 0 0 . Much of this was represented on the one hand by an f  increase i n Indian public debt and i n notes outstanding at the Reserve Bank of India; See: 31.  on the other by the increased holdings of blocked  Reserve Banks' proposals regarding extension of membership to Indigenous bankers i n Chapter 5> P. • •  Reserve Bank of India.  Report on Currency and Finance, 1944-M-5< Bombay 19^5, pp. 38-39.  - 61 sterling  -  assets.  As a M o n e t a r y The  Authority  o p e r a t i o n s o f t h e R e s e r v e Bank as a m o n e t a r y  more o r l e s s c o n f i n e d t o i ) w h i c h i t was  a u t h o r i t y were  f i x i n g and m a i n t a i n i n g a B a n k R a t e a t  p r e p a r e d t o make l o a n s o r t o p r o v i d e d i s c o u n t f a c i l i t i e s  t o i t s member b a n k s , i i )  i n c i d e n t a l attempts to u n i f y short  term  r a t e s and l e n d i n g p r a c t i c e s i n t h e c o u n t r y ' s s h o r t t e r m money m a r k e t s , and i i i )  s u p p l y i n g a t r e a s o n a b l e r a t e s t h e m a s s i v e amounts o f  through which, i n the main,  t h e G o v e r n m e n t ' s war  credit  c o n t r i b u t i o n s were  financed. The level  Bank R a t e w a s f i r s t v  a t w h i c h t h e Bank was  s e t a t 3.1/2  per cent.  T h i s was  the  p r e p a r e d t o s u p p l y day t o day l o a n s a g a i n s t  G o v e r n m e n t s e c u r i t i e s and oh.--J  eligible  commercial paper.  However  t h e 3 v l / 2 p e r c e n t r a t e o o f f e r e d no m a r g i n t o p o t e n t i a l d e a l e r s i n t h e s h o r t t e r m money m a r k e t s and was t h e War  soon reduced to 3 per c e n t .  Before  some advances' were made t o t h e s c h e d u l e d b a n k s b u t t h e  totals  were n e g l i g i b l e - n o t e x c e e d i n g R s . 200,000 i n any one y e a r . d u r i n g t h e War  t h e amount o f R e s e r v e Bank l o a n s and a d v a n c e s  s c h e d u l e d banks remained r e l a t i v e l y i n s i g n i f i c a n t . a t h e war  However,  t h e r e w a s / s u b s t a n t i a l i n c r e a s e i n such advances;  r o s e t o R s . 1 2 , 1 0 0 , 0 0 0 i n 1948. made a t a l l ,  w e r e a t no t i m e  Meanwhile  Even to after  t h e amount  Purchases of commercial paper, i f  significant.  t h e R e s e r v e Bank e n g a g e d i n open m a r k e t  operations to  s u p p o r t the p r i c e of s h o r t term government s e c u r i t i e s a t a p p r o a c h i n g the 3 per cent r a t e .  I t s d i r e c t advances  something  to the Treasury  had t a k e n on s i g n i f i c a n t p r o p o r t i o n s even b e f o r e W o r l d War  I I and  rose.  - 62 to as much as Rs. 26,200,000 during 1948.  Roughly equivalent  amounts of Treasury B i l l s were acquired i n open market operations i n order to maintain a 3 per cent market for the l a t t e r type of issue. Some idea of the size o f the Reserve Banks purchases of short term Government securities as well as i t s short term loans and advances during the period under review i s given i n Table"oHo.»w6.r,ontpage «63. .-\;s Some of the advances made to the scheduled banks and a part of the Bank's commitments i n Treasury B i l l s arose out of a successful attempt to minimise the spread i n short term money rates between the Bombay and Calcutta money markets.  Before the intercession of the  Reserve Bank the spread on secured loans and c a l l money to support trading on the stock markets,on the average,had been about 1/2 of 1 per cent,with banks i n Bombay money market charging the higher rate. When the Reserve Bank entered these markets as a buyer of Treasury Bills;  also, of other g i l t edged securities;  more p l e n t i f u l .  short term money became  Interest rates were driven down and also equalized  in the two money markets.  The results of these operations are r e -  flected i n the following summary of interest rate levels recorded i n the two markets.  1935  YEAR  1938 1941 1944 1947  1948  Average Rate: Bombay Money Market Calcutta  tt  11  m  1  7/8  5/8  /  2  1/4  1/4  1/2  1/2  1/2  1/2  1/2  1/2  Table 6 Short Term Operations of The Reserve Bank, 1936-1949 Inc. (Rs.000,000) Year ending i n March  Advances to Gov't.  Holding of Treasury Bills  Investment i n Rupee Securities^  Advances i to Banks  .  • Internal B i l l s Purchased and Rediscounted^  54.8  0.1  —  60.5  0.1  0.1  0.5  71.2  0.2  0.1  17.2  15.3  63.6  0.2  —  1940  10.5  28.7  72.5  1.0  —  19a  20.1  9.7  77.8  0.7  —  1942  40.9  2.7  89.6  0.4  —  1943  14.9  6.8  71.2  0.4  —  1944  4.9  9.1  76.1  1.5  1945  4.3  14.6  131.3  1.1  mn mm  33.5  246.5  1.2 ;  —  1936  8.7  1937  15.4  1938  7.9  1939.  1946  2.2  —  f  1947  0.5  23.3  317.0  8.2  —  1948  15.7  26.2  815.3  12.1  —  1949  17.1  39.3  756.3  33.4  2.9  Source: 1 2 3  Reserve Bank of I n d i a . Banking and Monetary S t a t i s t i c s of I n d i a . Bombay. 1954, p. 561.  The Reserve Bank o f I n d i a ceased t o be the banker t o the Governments' of Burma and P a k i s t a n on A p r i l 1, 1947 and J u l y 1, 1948 r e s p e c t i v e l y . No e x t e r n a l b i l l s were discounted during t h i s p e r i o d . Investment of the Banking Department c o n s i s t s mainly o f Rupee s e c u r i t i e s of the Government o f India and of the State Governments.  - 64 As a B a n k e r ' s  Bank  As a banker's bank the Reserve Bank was put to a severe test when i t was s t i l l at an early stage of development.  In order to  weed out i n e f f i c i e n t and weak banking i n s t i t u t i o n s and thus to sponsor the development of a sound banking system i t had encouraged the amalgamation of banks.  In 1937, i t had advanced substantial  sums (amount not disclosed)  to the TravaaCop©; National Bank and the  Quilan Bank to make their amalgamation scheme possible.  However,  a banking scare i n South India during 1938 caused large withdrawals of deposits which the newly amalgamated bank could not meet.  For  undisclosed reasons the amalgamated banks could- not support additional advances at the Reserve Bank and was forced to close i t s doors i n June 1938.  As i t did not allow the Reserve Bank to inspect  its  accounts and determine the value of i t s assets, the l a t t e r did not 32 feel obliged to come to i t s rescue.  The Reserve Bank was able to  give substantial help to other banks which were adversely affected by the Travancore - Quilan f a i l u r e .  Professor Sayers stated that "as  soon as the news of the c r i s i s was received, credit l i m i t s were granted to many banks i n South India and these l i m i t s were l a t e r doubled".^ During this c r i s i s the inspection of the accounts of many banks by the Reserve Bank revealed that t h e i r e l i g i b l e l i q u i d assets were quite limited and thus i n s u f f i c i e n t to support substantial withdrawals during a banking scare. meet a "run".  These banks needed considerable advances to  This was revealed i n a c i r c u l a r which was intended to  32. R.'S. Sayers, Banking i n B r i t i s h Commonwealth, Oxford University Press, London, 1952, p. 233. 33.  Loc. C i t .  - 65 be instructive but, unfortunately, the bankers interpreted i t as a refusal of the Reserve Bank to grant emergency assistance i n the future.  This considerably undermined confidence i n the Reserve Bank -  a confidence which was badly needed by the young and s t i l l not f u l l y accepted i n s t i t u t i o n . As a Banker. to.-.Government,, .....•In theory i t i s possible to distinguish between the f i s c a l and the banking operations of a central bank but i n practice the former has usually dictated the l a t t e r and monetary policy has become the hand maiden of f i s c a l necessity.  The operations of the Reserve Bank  during both World War II and the Communal r i o t s of 1947 were no exception to this general observation.  The Government's revenues from  ordinary sources and from voluntary savings spent on Government bonds f e l l far short of requirements during both emergencies and the balance had to be made up from forced savings provided, as i n other countries, through the credit granting f a c i l t i e s  of the Central Bank.  At the  beginning of World War I I , the central Government's funded and unfunded rupee debt stood at a l i t t l e over Rs. 7 b i l l i o n s , i t s s t e r l i n g debt at about Rs. 4.7 b i l l i o n s .  The combined t o t a l was thus about Rs. 11.7  34 billions.  Even though the s t e r l i n g debt had been reduced to about  Rs. 0 . 6 4 b i l l i o n s during the war, the Rupee debt of the Government of India had increased to Rs. 19.1 b i l l i o n s .  In the meantime the Reserve  Bank of India had granted Government credits on blocked s t e r l i n g assets 35 equivalenttcthe-staggering sum of Rs. 15.5 b i l l x o n s . i n a l l , funded ^*  Reserve Bank of India, op_. c i t . ,  35. Ibid. , p. 88l.  so .. .. ,  p. 560.  e x p e n d i t u r e s and c u r r e n t advances at the  h a d i n c r e a s e d f r o m R s . 11.7  t h e b e g i n n i n g o f W o r l d War I I t o R s . 35.2 b i l l i o n s War o r b y R s . 23.5 Of t h i s  hillions  a t t h e end o f  billions.  l a t t e r sum a p p r o x i m a t e l y R s . 9.7  billions  - almost a l l i n  f o r e i g n c u r r e n c y a s s e t s - was f u n d e d b y a n i n c r e a s e i n t h e n o t e i s s u e o f the  R e s e r v e Bank.  R s . 11.8  r o s e f r o m R s . 2.1  billions  i n 1939 t o  By t h e e n d o f 1948,  the l a s t  year of the  The l a t t e r  b i l l i o n s i n 1946.  p e r i o d under r e v i e w , t h e Reserve Bank's note i s s u e had i n c r e a s e d t o Rs. 12.75 advances  billions.  The e x t e n t t o w h i c h d i r e c t a n d i n d i r e c t  c o n t r i b u t e d t o t h e o u t s t a n d i n g n o t e i s s u e o f t h e R e s e r v e Bank  during i t s f i r s t It w i l l  t h i r t e e n years of operations i s d e t a i l e d i n Table 7,P g a  be n o t e d f r o m t a b l e 7 t h a t w h i l e t h e I s s u e  h o l d i n g s o f g o l d - c o i n s and b u l l i o n remained circulation i n 1945 1948.  e  67.  Departments'  f a i r l y c o n s t a n t , the note  i n c r e a s e d f r o m a b o u t R s . 3 , 1 0 6 , 0 0 0 , 0 0 0 i n 1939  t o R s . 9,796,000,Ooo  a n d f u r t h e r i n c r e a s e d t o . R s . 1 2 , 7 ^ 9 , 0 0 0 , 0 0 0 b y t h e end o f M a r c h , T h i s s u b s t a n t i a l i n c r e a s e i n note i s s u e reduced t h e banks  c o v e r f r o m a b o u t 53 p e r c e n t i n 1938 the  Government  t o 6 p e r c e n t i n 1948.  metal  Meanwhile  f o r e i g n c u r r e n c y c o v e r i n c r e a s e d f r o m R s . 6 2 1 , 0 0 0 , 0 0 0 i n 1936 t o  Rs. 8,637,000,000 in,1945. March  I t had reached Rs. 11,353,000,000  b y t h e end o f  1948. Not a l l t h e e v i d e n c e o f t h e R e s e r v e Banks f i s c a l o p e r a t i o n s i s  c o n t a i n e d i n t h e statement o f t h e I s s u e Department. R e s e r v e Bank made s u b s t a n t i a l s h o r t t e r m a d v a n c e s  As noted e a r l i e r the  t o t h e Government a n d  also acquired s u b s t a n t i a l holdings of Treasury b i l l s .  These o p e r a t i o n s  along with those undertaken i n the ordinary course o f i t s dealings w i t h t h e s c h e d u l e d banks B a n k i n g Department  '  are revealed i n the annual statemtnts of the page 68.  w h i c h a r e summarized  i n T a b l e 8/, The summary o f t h e  ~  Table 7 Operations of The Issue Department of The Reserve Bank, 1935-1949, Inc.  Year Ending in March  Note Liabilities in general Circln.  (Rs.000,000) Ni ote Cover Foreign Gov't of Currency India Rupee Rupee Assets-? Securities Coins T  Held in Banking Dept. Total  Uold coins and bullion n  1  2  Bullion Coin as of note  1936  1640.6  275.8  1916.4  442.2  555.1  620.9  296.2  52.2  1937  1758.1  258.1  2016.2  442.2  640.1  695.7  236.2  53.7  1938  1861.5  256.1  2117.6  444.2  662.4  799.2  271.9  49.9  1939  1823.6  282.8  2106.4  444.2  671.1  669.5  321.6  52.9  1940  2092.2  187.9  2280.1  444.1  675.2  786.4  374.4  49.9  1941 •  24U. 1  172.7  2586.7  444.1  358.7 1299.2  484.7  31.1  1942  3076.8  122.2  3199.0  444.1  352.8 1650.0  752.0  24.9  1943  5134Q4  n$m  .52.52H  444.1  223131 3191.1  1393.9  12.7  1944  7771.7  105.0  7876.7  444.1  142.8 6435.2  854.5  7.4  1945  9686.9  109.3  9796.1  444.1  135.1 8637.4  579.5  5.9  1946  11,626.4  164.1  11,790.5  444.1  155.2 10612.7  578.4  5.1  1947  12,229.6  326.1  12,555.7  444.1  194.3 11338.9  578.4  5.1  1948  12,278.2  471.2  12,749-5  444.1  323.6 11353.3  628.4  6.0  1949  12,374.2  220.2  12,594.4  424.9  438.6 9074.7  2656.2  6.9  Source:  Reserve Bank of India. Banking and Monetary Statistics of India, Bombay, 1954* P. 560.  1 Gold valued at 8.47512 grams per rupee. 2 Including government of India Rupee notes issued from July 24, 1940. 3 Only sterling securities up to December 31, 1948.  Table 8 Operations of The Banking Department of the Reserve Bank, 1936-1949 Inc. (Rs.000,000) Tear ending in March  Liabilities Bills Deposits PayGov't. Banks Others able  1936  112.6  272.6  0.9  0.7  8.4  495.2  275.8  1.3  149.9  8.7  0.1  1937  98.3  265.6  4.0  0.8  10.6  479.3  258.1  1.0  136.2  15.4  0.2  1938  113.7  249.6  7.0  0.9  7.7  478.9  256.1  0.8  134.8  7.9  0.2  1939  132.1  161.9  7.5  1.0  11.8  431.2  282.8  1.0  42.1  17.2  1940  115.0  178.0 10.4  1.0  14.5  442.5  187.9  0.9  123.4  1941  152.9  368.4 19.2  22.4  687.1  172.7  1.2  1942  151.8  377.3 38.9  7.8  35.5  735.5  122.2  1943  203.9  573.6 32.9  28.0  51.1  996.6  118.0  1  1944  418.5  646.9 66.5  25.4  82.8  1346.3  1945  1786.9  905.7 132.5  34.8  105.8  1946  4063.8  902.2 165.6  32.6  1947  4907.7  1948  3691.7  1949  2387.9  Other Liabilities  Total  1  Assets Cash Other Trea-- Gov't Balance Loan & Rupee and held advncs., Loans & sury Rupee Other t Advances3 B i l l s Secur.Asset Notes other coiins abroad^ to gov' 54.8  5.1  60.5  8.1  0.5  71.2  7.2  0.2  15.3  63.6  9.0  10.5  1.0  28.7  72.5  17.5  393.2  20.1  0.7  9.7  77.8  11.7  1.3  460.8  40.1  0.4  2.7 89.6  17.6 «  '3  751.1  14.9  0.4  6.8 71.2  33.0  105.0  2.7  1117.2  4.9  1.5  9.1 76.1 30.8  3Q73.8  109.3  2.6  2772.8  4.3  1.1  14.6 131.3  37.8  130.6  5407.1  164.1  3.1  4882.3  2.2  1.2  33.5 246.5  74.2  850.4 142.4 42.3  130.9  6187.6  326.1  2.4  5288.3  0.5  8.2  23.3 317.0 221.8  1024.7 3421.1 29.2  116.4  5449.6  471.2  122  4069.5  15.7  12.1  26.2 815.3 485.5  112.8  4190.5  220.2  1.1  3077.8  17.1  805.3  3.2  565.2 39.5  36.3  Source: Reserve Bank of India, Banking and Monetary Statistics of India , Bombay, 1954. p. 561. 1 Includes Rs. 100,000^000 of paid up capital and reserves 2 Includes Cash and short term securities. 3 There are no external b i l l s purchased or discounted during this time.  —  39.9 756.5  41.4  - 69 Reserve Bank's operations presented i n the previous Table reveals that i t s holdings of Government Rupee securities continuously increased during the period under review.  Between March 1936 and March 1949  the amount of such holdings rose from about Rs. 55,000,000 to the substantial sum of Rs. 756,500,000.  Its investment i n treasury b i l l s  increased from a nominal sum of Rs. 500,000 i n 1938 to about Rs.40,000,000 at the end of March 1949.  It also reveals the substantial growth i n  the Bank's holdings of foreign assets (sterling securities)  which reached  a peak of Rs. 5.3 b i l l i o n s at the end of March 1947 and then decreased to about Rs. 3.1 b i l l i o n s at the end of March 1949. Department as shown e a r l i e r held foreign securities;  The Issue on the l a t t e r date,  amounting to approximately Rs. 9«1 b i l l i o n s ,thus making a combined t o t a l of about Rs. 12.2 b i l l i o n s of these  securities.  Meanwhile the deposits of scheduled banks with the Reserve Bank increased from Rs. 272,600,000 i n 1936 to a peak of Rs. 1,024,700,000 i n March 1948 then decreased to Rs. 805,0.00j000• • i n the following year. Government deposits increased from Rs. 112,600,000 i n 1936 to approximately  Rs. 2^83,000,000  in 1949-  The combined summary of the Bank's operation for the period under review i s presented i n Table No.9, on page 70. Reserve Bank Credit and Prices It goes without saying that no central bank could have financed such a major portion of a country's credit needs as that revealed i n the foregoing tables without generating a rapid r i s e i n prices which i t was powerless to control.  And i n this case the magnitude of the Reserve  Table 9 Combined Operations of the Reserve Bank of India, 1936-1949 Inc. (Rs.000,000)  Year ending in March  Liabilities Notes in CircuDeposits lation  Other Liabilities  Total  1  Gold Coin and Bullion^ 0  Foreign Currency Assets  Assets Rupee and Subsidiary Coins  Gov't Securities  Advncs• and Re- Other discnts. Assets  1936  1640.6  3861  9.1  2135.8  444.2  770.8  55611  350.9  8.7  1937  1758.1  367.9  11.4  2237.4  444.2  831.8  641.1  296.7  15.5  1938  1861.5  370.2  8.7  2340.4  444.2  934.0  603.2  343.1  8.7  1939  1823.6  318$ 5  12.8  2254.8  444.2  711.6  672.1  385.2  32.7  9.0  1940  2029.2 .  327.1  15.4  2534.7  444.1  909.8  676.1  447.0  40.2  17.5  1941  2414.1  561.5  25.5  3101.2  444.1  1692.3  360.0  562.4  30.5  11.7  1942  3076.8  592.2  43.3  3812.3  444.1  2110.8  354.1  841.6  44.0  17.6  19433  5134.4  817.5  79.1  6131.0  444.1 .  3942.2  224.5  1465.1  22.1  33.0  1944  7771.7  1138.1  108.2  9118.0  444.1  7552.5  144.5  930.6  15.4  30.8  1945  9686.9  2833.2  140.6  12,760.6  444.1  11,410.2  137.7  710.8  20.0  37.8  1946  11,626.4  5143.8  163.2  17,0334.4  444.1  15,495*0  158.3  824.9  36.8  74.2  1947  12,229.6  5904.4  183.2  18,417.1  444.1  16,627.2  196.6  895.4  31.9  221.8  1948  12,278.2  5204.0  145.5  17,727.8  444.1  15,422.8  324.8  44.0  48.5  Sources  1443.7  Reserve Bank of India, Banking and Monetary Statistics of India. Bombay, 1954. p. 560.  1 Includes Rs 100 millions of paid up Capital and Reserves. 2 Valued at an rate of 8.47512 grains of fine gold per rupee. 3 Reserve Bank ceased to be the Currency authority and the bankers for the Government of Burma with effect from June 6, 1942 and April 1, 1947 respectively.  5.1 8.1 7.2  - 71 Bank's undertakings on behalf of the Government i s not revealed i n i t s entirety by purchases of Indian Government s e c u r i t i e s .  To the l a t t e r  must be added the Reserve Banks' holdings of foreign currency assets which secure Reserve Banks advances oh foreign indebtedness to the page 72 Indian Government.  In Table No. 10,/bhe t o t a l of these investments and  advances i s compared to the 'Gauntry's t o t a l funded debt and contingent l i a b i l i t i e s i n foreign currency assets. index are presented,  Price and purchasing power  also.  The extent to which this massive support of the Government's credit needs contributed to the r i s e i n the Bank's outstanding note issue and decline in the in turn to the/purchasing power of the Rupee needs l i t t l e additional comment.  There was anotre: .thans;;. a three-fold increase i n prices and a  related decline i n the value of the Rupee.  By no stretch of the  imagination could the increase i n the Bank's note issue have been absorbed in the cash needs of the Indian economy without i n f l a t i o n and i t s forced savings counterpart.  One may not seriously contend that the  implied forced savings could have been avoided by higher taxes and attractive interest rates on Government securities without seriously •restricting the War efforts themselves.  The p a t r i o t i c fervour of a  nation seldom reaches such a height that people w i l l surrender a l l of their War gains voluntarily. During the f i r s t two years of World War I the price r i s e was not considered s i g n i f i c a n t .  In his budget speech of March 1943? the then  Finance Minister held that " . . . there i s not the remotest r i s k of i n f l a t i o n of  the nature and on the scale which occured i n some of the countries  36  which suffered utter defeat i n the last War".  36.  Budget Speech, 19k3-kk, Paras. 50-55. op. c i t . , p. 288.  But Indian economists  As quoted i n G.P. Gupta,  Table 10 Government Debt, Reserve Banks C r e d i t and Purchasing Power of the Rupee, 1936-1949 I n c . (Rs.000,000)  Year Ending i n March  P u b l i c Debt i n I n d i a T o t a l Debt Indian Debt o f to Debts o f Indian Indian People For. Gov'ts. Gov't.  Reserve Holding of Indian and For. Debts  Bank C r e d i t % of Outstanding Note Total Issue Debt  Indexes General Index o f Price Value o f Index Rupee 1939-100 N.A. N. A.  1936  11,910  771  12,681  1916  15.1  1130.0  1937  ll|794  832  13,626  2016  14.9  1144  N. A.  N. A.  1938  11,747  934  12,681  2118  16.8  1286  N. A.  N. A.  1939  11,791  712  12,502  2106  16.8  1129  100.0  100.0  1940  11710  910  12,619  2280  18.1  1696  125.6  79.8  1941  12,061  1692  13,753  2587  18.8  2285  114.8  87.5  1942  11,517  2111  13,628  3199  23.4  2996  137.0  73.0  1943  12,978  3942  16,920  5252  31.0  5429  171.0  58.5  1944  14,146  7553  21,699  7877  36.3  8497  236.5  42.3  1945  16,390  11,410  27,800  9796  35.2  12,140  244.2  40.9  1946  19785  15,495  35,280  11,790  33.4  16,356  244.9  40.8  1947  21,852  16,627  38,479  12,556  32.6  17,556  275.4  36.3  1948  21,456  15,423  36,879  12,749  34.5  16,898  308.2  32.5  1949  23>853  12>153  36,005  12,594  34.9  15,632  376.2  26.5  Source * 1 Adapted from Reserve Bank o f I n d i a , Report on Currency and Finance. 1951-52. Bombay 1952. p. Ii 2 Adapted from Reserve Bank o f I n d i a , Banking and Monetary S t a t i s t i c s of I n d i a . Bombay, 1954, pp. 560, 561, and 881.  - 73 i n a manifesto  i s s u e d on A p r i l 12, 1943 p o i n t e d o u t t h e d a n g e r s o f  c r e e p i n g i n f l a t i o n generated  by t h e p e c u l i a r s y s t e m o f War f i n a n c e  a d o p t e d by t h e C e n t r a l G o v e r n m e n t .  They were p a r t i c u l a r l y  with the i m p l i c a t i o n of the process  by which t h e U n i t e d  Government and o t h e r A l l i e d and  paid f o r t h e i r purchases  blocked and  Governments purchased  s t e r l i n g balances.  credit  As n o t e d ,  t h e R e s e r v e Bank i s s u e d  the economists  suggested  p r i c e c o n t r o l s and r a t i o n i n g ; borrowing  o f t h e s e d e v i c e s were p u t i n t o  a c q u i s i t i o n of long-term  e f f e c t a n d , no d o u b t , d i d a r r e s t During  t h i s period the  But, as shown,continued  s e c u r i t i e s by t h e Bank t o s u p p o r t  the continued acceptance  p r i c e s continued t o r i s e .  their prices  of f o r e i g n currency a s s e t s brought  i n c r e a s e i n t h e money s u p p l y .  also  and' i n c r e a s e d t a x a t i o n .  g e n e r a l p r i c e i n d e x i n c r e a s e d f r o m 237 t o 2 4 5 .  attempted  currency  I n order t o check f u r t h e r  t h e p a c e o f t h e i n f l a t i o n b e t w e e n 1944 a n d 1946.  and  m a t e r i a l from I n d i a  a g a i n s t t h e s e s e c u r i t i e s and i t was n o t a b l e t o l i q u i d a t e  i n c r e a s e d d e p e n d e n c e on l o n g - t e r m All  Kingdom  i n i n c o n v e r t i b l e s t e r l i n g s e c u r i t i e s and  them f r o m t h e p r o c e e d s o f c u r r e n t i m p o r t s . inflation  concerned  Hence, i n s p i t e o f p r i c e  parallel  controls,  I n a d d i t i o n t o t h e c o n t r o l s t h e Government  t o s i p h o n o f f some o f t h e e x c e s s  s u p p l y o f money b y s e l l i n g  37 approximately  Rs.  800,000,000 w o r t h o f g o l d .  I t appears that the  s a l e o f g o l d s o u p l e d w i t h o t h e r d e f l a t i o n a r y measures d i d a r r e s t t h e p r i c e r i s e b e t w e e n 1944 a n d 1946 b u t o n l y t e m p o r a r i l y .  I n 194? when  t h e c o n t r o l s were r e l a x e d t h e g e n e r a l p r i c e i n d e x moved r a p i d l y 275 t o 376, t h e f i g u r e r e c o r d e d  f o r M a r c h 1949.  from  On t h e l a t t e r d a t e t h e  Rupee was w o r t h i n r e a l goods a b o u t o n e - f o u r t h o f i t s p r e - W o r l d I I value.  37. G.P. G u p t a , op. c i t . ,  pp.  191-192.  - 74 CHAPTER III DEVELOPMENTS IN THE PRIVATE BANKING SECTOR,  The establishment  1935-1949 INC.  of the Reserve Bank of India and i t s banking  operations before 1949 appear, on the surface at l e a s t , to have had little  i f any impact on the day-to-day operations of the several classes  of primary banking enterprises which function i n the Indian economy. The Indigenous bankers and money lenders continued to provide the bulk of the credit required by the a g r i c u l t u r i s t s , small tradesmen, and other artisans, with l i t t l e effective competition from the cooperative banks which were p a r t i c u l a r l y designed to meet the credit needs of such people. The Imperial Bank improved' upon i t s already significant role as a primary lender and a quasi-central bank;  the Joint Stock Banks continued to  finance domestic commerce and trade.  Meanwhile the Exchange banks as  before, financed most of the country's external trade.  These banks  also competed with the Indigenous bankers and the Indian Joint Stock banks i n financing the i n t e r n a l trade of the country. Yet . / i t would be quite misleading to leave the impression that these several classes of primary lenders were neither affected by the existence of the Reserve Bank nor by what, for lack of more accurate term, we may c a l l the Reserve Bank's non-banking undertakings.  The l a t t e r took  on the form of attempts to increase the scope of i t s j u r i s d i c t i o n to Indigenous bankers and non-scheduled Joint Stock banks, p a r t i c i p a t i o n i n attempts to eliminate the usurious rates charged by money lenders, and prime mover i n strengthening the laws under which the ordinary banks operated.  In fact during this period the foundations were l a i d for  ••.•r  the future extension and expansion of the Reserve Bank's regulatoryauthority over a l l incorporated banking i n s t i t u t i o n s . The nature and implications of these non-banking undertakings on the operation and accomplishments of each class of banking enterprises are now our immediate concern; Part I Indigenous Bankers and Money Lenders Two significant undertakings mark the progress of indigenous bankers and money lenders between 1935 and 19^9.  However neither  undertaking was promoted by these s e l f r e l i a n t , tradition-bound native bankers who provide such a s i g n i f i c a n t part of India's banking needs and make up the so-called "unorganized" sector of the Indian money market.  One was an attempt of the Reserve Bank to extend  its  j u r i s d i c t i o n to include such indigenous banking enterprises as could meet the conditions l a i d down by the Bank and thus qualify for membership i n the Country's Reserve Bank system.  The other was a  more or less concerted move on the part of governmental agencies to control the interest rates charged on loans to the usually hard pressed a g r i c u l t u r i s t s and small tradesmen to whose f i n a n c i a l needs the money lenders catered. Proposed Inclusion i n Reserve System Probably because the Indigenous bankers and money lenders do not operate under formal banking l e g i s l a t i o n and are not subject to public supervision or c o n t r o l , i t has become customary to designate them as  - 76 -  the 'unorganized' sector of the Indian money market.  But, to a  Westerner at l e a s t , such a designation could be quite misleading.  In  fact i t would be nearer the truth to designate them as the "native banking system" and thus eliminate the erroneous suggestion that they are either disorganized or are lacking i n unifying relationships.  The  indigenous bankers serve each other as correspondents i n the handling of i n t e r n a l b i l l s of exchange (Hundis). cially o  •:.'..,ar!ci?.lly  They help each other finan-  or otherwise i n times of emergency to keep up  the 'name' of t h e i r ancestral profession.  They also act as banker's  banks for the professional money lenders who generally cater to the credit needs of peasants and other r u r a l dwellers.  As noted e a r l i e r  these patriarchal lending i n s t i t u t i o n s have, on occasion, served as state bankers and exercised the important note-issue privilege."'" Because of t h e i r number and basic importance i n the Indian economy (exact data are unavailable) the Central Banking Enquiry Committee recommended that, on the establishment of the Reserve Bank, such indigenous bankers as were engaged exclusively i n the banking business, or would divest themselves of a l l non-banking business, be brought into direct association with the Reserve Bank i n the same manner as the Joint Stock banks.  This presumably implied the maintenance of reserve accounts  at the central bank, use of the l a t t e r ' s clearing and cash transfer f a c i l i t i e s and the important p r i v i l e g e of rediscounting e l i g i b l e commercial paper.  It probably also implied the l i s t i n g of q u a l i f i e d  indigenous bankers, many of whom are r i c h and i n f l u e n t i a l , as "scheduled' banks. 1.  Government of India,  Report of the Central Banking Enquiry Committee, Bombay, 1 9 3 1 , P« 1 0 7 .  - 77 -  In spite of these attractions, however, none of the indigenous bankers sought association with the Reserve Bank and the Reserve Bank itself  took steps to remedy the situation early i n 1937.  It issued  a c i r c u l a r to a l l scheduled banks and Indigenous bankers seeking a concensus on the question of l i n k i n g the Indigenous bankers d i r e c t l y to the Reserve System and the extent of the changes which the Indigenous bankers should be required to make to secure this linkage.  On the  basis of r e p l i e s , i t would appear of the scheduled banks only, the Reserve Bank drew up a plan under which the indigenous bankers would be granted the same f a c i l i t i e s and privileges as the scheduled banks  2 providing the Indigenous bankers undertook to: i. ii. iii. iv.  segregate their banking business from their trading and non-banking business; maintain proper records and make them available for inspection by the Reserve Bank; submit regular statements of their banking business to the Reserve Bank; and to have a minimum working c a p i t a l of Rs. 200,000 which would be increased to Rs. 500,000 within a reasonable period of time.  As might have been expected none of the Indigenous bankers was w i l l i n g to comply with these conditions.  In many cases their banking  business was not as important as t h e i r mercantile bsuiness.  Sometimes  their loans were made i n kind and thus posed the d i f f i c u l t y of recording them i n monetary units.  There was also considerable reluctance on the  part of indigenous bankers to disclose the nature of their business the Reserve Bank authorities.  Yet one may infer that a significant  thought not e x p l i c i t reason was the fact that the Reserve Bank could  2. S.R.K. Rao,  The Indian Money Market, Allahabad, Chaitanya Publishing House, 1959, PP« 87-88.  to  - 78provide no f a c i l i t y or privilege which was not already available within the Indigenous system I t s e l f  or through correspondents  with the Imperial Bank and other larger joint stock  relationships  institutions.  The question of a f f i l i a t i o n with the Reserve Bank was brought up again i n 19^1, interestingly enough, by the Bombay Shroffs who desired to make their internal b i l l s available for rediscount and were impressed by the p o s s i b i l i t y of developing a deposit business to supplement their working c a p i t a l .  This group was w i l l i n g to meet the o r i g i n a l conditions  set out by the Reserve Bank save the giving up of a l l their ancestral non-banking undertakings and the disclosure of the extent of their  business.  The Reserve Bank was prepared to allow the Shroffs a number of years i n which to make other provisions for non-banking undertakings but not to concede the ruling principle that a p a r t i c i p a t i n g or member bank should be engaged exclusively i n the banking business.  Hence nothing came of  this second attempt to incorporate the Indigenous bankers i n the country's Reserve Bank system.  Even so, the move does reveal the r e a l i z a t i o n on  the part of the Shroffs that some advantages could be gained by a f f i l i ating with the Reserve Bank.  As indicated i n Chapter V, another un-  successful attempt was made i n 1951. Money Lenders and the Rate of Interest The practices of money lenders, as would be expected i n any unorganized profession, are not uniform throughout the Country but vary from State to State, and even from one place to another i n the same State. They vary according to l o c a l customs and t r a d i t i o n s , to the needs and circumstances of the borrowers and to the nature of security, i f any, offered.  - 79 -  Character of Loans - Professional Money Lenders The professional money lenders make many small loans to borrowers whom they can trust without even the formality of a promisory note. But when the loans involve a substantial amounts of money and renewals, or are made to strangers,promisory notes with witnessed signatures are taken from the borrowers.  When security i s required i t may consist  of conditional b i l l s of sale on ornaments, land, houses, and other valuable property. by c a t t l e ,  Cases are not uncommon where the loan i s  crops or other movable property.  secured  Loans are made to farmers  on the security of crops with the understanding, expressed or implied, that the borrower w i l l s e l l the crop through the money lender or his agent - i n some cases, no doubt, the Indigenous banker or agent from whom the money lender obtains his funds.  Loans are generally for  short periods but, since their proceeds are used primarily for personal needs or to meet consumer obligations rather than for productive purposes, •t.heycarry usurious interest rates.  The debtor may become more or less  permanently enslaved to the money lender.  The a c t i v i t i e s  of the money  lender, who may also be a borrower, may also be r e s t r i c t e d . Character of Loans - Non-Professional Money Lenders The non-professional money lenders, as described i n Chapter One, generally lend i n kind;  i.e.,  seeds, consumer goods,  the security of land and chatties.  etc.,  usually on  In many cases no security whatever  may be required and the loan may be made on mutual t r u s t .  No formal  records are kept of the transactions and sometimes the i l l i t e r a t e and ignorant borrowers are cheated to their l a s t penny by greedy nonprofessional money lenders.  Since the loans made by the  non-professionals  - 80 are usually to a more impoverished group of borrowers than those made by the professionals,interest  rates are often higher.  Yet the  non-professional lenders are able to secure the payment of a larger proportion of their loans than are the professional money lenders at,; the former generally lend to their friends and usually hold a strategic economic and s o c i a l position i n the community. Rates - of Interest As would be expected there was and continues to be a great d i v e r s i t y i n rates of interest  charged by money lenders.  Individual  rates vary from one State to another,from one money lender to another, . and  according to the degree of r i s k involved.  According to the  Provincial Banking Enquiry Committee set up i n most of the provinces ' of  India during the early 1930's, interest rates charged by money  lenders ranged anywhere from 12 per cent to 373& per cent depending on the security offered, the amount of loans and on the. amount of credit available to the borrower from other sources.^  On unsecured loans  made by the money lenders interest rates were much higher.  Those  charged by itinerant money lenders are the highest and range from 75 per  cent to 360 per cent.  Professor J a i n , r e f e r r i n g no doubt to the  l o c a l money lenders, states i n effect that interest  charges may vary  from % Anna to two Annas per Rupee per month or from~5TUper cent to 150 per cent per annum.^  He further states that the rate of interest classes of charged by the Pathans (one of the..several/itinerant money lenders)  6 comes to over 300 per cent per annum. 3. S . G . Panandikar, Banking i n I n d i a , 1959, P.50  Bombay, Orient Longmans,  4.  JLTacv-'cU&vy £.._;.  5.  I.Anna = l / l 6 of a Rupee  6.  J . C . J a i n , Indigenous Banking i n India, Macmillan, London, 1928, The personal experience of the writer confirms the observations of Professor J a i n .  \ ~,-„\ '. • -  - 81 Government  Regulation  Moderately by t h e  -  h i g h i n t e r e s t r a t e s can  be  a c c o u n t e d f o r and  justified  e l e m e n t o f r i s k i n v o l v e d i n t h e l o a n s made by t h e money l e n d e r s ,  but r a t e s i n excess of say 3 per cent the i l l i t e r a c y  and  ignorance  o f t h e Government.  passed a Usurious  to p r o t e c t the simple  country  folk?  o f t h e money l e n d e r s , t h e Government o f  Loans Act  e a r l y a s 1918.  as  India  T h i s measure empowered  t h e c o u r t s t o examine a l l l o a n t r a n s a c t i o n s i n c a s e s where t h e was ever out  convinced  that  t h e r a t e was  l i k e many o t h e r  a p p e a r s t o h a v e been l e f t h i s r i g h t s and  excessive  pious undertakings,  t h e m a l p r a c t i c e s , and  and  no a g e n c y was  the onus of p r o v i n g g u i l t . to a p l a i n t i f f ,  always too impoverished  s e t up ; i  -  o f t e n too ignorant  to plead  p r a c t i c e s o f money l e n d e r s .  court  exceptionally high.  How-  t o weed rv;. t o know  them.  A t a somewhat l a t e r d a t e v a r i o u s S t a t e s t o o k s t e p s the u s u r i o u s  from  of the borrowers p l u s the i n d i f f e r e n c e  In order  from the m a l p r a c t i c e s  p e r month c o u l d a r i s e o n l y  I n 1930,-. t h e  to e l i m i n a t e Punjab  Government p a s s e d a r e g u l a t i o n o f a c c o u n t s A c t r e q u i r i n g a l l l i c e n s e d money l e n d e r s t o k e e p i n a p r e s c r i b e d f o r m a s e p a r a t e each d e b t o r .  The  form r e v e a l e d  t h e d a t e and  t h e r a t e o f i n t e r e s t , t h e amount and amount r e p a i d .  The  account  the p r i n c i p a l of the  t h e d a t e o f r e p a y m e n t , and  were shown s e p a r a t e l y . the Courts  accrued  I f t h e money l e n d e r f a i l e d  I n 193^,  Panadikar,  t o comply w i t h  t h e same S t a t e p a s s e d a r e l i e f  7op.  cit. ,  op>.  52  their  interest  were empowered t o d i s - a l l o w e i t h e r p a r t o f a l l o f  interest.  loan,  the  money l e n d e r s were a l s o r e q u i r e d t o p r o v i d e  b o r r o w e r s w i t h s e m i - a n n u a l s t a t e m e n t s i n w h i c h p r i n c i p a l and  law,  for  of  the the  - 82 indebtedness Act f i x i n g the maximum allowed rates of interest at Th per cent on secured loans and at 12)6 per cent on unsecured loans. The extent to which measures of this character were enacted either before or during the period under review and the l i m i t s placed on interest rates i s summarised on the following page. Although these Acts probably have unified the practices of professional money lenders and to some extent checked the abuses practiced on impoverished borrowers, they did not result i n the complete elimination of these practices.  Some unscrupulous non-professional  lenders continue to exploit their needy and captive borrowers, i f not by one device then another.  Moreover, while the professional money  lenders did keep within the laws, they did so by r e s t r i c t i n g or even denying loans to these more impoverished and hence unreliable borrowers. Many of them discontinued their lending operations and devoted t h e i r talents to:other a l l i e d occupations.  Since most of the customers of  money lenders are a g r i c u l t u r i s t s , the problem of credit a v a i l a b i l i t y has since taken the place of extortionate rates of i n t e r e s t .  Part 2 Indian Joint Stock Banks The 1935-48 period was one of singular importance for the banking enterprises incorporated i n India.  The conduct and operations of  both the scheduled and non-scheduled banks were affected by a t i g h t ening of the Companies Act of 1913 under which they were incorporated and by the extension of the authority of the Reserve Bank,  In spite  - 83 MEASURES TO REGULATE MONEY LENDING IN INDIA Maximum interest rate allowed; State  On secured loans  T i t l e of Act  On unsecured loans  % Assam  Bihar  Bombay Madbya Pardesh Madras  The Assam Money Lenders Act, 1934  9 3/8  12 1/2  9  12  9  12  The Usurious Loans A c t . o f 1918 as Amended i n 1934.  12  18  The Madras Pawnbrokers Act, 1943.  6)4 - 9 3/8  The Bihar Money Lenders (Regulation of transactions) Act, 1939 The Bombay Money Lenders Act, 1946.  The Madras Debtors Act, 1934. Orissa Punjab  Uttar Pardesh West Bengal Hydrabad Mysore Coorg.  %  Protection  The Orissa Money Lenders Act, 1934.  9  15  9  12  The Usurious Loans Act, 1918 (as amended by the Punjab Relief of Indebtedness Act, 1934) also Regulations of Accounts Act, 1930. 2% above bank rate  12%  The Usurious Loans Act, 1918, as amended i n 1934.  12  24  The Bengal Money Lenders Act, 1940.  8  10  The Hydrabad Money Lenders Act,  6  9  The Mysore Money Lenders Act, 1939.  9  12  The Coorg Money Lenders Act, 1939.  Th  12  8. S.R.K. Rao, The Indian Money Market, Chaitanya Publishing House, Allahabad, 1959, pp. 94-96.  - Sh of this attempt to circumscribe their operations, especially those of the non-scheduled banks to banking business only - or perhaps because of this - a substantial growth i n both their number and volume of business was•recorded.  Like the Reserve Bank, i t s e l f ,  these predominantly Indian banking enterprises participated heavily in the financing of a c t i v i t i e s  growing out of World War I I .  Through  them l i q u i d funds,•originally provided for the war effort were mobilized, then channeled into peace-time  pursuits.  Amendments to the 1913 Companies Act It w i l l be recalled that Indian Joint Stock banks;  i.e.,  banking  i n s t i t u t i o n s incorporated under the Indian Companies Act of 1913? began as a rule as banking-trading ventures.  In this l a t t e r  respect  they were not unlike the enterprises of the competing indigenous bankers.  It w i l l also be recalled that the growth of these banks down  to 1935, while substantial, was nevertheless marked by numerous f a i l u r e s and intermittant public c r i t i c i s m of both their management and the lack of a proper banking law, prescribing the boundaries of their operations.  In 1931 the Indian Central Banking Enquiry Committee, which  was set iip'to investigate and report on the operations of Indian banking enterprises, and to make suggestions for their future development, recommended that a special bank act be passed, defining the business of banking and laying down the r e s t r a i n t s and conventions under which this business was to be conducted.  Such statutory definition of banking i n  India, as against l i t t l e or no banking l e g i s l a t i o n i n England, was considered necessary because of conditions peculiar to India. It  is  true of course that sound banking practices depend on good bankers rather  - 85 than pn banking laws, but not a l l bankers are good bankers.  A  majority of the unscrupulous bankers would be influenced i n the right direction and might be kept on a sound banking track by means of judicious banking l e g i s l a t i o n .  Foreign experts, whose opinion was  sought by the Government, advised that the same end could be achieved with less complication by amendments to the Companies Act of 1913• some presumably Their advise was eventually followed. In 1936/far-reaching additions were made to the 1913 measure.  The more important ones may be grouped  9 as  follows: 1.  No banking company can be registered under the Companies A c t , 1937i unless i t l i m i t s i t s e l f to the business of banking. The l a t t e r i s s p e c i f i c a l l y defined as: a. the accepting of deposits withdrawable by cheque, draft or order; b. the granting of loans; c. dealing i n b i l l s of exchange, promisory notes, Government and stock exchange securities e t c . ; d. the handling of c o l l e c t i o n s , remittances, trust funds, etc.  2.  A bank may not be managed by an agent other than another bank unless given special permission by the Government. It may not hold shares i n non-banking enterprises.  3.  No bank may be chartered after 1937, a. with less than Rs.50,000 in paid up c a p i t a l and no such bank may b. make charges against i t s unpaid c a p i t a l , c. A l l non-scheduled banks s h a l l apply at least 20 per cent of t h e i r profit to reserves u n t i l the l a t t e r are equal to paid-up c a p i t a l .  4.  A l l non-scheduled banks are required a. to maintain cash reserves of at least 5 per cent of t h e i r demand deposits and Yjk per cent of t h e i r time deposits; 6. to f i l e monthly statements of their l i a b i l i t i e s and cash reserve position (as declared each Friday) with the Registrar of Companies.  5.  Both scheduled and non-scheduled banks were required to display i n their offices an audited statement of their condition c e r t i f i e d by independent auditors not indebted to the bank.  9. S.G.  Panandikar,  op. c i t . , 9 t h ed. pp. 431-33-  -  8 6  -  These amendments suggest that many of the banks were i n fact primarily under-capitalized trading companies;  that some were  operated by people without banking experience $ that i n many cases their depositors could obtain no r e l i a b l e information on their solvency.  In  one way or another however the bankers managed to circumvent most of these new r e s t r i c t i o n s and the l e g i s l a t i o n appears to have accomplished l i t t l e more than to reveal the ingenuity of the bankers and the courts i n working towards this end.  The courts generally upheld the contention  that conformity to the new d e f i n i t i o n of a banking enterprise was not mandatory on existing banks.  Most of the other r e s t r i c t i o n s were held  not to apply on the technicality that a mixed banking trading venture did not conform to the new d e f i n i t i o n of a bank.  It would appear, as  i f by design of the law makers themselves, that no provision was made for an enforcement agency;  and this more than anything else l e f t  provisions of the 1936 amendment Act without  the  sanctions.  Afterthe failure of Travancore National and Quilan Bank i n 1 9 3 8 , the Reserve Bank took cognizance of the extent of questionable banking practices.  It appealed to the Government for s t r i c t e r l e g i s l a t i o n to be  enforced, presumably., by i t s e l f , and submitted a draft banking b i l l to the Government i n November  1 9 3 9 .  1  0  But the l a t t e r ' s preoccupation with  the emergent problems introduced by World War II limited i t s  immediate  reaction to measures designed to enforce compliance with the more important provisions of the 1 9 3 6 amendments.  A 1 9 4 2 amendment to the  10.  A.B.' Dass and M.N. C h a t t e r j i , Indian Economy; i t s Growth and Problems, Calcutta, Bookland, 1 9 5 3 > p. 424.  - 87 -  .  .  Indian Companies Act provided i n effect that any enterprise which after November 1943 continued to use the term 'bank' or 'banking' i n i t s  title  would be deemed to be a bank and would be subject to the provisions of the 1936 amendment of the Indian Companies Act regardless of the extent of i t s non-banking a c t i v i t i e s .  Another amendment i n 1944 provided that,  after July, 1946, the banks were prohibited from paying t h e i r managers i n whole or i n part on a commission basis.  Banks incorporated after  Jan. 15, 1937 were required to pay up at least one-half of their subscribed capital and voting rights were limited to paid-up shares.  This  l a t t e r r e s t r i c t i o n grew out of the practice of issuing non-voting preference shares and deferred payment voting shares i n addition to ordinary shares; i . e , ,  divorcing management from responsible ownership.  Other Legislation prior to 1949 Of considerable significance to the conduct of banking enterprises i n India was an interim measure entitled the Banking Companies (Inspection)) Ordinance Act, brought down by the Government on January 1, 1946 at the insistence of the Reserve B a n k .  11  This Act gave the Reserve Bank with  the permission of theGovernment authority to inspect the books and accounts of any banking company with a view to determine whether or not i t should continue i n the banking business.  The granting of such an authority  would i n i t s e l f have a salutory effect on any questionable banking undertaking.  It not only marks the beginning of the exercise of regulatory  authority i n India but for the f i r s t time on record makes the exercise of that authority the r e s p o n s i b i l i t y of a central bank.  In the same  year the Government enacted a law under which new branches of a bank  11. Reserve Bank of India, Report on Currency and Finance, 1946-47, Bombayil947, p. 112  -  88 -  could be established only on procurement of a licence from the Reserve 12.  Bank.  *  Under the Banking Companies Control (Ordinance) B i l l of  September 1 8 , 1 9 4 8 , the Reserve Bank was given sweeping authority to determine the lending policy of a bank, the purposes for which loans could be made, the margins to be maintained, and even the rate of  interest  13  to be charged.  A year l a t e r a comprehensive banking measure incorp-  orating a l l these e a r l i e r amendments or ordinances was enacted.  This  l a t t e r measure known as the Banking Companies Act of 1 9 4 9 went into effect i n 1 9 3 0 and belongs,  chronologically at l e a s t , to the material  covered i n Chapter V. Growth and Operations, 1 9 3 5 - 1 9 4 9 Inc. In spite of a significant  f a i l u r e rate and alienations resulting'  from the separation of Burma (in 1 9 3 7 ) and of Pakistan (in 1 9 4 6 ) ; Indian Joint Stock banks achieved a phenomenal growth during this short but eventful period under review. 1 9 3 5 to a peak of 6 7 8 i n 1 9 3 9 .  The number of reporting grew from 1 0 0 i n Thereafter many small trading enter-  prises appear either to have stopped reporting or to have complied with the amendment to the Indian Companies Act by eliminating their banking operations; 455.  for, by 1 9 4 l , the number of reporting banks had decreased to  During World War I I , many new banking enterprises were incorp-  orated, r a i s i n g the number -reporting i n 1 9 4 5 to a new peak of 7 2 1 . However* the measures enacted during the war to force compliance with the 1 9 3 6 amendment of the Indian Companies Act and the eventual alienation of banks now i n Pakistan reduced the number to 5 9 8 by 1949. 12.  Reserve;-Bank.:e£.;3ndia, Report 1 9 4 6 - 4 7 , op. 13.  cit.,  pp.  112-113.  Because of some technical d i f f i c u l t i e s the B i l l did not become an.Act i n that year. Its provisions were incorporated i n the Banking Companies Act of 1 9 4 9 .  - 89 While admittedly significant i n other ways, the progress i n numbers i s a misleading indicator of the volume of banking business the l i a b i l i t i e s and easrning assets - of the reporting banks. for  Except  the decrease i n their c a p i t a l funds from Rs. 153,600,000 i n 1936  to Rs. 146,700,000 i n 1938, there was a continuous increase i n their aggregate c a p i t a l and reserve funds.  The,, e a r l i e r decrease may be  attributed to the failure of the Quilan Bank and the alienation of many hanks with the separation of Burma from India.  The c a p i t a l funds of  the Banks increased from Rs. 146,700,000 i n 1938 to Rs. 171,400,000 i n In spite of the decrease i n the number of reporting banks from  1939.  678 i n 1939 to 475 i n 1942,capital funds increased from Rs. 171,400,000 to Rs. 229,200,000 during the same period.  Between 1942 and 1945  reported c a p i t a l funds increased by almost 100 per cent, reaching Rs. 509,000,000 on the  l a t t e r date.  This substantial increase i n  such a short period may be attributed to excessive earnings a r i s i n g from an increase i n trade and i n d u s t r i a l a c t i v i t y .  After 1945 the rate of  increase i n c a p i t a l funds was considerably decreased but, even so ,the amount reached Rs. 645,000,000 at the end of 1949. There was also a phenomenal growth i n their deposit  liabilities  and earning assets of the J o i n t Stock banks during the period under review.  Total deposits increased from Rs. 897,300,000 i n 1935 to a  peak of Rs. 7,222,400,000 i n 1946, then decreased to Rs. 5,808,100,000 in 1949.  Meanwhile loans and discounts grew from Rs. 565,200,000  in 1936 to a peak of Rs. 3,647,600,000 i n 1946 then declined to Rs. 3,038,600,000 i n 1949.  Because of active p a r t i c i p a t i o n i n the  - 90 Country's war effort, other securities Rs.  the Banks holdings'of Government bonds and  increased from Rs. 383,000,000 i n 1936 to a peak of  3»110,100,000 i n 1945.  These holdings remained r e l a t i v e l y unchanged  during 1946 and 1947, despite the uncertainties prevailing during that period but declined to Rs. 2 , 6 3 9 , 6 0 0 , 0 0 0 i n 1949. The annual data revealing the progress of Indian Joint Stock banks i s presented i n .tables 11, 12 and 13 on pages 9 1 , 92 and 93 respectively. 'Comparative Importance  Scheduled and Non-Scheduled Banks  Attention has already been directed to the fact that only the very large banking enterprises which carry on no non-banking a c t i v i t i e s were placed on the schedule of banks associated with the Reserve Bank of India. A breakdown of the data r e l a t i n g to scheduled and non-scheduled banks given i n tables 12 and 13 reveals the progness made by each sub-division. As i s shown i n table 12 there was a substantial increase both i n the number and operations of the non-scheduled banks between 1936 and 1945. But this growth may hot be attributed to new banking i n s t i t u t i o n s  alone,  because a considerable number of small banks began to report their business only after 1938 when the provisions of the 1937 Indian Companies (Amendment) Act went into effect,  Even after taking this factor into  consideration, however, the data reveal that between 1 9 4 l and 1945 the number of reporting non-scheduled banks increased from 413 to 646 and their deposits from Rs. 246,900,000 to Rs. 1,107,500,000  - an. indeed  remarkable increase.  249,400,000  to Rs. 8 9 3 , 1 0 0 , 0 0 0 .  Meanwhile earning assets grew from Rs.  After 1945 there was a substantial decrease both i n  Table 11 Number, Principal Assets and L i a b i l i t i e s of Indian Joint Stock Banks (Excluding Imperial Bank), 1935-1949 Inc. (Rs.000,000)  Number Reporting  Year  Capital and Reserves  Total Deposits  Cash oh hand & at banks-'  Loans and Discounts  Gov't Bonds  Total Earning Assets  1935  100  146.7  897.3  199.4  N.A.  N.A.  N.A.  1936  112  153.6  1028.4  162.5  565.2  383.0  948.2  1937  1  148  J50.2  1086.6  181.2  626.5  396.4  1022.9  1938  161  140.7  1066.2  152.6  598.5  436.5  1035.0  1939  678  171.4  1154.4  189.2  719.8  416.8  1136.6  1940  630  182.6  1304.8  294.8  672.5  479.0  1151.5  1941  455  196.2  1536.8  293.8  810.3  649.6  1459.9  1942  475  229.2  2140.6  535.8  823.3  1109.5  1932.8  1943  546  309.7  3726.0  897.1  1367.1  1782.5  3149.6  1944  558  414.5  5126.7  1166.8  1976.4  2501.6  4478.0  1945  721  508.8  6535.5  1404.5  2788.7  3110.1  5808.8  619  551.9  7222.4  1438.8  3647.6  2943.6  6591.3  1947  624  586.6 •  7031.9  1387.5  3437.9  3111.5  6549.4  1948  618  635.4  6705.6  1286.0  3301.0  3037.2  6338.2  1949  598  645.0  5808.1  1033.5  3038.6  2639.6  5678.2  1946  2  Source: Adapted from Reserve Bank of India, Banking and Monetary Statistics of India. Bombay, 1954, pp. 14-16. 1 Excluding Burma banks from 1937 onward. 2 Data relates to banks i n Indian Union from 1946 onward. 3 Including gold bullion up to 1938.  Table 12 'Number, Principal Assets and Liabilities of Non-scheduled Banks, 1935-1949 Inc. (Rs.000,000) Number Reporting  Year  Capital Reserves  Total Deposits  Cash on hand at banks3  Loans and Discounts  Gov't Bonds  Total Earning Assets  1936  82  40.2  126.3  18.0  105.5  20.0  125.5  1937  1  117  33.1  144.8  22.0  115.8  . 29.6  145.4  1938  129  37.4  148.4  18.1  121.6  34.1  155.7  1939  641  54.6  217.4  28.2  195.7  52.2  247.9  1940  591  58.4  243.7  44.8  184.8  55.1  239.9  1941  413  62.8  246.9  52.0  184.4  65.0  249.4  1942  431  66.7  247.2  98.1  216.5  91.8  308.3  1943  489  72.5  481.0  154.6  277.8  112.3  390.1  1944  499  93.9  756.0  262.8  347.6  180.8  578.4  1945  646  121.1  1107.5  342.2  573.2  319.9  893.1  1946  542  118.2  1110.3  274.4  587.1  241.8  828.9  1947  544  120.9  833.2  172.7  553.8  263.1  816.9  1948  540  127.6  756.5  132.7  526.0  240.8  766.8  1949  521  133.9  715.5  118.4  528.0  221.0  749.0  2  Source:  Adapted from Reserve Bank of India, Banking and Monetary Statistics of India. Bombay, 1954, pp. 14-17.  1 Excluding Burma banks from 1937. 2 Data relates to banks i n Indian Union from 1946 onwards. 3 Including gold bullion up to 1938.  Table 13 Number, Principal Assets and Liabilities of Indian Scheduled Banks (Excluding Imperial Bank). 1935-1949 Inc. ' (Rs.000,000) Capital and Reserves  Cash on hand and at banks^  Year  Number Reporting  1936  30  113.4  902.1  144.5  459.7  363.0  822.7  19371  31  117.1  941.8  159.2  510.7  356.8  867.5  1938  32  109.3  917.8  134.5  476.9  402.4  879.3  1939  37  116.8  937.0  161.0  524.1  364.6  888.7  1940  39  124.2  1060.5  250.0  487.7  423.9  911.6  1941  42  133.4  1289.9  241.8  625.9  584.6  1210.5  1942  44  162.5  1893.4  437.7  606.8  1017.7  1624.5  1943  57  237.2  3245.0  742.5  1089.3  1670.2  2579.5  1944  59  320.6  4365.7  904.0  1578.8  2320.8  3899.6  1945  75  387.7  5428.0  1062.3  2215.5  2790.2  5005.7  1946  77  433.7  6112.1  1164.4  3060.7  2701.9  5762.6  1947  80  465.7  6198.7  1214.8  2884.1  2848.4  5732.5  1948  78  507.8  5949.1  1153.3  2775.0  2796.4  5571.4  1949  77  511.1  5092.6  925.1  2510.6  2418.6  4929.2  2  Total Deposits  Discounts  Gov't Bonds  Total Earning Assets  Source t Adapted from Reserve Bank of India, Banking and Monetary Statistics of India. Bombay, 1954, p. 15. 1 Excluding Burma banks from 1937 onward. 2 Data relates to banks in Indian Union from 1946 onward. 3 Including gold Bullion up to 1938.  - 9h the number of banks reporting and their deposits.  This may be  attributed both to the p a r t i t i o n of India and to the r e s t r i c t i v e authority conferred on the Reserve Bank. had decreased to 521;  their deposits,  By 1949, the number reporting  to Rs. 715,500,000.  On this  l a t t e r date earning assets amounted to Rs. 749,000,000. The progress made by the scheduled banks, though not as phenomenal as that of the non-scheduled banks i s , nevertheless,  significant.  During  the period under review the number reporting increased from 30 to 77; their deposits from Rs. 902,100,000 to Rs. 5,092,600,000.  Meanwhile  their earning assets increased from Rs. 822,700,000 to Rs. 4,929,200,000. After 1947 a slight decrease i s recorded i n their deposits and earning assets.  This may be attributed to the dislocation of Indian trade and  commerce during, and subsequent to, p a r t i t i o n . The tabular analysis on page 95 gives perhaps a better answer to the significant question of the r e l a t i v e importance of the mixed bankingtrading ventures represented by the non-scheduled banks and the more orthodox banking enterprises represented by the scheduled banks. The Table displays a marked contrast i n the number and the size of operations of the scheduled banks, on the one hand, and the nonscheduled banking-trading ventures, on the other.  Although the number  of scheduled banks i s substantially less than that of the non-scheduled banks, the former hold between 80 per cent and 90 per cent of the. t o t a l banking business of the Indian Joint Stock banks.  By the end of the  period under review the scheduled banks constituted only about 13% of the t o t a l number i n operation, but they held 88% of the deposits,  83% of the  t o t a l of loans and b i l l s discounted, and 92% of the t o t a l investment  95 Table U Comparative Number, Deposits, and Earning Avssets of Indian Scheduled and Non-scheduled Banks, Years 193&-*1940, 1945 and 1949. (Rs.000,000) 1936  1940  1945  1949  112  630  721  598  Scheduled Banks:  30  39  75  77  Non^scheduled banks:  82  591  646  521  Percent Scheduled  27%  10%  13%  1. Number of Indian Joint Stock B nks: a  6%  1028.4  1304.2  6535.5  5808.1  Scheduled banks:  902.1  1060.5  5428.0  5092.6  Non-scheduled banks:  126.3  243.7  1107.5  715.5  88$  si%  83%  565.2  672.5  2788.7  3038.6  Scheduled banks:  459.7  487.7  2215.5  ' 2510.6  Non-scheduled bands:  105.5  184.8  573.2  528.0  72%  79%  83%  2. Total deposits:  Share of scheduled banks: 3. Total loans and Discounts:  Share. of. scheduled: banks:  81%  88%  383.0  479.0  3110.0  2639.6  363.0  423.9  2790.2  2418.6  Non-scheduled banks:  20.0  55.1  319.9  221.0  Share of scheduled banks:  94%  88%  89%  92%  1028.4  1304.2  6535.5  5808.1  30.1  27.2  72.4  66.1  1.5  0.4  1.7  1.3  4. Total Investments: Scheduled Banks:  5. Comparative Size i n Deposits: Average a l l banks: Average Scheduled Banks: Average NNon-scheduled Banks:  -  portfolio.  As c a n  9 6  -  be s e e n f r o m t h e T a b l e , i n s p i t e o f t h e c o n s i d e r a b l e  i n c r e a s e i n t h e number o f n o n - s c h e d u l e d b a n k s , t h e s c h e d u l e d continued  to c o n t r o l the bulk of the business  J o i n t Stock  banks  c a r r i e d on b y t h e I n d i a n  banks.  Part 3 I m p e r i a l Bank o f I n d i a As n o t e d  i n Chapter  One, t h e I m p e r i a l Bank, r e p r e s e n t i n g a m e r g e r  o f t h e P r e s i d e n c y B a n k s i n 1 9 2 1 , h a d become an i m p o r t a n t banking  institution  of I n d i a . and  decades b e f o r e  the establishment  L i k e t h e Bank o f F r a n c e ,  central  o f t h e R e s e r v e Bank  The Commonwealth Bank o f A u s t r a l i a  t h e Ottoman Bank o f T u r k e y , i t c a r r i e d on i t s C e n t r a l  f u n c t i o n s along w i t h i t s o r d i n a r y commercial banking Before  semi-  banking  undertakings.  t h e e s t a b l i s h m e n t o f t h e R e s e r v e Bank I n d i a n n a t i o n a l s f a v o u r e d  t h e c o n v e r s i o n o f t h e I m p e r i a l Bank i n t o a c e n t r a l Bank o f I n d i a . the  I m p e r i a l G o v e r n m e n t o p p o s e d t h e move on t h e g r o u n d s t h a t t h e C§untry  s h o u l d n o t be d e p r i v e d o f t h e p r i m a r y b a n k i n g commercial banking its  But  institution.  s e r v i c e s o f such a v a s t  I n 1 9 3 5 , when t h e R e s e r v e Bank s t a r t e d  o p e r a t i o n , t h e I m p e r i a l Bank h a d a w i d e n e t o f b r a n c h e s  throughout  I n d i a and h e l d almost  spread  25 per cent o f t h e d e p o s i t s o f a l l  r e p o r t i n g commercial banks. R e l a t i o n s w i t h Government and R e s e r v e Bank o f I n d i a With  the establishment  I m p e r i a l Bank e x p e r i e n c e d but  little  o f t h e R e s e r v e Bank o f I n d i a i n 1 9 3 5 , t h e  some c h a n g e s i n t h e c h a r a c t e r o f i t s o p e r a t i o n s ,  o r no r e d u c t i o n i n t h e i r v o l u m e .  as a b a n k e r and f i s c a l  It relinquished i t s role  a g e n t f o r t h e Government t o t h e R e s e r v e Bank b u t  - 97 -  by way of compensation the Government removed most of the r e s t r i c t i o n s on i t s primary banking operations..  It was granted the right to lend  money on the security of r e a l property and to make advances for more than s i x months.  Though a.  \-'questionable practice, i t could, i n  common with the Indian banks, lend on the security of i t s own shares. The Imperial Bank was f i n a l l y allowed to deal i n foreign exchange; a significant concession indeed.  But most important of a l l , no  r e s t r i c t i o n s were placed on i t s role as a central correspondent to other banking i n s t i t u t i o n s .  Indeed, one may assume that the Government  and the Reserve Bank were disposed, on economic grounds at l e a s t ,  to  take f u l l advantage of the experience and structural f a c i l i t i e s already available at this pioneer foreign i n s t i t u t i o n .  Because of  its  past experience, country-wide branches and ample resources the Reserve Bank Act i t s e l f provided that the Imperial Bank could be appointed as an agent of the Reserve Bank at places where the l a t t e r had no office Ik  or branch but the former had one.  In these places the Imperial  Bank continued to manage currency chests and to handle Government receipts and payments.  For such services the Bank was to receive  during the f i r s t ten years a Commission fixed by the Government at the rate of l / l 6 of one per cent for the f i r s t Rs. 2,5Q0\QQ0r and 1/32 of one per cent for the remainder. ^ 1  After ten years these rates  were to be revised s,.; :cr every five years.  In addition to the  Commission the Reserve Bank undertook to pay Rs. 1 , 9 0 0 , 0 0 0 to the Imperial Bank during the ensuing fifteen years for the retention of the l a t t e r s existing branches many of which, i t would seem, might 1  Ik.  Section V? ( 1 ) , Reserve Bank of India Act, 19J>k 15.  S.G. Panandikar, op. c i t . ,  p. 4 l 8  - 98 16  have been closed down because of un-economic operations  The  Imperial Bank could not open a new branch i n substitution of an existing one without prior approval of the Reserve Bank. Although the Imperial Bank l o s t i t s p r i v i l i g e d position as a Government banker,its nomination as an agent of the Reserve Bank and the consequent handling of Government transactions at' many of  its  branches considerably enhanced i t s prestige i n the f i n a n c i a l c i r c l e . o f the Indian economy.  It continued to function, though u n o f f i c i a l l y , as  a banker's bank after the establishment of the Reserve Bank.  As the  Bank Rate, and the Hundi Rate were both equal to three per cent during the period under review, Indian banks who were accustomed to borrow.from the Imperial Bank, continued their practice and turned to this Bank when they were short of funds. This i s clearly revealed i n Table 14 which shows that the amount of b i l l s purchased and discounted by the Imperial Bank reached the s i g n i fiacant t o t a l of Rs. 99,300,000 i n 19^6. Reserve Bank was r e l a t i v e l y i n s i g n i f i c a n t .  The corresponding t o t a l for the While i n 1935 the Imperial  Bank held about 33 per cent of the deposits of a l l scheduled banks compared to about 26 per cent i n 19^6, i t s vast network of branches (the number increased from 228 to 358) and association with the Reserve Bank, assured i t s continuance as the most important Bank i n the Indian banking structure. The predominant position of the Imperial Bank as a functioning central banking i n s t i t u t i o n and the consequent r e s t r i c t i o n of the a c t i v i t i e s of the Reserve Bank appears not to have been seriously questioned before 19^7, at least by the Government and the Reserve Bank.  16. K . T . Shahi?. Currency and Banking (National Planning Committee Series), Vora and C o . , Bombay, 19^8, p. k$  - 99 But some Indian bankers objected to the appointment of the Imperial Bank as an agent of the Reserve Bank on the ground that i t was not i n the interest of other Indian Joint Stock banks to have a l l this business and prestige i n the hands of one bank - and a foreign one at that.  It was pointed out that, i f the Imperial Bank was put on  the same basis as other Indian banks, i t would be able to r e a l i z e the d i f f i c u l t i e s against which other banks were operating.  It would  then use i t s weight to remove the d i f f i c u l t i e s and, i n seeking to promote i t s own interest, banks.  would also promote those of other Indian  They further suggested that the Reserve Bank be free to  appoint any Joint Stock bank as i t s agent and thus distribute the 17  privileges that go with such appointments. was paid to this  However l i t t l e  attention  suggestion. ist  As the National/Movement grew stronger during the early 1940's, public resentment of the Imperial Bank's foreign o r i g i n and foreign personnel became widespread.  Its natural opposition to Indian nation-  alism and to Government ownership combined to raise many voices against the privileged position i t occupied i n the Indian economy.  The  Eastern Economist .after noting the r i s i n g public opinion against  the  Bank and accusing i t of an anti-national t r a d i t i o n , goes on to ask "is there no way of bringing this public i n s t i t u t i o n to a due sense of "18 i t s responsibilities? As a result of these c r i t i c i s m s and i n keeping with i t s collectivist  professed  philosophy, the National Government of India,on assuming  Central Committee, Minority Report, pp. 279, 283-85, as quoted i n S.G. Panandikar, Banking i n India, 9ed. p. 297 18.  The Eastern Economist, February 28, 1947. New Delhi, p. 397  - 100 office i n August 1947, announced i t s intention to nationalize the Imperial Bank along with the Reserve Bank of India.  But for reasons  that w i l l be dealt with i n Chapter V the Government withheld action on the Imperial Bank u n t i l 1956.  The only immediate consequence was  the appointment of a Government representative who was to participate in a l l meetings of the Bank's Central Board of Directors, and to observe the Bank's operations. Nature and Size of Operations, 1935-1949 Though impressive, the growth experienced by the Imperial Bank from 1935 to 19^9 was not as phenomenal as that of the Indian Joint Stock banks of which i n some respects i t was a competitor.  If  deposits  are taken as an indicator of growth of these banks, the deposits of Indian Joint Stock banks increased by about 700 per cent during this period and those of the Imperial Bank, by about 352 per cent. offices  Branch  of. the Imperial Bank grew from 228 i n 1935 to a peak of 426  in 1946; in 1949. partition.  then, after a sudden drop to 35& i n 1947, increased to 377 This substantial e a r l i e r decrease was no doubt due to The Capital funds of the Bank increased from Rs. 110,200,000  in 1935 to Rs. 119,200,000 i n 1949;  deposits,  to Rs. 2,639,700,000 during the same period.  from Rs. 768,600,000 Meanwhile t o t a l earning  assets increased from. Rs. 680,100,000 to Rs. 2,234,300,000 indicating an ever three-fold increase.  The annual data showing the progress of  the Imperial Bank during this period under review are given i n Tafele 7'4'lbn. page i; 101«. Among other things this Table reveals the very extensive operations of  the Imperial Bank on behalf of the Indian Government during and  Branches, Principal Assets and L i a b i l i t i e s , Imperial Bank of India, 1935-1949, Inc. (Rs.000,000)  No. of Branches  Year  Capital and Reserves  Total Deposits  Cash on hand and at banks  Loans and Advances  Other B i l l s prchd. Gov't securi- Investand ment Discounted ties  Total Earning Assets  1935  228  110.2  768.6  177.7  233.7  25.1  418.7  2.6  680.1  1936  269  111.1  787.2  207.9  200.7  29.0  436.4  1.5  667.6  1937  319  111.3  818.4  176.3  239.4  37.3  443.1  12.9  732.7  1938  358  111.4  812.2  H9.3  278.7  37.6  428.0  11.4  755.7  1939  381  111.9  844.7  138.6  319.5  40.2  431.9  917  801.3  1940  390  112.4  911.4  174.4  380.7  44.5  397.5  9.7  832.4  1941  401  112.6  1018.2  191.9  303.0  44.6  562.9  11.5  922.0  1942  398  112.9  1340.2  293.9  276.3  40.3  813.3  12.4  1142.3  1943  404  113.8  1877.8  338.6  320.5  34.9  1263.6  20.2  1639.2  1944  419  115.1  2242.8  402.5  528.5  50.3  1339.2  32.3  1950.3  1945  426  116.5  2393.1  403.1  613.2  44.7  1413.4  45.2  2090.5  1946  358  117.3  2636.5  4U.2  633.4  99.3  1525.3  66.5  2324.5  1947  362  118.3  . 2733.5  509.2  735.6  58.6  1459.5  64.9  2318.6  1948  307  118.8  2830.3  496.6  825.0  50.5  1*79.4  83.9  2438.8  1949  377  119.2  2639.7  513.7  998.0  63.1  1070.8 102.4  2234.3  ^ • *  Source: 1  Reserve Bank of India, Banking and Monetary Statistics of India. Bombay. 1954, pp. 30-31.  As given by S. G. Panandikar, Banking i n India. 9 ed. p. 9.  - 102 following World War I I .  During the War, when the Government was  a heavy borrower i n the market, the Bank's investment i n Government Securities increased from Rs. 3 9 7 , 5 0 0 , 0 0 0 i n 1940 to Rs.  1,525,300,000  in 19^6, thus showing about four-fold increase during the War. Imperial bank placed, as a r u l e , more than half of i t s funds at the Government's disposal.  The  customers  Meanwhile the Imperial Bank  continued to serve i t s correspondent banks through the purchase and discount of b i l l s of exchange.  The amount of ...such b i l l s increased  from Rs. 25,100,000 i n 1935 to a peak of Rs. 9 9 , 3 0 0 , 0 0 0 i n 1946. As a result of P a r t i t i o n , the amount was substantially reduced i n 1947 but had reached Rs. 63,100,000 by 1949. Part 4 The Exchange Banks Although the Indian branches of the several foreign owned and operated Exchange Banks must always have been a target for the resentment generally directed against foreign agencies,  fhis  became increasingly vocal during the period under review.  resentment In spite  of the public c r i t i c i s m these banks continued to make substantial material progress. Nature of Criticisms The Exchange Banks and their operations were c r i t i c i z e d on many grounds.  Native Indian bankers were of the opinion that Exchange  Banks presented an effective barrier against the development of foreign exchange business by the less well equipped Indian Joint Stock banks. Moreover they complained against f a i l u r e , or perhaps more appropriately  - 103 the unwillingness,  of the Exchange Bank to appoint native Indian's  to their o f f i c i a l personnel.  The banks were also accused of  investing Indian earnings abroad and thus hindering the development of the Country.  Lack of interest or enthusiasm i n the development of  a domestic exchange market - a project hardly less appealing to Indian nationalists than the Reserve Bank project itselfr-was  probably the  most significant of a l l the c r i t i c i s m s levelled at the Exchange Banks. At one time i t was formally proposed that a l l India Exchange and, Bank be nationalized/, i n order to ensure the success of this project, considerable r e s t r i c t i o n be placed on the Exchange Banks operations. The only tangible immediate r e s u l t , however, was the setting aside of the r e s t r i c t i o n s imposed on the exchange operations of the Imperial Bank,itself a foreign i n s t i t u t i o n .  This did make possible,  though, the  eventual breach of the Exchange Banks monopoly of the financing of India's external trade. The 1936 and the subsequent amendments to the Companies Act, 1913, did not i n the main apply to the scheduled banks - which i n c i d e n t a l l y included a l l Exchange Banks.  The only significant legal  enactment  that may have restricted their operations between 1935 and 19^8 was the Branches Restriction Act of 1946.  The l a t t e r , as noted under the  discussion of the Indian Joint Stock Banks, gace the Reserve Bank the authority to r e s t r i c t the establishment on changes i n existing  locations.  of new branches;  also to pass  - io4 Growth 1935 - 1949 Inc. It i s significant to note that the number of Exchange Banks was smaller at the end of this period than at i t s beginning. comparison may be misleading because of insufficient and  changes of identity within the group.  Yet this  data on branches  The number of branches i n  operation at the beginning of 1946 was 84 and i t may well be that this figure represents a substantial increase over the number i n operation The in 1935,  Moreover, the withdrawal of/Yokohama Specie Bank, the Mitsui  Bank and the Bank of Taiwan on the outbreak of World War II,and a number of  consolidations during t h i s conflict,suggests that there s t i l l may  have been several new r e c r u i t s among the banks reporting i n 1949. End of  the year data on the number of Exchange Banks, t h e i r deposits,  reserves,  cash  loans and b i l l s discounted are presented i n Table 15.on page 105•  These data reveal a considerable increase i n demand deposits and in b i l l s discounted,,: although the l a t t e r were at a l l times considerably less than the former.  Demand deposits increased from Rs. 395,000,000  in 1935 to a peak of Rs.. 5l6,000,000 i n 1946.  Thereafter a rather  significant decline set i n , reducing the amount recorded i n 1949 to Rs.  1227,100,000.  e r r a t i c course.  Meanwhile loans and advances pursued an even more From a previous a l l time high of Rs. 424,300,000 i n  1939, t h e . t o t a l decreased to Rs. 177,800,000 i n 1942, then rose very s i g n i f i c a n t l y to a new a l l time high of Rs. 1,076,100,000 i n 1948. In the following year the total was Rs. 1, 048,400,000,Whereas loans and  discounts constituted about 50 per cent of t o t a l deposits i n 1935,  these earning assets constituted about 66 per cent i n 1935*  Although  data on investment were not available for the period under review,  it  may be properly assumed the remainder of the deposited funds were r e invested i n Government of India bonds and other  securities.  Table 16 Number Deposits and Earning Assets of Exchange Banks 1935-1949 Inc. (Rs.000,000)  End of Year  No. of Banks  1935  20  1936  20  Captl, Funds  8t—  in India,  Total  Cash on Hand and at Banks  Loans and Bills Discounted  298.0  639.9  27.1  316.4  413.7  284.7  698.4  23.0  345.5  387.3  281.8  669.1  43.8  312.6  375.6  263.7  639.3  24.6  312.6  Demand  Deposits Time  395.0  1  1937  1  1938  18 18  o  Spi  1939  17  ^  432.2  238.7  670.9  37.6  424.2  1940  17  8  557.5  217.7  775.2  132.6  255.7  1941  15  H  722.7  228.8  951.5  83.9  295.1  1942  16  977.9  190.6  1168.5  67.4  177.8  1943  16  1181.1  220.8  1401.9  109.0  301.3  1944  15  1403.2  250.5  1653.7  115.9  352.9  1945  15  1515.0  275.0  1790.0  102.0  458.2  1946  15  1516.0  272.3  1788.3  88.6  699.6  1947  15  1359.8  298.6  1658.4  177.7  791.7  1948  15  1184.7  352.5  1547.4  63.8  1076.4  1949  15  1184.7  .145.-5  1581.6  79.0  1048.4  2  o  Source: Adapted from Reserve Bank of India, Banking and Monetary Statistics of India, Bombay, 1954, pp. 192-227. 1  Excluding Burma banks from 1937 onwards.  2 Data after 1946 relates to Indian Union.  - 106 -  Part 5 The Cooperative Banks Though s i g n i f i c a n t , the progress made by the Cooperative banks from 1935 to 19^9 was not impressive.  Many of the primary credit  societies did not survive the great depression.  Among those which  did were many with uncollectible loans and exhausted cash reserves. The period could best be characterized as one of retrenchment and a growing concern for the future of the cooperative movement by both State and Federal Governments and by the Reserve Bank.  On the one  hand this took the form of r e s t r i c t i o n s on questionable loans and the i n s t i t u t i o n of a system of regulations;  on the other, increased  access to loanable funds and r e l i e f from the pressure of non-liquid farm improvement loans.  The l a t t e r was accomplished through the  i n s t i t u t i o n and development of Land Mortgage Banks under the j u r i s d i c t i o n of Cooperative Departments of the several States. Restrictions and Regulations In the wake of f a i l u r e of the cooperative credit societies - a l l too casually attributed to the great depression - were many examples of bad lending practices and too great a dependence on the basic i n t e g r i t y of the borrower.  Many who could have paid their loans took  advantage of l e g i s l a t i o n providing for the scaling down of debts.  Cases  were not uncommon where the borrowers refused to repay simply on the ground of an i n a b i l i t y which could have been known at the time the loan was o r i g i n a l l y granted.  C o l l a t e r a l security, though often required,  was seldom properly assessed and executed, and the v i t a l question of  - 107 the a b i l i t y of the loan to provide for i t s own repayment appears not to have been the governing consideration i n granting i t .  In fact  the s e l f - r e a l i z a b i l i t y test could seldom, i f ever, have been used.. In response no doubt to the recommendations made by the A g r i c u l t u r a l Commissions and Provincial Banking Enquiry Committeesset by 16 States during the depression several State Governments through t h e i r supervisory Cooperative Departments brought down regulations governing the type of loans to be granted and the nature of security to be provided.  These  supervisory.departments also i n i t i a t e d the requirement that a l l Primary Credit Societies arrange for i n d i v i d u a l audits.  The l a t t e r were to  include not only an investigation of the adequacy of records and the ji.bo'.b'k.- values of t h e i r assets and l i a b i l i t i e s ;  but also c a l l e d for an  assessment of the r e a l i z a b i l i t y of their outstanding loans;  hence an  19  estimate of the extent of their solvency or insolvency.  The  Registrars of the respective States were empowered to liquidate the a f f a i r s of societies classed as hopeless and to a s s i s t , through consolidation and advances,in the reconstruction and r e h a b i l i t a t i o n of others with some chanee of recovery.  In a study made i n 1939, i t was estimated  that nine per cent of the. Primary Credit Societies were i n l i q u i d a t i o n and  that anywhere from 25 per cent to kO per cent, depending on the  20 State, were i n the hopeless c l a s s . Meanwhile i n 19^2, the Reserve Bank i t s e l f  undertook to make  advances on properly negotiated crop loans and to rediscount  1920.  Panandikar, Banking i n India ,9th I b i d . , p. 95  domestic  ed. Bombay 1959, P« 33^  - 108 -  time b i l l s of exchange to f a c i l i t a t e  crop movement and marketing.  The Bank supplied much needed information on the form and requirements of the loans and inland b i l l s which the Reserve Bank was authorised to purchase OJE rediscount. The Land Mortgage Banks Definite steps were taken to relieve the Cooperative banks of the constant pressure to negotiate five or more years loans on the of r e a l property and improvements.  security  This was a type of loan that they  were not r e a l l y equipped and qualified to make because of the necessity of maintaining considerable l i q u i d i t y i n their funds and the existing loans excessive demand for current outpui/.  The r e l i e f came i n the form of  additional support through the i n s t i t u t i o n of Land Mortgage Banks. Although the f i r s t Land Mortgage Bank was established during 1920 at Jhang i n Punjab, a real beginning i n this f i e l d was not made u n t i l 1929 21  when a Central Land Mortgage Bank was established i n Madras.  During  the l a t t e r year a few primary Land Mortgage Banks were also established i n Bombay and Madras, and a few more States had established Central Land Mortgage Banks by 19^9. Like the Cooperative banking system there are Primary Land Mortgage Banks and Central Land Mortgage Banks but not a separate structure of State Land Mortgage Banks. The Central Banks coordinate the lending p o l i c i e s and operation of primary institutions} and,with the cooperation i  of State Cooperative Departments and the Reserve Bank, cf loaf.debentures secure loanable" funds. 21.  The management of the Land Mortgage Banks i s  .  P.C. J a i n , Currency, Banking and Finance i n India, Allahabad, Chaitanya Publishing House, i 9 6 0 , p. 2^4  to  - 109 entrusted t,o the elected representatives  of their members.  Their  operations are supervised and audited by the Registrars of the Cooperative Departments of t h e i r respective States.  Day to day  operations are carried on by paid managers. The working capital of Land Mortgage Banks consists of membership fees, loans and deposits from State Governments and State Cooperative Banks and, most important of a l l , the proceeds of the sale pf debentures. These banks are also authorised to accept time loans from members and non-members but such deposits must be committed for a period of five years or over.  As a result of t h i s long withdrawal r e s t r i c t i o n s the  deposit of these banks form an insignificant part of t h e i r working capital.  Yet i t should be realized that commitments for a period shorter  than five years could hardly be accepted i f long term loans were to be negotiated.  In order to ensure a market for the debentures which provide  most of their loanable funds, State Governments guarantee both their p r i n c i p a l and interest.  U n t i l 1951 when the Reserve A'c.tk was l i b e r a l i z e d ,  the Reserve Bank was authorized to take up any short f a l l i n popular 22  subscriptions to the extent of 10% of the t o t a l offered for sale. As the name suggests the loans of Land Mortgage Banks are to be made to members against the mortgaged security of their land and improvements.  These loans as a rule may hot exceed one halef of the value  of the security so mortgaged.  In some States the loan ratio i s fixed at  one-third the value of land, but most States provide upper l i m i t s on 23  the amount of the loans ,ranging from Rs. 5,000 to R. 10,000. *  2 2  23 * J  See Chap. V I , part k Panandikar, op. c i t . , p, 120  - 110 Loans are granted for periods ranging from sixteen to twenty years, depending on the State, and are repayable i n equal annual instalments so arranged that they f a l l due at the end of the harvest season.  Loans  are made p r i n c i p a l l y on the demonstrable need of the borrower and his capacity to meet the instalments and they carry interest  rates varying  from six to nine per c e n t . ^ 2  As the Land Mortgaged Banks are of f a i r l y recent o r i g i n and few in number, no data are available showing the amounts outstanding u n t i l 1938.  Between 1929 and 1938 only a few States with well-developed  cooperative systems had made much progress i n t h i s f i e l d . States Land Mortgage Banks were either non-existent infant stage of development. •SiSlTftble ^20'i:?pfgefU8^  In other  or s t i l l i n an  Such data as are available are presented  c ; >...„•>.•.:.•  .  3 .  Membership and Operations Cooperative Credit- Societies,  1935-1949 Inc.  The Primary Societies In spite of many f a i l u r e s , and some consolidations,  the number of  Primary Credit Societies grew from approximately 931000 with a membership of  a little  over 3,000,000 i n 1935 to a peak of about 147,000 with ovef  5,500,000 members i n 1946.  As a result of the P a r t i t i o n of the  Indian sub-continent into Indian Union and Pakistan, the number dropped to about 117,000 i n 1947, but there was no. absolute decline i n t h e i r memberships i t remained at approximately the 1946 l e v e l .  By the end of  June 1949, their number had moved up to 1351000 and membership had gone to almost 7,000,000.  The membership per society increased from an  24. Panandikar, op. c i t . ,  p. 120  - Ill average of about 34 before the War to about 51 i n 1949.. Although there was a considerable reduction i n the number of Cooperative Credit Societies after the P a r t i t i o n of India, substantial gains i n c a p i t a l and reserve were, nevertheless, made by the societies s t i l l reporting i n 1949. Moreover the war prosperity and better credit standards appear to have reduced the amount of overdue loans without discouraging new advances.  The annual growth of Primary Credit Societies  between 1935 and 1949 i n shown i n Table l 6 , o n page 112. The data reveal that,despite  j u r i s d i c t i o n a l losses during the  period under consideration, the c a p i t a l and reserves of these societies increased from Rs. 134,800,000 i n 1935 to Rs. 193,700,000 i n 1949; deposits,  from Rs. 31,600,000 i n 1935 to Rs. 57,300,000 i n 1949; and  t o t a l working c a p i t a l , from Rs. 342,000,000. to Rs. 454,100,000 during the same period.  As a result of significant increases made during and  after the War, t o t a l loans outstanding (made up of loans due and new loans made) increased from Rs. 333,800,000 to Rs. 509,700,000.  In the  absence of information to the contrary i t may be assumed that an excess of loans over working c a p i t a l was made possible by rediscounting at the Reserve Bank and other banking i n s t i t u t i o n s . The Central Cooperative Banks ;.:::c. . .  ct  The separation of Burma from India i n 1937 and the  and •• . ' creation of Pakistan i n 1947/the consequent reduction i n the number of Central Cooperative Banks did not have an appreciable effect on the membership of these banks. c a p i t a l and reserves,  In spite of the expected reduction i n their  substantial gains were recorded i n their average  Table 17 Number and Business of Primary Cooperative Credit Societies, 1935-1949 Inc. (Rs.000,000)  Number i n 000  Working Capital Deposits and borrowed money from; Members Capital Other Coand and NonGov't. Reserves operative members  Tear ending June  Societies  Members  1935  93  3008  134.8  31.6  173.9  1.8  1936  94  3047  139.6  29.1  175.4  1937  96  3152  141.9  28.1  1938  96  3163  135.0  1939  105  3560  1940  119  1941  Loans to Members Current Loans  Due and Unpaid  Total  342.1 • 59.5  274.2  333.7  1.6  345.7  60.50  272.0  332.5  174.7  1.1-  345.8  65.1  269.6  334.7  26.3  157.3  0.9  319.5  62.8  244.7  307.5  127.8  26.6  160.9  0.8  316.1  73.9  248.0  321.9  4098  123.5  24.3  156.5  0.9  305.2  81.8  239.5  321.3  124  4341  126.6  23.8  154.1  0.8  305.3  • 82:41  233.1  315.5  1942  126  4573  129.8  24.1  147.4  0.7  302.0  91.1  226.3  317.4  1943  126  4493  132.8  28.5  128.7  1.0  291.0  130.4'  215.8  346.2  1944  135  4815  143.6  38.3  115.2  1.3  298.4  146.4  195.4  341.8  1945  136  5013  152.9  42.2  108.7  1.6  305.4  147.3  209.1  356.4  1946  147  5501  164.6  51.9  111.0  2.4  329.9  182.1  223.2  405.3  1947  117  5539  141.1  45.7  114.8  4.0  305.6  196.0  204.4  400.4  1948  126  6216  135  6963  43.9 57.3  131.1 167.1  3.8 36.0  347.0  1949  168.2 193.7  214.3 262.6  231.7 247.1  446.0 509.7  Source:  Reserve Bank of India. Banking and Monetary Statistics of India. Bombay. 1954. pp. 448-49.  1  2  Total  454.1  1 Excluding Burma and excluding Land Mortgage Banks from 1938 onward. 2 Relating to Indian Union after 1947.  - 113 working c a p i t a l - increasing from about Rs. 480,000 i n 1935 to about Rs. 990,000 i n 1949. made to members.  Similar growth i s indicated i n the loans they,  The extent of their operations between 1935 and 1949  i s given i n Table 17-on page 114. The data disclose that before P a r t i t i o n the number of  Central  Cooperative Banks remained at about 600 and that immediately thereafter dropped to less than 500;  that the number of member s o c i e t i e s , however,  rose from 89,000 i n 1935 to a peak of 121,000 i n 1941.  After a sharp  decline i n 1942 the number gradually increased to 118,000 i n 1946. 1949 the number was 93,800.  By  The number of individual members on this  l a t t e r date was 89,000 - approximately the same as i n 1935*  The average  membership of Primary Credit Societies i n ihe Central Cooperative Banks had thus increased from about 145 i n 1935 to about 194 i n 1949;  and  those of the individual members, from 139 to .184 during the same period. Meanwhile loanable funds made up of borrowed money and c a p i t a l subscriptions rose from Rs. 294,000,000 i n 1935 to a peak of about Rs. 451,000,000 i n 1946; then dropped back to Rs. 402,000,000 i n 1947 as a result of p a r t i t i o n . of Rs. 481,000,000.  By 1949 the amount had reached a new peak  During the period under consideration, the average  working c a p i t a l of the Central societies rose from about Rs.479,000 a l i t t l e less than Rs. 994,000. in the loans made by these banks.  U n t i l 1942 there was l i t t l e  to  increase  After that year we notice a consid-  erable increase i n their landing operations.  Their current loans  increased from Rs. 130,000,000 i n 1942 to Rs. 927,000,000 i n 1949- In spite of this considerable increase i n current loans after P a r t i t i o n , the r a t i o of loans due and unpaid to current loans decreased from 48  Table 18 Number and Business of Central Cooperative Banks, 1935-1949 Inc. (Rs.000,000)  Year ending in June  No. of Banks  Membership (000) PrimarySociIndividuals eties  Working Capital Deposits Capital and bor. and Reserves money  Loans to Members Total  Due and Unpaid  Current Loans  Total  1935  615  85  89.1  61.0  233.0  294.0  204.1  100.0  304.1  1936  615  84  89.7  62.9  231.4  294.3  202.3  98.7  301.0  1937  611  85  91.3  65.1  229.9  295.0  196.9  91.4  288.3  1938  599  82  91.8  65.2  225.7  290.9  195.9  109.5  305.4  1939  594  81  96.1  66.5  227.7  294.2  199.2  105.1  304.3  1940  600  80  104.1  68.5  223.7  292.2  197.5  108.7  306.2  1941  601  80  121.3  70.5  222.8  293.3  189.8  110.5  200.3  1942  595  80  110.6  73.0  225.4  298.4  187.8  130.1  317.9  1943  589  79  111.5  73.7  254.7  328.4  189.2  210.7  399.9  1944  601  84  115.5  77.2  288.7  365.9  185.6  280.1  465.7  1945  602  84  116.4  80.6  317.6  398.2  190.9  392.2  483.1  1946  601  80  118.1  84.5  366.2  450.7  203.6  430.7  634.3  1947  469  74  86.0  63.7  338.2  401.9  211.3  612.7  824.0  1948  469  79  88.3  67.0  352.0  419.0  217.8  629.1  846.9  1949  484  89  72.7  408.5  481.5  290.2  926.8  1217.0  1  2  93.8  Source: Reserve Bank of India, Banking and Monetary Statistics of India. Bombay, 1954, pp. 422-23. Note: 1 Excluding Burma from 1938 onwards. 2 Relating to Indian Union from 1947 onwards.  - 115 per  cent i n 1946 to 31 per cent i n 1949.  The State Cooperative Banks, Operations 1935-1949, Inc. The number of State Cooperative Banks or top t i e r © © o p e r a t i v e s , remained more or less unchanged during the period under review.  The  more s i g n i f i c a n t changes i n number were brought about by t h e . a l i e n ation of Burma and Pakistan from the Indian sub-continent.  The number  of i n d i v i d u a l members gradually increased from about 3000 i n 1935 to about 7000 i n 1949-  However the number of member societies which  remained about 19,000 u n t i l 1946 sharply decreased to about 8000 i n 1947, then moved up to 89OO i n 1949-  Yearly data showing their  progress are given i n Table l 8 . o n page 116. This summary reveals that the c a p i t a l and reserves of the State Cooperatives continued on the whole to increase, though e r r a c t i c a l l y . The t o t a l rose from Rs. 15,5000,000 i n 1935 to Rs. 30,300,000 i n 1946, and after a decline ±0 Rs. 25,400,000 i n 1947 again increased to Rs.  29,200,000 i n 1949.  Average working capital rose from Rs. 10,600,000  i n 1935 to Rs. 16,800,000 i n 1946 and the amount further increased to Rs.  23,400,000 i n 1949*  The increase i n the amount of loans due and  unpaid was arrested i n 1940 because the war prosperity enabled many defaulting members to pay t h e i r obligations to these banks.  But after  the war, the amount again increased and reached Rs. 167,600,000 i n 1949However there was a substantial increase i n their t o t a l loans after the war and the proportion i n default was no higher than during the war period i t s e l f . Rs.  Current loans grew from Rs. l68,800,000 i n 1946 to  4o8,6oO,000 i n 1949.  The very considerable increase i n loans made  Table 19 Number and Business of State Cooperative Banks, 1935-1949 Inc. (Rs.000,000)  Year Ending In .iune  Number of Banks  Membership .000 Primary & Central Individuals Societies  Working C a p i t a l Capital Deposits & and Borrowed Money Reserves  Loans t o Members Total  Due and Unpaid  Current Loans  Total  1935  11  3  19.4  15.5  100.8  116.3  49.8  69.2  119.0  1936  11  4  19.3  18.1  108.2  126.3  54.5  66.6  121.1  1937  11  4t  19.2  18.3  107.5  125.8  57.3  80.5  137.8  1938  1  10  4  19.2  18.9  104.3  123.2  62.4  70.2  132.6  1939  10  4  19.1  20.6  108.7  129.3  66.4  73.3  139.7  1940  10 .  4  19.0  22.5  111.7  134.2  70.1  70.6  140.7  1941  10  5  18.8  23.8  115.2  139.0  70.0  69.3  139.3  1942  10  5  18.8  22.6  122.7  145.3  65.8  79.8  145.6  1943  10  5  18.7  23.4  151; 5  174.9  56.4  99.6  156.0  1944  10  6  19.2  24.6  162.8  187.4  61.6  179.0  240.6  1945  11  6  19.5  27.1  178.7  205.8  63.7  163.5  227.2  1946  13  8  20.1  30.3  218.7  249.0  65.4  168.8  234.2  11  6  8.1  25.4  194.4  219.8  90.6  246.9  337.5  1948  11  7  8.5  26.0  214.5  240.5  89.6  217.8  307.4  1949  12  7  8.9  29.2  218?9  311.1  167161  ljl©g£6  §76*2  1947  2  Sources  Reserve Bank of India . Banking and Monetary S t a t i s t i c s o f India. Bombay 1954. pp. 410-11.  1  Excluding Burma from 1938 onward.  2  R e l a t i n g t o Indian Union from 1947 onward.  f  . - 117 during the late 1940's was made possible presumably by taking advantage of the rediscounting f a c i l i t i e s  available at other banking  institutions. Number and Operations of Land Mortgage Banks As the Land Mortgage Banks are of very recent o r i g i n i n India the data with respect to the number and the size of their not  operations  are not available before 1938, and then/in p a r t i c u l a r l y revealing form.  Annual data compiled by the Reserve Bank from 1938.'-'.. " J  ;  to 1951 combine the operations of both the Primary Land Mortgage banks and the Central Land Mortgage banks and thus give an exaggerated picture of the amount of business originated by the system as a whole. down of the data i s available only after 1945.  A break-  However the combined  t o t a l s may be used to indicate the direction of the growth and the importance of these banks i n the Country's f a c i l i t i e s  for a g r i c u l t u r a l  finance, and some estimate of the amount of duplication may be had from a scrutiny of the breakdown of the data after 1945. Combined Operations - Primary and Central Banks The combined data for Primary and Central Land Mortgage banks presented i n Table 19 on page 118 display a f a i r l y constant and growth i n membership i f not i n number.  expansion  The membership grew from  63,000 i n 1938 to 139,000 i n 1945 and reached 180,000 i n 1949 - an almost three-fold increase.  Such a remarkable growth i s not feowever  revealed i n the number of banks which increased from 202 i n 1938 to only 268 i n 1949.  Yet, i n spite of this small increase, working c a p i t a l ,  made up of membership fees, deposits, borrowed money, and the proceeds of debentures,  scored an impressive gain, moving from Rs. 41,200,000  in 1938 to Rs. 164,700,000 i n 1949.  Table 20 , KG/":oysbipNjnibe5^ Cenferaltand f Centr-;;. Primary Land Mortgage Banks, 1938-1949 Inc. (Rs. 000,000) c  Year ending in June.  Number of: Indiv. Banks members and So(000} pieties  1938  202  63  3.7  1939  226  80  4.4  1940  243  92  5*  1941  252  105  1942  269  1943  Capital and Reserves  Working Capital Depsts. Debenand bortures owed money 20.8  Loans Total  Current Uik>ans  Due and Unpaid  Total  16.7  41.2  10.6  36.9  47.5  28.6  20.4  53.4  15.6  49.4  55.0  32.5  25.1  62.7  11.6  57.0  68.6  5.8  33.8  30.9  70.5  11.4  63.5  74.9  116  6.4  35.4  34.4  76.2  11.2  68.2  79.4  271  120  7.2  33.5  37.1  77.8  7.5  65.3  72.8  1944  285  126  7.3  31.7  36.3  75.3  5.8  60.8  66.6  1945  289  139  8.0  69.9  38.0  115.9  7.8  60.8  68.6  1946  289  142  8.7  74.9  40.5  124.1  12.1  65.0  72.1  1947  273  145  9.1  62.5  43.5  135.1  13.7  70.2  84.0  1948  277  158  9.7  86.6  43.5  139.7  16.8  79.1  95.9  1949  268  180  10.5  100.7  53.6  164.7  21.7  92.5  115.2  Source:  1  Adapted from Reserve Bank of India, Banking and Monetary Statistics of India. Bombay, 1954, p. 504.  - 119 Loans and advances made by these banks,both current and unpaid, amounted to Rs. 4y,500,000 i n 1938. had of  grown to Rs. 124,800,000.  By 1949 the comparable t o t a l  Unfortunately, however, the breakdown  loans reveals that those due and unpaid had increased by considerably  more than had new commitments.  This may be attributed i n part to the  long-term nature of loans made by these i n s t i t u t i o n s .  The fact that  before 19^2 the t o t a l loans outstanding are i n excess of the working c a p i t a l suggests that the column on loans due and unpaid contain a carry over of loans outstanding from preceeding years.  Definite  information i s not available. Relative Importance of Primary and Central Land Mortgage Banks The combined statements of the Central Land Mortgage banks and the Primary Land Mortgage banks presented i n the table does not reveal the r e l a t i v e importance  of the two categories of Land Mortgage banks.  Since separate data are available on their respective operations  after  1945, some estimate of their r e l a t i v e importance may now be made. Separate summaries are presented i n Table 20.  There ,as would be expected  i s shown that the number of Central Land Mortgage banks i s considerably smaller than that of the Primary Land Mortgage banks. of  While the number  the former remained at five during this period, the number of the  l a t t e r decreased from 284 i n 1945 to 263 i n 1949-  In spite of this  decrease i n number their operations, on the surface at least,appear have been l i t t l e affected. of Rs.  to  The working capital and the outstanding loans  the Central Land Mortgage banks increased from Rs. 43,100,000 and 32,900,000, respectively i n 1945;  to Rs. 59,800,000 and  u  Table 21 N u i ^ r  Year ending in June  1 zaiieNumbgr  aMiBusineassof ECentralaaMiEP.amaoJ^rriiriarv Land Mortgage Banks, 1945-1949 Inc. (Rs.000,000)  Number of Banks and Indiv. SociMembs. eties  Working Capital Capital Depsts. Total and and BorDeben- working Reserves rowed money tures capital  Loans to Members Due and Unpaid  Current Loans  Total  Central Land Mortgage Banks 1945  5  6  3.8  2.0  37.3  43.1  29.4  3.5  32.9  1946  5  6  4.2  2.5  39.7  46.4  31.3  5.4  36.7  1947  5  6  4.5  4.3  42.9  51.7  34.3  6.3  40.6  1948  5  7  4.8  4.7  42.8  52.1  38.5  7.8  46.3  1949  5  8  5.1  2.0  52.7  59.8  44.9  10.3  55.2  Primary Land Mortgage Banks 1945  284  133  4.3  30.8  0.8  35.1  31.5  4.4  35.9  1946  284  136  4.6  32.0  0.8  37.4  33.8  6.5  40.3  1947  268  139  4.6  34.8  0.6  40.0  36.0  7.4  43.4  1948  272  151  4.9  38.5  0.6  44.0  40.7  9.1  49.8  1949  263  172  5.4  45.1  0.9  51.4  11.5  59.2  Source:  47.7  Reserve Bank of India, Banking and Monetary Statistics of India. Bombay, 1954, p. 5 0 4 .  l— to 1  o  - 121 Rs.  55,200,000,respectively i n 1949.  The corresponding figures  for  Primary Land Mortgage banks were Rs. 35,100,000 and Rs. 35,900,000 respectively i n 19^5;  Rs. 51,.700,000 and Rs. 59,200,000,respectively  in 194-9. This table further discloses that, while there were only five Central Land Mortgage banks during t h i s period, they supplied the bulk of  the working capital used by themselves and the Primary Land Mortgage  banks through the sale of debentures.  The data on the Central Banks  reveal that the proceeds of debentures accounted for 8 6 per cent of their working c a p i t a l i n 1945 and 88' per cent i n 1949« primary i n s t i t u t i o n s ,  In the case of these  money borrowed presumably from the Central Land  Mortgage Bank provides the major portion of the working c a p i t a l .  Under  these conditions i t would appear f a i r l y safe to conclude that the net t o t a l of primary advances by the system as a whole did not exceed the proceeds of the debentures plus c a p i t a l and reserves of both classes of banks.  Table No. 19 disclosed that i n 1938 this sum would have been  approximately Rs. 20,000,000.  In 1949 the corresponding figure would  have been approximately Rs. 64,000,000. The 'window dressed' combination of  both the primary and secondary advances would encourage one to believe  that the t o t a l amounted to Rs. 114,400,000. Part 6 The Postal Savings System There i s l i t t l e to add to the material already given on India's unique Postal Savings System, save the substantial progress recorded by i t during the 1935-1949 period.  This i s accomplished through  - 122 Table No. 21 which, i n keeping with the summary of Chapter I , sets forth the annual data on the number of savings offices,  t h e i r receipts  during the year and the t o t a l of individual balances outstanding. TABLE 2 1 Number, Deposits and Balances outstanding 1935-1949 Inc. Year ending i n March  No. of Savings Offices  Postal Savings System  (Rs.  000,000)  Deposits During Year  Balanci Out stai  1935  12,679  430.6  583.0  1936  12,926  510.9  672.5  1937  12,903  493.6  746.8  12,631  488.9  744.9  1939  12,109  504.3  818.6  19^0  11,870  462.5-  783.2  1941  11,883  305.9  595.1  1942  11,667  263.9  520.7  1943  11,324  262.5  522.2  1944 •  11,296  388.6  641.8  1945 '  11,227  479.1  1150.5  1946  11,202  809.4  1423-5  11,189  1021.0  1372.5  1948  9,939  436.1  1281.1  1949  9,090  529.2  1484.9  1938  1947  1  2  Source:  Reserve Bank of India, Banking and Monetary S t a t i s t i c s of India, Bombay, 1954. p. 369 1.  Excludes Burma from 1938 onwards  2.  Excludes Pakistan  -  1 2 3  -  Here i t can be seen that the j u r i s d i c t i o n a l alienations ,caused by the p a r t i t i o n of India i n 19^7 and the separation of Burma i n 1937, reduced the number of offices from a peak of 12,679 i n 1935 to 9,090 in 194-9«  In spite of this considerable decrease i n the number of  savings offices annual accumulation brought deposit balances on this l a t t e r date to approximately 2k0 per cent of what they had been at the beginning of this period.  By 19^9 the accumulated savings amounted  to almost Rs. 1,500,000,000 which i s not an i n s i g n i f i c a n t sum considering the economic condition of India and especially that of the customers of these banks.  - 124 -  CHAPTER IV NATIONALIZATION AND EXTENSION OF CENTRAL AUTHORITY World War II brought significant both p o l i t i c a l l y and economically.  changes i n the Indian economy In the p o l i t i c a l sphere, India was  midway between national and c o l o n i a l status.  The B r i t i s h Government's  promise of a f u l l independence after the war provided the Indian nationals an opportunity to f u l f i l l  their long cherished desire of  moulding their own destiny and of planning their future themselves.  In  the economic sphere India has made great strides during World War I I . Her balance of trade had increased from Rs. 82.7 m i l l i o n i n 1938 to a peak of Rs. 379-4 m i l l i o n i n 1944 .  Indian industry, i n order to meet  the war needs of the B r i t i s h Government and her a l l i e s , considerably d i v e r s i f i e d .  had been  Meanwhile many B r i t i s h establishments had 2  been purchased by the Indian business interests , and this brought a significant increase i n the percentage of Indian owned i n d u s t r i a l enterprises. Though national income and product data are not available for the war period, the rapid pace of.the i n d u s t r i a l expansion which took place may be demonstrated  byr. a comparison of rates of increases i n employment  in various industries between 1934 and 1939 on the one hand, and between 1939 and 1945"'' on the o t h e r .  1  *  2  *  3.  3  Reserve Bank of India, Report on Currency and finance, p. 47  1946-47, Bombay  ' For further details see H. Venkatasubiah, Indian Economy Since Independence, Asia Publishing House, New York, 1 9 6 l , p. 80 Ibid, p. 8 l  - 125 -  Comparative Percentage increase i n Employment by Industries, Period 1934-1939 and 1939-1945.  Industries  Percent Increase Between 1934-39  %  Percent Increase Between 1939-45  %  Ordinance factories  67  505  Clothing  62  958  7  109  Textile  24  24  Food, drink & tobacco  31  25  Paper and printing  33  27  Hides and skin  87  181  Wood stone and glass  82  Engineering  25  97  Minerals and metals  39  128  Chemicals and dyes  24  75  Miscellaneous  4l  194  Railway workshop  •  101  This comparison reveals a phenomenal expansion i n industries that were closely related to the prosecution of War;  i . e . , arms and ammunition,  clothing for the forces, the repair and construction of railway r o l l i n g stock, and the production of minerals and metals.  The other industries  experienced on the whole a substantial growth but, for obvious reasons, the rates were not so phenomenal. Once assured of Independence by the Labour Government of B r i t a i n , Indian nationalists faced the choice of following either a free enterprise c a p i t a l i s t system or a planned c o l l e c t i v i s t pattern of economic development.  - 126 They had already expressed their choice i n their o r i g i n a l proposal to establish the Reserve Bank of India as a national i n s t i t u t i o n . Since, after 19^7, they were free to choose what they believed would be best suited to Indian conditions, they elected not only to nationalize the Reserve Bank;  they also took steps to nationalize i t s  competitor,  the Imperial Bank, and to establish a number of governmentally sponsored quasi-public financial i n s t i t u t i o n s to expedite.their ambitious plans for the Country's i n d u s t r i a l i z a t i o n . Part 1 Nationalization of the Reserve Bank • The most impressive argument made for the nationalization of the Reserve Bank was the growing concentration of the ownership and control of the Bank's shares i n the hands of the vested f i n a n c i a l i n t e r e s t s . At the time of the establishment; of the Bank, the Imperial Government of India had attempted to make i t a t r u l y representative  share-holders  bank by dividing the Country, as mentioned! e a r l i e r , into five regions and by a l l o c a t i n g a fixed number of shares to each.  It had also placed a  l i m i t on the number of shares that an individual could hold.  In spite  of these measures, the d i s t r i b u t i o n of the ownership of the shares changed considerably i n the years immediately following.  This i s  k  revealed i n some d e t a i l i n the following table.  4. J . P . J a i n , Indian Banking Analysed, Rajhan Publications, Delhi 1949, p. 157 also S.K. Basu, A Survey of Contemporary Banking Trends, Book Exchange, Calcutta, 1957,. p. 51  - 127 Regional Distribution of Ownership of Reserve Bank Shares, 1935 © 1948 Inc. (In,000) Regions  April  Dec.  Dec.  June  1935  1936  1938  1940  Bombay  i4o  190  206  211  Calcutta  145  131  123  Delhi  115  97  Madras  70  Rangoon  30  June  June  June  1944  1946  June  June  1947  1948  219  231  236  237  239  120  120  119  124  126  128  93  93  86  85  79  79  79  61  60  59  59  55  51  50  49  20  18  17  17  10  8  8  5  1942  This summary reveals an eventual concentration of shares i n the Bombay region at" the cost of the other regions.  Whereas the number of  shares i n the Bombay region increased from 140,000 in 1935 to about 239»000 i n 1948, the number i n the Calcutta region declined from 145,000 to 128,000. to 79^000;  In the Delhi region the decline was from 115,000  i n the Madras region, from 70,000 to 49,000; and i n the  Rangoon region, from 30,000 to 5,000.  The regions of Delhi and Rangoon  were the heaviest losers. The data below reveal the reduction that meanwhile had taken place i n the number of Individual Shareholders. Regional Distribution of Share-Holders, 1935-1948, Inc. (00 omitted) Region  April  Dec.  Dec .  June  22 3  1938 20 8  1940  Bombay  1935 28 0  1936  June  June  1942 19 8 18 0  1944 18 0  June  June  17 4  1947 17 4  1948 17 2  1946  June  Calcutta  23 9  15 6  13 8  12 8  11 6  11 0  10 6 10 5  10 4  Delhi  23 0  16 7  14 9  13 7  12 2  11 5  10 6 10 3  10 1  Madras  14 0  9 7  8 7  8 2  7 7  7 1  6 6  6 4  6 2  3 1  1 9  l 6  1 4  1 2  0 6  0 6  0 5  0 4  66^2 59 8  55 9  51 1  48 2  45 7 45 0  44 4  8.4  8.9  9.8  10.4  10.9  11.1  11.3  Rangoon TOTAL . . .  92 0  Av. N O . O f ' c shares per share-holder  ;,  7.5  - 128 It i s significant  to note that the total number of share-holders  of the Bank decreased from 92,000 i n 1935 to 44,400 i n 1948;  that  meanwhile the average number of shares held by a share-holder increased from 5.4 to 11.3.  The data further reveal that the number of share-  holders i n a l l regions except Bombay decreased by considerably more than 50 per cent. Taken together,  these tables reveal that the Bombay region had  acquired almost half of the Bank's outstanding shares and about 40 per cent of the share-holders.  Thus the Reserve Bank was rapidly losing  its  status as a representative public i n s t i t u t i o n and the o r i g i n a l attempt of the Imperial Government to keep the Bank's electorate possible was being defeated.  as wide as  The Bank was coming increasingly under  the domination of vested interests i n the Bombay region.  Nationalization  appeared to be the most decisive way of permanently restoring the Bank to the status of a representative public i n s t i t u t i o n . The proponents of state-ownership of the Bank also held the view that to entrust the control of the Bank - the proposed hub of the Indian Banking System - to private share-holders;  and i t s  to directors belonging largely to the c a p i t a l i s t class; the best interest of the whole country.  management  was not i n  Such a public i n s t i t u t i o n  should, they believed, represent a l l interested groups i n the Country. It was feared moreover that, since much of the f i n a n c i a l structure of India was already i n European hands, the policy of the Bank might not coincide with the national i n t e r e s t .  -  129 -  Confidence i n the success of the nationalization measures on economic grounds was enhanced by the fact that the e a r l i e r take-over and management of the Indian Railways by the Government had proved to be very successful.  The p r o f i t s earned by the nationalized railways  had been used both to improve the service and to expand the system. The proponents of nationalization f e l t that profits earned by the Bank from the free use of public funds and from the issue of the Nation's currency should be used for the benefit of the Country as a whole rather than be l e f t to the disposition of a r e l a t i v e l y small group of share-holders. Unlike the people of the United States of America, the Indian people do not suffer from an innate skepticism of the extension of government authority i n the f i e l d of business enterprise.  The people  of India sincerely believed that a publicly owned central bank would win the confidence and cooperation of a great number of private banking i n s t i t u t i o n s which, hitherto, had not seen f i t to associate themselves with the privately owned Bank. In spite of the popular appeal of public ownership of the Reserve Bank, the move was not unchallenged.  The Central Board of Directors  of the Bank was highly c r i t i c a l , contending that the move was premature and hazardous i n the existing state of Indian economic a f f a i r s .  They  feared that i t might reduce the flow of incoming foreign c a p i t a l by creating the impression that this was but the f i r s t step towards nationalization of other industries and financial i n s t i t u t i o n s .  They  also contended that the Bank would become even more the hand maiden of  - 130 the Government and so abuse the p r i v i l e g e of note issue as to destroy confidence i n the Indian currency. To a l l intents and purposes the arguments i n favour and against the take-over of the Reserve Bank were concluded by the Minister of Finance, Mr. Liakat A l i Khan, who, i n February 1947 made the following announcement;^ "I have since given further thought to the matter and am convinced that the advantages of nationalization outweigh any possible disadvantages. I have, therefore, come to the conclusion that the Reserve Bank of India should be nationalized . . . " In order to implement this conclusion, the Government of India passed the Reserve Bank (Transfer to Public-ownership) Act on September 3» 1948.  This Act, among several other s i g n i f i c a n t provisions,  empowered the Government to purchase a l l outstanding p r i v a t e l y owned shares of the Bank.  The effective date of the transfer of ownership  was January 1, 19^9.  The purchase price of the shares was based on the  average market price during the preceding 12 months. out to be Rs. I I 8 5 / 8 per share. Rs. 100.  The l a t t e r turned  The par subscription price had been  The share-holders were paid partly i n cash and p a r t l y i n 20  to 25 year 3% Government promisory notes. Unlike the take-over of the Bank of Canada or that of the Bank of England, the nationalization of the Reserve Bank of India was not merely a p o l i t i c a l gesture to the p r o - c o l l e c t i v i s t group among the Indian nationalists.  It was part of a comprehensive plan to place a l l banking  Reserve Bank of India, Report on Currency and Finance, 1947-48, Bombay, 1948. p. 113  - 131 institutions  -  under Government regulation and control with the Reserve  Bank as the p r i n c i p a l instrument for accomplishment.  One of the  more significant parts of the Transfer Act i s Section 7 which provides that, "The Central Government may from time to time give such directions to the Bank as i t may, after consultation with the Governor of the Bank, consider necessary i n the public interest".  Other sections of this Act  i n combination with the provisions of the Banking Companies Act of  19^9  provide for an extension of the authority of the Bank to p r a c t i c a l l y a l l formalized banking i n s t i t u t i o n s  i n India.  Changes i n Administrative Structure As before,  the administration of the Bank was entrusted to a  Central Board of'Directors.  But under the Nationalization Act, their  number was reduced from sixteen to fourteen.  Whereas before national-  i z a t i o n the private share-holders of the Bank controlled the majority of the voting members on the Central Board, the Government take-over made a l l of them i n effect appointees of the Government.  Now the  directors of the Bank are presumably more concerned with promoting the general interest of the economy than with the profit making potential of the Bank. The Central Board of Directors now consists of a Governor, two deputy governors ,a Government representative  and ten other directors.  Of these l a t t e r ten, four represent the Regional Boards provided i n the original Act.^  The remaining six directors are representatives  a g r i c u l t u r e , Industry, Jfcrade and commerce, cooperative banks,  6  of etc.  The o r i g i n a l Act provided for five Regional Boards: Bombay, D e l h i , Calcutta, Madras and Rangoon. The l a t t e r region was eliminated by virtue of the separation of Burma.  - 132 Under the Transfer Act, the Governor and the Deputy Governors held office  for such terms as may be determined by the Government at the  time of their appointment.  However i t was l a i d down i n the Act that  their terms may not exceed five consecutive years.  The Government  o f f i c i a l on the Board holds office during the pleasure of the appointing authority.  The Government's representatives on the Board  hold office for five years; for four years; for three years.  the representatives of the Regional Boards,  and the representatives of a g r i c u l t u r e , industry e t c . , The Regional Boards now consist of five members  instead of eight as previously.  The directors of these Boards are  appointed by the Government to represent l o c a l economic They hold office for four years.  interests.  A l l the members of the Central Board  of Directors, except the Government o f f i c i a l and the directors of Regional Boards, are e l i g i b l e for re-appointment. J u r i s d i c t i o n a l Changes O r i g i n a l l y membership i n the Indian Reserve Bank system was limited to banks with Rs. 500,000 or more paid-up c a p i t a l .  Only these  normally designated scheduled banks were required to deposit their statutory reserves with the Reserve Bank, and to submit weekly reports of their p r i n c i p a l assets and l i a b i l i t i e s .  A l l non-scheduled banks and  indigenous bankers were thus outside the Reserve Bank's province. Presumably to protect the correspondent business of the larger scheduled Banks, discount and remittance f a c i l i t i e s were r e s t r i c t e d to member banks only.  During World War II these f a c i l i t i e s were extended to  The State Cooperative Banks but not to the other non-scheduled i n s t i t u t i o n s .  - 133 However, i n the Banking Companies Act of 19^9, a l l non-scheduled banks were,in effect, brought within the scope of the Reserve Bank's authority by the provision that "every banking company not being a scheduled bank s h a l l maintain by way of cash reserves i n cash with i t s e l f ,  or i n account  opened with the Reserve Bank . . . a sum equivalent to at least two per cent of i t s time l i a b i l i t i e s and f i v e per cent of i t s demand l i a b i l i t i e s and s h a l l f i l e with the Reserve Bank before the 15th day of every month three copies of a statement of the amount so held on Friday of each week of the preceding month with particulars of i t s time and demand l i a b i l i t i e s 7  on each Friday".  Subsequent to t h i s Act the discount and remittance  f a c i l i t i e s of the Reserve Bank were extended to a l l banking companies that may see f i t to employ them. Extension of Regulatory Authority Although the Transfer Act of 19^8 i t s e l f did not s i g n i f i c a n t l y a l t e r the functions of the Reserve Bank with respect to the exercise of i t s monetary p o l i c y , other banking measures enacted by the Government greatly increased i t s power and extended i t s authority to include regulatory authority over a l l banking i n s t i t u t i o n s .  Early i n 19^9, The  Government of India f i n a l l y passed the revised and comprehensive Banking Companies Act which had been i n process of development from 19^4 onward. This new l i g i s l a t i o n included the e a r l i e r ad hoc measures such as inspection, and branch l i m i t a t i o n along with several others which quite d e f i n i t e l y placed a l l private banks under the supervision of the Reserve Bank.  These included the licensing of banks, dictation of t h e i r lending  p o l i c i e s , responsibility for their inspection and the authority to suspend their operations.  7.  Government of India, Banking Companies Act, 19^9, Sec. l 8 , Government °? India Press, Delhi, 19^9.  - 134 The At  L i c e n s i n g o f Banks t h e t i m e o f t h e i n s t i t u t i o n o f t h e R e s e r v e Bank o f I n d i a , a n d  f o r some y e a r s f o l l o w i n g , no r e s t r i c t i o n s were p l a c e d of p r i v a t e b a n k i n g i n s t i t u t i o n s . business expansion that occurred  This  situation,  on t h e  establishment  combined w i t h t h e  d u r i n g W o r l d War I I , p r o m p t e d t h e  o r g a n i z a t i o n o f many p r e d o m i n a n t l y s m a l l e n t e r p r i s e s w h i c h c a l l e d thems e l v e s banks. was  B e f o r e 194-9, t h e o n l y r e s t r a i n t upon t h i s mushroom g r o w t h  the requirement that  Companies.  t h e b a n k be r e g i s t e r e d w i t h  the Registrar of  The o n l y r e s t r i c t i o n o n e s t a b l i s h e d b a n k s was t h e 1946  ordinance p r o v i d i n g f o r the l i c e n s i n g o f branches.  I n order  t o check  t h i s w i l d and u n h e a l t h y growth and t o encourage t h e development o f sound b a n k i n g i n s t i t u t i o n s ,  t h e 1949 A c t r e q u i r e d  a l l e x i s t i n g banking  companies t o s e c u r e a l i c e n c e from t h e R e s e r v e Bank o f I n d i a i f t h e y were t o c o n t i n u e  i n business.  A l l new b a n k i n g c o m p a n i e s were  required 8  t o g e t a l i c e n c e f r o m t h e Bank b e f o r e granting by  they could  be e s t a b l i s h e d .  When  l i c e n c e s t o e x i s t i n g b a n k s t h e R e s e r v e Bank was t o be s a t i s f i e d ,  inspection or otherwise,  t h a t t h e a p p l i c a n t bank was i n a p o s i t i o n t o  meet i t s o b l i g a t i o n s and c o n d u c t i t s b u s i n e s s o n s o u n d b a n k i n g p r i n c i p l e s . With respect satisfied  t o t h e new b a n k s a n d b r a n c h e s t h e R e s e r v e Bank was t o be  that there  was a need f o r a bank i n t h e a r e a where t h e b a n k  proposed t o operate. I f a b a n k i n g company s h o u l d the  licence.  t h e c o n s e n t o f t h e Government i s a u t h o r i s e d  The a g r i e v e d  Government b u t a f t e r t h e s u s p e n s i o n n o t b e f o r e . 8  *  to cancel  b a n k i n g company may a p p e a l t o t h e C e n t r a l  9  9  with •  n a t i o n a l i n t e r e s t and i n t h e i n t e r e s t o f i t s d e p o s i t o r s , t h e  R e s e r v e Bank w i t h its  not follow a p o l i c y consistent  Government o f I n d i a , o p . c i t . , S e c t i o n 22(1) I b i d . , 22(4)  - 135 D i r e c t i v e s on L o a n s and The  B a n k i n g Companies A c t  which considerably  increased  R e s e r v e Bank as w e l l a s 21  I n t e r e s t Rates  ( l ) provides  that  o f 19^9  the  not  t h e R e s e r v e Bank may  company s h a l l be  the  (1)  of the  and  or c l a s s of t r a n s a c t i o n s not  a u t h o r i t y has  discontinuance  not  authorised  each b a n k i n g  given.  anybbanking  particular transactions W i t h the  1 1  possible  similar direct  p r e s e n t day  B a n k i n g Companies A c t ,  c e n t r a l bank.  19^9  /The  R e s e r v e Bank  t o i m p o s e c o m p u l s o r y m e r g e r o r a m a l g a m a t i o n on  d i d b r i n g pressure  weak o r n o t  p r o p e r l y managed.  A f t e r the r a t h e r d i s a s t r o u s  the Loxmi bank i n e a r l y i960,to  Government-.of-India, B a n k i n g Companies A c t , Delhi, Ibid., Section  36  (1),  12. I b i d . , Sedtions  kk  had  was  banking It  could,  on them t o u n d e r t a k e s u c h moves cwh'en c o n d i t i o n s  them t o do s o . 1  banks  o f t h e R e s e r v e Bank f o r t h e i r a m a l g a m a t i o n , m e r g e r But  of t h e i r banking business.  P a l a i C e n t r a l B a n k and  *  of  t h e R e s e r v e Bank  i n the p u b l i c i n t e r e s t .  b e e n g r a n t e d t o any  companies which i t considered  1 1  Companies A c t ,  e n t e r i n g i n t o any  p r o v i s i o n s of the  and  ^9/  of  Amalgamation  to seek the p e r m i s s i o n  permitted  d i r e c t i o n s so  o f t h e Commonwealth Bank o f A u s t r a l i a , no  Under the  and  19^9  c h a r g e d , and  to p r o h i b i t banks g e n e r a l l y , or  company i n p a r t i c u l a r , a g a i n s t  M e r g e r and  banking  to the purpose f o r w h i c h advances  r a t e o f i n t e r e s t t o be  empowered t o c a u t i o n  regulatory  d i r e c t i o n s to  b a n k i n g company o r a g r o u p  bound t o c o m p l y w i t h any  U n d e r S e c t i o n 36  exception  give  the  Section  be made, t h e m a r g i n s t o be m a i n t a i n e d i n r e s p e c t  s e c u r e d a d v a n c e s and  is  measures  i t s i n s t r u m e n t s of monetary c o n t r o l .  b a n k i n g c o m p a n i e s i n p a r t i c u l a r , as or may  several other  scope of the r e g u l a t o r y powers of  c o m p a n i e s , e i t h e r g e n e r a l l y o r t o any  may  contained  and  45-  1949.  19^9,  f a i l u r e of  the  which-additional Section  21,  - 136  -  r e f e r e n c e i s made i n C h a p t e r V I , t h e B a n k i n g C o m p a n i e s A c t was amended.  U n d e r t h e p r o v i s i o n s o f B a n k i n g C o m p a n i e s ( S e c o n d Amendment)  A c t , i 9 6 0 t h e R e s e r v e Bank was a u t h o r i s e d , w i t h t h e p r i o r p e r m i s s i o n o f such t h e G o v e r n m e n t , t o i n i t i a t e / m e r g e r s and a m a l g a m a t i o n s as a p p e a r e d t o be i n t h e p u b l i c i n t e r e s t and t h a t o f t h e b a n k s t h e m s e l v e s . " ^ amendment p r o v i d e d t h a t i n c a s e o f a bank f a i l u r e  T h i s same  d e p o s i t o r s were t o be  14 g i v e n p r i o r i t y over a l l o t h e r c r e d i t o r i s ,  secured or otherwise.  Sub-  s e q u e n t l y i n I96I, i n o r d e r t o s p e e d up t h e p r o c e s s o f a m a l g a m a t i o n o r the m e r g e r , / B a n k i n g , C o m p a n i e s A c t was f u r t h e r amended. o f B a n k i n g C o m p a n i e s (Amendment) A c t , 196l  Under t h e p r o v i s i o n s  t h e R e s e r v e Bank  was  a u t h o r i z e d t o p r e p a r e p l a n s u n d e r w h i c h weak and mis-managed be a b s o r b e d by t h e S t a t e Bank o f I n d i a o r some o t h e r w e l l bank."^ their  banks c o u l d  established  S u c h a m a l g a m a t i o n p l a n s a r e b i n d i n g - • n o t o n l y on b a n k s c o n c e r n e d ,  d e p o s i t o r s and c r e d i t o r s , b u t on t h e i r e m p l o y e e s a s w e l l . Appointment of O f f i c i a l s I n a d d i t i o n t o t h e power t o d i r e c t  p r i v a t e b a n k s , t h e 1949  the l e n d i n g a c t i v i t i e s of the  A c t gave t h e R e s e r v e Bank t h e a u t h o r i t y t o  a p p r o v e t h e a p p o i n t m e n t o f managers and c h i e f e x e c u t i v e o f f i c e r s o f p r i v a t e banking i n s t i t u t i o n s .  I t a l s o gave t h e Bank t h e power t o  prohibit inter-locking directions,  t h e employment o f m a n a g i n g a g e n t s ,  and t h e g r a n t i n g o f u n s e c u r e d l o a n s e i t h e r t o d i r e c t o r s o r t o f i r m s i n w h i c h d i r e c t o r s had  interests.  Government o f I n d i a , B a n k i n g C o m p a n i e s ( S e c o n d Amendment) A c t , i 9 6 0 , S e c t i o n 43  A.  I b i d . , S e c t i o n 44 B Government o f I n d i a , B a n k i n g C o m p a n i e s (Amendment) A c t , S e c t i o n 45  l6  Government o f I n d i a , B a n k i n g C o m p a n i e s A c t , 1949,  Section  196l,  10.  - 137 These powers of appointment, etc.were considerably enlarged by a 1959 amendment to the Banking Companies Act which gave the Reserve Bank the right to "remove from office the chairman, any d i r e c t o r , manager or chief executive o f f i c e r of a banking company found guilty 17 of contravening any law r e l a t i n g to the operation of the bank". Furthermore, banking i n s t i t u t i o n s were required to seek the approval of the Reserve Bank on such matters as the appointment, reappointment any or remuneration of/; be employed by them.  director, manager, secretary or treasurer who may Banks have also to seek permission from the  18. Reserve Bank for a grant of retirement benefits to any of these persons. Inspection, Supervision and Suspension Before i t s nationalization, the Reserve Bank was not authorized to inspect the working and accounts of banking i n s t i t u t i o n s .  A  scheduled bank had to submit i t s accounts to the Reserve Bank for review but i t did not have to submit to audit and inspection by Reserve Bank The Banking Companies Act of 19^9, specifies that "the  officials.  Reserve Bank at any time may, and on being directed so to do by the Central Government s h a l l , cause an inspection to be made by one or more of i t s officers of any banking company and i t s books and accounts, and the Reserve Bank s h a l l supply to the Banking Company a copy of  its  report on such inspection". *  disclosed  If after due inspection, i t i s  that the bank had not been operated i n a proper manner, the Reserve Bank was authorized to prohibit the bank from accepting new deposits and to apply to the proper court for an order to wind up the bank's affairs. •I  However, i f the Reserve Bank considered that a banking  n  G6'vernmeftt of India, Banking Companies Act, 19^9, Section 6 op_. c i t . , Reserve Bank of India, Trend and Progress of Banking i n India during 1959, Bombay, i 9 6 0 , p. 16 Section 35 (l) Banking Companies Act, 19^9, Government 1949 of India, :  |8,  - 138 company could be salvaged, application could be made to the Central Government for an order of moratorium.  During this moratorium the  Reserve Bank could prepare a plan either for the bank's reconstruction or foi? i t s amalgamation with another banking company and submit i t for approval to the Central Government. Additions to Instruments of Monetary Policy Under the o r i g i n a l Reserve Bank Act the instruments by which the Bank could attempt to exercise a measure of control over the money supply, credit and prices were quite l i m i t e d . i. ii.  of:  the authority to engage i n open market operations; To /make or to deny advances to the scheduled banks or to rediscount their e l i g i b l e paper;  iii.  They consisted  and  the right to fix the interest or 'bank rate' at which such transactions would be made.  The Bank neither had the authority to manipulate the reserve r a t i o nor to ration c r e d i t .  It did not have sufficient  the banking community to exercise moral suasion.  stature i n  Most of these short-  comings were met by provisions of the Banking Companies Act of 19^9 and subsequent amendment of t h i s Act and to the Reserve Bank i t s e l f . Selective Credit Control and Credit Rationing As noted i n connection with the Reserve Bank's newly acquired regulatory authority the new Bank Act gave the Reserve Bank the authority to dictate the purpose for which advances by primary lenders may or may not be made as well as the rate of interest to be charged.  The monetary  - 139 policy implications of this authority are spelled out as follows:  16.  Where the Reserve Bank i s s a t i s f i e d that i t i s necessary or expedient i n the public interest so to do, i t may determine the policy i n r e l a t i o n to advances to be followed by banking companies generally or by any banking company i n p a r t i c u l a r , and when the policy has been so determined, a l l banking companies or the banking companies concerned as the case may be, s h a l l be bound to follow the policy as so determined. Later on credit rationing was imposed under this authority i n an attempt to arrest the i n f l a t i o n a r y effects of the Government's "on  vast d e f i c i t financing during the Second Five Year Plan.  The  Reserve Bank has also used this authority to channel credit away from the speculative stock and produce markets, and into the b a s i c a l l y productive sectors of the economy. Interest Rates on Deposits In addition to i t s authority to impose selective credit measures, the Banking Companies Act of 1949 confers upon the Reserve Bank the authority to l i m i t the rates of interest paid on short term deposits by the private banks.  This i s a subtle way of closing an important  avenue of r e l i e f of cash shortages resulting from the operation of a r e s t r i c t i v e bank rate and considerably enhances the power of the central bank.  The 1949 measure provided i n effect that the Reserve Bank could  force the private i n s t i t u t i o n to keep the interest rate paid on customers' deposits at two percentage points below the Reserve Bank's discount rate.  20.  Section 21 (1)  2J.  See Chapter V, page l64.  Banking Companies Act, 1949, Government of India, 1949-  - 140 Reserve R a t i o In  Manipulation  an a t t e m p t t o m i t i g a t e t h e i n f l a t i o n a r y e f f e c t s o f e x t e n s i v e  r e l i a n c e on c e n t r a l b a n k c r e d i t i n t h e f i n a n c i n g o f t h e C o u n t r y ' s r e c o n s t r u c t i o n p r o g r a m , R e s e r v e Bank o f f i c i a l s i n 195& and  were g r a n t e d  the a u t h o r i t y to manipulate  sought out  the r a t i o s  governing  22 t h e r e s e r v e s o f member b a n k i n g  institutions.  T h i s was  accomplished  by  a n amendment t o t h e R e s e r v e Bank A c t i t s e l f w h i c h empowered  to  s e t t h e p r e v a i l i n g r a t i o on t i m e  cent  and 8 p e r c e n t ;  5 per cent the  d e p o s i t s anywhere between 2 p e r  t h e r a t e on t h e demand d e p o s i t s a n y w h e r e  t o 20 p e r c e n t .  t h e Bank  Of c o n s i d e r a b l y more s i g n i f i c a n c e  from was  a d d i t i o n a l p r o v i s i o n t h a t u n d e r emergency c o n d i t i o n s t h e s t a t u t o r y  p r o v i s i o n may be e x c e e d e d b y as much a s f i f t y p e r c e n t deposits.  That i s t o s a y , a f t e r t h e e s t a b l i s h m e n t  on  additional  of a givenr^ratio  b e t w e e n t h e a u t h o r i z e d l i m i t s an a d d i t i o n a l r e s e r v e r e q u i r m e n t i m p o s e d on new d e p o s i t s o f t h e . b a n k s p r o v i d e d  may  be  t h e a v e r a g e o f 2 0 % and  8% a r e n o t e x c e e d e d . T h i s i s r e a l l y a d e c i s i v e p o w e r , f o r i t has t h e e f f e c t o f burdening  the banks w i t h o p p o r t u n i t y c o s t of h o l d i n g i n e x t r e m i t y as  much a s 100 p e r c e n t o f new d e p o s i t s | n i d l e r e s e r v e b a l a n c e s . also reduces s u b s t a n t i a l l y  It  the i n f l a t i o n a r y p o t e n t i a l of the c e n t r a l  b a n k c r e d i t made a v a i l a b l e t o Government and o t h e r s p e n d i n g  Government o f I n d i a , R e s e r v e Bank (Amendment) A c t , 1956,  agencies.  Section  42.  - 141 Moral Suasion Though tangible areas of application are not s p e c i f i e d , Indian writers on.the role of the Reserve Bank hold the view that nationali z a t i o n generally enhanced the persuasive power and prestige of the Reserve Bank.  This i s undoubtedly true but one may s t i l l wonder i f  this enhancement was not the result of a very considerably enlarged k i t of (.control instruments and the fact that there was no longer any d i s t i n c t i o n between Government p o l i c y and central bank p o l i c y .  With  the -possible exception of the Commonwealth Bank of A u s t r a l i a , no central bank i n the admittedly more advanced Western Countries has been granted such a wide range of authority over both the public and 2-3  private interests of the subordinate banks.  Thus, for example, an  announcement of the p o s s i b i l i t y of a change i n the reserve r a t i o or a reduction i n the rate of interest i n short term funds may be even more effective than the posting of the change i t s e l f . Part 2 Nationalization of the Imperial Bank As mentioned  i n Chapter I I I ,  the Government of India had decided  to nationalize the Imperial Bank as early as 1947-  Owing, as i t was  s a i d , to some technical d i f f i c u l t i e s presented by the Imperial Banks network of branches i n Pakistan, Burma and Ceylon:  but more probably  to the f i n a n c i a l consideration involved i n the take-over of this largest of a l l private banking i n s t i t u t i o n at the i n i t i a l stage of the country's eoonomic development;  the Government had to postpone the  This conclusion was reached by Professor Crumb of the University of B r i t i s h Columbia after studying the powers and duties of many of the world's leading central banks.  - 142 actual  t a k e - o v e r u n t i l 1955.  i z a t i o n of t h e Reserve  By t h i s  time the a c c o m p l i s h e d  national-  Bank a n d t h e announcement o f t h e p e n d i n g  n a t i o n a l i z a t i o n o f t h e i n s u r a n c e c o m p a n i e s a n d o t h e r e n t e r p r i s e s no longer l e f t  any v a l i d p o l i t i c a l  a t t i t u d e towards  this v i t a l  excuse  f o r maintaining a passive  "foreign" institution.  T h e r e was a l s o t h e  hope t h a t i t s v a s t r e s o u r c e s , w i d e n e t - w o r k o f b r a n c h e s , skilled  and i t s  p e r s o n n e l c o u l d t a k e on t h e v e r y r e a l t a s k o f i m p r o v i n g  facilities  for financing India's greatest industry - agriculture. T h i s l a t t e r v i e w had a l r e a d y been e x p r e s s e d by t h e R u r a l E n q u i r y Committee which up  the newly n a t i o n a l i z e d Reserve  to study a g r i c u l t u r a l  Banking  Bank h a d s e t  f i n a n c e a n d t o make r e c o m m e n d a t i o n s t o s p e e d  up t h e s p r e a d o f a g r i c u l t u r a l b a n k i n g f a c i l i t i e s .  Among i t s o t h e r  r e c o m m e n d a t i o n s was one t h a t t h e I m p e r i a l Bank s h o u l d work a s a n a u x i l i a r y to t h e Reserve  Bank and t h a t i t s h o u l d e s t a b l i s h 270 b r a n c h e s  i n unserved  24 and  o u t l y i n g areas w i t h i n the f o l l o w i n g f i v e years..  As a p a r t i a l c o m p e n s a t i o n i n c r e a s e d the commission  T h i s i t b e g a n t o do.  f o r l o s s e s on t h e new b r a n c h e s  the Reserve  Bank  p a i d t o t h e I m p e r i a l Bank on c o l l e c t i o n s and  25 p a y m e n t s made f o r i t s a c c o u n t . L a t e r on t h e Reserve Survey  Bank a p p o i n t e d  Committee t o s t u d y t h e r u r a l  recommendations t o f a c i l i t a t e  the A l l I n d i a R u r a l C r e d i t  c r e d i t p r o b l e m s a n d t o make  the free flow of credit  to a g r i c u l t u r e  ?4 S.G. P a n a n d i k a r ,  B a n k i n g i n I n d i a , 9 t h e d , O r i e n t Longmans, Bombay,  1959, p. 514 The new r a t e s o f C o m m i s s i o n were l / l 6 o f one p e r c e n t o n t h e f i r s t Rs. 1,500,000,000; 1/32 o f one p e r c e n t on t h e n e x t R s . 3 , 0 0 0 , 0 0 0 , 0 0 0 ; 1/64 o f one p e r c e n t on b u s i n e s s o v e r R s . 3 , 0 0 0 , 0 0 0 , 0 0 0 b u t n o t e x c e e d i n g R s . 1 2 , 0 0 0 , 0 0 0 , 0 0 0 and 1/128 o f one p e r c e n t on b u s i n e s s exceeding Rs. 12,000,000,000.  - 143 and a l l i e d industries i n r u r a l areas.  This Committee was c r i t i c a l  of the progress made by.the Imperial Bank between 1950 and 1954 i n i t s branch expansion program.  The slow progress, the Committee contended,  was due to the primary profit motive of the Bank.  It could not keep  i t s owners content with the lower dividends that would result from a primary interest i n the development of the Indian economy.  In i t s  integrated scheme to reorganize the rural credit and thus to provide adequate credit f a c i l i t i e s to the r u r a l population, the Committee of Direction of the A l l India Rural Credit Survey recommended that the Imperial Bank,along with other State associated banks, be made a state i n s t i t u t i o n i n language that appears to have presumed as much on the Imperial Bank's existing f a c i l i t i e s as on new ones to be added.. Committee concluded i n approved c o l l e c t i v i s t State Bank be: p, , !r  The  style that the proposed  "one strong, integrated, state-sponsored, statepartnered commercial banking i n s t i t u t i o n with an effective machinery of branches spread over the whole country, which, by further expansion can be put i n a position to take over cash work from non-banking treasuries and sub-treasuries, provide vastly extended remittance f a c i l i t i e s for cooperative and other banks, thus stimulating the further establishment of such banks, and, generally, follow a policy of advances including advances for a g r i c u l t u r a l purposes - which, while not deviating from the cannons of sound business, w i l l be i n effective consonance with national p o l i c i e s as expressed through the central govefnemtn and the Reserve Bank".2©  The Committee went on to state that the Government of India and the Reserve Bank together should hold 52 per cent of the share c a p i t a l of the proposed State Bank;  i t also made proposals t&r the management  and operations of the nationalized i n s t i t u t i o n .  Similar proposals were  Reserve Bank of India, Report on Currency and Finance, 1954-55, Bombay, p. 91  - 144 remade:; hy the Shroff Committee appointed by the Reserve Bank to enquire into problems o f finance i n the private 6gct;Oi!. ^(Jher.  ihe  Government f i n a l l y announced i t s decision to nationalize the Imperial Bank on December 20, 1954.  In May of the following year the State  Bank of India Act was passed by the Indian Parliament, and on July 1, 1955 the State Bank took over the operations of the former Imperial Bank. Ownership of the State Bank of India The conversion of the Imperial Bank into the State Bank was accomplished by the directed sale of the shares of the Imperial Bank to the state owned Reserve Bank at a price of Rs. 1,765 5/8 per share. 22 This was more than three times the o r i g i n a l par value of Rs. 500. The payment i t s e l f was made partly i n cash and partly i n Government National Plan Bonds bearing interest at Jjk per cent. Under the provisions of the State Bank of India Act, the Reserve Bank was authorized to dispose of 45 per cent of the share c a p i t a l of the State Bank to the general public with preference given to the former share holders of the Imperial Bank.  The Central Board of the  State Bank was authorised to increase the outstanding shares of the State Bank providing the holdings of the Reserve Bank did not  fall  below 55 per cent of the t o t a l . The State Bank of India Act of 1955 also contained provisions under which other banking companies may be and subsequently were amalgamated with the State Bank.  Partly paid-up share of Rs. 100 were bought at Rs. 431 3/4. Their price was based on the average market price for the past twelve months.  - 145 Administration and Management The Administration of the State Bank was entrusted to a Central Board of Directors.  This Board consists of twenty members.  The  chairman and vice-chairman are appointed by the Central Government i n consultation with the Reserve Bank.  Two managing directors are  appointed by the Central Board with the approval of the Central Government.  Six directors are elected by shareholders other than  the Reserve Bank.  Eight directors are nominated by the Government  i n consultation with the Reserve Bank and these directors  represent  various economic interests of the country, i . e .  agriculture, industry,  trade and commerce, and the cooperative banks.  One i s appointed by  the Reserve Bank and one by the Central Government.  The management  of the State Bank continued i n the hands of the former o f f i c i a l and personnel of the Imperial Bank. Part 3 Industrial Banks and the Insurance Corporation of India After August 15, 1947, when India became a sovereign state,  the  Indian Government was f i n a l l y free to chart the country's future development.  This was done along lines dictated by the needs and  aspirations of the Indian people. summed up i n the expression,  self  These needs and aspirations could be generated i n d u s t r i a l i z a t i o n .  The  Indian people looked upon i n d u s t r i a l i z a t i o n not only as a means of improving per capita incomes, l i v i n g standards and employment opportunities,  *  but as an eventual escape from dependence on foreign interests  Reserve Bank of India, op. c i t . , p. 42  - 146 for the development of the Indian economy.  The program of development  which ultimately emerged in a series of five year plans, encompassed a g r i c u l t u r a l improvements,  natural resources exploitation,  and the  development of iron and s t e e l , ship building and a i r c r a f t industries a l l to be financed as far as possible from domestic sources.  -  Considering  the r e l a t i v e l y impoverished state of the Indian economy this was,  to  say the l e a s t , a very ambitious undertaking. In a l l , the Government i n cooperation with the Reserve Bank and various private f i n a n c i a l i n s t i t u t i o n s ,  established six  different  f i n a n c i a l corporations through which the credit needs of the program of i n d u s t r i a l i z a t i o n were to be channelled and i n part provided. approximate order of establishment they were:  In  the Industrial Finance  Corporation, the State Financial Coporations, the National Industrial Development Corporation, the Industrial Credit and Investment Corporation of India, the National Small Industries Corporation and the Corporation.  Refinance  It also nationalized the Country's insurance business  through the establishment of the L i f e Insurance Corporation of India. The Industrial Finance Corporation The Industrial Finance Corporation was established on July 1,  1948.  This agency was authorized to grant long term c a p i t a l loans to public limited companies and to cooperative ventures engaged i n manufacturing, mining, and the generation and d i s t r i b u t i o n of power.  Subsequently  ship building was brought within the sphere of i t s lending  operations.  Capitalization and Ownership This agency has a paid up c a p i t a l of Rs. 50,000,000 which was subscribed by the Government, the Reserve Bank, the Scheduled Banks,  - 147 the Insurance companies and the cooperative banks i n the following proportions. Amount subscribed (000,000)  Subscribers  Percent of Total  Insurance companies  13.0  26.0  Scheduled banks  12.0  24.0  Government of India  10.0  20.0  Reserve Bank of India  10.3  20.6  Cooperative banks  4.7  9.4  The Government of India i n conjunction with the Reserve Bank of India contributed about 4 l per cent of the share c a p i t a l of the Corporation.  With the nationalization of the Imperial Bank and the l i f e  insurance companies of India i n 1955 and 1956 respectively,  the t o t a l  share of Government and public i n s t i t u t i o n s became something more than 70 per cent. In order to make the shares of the Corporation a reasonably a t t r a c t i v e investment for the private banks and insurance companies, the Government undertook to guarantee i t s par value and a minimal dividend of 2% per cent.  The maximum dividend allowed was 5 per cent.  Any net p r o f i t above this maximum accrued to the Government.  In 1952  the Enabling Act was amended to provide that dividends payable to the Government and, the Reserve Bank be placed i n a special fund u n t i l such payments amounted to Rs. 5,000,000.  S . L . N . Simha, The Capital Market of India, Bombay, Vora & C o . , Bombay, i 9 6 0 , p. 144 3ft* Reserye Bank of India, Report on Currency and Finance, 1952-53Bombay, 1953, p. 54  - 148 Administration and Control The administration of the Industrial Finance Corporation i s entrusted to a Board of Directors consisting of 13 members. Government of India on behalf of i t s e l f  The  and the Reserve Bank appoints  seven members of this Board including the managing director and the chairman.  The other directors are appointed by the scheduled banks,  the insurance companies and the cooperative banks.  In addition to i t s  majority control, the Government has the right to discharge the entire Board i f the l a t t e r should f a i l to follow Government p o l i c y . Sources of Working Capital In order to augment i t s c a p i t a l funds the Industrial Finance Corporation was o r i g i n a l l y authorised to issue bonds and debentures up By 1957 this authorization had been  to five times i t s paid-up c a p i t a l .  31 raised to ten times the paid-up c a p i t a l .  Meanwhile bonds and debent-  ures issued by the Corporation had risen from Es. 5 8 , 0 0 0 , 0 0 0 i n 1951 to Rs. 222,000,000 by the end of i 9 6 0 . Under the o r i g i n a l Act the Corporation was not authorised to borrow from the Reserve Bank.  In order to increase i t s immediately available  lending capacity and thus to enable the Corporation better to serve i t s customers, the Act was amended i n 1952 to permit such borrowing'provided proper c o l l a t e r a l was presented.  The l a t t e r included s e c u r i t i e s of the  Corporation i t s e l f and other s e c u r i t i e s acceptable to the Reserve Bank. 32 In 1957 the The t o t a l of such loans could not exceed Rs. 3 0 , 0 0 0 , 0 0 0 . 3 1 . Reserve Bank of India, Report 1952-53, op. c i t  p. 4 4 .  3 2 . Reserve Bank of India, Report on Currency and Finance, .1957-58, Bombay, p. 54.  -Incorporation was authorised to borrow d i r e c t l y from the Government provided i t s t o t a l borrowings from the Government, the Reserve Bank and i t s own outstanding bonds and debentures did not exceed ten times i t s c a p i t a l and reserves.  In 1958 the authority to underwrite  security issues for other Government corporations was added to this agency's growing powers and duties.  In i960 the Original Act was  amended to allow the Corporation to subscribe d i r e c t l y to the common stock of the various i n d u s t r i a l enterprises which borrowed from i t and  for whom i t had underwritten share c a p i t a l .  It was also authorised  to convert loans already granted and debentures into the share capital  33 of the borrowing concern i n question. Under the amended Act the Government was authorised to guarantee such foreign loans as the Corporation may seek from the International Bank for reconstruction and development or from other international f i n a n c i a l i n s t i t u t i o n s for making loans i n foreign currency to customers.  its  Before i960 the Government was not authorised to guarantee  such loans.  As we s h a l l see i n Part 3 of Chapter V the Industrial  Finance Corporation played an important role i n the financing of the Government enterprises i n India. establishment  Its successful  beginning led to the-  of various other f i n a n c i a l i n s t i t u t i o n s to meet the  growing needs of the Government's expansion program. The State Financial Corporations At the time of i t s organization the operations of the Industrial Finance Corporation were limited to large public and cooperative enterprises and other private i n d u s t r i a l ventures within the j u r i s the d i c t i o n of/States also needed f i n a n c i a l assistance for t h e i r development Reserve Bank of India, Report 1957-58, op. c i t . , pp. 5^-55.  - 150 and  expansion.  In order to make this' possible the Government of  India passed the State Financial Corporation Act on September 28, 1951.  Under the provisions of t h i s measure the State Governments  were authorized to set up their own financial corporations.  By 1961  there were fifteen such corporations - one i n each State. Capitalization and Ownership The State Financial Corporation Act empowers each State Government to f i x the authorized c a p i t a l of i t s corporation according to i t s own needs subject to minimum and maximum l i m i t s of Rs. 5,000,000 and Rs.  50,000,000, respectively.  The authorized c a p i t a l of the existing  corporations ranges between Rs. 20,000,000 and Rs. 4-0,000,000.  The paid-  up c a p i t a l of these Corporations i s Rs. 10,000,000 except for the States of  Bombay, Madras, Andhra Pardesh and Orissa where Rs. 20,000,000,  Rs.. 13,200,000, Rs. 15,000,000 and Rs. 5,000,000 respectively, have been paid i n . The par value of the share c a p i t a l of each State Finance Corporation and a minimum dividend of three per cent i s guaranteed by the respective state Governments.  Minimum and maximum rates are fixed at 3 per cent  and 5 per cent, respectively.  Within these l i m i t s , each State  Corporation i s free to f i x i t s actual dividend rate to reflect the l o c a l pattern of interest rates.  The guanranteed rate of dividend i s Jfe per  cent i n a l l States except Punjab and Madras where i t i s 3 per cent. Like the l i m i t a t i o n imposed on the Industrial Finance Corporation, the rate of dividend of the state f i n a n c i a l corporations cannot exceed the  S . L . N . Simha, op. c i t . , p. 160  - 151 guaranteed minimum u n t i l reserve funds are equal to paid up c a p i t a l , and  the State Government has been repaid any debt resulting from  obligations incurred on behalf of the corporation. Unlike the Industrial Finance Corporation whose entire stock i s either Governmentally or i n s t i t u t i o n a l l y held, the general public can subscribe to the share c a p i t a l of State Financial Corporations up to a maximum l i m i t of twenty-five  per cent.  The remainder is subscribed  by the respective State Governments, the Reserve Bank and other financial i n s t i t u t i o n s .  As of March 1959? the subscription of State  Governments averaged 47 per cent of the t o t a l paid up c a p i t a l , of  the Reserve Bank was 15 per cent and other f i n a n c i a l  that  institutions  had subscribed on the average about 35 per cent.  The remaining 5  per cent was subscribed by the general public.  Thus the State  Governments along with the Reserve Bank controlled about 62 per cent of  the t o t a l c a p i t a l of these Corporations. Administration and Control The administrations of the State Financial Corporations are  entrusted to boards of directors, consisting of ten members.  The  respective State Governments i n consultation with the Reserve Bank appoint the managing directors and nominate three other directors including the board chairman.  The Reserve Bank and the Industrial  Finance Corporation nominate one director each.  The scheduled banks,  Cooperative banks, insurance companies arid other f i n a n c i a l elect three directors from among themselves. holders elect one d i r e c t o r .  •gs,^ S . L . ' S i m h a v  institutions  The rest of the  share-  Thus the majority of the directors are  o p . c i t . , p. l o O .  - 152 appointed  by t h e S t a t e G o v e r n m e n t s a n d p u b l i c i n s t i t u t i o n s .  e n a b l i n g A c t s t i p u l a t e s t h a t each board  The  s h a l l f o l l o w the p o l i c i e s  d i c t a t e d b y i t s Government i n c o n s u l t a t i o n w i t h t h e R e s e r v e B a n k . Sources of Working C a p i t a l I n order t o supplement t h e i r c a p i t a l funds a r e a u t h o r i z e d t o i s s u e bonds and debentures f i v e times  t h e i r p a i d up c a p i t a l .  up t o a maximum l i m i t o f  a r e guaranteed  by t h e r e s p e c t i v e  Governments. Some i n d i c a t i o n o f t h e i m p o r t a n c e  gained  o f t h e S t a t e C o r p o r a t i o n s may be  f r o m t h e f a c t t h a t by M a r c h , 1961  l o a n s amounting t o Rs.  361,700,000.  o r a b o u t 60 p e r c e n t , w a s a c t u a l l y  these C o r p o r a t i o n s had approved  Of t h i s sum R s .  disbursed.  221,600,000,or  At this latter  amount o f l o a n s a n d a d v a n c e s o u t s t a n d i n g was R s . The  corporations  L i k e the share c a p i t a l o f the  c o r p o r a t i o n s t h e i r bonds and debentures State  these  date the  36 l4l,900,000.  N a t i o n a l I n d u s t r i a l Development C o r p o r a t i o n With  the operations of the I n d u s t r i a l Finance  Corporation  limited  t o l a r g e p u b l i c and c o o p e r a t i v e e n t e r p r i s e s , a n d t h o s e o f t h e S t a t e F i n a n c i a l Corporations l i m i t e d i n d u s t r i a l undertakings,  t o s t a t e and s m a l l l o c a l p r i v a t e  t h e r e was s t i l l  that c o u l d p r o v i d e l o n g term a s s i s t i n the establishment  capital  need f o r a f i n a n c i a l  t o l a r g e p r i v a t e i n d u s t r i e s and  o f new o n e s .  The p r i v a t e s e c t o r , i t was  r e a l i z e d , a l s o h a d t o be e n c o u r a g e d i f t h e C o u n t r y full  industrial potential.  institution  was t o r e a l i z e i t s  In r e c o g n i t i o n o f the d i f f i c u l t i e s o f  private firms i n a c q u i r i n g equity c a p i t a l f o rr i s k y ventures  R e s e r v e Bank o f I n d i a , R e p o r t on C u r r e n c y a n d F i n a n c e , Bombay, 196l, p. 64  and t o  I96O-61,  - 153 encourage balanced growth of the i n d u s t r i a l sector, the Government established the National Industrial Development Corporation on October 20, 1954."^ This Corporation was intended primarily to promote new i n d u s t r i a l enterprises for the planned development of the Country's i n d u s t r i a l sector and to finance improvements and extensions i n existing ones . Particular attention was to be given to the jute industry, to cotton t e x t i l e s and to the manufacture of machine tools. given to such firms as could make use of equipment,  P r i o r i t y was to be experience and  s k i l l available i n India. Capitalization and Ownership The National Industrial Development Corporation had a paid-up c a p i t a l of Rs. 1,000,000.  Unlike the Industrial Finance Corporation  and the State Financial Corporations, where participation i n ownership was f a i r l y broad, the Government of India was the sole subscriber to and shareholder of this Corporation.  The Government has increased  working c a p i t a l of the Corporation through loans and grants.  the  During  1956 these loans and grants amounted to Rs. 14,900,000. Administration and Control The administration of the National Development Corporation i s entrusted  to a Board of fourteen Directors drawn from the private  business sector and chaired by the Minister of Commerce and Industry.  37- • 38. 39-  Reserve Bank of India, Report on Currency and Finance, 1954-55 Bombay, 1955, p. 50 Loc -. . c i t . ,'', -Its authorized capital was Rs. 10,000,000  -154 The representatives of private business are nominated by the Government i n consultation with the Industrial Finance Corporation and the Reserve Bank.  Such prominent i n d u s t r i a l i s t s as Tate, B i r l a ,  and Medi are represented on the Board.  This was done to ensure sound  advice and guidance to the Corporation i n undertaking and developing new projects.  The summary of the.operations of the various quasi-public  f i n a n c i a l corporations given i n Part 3 of Chapter V reveals that  this  Corporation (N.I.D.C) has already made a very substantial contribution to the country's jute and cotton t e x t i l e industries. Industrial Credit and Investment Corporation Although considerable progress towards i n d u s t r i a l development was made during the F i r s t Five Year Plan the pace of this development was undoubtedly retarded by the fact that l i t t l e or no inducement had been given to l o c a l private enterprises or to foreign investors. No particular attempt had been made to provide instrumentality through which private equity c a p i t a l could be channelled into i n d u s t r i a l undertakings, and no special attempt had been made to tap either the vast c a p i t a l resources or the technical proficiencies of the Western World.  An i n s t i t u t i o n that could bridge this gap was urgently needed.  In 1954, when the Indian Planning Commission was working on the Second Five Year Plan, discussions were held with the  representatives  of the World Bank, the Foreign Operation Administration of the United States Government and the Commonwealth Development Finance Company on the f e a s i b i l i t y of establishing a nominally private investment corporation, to assist i n promoting private enterprise.  These  discussions bore f r u i t i n the form of a recommendation that an i n d u s t r i a l  - 155 credit and investment  corporation be set up i n India under which a  Indian and foreign investors would join hands to provide equitycapital and other benefits to private i n d u s t r i a l enterprises.  As  a r e s u l t , an i n s t i t u t i o n bearing that name was established on January 5, 1955. Duties of this Corporation consisted i n the main of f i n a n c i a l and technical assistance to private i n d u s t r i e s . a One of i t s p r i n c i p a l of tasks was to help i n the provision loans i n foreign currencies for importing urgently needed machines and equipment. of  The Reserve Bank  India gave a BiffiEt detailed summary i t s main objectives as  follows:  a.  To assist i n the creation, expansion and modernization of private industries  b.  To encourage and promote the participation of private c a p i t a l , domestic and foreign, i n the ownership of i n d u s t r i a l investment and thus expand the investment market by: i. ii.  iii.  providing long and medium term loans and equity capital underwriting new issue of stocks and bonds of private industries, or by guaranteeing loans from private institutions to such industries furnishing managerial, technical and administrative services to industries3®  Capitalization and Ownership The Industrial Credit and Investment Corporation had an authorized c a p i t a l of Rs. 250,000,000 of which Rs. 50,000,000 was paid up.  Of  the l a t t e r sum Rs. 35,000,000 was subscribed by Indian nationalists and other financial i n s t i t u t i o n s ;  Rs. 10,000,000 were contributed by  B r i t i s h Eastern Exchange banks, B r i t i s h insurance companies and the  Reserve Bank of India, Report on Currency and Finance, 1954-55> Bombay, 1955* P- 50  - 156 Commonwealth Development Finance Company.  The rest of the  Es. 5,000,000 were subscribed by public corporations i n the United States and by i n d i v i d u a l s . In addition to i t s share c a p i t a l the Corporation received an interest free loan of Rs. 75,000,000 from the Government of India repayable after 15 years i n 15 annual instalments.  It was also  granted a 4.5% loan of $10,000,000 for 15 years from the World Bank. The l a t t e r sum was to be used to advance loans i n foreign currencies to private firms to enable them to purchase from abroad machinery,equipment, material and services not available in India. Because of the considerable increase i n demand for loans from the Corporation, both i n domestic and foreign currencies, i t s funds were further increased in 1959.  capital  By an agreement between the  Government of India and the United States Technical Corporation Mission on May 21, of that year, the Corporation was provided a loan of 42  Rs. 100,000,000 out of Public Law 480 funds.  During this year the  International Bank for Reconstruction and Development granted the  43 corporation an additional loan of $10,000,000. Administration and Control The Industrial Credit and Investment Corporation i s by a Board of Directors consisting of fifteen  administered  members, who are elected  4l Reserve Bank of India, op. c i t . , p. 51 i f 2  *  The l e g i s l a t i o n under which the United States Government makes grants i n aid to foreign countries. Reserve Bank of India, Report on Currency and Finance, 1958-59, Bombay, 1959, p. 47,  - 157 by the shareholders.  It i s stipulated  Corporation must be an Indian national.  that the chairman of the The Government of India  has the right to appoint one director u n t i l the Government loan i s f u l l y repaid.  The day to day business of the Corporation i s carried  on by the salaried general manager who i s also to be an Indian national.  The World Bank acts as the Corporation's adviser.  ghe Refinance Corporation Under an agreement between the United States Government and the Government of India, i t was stipulated equivalent  that Rs. 260,000,000, the  of 355,000,000 a r i s i n g out of the sale of imported food  grains from the United States, be reserved for relending to private enterprise  through established banking i n s t i t u t i o n s .  advantage of this arrangement,  In order to take  the Indian Government i n June 1958 set  up the Refinance Corporation - an i n s t i t u t i o n  empowered to make advances  to member scheduled banks against loans granted to medium sized i n d u s t r i a l kk undertakings.  Advances not exceeding Rs. 5,000,000 to a single  concern, were to be made for periods running from three to five  years.  Preference was to be given to industries included in the Second Five Year Plan and the succeeding plans. Capitalisation and Ownership The Refinance Corporation had a paid-up capital of Rs. 25,000,000 k3 which was subscribed by various f i n a n c i a l i n s t i t u t i o n s as follows: A medium sized industry i s defined as a concern whose paid-up capital and reserves are not less than Rs. 500,000 and not more than Rs. 25,000,000. Reserve Bank of India, Report 1958-59, op. c i t . ,  p. k7  158 -  Subscriber  Amount of Subscription  Reserve Bank of India  10,000,000  ko  L i f e Insurance Corporation  5,000,000  20  State Bank of India  4,500,000  18  Fourteen scheduled banks  5,500,000  22  Per Cent of Total  In addition to i t s share c a p i t a l , counterpart funds a r i s i n g from the wheat sale were made available to the Corporation i n the form of an interest bearing loan of Rs. 260,000,000. Administration and Control The management of the Refinance Corporation i s entrusted to a Board of Directors consisting of seven members. Reserve Bank i s i t s chairman.  The Governor of the  The other directors include the Dep&ty  Governor of the Reserve Bank, the Chairman of the State Bank of India and the Chairman of the L i f e Insurance Corporation of India.  The  remaining three directors represent the p a r t i c i p a t i n g scheduled banks. The day-to-day operations of the Corporation are carried on by a salaried general manager. In the beginning loans to banks were restricted to the  fourteen  scheduled institutions which subscribed to the corporation's c a p i t a l . These loans carried an interest rate of 5 per cent,  and the  borrowing banks were not to charge more than V/z per cent above this ratet.ton xhe borrowing customer.. Obviously this maximum did not provide enough p r o f i t margin for the member banks and hence no particular inducement to u t i l i z e the corporation's f a c i l i t i e s .  In view of these  difficulties  - 159 the 6% per cent primary rate l i m i t was relaxed providing the  latter  did not exceed rates on other types of loans in the same l o c a l i t y . After these concessions the Corporations's lending f a c i l i t i e s were extended to fourty three scheduled banks, to a l l State Financial Corporations and to three Cooperative banks.  46  National Small Industries Corporation Although the development of small industries f a l l s within the purview of the State Governments, the Central Government has also stepped in to hasten the process.  In order to assist i n providing the  f i n a n c i a l as well as technical needs of such industries the Government of India established the National Smaill Industries Corporation i n February 1955 with a main office  i n Bombay.  In order to supplement  the operations of this Corporation subsidiary corporations were established i n Calcutta, Delhi, Madras:  also i n Bombay in 1957-  In addition to financial assistance in acquiring machinery under a hire-purchase arrangement, the National Small Industries Cooperation attempts to secure a reasonable share of Government orders for small industries and to provide such technical assistance as may be necessary to f u l f i l l these orders.  It also endeavours to secure coordination  between large and small scale undertakings to enable the latter to supply a n c i l i a r i e s and components required by the large ones.  47  O r i g i n a l l y the hire-purchase scheme was limited to Indian-made machinery. It was eventually extended to imported machinery as well.  ^*  Reserve Bank of India, Report I96O-61, pp. c i t . , p. 65. Reserve Bank of India, Report 1954-55, op. c i t . , p. 51  - 160 Under the o r i g i n a l scheme loan applicants were required to make a down payment of 20 per cent of the value of a general purpose machine and ^yM per cent of that of a special purpose machine.  The balance of  the cost was repayable i n half yearly instalments spread over a period not exceeding eight years.  The f i r s t instalments of such loans were  repayable after six months.  In 1959 this scheme was l i b e r a l i s e d by  reducing the down payments on a special purpose machine to the same l e v e l as that of the general purpose machine.  The down payment of machines  valued at less than Rs. 200 was reduced to 10 per cent as against 20 per cent previously;  and the f i r s t instalment on a l l loans under the  hire-purchase scheme was made payable after one year.  In 19s>0  the down payment on such machines was further reduced to 5 per cent, ^9 providing the remaining 15 per cent was guaranteed by the Government. Capitalization and Ownership When o r i g i n a l l y established this Corporation had a paid-up capital of Rs. 1,000,000 - alllsubscribed by the Government of India. of  Because  the great demand for i t s loans and other assistance, i t s c a p i t a l was •5©  increased to Rs. 4,000,000 i n 1959.  Each of the four subsidiary  Corporations had a paid-up c a p i t a l of Rs. 250,000.  In i 9 6 0 the  Corporation obtained a long term loan of $10,000,000 from the United States Development Loan Fund.  This loan was to be used for procuring  machinery from non-Communist countries.  Machines valued at more than  $50,000 were to be obtained i n the United States only. ^*  Reserve Bank of India, Report on Currency and Finance, 1959-60, Bombay, i 9 6 0 , p. 54 Reserve-Bank;.of-Indda, Report 1960-61, op. c i t • , p. 68 Originally i t s authorised c a p i t a l was equal to Rs. 1,000,000. '1959 i t was increased to Rs. 20,000,000  In  - 161 In  a d d i t i o n to i t s c a p i t a l funds  the C o r p o r a t i o n ' s working  t h e Government s u p p l e m e n t s  c a p i t a l w i t h l o a n s and g r a n t s .  A d m i n i s t r a t i o n and C o n t r o l The  N a t i o n a l S m a l l I n d u s t r i e s C o r p o r a t i o n i s a d m i n i s t e r e d by a  Board o f D i r e c t o r s appointed  b y t h e Government o f I n d i a i n c o n s u l t a t i o n  w i t h t h e R e s e r v e Bank and t h e I n d u s t r i a l F i n a n c e its  s u b s i d i a r i e s i s a d m i n i s t e r e d by a b o a r d  Corporation.  Each o f  o f d i r e c t o r s made up o f  the r e g i o n a l heads o f the J o i n t Development Commission, t h e S m a l l I n d u s t r i e s S e r v i c e I n s t i t u t e , a r e p r e s e n t a t i v e o f s m a l l i n d u s t r i e s and $1  the managing d i r e c t o r o f t h e C o r p o r a t i o n . ' The found The  n a t u r e and e x t e n t o f t h i s C o r p o r a t i o n ' s a c t i v i t i e s w i l l be  i n Part 3 o f Chapter  L i f e Insurance In  V.  Corporation of India  l i n e w i t h i t s p o l i c y o f d e v e l o p m e n t o f t h e I n d i a n economy o n  a s o c i a l i s t i c p a t t e r n , t h e Government o f I n d i a a n n o u n c e d i t s d e c i s i o n to  n a t i o n a l i z e the l i f e  1956 t h e L i f e piloted  Insurance  through  all  In early  C o r p o r a t i o n B i l l was i n t r o d u c e d a n d s u c c e s s f u l l y  Under t h e p r o v i s i o n s o f t h i s m e a s u r e t h e L i f e  C o r p o r a t i o n o f I n d i a was s e t up on S e p t e m b e r 1, 1956, a n d  the l i f e  insurance  b u s i n e s s o f e x i s t i n g c o m p a n i e s i n and o u t s i d e  o f I n d i a was t r a n s f e r r e d t o i t . right  b u s i n e s s i n I n d i a i n 1955«  b o t h H o u s e s o f t h e I n d i a n P a r l i a m e n t , i t was a p p r o v e d  on J u l y 1, 1956. Insurance  insurance  t o c a r r y on l i f e  the f o r e i g n a c t i v i t i e s  The C o r p o r a t i o n was g i v e n a n e x c l u s i v e  i n s u r a n c e b u s i n e s s i n I n d i a and t o c o n t i n u e o f the former  p r i v a t e eompaniesi; - However i t i s  R e s e r v e Bank o f I n d i a , R e p o r t on C u r r e n c y a n d F i n a n c e , Bombay, 1958, p. 48  1957-58  - 162 authorized to transfer i t s foreign business to such insurance companies as i t may deem f i t . At the time of i t s establishment  the Corporation took over the  l i f e insurance business of 245 insurance companies that were engaged i n business i n India.  The t o t a l assets of these l a t t e r  on August 31, 1956 amounted to about Rs. 4,110,000,000;  institutions the t o t a l  number of p o l i c i e s i n force were a l i t t l e over 5,000,000 with an 52  assured value of approximately Rs. 12,500,000,000.  This was indeed  a major conquest for the Indian Government, bringing within i t s reach a considerable sum of voluntary savings. Ownership and Control The L i f e Insurance Corporation has a paid-up capital of Rs.  50,000,000 a l l provided by the Central Government.  It i s managed  by a.Board of Directors consisting of not more than fifteen members including the chairman.  The Board i s charged with the r e s p o n s i b i l i t y  of managing the affairs of the Corporation along proper a c t u a r i a l lines subject only to such directives on policy matters as may be given by the Government.  The Corporation has an Executive Committee, and an  Investment Committee.  The former, consisting of five members, appointed  by the Board, is entrusted with the day to day operations of the Corporation;  the l a t t e r i s responsible for the investment  The nationalization of the l i f e insurance business was  policy. strategic  as well as a p o l i t i c a l move which brought into the Government's orbit the only r e a l l y significant savings instrumentality i n the Indian economy.  52-  Through this newly acquired agency the Government was able to  India, Ministry of Information and Broadcasting, India, 195°, Delhi, p. 251.  - 163 -  channel much of the real savings of the Indian people into Government enterprises. The operations of the L i f e Insurance Corporation along with the other public and semi-public f i n a n c i a l i n s t i t u t i o n s Part 3 of Chapter V.  are reviewed i n  - 164 CHAPTER V OPERATIONS OF THE RESERVE BANK, THE STATE BANK AND OTHER PUBLIC FINANCIAL INSTITUTIONS 1949 ONWARD  The banking l e g i s l a t i o n  enacted by the Indian national Government  f i n a l l y provided the framework for a complete re-orientation of the direction and outlook of the Indian banking system.  What formerly  had been a privately controlled and directed system without a strong centralized authority, to help and guide i t had been subordinated to a central bank redesigned to execute Government policy as well as to meet the day-to-day credit and clearing needs of i t s bank and Government customers.  The Reserve Bank of India had been nationalized.  instruments of monetary control had been considerably enlarged.  Its Moreover  i t s authority was extended to include, where necessary, regulation and direction of the operations of a l l the private banking enterprises, or small, sheduled or non-scheduled.  large  Steps had been taken to convert  the Imperial Bank to the State Bank of India, to extend i t s a g r i c u l t u r a l finance business independently as well as through Cooperative banks, and to expand even further i t s already wide-spread physical Among others,  facilities.  the i n s t i t u t i o n of the Industrial Finance Corporation,  the State Financial Corporations,the Industrial Credit and Investment Corporation, e t c . ,  had provided agencies for making investment  funds  available for an ambitious program of i n d u s t r i a l i z a t i o n - a program which, i t was hoped, would provide the .Country with a higher standard of l i v i n g , and at the same time, a measure of economic independence and self  reliance.  - 165 -  The operations of what we may now c a l l the governmentally controlled banks and their contribution to monetary p o l i c y , and to onward, the Government's program of development from 19^9/may now be reviewed. They shed some light on the extent to which an orthodox conception of the business of both public and private banks must,perforce,be  dis-  regarded i f a planned economic expansion i s to go forward under forced draft. Part I . Operations of the Reserve Bank After 19^9. The operations of the Reserve Bank from 19^9 to date display the often c o n f l i c t i n g roles of a Government banker, a banker's banker, and a guardian of the i n t e g r i t y of a country's money.  Most of these  c o n f l i c t s are revealed by the Reserve Bank's continuous attempts to r e s t r i c t price rises i n face of a constantly increasing Government reliance on Reserve Bank credit i n projecting i t s program of i n d u s t r i a l development. The exercise of Monetary Authority At the beginning of 19^9* Reserve Bank credit as measured by the Reserve Bank's notes outstanding stood at Rs. 11,635>200,000 and the general price l e v e l on a 1939 base at 385.4.  U n t i l this time the  monetary policy of the Reserve Bank, i f one could c a l l i t such, was designed to maintain the market for Government securities and thus help to minimise the cost of the rapidly r i s i n g Government War debts. the late 1940's the Bank's open market policy, i f used at a l l ,  During consisted  of encouragements i n the form of small percentage discounts to the  - 166 i n s t i t u t i o n a l investors to take off the Bank's hands p a r t i c u l a r types of securities which at once suited their investment needs and relieved the Bank of the burden of carrying them."*" Counter Measures for the Korean Inflation Before and during the Korean conflict many foreign countries, p a r t i c u l a r l y the United States of America and the United Kingdom, were stockpiling i n d u s t r i a l raw materials i n anticipation of a f u l l scale war. This had led to a considerable increase i n Indian exports,  a rise i n  prices and a general spurt i n Indian trade and i n d u s t r i a l a c t i v i t y .  ? There was a concomitant increase i n demand for bank credit and the scheduled banks eventually began to liquidate Government s e c u r i t i e s i n order to meet i t .  This, i n the absence of support by the Reserve Bank,  led to a f a l l i n prices of these securities and the corresponding increase iii interest rates.  To prevent any further decrease i n the prices of  these securities •• the Reserve Bank entered the Securities market as a buyer on an unprecedented scale.  The Bank's net purchases of Government 2  securities during 1950 amounted to Rs. 562,700,000 .  This action,  coupled with a trade surplus of Rs. 700,000,000 between July 1950 and March 1951, contributed to a sharp increase i n the country's money supply and i n the general level of prices.  Between March 1950 and March  1951 the Reserve Bank's note c i r c u l a t i o n rose from Rs. 11,635,200,000 to Rs. 12,474,100,000 or by about Rs. 849,000,000. 1  *  2.  J . S . G . Wilson, "The Rise of Central Banking i n India", as quoted in R.S. Sayers, Banking i n the B r i t i s h Commonwealth, Oxford University Press, London, 1952, p. 240. For further details of the Reserve Bank's dealings i n Government securities, see Appendix I at the end of Chapter VII.  - 167 -  This, as i s shown i n the table  .on.  the combined operations of the  Reserve Bank, was largely a result of Government bond purchases. This expansionist monetary p o l i c y , coupled with a continuous increase i n both domestic and foreign demand for Indian goods, boom conditions i n India.  created  Prices of i n d u s t r i a l raw materials, finished  and semi-finished goods were on an uptrend.  The General Price Index  (1939-100) increased from 410 i n 1950 to 435 i n 1951. a c t i v i t y had developed i n the goods market.  A speculative  In order to curb this, the  Reserve Bank exercised i t s newly acquired selective credit control authority to direct a l l banking i n s t i t u t i o n s to r e s t r i c t their advances against raw jute and jute goods.  Scheduled banks i n Calcutta and  surrounding areas p a r t i c u l a r l y were asked to r e c a l l their advances against jute stock,  to parties other than jute m i l l s and jute exporters,  within a specified period of time. Bank Rate In order to counteract the general rise i n prices the Bank increased i t s discount rate (Bank Rate) from 3 per cent to yh per cent, on November 15, 1951, and simultaneously announced that i t would not, except i n emergency cases, continue to buy Government securities from the scheduled banks at the existing price of Rs. 92.7 per Rs.100.  In  f a c t , during the following two years the Bank disposed of almost Rs. 1,300,000,000 worth of Government bonds and thereby reduced the outstanding notes i n c i r c u l a t i o n by approximately the same amount.  The  Imperial Bank followed the Reserve Bank's lead by r a i s i n g the rate (Advance Rate) at which i t was prepared to make short term loans. from 2& per cent to %• per cent and i t s Hundi Rate from 3# per cent to  - 168 4)4 per cent.  The Exchange Banks increased their lending rates on  acceptances from 1 per cent to Vk per cent.  The Indian Joint Stock  banks generally passed the increase i n bank rates along to their customers i n the form of higher interest  rates.  As an immediate consequence of these a c t i v i t i e s  the Government's  3 per cent I985 conversion bonds, which had been supported at Rs.  92.7, had declined to Rs. 80 by December  3, 1951 and the y i e l d  4 had risen to approximately 4 per cent.  Thereafter the price was held  at about this l e v e l , though not without subsequently adding to the Bank's investment account and i t s outstanding c i r c u l a t i o n . The increase i n the Bank Rate, coupled with the changes i n open market policy, may have put a brake on credit expansion by the commercial banks.  The amount outstanding at the scheduled banks decreased from  Rs. 5,321,000,000 at the end of March 1951 to a t o t a l of Rs. 5,195,000,000 at the end of March 1952, and to Rs. 4,914,000,000 at the end of March 5 Yet i t must be realized that the inventory s t o c k - p i l i n g by  1953.  foreign interests had been discontinued and thus one of the temporary but significant pressures on prices had been removed.  This, coupled  with increased a g r i c u l t u r a l production, had eased the pressure on the price l e v e l .  The Consumer Price Index (1949-100) decreased fjr,om lOoVirf; 1953  to 99 i n the following year, and declined further to 96 i n 1955. 5*  Reserve Bank of India, Report on Currency and Finance, 1957-1958, Bombay, 1958, Statements 30 and 3 1 .  L  G.P. 5.  Gupta, The Reserve Bank of India and Monetary Management, New York, Asia Publishing House, 1962, p. l64.  Reserve Bank of India, Trend and Progress of Banking i n India - I960, Bombay, 1 9 6 l , p.6o.  - 169 The B i l l Market Scheme Although the Reserve Bank was authorized under the o r i g i n a l enabling Act and i t s subsequent amendments to rediscount bona fide commercial b i l l s , l i t t l e use had been made of the Bank's f a c i l t i e s by the private banks u n t i l 1951.  This indifferehce may be attributed  to the existence of other less expensive and more convenient methods of obtaining l i q u i d funds, such as disposing of investments and s o l i c i t i n g deposits,  as well as by the t r a d i t i o n a l association of private  banks with the Imperial Bank of India. the means of making effective of a short term money p o l i c y .  It l e f t the Reserve Bank without  use of the discount rate i n the  exercise  In order to correct the s i t u a t i o n the  Reserve Bank o f f i c i a l s i n consultation with representatives of some of the large scheduled banks evolved what has since been called the B i l l Market Scheme, and introduced i t on an experimental basis on January 16, 6 The important features of the Scheme were:  1952. i.  ii.  iii. iv.  An undertaking on the part of the Reserve Bank under Section 17 (4) (C) of the Reserve Bank Act, 1934, to make loans against bona fide commercial time b i l l s of exchange and promissory noted drawn on and payable i n India, and countersigned by a scheduled bank at % of 1 per cent below the posted discount rate. An additional of 1 per cent b i l l s to time this duty was  undertaking oh the part of the Bank to bear yk stamp duty imposed on the conversion of demand b i l l s by the central Government. Subsequently withdrawn.  The Scheme was limited to large scheduled •hanksiwaitfiodeposits of Rs. 100,000,000 or over. The minimum value of an individual b i l l "to be discounted under the Scheme was fixed at Rs. 100,000 and the minimum that a bank could rediscount was fixed at Rs. 250,000.  Reserve Bank of India, Report on Currency and Finance, 1953-54, Bombay, 1954, p. 46.  - 170 With these enticements the reluctance of the private banks to patronize the Reserve Bank were quickly overcome, and the Scheme proved to be successful.  Finally,  effective  from July 14, 195k, i t  was extended to a l l scheduled banks irrespective of their s i z e .  The  minimum l i m i t on advances to a single bank was reduced to Rs.1,000,000 7  and that on individual b i l l s was reduced to Rs. 50,000.  The  Government added to the attractiveness of the Scheme by temporily removing the stamp duty altogether. Although, as disclosed above, the Reserve Bank raised i t s discount rate on advance secured against Government bonds during the l a t t e r part of the Korean c o n f l i c t , i t did not change the rate on discounted bills.  This presumably further explains the immediate success of the  Scheme and the phenomenal increase i n the advances made under i t even while the Bank was pursuing, on the surface at l e a s t , a r e s t r i c t i v e monetary p o l i c y .  By 1952 advances under the Scheme had r i s e n to  Rs.  8l4,500,000 and by 1957 had reached the impressive figure of  Rs.  4,148,100,000.  Extension of the B i l l Market Scheme The success of the B i l l Market Scheme with respect to the i n t e r n a l b i l l s of exchange led •  the Bank to extend this scheme for  one year to export b i l l s on October 1, 1958.  In this f i e l d this  Scheme was introduced (and s t i l l operates) on an experimental basis at Bombay and Calcutta.  Under t h i s scheme the banks that were e l i g i b l e  to borrow against the time b i l l s under the o r i g i n a l B i l l Market Scheme  Reserve Bank of India, Trend and Progress of Banking i n India during 1954, Bombay, 1955, P-8.  - 171and those which were authorised dealers i n foreign exchange, could also borrow under the extended Scheme against their export b i l l s . In order to make advances available to small exporters under t h i s scheme the minimum amount to be advanced to a bank and the minimum amount of an individual time b i l l of exchange to be accepted as security were fixed at Rs. 200,000 and Rs. 20,000 Respectively as respectively against Rs. 500,000 and Rs. 50,000,,in the case of other advances  g under the scheme.  Although the interest rate charged on these loans  was the same as on other loans against internal time b i l l s , i . e ,  four  per  cent, the Reserve Bank was to bear half the stamp duty cost required  for  the conversion of demand b i l l s into time b i l l s .  This scheme was further l i b e r a l i s e d and extended u n t i l September and 30, 1 9 6 l , / i n order to increase exports by assisting Indian exporters, The Bank undertook to pay a l l the cost of the Stamp Duty.  Since the  o r i g i n a l limits were high for a number of Indian exporters, they were further slashed to bring them within the reach of the average Indian exporters.  Thus the minimum amount of borrowing by an e l i g i b l e bank  at any one time, and the amount of an individual time promisory note, were reduced to Rs. 100,000 and Rs. 10,000 respectively.  Since January 9  12, 1961, the l a t t e r l i m i t has further been reduced to Rs. 5,000. In addition to the reduction of these l i m i t s , the f a c i l i t i e s provided under this Scheme,which were o r i g i n a l l y limited to Bombay and Calcutta, branches of were extended to a l l places where/the Banking ©epartment of the Reserve  o Reserve Bank of India,  -  9  Trend and Progress of Banking i n India during 1958,Bombay, 1959, PP> IO6-7. c c  Reserve Bank of India, Report on Currency and Finance, 1960-61, Bombay, 1961, p. ^7.  •  '  Bank was located.  - 172 These places include, Madras, Bangalore, Kaupur,  Nagpur, and New Delhi.  Moreover, the stipulation that the parties  concerned should either cover the exchange r i s k , or maintain the specific margin of r e l a t i v e loans accounts, has been withdrawn and l e f t ot the discretion of the banks concered.' ' Since the B i l l Market 1  0  Scheme i n this f i e l d i s quite new, the data required for a proper study of i t s operations arenot yet available i n sufficient  detail.  The Containment of Budgetary I n f l a t i o n The trend of both wholesale and r e t a i l prices turned downward to well below the 1949 l e v e l after the collapse of the economic boom caused by the Korean War.  A new and sustained upward trend began late  i n 1955. This was no doubt due to the effect of the mounting budgetary d e f i c i t s by means of which the Indian Government was able to accelerate i t s plans for i n d u s t r i a l growth and development from that time onward. By 1955, the last year of the F i r s t Five Year Plan, annual d e f i c i t s had reached Rs. 1,500,000,000 and were s t i l l growing.  By the end of  March 1956, these d e f i c i t s had raised the note c i r c u l a t i o n of the Reserve Bank to about Rs. 14,700,000,000, an increase of almost Rs. 2,000,000,000 over 1954 and approximately Rs. 3,300,000,000 over ted 1951.  Before this large and not immediately substantia/ increase could  be ansorbed i n transaction and reserve cash needs, the general l e v e l of wholesale prices had been pushed up^some fifteen points, from 91.4 i n 1955 to 107.1 i n 1957. The comparable change i n the Consumer Price Index was from 96 to 112.  10.  •seser.ve .Bank of India, Report I96O-6I, op. c i t . , p. 47  - 173 Bank Rate Adjustments and Open Market Operations Although the Reserve Bank could not have hoped to arrest an.i i n f l a t i o n for which i t s own Issue Department was supplying the necessary i n i t i a l f u e l , i t could, nevertheless,  attempt to constrain i t .  The  f i r s t control measure which i t employed, not too l o g i c a l l y , came i n the form of an increase^ i n the Bank's rate on advances against inland bills.  This special rate under the B i l l Market Scheme was f i r s t raised  from i t s o r i g i n a l base of 3 per cent to 3% per cent i n March of 1956. In the following November i t was further raised to 3% per cent where, for the moment i t was even with the Bank's rate on advances secured by Government bonds.  In February 1957, however, the Government reimposed  the stamp duty at a rate of ^ of 1 per cent.  U n t i l the following May,  when the Reserve Bank raised i t s rate on Government securities from 3)& per cent to 4 per cent, and the Government reduced the stamp duty to 1/5 of 1 per cent, the effective  inland b i l l rate exceeded the  Government security rate by % of 1 per cent.  Thereafter the B i l l rate  exceeded the Security rate by 1/5 of 1 per cent, the l a t t e r being effective  at k per cent.  Meanwhile the state Bank of India had increased i t s Hundi Rate from 5 per cent to 5/£ per cent; 1  k per cent to h-Vz per cent;  i t s rate on short term advances, from  and i t s C a l l Loan Rate (on loans of  Rs. 500,000 or over) from 3/2 per cent to k per c e n t . 1  1 1  Similar actions  were taken by the Exchange Banks and the Indian Joint Stock banks,but the extent of the change i n t h e i r rates varied.  A l l banking i n s t i t u t i o n s ,  11. Reserve Bank of India, Trend and Progress of Banking i n India, during 1958, Bombay, 1959, PP- kk-k^.  _ 174 -  large or small, followed the lead provided by the Reserve Bank and passed the. related rate increases along to their borrowers. No subsequent increase was posted i n the Bank rate on advances against Government securities because of the related increase i n the carrying cost of the Government's mounting debt and i t s effect on the prices of securities already outstanding.  Because of possible  dis-  couragement of new enterprises and real expansion i n the private sector of the economy, ho subsequent increase was posted i n the rate on advances against inland b i l l s and other commercial paper'.. .Thereafter the Bank had to rely  on i t s other credit control measures.  In  fact, ripen market acquisitions of long term Government bonds had to be continued from that time on to sustain a market price of.Rs. 80 and a not too attractive y i e l d of 4 per cent. Selective Credit Controls i n A g r i c u l t u r a l Products During the late 1 9 5 0 ' s the Reserve Bank turned to the use of selective Credit  control measures, boih i n the form of r a i s i n g margin  requirements and of f i x i n g a maximum c e i l i n g on bank loans, which i t had f i r s t employed to r e s t r i c t bank advances to speculators i n raw jute. The Bank resorted to this measure to curb the abuse of bank credit and, at the same time ,to supress i t s inflationary potential. the  It could not  of course hope to hold back the tide of/creeping i n f l a t i o n by such short term measures, but i t could contain some of the secondary aggravations most of which had appeared i n the a g r i c u l t u r a l sector. On Paddy Rice and Food Grains A substantial increase i n developmental expenditure involving large d e f i c i t financing during 1955 and 1956 appears to have contributed  - 175 to an inflationary psychology.  This led to hoarding of a g r i c u l t u r a l  commodities, p a r t i c u l a r l y those i n short supply, i n an anticipation of  future price increases.  From the reports submitted by banks  during 1956 the Reserve Bank authorities noticed a significant  increase  in bank loans against paddy and r i c e , beyond a l e v e l that could be j u s t i f i e d by the increase i n their production.  Whereas the t o t a l bank  advances against paddy and r i c e amounted to Rs. 116,000,000 during the 1955 crop season, these had increased to Rs. 246,000,000, with l i t t l e or  even  no i n c r e a s e s  in total  ricel  production,  during  the  1956  crop  12 season.  To arrest the price increases of paddy and r i c e , the Reserve  Bank directed a l l banks on May 17, 1956 not to grant ..new  advances i n  excess of Rs. 50,000 to individual parties against r i c e and paddy, and to raise the existing margin requirement on such loans by 10 per cent. The banks were further instructed to bring down their advances  against  these commodities to a l e v e l of 125 per cent of the l e v e l of such loans in the corresponding period of the preceding year.*^  Through another  directive on July 12, 1957, bank credit against paddy and r i c e was further restricted to 66.2/3 oer cent of the l e v e l p r e v a i l i n g i n the 14 corresponding week i n 1956.  These r e s t r i c t i v e measures resulted  in a phenomenal cut back i n bank loans against paddy and r i c e , and i n the respective prices of these commodities. The Bank i n 1957 made a frontal attack to arrest the price increases i n other food grains which were i n short supply.  Unfavourable  12.  G.P.  13.  Reserve Bank of India, Report on Currency and Finance, 1955-56, Bombay, '1956, p. 32.  14.  Gupta, op. c i t . , pp. 206-207-  Ibid, 1956-57, p. 33.  - 176 weather conditions had resulted i n a considerable reduction i n the 1956 harvest of food grains. lower than i n 1955.  Their production that year was ten per eent  Yet, despite the decrease i n harvest and the  Bank's e a r l i e r general d i r e c t i v e ,  the amount of bank credit  against these crops had continued to increase.  extended  This had made possible  the speculative hoarding of these commodities and a rise i n their p r i c e . In June of 1956 the Reserve Bank directed a l l commercial banks to increase their margin requirements for advances on food grains to kO per cent, and to l i m i t  individual  loans  against  food  grains  to Rs. 50,000.  The  banks were directed to r e s t r i c t the aggregate of such advances made i n succeeding years to 80 per cent of the amount outstanding on the following July 12, 1957. These selective controls appear for the time being to have accomplished their respective tasks.  Restrictions on paddy and r i c e  therefore were relaxed i n 1958 to 75 per c ent of the average amount of such loans outstanding i n the corresponding months of 1955» 1956-and 1957.  This somewhat more f l e x i b l e base was applied to advances on other  food grains, but the 80 per cent r e s t r i c t i o n remained as unchanged. The production of other food grains was disappointing i n the following year and i t was feared that their price l e v e l would increase substantially.  Some State Governments introduced a program for  procurement of food grains to counteract the expected price increases. To help them i n this program the Bank modified i t s existing credit control measures against food grains.  selective  On July 10, 1959, the  Bank enjoined a l l scheduled banks to continue to maintain the  existing  margin 'requirements of 40 per cent of the value of stock i n respect of  - 177 their advances against food grains, but revised these l i m i t s down to 25 per cent i n respect of their advances against paddy and r i c e to purchasing agents of the Government of Orissa, and against wheat to storage delivery contractors operating on behalf of the Punjab Government. The production of food grains during i 9 6 0 increased by about 6 per cent over the preceding year, while supplies were further augmented by imports under the Public Law 480 from the United States. Credit controls against food grains were relaxed accordingly, and their at Ions oper/was made more f l e x i b l e by r e l a t i n g i t to the amounts of such credits granted during the corresponding months of 1958 or 1959, whichever was higher. The prospect of a good crop i n 1 9 6 l had a dampening effect on food g*ain prices.  In February of tha|- year, the Bank accordingly  reduced the margin requirements on advances against food grain from 40 per cent to 35 per cent.  With respect to their advances against paddy  and r i c e beginning with March, A p r i l of 1961, the banks were required to maintain a level of 110 per cent of the average l e v e l of the prevailing i n the corresponding period of 19°0.  advances  Fortunately for a l l  concerned, continuing good crops and a f a i r l y stable price had made possible  the elimination of a l l controls on wheat as of May 15, 19&1.  However i n the absence of similar production increase,  the controls on  bank credit against paddy and r i c e were continued.  15. 16.  Reserve Bank of India, Report, 1959-60, op. c i t . , Reserve Bank of India, Report 1960-61, op. c i t . ,  p. 34. p. 44  - 178 Ground nuts During the f i r s t two months of 1959 the spot and forward prices of ground nuts had shown sharp increases,  Though a part of  these increases could be attributed to a significant decrease i n the 1958 crop, which f e l l by about 8 per cent over the l e v e l of production in the previous year, a large part .appeared to be due to excessive 17 hoarding supported by bank c r e d i t .  The amount outstanding of such  credit had increased from Es. 15,800,000 i n October 1958 to Rs.129,500,000 by the end of A p r i l 1959• of  In order to check the speculative  hoarding  ground nuts without at the same time affecting the operations of  legitimate producers and dealers,  the Reserve Bank on February 8, 1958  directed a l l scheduled banks to increase existing margin requirements for  advances against the security of ground nuts granted before  February 9, 1959 to not less than 45 per cent.of the value of stock and to maintain this r a t i o for a l l such future advances.  For each month  hereafter the scheduled banks were enjoined to r e s t r i c t their t o t a l current advances against ground nuts to the l e v e l maintained i n the corresponding months of 1957 and 1958, whichever was the higher.  These  provisions did not apply to persons holding v a l i d export licenses for l8 ground nuts and to manufacturers of ground nut o i l . Though at f i r s t d i f f i c u l t to apply, these r e s t r i c t i v e measures appear to have been instrumental i n reducing the bank credit against 19 the security of ground nuts-  But, despite this fact,  the prices of  17.  Reserve Bank of India, B u l l e t i n , November i 9 6 0 , pp. 1692-93.  18.  Reserve Bank of India, Trend and Progress of Banking i n India during 1959, Bombay, i 9 6 0 , p. 126  19.  Ibid, p. 144  - 179 ground nuts and other o i l seeds continued to r i s e .  The Bank noticed  that speculative hoarding of 'oilseeds' had developed, as bank credit against o i l seeds was considerably higher i n 1959 that i n 1 9 5 8 . i t was beyond a l e v e l j u s t i f i e d by any increase i n production.  In order  to discourage this unhealthy development the Reserve Bank directed a l l scheduled banks on December 11, 1959 to maintain kO per cent margins against advances on o i l seeds.  But, as i n the case of ground nuts, these  r e s t r i c t i o n s did not apply to genuine exporters of o i l seeds or to manufacturers of vegetable o i l . ^ 2  It appears that these r e s t r i c t i v e  measures helped to reduce the demand for o i l seeds and the pressure on their prices. Raw Jute and Jute goods After a peak crop of jute i n 1958 the output of that product was r e l a t i v e l y small i n the following two years.  Prices of raw jute  and jute goods reached new heights and- because?;ofsthis  supplies were  hoarded i n anticipation of even higher prices i n the future. price of raw jute rose-  The  .-."by 72 per cent, and that of jute goods  by 5k per cent between November 1959 and November, i 9 6 0 .  From the  weekly and monthly statements submitted by the scheduled banks, the Reserve Bank o f f i c i a l s  concluded that a substantial part of the price  increase was supported by an unwarranted increase i n bank credit against jute and jute products. Between October 28, and November 11, i 9 6 0 the bank credit against jute had increased by  Rs.20,000,000 21  and a similar increase was noticed against jute goods.  In order  to discourage the speculative hoarding and to check any further increase  20. 21.  Reserve• Ba-rik • o f India, Trend and Progress of Banking in India during 1959, Bombay, i 9 6 0 , p. ikk. Reserve Bank of India, Report I960-61, OJK c i t . , p. kk  - 180 in all  jute prices the Bank issued a d i r e c t i v e , i n December i 9 6 0 , to scheduled banks to maintain a minimum margin of kO per cent of  the value of stock against advances, both old and new, on stocks of jute and jute goods and r e s t r i c t e d the totals of such advances,every two months, starting from January 1 9 6 l , to 130 per cent of the average amount recorded for the corresponding period of i 9 6 0 .  In order to  avoid any adverse effects on the production and export of jute goods, the maximum margin requirements for advances on raw jute to jute m i l l operators and exporters of jute goods was fixed at 25 per cent. The  selective credit control measures against jute and jute goods  were successful i n restraining bank credit against these products, as the Reserve Bank later reported.  The ko per cent margin requirements 22  against jute and jute goods were therefore withdrawn i n June  1961.  However, i n evaluating the success of the credit control measure one should not lose sight of the fact that the supply of jute had considerably improved during 1961.  In fact, as a result of a bumper crop of  jute that year, a l l r e s t r i c t i v e measures against this product were withdrawn on August 29, 1 9 6 l . Selective Controls on Stock Trading Although the A l l India Index of Industrial securities prices increased only by Ik per centage points between March 1959  and March  i 9 6 0 , the more sensitive index of the Bombay Schoffeincreased by as much as 27 per cent over the same period.  In the opinion of the Bank  this was partly due to narrow margin requirements on c a l l loans, and partly due to an absence of r e s t r i c t i o n s on the amount of credit  Reserve Bank of India, Report, 1960-61, op. c i t . , p. kk  - 181 available to professional speculators.  But i t may have been the  result of a growing number of prudent investors who were hedging against the continued decline i n the purchasing power of the Kupee. The former view seems to be nearer to the truth, because between February 1959 and February i 9 6 0 bank loans on stocks had increased from 8 . 6 per cent to 15 per cent of total bank advances,  thus  r e s t r i c t i n g the amount of credit available for more s o c i a l l y productive 25 undertakings.  To check any further increase i n prices i n the share  market, and to eliminate i l l effects that might follow such an unhealthy s i t u a t i o n , the Bank on March 11, i 9 6 0 raised the margin jrequirements on loans against stocks to 50 per cent of the value of the Shares traded.  But most of the potential r e s t r i c t i v e effect of t h i s measure  was dissipated by the Bank's attempt to r e s t r i c t i t s application to large speculative dealers, and by exempting a l l purchases of shares amounting to Rs. 5,000 or l e s s . The Reserve Bank, i n order to prevent any circumvention of this d i r e c t i v e , prescribed that, i n the absence of i t s special consent,  the  average ratio of clean advances to t o a l advances i n any month s t a r t i n g from A p r i l i 9 6 0 was not to exceed the average ratio i n the corresponding month of 1959.  In view of these maximum limits on clean advances, their  r a t i o to toal bank advances was reduced from 1 7 . 3 per cent i n September i 9 6 0 to 1 3 . 3 per cent i n September 1961.  When the stockmarket resumed  i t s normal course, these r e s t r i c t i o n s were set aside, effective  from  October 2 3 , 19&1.  Reserve Bank of India, Trend and Progress of Banking i n India during i 9 6 0 , Bombay, 1 9 6 l , p. 133 I b i d . , p. 12  - 182 The Reserve Bank concluded i n a 1961 review of the  efficacy  of selective credit controls as an instrument of monetary p o l i c y , that by and large i t s operations during i960 and 1961 had been effective.  The banking i n s t i t u t i o n s were wor2<ing within the framework  of the Reserve Bank's control measures.  Throughout the years advances  against paddy and r i c e remained well below the 35 per cent l i m i t allowed under the d i r e c t i v e .  Bank advances against food grains and ground nuts  were, respectively 26 per cent and 23 per cent below the permitted of 35 per cent.  levels  Although i n A p r i l 1961 advances against stocks and shares  reached the maximum l e v e l permitted, after that date the amount remained well within the l i m i t s prescribed by the Bank. Credit Rationing As the selective credit controls on a g r i c u l t u r a l advances and stock trading did not stop the tide of i n f l a t i o n arising from the use of Reserve Bank credit by i t s member banks, the Reserve Bank turned to other as yet untried expedients.  Among these was the rationing of Reserve Bank  credit to the commercial banks, and the manipulation of the statutory reserve ratios of banking enterprises. As noted e a r l i e r , a considerable increase i n prices during i960 was supported by an extension of bank c r e d i t .  During the same year the  borrowings of the scheduled banks from the Reserve Bank had increased to Rs. 384,000,000 from a considerably less amount of Rs. 185,000,000 in 1959.  In order to curb this source of i n f l a t i o n the Reserve Bank  issued a c i r c u l a r on September 21, i960 according to which the Bank rate  - 183 was suspended beyond the quota fixed for each scheduled bank.  In the  c i r c u l a r eaah scheduled bank was assigned a borrowing quota equal to 50 per cent of i t s average of statutory reserve requirements during the preceding quarter.  Any bank that borrowed above this l i m i t was  charged a penalty rate.  According to the directive "any borrowing  over this l i m i t up to 200 per cent of the quota would bear a penal rate of  1 per cent over the Bank Rate;  i.e.,  5 per cent,  and borrowing above  200 per cent of the quota, a penal rate of 2 per cent above the Bank "25 Rate. J  Generally an increase i n the borrowing rate of the scheduled banks should lead to an increase i n their lending rate to primary borrowers. Biit i t need not be true for banks that have excess reserves and that do not need to borrow from the Reserve Bank.  Moreover, as the Bank Rate  was not increased, such scheduled banks would have found i t not to increase their lending rates.  expedient  Borrowing banks that may be  financing the productive credit needs of their borrowers would have been the victims of this r e s t r i c t i v e measure.  To avoid this the Reserve Bank  issued another directive on October 1, I 9 6 0 ,  requiring a l l scheduled  banks to charge a minimum lending rate of one per cent above the Bank Rate on a l l advances except the inter-bank loans and the loans to their employees.  The banking institutions were further directed, under Section  21 of the Banking Companies Act of 19^9, -to iraise their average lending rate at least by # of one per cent (the base being June 30, i 9 6 0 ) and not to pay interest rates higher than 2 per cent on deposits repayable 26 within 21 days. 2 5  *  Reserve Bank of India,  26. Loc.  cit..  Report, 1960-61, op_. c i t . , p. k2  - 184 The Reserve Bank modified this three t i e r rate formula, where necessary to meet the genuine credit needs of expanding industry and trade i n order to provide adequate bank credit to jute and sugar m i l l s . It sanctioned large l i m i t s on the b i l l s discounted by these m i l l s . The Bank also used this measure to encourage commercial bank loans to small and cooperative i n d u s t r i e s .  To this end i t sanctioned  additional quotas equivalent to the increase i n their loans to such enterprises i n the f i r s t half of 1961 over the corresponding period of  I960.  2 7  It appears that the increased lending rate of the Reserve Bank above a certain l i m i t restrained the scheduled Banks,borrowing from the Bank.  The t o t a l amount of t h e i r borrowing decreased from  Rs. 384,000,000 i n i960 to Rs. 282,000,000 i n 1961.  The'.precise-  effect cannot be observed, however, as other restraining forces were also at work. Reserve Ratio Variation The Reserve Bank also took action to r e s t r i c t further, and more decisively, the a b i l i t y of commercial banks to expand credit and increase the money supply more rapidly than the output of goods.  It  exercised  i t s newly acquired authority to raise the statutory reserve r a t i o of the scheduled banks .requiring them to maintain with i t an additional average daily balance equivalent to 25 per cent of the increase i n their  28 time and demand deposits accruing after this date.  These reserve  requirements were i n addition to the existing statutory reserves of  27. 28.  Reserve Bank of India, Trend and Progress of Banking m India during 1 9 6 l , Bombay, 1962, p. 11 I b i d . , Trend and Progress - i 9 6 0 , pp. 120-25  - 185 5 per cent of their demand deposits and 2 per cent of their time deposits. deposits,  By way of p a r t i a l compensation for this s t e r i l i z a t i o n of the Reserve Bank undertook to pay interest on reserve  deposits at a rate determined by the average rate paid by the depository banks provided the rate did not exceed the Bank R a t e .  2 9  As might have been expected this increase i n the reserve ratio had  l i t t l e i f any effect, probably because Indian banks had long been  in  the habit of actually maintaining considerably more reserves than  the addition made necessary.  Consequently on May 5, 19^0 the Reserve  Bank increased the scheduled banks reserve requirements rather d r a s t i c a l l y . Under the new d i r e c t i v e , the scheduled banks were required to maintainj 25 per cent of the amount by which their t o t a l deposits on May 6, i960  i)  exceeded the comparable total on March 11, i960;  ii)  50 per cent of the  amount by which their t o t a l deposits exceeded the corresponding t o t a l on May 6,  I960.  5 0  These measures did of course reduce the credit expansion a b i l i t y of  the scheduled banks, and i n the f i n a l analysis checked the pace of  inflationary forces by making i t necessary for primary borrowers to finance a r i s i n g real output with the same or even a declining amount of  credit.  This considerably reduced the credit expansion capacity  of  the scheduled banks, and placed excessive burdens on them i n the  form of large reserves.  To compensate for losses i n their earning  capacity the Reserve Bank undertook to pay interest on the  Reserve Bank of India, Trend and Progress - I960, op. c i t . , p. 124 *  Ibid, p. 126  - 186 additional reserves,  this time at # of 1 per cent above their average  31 rate of interest subject to a maximum of tyz per cent. In spite of this decrease i n the l i q u i d reserves of the scheduled banks, resulting from the increase i n their reserve requirements, bank credit continued to expand.  This was made possible by the banks  increased borrowing and from the sale of Government securities at the Reserve Bank.  In this l a t t e r expedient,  the open market operation was  i n i t i a t e d by the member banks and, as long as the Reserve Bank persisted i n maintaining the price of Government bonds and a c e i l i n g on interest,: rates, nothing could be done about i t except to resort to measures which limited the Reserve Bank credit to member banks.  This l a t t e r took  the form of the already discussed credit rationing. As would be expected under the prevalent conditions i n the Indian money market, the substantial increase i n reserve ratios do to have achieved the desired objectives.  not seem  They merely burdened the Reserve  Bank with calculating and doling out the interest rates on additional reserves, and discouraged deposit mobilization by .scheduled banks.  In  view of the considerable increase i n demand for bank credit during i960 and 1 9 6 l , and the unnecessary constraint placed on r e a l growth i n the economy, the Reserve Bank removed additional reserve requirements on a l l deposits subsequent to November 11, i 9 6 0 .  The 50 per cent reserve  requirements on additional deposits was reduced to 25 per cent i n the following month.  F i n a l l y , i n January 1 9 6 l , the rest of the reserve  r e s t r i c t i o n s were set aside as the money market showed signs of r e l i e f and prices were r e l a t i v e l y stable.  31. Reserve Bank of India, Trend and Progress - i960, op. c i t . , p. 126  - 18? Moral Suasion To Westerners, moral suasion as an instrument of credit control refers to requests for the exercise of restraint that are not covered by the instruments of monetary policy which the central bank has already been authorised to use.  This method of friendly persuasion  and advice to influence the lending policy of commercial banks has long been used both by the old and newly established central banks. But i t s  effects have been more pronounced i n the former case rather than  in the l a t t e r . Although the Governor of the Reserve Bank had requested the cooperation of commercial banks on a number of occasions before 19^9, i t had rarely been complied with.  After that year, however, when the  Reserve Bank was equipped with sweeping regulatory powers over a l l banking i n s t i t u t i o n s ,  the Governor's requests carried more weight and  were usually acted upon.  During 1957, when prices of a g r i c u l t u r a l  commodities were increasing continuously, the Bank authorities used moral suasion i n addition to selective credit control i n order to l i m i t the examinsion i n Bank c r e d i t .  During a conference with the represent-  atives of banks in August 1957, the Governor of the Bank advised them to bring down their advances to a l e v e l of Rs. 8,000,000,000 by the middle of October 1957 and thus help to contain the inflationary forces at work.  As the Bank l a t e r reported, the Commercial banks f u l l y  cooperated and the t o t a l bank credit decreased from Rs. 9,380,000,000  32 in July 1957 to Rs. 8,470,000,000 i n September 1957.  Reserve Bank of India, Report 1957-58, op. c i t . , p. 31  — 188 The latest use of this measure was i n May i 9 6 0 .  During that-  year, the general price l e v e l was considerably higher than i n the corresponding period of 1959 although the production of both a g r i c u l t u r a l and i n d u s t r i a l goods was higher.  From the weekly state-  ments submitted by commercial banks, the Bank authorities noticed that the a considerable increase i n prices was supported by/expansion of bank credit.  In order to remove this source of i n f l a t i o n , the Governor of  the Bank enjoined a l l commercial banks to.reduce their t o t a l  advances  by about Rs. 11,000,000,000, or about 10 per cent, during the slack season (May to November).  There seems to have been l i t t l e  response  from the banks, as bank credit decreased by only Rs. 203,000,000 during 33 that time. On the whole the Bank authorities have been able to influence the lending policy of commercial banks through this method of credit control.  This may partly be attributed to the substantial powers  vested i n the Reserve Bank.  Banking i n s t i t u t i o n s are well aware of  the fact that i f the friendly nod f a i l s ,  the regulatory rod i s bound  to follow. The Accomplishments of Monetary Control The Reserve Bank i n general has employed i n one form or another the entire arsenal of i t s credit control instruments.  Although each  appeared to be j u s t i f i e d i n the particular circumstances prevailing at the time, none of them constituted a frontal attack on the basic prompting force i n the country's creeping i n f l a t i o n , i . e . ,  continued  33. Reserve Bank of India, Trend and Progress of Banking i n India during i 9 6 0 , Bombay, 1961, pp. 137-38.  - 189 budgetary imbalances and heavy reliance on Reserve Bank credit i n financing the country's planned program of i n d u s t r i a l i z a t i o n and economic development.  But to have attempted such a frontal attack i n  the special case of India, p a r t i c u l a r l y during the prosecution of the Second Five Year Plan, would have been tantamount to defeating the program i t s e l f . sufficient,  Voluntary savings and foreign assistance were not  and forced savings with i t s price increase counterpart real  was th© only answer i f a perceptable rate of/growth was to be maintained. Some of the more important indicators of the nature and extent of the price control problem are brought together i n Table.jNo. 26 on'page 190.-. This somewhat random display reveals, f i r s t , the very rapid increase i n India's outstanding funded debt after 1954, and the extent to which the Reserve Bank was called upon to support i t at a 4 per cent rate by taking excess offerings off the market.  After 1954 this one-sided open  market operation eventually brought an almost four-fold increase i n the Reserve Bank's holdings of Government bonds.  In less compelling c i r -  cumstances the increase i n the Bank's share of the t o t a l outstanding debt would undoubtedly have been considered alarming.  The Reserve  Bank's holding of Government debt amounted to Rs. 5,159,000,000 i n 1949, which constituted a l i t t l e over 21 per cent of the t o t a l outstanding debt.  By 196l i t s holdings of Rs. 19,106,000,000 constituted a l i t t l e  over 35 per cent of the t o t a l outstanding debt.  Meanwhile the increase  i n the Reserve Bank's credit was put to good use even i f i t was i n flationary.  The national income at current prices increased from  approximately Rs. 90,000,000,000 i n 1949 to an estimated sum of Rs. 142,000,000,000 i n i960 roughly a 57 per cent gain during this period.  190b  190a Table 26 '", Comparable Rates of Growth of Public Debt, Reserve Bank Credit and National Income, 1949-1961, Inc. (Rs. 000,000) Reserve Bank Credit Notes Holders of OutGov't. standing Securities  National Income Current Prices  1949 Prices  Public debt Index  ~% at Res.Bank  Comparable Rates of Growth, 1949=100 National Income Current % inc. i n Price '49 Price R. B. Notes  Consumer Price Index  Year  Total Public Debt  1949  23,781  5,159  11,529  90,100  90,100  100  21.2  100  100  100  100  1950  24,627  5,858  11,804  95,300  94,400  103.7  23.8  102.6  105.2  104.7  101  1951  24,722  12,176  99,700  95,900  104:i  22.9  106.1  115.6  106.5  104  1952  24,598  4,560  11,427  98,200  94,400  103.6  18.9  99.1  109.0  104.9  104  1953  24,935  4,875  11,570  104,800  98,900  105.0  19.6  100.8  116.4  109.9  106  1954  25,052  5,533  12,192  96,100  97,100  105.5  22.1  106.1  106.4  107.9  99  1955  28,439  7,260  13,565  99,800  104,000  119.7  25.6  118.2  110.9  115.5  96  1956  30,672  10,062  14,945  113,100  105,700  129.1  32.2  129.6  125.5  117.4  107  1957  30,078  14,095  15,525  113,900  101,700  147.7  40.2  134.8  126.6  113.0  112  1958  41,179  15,429  16,132  126,000  106,800  173.4  37.5  140.0  141.7  118.0  118  1959'  46,235  16,945  17,508  129,400  105,200  194.7  36.7  152.2  143.6  116.9  123  I960  51,291  18,821  18,821  142,100  114,600  215.9  35.3  163.5  157.8  127.2  125  1961  54,628  19,106  19,770  N. A.  N. A.  230.0  34.9  172.2  N. A.  N. A.  127  Source:  a  5,667  a  1  Government of India, India. 1958, 1961 and 1962.  2  Reserve Bank of India,  Figures are provisional.  i) Report on Currency and Finance. 1952-53, 1957-58 and 1960-61. Statements 54, 65 and 66 respectively, i i ) Report on Currency and Finance. 1956-57 and 1961-62. Statements 19, 20 and 17, 19 respectively.  - 191 After allowing for the price increase i n terms of the relativelyconservative Consumers Price Index, the real growth as measured i n 1949 rupees was from Rs. 90,100,000,000 to Rs. 114,600,000,000 or about 27 per cent for the period. been  Most of this increase i s  revealed to have/realized after 1955 when prices began to register the effects of the plan period expansion program.  If one may use the  real national income estimate as a guide, i t would appear that something in the neighbourhood of Rs. 15,000,000,000 i n Reserve Bank notes would have been sufficient to meet the uninflated cash needs of the Indian economy i n i960.  But the amount made available.by the rather one-  sided open market operations of the Reserve Bank was close to Rs.19 billion.  The difference of some Rs. 4000,000,000 may, in the absence  of a more refined estimate, be said to indicate the magnitude of the forced savings effected by the Government through the Reserve Bank. Reserve Bank Operations The annual operations of the Reserve Bank portrayed i n Tables t.2'7, 28,-andi29  .;••„-_ on pages 192, 193 and 1Q4.  They do not appear to  have been greatly affected by the Government take-over, or by the progress of the F i r s t Five Year Plan.  It is noteworthy, however, that -  this period was marked by a rapid depletion of the Bank's foreign currency assets.  In the absence of this backlog of savings there would  undoubtedly have been a reverse trend i n the Bank's holdings of Government securities and i n outstanding note issue, with a l l i t s i n flationary implications.  The point i s that the use of foreign currency  assets provided the Government with revenue that did not have to be created either through the budget or through increasing i t s borrowings  192a  Table 27  192 b  Principal Liabilities and Assets of the Reserve Bank (Issue and Banking Departments) of India 1949-1961, Inc. (Rs.000,000)  Capital Last F r i . and in March Reserves  Notes Outstanding  Liabilities Deposits Gov't" Banks  Others  Other . Liabs.!  Total Liabs. and '•"Assets  Gold Coin and Bullion2  1949- 50  100.0  11635.2  1749.1 529.2  636.1  198.1  14847.7  400.2  1950- 51  100.0  12474.1  1884.4 592.8 723.1  231.0  16005.4  400.2  1951- 52  100.0  11411.1  2052.2 469.9  659.0  259.0  14951.1  400.2  1952- 53  100.0  11331.2  1556.3 465.2  628.1  307.0  14387.8  400.2  1953- 54  100.0  11859.2  1283.6 424.1 437.6  250.8  14355.2  400.2  1954- 55  100.0  12770.9  1197.2 477.2  215.3  298.6  15059-2  400.2  1955- 56  100.0  14666.9  1293.7 532.4 166.8  494.6  17254-1  400.2  1956- 57  15260.9  965.2 577.7 742.8  15791.3  1031.8 678.3 1175.2  1610.3 910.3 974.6  19256.8  1957- 58  100.0 800.0 800.0  20451.2  400.2 1176.6 1176.6  1958- 59  800.0  17015.3  1959- 60  800.0  1960- 61 1961- 62 Source:  Rupee„ coins-5  For. cmcy.  Assets Inv. i n Loans Gov't. to Securities - Gov't.  Other Loans  Bills Disc'd  Other Assets  512.3  8587.8  5159.4  2.4  112.1  19.7  53.8  545.1  8841.8  5858.3  15.6  167.5  82.1  92.0  7230.7  5667.3  9.4  613.7  37.2  299.9  823.2  7236.8  4559.8  33.0  269.5  88.0  77.2  939.7  7529.7  4875.0  5.1  411.0  107.4  87.2  1025.0  7300.0  5533.2  4.5  478.7  103.7  213.9  1033.1  7461.3  7260.1  0.0  799.4  122.3  177.7  1227.9  5268.3  10062.0  76.5  1278.7  28.9  136.1  12942.2  2670.0  14095.5  212.3  784.0  76.8  140.8  1301.6  2130.6  15429.6  247.7  1134.4  51.8  120.5  1242.3  1971.2  16945.1  223-4  1565.4  336.0  142.6  692.9  675.7 1190.7  1106.7  21593.8  1176.6  18449.0  1061.2 929.0 1001.0  1363.4  23603.4  1176.6  800.0  19847.4  1054-5 708.5  879.6  1413.9  24703.9  1176.6  1197.1  1362.5  18131.5  390.2  1855.0  391.7  198.2  800.0  20703.0  871.9 727.3 1523.6  1518.4  26144.2  1176.6  1169.7  1297.0  19105.7  808.9  1776.9  466.0  342.4  805.5  Adapted from Reserve Bank of India, Reports on Currency and Finance, 1952, 1953, 1955-67, and 1961-62. Statements, 21, 37, and 36 respectively.  1. Includes: i National Agricultural Credit (Long-term operations) fund. Details i i National Agricultural Credit (Stabilization) fund. Opposite 2. Gold valued at 8.47512 grains per rupee up to October 5, 1956 and at 2.88 grains per rupee thereafter. 3. Including one rupee notes.  i)  Rs.100,000,000 from 150,000,000 from 200,000,000 from 250,000,000 from 300,000,000 from 400,000,000 from 500,000,000 from  Feb. Jul. Jul. July July July July  3, 1956 6, 1956 5, 1957 4, 1958 3, 1959 1, i960 30, 1961  ii)  Rs. 10,000,000 from 20,000,000 from 30,000,000 from 40,000,000 from 50,000,000 from 60,000,000 from  July July July July July June  6-, 1956 5, 1957 4, 1958 3, 1959 1, i960 30, 1961  Table 28  ' ,  Principal Assets and L i a b i l i t i e s , Reserve Bank (Issue Department) of India, 1949-61, Inc. (Rs.000,000) Ave. of " Fridayfigures.  LIABILITIES Note In banking Circltn. dept.  Foreing secrts.  Gov't of India rupee secrts.  Total  Gold coin & bullion  Rupee coins  400.2  505.3  6470.4  4153.6  400.2  572.1  6247.0  4584.7  2  1949-50  11,289.4  240.0  11,529.4  1950-51  11,632.1  171.9  11,804.0  1951-52  11,898.4  277.8  12,176.2  400.2  639.8  6252.7  4883.3  1952-53  11,148.4  278.7  11,427.2  400.2  802.2  5644.0  4580.8  1953-54  11,339.5  230.3  11,569.7  400.2  928.3  •5940.2  4301.1  1954-55  11,961.9  229.8  12,191.8  400.2  1022.6  6488.1  4280.9  1955-56  13,393.9  170.8  13,564.7  400.2  1068.7  6565.2  5530.6  1956-57  14,757.7  187.5  14,945.2  1159.3  5459.8  7552.2  1957-58  15,293.6  231.8  15,525.3  400.2 1177.6 1177.6  1300.6  3296.5  9750.6  1958-59  15,938.8  193.0  16,132.1  1177.6  1339.9  1820.4  11,794.2  1959-60  17,309.0  198.6  17,507.7  1177.6  1315.0  1676.2  13,338.8  1960-61  18,631.3  189.4  18,820.7  1177.6  1268.4  1349.9  15,024.8  1961-62  19,574.2  195.8  19,770.0  1177.6  1216.5  1159.3  16,216.7  Source:  .  Adapted from Reserve Bank 1of India. Report on Currency Statements no. 29, 35 and 37 respectively.  and Finance>, 1952-53, 1954-55 and 1961-62.  1 Gold valued at Rs 21.24 per tola or 8.47512 grains per rupee up to October 5, 1956 and at Rs. 62.5 per tola or 2.88 grains per rupee there after. 2  Including one rupee notes.  '  Table 29  194 b  Principal L i a b i l i t i e s and Assets of the Reserve Bank (Banking Department) of India, 1949-1961, Inc. (Rs.000,000) Liabilities Ave. of Friday Figures  Capital and Reserves  Gov't.  Deposits Banks  Others  Other Liabs.  1  Total  1949-50  100.0  1643.1  670.0  643.9  157.6  3214.5  1950-51  100.0  1663.1  622.2  622.9  181.4  3189.7  1951-52  100.0  1972.5  586.8  692.2  186.2  3537.7  1952-53  100.0  236.9  2927.1  239.1  2667.2  362.9  236.2  2349.0  100.0  1953-54  1441.9  528.9  1288.4  465.2  619.3 574.5  1954-55  100.0  1097.9  552.0  1955-56  100.0  799.6  537.7  183.1  355.1  197694  1956-57  100.0  716.2  524.6  197.3  912.1  2450.2  1957-58  800.0  810.0  1113.8  639.6  4076.3  1958-59  800.0  875.3  1187.3  767.7  4414.4  1959-60  800.0  787.4  796.1  1234.8  881.8  4500.1  1960-61  800.0  830.0  973.0  987.6  1053.3  4643.9  1961-62  800.0  772.6  819.5  1407.3  1241.3  5040.8  Source:  1. 2  658.9 784.2  Adapted from Reserve Bank of India, Report on Currency and Finance. 1952