PRESENT STATUS OF BANKING IN 
 BRITISH INDIA 
 
 By 
 
 BHUPENDRA NATH BYSACK 
 
 B. S. University of Illinois, 1921 
 
 THESIS 
 
 SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS 
 FOR THE DEGREE OF MASTER OF SCIENCE IN ECONOMICS 
 IN THE GRADUATE SCHOOL OF THE UNIVERSITY 
 OF ILLINOIS 
 
 URBANA, ILLINOIS 
 1922 
 

 
 
 
 
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 UNIVERSITY OF ILLINOIS 
 THE GRADUATE SCHOOL 
 
 3/ 
 
 192-t-- 
 
 1 HEREBY RECOMxMEND THAT THE THESIS PREPARED UNDER MY 
 SUPERVISION 
 ENTITLED. 
 
 BE ACCEPTED AS FULFILLLNG THIS PART OF THE REQUIREMENTS FOR 
 
 Head of Department 
 
 Recommendation concurred in* 
 
 A f 
 
 
 Committee 
 
 on 
 
 Final Examination* 
 
 Required for doctor’s degree but not for master’s 
 
In the prepara,tion of this thesis the 
 writer feels that he owes much to Prof. N.A. 
 
 Weston and to Prof. E.L. Eos'art for their 
 
 many suggestions and constructive criticisms. 
 
 He also acknowledges helpful suggestions from 
 
 the memhers of the Economic Seminar. 
 
C0I7TENTS . 
 
 Chapter Page 
 
 I. Introduction.... . T 
 
 II. The Banking System of India 4 
 
 III. The Function of Indian Banks 23 
 
 IV. Situation of the Indian Banks 
 
 from 1913 to 1918 33 
 
 1. Failure of the Indian 
 
 Joint Stock Baiiks 40 
 
 2, Effect of the Grea,t War 
 
 on Indian Ba.nking 47 
 
 V, A Central Bank for India and the 
 
 Amalgamation of the Presidency 
 
 Banks 54 
 
 VI. Conclusion 62 
 
 Bibliography 68 
 
Digitized by the Internet Archive 
 in 2015 
 
 https://archive.org/details/presentstatusofbOObysa 
 
I 
 
 Chapter I . 
 
 Introduction. 
 
 The new field of banking which has been developed since 
 the modernisation of industries has attracted wide attention throu^- 
 out the world. In almost all the countries where experiments 
 ha,ve been conducted for quite a long time, these experiments have 
 recently resulted in fruitful achievements. Many stages have 
 passed in its history until principles have been evolved which 
 ensure the safe carrying on of its trade. The operations, as the 
 system has been improved upon in the last century, appear at first 
 sight to be rather complex and difficult of comprehension. But, 
 this is not due to any mystery in the operations themselves; rather 
 it is the result of their multiplicity and of the varied conditions 
 under which they take place. The needs which the banks supply 
 are of a simple kind, sure to arise in any commercial or industrial 
 comrmrnity in which there is mutual confidence among men. The 
 transactions by which these wants are satisfied are, moreover, as 
 simple as the wants themselves, and they may easily be carried 
 on by any joint stock company as it is being proved to-day. 
 
 India, from very early times, had been commercially 
 important among the rest of the nations, but she hardly developed 
 any bankii]g- system, worthy of great coirmient, like the medieval 
 Venetians or the Dutch in Holland. But, she had a method 7/hich 
 was quite efficient to transact the business of the government as 
 well as to assist in the movement of the internal trade of the 
 country. The system as it was then prevailing was of a type of 
 
3 
 
 high class of merchant firms vvho combined their business of banking 
 with the ordinary business of the firms. There was also a cla5s 
 of people, called money lenders who advanced money on a mortgaged 
 chattel, e.nd gave loans to cultivators and farmers at a high usury. 
 The system which was then in existence is still in e\’’idence to-day; 
 and, in spite of the appearance of joint stock banking, it still 
 plays an important part in the banking role of India’s business. 
 Though, owing to British influence in the country, there are to-day 
 many banking institutions established after the western model; 
 yet, there is much to 'oe done by many such institutions at present 
 and in future. Since the advent of the British the country has 
 been apparently prosperous, and the number of institutions has been 
 somewhat increased; but not so proportionately as the commerce of 
 the country has been developed. 
 
 For the purpose of presenting India's banking status, the 
 paper has been divided into several chapters, dealing at first 
 with the growth of the banking institutions and, then, with the 
 character of business they perform. In other chapters such 
 questions as the failure of Indian banks, effect of the great war 
 on banking institutions in India, and the establishment of a central 
 bank have been respectively considered. In conclusion, an attempt 
 has been made to show the banking need of India and the spread of 
 the banking habit among the people . The paper is by no means an 
 exhaustive study of these questions; but is mors or less a surface 
 scratching of the subject, and a great deal can be written in 
 detail on some of them which have been dealt with here. 
 
 Several banking terms of India used in this connection 
 have been left in the original , without being translated into 
 
3 
 
 English, lest the peculiar meaning which they convey should be 
 misconceived. Such terms, however, have been explained in the 
 foot-notes so as to make them comprehensible to the reader. In 
 the statistics and data, the figures have been used in Indian 
 money and in Indian counting method, but an explanation of them 
 has also been sriven in the foot-notes. The rupees have not been 
 converted into American coins because the exe.ct equivalents could 
 not be determined at the different periods. It is believed, that 
 no trouble will ’ce encountered in understanding the statistics in 
 terms of ru.pees, in lakhs (lOO, 000 ) , and in cr ores (lO, 000, 000 ) , 
 
 In preparing this paper, materials were sought from 
 India as well as from England, but with no results as no printed 
 matter on the subject of India^n banking was available with the 
 exception of scm.e government documents and a few books. It is 
 desirable, therefore, that more books should be written on Indian 
 banking by persons interested it it, so that any future writer 
 who would like to take up any subject concerning Indian banking 
 would have plenty of material at his disposal to handle it 
 efficiently and critically. 
 
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4 
 
 Chapter II . 
 
 The Banking System of India. 
 
 Banking, as a rule,, means dealing in credit. It consists 
 in the hankers and hanking firms keeping money for their customers 
 subject to v/ithdrawal on specific conditions. They &.dvance or 
 loan money on security, and purchase and sell hills of exchange, 
 bonds, stocks, promissory notes etc. In India, even before the 
 appearance of modern joint stcck hanking, these operations were 
 evident. There were numierous hanking firms and hankers who carried 
 on business on a large scale. The operation of money lending was 
 and is done by various persons of every caste and class in towns 
 and villages all over the country. These people are, in a true 
 sense, the money lenders of India, and lend money for almost all 
 kinds of demands. As distinguished from them, the hankers are a 
 class who had a semi-official recognition, and who took money on 
 deposit, made loans, and issued drafts, or 'handies’. It is 
 this class which has always occupied a high status in India.n 
 society, hut no one should confuse them with hankers in the modern 
 sense of the word. They are something like the goldsmiths of 
 England about two centuries ago. 
 
 In former times the go-''-ernment borrowed largely from such 
 hankers for the purpose of financing military campaigns. The 
 Peshwas*, for instance were heavil^r indebted to them and several 
 firms enjoyed great social reputation on account of the extent of 
 
 * Ruling class cf Western India. 
 
5 
 
 their transactions and the honesty of their dealings. 
 
 The small Indian hankers took deposits also, and allowed 
 interest upon them. They also granted loans on the security of 
 jewelry pledged with them, and purchased and sold oullion and 
 ornaments. This business is being carried on to-day to a great 
 extent in villages and smal] towns all over India, where modern 
 banicing is unknown. The banking houses of a higher status deal 
 on a much larger scale. They finance internal trade and remit 
 funds from once place to another for their customers and discount 
 the 'hundies ’ of bills of small producers and traders. They 
 very often combine trade with banking. In spite of the rapid 
 progress joint stock banks have m.ade during several decad.es past, 
 these indigenous banking houses still play a highly important part 
 in financing the internal trade of the country. Mr. Findlay 
 Shirras describes the indigenous bankers very clearly and throws 
 much light on banl'ing conditions previous to the coming of the 
 Westerners, He says, ’’Before the British era, trade was entirelj’' 
 financed by the Eania.s*, who combined money lending and finance 
 with trade. Throughout the length and breadth of India, these 
 Banias undertook the financing: of agricultural operations. To-day 
 the money lender or money changer is still in a flourishing con- 
 dition. The large bankers and shroffs** still continue to do a 
 large part of the internal banking business. They were the 
 depositories of much of the money wealth of the villages or dis- 
 
 * Merchant class of India. 
 
 ** Who acts as an intermediary between the trading community and 
 the banks , 
 

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6 
 
 tricts in which they resided and they were also engaged in exchange 
 
 operations, as well as trading on their own account. They used 
 ’hundies’ or hills which were drawn up in 'Mahajani' or a written 
 character peculiar to hankers, and these were usually illegible to 
 any one outside their class. A dishonoured 'hund.i ’ or hill was 
 an event of rare occurence with them. ’Hundies’ despite the 
 increase in joint stock hanking, were not decreasing hut increasing 
 and the circulation of ’hundies' was the most perfect portion of 
 the purely Indian system. The Bania class was one to which 
 India, was greatly indebted for financing agriculturists, and re- 
 moving products from, the growing to the consuming: districts 3.nd 
 distributing goods of all kinds all over India*”. What Mr, 
 
 Shirras says is true even at the present time. 
 
 The introduction of the Western hanking system in India 
 could he dated as far hack as l'^70. After the occupation of 
 Bengal 'ey the British, the administration of the country passed 
 over to them, and many English merchants estehlished themselves 
 in Calcutta. As the business hegs.n to grow and the profits 
 heca.m.e tremendous, the merchants at Calcutta decided to establish 
 there a hank after Western model. The la.te firm of Messrs. 
 ,Alexander & Co., very energetically took up the matter and founded 
 the Bank of Hindusthan in 17?0, It was the first institution 
 of the kind in India, Though it v;as a branch of the husinesc; of 
 one of the first firms of the period, its operations were entirely 
 distinct from, their trading business. It continued its opera,tions 
 
 * Report of a lecture delivered in Calcutta, 1914. 
 
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till the month of Deceiiiber, 183S, when the most severe commercial 
 crisis that ever occurred in India caused the discontinuance of 
 this bank. The bank had its own note circulation which was con- 
 fined entirely to Calcutta and the immediate neighborhood. The 
 notes were not recognised as lega.l tender, and there were very 
 few left in circulation when the house failed. There were also 
 some other agency houses at that time which shared the same fa.te 
 in the crisis . 
 
 The foreign trade of India in the ea^rly part of the last 
 century was comparatively small and internal exchange was facili- 
 tated by indigenous bankers. Hovirever, as trade slowly expanded, 
 European merchants and others d.irectly interested in it, felt the 
 necessity of having bariking arrangements of the Western type in 
 their midst. Like the mercantile commurdty the government also 
 experienced difficulty in carrying on its financial operations 
 without the assistance of a well-conducted modern bank. It was 
 these circumstances that gave rise to modern banliing, and the first 
 important bank was opened, in 1606, under the name of the Bank of 
 Calcutta with a, capital of fifty lakhs of rupees*in five hundred 
 shares of ten thousands rupees eacht* The first charter was 
 
 granted in 1809 on which occasion the name was altered to that 
 which it had till 1920, viz., the Bank of Bengal. Thus, a system 
 
 * The American equivalents of Indian money are as follows: Rupee - 
 16 annas = |0.3244; anna =12 pies; 15 rupees are equivedent to 
 £1. The sum of 100,000 rupees is called a la,kh and of 10,000,000 
 rupees a crore. 
 
 *♦ Shirras,F.G. — Indian Finance and Banking, p. 346. 
 
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8 
 
 of Indian banking appeared under govermnent charter; and, at 
 present, the system may be said to comprise four categories, viz., 
 (l) the Presidency Banks*; (s) the European Exchange Banks; (3) the 
 Indian Joint Stock Banks; ( 4 ) the Private Indian Banking firms, 
 and money-lenders like the Shroffs ,Bania, etc. These four classes 
 of institutions mainly constitute the Indian banking machinery. 
 
 The following paragraphs are devoted to the study of these four 
 types of Indian banks. The character Of their business will be 
 taken up in the next chapter. 
 
 The first Presidency Bank was established in Calcutta 
 in 1809 under the name of the Bank of Bengal. Its charter provided 
 that ” the affairs of the bank shall be managed by nine directors, 
 three of whom shall be nominated by the government to represent 
 its interest (lOO) shares, and six by the proprietors; that no 
 person shall be entitled to vote who shall not be possessed of one 
 share of the capital, registered a,s such in the bank-books; that 
 the presence of three directors, at least, shall be necessary to 
 constitute a board to transact business; that dividends shall be 
 determined by the directors upon the grounds of the actual profits 
 of the bank, during the period for which such dividends shall be 
 made; that upon giving only one year’s notice the government may 
 put an end to the corporation; tha.t there shall be two general 
 meetings of the proprietors every year, when the directors shall 
 submit a statenent of the transs-ctions of the bankt*”. To make 
 
 ♦ The Presidency Banks have been amalga.mated in 1920 under the name 
 of the Imperial Bank of India. The subject is discussed in 
 chapter V. 
 
 ** Cooke, C. N, — Banking in India, p. 95. 
 
9 
 
 fnis bank secure the government Was to aid it by contributing as 
 a shareholder to the extent of one-fifth, by sharing in its direc- 
 tion, and in the privilege of voting. 
 
 The bank is directly connected with, and to a consider- 
 able extent supported by the capital of the government, which 
 holds 275 shares of the value of rupees 4,000 each. The manage- 
 ment is vested in a board of nine directors; of these, six are 
 elected by the proprietors, the other three being high officials 
 of the government who are nominated to watch over its interests. 
 
 The meeting of the directors is held every Thursday morning when 
 they severally receive a fee of twenty five rupees as remuneration 
 for the time and attention they give to the affairs of the bank. 
 
 Up to the close of the 1862, the ba.nk under its old 
 charter, had the exclusive privilege of a circulation of bank notes 
 which limited to two crores of rupees. In Feb. 1662, the govern- 
 ment granted a new charter without any limitation as to existence, 
 clause 2 declaring that " from and after the coming' into operation 
 of this act, the present and future proprietors of the Bank of 
 Bengal shall continue to be a body corpors.te with perpetual success, 
 and enjoy all the rights, privileges and immunities incident to a 
 corporation ag-gregate” , On this occasion the privilege of 
 issuing notes was withdrawn from the bank, the government havirig 
 decided upon the introduction of the state currency. Under a’ 
 clause of this charter the bank commenced the establishment of 
 branches, which are locau.ed in these places: Agra, Akyab, Allahaba,d, 
 Benares, Cawnpore, Chittagong, Dacca, Hyderabad (Deccan), Jalpaigu.ri, 
 Lahore, Lucknow, Moulm.ein, Nagpore, Naraingunge, Putna, Rangoon, 
 

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10 
 
 Secunderatad, and Simla. 
 
 Next in order of the Presidency Banks are the Banks of 
 Bombay and M^-dras . Banking in Bombay appears to have been, for 
 a considerable period of time, in the hands of a very limited 
 number cf large capitalists. About the close of the year 1836, 
 a proposition was brought forward for establishing a chartered bank 
 at Bombay, which was to be based on the most liberal principles. 
 
 The same amount of capita,! was to be provided as in the case of 
 the Bank of Bengal, but the government was to subscribe only three 
 lakhs. The charter was not passed until 1840. The bank was 
 able to commence business in the same year, four ^/-ears after it 
 was projected. 
 
 The bank is governed by a board of nine directors who 
 receive no remuneration for their services. Six directors are 
 elected by the proprietors, whose qualifications are that each 
 should be possessed cf 12 shares in his own name. The other 
 three are appointed by'’ the government. The directors have the 
 power to appoint all the officers of the bank and to fix their 
 salaries. It is interesting to observe that in the case of the 
 Bank of Bombay, two of the directors are Indians where as in other 
 Presidency Banks there are none at all. The reason is that the 
 merchant commuriity of Bombay is more strongly Indian in composition 
 than th8.t of any other presidencies. The bank was authorized by 
 the charter of 1882 to estsblish branches. They are at present 
 located in Ahmedabad, Ahmedabad city (sub-, branch), Akola, Amraoti, 
 Broach, Hyderaba,d, Indore, Jalga^on, Karachi, Poona, Quetta, 
 
 Rajkot, Sholapur, Sukkur and Surat. 
 
 The third and the last cf the Presidency Banks is the 
 

 
 
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II 
 
 Bank of Madras. Previous to the estahlishnient of this institution, 
 there existed, at Madras, a bank which conducted business on a very 
 small scale, and had a circulation of a very limited amount. As 
 it was not suited to the needs of the second Presidency in India, 
 it was determined to start a new institution which was, in almost 
 every respect, on the plan of the Bank of Bengal. The act of 
 incorporation was passed by the supreme government in 1843, and the 
 bank came into operation in the same yea.r. The capital, fixed to 
 commence with was thirty lakhs of rupees. Three lakhs were to be 
 the property of the governor in council of Madras. The number of 
 shares subscribed was three thousand, of one thousand rupees each. 
 
 The bank is managed by nine directors of whom three are appointed 
 and are removable by the governor in council at Madras. The re- 
 maining six are elected at a general meeting of the proprietors. 
 
 In 1662, the privilege of issuing notes was withdrawn from the 
 bank, government currency notes being substituted . But, under 
 the charter, branches were allowed to be established. They are 
 now located in Allep^'-, Bangalore, Bellary, Bimlipatam, Calicut, 
 Coconada, Cochin, Coimbatore, Colombo, Gimtur, Madura, Mangalore, 
 Muslipa^tam, Nagapatam, Ootacamund, Sakem , Tellicherry, Trichinopoly , 
 Trivandrum, and Tut ic or in. 
 
 The Presidency baiics - the Bank of Bengal, the Bank of 
 Bombay and Bank of Madras - have at present capitals of about two 
 crores, one crore, and 75 lakhs of rupees respectively. Their re- 
 serves* are about equal to their respective capitals and their 
 shares, fully-paid-up, stand at or over three times their face value. 
 
 * By”reserve'' is meant the additional funds accumulated from the 
 operations of the bank, i.e., surplus. 
 

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12 
 
 The grea,ter part of their capital is held toy European shareholders. 
 The operations of the Banks of Bombay and Madras are confined to 
 their respecti^’e Presidencies. The Bank of Bengal covers the rest 
 of India. 
 
 The Presidency Bank Act of 1876 brings about a different 
 relationship between the government and the Presidency Banks. It 
 imposes certain definite restrictions upon their business operations 
 while it concedes to them some material and moral advantages also. 
 Before that date the agreement with the ba,nks com.pelled the govern- 
 ment to place all the cash balances bel orbing to it in the hands 
 of the banks, with the result that there was a serious danger of 
 the government’s money not being available when it was urgently 
 reouired. After the passage of that Act, the government was 
 required to keep a minimum balance in the Presidency Banks; but, 
 in practice, it keeps a larger amount and is more liberal to them 
 than is provided in the agreement. 
 
 Next in order in the banking system, of India are the 
 Exchange Banks. These are large European banking concerns, and 
 carry on their operations in India and throughout Asia. Their 
 importance from the point of view of banking development in India 
 is not great; but still they play a certain role which has a con- 
 siderable bearing on business in India. For the sake of conve- 
 nience they may be classified in two groups according to the extent 
 of business done by them in India, viz., (l) those doing a consider- 
 able proportion of their total business in India, and (s) those 
 which are no more than agencies of large banking corporations doing 
 business all over Asia. These banks, which finance India's foreign 
 

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 trade, are : Chartered Bank of India, Australia., and China; Delhi 
 and London Bank; Hongkong and Shanghai Banking Corporation; Nation- 
 al Bank of India; Mercantile Bank of India.; Eastern Ea.nk ; Cornptoir 
 National d’Escompte de Paris; Yokohama Sperie Bank; Deutsch-Asiar- 
 tische Bank; International Banking Corporation, and Russo- Asiatic 
 Bank, The last five banks are included in the second group, i.e., 
 they are no more than agencies in India. They represent in India. 
 French, Japanese, German, American, and Russian interests respec- 
 tively, and, therefore, they are considered less prominent in the 
 affa.irs of India.n banking'. 
 
 The first six banks belong to group one. The oldest one 
 
 is the Delhi and London Bank, established in 1844, The Eastern 
 
 Bank is a recent one and was established in 1^10, The rest are 
 pretty old ones, and began operations before the eighties. Of 
 these, two, the Chartered Bank of India, Australia, and China, and 
 the Hongkong Shanghai Be^nking Corporation have very large interests 
 in other parts of the East, especially in China; but this doss not 
 prevent their Indian connection from being important. The other 
 four are primarily Indian, but not exclusively. It is noticeable 
 that all the Exchange Bcnks which still survive were founded before 
 IRIO. This is true in spite of the fact that most of them, es- 
 pecially in the last decade, have proved very successful from the 
 shareholder’s point of view. Mr. J. M. Keynes, in his book 
 "Indian Currency and T?inance”, writes in this connection tha.t " it 
 Would be exceedingly difficult to start a new exchange bank at the 
 present ti^e, except under the aegis of some important financial 
 house already established in strong position in India. Indian 
 
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 Exchange banking is no business for speculative or enterprising 
 outsiders, and the large profits which it earns are protected by 
 established, and not easily assailable, advantages”. 
 
 The head offices of all these Exchange Banks a.re located 
 outside of India, scattered all over the world and representing 
 primarily the interests of the countries where their head offices 
 are established. The cash they hold in India is of very limited 
 amount and represents only a small fraction of their liabilities 
 to private depositors in India. These banks are not under strict 
 regulations in India, but enjoy patronage from official circles 
 in many ways . 
 
 The third class of banks in India is the Joint Stock 
 Banks. These institutions are almost all of recent origin. 
 
 The growth of this type of banks has taken place during the last 
 two decades. There were, however, some Joint Stock Banks which 
 were established in the forties and fifties of the last century. 
 Such banks were the Agra Bank (l833-l!^00 ) , the Simla Bank (lB44), 
 and the Dacca Bank (l846). They all did useful work. The Dacca 
 Bank was founded in 164S with a capital of five lakhs of rupees 
 in shares of 1000 mpees and 500 rupees each. In 166S, the 
 Bank of Bengal in accordance ■'''ith its charter, took over the Dacca 
 Bank, the shareholders receiving an equivalent for their shares in 
 the Bank of Bensral stock. 
 
 Iw' 
 
 Besides these three there are others which may be meiv- 
 tioned here. The Allahabad Bank, the Alliance Bank of gimla, and 
 the Oudh Commercial Bank belong to the last century group. The 
 Allahabad Bank was established in 1365. The paid-up capital is 
 

 
 
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15 
 
 now Rs . 30 lakhs. The head office is at Allahabad and there 
 are fourteen branches with twelve subagencies. Although the bank 
 com'nenced operations in 1665, the first branch was not opened 
 until twenty three-years later, when a branch was opened at the 
 same place. The Alliance Bank of Simla was established is 1874, 
 Its head office is at Simla, It has thirty-nine branches and 
 eleven sub-agencies. The paid up capital in 1917 was Rs.84 lakhs. 
 In 1916, the bank amalgamated with the Pun;jab Banking company and 
 Delhi and London Bank, and in 1917 with the Bank of Rangoon. The 
 Oudh Comrjercial Bank was established in 1881, The head office is 
 at Fyzabad with two branches. The paid-up capital is five lakhs 
 of rupees. 
 
 Since the beginning of the present century, the Indian 
 Joint Stock Banks ha,ve gro?irn by leaps and bounds. The following 
 table* will give an idea of the extension of Joint Stock banking: 
 
 Bank 
 
 Hea.d 
 Office . 
 
 Paid up 
 Capital , 
 
 Date of 
 Registration, 
 
 Bank of India 
 
 Bombay 
 
 50 lakhs 
 
 1906 
 
 Indian Bank 
 
 Madras 
 
 10 " 
 
 1907 
 
 Punjab Sindh Bank 
 
 Amritsar 
 
 3 ” 
 
 1908 
 
 Bharat Nat’l Bank 
 
 Delhi 
 
 4 " 
 
 1908 
 
 Bombay Merchants Bank 
 
 Bombay 
 
 15 " 
 
 1909 
 
 Cent ran Bank of India 
 
 Bombay 
 
 35 " 
 
 1911 
 
 Bank of Mysore 
 
 Bangalore 
 
 10 ” 
 
 1913 
 
 Bank of Norther India 
 
 Rawalpindi 
 
 1 »' 
 
 1908 
 
 Cooperative Hindusthan 
 Bank 
 
 Cal cutta 
 
 1 " 
 
 1908 
 
 * Shirras, G.F. - Indian Finance and Banking, p. 384. 
 
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There are, in all, 68 Indian Joint Stock Banks with 199 branches. 
 The importance of 43 of them in the banking system may be estima- 
 'ted from the following data*. They have 'cesn divided into 
 two classes according to the amount of business. 
 
 (in lakhs of rupees) 
 
 
 Class I 
 (l8 banks ) 
 
 Claus II 
 (S5 banks) 
 
 " ‘ ' YoYa’l 
 
 Paid up capital 
 
 304 
 
 44 
 
 348 
 
 Deposits 
 
 3117 
 
 99 
 
 3216 
 
 Cash balance 
 
 765 
 
 20 
 
 785 
 
 The banking and loan companies included in the Joint 
 Stock system and registered under the companies act in 1914-15 
 numbered 574 and their paid up capital amounted to Rs. 79,875,509. 
 The figures in 1917-18 were 485 and Rs .101 , 949, 000 respectively, 
 i The number declined in 1915-16 due to failure of many banks. 
 
 There are hundreds of petty banlci ng and lending establishments 
 included under banking and loan companies. The institutions 
 carrying on operations on a considerable scale are very few in 
 number. For a better understanding Indian Joint Stock Banks 
 - may be classified into four groups according to the amount of 
 
 * Shirr as, G. F. - Indisu Finance and Banking ,p. 364. 
 

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17 
 
 their capital. Their position in 1918 is shown in the following 
 table* ; 
 
 (in lakhs cf rupees) 
 
 No. of 
 banks . 
 
 Paid up 
 capital . 
 
 Reserve 
 8c Rest 
 
 Deposits 
 
 Cash 
 
 balance 
 
 l) Banks with 
 capital re- 
 
 serve amount- 
 ing to Rs .S, 
 
 000,000 and 
 
 above ■ — 8 
 
 35605 
 
 13579 
 
 377364 
 
 87292 
 
 S) Banks with 
 capital ^ re- 
 serve between 
 Rs .20 and 10 
 lakhs — 5 
 
 4871 
 
 2136 
 
 23027 
 
 5854 
 
 3) Banks with 
 capital 8c re- 
 serve between 
 Rs . 10 and 5 
 lakhs — 6 
 
 5159 
 
 644 
 
 5557 
 
 1712 
 
 4 ) Banks with 
 capital & re- 
 serve between 
 Rs . 5 and 1 
 lakhs — 28 
 
 4865 
 
 1443 
 
 13635 
 
 3690 
 
 Total - 48 
 
 44810 
 
 18002 
 
 421463 
 
 96648 
 
 Indian Joint Stock 
 
 ; Banking 
 
 0 
 
 is still in 
 
 its infancy 
 
 and 
 
 has yet to become strong and sound like the Euroj^ean banks of 
 
 ♦Kale,V.G. — Indian Finance, p,568. 
 

 
 
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18 
 
 longer experience. Nor are all the Joint Stock Banks managed 
 by Indians. The largest of them, na-mely, the Alliance Bank of 
 Simla, which has absorbed se</eral other banks, and the Allahabad 
 Bank as well as a few others are under Eurox^ean management. 
 
 While Joint Stock banking was progressing satisfactorily, it was 
 checked suddenly by the crisis in I'^IB, when a number of banks 
 collapsed. The failure caused ruin and hardships to many people, 
 but it contributed a wholesome and much-needed lesson, as it 
 exposed the unsafe condition of many apparently prosperous concerns. 
 
 Banks of the fourth class are the private Indian indi- 
 
 r 
 
 genous banking and quasi-banking firms. Some of them are of 
 large means and connections. In this class, the agricultural, 
 industrial and land and mortgage banks may be included. In 
 addition to these, the money lenders like the Chetties, Banias, 
 and the Shroffs etc. are to be considered. These banking firms 
 and money lenders are very important from the point of view of the 
 Indian population. Private bankers and Shroffs flourished in 
 India long before Joint Stock Banks were ever thought of and it 
 seems likely that they will continue to thrive for some very con- 
 siderable time to come. 
 
 In the beginning of the chapter much space was given to 
 the indigenous banking firms of India and the Indian money-lenders, 
 
 ’ To avoid repetition, the remaining pages will be devoted to con- 
 sideration of two types of banks which are now beginning to appear 
 in India. They are the agricultural banks and the industrial 
 banks. Both are private enterprises, and hence included in the 
 fourth class of Indian banks. 
 

 
 
 11 
 
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T9 
 
 Practically speaking, there are no land banks or agri- 
 cultural banks in India like those in other countries. The land 
 holders of India obtain loans by mortaging their lands to money- 
 lenders at very high rates of interest, and cultivators obtain 
 advances from the village ’shroff ’ for the current expenses of agri- 
 culture. The government loans money to cultivators to a certain 
 extent, but government loans are not popular and do not meet the 
 smallest fraction of the needs of the people. The indebtedness 
 of the Indian peasants is overwhelming and attempts made to re- 
 lieve it have mostly failed. If there were banks like the 
 agricultural banks of France and other countries, the peasants’ 
 condition would be vastly improved. But he still has to rely, 
 where there is no co-operative credit societies -- and these are 
 too few in view of the large population of the country — on the 
 old credit machinery, viz., the money-lenders who charge high 
 rates for money. 
 
 Fortunately, the Indian public is opposed to this sort of 
 procedure and is trving to establish agricultural banks in imita- 
 tion of the agricultural banks of Egvpt . There are at present 
 quite a number of co-operative credit societies to aid agricultu- 
 rists, but their number is so limited that they afford but little 
 help in the solution of the problem. These co-operative credit 
 societies are mainly intended to assist agriculturists. The 
 chief features they include are: (l) limitation of area; (s) low 
 shares; (3) permanent indivisible resean/e fund; (4) unlimited 
 liability of members; (s) loans only for productive or provident 
 purposes; (g) loans only to members; (*^) credit for relatively. 
 

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30 
 
 long period with facilities for repayment by installments; (s) 
 absence of profit seeking. 
 
 These features of the village bank not OifLy supply the 
 cultivator with cheap credit but also teach him to combine with 
 his fellows for common interest, to practice thrift, to make pro- 
 ductive use of lis resources, and to build up his economic pros- 
 perity on the foundation of self-help. Wany people, who appre- 
 ciate the importance of the co-operative societies and who are 
 working to help on their progress, feel that the government must 
 directly encourage the establishment of mortgage, land, and agri- 
 cultural barks, and must, for this purpose, place funds at the 
 dispossl of such banking enterprises. Millions of India’s 
 Re serve which are lent in England, may be made available in India,. 
 
 In Fra.nce, Japan, America, and other countries, such state help 
 is given to agriculturists and the example must be followed in 
 India . 
 
 In industry the same need has been felt as in agricul- 
 ture. As the other classes of banks can not afford to tie up 
 their funds in the ordina.ry securities of new industrial concerns, 
 there must be some industrial banks to take their place. India 
 has already seen a few such industrial banks and in future she 
 hopes tc have many. Messrs. Tata, Sons and Company, an Indian 
 firm, have taken the les.d in starting an industrial bank. The 
 Tata Industrial Bank was established in 1917 with an authorized 
 capital of nine crores of rupees. In the same year Karnani In- 
 dustrial Bank of Calcutta with a ca.pital of six crores of rupees, 
 and the Calcutta Industrial Bank with a capital of two crores 
 of rupees were also established. The progress of these industrial 
 

 
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21 
 
 banlcs at present is being' watched with the keenest interest. 
 
 These industrial banks were started without any govern- 
 assistance, and though the govsrrjnent must help industries directly 
 in a variety of ways, it is best that industrial banks should 
 multiply so a.s to be able to stimuls-te the development of indus- 
 tries through private agency. The financing of industries could 
 certainly be better done by private barks strongly supported and 
 supervised by the state. Many such banks are needed for provid.ing 
 adequate funds for new ventures. The business of industrial 
 banks is, of course, full of risks, s.nd special precautions have 
 to be taken 'ey them in laying out their funds. 
 
 It will be seen now that the Indian Banicing System is 
 unlike that of any other country. It is unique in its develop- 
 ment, and becirs little rela.tion to other systems, with the excep- 
 tion of the Presidency banks, which are to a certain extent, like 
 the Banlc of England. The following table, No. I shows the re- 
 lative strength of the three classes of Indian Banks. The fourth 
 class has been omitted, because data from the priva,te and the 
 quasi-private banks are not available. Table Nc.2 is also iri^ 
 teresting as it shows the present development of banicing in India. 
 
 Ta'cle No, I.* (in crores of rupees) 
 
 Paid up 
 
 Deposit 
 
 Percentage 
 
 capital 
 
 
 of cash to lia 
 
 Presidency Banks 4 
 
 76 
 
 45 
 
 Exchange Banks 28^ 
 
 53^ 
 
 
 Indian Joint Stock Bks , 3 
 
 32 
 
 24 
 
 ^Total paid up capital . '^Indian portion. 
 
 ^Calculated on the deposits and cash balance in India. 
 
 ♦ Shirras,G,P. - Indian Fianance and Banking , p366. 
 

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22 
 
 Table No. 2.* 
 
 1913 1914 1915 1916 1917 
 
 Number of banks 
 Number of branches 
 
 Capital & Reserves (in 
 crores of rupees) 
 
 56 
 
 56 
 
 59 
 
 61 
 
 55 
 
 304 
 
 a. Presidency'- banks 
 
 7 
 
 8 
 
 7 
 
 7 
 
 7 
 
 b. Exchange banks (tota.l)5'? 
 
 c. Indian^ Joint Stock 
 
 55 
 
 55 
 
 57 
 
 49 
 
 banks 
 
 Deposits (in crores of 
 rupees ) 
 
 4 
 
 4 
 
 5 
 
 5 
 
 5 
 
 a. Presidency/ banks 
 
 b. Exchange banks (in 
 
 India) 
 
 c. Indian Joint stock 
 
 42 
 
 46 
 
 43 
 
 50 
 
 76 
 
 31 
 
 30 
 
 34 
 
 38 
 
 53 
 
 banks 
 
 Cash to liabilities on 
 deposits (percentage) 
 
 24 
 
 18 
 
 19 
 
 26 
 
 32 
 
 a. Presidency banks 
 
 b. Exchanpe banks (in 
 
 38 
 
 46 
 
 34 
 
 35 
 
 45 
 
 India only) 
 
 c. Indian Joint Stock 
 
 19 
 
 28 
 
 23 
 
 27 
 
 63 
 
 banks 
 
 18 
 
 21 
 
 22 
 
 24 
 
 24 
 
 ♦ Shirr=LS, G.F. - Indian Finance and 
 
 Banking, p. 
 
 339. 
 
 
 1916 
 
 7 
 
 54 
 
 80 
 
 62 
 
 28 
 
 26 
 
r 
 
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23 
 
 Chapter III, 
 
 The Function of Indian Banks, 
 
 The utility of hanking has been airply justified by 
 numerous writers on political economy, perhaps to a greater degree 
 than by authors who are actually in the profession. Therefore 
 nothing new about the utility of a bank is going to be considered 
 here, but rather the character of business which it nie-y have in 
 a particular country. Fund &imen tally, banks are to provide for 
 
 the lea^dlng wants of a, nation, which are, first, loans of a. 
 considerable amount, required by individuals embarking in enter- 
 prises beyond their own means; and, second, the temporary employ- 
 ment of money which is not required by the owner for immediate use. 
 To provide for this primary and indispensable function, some 
 agency is called for; and it is this which gi^'-es rise to the 
 business of modern banking. In India the same banking business 
 is in evidence, but the character of it is somewhat different, 
 and it is this difference w^hch is taken up here. 
 
 Of the three Presidency Banks mentioned before, the 
 Bank of Bengal is 03 ?’ far the oldest, having commenced business in 
 1605, It was followed b^/- the Ba,nk of Bombay in 1640, and by 
 the Bank of lia.dras in 1643. The charters which have authorized 
 the establishment of these banks place some restrictions on their 
 business transactions, and it will be necessa.ry to know just what 
 these restrictions are, if the banks ’ business is to be clearly 
 understood. In the case of the Bank of Bengal, it is laid down 
 that one lakh of rupees is to be the maximum arriount of stock which 
 
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24 
 
 any one proprietor may hold; and one lakh, and 5 lakhs of rupees 
 are to he the maximum amount which can be advanced to any indivi- 
 dual and to the government respectively. The idea, of this res- 
 triction on a.dvances to the government is presumably borrowed from 
 the Bank of England’s charter of 1695, which prohibited the bank 
 from making advances to the government without the permission of 
 parliament. It is also laid down that the bank’s ra.te of interest 
 is to be limited to a maximum of 12 per cent, just as the Bark of 
 England’s rate until 1839 was limited to 5 per cent. The charter 
 further provides that, (l) a cash reserve of at les.st one-third 
 of the outstanding liabilities payable on demand should be kept; 
 
 (2) the total liabilities of the Bank including deposits, note 
 issues etc. are not to exceed the Bark’s ca.pital of 50 lakhs of 
 rupees; (3) note issue up tc 2 crores of rupees or four times the 
 Bank’s capita,! is permitted.; (4) the limit of the cash reserve to 
 other liabilities is to be one-fourth; and (b) the bank is prohi- 
 bited from financing the exprot and import trades.* This last 
 restriction definitely fixes the bank’s operation of business 
 inside the country, of which .mention is to be made later. 
 
 The other Presidency banks also share the same restric- 
 tions on their business with slight variations. Under the pro- 
 vision of the charter, the Bank of Bombay is prohibited from en- 
 gaging^any kind of business except the kind specified, viz.r \ 1 ) 
 the discounting of negotiable securities; (2) the keepir.g of cash 
 accounts; (3) buying and selling of bills of exchange payable in 
 
 ♦ Cooke, C. N. — - Banking in India , p. 102 
 

 
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25 
 
 India; (4) the lending of money on short notes; (5) buying and 
 selling of bullion; (g) receiving of deposits; (*7) issuing and 
 circulating ba-uk post bills; and (s) selling property or securities 
 deposited in the bank as security for loans and not redeemed,* 
 
 The bank is further obliged to keep cash in its vaults equal to 
 at least one-fourth of all claims outstanding against it and 
 payable on demand. For the Bank of Madras similar provisions 
 exist, and, therefore, they need not be enumerated. 
 
 From the above limitations it may be clearly perceived 
 that the Presidency Banks are debarred from, entering into any 
 other enterprise of business activities which they might be able 
 to carry on successfully''. For a strict supervision of the barks, 
 the government is entitled to call for any information touching 
 the affairs of the banks and the production of any documents re- 
 lative thereto, and may also require the publication of such 
 statements on assets and liabilities at such intervals and in 
 such form and m.anner as it m.ay determine. 
 
 Until the year 1662, the Presidency;- Banks had the right 
 to issue notes, but in that year this privilege was withdrawn and 
 to compensate the banks for being deprived of this right, the 
 government decided to deposit the whole of its balances at the 
 Presidency tow'ns with the banks. This practice held good until 
 Ib'TG, when the independent treasuries v;ere formed; but since that 
 yea.r the government balances, which a.re payable at call, have been 
 maintained at a figure only sufficient to meet the demand of the 
 
 * Cooke, C. N. — Banking in India, p.l05. 
 
'A 
 
 
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26 
 
 government and to compensate the banks in part for the work of 
 keeping the accounts. There is no definite undertaking on the 
 part of the government to keep an^^’ balance with the barks either 
 at the head offices or branches, but there is a stipulation that 
 in the event of the balance at the head office of each bank falling 
 below a certain figure the government will pay interest on the 
 deficit. This relation between the government and the Presidency 
 banks in respect to the holding of balances is partly regulated 
 by agreements with the banks. 
 
 In order to assist the government in its attempts to 
 encourage the use of currency notes throughout India, the banks 
 have recently undertaken to issue and to encash freely for the 
 public on behalf of the government the universal currency notes 
 at most of their branches; and, in consideration of their having- 
 undertaken this work the government has agreed to maintain certain 
 mirdmum balances at such bra.nches so long as they are entrusted 
 with this work. 
 
 In the year 1876, the government passed the Presidency 
 Banks Act. Under the provision of this Act all the three ba.nks 
 are required to operate their business. The vs-riou.s types of 
 business which the banks may transact are set dov/n and described 
 in this Act. Briefly stated the main forms of business which 
 the banks may engage in are as follows*: 
 
 1, Investing of money in any securities of the government 
 
 of India or of the United Kingdom of Gt . Britain and 
 Ireland, the stock or debenture of, or shares in 
 
 * The Indian Year Book, 1920, p, 271-272. 
 
. .1 '.i W'-; '4t : «i<*7 -<>' 
 
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27 
 
 railways bearing' a government guarantee in respect to 
 interest and the debenture, and in securities of any 
 municipal body or Port Trust in India or of the 
 Bombay Improvement Trust, and of altering, converting 
 and transposing of such investments. 
 
 2. Advancing of money against any of the securities 
 specified above or against bullion of gold and silver 
 or other goods or the documents of title which are 
 deposited with or assigned to the bank a,s security. 
 
 3. Advancing of money against accepted bills of exchange 
 and promissory notes. 
 
 4. Drawing:, discounting, buying and selling of bills of 
 exchange and other negotiable securities payable in India 
 
 or Ceylon. 
 
 5 . Re ce i vi ng deposits. 
 
 6. Receiving securities for ss.fe custody and realisa.tion 
 interest etc. 
 
 7. Buying and selling gold and silver whether coined or 
 uncoined . 
 
 8. Transacting pecuniary agency business on commission. 
 
 The principal restrictions* placed on the business of the banks 
 are as follows: 
 
 1. The drawing, discounting, buying and selling bills of 
 exchange and other negotiable securities are confined 
 
 * Keynes, J, M. — Indian Currency and Finance, p.201. 
 
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28 
 
 to bills and securities payable in India and Ceylon. 
 
 2, Loans- or advances upon mortgage or in any other manner 
 upon the security of any immovable property or the 
 documents of title relating thereto are expressly 
 prohibited, 
 
 3, The amount which may be advanced to any individual or 
 partnership by way of discount or on personal security 
 is li'mited to an amount prescribed in the by-la-ws of 
 the ba.nks , such by-laws having previously been approved 
 by the government. 
 
 4. Loans or advances can not be granted for a longer 
 period than six months at a time. 
 
 5. Discounts can not be made, nor advances on personal 
 security be given, unless such discounts or advances 
 carry with them the several responsibilities of at least 
 two persons or firms not connected with each other in 
 general partnership. 
 
 From the foregoing limitations it is not difficult to 
 see how much these Presidency Banks are handicapped in business 
 transactions outside of India. In order to remedy the situation 
 various requests have been m.ade to the government by the banka to 
 have certain of these restrictions withdrawn, ps^rticularly those 
 referred to under Nos. I and 2 which have effectually prevented 
 the banks from, doing anything in the nature of exchange business 
 and from having access to the London money market for borrowing 
 purposes, but these have been of no avail, a,nd the suggestions 
 
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39 
 
 have been definitely negatived. 
 
 The prohibition of the Presidencv Banks from dealing in 
 foreign exchange business, on the other hand, has effected a 
 fruitful result. It has established thereby a close connection 
 between them and the indigenous money market of India. The banks 
 being precluded from speculative business have been obliged to 
 finance the internal trade of India through their purchase of 
 internal bills of exchange known generally as 'hundies'. It must 
 not be thought, however, that the financing by the Presidency 
 Banks of internal tr?de and the assistance given by them to Ind.ian 
 financiers and merchants is limited to their ’hundi ' business, 
 
 P. substantial portion of the cash credits gi^'-en by the Presidency 
 Banks represent advances made directly against produce, hypothe- 
 ce.ted to the ba-nk by Indian traders. Again, loans against the 
 government and other approved securities are frequently made to 
 Indian concerns. But, the banks’ ’hundi’ business is important, 
 and it is ?;here they impinge directly upon the market. The 
 operation of the ’hundi’ business by the three Presidency Banks 
 do not differ materially in each with the exception that the ’hundi’ 
 rate of the Bank of Madras is go^^'erned to a laroe extent by those 
 of Bengal and Bombay. In order to understand the ’hundi’ business 
 a very short and generalized account is given with the object of 
 showing the working- of the ’shroff’ system in its relation to the 
 Presidency Banks. 
 
 The people with whom the ba.rks deal directly are for 
 the most part large ’shroffs’ of good standing in the principal 
 cities. These men operate with their own capital, and generally 
 
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30 
 
 speaking, it is only when they have laid out all their available 
 capital in purchasing the 'hundiss' or hills of other ’shroffs’ 
 (usually smaJler) ths.t they come to the Presidency Banks. The 
 ’shroffs’ whose ’hundies’ the larger ’shroffs’ have purchased, 
 have also similarly financed other and still smaller ’shroffs ’and 
 so on until the villa.ge Bania.s, or grain dealer or goldsmiths are 
 reached. For instance, ’shroff A at Dacca may purchase a iDill 
 drawn by a grain deader upan a Bombay merchant. A may endorse 
 and sell it to B, a large ’shroff’ at Calcutta, who sells it to 
 the Presidency Bank, which sends it to their Bom.bay agency for 
 collection. The bills thus created are of two kinds: One , a 
 pure finance bill, generally known as ’hand bill’ the other a 
 ’trade bill’ so called because drawn against produce, 
 
 Spee.king very generall^^ it may be said that the banks’ 
 rea,l security in the matter of purcha.sirg or rediscounting bills 
 is the personal standing of the drawee or endorser or acceptor. 
 
 The banks have an elaborate a,nd very efficient system of limits 
 whereby the amount of bills discounted for each ’shroff’ is watched 
 carefully. To put it briefly, the system is as follows: ’Shroff’ 
 
 A is given in the ba.nk’s register a limit of, say 10 lakhs of 
 rupees, and at the same time the names of the drawers of the bills 
 purchased from him by the ba.nk are watched. The bank may have 
 purchased from A, say 8 lakhs of bills, the drawers of w^hich are 
 B,C,D,E, etc. It is observed that ’shroff’ A has been purchasing 
 large num.ber of bills from D who has comparatively small standing 
 or about whom little is known. A, then, will be lia.ble to be 
 refused, or if the fact is noticed by the head office, the bra.nch 
 

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31 
 
 ' ill be at once notified about his condition. 
 
 The business of the ’shroff’ is a rather specific one. 
 
 The 'shroffs’ finance nearly the whole of the internal trade of 
 India, and, rarely, if ever, discount European paper and never 
 purchase foreign or sterling bills. Neither do they lend money 
 on government papers or securities, but confine their advances to 
 the discount of the ’hundis', to loans to cultivators, and aga.inst 
 gold and silver bullions. The ’hundis’ they purchase are, for the 
 most part, those of traders, small and large, at rates of discount 
 ranging from 9 to 25 per cent per annum, but the ’hundis’ they buy 
 from and sell to each other, which are chiefly the traders ’hundis' 
 bearing the ’shroffs’ own endorsement, rule the rates in the 
 Indian native market and are generally negotiated during the 
 busy season at from 5 to 8 per cent discount. They also discount 
 their endorsements pretty larg-ely with the Presidency Banks when 
 ra,tes are low and discontinue doi r^g so when they rise above 6 per 
 cent. 
 
 As already mentioned, ’hundis’ are of two kinds - pure 
 finance bills, known as 'hand bills’, and trade bills. The banks 
 are much more particular as to the amount of the former that they 
 discount for a ’shroff’ than that of the latter. Tliis is not 
 because they receive any documents on accounts of trade bills, • 
 (their direct security is just as personal as in the case of 'hand 
 bills'), but because they know that some where or other, produce 
 or goods exist against the credit so created, that such goods must 
 have been hypothecated to one or other of the 'shroffs’ whose 
 names are on the bills, and that if anything goes wrong, such 
 
> « ‘s A \ 
 
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33 
 
 *sliroff3’ will "be able to realize of the goods and so to reimburse 
 the subsequent holders of the bills to whom he is liable. In 
 the case of ’hand bills’ on the other hand, it is impossible to say 
 definitely how far these represent a genuine trade demand. 
 
 The ’hundi ’ rate rises and falls with the bank rate 
 proper, though somewhat in advance of it, and naturally so, for one 
 is a distant rate and the other a rats for day-to-day loans. 
 
 Thus, at the beginning of the business season the ’hundi’ rate 
 is usually higher than the bank rate; the reverse being the case 
 when the sTack season is about to begin. When the bank finds 
 that it is not getting enough ’hundis’ and its money is lying un- 
 employed it puts down the ’hundi’ rate; when, on the other hand, 
 it feels that it has already got too much money in the market, or 
 for some reason or other wishes to consolidate and conserve its 
 resources, it puts up the ’hundi’ rate and may even go to the 
 length of refusing to (;y new ’hundis’. On some special occasions, 
 when the bank is very hard pressed for money it may impose a 
 prohibitive rate so as to force the ’shroffs’ to endeavour to 
 raise money elsewhere instead of renewing their ’hundis’ with the 
 bank. The following statement* will show the amount of ’hundis’ 
 held by one of the Presidency Ba,nks at various dates during 
 1P15-18. Figures are also given to show the bank's ’hundi' 
 business in comparison with its total business. It will be noticed 
 that on some occasions over a third of the bank's total advances 
 have been represented by the purchase of ’hundis’. 
 
 ♦ Appendices to the report of the committee on Indie.n Exchange 
 and Finance, 1920. 
 

 
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f 
 
 33 
 
 (in lakhs of rupees) 
 
 
 Date 
 
 
 Bills Disc. 
 
 Total 
 
 Average bank 
 
 
 
 
 
 advances 
 
 rate for year. 
 
 
 f 30th 
 
 June 
 
 204.86 
 
 933. S2 
 
 5,837 
 
 1915 
 
 .31st 
 
 Dec , 
 
 259,33 
 
 1033,79 
 
 5,543 
 
 
 I" 30th 
 
 June 
 
 224 .46 
 
 106'?,78 
 
 7,252 
 
 1916 ' 
 
 .31st 
 
 Dec . 
 
 316 , 58 
 
 1233,62 
 
 6 , 890 
 
 
 ^ 30th 
 
 June 
 
 179,32 
 
 1402.28 
 
 5.364 
 
 1917 ^ 
 
 ^31 st 
 
 Dec . 
 
 500,29 
 
 1449.38 
 
 5.773 
 
 
 rsoth 
 
 June 
 
 255,41 
 
 1463,79 
 
 5.298 
 
 191c ' 
 
 ^31 St 
 
 Dec . 
 
 200,17 
 
 1693, 
 
 
 The rate charged for loans against the gO'/ernment se- 
 curities is the hank rate. It is slightly lower than the rate 
 of advances on other securities and of discounts. The rates are 
 not the same in the different provinces and are influenced largely 
 hy the demand for money required to finance exports to foreign 
 markets and to ohtenn raw materials for the Indian industries. 
 Dealers ma^'- obtain the loans from the hanks in order to return 
 the advances made to them hy the 'shroffs’, and in that way two 
 money raa.rkets come into contact with each other. When there is 
 less money, the Presidency banks will attract deposits for short 
 periods by offering higher rates of interest. The rates are 
 naturally high in the busy season and low in dull season. The 
 following table*gives the maximum and minimum rates of the Pre- 
 
 ♦ Kale, V.G . — Indian Economics, p.273. 
 

 V* 
 
 
 
 <» 
 
 
 f'- 
 
 
 1 
 
 
 V * -i 4‘f { 
 
 m. 
 
 \ 
 
 %' 
 
 •> 
 
 1 
 
 . \ ‘ ' * 
 
 
 I « 
 
 
 3 •! • • Tf ' 
 
 •• *• • - ,• ♦* 
 
 ' r 
 
 ■ ■ / . 
 
 ^4 
 
 >.' * '■» n 
 
 t 
 
 .J»a>V . , ’J '. ■’ :. .. 
 
 ,.' »■ I ' *5 C: U .' ». -b J : 'l,' - 
 
 ij ; ;v I"' : 
 
 •fiWi 
 
34 
 
 sidency banks. 
 
 1913 
 
 1914 
 
 1916 
 
 1913 
 
 Max . 
 ■p . c . 
 
 Bank of Bengal 8 
 Bank of Bombay 7 
 Bank of Madras 7 
 
 Min. 
 
 p , c . 
 
 3 
 
 3 
 
 3 
 
 Max 
 
 p . c . 
 
 7 
 
 S 
 
 Min, 
 
 p . c , 
 
 3 
 
 3 
 
 4 
 
 Max . 
 
 p . c . 
 
 8 
 
 8 
 
 8 
 
 Min, Max. Min. 
 p.c . p.c. p.c . 
 
 5 
 
 4 
 
 6 
 
 6 
 
 5 
 
 5 
 
 6 
 
 With regard to the Exche^nge banks, it is found that they 
 originally confined their business almost exclusively to the 
 financing of the external trade of India. In recent years , 
 however, most of them, while continuir^ to finance that part of 
 India’s trade, have also taken as active part in the financing 
 of the internal portion, and, besides, have entered into other 
 business in India. The operations of the Exchange Banks, at 
 present, are divided into tv;o kinds, viz., (l) exchange business, 
 and (s) ordinary business. 
 
 In exchange business, bills against the export and the 
 import trades are drawn either as documents on payment (d.P.), 
 or documents on acceptance (d.A.). The banks purchase these 
 bills of exchange drawn by exporters of produce and discount 
 them on the London banks, or realise them when they mature. 
 
 Through their London offices they purchase import bills which are 
 
li ‘ . il , 'th. 
 
 ■■ 1 ' 4 -j 
 
 
 ' , \ 
 
 • . - . \ 
 
 
 
 •i'', X 
 
 w . \'. ,, 'V am :'X^^ ' 
 
 ifi. .r,.u 
 
 
 
 . .T»fP ks ' .,; ; • :is .vfo<ui ’■■•:, 
 
 e .'" ■x.eP? tsg! S(,-^ rt- . i5i4%ts 'jit> jui^. 
 
 i ■>' 
 
 \ . 
 
 • SJ^', 
 
 .. ' •'••V'* i 
 
 C'':" '■■ .r; 
 
 
 . J7K^ 
 
 iS 
 
 
 > T>^ 
 
 5 ? ‘-\ 
 
 :h 
 
 ■h;^' ■, 
 
 ; • 
 
 ' ,t , 
 
 ; ■ ^rcjkSF :' 1 , '> 4 .V t: 
 
 
 
 . ••^ ' ■»■■ 
 
 l> 4 
 
 ... ',• ^;+v' . Mm 
 
 *> 
 
 j[|^jJ|‘ J(;^V - 'i •• * f‘i-.:W' r‘''.lff^''^ 51 |' x’f 
 
 ■ V,;; m . 
 
 : . . . • ’If ■??; t* , ^L-/$w *v, ft vi^. 4 ^ 
 
 r , ' I < 
 
 ifel 4*i tr. *1 ^10 
 
 ■^^{}l. U ' ,' AvW ■''^.T; 
 
 V* ' 4 -f • 't 4 f .V cti -X ti\c I' lit . A uA 1 ni i^'ftpif 
 
 . . »‘ . ' 4 '^ ■' 5 /' ' • ' <• ■•(!..■' Y' *''^r' *1 ' 1*4 
 
 . ^■'^• ' X , 
 
 - I • ^» ■ If , . *1 ' ’^3 
 
 « (' 4 . •" .fc w, • ilbh. 'Hty* 7- -‘ 
 
 , ■■ ’ . I ■ ,' .’ f I I . ‘ — : •. \ #• |\ , . , ., 
 
 . I ' ■ ^ ' ' . A‘, •. ' < ’ - ■'’\- ■*)^^'' ' 
 
 >» 4 1/ i.'/*. ft w ■- V* 'T- j '?'<■’" « .’ to ff'VfCf ,0 ><» Xiitfj 
 
 J t^- *t V f 
 
 ‘-i'- ’ ■ ‘ V'.^ y :.S' , : ..' 
 
 ,.(fi ,,' , * • 
 
 >. j‘^1''’''.vl’'' ii. 4u^- Jr a*:} I'lkut'K&niia 
 
35 
 
 drawn on consignees in sterling. The documents on acceptance 
 hills as a general rule are discounted or rediscounted, immediate- 
 ly after acceptance. The exchange banks have practically a mono- 
 poly of the export finance in India and, in view of the volume 
 of the trade which has to be dealt with, the banks, it is appa- 
 rent, would need to utilise a very larpe proportion of their 
 
 ableo 
 
 resources in carrying through the business. They ars^ however, 
 through a system of rediscount in London to limit the employment 
 of their own resources to a comparatively small figure in relation 
 to the business they actually put through. As the value of 
 India’s experts ncrms-dly exceeds that of the imports, the diffi- 
 ciency in import bills is made good by the purchase of council 
 bills*, and telegraphic transfers, and shix^riient of gold, The 
 following statistics will give an idea of the position of the 
 Exchange Banks on December, 1918.** 
 
 Wo. of ^ Paid up Reserves Derjcsits Gash 
 banks capital Out of In 
 
 India India India 
 
 . ' £1000 ■^£1000 £1000 RIO 00- “RIOOO 
 
 vT)Banks doing 
 a considerable 
 portion of their 
 business in 
 
 India, 5 4012 5159 61 '^73 5036S& 103466 
 
 (b) Banks which 
 are merely agencies 
 of large banking 
 corporations doing 
 business all over- 
 
 Asia. 5 18257 12020 242896 102845 119442 
 
 * Bills issued by the secretary of State for India. 
 
 ** Kale, V. G. — Indian Finance, - p. 356. 
 
r 
 
 » 
 
 r 
 
 !' 
 
 h 
 
 j 
 
 I. 
 
 ‘4 
 
 
 
 ii 
 
 r 
 
 i 
 
 
 or 
 
 ^ ■*---^. - / 
 
 iji< 
 
 .'■ "nTS*? '::, ■. 
 
 I 
 
 'C 
 
 I ^ ^ . 
 
 , «? 
 
 4 fc 
 
 V 
 
 . ; .1 
 
 I 
 
 ' 1 : 
 
 •* ' .' .' i 
 
 f i •■ •. v; 
 
 rfv*> 
 
 .•'. .t xo:‘- 
 
 ■ s ;;. 
 
36 
 
 Ordinary banking' business is also carried on by the 
 Exchange Banks, and in this the competition has been considerably 
 felt both by the Presidency Banks and the Indian Joint Stock 
 banks. The competition, with the latter banks, is in raising 
 deposits, whether on current accounts or as fixed deposits. 
 
 Great progress has been made by these banks in this field of 
 business. The terms for deposits, both on fixed deposit and 
 on current accounts, are as a rule more favorable than those of 
 the Presidency Banks, while less favorable than those of the 
 Indian Joint Stock Banks, The Indian deposits in the Exchange 
 Banks in 1917* amounted to £36,000,000 as against £50,000,000 
 in the Presidency Banks and £21,000,000 in the India.n Joint Stock 
 Ba,nks . In loans, overdrafts, and d.iscounts, there is also com- 
 petition between the Exchange Banks s.nd the above-mentioned 
 banks, a.nd success of the latter banks is great in these fields 
 also. Upon the strength of the deposits a bank's participation 
 in loans, cverdra.fts, and discounts business depends. The extentj 
 then, of the Exchange Bank’s activity in this ordinary business 
 can readily be estimated from their deposits. 
 
 The banks engage themselves mostly in accepting deposits 
 and carrying on financing the internal trade of the country. 
 
 They also help in the grov^th of industries by giving accommode-tion 
 to many shop-keepers and traders in their business. They offer 
 a rate of interest from 5 to 6 per cent, which is rather high, 
 for deposits fixed for a year or two years. 
 
 * Shirr as, G.F. — Indian Finance and Banking, p. 364, 
 
37 
 
 Elsewhere the functions of the indigenous banking 
 firms and the money-1 end.ers like 'shroffs’ etc. have been mention- 
 ed, and it will be unnecessary to enter into the discussion of 
 it again. A few words, therefore, will be devoted here to 
 Banker’s Clearing Houses in India. 
 
 These houses in India do not play a great role in the 
 banking business of India, yet their importance is not negligible. 
 Some of these are located in the interior of the country, but 
 the principal ones, one in each cit3s are situated in Calcutta., 
 Bombay, Ka.dras, and Kerachi, The first two of these are by far 
 the most important owing to their favorable locs.tion. The 
 members of these clearing houses consist of the Presidency Banks, 
 most of the Exchange Banks and Eng'lish BarJcing Agency firms, 
 and a few of the better known of the IccaJ Joint Stock Banks. 
 
 No bank is entitled to claim membership) as of right and any 
 application for admission to a clearing house must be proposed 
 and seconded- by two members a.nd must be subject thereafter to 
 ballot by the existing miembers. 
 
 The duties of these clearing banks ere undertaken by 
 the Presidency Banks a.t each of the places mentioned and a re- 
 presentative of each member attends at the office of tha.t bank 
 on each business day at the fixed time to deliver all cheques 
 he may have negotiated on other members a.nd to receive in exchange 
 all cheques drawn on him negotiated by the latter. After all 
 the cheques have been received and delivered the representative 
 of each bank advises the settling bank of the difference between 
 his total receipts and deliveries, and the settling bank thereafter 
 
^ i^ wwa i n 
 
 ii*. K-'*/_ %>.■ A t , ■; .H\l- ■• J 
 
 Vv. • * 
 
 , '..♦i jw'^^ . X^ti-I (J 
 
 (Jl 
 
 
 • ^",w" '’v' 
 
 ■* . ' ‘ '-■■'! ' * , 'N' . '•"’1 
 
 p\ ■ ‘ ’ ' "■ ( ' "■ I ’.j, * ■ ,,^ ' ■ -V' '” '’f “' 
 
 • ^*1- . V t .■.U»-t?/5 ,J .■ , 
 
 =r..y,» ■ 
 
 
 U ‘ r: 
 
 f '^v " ■ •.' j»'"i , '■" . .. , * < ^ i^' «i 
 
 c- AT • :.'•' >,»'U:-f;‘ t. *f.^4' • ■V*.v^y>^.<!?^-ii!| • • -rt ■ 
 
 r-'"'’ '•' i 'V ■ , "'iflii '"' ■” -''jF' if* 
 
 ^ ‘ ■ *r ’.v . ■'»- ^.* . »'V'(''i ' •■ . •'’ ' ^ " ’ i' k>l ■ • ' . ' ^ ‘ •; V '\ 
 
 ^ ^ ' to' ; f ‘ .•w,4* toB-V- " MwtfSO •: 
 
 < . ^'.r. ■•■■■ V ' ,'W.r, : t* ■ <yJ 
 
 V' \* 
 
 j ■" ' 
 
 t'; '"T-' ' ■. 
 
 t' • •- ^ •• • to'.,to ( ' I . ^9f> '^,0 • j 
 
 i’ 'r * .'.V, ,.M' i, 
 
strikes a final balance to satisfy itself that the total cf the 
 debtor balances agrees with the totals of the creditor balances. 
 The debtor barik then arranges to pay the amounts due by them to 
 the settling bank during the course of the day and the latter in 
 
 turn arranges to pa^'’ on receipt of those amounts the balances due 
 to creditor bank. In pra,ctice, however, all the members keep 
 bank accounts with the settlir.g bank so that the final bala,nces 
 are settled by cheques and book entries, thus doing awa.y with 
 the necessit^^ for cs-sh in anv form. 
 
39 
 
 Chapter IV. 
 
 Situation of the Indian Banks from 1913 to 1916, 
 
 The period of five years from 1913 to 1918 in the 
 history of the Indian banks was of great importance. In that 
 period, the Indian banks experienced a severe convulsion which 
 made their continuation of business doubtful. Never before had 
 
 they faced such crisis as they did at this time. The crisis was 
 due to two significant happenings which made the era an important 
 eventful one. On the one hand, the Indian Joint Stock banks 
 created- a panic in banking circles because of their failures in 
 1913; and, on the other, the outbreak of the great war, a year 
 after, brought about a situation which made the positions of the 
 banks somewhat stabilised. In the case of failure, the Indian 
 Joint Stock banks and the private banks were affected, exclusively; 
 while, i n the case of war, all classes of banks felt the condi- 
 tions alike. The former removed the banks of unsound sta-nding 
 from the field of operations; while the latter strengthened the 
 ones which were left to continue the business. The two events 
 of the period are thus reversal in their effects, and therefore, 
 they are taken up separately under the headings just given. 
 
 1, Failure of Indian Joint Stock Banks, 
 
 and 
 
 2, Effect of the Great War on Indian Banking, 
 
rT 5 r 
 
 'it 
 
 
 
 .'.-.'i^li :W^5#:cr' *' '* 
 
 
 
 ^ 1 if ji 
 
 ♦ 1 . 
 
 
 4 W*Lidj 
 
 ,. ^*l>.Jx#;£;|(, ‘fr,; •• ;'.■ '' ’ pM 
 
 »- m :.;:V: ■ A.r ,. , 
 
 ' ' • V • •■ v^ 4 ‘* '■iij f. 
 
 V*_ 
 
 . ^...' , v-^.' 
 
 ■• •'j*: ' 
 
 '^ - ‘■-» SZau.'.'S,'? tXiT"* "''■■*"' «iCi,f' .*J''v 
 
 fP. . ' C^;#' 
 
 rV '^’- ili 
 
 w .iM»? 4 vi; ii >t, A. ' I-!/'". 
 
 W.A* 
 
 "■ * 'r- . 
 
 M ' ij J*i. * % 
 
 f v »U‘. ,. , , ■».:, I 
 
 ' ■ / ' '* r 
 
 .rs'-'iT '^‘i.’»:!,- 1 < 
 
 ■>( h%> 
 
 
 
 l' > 
 
 
 f^ .' , I 
 
 "V ' 
 
 , ,_™. 
 
 ■ilH 
 
 1 •* , tf* *' ■ f i^*' ' . 1 ' 
 
 X>' ft M;-:^4f■ • • * y^i'u. i*. ' ■- .</;.'■:■• • ap|M«W 
 
 <i ; 
 
 ;> i«- 5 ' V-''ar*.f 
 
 ; \ •. •■'. V..'< 
 
 ' ' . •e< ■ -.. -i , f. r . 1 . V ■ 'V' 
 
 1 ^. '■■• > 1 . > '.V . ,, .»,' ,,V '\^,.; I 
 
 rt! . 1 V • >■ ' •! J.’’' -/Ill 
 
 
 St 
 
 if-ir'l 
 
 :V: 
 
 'M 
 
 '■ 
 
 . -i , ,'ii 
 
 ; ' ilV- IL .< * V '" 4 Wi lI.- j(»'-^ -> ‘ '^^'^ffjL/', 
 
 V4> 
 
 
 • I v^'- r>‘\ 
 
 
 ,.’- ■!' '/ l^i 
 
 ,.;■!«•■ k'- 
 
 'ijJ.r"’'" 
 
 1*^1 
 
 
 ' •,W.*>v - 
 
 t '( '•■ Mm, 
 
 
 fiiV-vi 5 .' 
 
 
 
 'f\ 
 
 ■M 
 
 r 4 «LArl' 
 
 
i 
 
 40 
 
 1. Failure of the Indian Joint Stock Banks 
 
 Failure of banking institutions is not a new thing in 
 the world. From time immemorial failures have occured, and it 
 will continue to occur so long as the true principles underlying 
 such institutions are disregarded. In a few cases, failure of 
 this type of institutions has been of exceptional nature due to 
 remote causes; but, in the majority of the cases failure has been 
 due to wanton supervision or careless management and deviation 
 from the right path of proper business activities. 
 
 India has not escaped this financial disturbances, 
 and she has witnessed several in the last century. But they were 
 all more or less mild in comparison with the recent one. The 
 first severe financial crisis took place in the years 1329-31, 
 when several hanks collapsed. There were not many barking insti- 
 tutions at that time; and the majority which suffered this shock 
 failed while only a few were able to remain solvent. There were 
 several other crises in the last century, which, however, did not 
 have far-reaching serious effects. At each time not more than 
 two or three banks were oblip-ed to close their doors. None 
 
 o 
 
 was so severe and so intense in character as the recent one which 
 shook the very foundation of banking enterprise in India. 
 
 Since the beginning of this century until 1913, the 
 Indian banks were growing vigorously. No public mind at that 
 time thought that there was a crisis ahead of. The country, was 
 apparently prosperous, and ^'he banks were reaping enormous har- 
 vests from their business activities. What, then, led to this 
 
41 
 
 situation the following pages will take it up? 
 
 Several years preceding the failure a considerable nuua- 
 her of hanks established themselves in Western India, in the 
 Pun;jab, and in the United Provinces. They grew so suddenly tha.t 
 the general public thought banking a very profitable business. 
 
 Some of these banks made every possible attempt to get large 
 profits without being guided by a staff of experienced officers. 
 
 As the government had no restrictions on the conduct of business 
 of these banks, they began to speculate extensively in silver 
 and in other industries of dou'ctfui char-^cter. Many of the 
 banks had inadequate reserves against their deposits, and the 
 balance sheets were in several cases good examples of window- 
 dressing, i.e., skilful manipulation of the accounts. The per- 
 centage of cash to liabilities on deposits was only 11 , and in 
 very many ca.ses the percenta^ge was lower tha.n this. 1/Ynile the 
 proportion per cent, of the cash to the liabilities on deposits 
 of the Presidency Banks had been 33 and of Exchange Banks SO, on 
 an a^’-erage , that of the Joint ptock banks had not exceeded 15 or 
 16. It is hardly justifiable for banks to have such insufficient 
 percentage. Then, many too had an imposing capital but little 
 paid-up. 
 
 The crisis started in Northern and Western India (where 
 the banks had grown up like mushrooms) in September, 1P13, It 
 began with the failure of the People’s Bank of India, in the 
 P^unjab, which went into liquidation on November, 1913, after 
 being suspended for about a month. The closing of this bank re- 
 sulted in a very large number of other failures, the principal 
 
43 
 
 being that of the Indian Specie Bank of Bombay. Altogether 85 
 banks with many branches, including a like number of small firms, 
 were liquidated; of which 56 were more or less important. The 
 banks which suffered most were the ones located in the Punjab and 
 in Bombay. Of these 56 banks, 38 were in the Punjab, 11 were in 
 Bombay, 9 were in the United Provinces, 3 were in Madras, 3 were 
 in Northwest Frontier Province, 3 were in relhi, and one each 
 Was in Bangalore and Ba.luchistan. ♦ The most important failures 
 of each Province were: In the Punjab — the People ^s Bank of 
 India, the Popula-r Bank, the Orient Bank of India, and the Punjab 
 Co-operative Bank; in Bombay -- the Indian Specie Bank, the 
 Credit Bank of India, and the Kathiawar and Ahmedabad Banking 
 Corporation; in the United Provences — the Bank of Upper India. 
 
 It was very noticeable that in Beng.al, which is the most important 
 Province in India, there was not a single bank of even less im- 
 portance that was compelled to close its doors. The reason is 
 that there is less speculative business and more experienced 
 men in banking in Bengal than in the Western and Northern parts 
 of India. The following table# will show the number of banks 
 liquidated between 1913 - 1913. It will also show the position 
 of the banks in their ratio of paid-up capital to the subscribed 
 and authorised capital: 
 
 * 
 
 U.S. pept , of Commerce - Special Consular reports, V. 7S,p.S4. . 
 
 # 
 
 Kale, V. Ct. - Indian finance, p. 364. 
 
43 
 
 Year 
 
 No. "of 
 
 banks liquidated 
 
 (in 
 
 capital 
 thousands of 
 
 rupees ) 
 
 
 
 Authorised 
 
 Subscribed 
 
 Paid-up 
 
 1913 (two 
 months ) 
 
 12 
 
 27,400 
 
 16,456 
 
 353 
 
 1914 
 
 43 
 
 71,050 
 
 24,561 
 
 10,912 
 
 1915 
 
 11 
 
 5,850 
 
 791 
 
 460 
 
 1913 
 
 13 
 
 23,090 
 
 2,090 
 
 423 
 
 1917 
 
 9 
 
 7,350 
 
 3,575 
 
 2 , 526 
 
 1=»18 
 
 7 
 
 20,350 
 
 2,436 
 
 1,461 
 
 As soon as the crisis came, the People *s Bank of India , 
 because of its failure, spread panic among the depositors , and 
 caused the whole banking business of India to face a. critical 
 situation. The bank with a paid-up capital of 13 lakhs of 
 rupees and deposits of 126 lakhs of rujjees went into bankruptcy, 
 and caused the collapse of a number of other Indian managed banks 
 in that province and in Bombay. The spread to the Bombay Pre- 
 sidency was due to the branch banks of the important banks located 
 in the Punjab, and they had to close up the ’cusiness when the 
 head offices failed. The Indian Specie Bank failed owing to 
 gross mismanagement. Mr. Doraiswamit in connection with the 
 failure of this bank, explains that ” the Indian Specie Bank, 
 under the management of the late Mr, Chunilal Saraya, cooked the 
 accounts, without the knowledge of the directors, and speculated 
 
 * Dorasws.mi - Indian Trinance a,nd Currency, - p.ll7. 
 

 
 
 ■ 
 
 1 ^ 155 ^^ ■ ‘Fr-L;^pK^i^T) ; -r 
 
 ( • '•% ♦>' 
 
 M. ri» £«^ , 
 
 1...'.,:.: 
 
 
 V: 
 
 
 A v*! 
 
 .:* ■ 
 
 
 
 'f: 
 
 
 
 4’ 
 
 • . V 
 
 
 't)Pk 
 
 
 |, I K»e& A 
 
 • ^ ♦r ' -•, '; 1 , ^v,,; . 
 
 '■■ '! .- ■/- ':**{■ ■ ■0i*,4fv;n '• ■ 
 
 X'-C^.il '■...., ■ ‘•■'v.'^ T.f^ .vlS 
 
 trt- 
 
 
 
 'V '^V'- ' '’ 
 
 • '“/'J 
 
 
 ■■'■ i if.r * ft 'irfii '*■ 
 
 ' " ^ *A^nr ' ' '''N'jflt ^ 
 
 '•■^,<9f. ' .v*.^ ‘ 
 
 
 
 ;4-,v -v. 
 
 r. 
 
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 ' ,. r . : ■ * “ -V *' '■' >’ 
 
 ►: 
 
 •^V»,y; :_ ,y ■^." • T*";' i,5; - 1 V '■^eSBp ' 
 
 V • ?• I' ■ .; ;* -‘ti^itif V, - ■•1» • ^0 *^’! <?»/€«'’ 
 
 ■ ■ ' ' ‘ ’' '■ ■• ■ V'.i ■• ‘ 'a 
 
 V ■ r-j '^4 av'( 4M. ''jii(’ ■ 
 
 Jfevriy’ 
 
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 ^ipi. -t, i 
 
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 ■ .' ■• • ''':i'j'a^i.‘ . ’-u ’*i .;*oi 
 
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44 
 
 extensively in silver.” Liquidation of the Specie Bank created 
 panic everyflrhere , and, particularly, it affected the Western and 
 Northern regions. The tide s?7ept away many smaller hanks causing 
 immense hardships on the part of the depositors, who were mostly 
 of the middle and poor classes. 
 
 The failure of the hanks may he attributed to several 
 causes, these combined made their positions insecure. The 
 causes are: (l) directors of hanks lacking experience in the 
 
 hanking business; and their failure to control the operations of 
 the hanks; (s) keeping of improper accounts and advancing loans 
 without sufficient security; (3) investment of large amounts in 
 such business as it could not he easily realised; (4) speculation 
 of the managers in business which banks should avoid; (s) using 
 of depositors^ money obtained at a high rate of interest to 
 fin'ance concerns of doubtful profitableness; (s) distribution of 
 dividends among sheireholder ’s out of capital and the concealment 
 of this fact by skilful manipulation of the accounts.* These 
 internal defects were carried to such an extent that the banks 
 simply could not go a step further. The report of the accounte.nts 
 appointed in connection with the Specie Bank failure contains 
 the following remarks : ” We have found the books in an incomplete 
 state. They were not written up to date. The general loan 
 
 ledger contains receipt for miscellaneous advances, chiefly on 
 the security of pep'ls. ... It is extremely disappointing to have 
 to relate what can only be described as a miserable tale of the 
 
 X. Kale, V . G. - Indian Tj^conomics , p. 363 
 
■ •/.' .■ trw’i' **Gi3SB 
 
 r.Tripr *if ■ /, 
 
 iK> / liti' i:a 
 
 < ^ , • _ 
 
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 ‘ <. ■ , i 
 
 
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 ) : 
 
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 ■: . ■' ;-r . V'.: ' 
 
 yii^^ 
 
 » ' . 'i». ^< ■ vt--i*-H’';' . ' rfe , ...ifl 
 
 1^"'^ ■ ■ '■ > ^.' ■■. ■ ' ■■ h . V ' , ' " 
 
 ' ■ •" *,‘« ■ - '■• '■' ‘iWW l’^*.X^.- '^i 
 
 , jv . 'V- .1 . <v -1 vi.fa 
 
 \^f^'ii4L\k^‘'ki : ;*.. f.'^.2t ...w • i£it‘y o; V.^ V' ' 
 
 
 ' ,- - ;* •.' TTT^-isia mi^-t-^;tmim 
 
 1^- .' tr.^4;{ r ? ,^ . . V. ' ^ t ■’^ 4 ^ 
 
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45 
 
 lowest form of fraud, the creation of fictitious debtors and the 
 preparation of demand promissory notes in support of these.”* 
 
 The investigations thus brought out the true conditions of the 
 banks. It was no wonder that the banks failed under such circums- 
 tances . 
 
 The financial panic undoubtedly gave a considerable 
 check to the spread of banking, especially in those affected 
 regions; but, it gave a good lesson to the banking concerns. It 
 removed the vulnerable spots from the whole banking system, and 
 to-day Indian banks are in a stronger and more stable condition 
 than before. It also made men consider the necessity of over- 
 hauling the banking system to meet the new and changed conditions. 
 
 The Indian Joint Stock banks and the private banks were 
 the only victims of this panic, and the positions of the Presi- 
 dency banks were not at all jeopardised. Mr. Keynes in regard 
 to this says that ”the restrictions under which they (Presidency 
 banks) work have in the past contributed, beyond doubt, to their 
 stability. ... Only by virtue of its being absolutely precluded 
 by law from the more speculative forms of business, have the 
 banks survived the half-dozen or more violent crises by which 
 the Indian financial system has been assailed in the last hundred 
 years . ”** 
 
 The failure of many banks during the period led the 
 public mind and also the government to consider some means by 
 which it would be possible to check such crises as might be im- 
 pending in the future. The question came up whether it would not 
 
 ♦ Pioneer, December 21, 1913, 
 
 ** Keynes, J. M. - Indian Currency and Finance , p. 203. 
 
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46 
 
 "be desirable to have some restrictions or limitations placed upon 
 firms and individuals who took the name of ’banks ’bankers ’ , or 
 their equivalents. The government of India, therefore, asked the 
 Provincial governments to get the views of the commercial community 
 and others on this point, and also issued a circular to tha,t effect. 
 It suggested restrictions embodied in the following: (l) sanction 
 
 of a minimum amount of subscribed ca,pital; (s) certain portion 
 of such capital should be duly paid up within a certain period 
 from the commencement of bu.siness; (3) restrictions on the dis- 
 tribution of dividends from profit until an adequate reserve is 
 built up; (4) prohibition of engaging in any business except 
 that of banking.* These pror^osed restrictions are clearly 
 necessary in the interest of the public as well as of sound 
 development of the Indian Joint Stock banking. The government 
 has not yet passed any law in regard to these, but it will be 
 not long until India will have such laws against joint stock 
 and private firms. 
 
 ♦ 
 
 Kale, V. G. - Indian Currency and Fins^nce, p. 337. 
 
 
47 
 
 S. Effect of the Great War on Indian Banking. 
 
 The next event of the period for consideration here is 
 the great war which opened for banks a field of speculation in 
 foreign exchange. The business of foreign exchanc-e.is not 
 carried on by any purely Indian institution as done by many banks, 
 and hence the question is left out of consideration. The other 
 War activities, such as the selling of the government papers and 
 bonds etc,, with which the banks had anything to do, have also 
 been omitted from this discussion with the exeeption of those 
 in which the banks themselves privately dealt and for which they 
 advanced their own funds. The point to 'oe considered, then, in 
 this connection, is only the exact position of banks whether in 
 upward or downward direction, with regard to their deposits, 
 imvestments, etc. as caused by, the great war. The matter is 
 presented merely in outline form with copious statistics to give 
 the exact status of the banks. 
 
 When the war broke out, the Indian banks were in a 
 disrupted condition; particularly was this the case with the 
 Indian joint stock banks, on account of the failures. By that 
 time some of the important joint stock banks had been liquidated 
 and others were following them. The depositors were in a feverish 
 mood to withdraw their money, and the whole Indian bani:ing field 
 v/ris more or less topsy-turvy. But, in spite of this , the war 
 found India in an unusually good position to withstand the dis- 
 locsition of credit and trade, and this condition was due to a 
 number of reasons. 
 

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48 
 
 In the first place, the Indian banking failures which 
 swept over the country during the latter months of 1913 had removed 
 from the active sphere of operations a large number of badly managed 
 speculating Indian banking concerns; and, the removal opened the 
 eyes of others and compelled them to make their positions secure. 
 Secondly, the Presidency Banks had enough cash balances, due to 
 large balances kept by the o-overnment, to meet i.ny emergency 
 demands which may have been made on them. The Bank of Benga,! had 
 a cash balance of Rs . 160,000,000 which was almost a record and 
 their statement showed a percentage of cash against banking lia- 
 bilities of 56,19,* Thirdly the Exchange banks were also fully 
 supplied with cash in anticipation of the usual demands on them 
 to move the jute crop at that time of the year. And, fourthly, 
 the govermnent intimated its intention to provide funds to the 
 Presidency banks as required, which in their turn would support 
 all legitimate trade requirements. The Joint Stock banks also 
 benefited by this arrangement of the government with the Presidency 
 banks as they were then able to get advances from them for the 
 movement of the internal trades. As regards loans made locally, 
 banks confined themselves to financing jute mills, tea gardens, 
 and kindred industries, but any business savoring of speculation 
 had been discarded after the crisis and consequent failure. It 
 was said that if the war had been precipitated a few months later, 
 matters would probably have proved serious. 
 
 In order to show the real position of the banks during 
 War time, the method adopted is to produce the aggregate balance 
 
 * U.S. Special Consular reports, V,?2,p,B5, 
 

 
43 
 
 sheet of the Indian banks, and the statistics relating to the 
 items therein. In these aggregate balance sheets all the Pre- 
 sidency banks and thirteen major Indian joint stock banks have 
 been combined. The Exchange banks have been left out, for it 
 is not possible to combine their balance sheets with other Indian 
 banks as their business is not only in India but outside of it, 
 and the capital for the purely Indian portion can not be separately 
 distinguished. The following is the aggregate balance sheet * 
 of the banks. 
 
 (in millions of rupees) 
 
 December 31, 1913. 
 
 Capital and Reserves 
 
 105 
 
 Cash in hand, etc. 
 
 195 
 
 Deposits, etc. 
 
 615 
 
 Investments 
 
 105 
 
 Other liabilities 
 
 15 
 
 Bills discounted, etc 
 
 . 480 
 
 
 
 Other assets 
 
 15 
 
 Total 
 
 735 
 
 Total 
 
 735 
 
 
 (in millions 
 
 of rupees) 
 
 
 
 December 
 
 31, 1917. 
 
 
 Canital and Reserves 
 
 105 
 
 Cash in ha.nd etc. 
 
 430 
 
 Deposits, etc. 
 
 1050 
 
 Investments 
 
 310 
 
 Other liabilities 
 
 15 
 
 Bills discounted, etc 
 
 . 535 
 
 
 
 Other assets 
 
 15 
 
 Total 
 
 1170 
 
 Total 
 
 1170 
 
 ♦ The statistics for this 
 
 and the fol 
 
 lowing ones in this 
 
 chapter 
 
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50 
 
 The noticeable features in the war balance sheet are: 
 
 (l) the increases in the deposits on the liabilities side, and 
 (s) the growth in the cash and. investments among the assets. 
 Deposits in the Presidency and India.n Joint gtock banks increased 
 by Rs , 435,000,000, or 71 per cent; cash by Rs. 325,000,000 or 
 115 per cent; and investments by Rs . 105,000,000 or 100 per cent. 
 It will be interesting also to compare the capital and reserves 
 of the banks in the pre-war year and at the end of 1917 . The 
 following table will show that the capital and reserves are pra.c- 
 
 tically the same, excepting in the Exchange banks. 
 
 Capital and Reserves of Indian Banks 
 ( In rupees) 
 
 DecemJlj^Sl, 
 
 Presidency barJcs 75,000,000 75,000,000 
 Exchange bariks^ 105,000,000 120,000,000 
 Joint Stock banks 30,000,000 30,000,000 
 
 The growth of banking credits has continued rapidly, 
 especially during 1916 and 1917. The large profits which have been 
 
 have been taken from "Indian Finance and Banking " by G.F, 
 Shirra.s. The figures have been converted into rupees, and the 
 essestial portions of the data have been taken only to suit the 
 purpose . 
 
 * Five Excha,nge banks which have considerable business in India, 
 are included. Their total capital and reserves have been taken 
 as the India.n portion can not be estimated . 
 

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51 
 
 made by most Indian industries on account cf the war were reflected 
 in the larg;e increase in deposits. The teble below will show the 
 comparative increase in deposits and current accounts by banks: 
 
 Deposits in millions of rupees. 
 
 
 1913 
 
 1915 
 
 1917 
 
 Presidency banks 
 
 420 
 
 435 
 
 750 
 
 Exchange banks (refer to 
 
 foot-note in the prece- 
 ding page) 
 
 645 
 
 855 
 
 1260 
 
 Indian Joint Stock banks 
 
 195 
 
 180 
 
 300 
 
 The decrease in 1915 in case ci the Indian Joint stock banks is 
 due to the withdrawal of money by the depositors owing- to the 
 failure of many India.n Joint Stock banks. 
 
 The percentage of cash balances to liabilities on 
 deposits may also be examined from, the d.ata. The tremendous 
 increase in the cash balances i n 191? of the Exchange banks is 
 to be explained by large import of gold for cotton in the same 
 year. 
 
 Percentage of cash to liabilities on deposits i 
 
 
 1913 
 
 1915 
 
 1917 
 
 Presidency banks 
 
 P.C. 
 
 36 
 
 P.C. 
 
 34 
 
 P.C. 
 
 45 
 
 Exchange banks (doing considerable 
 business in India) 
 
 17 
 
 41 
 
 160 
 
 Indian Joint stock banks 
 
 18 
 
 22 
 
 25 
 
':'n 
 
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53 
 
 The War had a great effect on the bank’s investments. 
 
 Tn the case of the Presidency and Exchange banks, they were very 
 noticeable. The increase in the investment of the Presidency 
 banks was 141 per cent, while that of the Exchange banks which Inaci 
 considerable business in India wa.s 13? per cent. There was also 
 an increase of 53 per cent in the investment of the Indian Joint 
 Stock banks. The table below shows the comparative increase in 
 the investment. 
 
 (in millions of 
 
 rupees ) 
 
 
 
 1913 
 
 1915 
 
 1917 
 
 Presidency banks 
 
 ?5 
 
 130 
 
 165 
 
 Exchange banks (doing considerable 
 business in India) 
 
 60 
 
 150 
 
 150 
 
 Indian Joint otock banks 
 
 30 
 
 30 
 
 45 
 
 The increase in investment is due m.aihly to the subscription to 
 the government loans of all kinds after the outbreak of the war. 
 
 As to the discounts and advances, the incres.se is of 
 specis.! interest, with the exception of the Exchange banks, in 
 spite of the banks investments of funds in so many things. This 
 will be seen from the following figru.res, 
 
 (Next page) 
 

 Discounts and 
 
 advances 
 
 
 
 ( In millions ' 
 
 of rupees) 
 
 
 
 1913 
 
 1915 
 
 1917 
 
 Presidency ba.nks 
 
 270 
 
 225 
 
 315 
 
 Exchange banks (doing considerable 
 
 
 
 business in India,) 
 
 405 
 
 360 
 
 405 
 
 Indian Joint otock banks 
 
 150 
 
 135 
 
 210 
 
 The above atatistics and data have clearly shown the 
 position of the Indian banks of three classes during the war 
 period. In al.l aspects of business, they have increa.sed their 
 amounts considerably. In some 'cases there has been tremendous 
 growth, as, for instance, in deposits, in investments, and in 
 C3.sh balances. The public thought at the beginning of the war 
 that there would be a genera.1 failure of all banks. There was 
 perhaps some grounds for this fear for the Indian Joint Stock 
 banks were still being liquida,ted, and every where there was a 
 rush of withdrawals of money by the depositors. But, the war 
 produced a curious effect on the status of the banks and stabilised 
 their conditions more than was expected. The governments 
 attitude toward the Presidency banks by providing them with funds 
 was commendable. Speaking generally, then, the Indian banks have 
 come out of the time of stress vexy well, and this ma^'’ be attri- 
 buted to the elimination of unsound concerns, which took place 
 during the latter part of 1913. 
 

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54 
 
 Chapter V . 
 
 A Central Bank for India and the Amalgamation of 
 the Presidency Banks, 
 
 The question of starting a central cr state hank in 
 India on the lines of the Bank of France cr the Reichshank of 
 Germany is an old one, and has been under discussion for several 
 years. In India, the government has the monopoly of note issue, 
 while in other countries, the central bank or a few banks have 
 the privilege of it. The gcvernm.ent of India performs therefore, 
 m;any functions which would ordinarily fall within the sphere of a 
 bank’s business. The go^’-ernment has its reserve treasuries and 
 ordinary treasuries, and supplies the currency required for the 
 movement of crops at different times and in different provinces. 
 
 It keeps its gold standard and currency reserves. It also meets 
 council bills and sells sterling drafts, borrows locally and in 
 England, and lends to iruniclpal and local bodies out of its surplus 
 balances. The relation of all these transactions of the govern- 
 ment with the ordinary transactions of the miOney ma.rket, is, 
 therefore, very intimate; and it is maintained by the government 
 through the agency of the Presidency banks. For the interests 
 of tr0.de and. of the general public, it is felt that it would, be 
 much better for the public and for the government as well if these 
 functions were transferred to a created central or state bank. 
 
 The created bank would have government supervision and control 
 in order that it could not promote its own interest to the detri- 
 ment of the interest of its patrons. 
 

 
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55 
 
 The first scheme for such a bank was developed in 
 1836 by a body of merchants interested in the East Indies business. 
 They submitted to the court of directors of the East India Company 
 a project for a great banking establishment for British India. 
 
 Such a bank, as they argued, confining its transactions strictly 
 to banking principles and business would under judicious manage- 
 ment and control, become an instrument of general good by facili- 
 tating Indian commerce,* giving stability to the monetary system 
 of India, and afford.ing the company facilities and adva.ntages in 
 their financial arrangements. From 1860 to 186? there was 
 some discussion of the possibility of the Bank of Bengal develop- 
 ing into a Bank of India.,. To this suggestion the government 
 council members were favorable, and in 186? the Secretary and 
 Treasurer of the Bank of Bengal, Mr. Dickson, laid down before 
 the government a specific proposal for the amalgamation of the 
 three Presidency banks. The opinions of the viceroy and the 
 Secretary of Stcite for India were unfavorable toward this propo- 
 sition, and the project died. Nothing further was done until 
 the subject was brought before the Fowler Committee in 1899 and 
 1900. Both the Secretary of State for India and the viceroy 
 were favorably inclined toward the idea, but it was again tempo- 
 rarily abandoned as it was thought that the time was not propiti- 
 ous. The provincial and personal jeslousies of the banks at this 
 time were so strong that the scheme could not have been managed 
 successfully and it was much better to abandon it. It was 
 brought up again for consideration before the Chamberlain Commis- 
 sion of 1913. • The comitiission declined to express any definite 
 * Keynes , J. M. - Indian currency and Finance ,p. 833. 
 

 
 
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56 
 
 views on it a.nd to ^ake any recommenda.ti ons about it in the absence 
 of sufficient material and an opportunity for adequate discussion. 
 The commission, nevertijLess , regarded that an enquiry be made 
 fully which would consider the feasibility of a central bank, and 
 would either pronounce definitely against the desirability of its 
 establishment or submit to the authorities concrete scheme for 
 its establishment fully worked out in all details. The commission 
 made a careful m.erriorandum. which clearly pointed out the advan- 
 ta.ges of a state bank both to the government and to the mercantile 
 community. This made a strong impression in India when it was 
 made public. The advantages which it suggested were:* (l) the 
 abolition of the independent treasury system, its place being 
 taken by a la,rge central bank; (s) the discontinua.nce of the 
 system of keeping large sums at loans for short periods in the 
 London m.oney market; (3) the management of a note issue by an 
 agency possessing greater opportunities for increasing the note 
 circulation; (4) the handing over of questions relating to bailances, 
 paper currency, and loans to expert bankers; (5) the release of 
 government balances and the development of paper currency, thereby 
 benefiting the trade as well a,s avoiding; large fluctuations in 
 in discount rates; (s) the increase in branch banking in many 
 parts of India where it is almost entirely wanting; and (?) the 
 introduction of rediscounting facilities w^hich wauld greatly 
 assist the eventual development of Indian banking. 
 
 Soon after the publication of the report, the war 
 broke out and the m.atter was deferred. In March 1919 a resolu- 
 
 * Shirras, G, F. - Indian Finance and Bankino-, p, 372. 
 
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57 
 
 tion was brought forward, based on the Chamberlain Commision’s 
 report, to recommend the measures required by it for organising and 
 developing the banking system of the country. It had an instanta- 
 neous effect, for the need of a central bank was very keenly'’ felt. 
 
 So strong was the feeling in favor of it that the go/ernment 
 had to appoint a committee for its consideration again. Condi- 
 tions were ripe at this time for its official approval, and the 
 proposition had its final successful culmination in legal form 
 when the governm.ent in 1980 passed an act for such a bank. 
 
 Negotiations between the three Presidency banks and 
 the government with a view to the amalgamiation of these institutions 
 were started in 1919, The directors of these ba,nks submitted 
 the scheme of amalgamation and the constitution of an Imperial 
 Bank of India to the sha.reholders . The banks pressed upon the 
 shareholders the necessity of such a,n amalgamation on the ground 
 that the economic conditions after the war had become so complex 
 that such an organisation was imperatively necessary. The 
 shareholders after much persuation by the boa.rds of directors 
 agreed to the scheme and sanctioned the project in 1930, The 
 consent of the three Presidency banks, thus, culminated in the 
 passing by the government in September, 1920, of Act 47 of 1920 
 ”An Act to constitute an Imperial Bank of India and for other 
 purposes."* Under this Act the three Presidency banks were 
 m.erged in the Irperial Bank of India on the 2?th. January, 1921, 
 
 The total authorised capital with the reserve fund of 
 
 ♦ The Indian Year Book, 1921,p-273. 
 

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58 
 
 the Imperial Bank of India ^^ill be Rs .150,000,000 as sanctioned 
 by the government, of W^'ich the authorised share capital will 
 consist of 225,000 shares of Rs . 500 each representing- Rs, 112, 600, 
 
 000 and the reserve fund Rs .37, 500, 000.* The fully paid-up 
 shares of the three Presidency banks at that time, were as follows#: 
 
 Bank of Bengal, 40,000shares of 
 
 Rs. 500 each rs ,20,000, 000 
 
 Bank of Bombay ,20, 000 shares of 
 
 Rs . 500 each pS .10,000,000 
 
 Bank of Madras, 15,000 shares of 
 
 PS . 500 each Rs . 7^900,000 
 
 Total Rs .37,500,000 
 
 It is proposed that the paid-up capital of the 
 Imperial bank shall be Rs . 56,250,000 and that the reserve fund 
 shall be increased to Rs . 500, 000. To effect this the portions 
 
 as given below will be contributed by each: 
 
 Bank of Bengal including reserve Rs . 50 , 000 , 000 
 
 Bank of Bombay ” ” Rs .25, 000, 000 
 
 Bank of Madras ■ " '' Rs .13, 750, 000 
 
 Total RS. 93,'?' 50, 000 
 
 The Imperial Bank will issue 150,000 new shares of the 
 nominal value of Rs . 500 each, and on which the sum of Rs.l25 will 
 
 * Indian Year Book, 1921, p. 373 . 
 
 # Kale,V.G-. - Indian Finance, p. 388. 
 
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59 
 
 be payable. Out of this total issue, the shareholders of the 
 Bank of Bengal, the Bank of Bombay, and the Bank of Madras will 
 get 80,000; 40,000; and 30,000 shares respectively. The scheme 
 is that each shareholder of the respective banks will exchange his 
 present holding of shares for an equivalent number of fully paid 
 shares in the Imperial Bank; and in addition, for each share so 
 exchanged, he will receive two new shares of the Imperial bank\stock 
 at par, and on these latter new shares Rs.l25 will be immediately 
 called up and paid. The rest of the amount on the partly 
 paid sh3.res of the Imperial Bank will be payable in the future , 
 
 The organisation of the hank will be controlled by a 
 central board, and in each presidency there will be a local board. 
 It will also ope n an office in London. The governing body of the 
 bank will be the central board which will consist of a general 
 manager, the controller of currency, the president and vice- 
 president of each local board, and the seer et Airies and treasurers 
 of the local boards. The gotT’ernment is represented on the cen- 
 tral board by the controller of currency or some of her officer 
 selected in "'is nlace by the governor general and by not more than 
 six other persons nominated by the governor general. The 
 nominated members as well as the secretaries and the treasurers 
 of the local boards will have no voting power. 
 
 The function of the central board will be to deal 
 with matters of general policy and it will have general power of 
 control over the local boards. It will also determine the dis- 
 tribution of funds and the fixation of the bank rate, and will 
 be repons ible for the publication of the bank’s weekly statements. 
 
60 
 
 The local hoards wil] retain their existing constitutions and 
 Will deal with the ordinary day-to-day business in their respective 
 territories. New local boards may be formed at other centers 
 where their presence will be necessitated. The Imperial bank 
 will open 100 new branches within 5 years, and the government will 
 have the ri?rht to determine the location of one in every four. 
 
 Twenty of these have been established during 19S1, and the follow- 
 ing centers have been selected: Peshawar, Amritsar, Lyallpur, 
 
 Rawal-pindi, l^ltan, Ambala, Meeral, Bareily, Gorakpur, Moradaba.d, 
 Noakhali, Asansole, Larkana, Dwarwar, Berampur, Cudalore, Jubblepur, 
 Cut tuck, Muzaffarpur, and Mandalay.* 
 
 The Imperial Bank, for the present, will not manage the 
 note issue; and, therefore', will not have anything to do with the 
 currency reserve, the gold standa^rd reserve, and the coina.ge of 
 rupees. With these exceptions, the Imperial Bank will transact 
 all the banking functions of the government which will place 
 all st^te balances at its disposal. It will have facilities for 
 rediscount ing bill s of exchange relative to Indian trade drawn in 
 rupees or in sterling. Although the bank is to act as fiscal 
 agent of the government and to carry all the government balances, 
 the government will not participate in the bank ’s' profit for the 
 first three years, largely for the reason that the establishment 
 of new branches will involve for the immediate future considerable 
 unprofitable business. Moreover, the bank is to 'ce compensated 
 
 * The Economist, ■V.9S,p,836, 
 
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61 
 
 for its work as fiscal agent in connection with the handling 
 of government securities and coupons. At the end of three years 
 it is to he determined on the basis of actual experience whether 
 or rot and to what extent the government is entitled, to partici- 
 pate in the bank’s profit.* 
 
 The function of the Imperial Bank of India as indicated, 
 is net truly speaking that of a central bank which is supposed 
 to subser\’'e the public interests. Restriction in its business 
 of note issue, of foreign exchan<re, and cf gold standa.rd reserve 
 is not a healthy sij?n for a real centralised bank. But, as far 
 as its functions are within its jurisdiction, it is ably ful- 
 fulling all its duties. It has relieved the Financial Department 
 of the India.n G(^rnm.ent of much routine work that rightly falls 
 to the bank’s lot. It has consolidated the country’s credit 
 and has distributed it along well defined lines. The bank is, 
 moreover, demonstrating its great assistance in many ways to the 
 Secret=<r 3 ^ of State for India and the India Office in London. 
 
 * Bankers' Magazine, V,jOS,p,8C4. 
 
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 w in r- ma t ^' i n 'm a i tL^ bim 
 
 V 
 
Chapter VI . 
 Conclusion. 
 
 The condition of the Indian hanks, as has been seen in 
 the preceding' pag;es, is undergoing a cha,nge of great importance. 
 The government, as it appears, has taken deep interest in the 
 growth of the banking institutions in India, and has come forward 
 with means at its disposal to make banking a success, not only 
 for its own primary benefit but for the benefit of the people as 
 wel] , With the recent establishment of the Imperial Bank of 
 India, the country’s banking trade is on the way of progress, and 
 much depends upon its promotion for it will determine whether or 
 not the other industries are likely to have any chance for further 
 development. Rightly, the couse of establishing the central 
 bank has been chosen by the government because efficient banking 
 is an imperative necessity for a growing commercia.! country. 
 India’s commerce, during the war, has grown tremendously, but 
 unfortunately her banking institutions have not kept pace with it. 
 One of the reasons for the establishment of the Imperial Bank is 
 to meet the commercia.1 growth of the country. 
 
 India has been known to the outside world as a country 
 whose people are very apt to hoard money. Is it not the same 
 case with the people of other countries where there are or were 
 at one time very few banking institutions? The spread of the 
 bahliing habit among any people does^not come unless encouraged by 
 bankino- institutions which are strong enough to command the 
 respect and confidence of the people. Education in that respect 
 

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33 
 
 is the only remedy which can cure the hoarding ha.bit. In nearly 
 every country the government has interested itself in the estal>- 
 lishment of hanks and hanking firms, and where there is such an 
 interest on the part of the D:o’’'ernment , hanking has advancedj 
 h anklnp' has adx ^ .nced ; and, consequently, the hahit of the people 
 for privately hoarding is less in evidence than in India. Until 
 recently, the Indian government has done very little for such 
 enterprises, and credit must he given to bankers and hanking firms, 
 net connected with the government, for whatever spread of good 
 hanking habits there ha.s been among the Indian population. People, 
 as a rule, do not have as much confidence in a priva.te institution 
 as the37- have in a government controlled or supervised one. 
 
 Recently the Indian government has realized the need and 'its 
 own responsihili ty in the matter and has taken at least the steps 
 necessary to develop a strong hanking system which will give the 
 people improved financial advantages. 
 
 The spread of the hanking hahit among the Indian people 
 should hot he judged from the amount of deposits or from the 
 number of checks issued; hut it should he judged from their 
 investments in the government papers, bonds, and war loans. To 
 determine the haiiking hahit of the people from deposits would he 
 misleading, for Indian deposits are not the total deposits of all 
 the people who. have a surplus of money; brt, are, on the contrary, 
 only the deposits of the big merchants of the country, European 
 as well as Indian. Similerly, in the case of checks, they are 
 no true indication of the amount of financial business of all the 
 people; for they are only issued by the same merchant houses and 
 
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64 
 
 "by a few rish t)ersons. In other countries numbers and amounts 
 of deposits and checks are a means by which the banking habit and 
 the amount of business could be determined, but for India they 
 are of no value as the people neither deposit nor issue any checks. 
 The reason is that the m.ajority of them- do not have any confidence 
 in banking- firms not connected with the government. 
 
 The investments by the Indis-n population in the gcvern- 
 m.ent loans and bonds, on the o"^her hand, will shov^r the attitude 
 of the people toward hoarding money. The investing habit is not 
 without relevance to the present discussion of the banking habit, 
 for as scon as a me.n begins to invest his savings, the time must 
 com.e eventually when he will use a bank provided of course there 
 is one conveniently near which he will trust. 
 
 The growth of the investment habit among the Indians 
 has been strikingly increased lately by the operations of the 
 Indian war loans and the selling of cash certificates. It was, 
 of course, the result of an energetic propaganda and an appeal to 
 the patriotism, of the investors, but, never thless, some will con- 
 tinue to make their investments in the governm.ent securities. 
 
 Before the war, many people had their surplus money invested in 
 government bonds and other papers, and they did not have their 
 raone^’- in the banks because not much facilities for it. The 
 investments also m.ade by the people in the governm.ent post offices 
 reach a considera.ble am.ount, and this is a further evidence of 
 the people’s habit to use the surplus money and not to hoard it. 
 
 In spite of many discouragements for keeping their m.oney with the 
 baTiks, there is undoubtedly a growing tendency amiong the people 
 
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65 
 
 towards depositing in the banks at present. 
 
 With respect to banking facilities and the^r.ounts handled 
 by banks, there is no comparison between the position of India, 
 and that of western countries. On 31s^ . December, 1917, the 
 
 bai-nks 
 
 number of head offices and branches oi^for 315,000,000 people of 
 India was only 402.* Canada with a population of less than 
 10,000,000 had on 31st. October, 1918, 3,306 bra.nches of banks. 
 After the signing of the armistice, nearly 500 new branches were 
 opened in that Dominion. It is, therefore, ver 3 r evident that 
 the few sub-stations, agencies, and branches established or 
 proposed by the Imperial Bank and other banks are not adequate 
 to create good banking fe.cilities throughout the country. The 
 banking requirements of India which is nearly two- thirds the 
 area of the United States of A.nierica, could not possibly be met 
 by the few branches, which now exist, of the Imperial Bank and 
 other banks. Practically, there is net a single bank in any 
 tow^n having population from fifty thousand to a hund.red thousand. 
 Many commercial centres of India have no banking institutions, 
 
 paopW 
 
 and where the sound places of deposits are lacking, the,^with small 
 surplus at their disposal either keep it in the form of gold or 
 silver or ornaments, or entrust it to the local .money -lender. 
 
 The facilities for investment even in g-overnment securities are 
 still inadequate. 
 
 In connection with the establishment of branches, the 
 
 * Appendices to the report of the com.mittee ,V, 8, 130. 
 
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66 
 
 answers of Mr. Bomanji*, an Indian representative of the Mer- 
 chants 'Chamber and Bureau, to the questions of the Indian Comn'ittee 
 on Exchan-^e and Finance, are of much interest ; and, therefore, 
 they have been reproduced verbatim, 
 
 ” Do you sug'p-est that it would be a ^reat advantage if the 
 banks were to establish branches more widely? - Yes, 
 
 ” Will you explain to us what the adva.ntage would be? - Why 
 does the poor m.an hoard his silver, or is gold, or whatever 
 it may be? Because he has no bank facilities, We 
 want banking facilities, and that will aleviate all the 
 complaints that v^e are having so much about in regard to 
 hoarding. ” 
 
 Mr. Bomanji in the end points out four advantages to be obtained 
 by the establishment of numerous branches throughout India, by 
 the banks , They are ; 
 
 1. Hoarding of coin and bullion would diminish. 
 
 2. The necessity of coirlng laree quantities of silver 
 w oul d di s appe ar . 
 
 3. The circulation of paper currency would increase. 
 
 4. Opportunities would be afforded to Indians to learn 
 western method of banking and to t-ake higher appoint- 
 ments in the Imperial Bank and Excha.nge banks. 
 
 The Indians believe that the Imperial Bank of India should open 
 more branches than already have been established or proi^osed. 
 
 * East India Committee - Munites of Evidence, V. 2, p.l97. 
 
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They urge the central hank to have many branches because of the 
 fact that it is sound in business policy. It is restricted by 
 the government to a certain extent, and it is quite safe for the 
 investments of the poor people. The execution of such a programme 
 of opening many branches would involve the appointments of a very 
 larc’e trained Indian Staff, where only a limited supply now exists. 
 It is only right that the Imperial Bank should have the power to 
 call on the government to establish ^so the educational facilities 
 necessary to furnish a sufficient supply of men trained in banking 
 and commerce from, which the requisite staff might be recruited. 
 
 The government should take the initiative and establish such 
 com.rrerci al schools and colleges as to qualify young men with suffi- 
 cient knowledge for the banking t re.de of the country. 
 
 To sum up, India needs many banking houses. If the 
 trade of the country is to be fostered, then bankers and banking 
 firms are indispensable. Both must go together, as the one 
 
 without the other can not stand nor progress. F-urthermore , 
 
 India must ha,ve her own efficient men to conduct the operations 
 and should not depend on outsiders. In order to have such highly 
 trained and competent men, she must lay cut plains for education, 
 and com.pel the government to carry out such plans. Happily, 
 the University of Calcutta has opened several courses to qualify 
 candidates for banking positions. Sir Ashutosh Mukhsrjee, the 
 Vice-chancellor of the university, who has done sc much for the 
 disemination of knowledge in almost all branches of studies, ha.8 
 the credit and honor for introducing the commercial a.nd banking 
 courses in the said universit 3 r recently. 
 

 
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BIBLIOGRAPHY. 
 
 Attfield, J.B. 
 
 English and Foreign Be^nks 
 
 London, Effingham, Wilson •& Co., 1893. 
 
 Cooke, Charles N. 
 
 The Rise , Progress , and Present Condition of Banking 
 in India. 
 
 Calcutta, P. Cranenhurgh, 1863, 
 
 D oral 8 warn!, S. V. 
 
 Indian Finance, Currency and Banking 
 Madras, S. S, Doraiswami , 1915, 
 
 Dunbar, Charles F. 
 
 Chapters on the Theory and History of Banking 
 New York, G. ?. Putna,m’s Sons, 1901. 
 
 Dupe me X, H. 
 
 People’s Banks for Northern India 
 Calcutta, Thacker, ppink Co., 1900. 
 
 Handy, William M, 
 
 Banking Systems of the World, 
 
 Chicago, Charles H. Kerr and Company, 1897. 
 
 Hull, Walter H. 
 
 Practical Problems in Banking and. Currency 
 New York, The Macmillar Company, 1907. 
 
 Indian Currency and Finance 
 
 Bombay, Bennett, Coleman ^ Co., l'^13. 
 
 The Indian Year Book, 1920 and 1921 
 Bombay, Bennett, Coleman Co. 
 
 Kale, Vaman G, 
 
 Indian Economics 
 
 Poona, Aryabhushan Press, 1920. 
 

69 
 
 Keynes, John M.’ 
 
 Indian currency and Finance 
 
 London, Macmillan and Co., Limited, 1913. 
 
 Shirras, C-eorge F, 
 
 Indian Finance and Banking- 
 
 London, Macmillar and Co., Limited, 1920. 
 
 Speeches of the Honourable Mr. C. K. Gokhale 
 Madras, G, A. Natesan Co . , 190- 
 
 Documents . 
 
 East India (committee on Indian Exchange and Currency) 
 Appendices to the Report, V. Ill 
 London, His Majesty's Stationary Office, 1920. 
 
 East India (Committee on Indian Exchange and Currency) 
 
 Minutes of Evidence taken before the Committee, 7. II 
 London, His Majesty's St'-’tionary Office, 1920. 
 
 East India (Progress and Condition) 
 
 Statement exhibiting the progress and condition of 
 India. 7. 55 and. 56. 
 
 Lon3.on, His Majesty’s St^’tionary Office, 1919-20. 
 
 Indian Government - Finance p,epartment 
 Financial Statement and Budget 
 
 Delhi, Government Printing Press, 1914-15 and 1917-16. 
 
 United States of America - Dept, of Commerce 
 Special Consula-r Reports, 7, 72. 
 
 Washino-ton, Government Printing Office, 1915. 
 
 Periodicals: 
 
 ”The Imperial Bank of India"- Bankers’ Magazine, 7.102. 
 New York, The Bankers Publishing ciO., 1921. 
 
 "Indian ban'^ing" - The Economist, 7, 92 
 London, C. Reynolds, 1921. 
 
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