INDIAN BANKING
1. In passing from Currency and the Finance of Government to the
kindred topic of Banking, we come to a part of the subject where
statistics and other information are much less freely available to
the outside critic. The published figures are not adequate to tell us
much of what we require to know, and the literature of Indian Banking
is almost non–existent. I must run the risk, therefore, of sometimes
falling into errors of fact, and hope that, if these errors provoke
criticism, they will bring to light the true facts at the same time.
2. The Money Market and Banking System of India comprises the following
as its four main constituents:—
(i.) The Presidency Banks; (ii.) the European Exchange Banks; (iii.)
the Indian Joint Stock Banks; and (iv.) the Shroffs, Marwaris, and
other private bankers and money–lenders.
The first two of these constitute what we may term the European
Money Market, and the rest, under the leadership of Marwaris and
Parsees, the Indian or Native Money Market,—up–country Banks such as
the Allahabad Bank and the Alliance Bank of Simla, which are Indian
Joint Stock Banks under European management, occupying, perhaps, an
intermediate position. The local money markets, outside the main towns
in which European business men have offices and where the bulk of the
foreign trade is handled, are entirely in the hands of Indians.
3. How close a connexion exists between the two money markets—native
and European—how nearly the rates ruling in one agree with those in
the other, and how readily capital flows from one to the other, I am
not clear. Some evidence bearing on these points was laid before the
Fowler Committee of 1898, but such facts are now fifteen years old.
In the pre–1899 period it was not uncommon in times of stringency
for the bazaar rate to be appreciably lower than the Presidency Bank
rate, and the connexion between the two money markets seems to have
been very incomplete. The following quotation from a letter by Mr. J.
H. Sleigh, Secretary and Treasurer of the Bank of Bombay, written in
1898 (reprinted in the Appendix to the Fowler Committee’s Report), is
interesting:—
During the last export season, Shroffs’ 60 days’ sight bills were
not obtainable over 8 per cent discount.... This was the rate then
ruling in the native bazaar both in Bombay and Calcutta, and that,
too, while the Exchange Banks were greedy to receive fixed deposits
for short periods at 9, 10, and even 11 per cent per annum, and
while the Presidency Banks were straining to meet the demands for
loans at 12 and 13 per cent per annum. But there is no singularity
in these facts. The same peculiarity has shown itself over and over
again during periods of financial pressure; and even at the present
moment (November 1898), while money is not by any means tight, there
exists a difference of about 2 per cent between the bazaar and the
Presidency Bank rates. I have ever found that when the official rate
rose abnormally high, the rate in the native market did not respond
to the full extent, but generally stopped at 7 or 8 per cent, though
the Presidency Banks’ rate might rise to 10 or 12 per cent. The
explanation is simple. The Shroffs, who finance nearly the whole of
the internal trade of India, rarely, if ever, discount European Paper
and never purchase foreign or sterling bills. Neither do they lend
money on Government Paper or similar securities, but confine their
advances to the discount of _hoondees_, to loans to cultivators, and
against gold and silver bullion. The _hoondees_ 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 _hoondees_ they buy
and sell to each other, which are chiefly the traders’ _hoondees_
bearing the Shroffs’ own endorsements, rule the rates in the native
bazaar, and are generally negotiated, during the busy season, at from
5 to 8 per cent discount. They also discount their endorsements pretty
largely with the Presidency Banks when rates are low, and discontinue
doing so when they rise above 6 per cent. They also speculate largely
at times in Government Paper, especially during the off season, but
rarely or ever hold it or lend on it.
I have seen no evidence for supposing that the general conditions
outlined in this quotation do not still hold; but in recent years
the Presidency Bank rates have not risen above 9 per cent, and
occasions for the operation of the tendencies described above have
been rarer. The conditions prevailing in the Indian Money Market in
the period immediately preceding 1898 were in many respects very
abnormal. I suspect that the rates in the two markets may appear to
be more different than they really are, and are explicable by the
difference of the conditions and of security, subject to which business
is transacted. It is, however, plain that the main movements of the
interest rate up and down, which result from the central facts of the
Indian seasons and harvests, must be the same in both markets, and that
the Native Money Market must ultimately depend on the European for
additional supplies of cash.
4. As I am chiefly interested in the Indian Banking System, so far
as this book is concerned, from the point of view of its effect on
the remittance of funds to and from India, I shall be concerned for
the most part with what I have called the European Money Market—the
Presidency and Exchange Banks. But an Indian writer, in a position to
know the facts, could throw much useful light on a question where I
must necessarily be content with somewhat doubtful conjecture.
5. The Presidency Bank of Bengal was opened in 1806 and received its
charter of incorporation from the East India Company in 1809.[86] The
first Bank of Bombay[87] was established under a similar charter in
1840, and the Bank of Madras in 1843. The establishment of these Banks
in the other Presidencies put an end to the possibility that the Bank
of Bengal might become a Bank for all India. The Presidency Banks had,
at first, a semi–official character. At the foundation of the Bank of
Bengal, the East India Company contributed one–fifth (the proportion
became smaller subsequently) of the capital and appointed three of the
directors. Up to the time of the Mutiny the office of Secretary and
Treasurer was held by a Covenanted Civilian.
Up to 1862 the Banks had the right of note issue; but this right was
so hedged about by a restriction of the total liabilities payable on
demand to a certain multiple (at first three times, later four times)
of the cash reserve, and of the total liabilities of all kinds to the
amount of the Bank’s capital (up to 1839), or of the total note issue
to a fixed amount (from 1839 to 1862), that the note issue of the
Presidency Banks never became important. In 1862 the management of the
note issue was taken over by the Government in the manner described
in Chapter III. At the same time the right of note issue by private
Banks was finally abolished.[88] In 1876 the Government relinquished
their share of the capital of the Banks and their right of appointing
directors.[89] Since then the Presidency Banks have lost their official
character, but remain distinct from other Banks in that they are
governed by a special Charter Act (the Presidency Banks Act of 1876).
6. The Presidency Banks have worked from the beginning under very
rigorous restrictions as to the character of the business which they
might undertake. These restrictions were originally due partly,
perhaps, to a feeling of jealousy on the part of the Court of Directors
of the East India Company lest the Banks should compete in business
(such as foreign exchange) which the Company regarded as its own;
but chiefly from a proper wish that semi–official institutions, in a
country so dangerous for banking as India, should be conducted on the
safest possible principles.[90] An exceedingly interesting history of
the restrictions is to be found in Mr. Brunyate’s _Account_. In 1862
they were greatly relaxed, but the most important limitations were
reimposed in 1876.[91] Since that time only minor charges have been
effected.
7. The principal restrictions on the Presidency Banks are now the
following:—
(i.) The Banks may not draw, discount, buy, or sell bills of exchange
or other negotiable securities _unless they are payable in India_[92]
or in Ceylon; this restriction has cut off the Presidency Banks
completely from dealing in sterling drafts or any kind of foreign
exchange; (ii.) they may not borrow, or receive deposits payable,
outside India, or maintain a foreign branch or agency for this or
similar purposes, and they are thus prevented from raising funds in
London for use in India[93]; (iii.) they may not lend for a longer
period than six months[94]; (iv.) or upon mortgage, or in any other
manner upon the security of immovable property; (v.) or upon promissory
notes bearing less than two independent names; (vi.) or upon personal
security; (vii.) or upon goods, unless the goods, or the title to them,
are deposited with the Bank as security.
The fifth of these provisions allows a loophole by means of which the
rules can be made to work in practice less rigorously than appears on
paper. Any two names will satisfy the letter of the Presidency Banks
Act; but any two names are not necessarily very good security. After
getting two names to satisfy the Act, the authorities of the Banks can
then proceed to satisfy the dictates of cautious banking by taking, as
well, some of the other kinds of security upon which, technically, they
are forbidden to lend. It is an excellent instance of the consequences
of an attempt to control banking by an elaborate Act forty years old.
The last provision has led, I believe, to the Banks establishing a kind
of bonded warehouse for the reception of merchandise. In other cases
the borrower’s own mill or warehouse is made to serve the purpose by
the expedient of the Bank’s paying the wages of his watchman. Where
the personal security of the borrower is obviously good, there must be
a temptation to allow him to value the goods generously, rather than
to put the Bank to the inconvenience of housing or watching a greater
bulk of merchandise.
As some recompense for these restrictions, the Presidency Banks have
been allowed to hold a portion of the Government balances without
payment of interest. The use of these balances was first granted them
in 1862 as compensation for their being deprived of the right of
note issue. Up to 1876 the Presidency Banks held, subject to certain
conditions, the _whole_ of the Government balances which would have
been “paid in ordinary course into Government Treasuries at the
places where the head offices and branch offices of the Banks are
established.” But on more than one occasion the Banks made difficulties
when the Government desired to withdraw large sums at short notice. In
1876, therefore, the Reserve Treasuries were established, and since
that time only a portion of the balances has been placed with the
Banks.[95]
8. The present constitution of the Presidency Banks is to be explained,
therefore, by their long and complicated history. The restrictions
under which they work have in the past contributed, beyond doubt,
to their stability. The Bank of Bengal has seen the rise and fall
of numerous powerful rivals. Only by virtue of its being absolutely
precluded by law from the more speculative forms of business, has
this Bank survived the half–dozen or more violent crises by which the
Indian financial system has been assailed in the last hundred years.
And, in spite of the restrictions, the Presidency Banks have shown
great vitality and a power of expansion hardly less than that of the
Exchange Banks in the happier circumstances of the last decade. But
their constitutions are exceedingly out of date at the present time.
The considerations which originally gave rise to them are no longer
operative;—since the introduction of the Gold Standard, for example,
dealing in foreign exchange has ceased to be a highly speculative
business. And they do not play as useful a part in the Indian Financial
System, as with a different history behind them they might do.
9. The principal statistics of the three Presidency Banks are as
follows[96]:—
┌────────–┬────────────┬────────────┬────────────────┬──────────────–┐
│ │ Capital, │ │ │ │
│Dec. 31. │ Reserve, │ Public │ Private │ Cash. │
│ │ and Rest. │ Deposits. │ Deposits. │ │
├────────–┼────────────┼────────────┼────────────────┼──────────────–┤
│ │ │ │ │ │
│ 1870 │ £2,412,000 │ £3,620,000 │ £4,264,000 │ £6,646,000 │
│ 1880 │ 2,702,000 │ 1,941,000 │ 5,662,000 │ 4,943,000 │
│ 1890 │ 2,984,000 │ 2,395,000 │ 9,842,000(a) │ 8,645,000(a) │
│ 1895 │ 3,267,000 │ 2,218,000 │ 8,747,000 │ 5,131,000 │
│ 1900 │ 3,731,000 │ 1,870,000 │ 8,588,000 │ 3,363,000 │
│ 1905 │ 4,156,000 │ 2,078,000 │ 14,842,000 │ 5,487,000 │
│ 1906 │ 4,266,000 │ 2,052,000 │ 18,301,000 │ 7,300,000 │
│ 1907 │ 4,366,000 │ 2,239,000 │ 18,742,000 │ 6,350,000 │
│ 1908 │ 4,461,000 │ 2,172,000 │ 19,077,000 │ 6,925,000 │
│ 1909 │ 4,521,000 │ 2,132,000 │ 21,767,000 │ 7,770,000 │
│ 1910 │ 4,607,000 │ 2,824,000 │ 21,563,000 │ 7,567,000 │
│ 1911(b) │ 4,650,000 │ 2,640,000 │ 23,250,000 │ 9,430,000 │
│ 1912(b) │ 4,900,000 │ 2,530,000 │ 24,000,000 │ 8,070,000 │
└────────–┴────────────┴────────────┴────────────────┴──────────────–┘
(a) An exceptional year, due to the excessive abundance of money.
(b) The figures for 1911 and 1912 are not taken from the same returns
as the rest, and are not quite strictly comparable with them in one or
two details.
These figures do not require much comment. The growth of private
deposits since 1900 (rising from £8,500,000 in 1900 to £15,000,000
in 1905 and £24,000,000 in 1912) is very noticeable. This has been
accompanied by a fair increase of Capital and Reserve and of Cash.
The Presidency Banks publish weekly statements of their affairs, and
it is scarcely possible, therefore, that they should “window–dress”
their balance sheets. The figures given above refer to December 31,
which falls in the busy season; and the proportion of cash held affords
no ground of complaint. It should be said, however, that, while the
public deposits at the head offices are stable and not liable to
sudden reduction, the public deposits at the branch offices stand in a
different position and are held literally at call. It is necessary for
the Banks to hold a considerable proportion of these in cash at the
branches in question, and this arrangement makes the cash held against
the private deposits appear in a somewhat more favourable light than it
should. It must also be remembered that the Presidency Banks are to a
certain extent Bankers’ Banks, and that the other Indian Banks reckon
their balances with the Presidency Banks (included in the private
deposits) as part of their cash.
10. The two provisions of the Presidency Banks Act which have proved
fundamental in their effect on the development of the Indian Banking
System are those which prohibit the Presidency Banks from dealing in
foreign exchange and from raising funds in London. To transact these
two classes of business—though once established they have not limited
their transactions to them—a class of Banks has arisen known as the
Exchange Banks. Officially a Bank is an Exchange Bank if its head
office is located elsewhere than in India; but Banks in this category
coincide very nearly with Banks doing the class of business described
above. The Indian Specie Bank is the only Indian Joint Stock Bank
having a branch office in London; but this is probably in connexion
with its business in silver and pearls, and this Bank does not transact
any considerable volume of business of the kind undertaken by Exchange
Banks.
11. The Exchange Banks proper fall into two groups—those doing
a considerable proportion of their total business in India, and
those which are no more than agencies of large banking corporations
doing business all over Asia. This second group includes the
Comptoir National d’Escompte de Paris, the Yokohama Specie Bank, the
Deutsch–Asiatische Bank, the International Banking Corporation, and the
Russo–Asiatic Bank. These Banks represent in India French, Japanese,
German, American, and Russian interests respectively. No figures are
published of the proportion of their total business which these Banks
transact in India. But I should be surprised if, even in the case of
the Yokohama Specie Bank, it would amount to more than five to ten
per cent; and in the case of some of them it must be much less than
this. In what follows, therefore, I shall leave these five Banks out of
account.
In the first group there are six Banks—the Delhi and London Bank
(1844), the Chartered Bank of India, Australia, and China (1853), the
National Bank of India (1863), the Hong Kong and Shanghai Banking
Corporation (1864), the Mercantile Bank of India (1893[97]), and the
Eastern Bank (1910). The dates after these Banks give the years when
they were established. Of these, two, the Chartered and the Hong Kong
Banks, do a very large business in other parts of the East, especially
China[98]; but this does not prevent their Indian connexion from being
important. The other four are primarily Indian.[99] It is noticeable
that no entirely new Exchange Bank now surviving[100] was founded
between 1864 and 1910. This is in spite of the fact that most of the
above, especially in the last decade, have proved enormously successful
from the point of view of their shareholders. The Delhi and London
Bank,[101] the oldest established of all, has not shown the vitality
or power of expansion of the others; and the Eastern Bank, though it
seems to have made a good start, is still too young to pass judgment
on. But the shares of the rest, if the issue of bonus shares be allowed
for, stand at a premium of about 200 per cent or more. It is probable,
however, that it would be exceedingly difficult to start a new Exchange
Bank at the present time, except under the aegis of some important
financial house already established in a strong position in India.[102]
Indian 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.
12. This summary leads us, therefore, to the important conclusion that
the business of financing Indian trade, so far as it is carried out by
Banks with their seat in London,[103] is in the hands of a very small
number of Banks. They stand, broadly speaking, in an exceedingly strong
financial position supported by large reserve funds. In this matter
India is now enjoying the fruit of past disasters and of conditions in
which the struggle for existence was too keen to allow any but the
fittest to survive. If the present spell of prosperity lasts too long,
she will no doubt lose it.
13. I shall not attempt any complete account of the activities of a
typical Exchange Bank. Much of their business is very like that of
any other Bank. But it will be worth while to describe in rather more
detail the most characteristic part of their transactions and the part
which is most relevant to the topics of this book.
14. In addition to its capital and the reserves accumulated from
profits, an Exchange Bank obtains its funds by receiving deposits
either for fixed periods or on current account. These deposits are
received both in India and in London; but it is a principal object of
Exchange Banks to obtain as much as they can in London, and they seek
to attract such deposits by offering better terms than an English Bank
will allow. On fixed deposits, received for a year or more, 4 or 3½
per cent will be paid; for shorter periods a more variable rate; and
on current accounts 2 per cent will be allowed on the minimum monthly
balance or on the amount by which the balance exceeds a certain fixed
minimum. Apart from the cash, money at call, and investments, which
every Bank must hold, a certain part of these funds are employed in
making loans either in India or elsewhere. But a large part is employed
in the purchase (or discount) of bills of exchange. Some of these
bills will be negotiated in London and drawn on India, but the bulk of
them will be negotiated in India and drawn on London. A busy Exchange
Bank discounts far more of these trade bills in India than it can
afford to hold until maturity. But as they are drawn on London houses
there is no difficulty in rediscounting them in London. As the majority
of the bills are bought by the Banks _in India_, while cash is received
for them, either at maturity or through rediscount, _in London_, the
Banks are constantly in the position of finding themselves in funds in
London and of wishing to have funds (for the purchase of more bills) in
India. They proceed, therefore, to even up their accounts as between
London and India by buying, in London, Council Bills (or transfers) or
sovereigns (from the Bank of England or from the agents of Egyptian or
Australian Banks) for delivery in India, or, perhaps, silver (though
their dealings in silver bullion are probably much less important than
formerly)[104] for remittance to India. The question of what determines
the relative advantages of these methods has been discussed in Chapter
V.
The demand for Council Bills, therefore, chiefly depends on how much
new business the Exchange Banks are entering into in India. The method
of telegraphic transfers enables them to act with great despatch on
receiving advices from their Indian agents. The Indian branches obtain
immediately the funds enabling them to take the trade bills, the offer
of which had seemed to them to be at sufficiently satisfactory rates
to make the transaction taken as a whole worth while. A few weeks
later the bills reach England, are duly accepted, and are capable of
being rediscounted if the Bank needs additional free funds to buy more
Council Bills and turn its money over again in another transaction of
the same kind.
We are now in a position to understand what the Secretary of State
means when he says that he has sold bills to meet the needs of trade.
If he withdraws the convenience of telegraphic transfers or forces
the Banks to put themselves in funds in India by sending sovereigns,
he causes delay or additional expense in the discounting of bills in
India. In other words, Indian traders are less easily able to turn the
goods they are exporting into money. On the other hand, if the Indian
season is a poor one and the exports fall off, the offer of bills for
discount is reduced and the need of the Exchange Banks in London to buy
Council Bills correspondingly less.
It is worth noticing that, from the point of view of the London Money
Market as a whole, it is a mere difference of machinery whether the
Exchange Banks finance the Indian trade by attracting deposits in
London and hold the bills themselves, or whether the Discount Houses
and London Banks attract the deposits and use them to rediscount bills
for the Exchange Banks. In so far as the Exchange Banks can attract
deposits themselves without paying too high a rate for them, this
alternative is usually the more profitable for them,—especially since,
if they are able to hold in this way a considerable proportion of the
bills they discount, they can afford to wait for a favourable moment
before rediscounting such bills as they have eventually to dispose of.
But, apart from private profits, the important point is the extent
to which Indian trade is financed by the purchase of Council Bills
in London with borrowed money, whether this money is supplied by the
depositors in Exchange Banks or by those who rediscount the bills.
15. There is, _prima facie_, some danger to the stability of the
Indian financial system in the fact that its money market is largely
financed by funds raised, not permanently but for short periods, in a
far–distant foreign centre.[105] In order to judge accurately whether
this danger is in any way a real one, it would be necessary to have
before us certain facts which are not ordinarily published. We do not
know what proportion of the Exchange Banks’ total deposits are held in
England; or to what extent those which are so held are fixed for a
year or more and how far they are at call or short notice. As is often
the case when banking is under discussion in other countries, those
who are in a position to know are not in a position to speak, while
those who are in a position to speak are not in a position to know. I
will make my guess for what it is worth in § 18. In the meantime let us
discuss the principle which should guide us, had we knowledge.
It is plain that if Banks were to borrow money at short notice in
England and use it in India—certainly if they were to do this on a
large scale,—the situation might be dangerous. They might be called on
to return what they had borrowed in England, and unable at short notice
to bring back what they had lent in India. The principle of which we
are in search is, therefore, that the sums borrowed on relatively short
notice in either country should not exceed the assets located there.
Where, however, bills of exchange between England and India are in
question, it is not immediately plain what part of the Banks’ funds may
properly be regarded as located in England and what part in India. The
answer is, I think, that a bill which has been accepted in England, and
is payable there at maturity, is an English asset, wherever it may have
been originally negotiated. Thus in the case of Indian Exchange Banks,
their deposits in London (other than those fixed for long periods)
should be at least balanced by their short–term loans in London,
their cash in London, their portfolio of trade bills having a London
domicile, and such of their securities as may be readily marketable in
London. Similarly their liquid assets in India should at least balance
their short–period liabilities there.
16. How far these conditions are as a matter of fact satisfied, it is,
as I have said above, impossible to know for certain. The Exchange
Banks do not distinguish in their published accounts between their
Indian and London deposits. They do, however, give private information
to the Indian authorities of their deposits in India and elsewhere
respectively in each year. These aggregates for all the Exchange Banks
together are published in the _Statistics of British India_, Part II.,
and are, therefore, available to the public two or three years after
the period to which they refer.[106]
So far as the Indian deposits are concerned, these returns are very
valuable. But the aggregate of deposits outside India is as nearly
as possible useless. For Exchange Banks of both groups—the Banks
primarily Indian and the agencies of huge European institutions doing
business in many parts of the world—are lumped together, so that
the total includes the whole of the French deposits of the Comptoir
National d’Escompte and of the deposits, in whatever country, of the
other Banks with Indian agencies enumerated on p. 206. The figures
are, therefore, hardly relevant to questions peculiarly Indian; and I
will content myself with quoting, from the table given in the official
statistics, the total deposits of Exchange Banks made _in India_, and
the cash balances held _in India_ against them.
EXCHANGE BANKS
┌──────┬────────────────────┬────────────────────────–┐
│ │ Deposits in India. │ Cash Balances in India. │
├──────┼────────────────────┼────────────────────────–┤
│ 1890 │ £5,000,000 │ £2,300,000 │
│ 1895 │ 6,900,000 │ 1,800,000 │
│ 1900 │ 7,000,000 │ 1,600,000 │
│ 1901 │ 7,900,000 │ 2,200,000 │
│ 1902 │ 9,100,000 │ 2,300,000 │
│ 1903 │ 10,800,000 │ 2,100,000 │
│ 1904 │ 10,900,000 │ 3,300,000 │
│ 1905 │ 11,400,000 │ 2,500,000 │
│ 1906 │ 12,100,000 │ 3,400,000 │
│ 1907 │ 12,800,000 │ 3,700,000 │
│ 1908 │ 13,000,000 │ 2,500,000 │
│ 1909 │ 13,500,000 │ 2,800,000 │
│ 1910 │ 16,200,000 │ 2,900,000 │
└──────┴────────────────────┴────────────────────────–┘
17. Two facts emerge from this table with great plainness—the rapid
rate at which in recent years Exchange Banks have been able to increase
the funds raised by deposit in India herself, and the slow rate at
which they have thought fit to increase their Indian balances.[107] The
position has evidently changed a good deal in quite recent times. It is
tantalising to think that two years must elapse before we can know how
the Banks stood in these respects last December (1912). The _Statistics
of British India_ do not lend their aid to ruder hands than those of
the historian.
In the event of an internal financial crisis in India the Exchange
Banks are probably depending on the anticipation that they will be
able to remit funds from London by telegraphic transfer. In this case
they rely on not being hard pressed in India and in London at the same
time. An Indian reserve, such as they appear to keep, of from 18 to 20
per cent would be respectable, for example, in England. But in such a
country as India, where banking is ill–established and hoarding more
than a memory, the proportion held in reserve seems somewhat lower than
perhaps it ought to be. Possibly Exchange Banks have already been in
smooth waters longer than is for their good. There are famous dates in
the history of Indian banking which should serve as a _memento mori_.
18. When we turn to the assets and liabilities of the Exchange Banks in
England we find reason for supposing a much stronger position; for the
bulk of the bills of exchange held are probably domiciled in London and
may be regarded, therefore, as liquid London assets.[108] The following
table sets out the figures relating to deposits, leaving out the Hong
Kong and Shanghai Banking Corporation, because, although its Indian
business is important, this can only be a small proportion of its total
business. I include all the other Banks given in my first group (see
p. 207) although the non–Indian business of the Chartered and National
Banks cannot be accurately allowed for.
FIXED AND CURRENT DEPOSITS (IN £1,000,000)
┌───────────────–┬────–┬────–┬────–┬────–┬────–┬────–┬────–┬────–┬────–┐
│ Bank. │1900.│1905.│1906.│1907.│1908.│1909.│1910.│1911.│1912.│
├───────────────–┼────–┼────–┼────–┼────–┼────–┼────–┼────–┼────–┼────–┤
│ │ £m.│ £m. │ £m. │ £m. │ £m. │ £m. │ £m. │ £m. │ £m. │
│Chartered │ 9¼ │ 11½ │ 13¼ │ 12¼ │ 12½ │ 13¾ │ 15½ │ 16¼ │ 18 │
│National │ 6 │ 9 │ 9¾ │ 10¼ │ 10¼ │ 11¾ │ 12¾ │ 13 │ 14 │
│Mercantile │ 1½ │ 2¾ │ 3¾ │ 3½ │ 3½ │ 4½ │ 5¼ │ 5½ │ 5½ │
│Delhi and London│ 1¼ │ 1¼ │ 1¼ │ 1½ │ 1¼ │ 1¼ │ 1½ │ 1½ │ 1½ │
│Eastern │ ... │ ... │ ... │ ... │ ... │ ... │ 1¼ │ 1¾ │ 2 │
├───────────────–┼────–┼────–┼────–┼────–┼────–┼────–┼────–┼────–┼────–┤
│ Total │ 18 │ 24½ │ 28 │ 27½ │ 27½ │ 31¼ │ 36¼ │ 38 │ 41 │
└───────────────–┴────–┴────–┴────–┴────–┴────–┴────–┴────–┴────–┴────–┘
The total cash in hand and at bankers held by these five Banks at the
end of 1912 was about £m7¾. I estimate that in 1910 these Banks may
have held _outside India_ about £m23 in deposits and about £m5 cash in
hand and at bankers.
As to the proportion of these deposits which were held for long periods
there is no accurate information. The Chartered and Eastern Banks
are alone in distinguishing in their balance sheets between fixed
deposits and current accounts. In 1912 the Chartered Bank held £m10½
on current account, etc., and £m7½ on fixed deposit; the Eastern
Bank £m½ on current account and £m1½ on fixed deposit.[109]
More than half of the deposits of the Banks as a whole are probably
held on current account or at short notice. If we are to make a
guess, the Banks may have held in 1910 about £13,000,000 on current
account outside India; but by no means all of this (in the case of the
Chartered and National Banks especially) would be held in London. The
question of the amount of the London assets of the Banks does not lend
itself to statistical summary. But I do not think that there is the
least reason for supposing that the position is not a strong one.
19. The principles which underlie the preceding analysis may be
illustrated by reference to a hypothetical balance sheet, simplified,
but less simplified than those commonly published.
£m. │ £m.
(i.) Capital and │ (vii.) Loans and Advances
Reserve Fund 1½ │ in London 3
│
(ii.) Fixed Deposits │ (viii.) Loans and Advances
in London 3½ │ in India 3
│
(iii.) Current Accounts │ (ix.) Trade Bills on London
in London 2½ │ negotiated in India 6½
│
(iv.) Fixed Deposits │ (x.) Trade Bills on India
in India 2 │ negotiated in London 1½
│
(v.) Current Accounts │ (xi.) Cash, etc., in London 1½
in India 2½ │
│ (xii.) Cash, etc., in India ½
(vi.) Trade Bills on │
London negotiated │ (xiii.) Securities 1
in India │
and rediscounted │ (xiv.) Miscellaneous assets
in London 5½ │ including silver
│ bullion ½
│
—————— │ ————
17½ │ 17½
══════ │ ════
This would probably be published as follows:—
£m. │ £m.
│
Capital and Reserve Fund 1½ │ Loans, Advances, etc. 6
Deposits, etc. 10½ │ Bills of Exchange 2½
│ Cash, etc. 2
│ Securities 1
│ Miscellaneous assets ½
—————— │ ——————
12 │ 12
══════ │ ══════
[Bills rediscounted and outstanding, £m5½.]
Acceptances have been omitted in the above, the amount of bills
payable is supposed to be deducted from cash, and various minor items
are omitted. The “capital employed in India” seems to be (viii.) +
(x.) + (xii.) = £m5. The “capital employed in London” is (vii.) +
(ix.)–(vi.) + (xi.) = £m5½.[110] The securities and miscellaneous
assets (xiii.) + (xiv.) = £m1½, may be regarded perhaps as equally
available in either centre. If there is a run in India, assets must
be available there in a liquid form equal to (v.). If there is a run
in London, liquid assets must be available there equal to (iii.). The
second condition, but not the first, is, in this hypothetical example,
fulfilled. If the Bank had to remit funds back from India to London,
this would be most simply effected by not entering into new business
under (ix.). It would not then be necessary to buy Council Bills,
and the trade bills already bought under (ix.), being rediscounted or
allowed to mature in London, would swell the available funds there
automatically. If it were possible to call in loans in India and
reduce (viii.), then it would be possible to buy more trade bills
under (ix.) in India (or Government sterling drafts if trade were
depressed), without having to buy Council Bills in London, and these
trade bills could then be rediscounted in London. If the Exchange Banks
are remitting funds back to London, this shows itself, therefore, in a
poor demand for Council Bills; and conversely when they are remitting
funds to India, there is a strong demand for Council Bills. Thus the
weakness of the demand for Council Bills in times of depression (and
the strength of the demand for Government sterling drafts) partly
depends on the action of the Exchange Banks. What their action would be
in a situation of acute stringency bordering on financial panic, it is
not easy to predict.
20. So far the only apparent element of danger in the banking position
seems to lie in the growth of deposits attracted by the Exchange
Banks in India without a corresponding growth in their Indian cash
reserves. It would be a good thing if the Exchange Banks were compelled
to distinguish in their balance sheets between their Indian and
extra–Indian business, much in the manner set out in the hypothetical
balance sheet on p. 218, except that for “London” “outside India”
would have to be substituted.[111] They should also distinguish, as two
already do distinguish, between fixed deposits and accounts at call
or for short periods. When, as in the case of the Exchange Banks, we
have to deal with a small number of Banks of established position, an
insistence on due publicity, rather than compulsion or regulation in
matters of policy, is likely to be the proper remedy for any weaknesses
which may possibly exist.
21. The next section of the Indian banking world comprises the Indian
Joint Stock Banks, _i.e._ those Banks, other than the three Presidency
Banks, registered in India and having their head offices there. This
is a confusing group, because a great number of small money–lending
establishments are registered as Banks under the Indian Companies
Act—in 1910–11 492 businesses were classified as Banks.[112] The
official statistics separate off, however, those of the Banks proper
which are of any considerable size,—those, namely, which have a
paid–up capital and reserve of at least 5 lakhs (£33,000).
The earlier Banks, coming under this description, were usually under
European management. Out of seven existing in 1870, only two now
survive,—the Bank of Upper India (1863) and the Allahabad Bank
(1865).[113] Between 1870 and 1894 seven more Banks, conforming on the
whole to this same type, were founded, of which four now survive,—the
Alliance Bank of Simla (1874), the Oudh Commercial Bank (1881),
the Punjab Banking Company (1889), and the Punjab National Bank
(1894).[114] All these Banks are on a very small scale compared with
the Presidency and Exchange Banks; but they are distinguished in type
from most of the more recent creations.
Between 1894 and 1904[115] no new Banks were founded with as much as
5 lakhs of paid–up capital. But since 1904 there has been a great
outburst of fresh activity, and a type of Bank new to India has become
important. The way was led in 1904 by the foundation of the Bank of
Burma. This Bank failed in 1911, two directors and the general manager
being found guilty of cheating and sentenced to imprisonment in 1913.
In 1906 three Banks were founded, all of some importance,—the Bank of
India (under important Parsee auspices), the Bank of Rangoon, and the
Indian Specie Bank. Until 1910 these three Banks remained alone amongst
the new creations in having a paid–up capital in excess of 15 lakhs
(£100,000).[116] Since 1906 numerous Banks have been started, amongst
the most important of which in respect of paid–up capital may be
mentioned the Bengal National Bank (1907), the Bombay Merchants’ Bank
(1909), the Credit Bank of India (1909), the Kathiawar and Ahmedabad
Banking Corporation (1910), and the Central Bank of India (1911).
The main object of most of these Banks is, of course, to attract
deposits (though some of them are almost as much concerned at present
with placing a further part of their unissued capital). For deposits
fixed for a year the rate offered varies, as a rule, from 4½ to 5
per cent, the newer creations generally favouring the higher rate.
Some Banks offer 6 per cent. About the rates for shorter periods
there is more vagueness. On current accounts 2 per cent is generally
allowed, though the eagerness of some of the newest Banks has led
them to offer 2½. I have the advertisement before me of a Bank
which offers 3 per cent on the daily balance, and up to 6 per cent on
sums deposited for longer periods; at the head of the advertisement
appears in large letters—Capital, Rs. 50,000,000; but it appears below
that applications for shares are invited, and the paid–up capital is
probably negligible. Some Banks advertise such advantages as “Special
Marriage Deposits, 50 per cent added to Principal in five years’
time.”[117]
4½ per cent on deposits fixed for a year and 2 per cent on current
accounts in excess of a certain minimum are very likely reasonable
rates to offer in Indian conditions, provided that the funds thus
attracted are not used for speculation and that adequate reserves
are maintained in a liquid form. It is in this respect that the more
substantial of these Banks are chiefly open to criticism. The official
statistics are, unfortunately, very much out of date. But for the
Banks which had a paid–up capital and reserve of at least 5 lakhs the
available figures up to 1910 are as follows:—
INDIAN JOINT STOCK BANKS
┌──────┬────────┬──────────────────–┬────────────┬──────────–┐
│ │ No. of │ Capital, Reserve, │ Deposits. │ Cash │
│ │ Banks. │ and Rest. │ │ Balances. │
├──────┼────────┼──────────────────–┼────────────┼──────────–┤
│ 1890 │ 5 │ £340,000 │ £1,810,000 │ £370,000 │
│ 1895 │ 9 │ 630,000 │ 3,780,000 │ 640,000 │
│ 1900 │ 9 │ 850,000 │ 5,380,000 │ 790,000 │
│ 1905 │ 9 │ 1,080,000 │ 7,990,000 │ 1,160,000 │
│ 1906 │ 10 │ 1,270,000 │ 7,700,000 │ 1,000,000 │
│ 1907 │ 11 │ 1,950,000 │ 9,340,000 │ 1,300,000 │
│ 1908 │ 14 │ 2,060,000 │ 10,840,000 │ 1,630,000 │
│ 1909 │ 15 │ 2,360,000 │ 13,660,000 │ 1,860,000 │
│ 1910 │ 16 │ 2,510,000 │ 17,110,000 │ 1,870,000 │
└──────┴────────┴──────────────────–┴────────────┴──────────–┘
22. These figures reveal, in my opinion, an exceedingly serious state
of affairs. If they could be brought up to date, they would probably
appear even worse. As late as 1900 these Banks were comparatively
insignificant. Since that time they have succeeded in attracting so
large a volume of deposits as to make them an important part of the
banking system of the country. Only six of them date back long enough
to remember any real financial crisis in India (for the depression
of 1907–8 was not accompanied by the symptoms of financial crisis).
Growing up in smooth times, they have thought more of attracting
deposits than of retaining cash reserves; and in 1910 we find sixteen
Banks with deposits of £17,000,000 and cash reserves of not quite 11
per cent.[118] Even of these reserves the greater part is probably held
by the older and more established of the Banks belonging to this class.
In the case of the smaller Banks, dealing, as they are, with clients to
whom banking is a new thing and in a country where hoarding is still
dominant, the cash balances seem, from the available indications, to
be hopelessly inadequate; and it is hard to doubt that in the next bad
times they will go down like ninepins. If such a catastrophe occurs,
the damage inflicted on India will be far greater than the direct loss
falling on the depositors. The growth of banking habits in India is, of
course, of the utmost importance to the country’s economic development.
A startling series of failures will do much to retard it.
In this connexion the history of the Bank of Burma, the first Bank of
the new order to be founded, is instructive. This Bank was started
in 1904 under European management by a firm engaged in floating
oil companies and other highly speculative enterprises. The Bank’s
capital was £117,500, and by 1911, when it failed, deposits had been
attracted to the extent of £792,701, a large part of which is said to
have come from Bombay and Calcutta. To obtain these deposits the Bank
had offered interest at the rate of 6 per cent for deposits placed
with it for a year; and many persons, it seems, were deceived by its
title into believing that it was in some sense a Presidency Bank. In
the autumn of 1911, after a year in which the Burma rice crop had been
good and had sold at very high prices, and when the province generally
was prosperous, the Bank failed. The balance sheet turned out to be
false, and one–third of the assets had been advanced against worthless
security to a firm in which the directors were interested.
23. Both in the case of the Exchange Banks and in that of the
Indian Joint Stock Banks, the “Cash Balances” include, I think,
balances held at other Banks.[119] It is impossible, therefore, to
summarise accurately the figures for the Indian Banking System as
a whole—Presidency Banks, Exchange Banks, and Joint Stock Banks
together. The figures given below state accurately the total of private
deposits; but in the total of cash balances some items must be counted
twice over.
┌──────┬──────────────────–┬────────────–┬──────────–┐
│ │ Total Deposits in │ │ Cash Per │
│ │ India, excluding │ Total Cash │ Cent of │
│ │ Public Deposits. │ Balances. │ Deposits. │
├──────┼──────────────────–┼────────────–┼──────────–┤
│ 1890 │ £16,650,000 │ £11,310,000 │ 68(a) │
│ 1895 │ 19,430,000 │ 7,570,000 │ 39 │
│ 1900 │ 20,970,000 │ 5,750,000 │ 23 │
│ 1905 │ 34,230,000 │ 9,150,000 │ 27 │
│ 1906 │ 38,100,000 │ 11,700,000 │ 31 │
│ 1907 │ 40,880,000 │ 11,350,000 │ 28 │
│ 1908 │ 42,920,000 │ 11,050,000 │ 26 │
│ 1909 │ 48,930,000 │ 12,430,000 │ 25 │
│ 1910 │ 54,870,000 │ 12,340,000 │ 22 │
└──────┴──────────────────–┴────────────–┴──────────–┘
(a) An exceptional year.
The steady deterioration of the position, as shown in the above
figures, is exceedingly marked. These figures flatter the Banks, rather
than the reverse. For I have excluded the Public Deposits (amounting in
1910 to £2,820,000), and have included the whole of the cash balances
(at the branches as well as the head offices) held by the Presidency
Banks against them. If the figures could be worked out accurately, the
present proportion of cash available against the private deposits would
come out, I suspect, lower by far than appears superficially from the
above table.
24. To complete the figures of Indian deposits,[120] it will be useful
to give at this point the deposits in the Post Office Savings Banks,
which have increased at a great rate, though not so fast as deposits in
Banks, since 1900:—
┌──────────–┬──────────────────────–┬────────────┐
│ March 31. │ Number of Depositors. │ Deposits. │
├──────────–┼──────────────────────–┼────────────┤
│ 1900 │ 785,729 │ £6,431,000 │
│ 1905 │ 1,058,813 │ 8,938,000 │
│ 1906 │ 1,115,758 │ 9,328,000 │
│ 1907 │ 1,190,220 │ 9,845,000 │
│ 1908 │ 1,262,763 │ 10,121,000 │
│ 1909 │ 1,318,632 │ 10,156,000 │
│ 1910 │ 1,378,916 │ 10,578,000 │
│ 1911 │ 1,430,451 │ 11,279,000 │
│ 1912(a) │ 1,500,834 │ 12,599,000 │
│ 1913(b) │ │ 13,860,000 │
└──────────–┴──────────────────────–┴────────────┘
(a) Limit of annual cash deposits raised from Rs. 200 to Rs. 500.
(b) Estimate.
As in England, the Government do not maintain any specific reserve
against these deposits. They are treated as unfunded debt and used
for capital expenditure. It is important, therefore, to remember that
the Government now hold in India nearly £14,000,000 of unfunded debt
repayable at short notice to 1,500,000 depositors. This constitutes a
not negligible claim on their general reserves.
25. The figures of the preceding paragraphs, in their cumulative
effect, suggest the following reflection. Apart from any deterioration
in the proportion of reserves held, the question of Indian deposits
is now _important_. They stand for the first time at a figure which
is large in relation to the total trade of the country and to the
resources of the Government. If the Banks get into trouble, there
will be much more far–reaching effects than could have been the
case formerly. This is quite apart from the question whether they
are more _likely_ to get into trouble than formerly. The question
of the reserves they hold matters, therefore, more than it used.
The information which I have been able to convey in this chapter is
exceedingly incomplete. But, such as it is, it provides strong _prima
facie_ grounds for doubt and dissatisfaction.
26. The last group of Banks for discussion—since I have no precise
_data_ relating to the private and unincorporated bankers or
money–lenders—consists of those numerous institutions registered as
Banks under the Indian Companies Act, but with a capital insufficient
or with activities too mixed for inclusion in the list of Indian Joint
Stock Banks proper, dealt with above.
The available statistics (approximate) are as follows:—
┌──────────–┬─────────────────–┬──────────────────┐
│ March 31. │ Number of Banks. │ Paid–up Capital. │
├──────────–┼─────────────────–┼──────────────────┤
│ 1900 │ 398 │ £2,000,000 │
│ 1905 │ 510 │ 2,200,000 │
│ 1906 │ 505 │ 2,000,000 │
│ 1907 │ 504 │ 1,900,000 │
│ 1908 │ 478 │ 2,800,000 │
│ 1909 │ 492 │ 3,100,000 │
│ 1910 │ 476 │ 3,400,000 │
└──────────–┴─────────────────–┴──────────────────┘
There are no statistics of their deposits. While the capital of these
Banks has increased rather rapidly since 1907, the above figures show
that it is not yet large.
Our interest in these Banks, however, arises not so much out of the
banking business which they may possibly transact, as out of certain,
almost Gilbertian, characteristics calculated to bring the name and
profession of banking into derision or disrepute. These Banks have
discovered that there is, or may be, a useful ambiguity in the public
mind between nominal capital and paid–up capital, and that nothing
is cheaper than to increase the former. When, therefore, a Bank is
registered, its promoters may just as well put down as its nominal
capital sums ranging from £100,000 to £1,000,000 as anything else. One
comic opera Bank registered in Calcutta in 1910 put down £20,000,000,
without having at the time of the last return any paid–up capital at
all. Apart from this exceptional venture, the 38 Banks registered
in 1910–11 had between them a nominal capital of £1,306,000 and a
paid–up capital of £19,500. With enormous nominal capitals they
combine high–sounding titles—the Bank of Asia, the East India Bank,
the Hindustan Bank, the United Bank of Commerce, and so forth. Once
established, their activities are not limited. One of these Banks has
included in its operations coach–building and medical attendance.
27. Plainly these ventures are not to be taken too seriously. But the
recent activity of their promoters has raised some discussion in India
as to whether it would not be for the public good to restrain them by
legislation. In this matter, as is the case in so many (her governors
knowing no other model), the legislation of India has followed the
lines of Great Britain’s. Just as in this country there is no special
law relating to the incorporation of Banks, so in India Banks are
registered under the ordinary Joint Stock Companies Act. As a Bill
to amend this Act has been to the front for some time, discussion
has naturally centred round the question whether this opportunity
should not be taken of introducing some suitable restrictions relating
specifically to Banks.[121] While I am inclined to think that it would
be more convenient to deal with this matter in a separate Bill, the
important point is that decided action of some kind should be taken
with the least possible delay. The Upper Indian Chamber of Commerce, in
reply to an inquiry from Government in 1910, answered, very wisely, as
follows:—
The Committee feel very strongly that something more is needed
(_i.e._, than in other Companies) in the case of Banks where the
capital and confidence, not only of the shareholders but of the
depositors, are involved. New Banks are springing up with alarming
rapidity, with little share capital subscribed; these Banks are
trading on the confidence of the depositor who is little versed in
money matters but is attracted by the name “Bank” and wishes to earn
interest on his savings.... The fear is that if one of these mushroom
growths fails, others will follow, and the timid depositor, unable to
discriminate between the sound and the unsound concerns, will make
haste to get his money back from whatever Bank it is in, and his
confidence in banking institutions thus rudely checked will take
years to win back.
Various suggestions have been made as to what restrictions would be
proper. It has been proposed that it should not be permitted to combine
banking operations with other businesses; that the accounts of Banks
should be regularly audited and the results published; that fairly
detailed accounts[122] should be published in the local official
Gazette; that all institutions calling themselves Banks should be
required to publish certain specified particulars at the head of every
advertisement; and that capital and reserves should bear a certain
proportion to liabilities before dividends may be paid. The abuse of a
great disproportion between nominal and paid–up capital could be cured
by a stamp duty on registration proportioned to the nominal capital.
Provisions for due publicity will probably lead in the long–run to the
best results—though care must be taken that the form for publication
of accounts is well suited to bring to the light what is most relevant.
Regulations of other kinds are apt to have hampering results which
cannot be easily foreseen. During the infancy of Indian banking,
nevertheless, it will very likely be wise to have some precise rule as
to the kind and amount of the reserves.
28. In conclusion, something must be said about proposals for a State
Bank. This is a proper subject for inquiry by a Royal Commission. I am
not prepared to discuss it here in detail.
The question is an old one. In 1836 “a large body of merchants
interested in the East Indies” submitted to the Court of Directors of
the East India Company a project for a “great Banking Establishment
for British India.” Such a Bank, “confining its transactions strictly
to Banking principles and business,” and “established by Act of
Parliament and possessed of adequate capital, would, under judicious
management and control, become an instrument of general good by
facilitating the employment of a portion of the redundant capital
of this country (England) for the general improvement of Indian
commerce, giving stability to the monetary system of India, and
preventing those occasional fluctuations to which it is at present
subject, and also by affording the Company facilities and advantages
in their future financial arrangements.” It was also to “facilitate
the receipt of the revenue and its subsequent diffusion through the
various channels of the public expenditure, furnish the remittance
to Great Britain of the sums required there for the Home Charges,
and enable the East India Company to act up to the instruction of
the legislature by keeping their Government entirely aloof from that
interference with the commerce of India which the present system of
remittance involves.... At present the basis of the Bank of Bengal
is too narrow for such a customer as the Government.” I quote this
from the _Account of the Presidency Banks_ by Mr. J. B. Brunyate, who
remarks on its appropriateness to present conditions. From 1860 to
1876 the possibility of the Bank of Bengal’s developing into a “Bank
of India” was constantly in the air, successive financial Members of
Council being not unfriendly to the idea. In 1867 a specific proposal
for the amalgamation of the three Presidency Banks was laid before the
Government of India in a memorandum of complete grasp and mastery by
Mr. Dickson, celebrated (in his own time) for pre–eminent ability as
Secretary and Treasurer of the Bank of Bengal. The Viceroy’s minute was
unfavourable. “I submit,” he wrote, “that it is not for the interest
of a State that a great institution of the kind should grow up for
all India, the interests of which may in time be opposed to those
of the public, and whose influence at any rate may overshadow that
of the Government itself. A Bank of such a character would be very
difficult to manage. Few men in India would be found equal to the
task. And as regards the interests and convenience of the merchants of
Bombay and Madras, surely it is only natural that they should prefer
separate Banks for those important centres of commerce.” The Secretary
of State’s sole contribution to the discussion—no need to name
him, it is the eternal Secretary of State speaking, not a transient
individual—was as follows:—
Any proposition for changes of a fundamental character, such as
the establishment of a Central State Bank, or a return to the
system of Government Treasuries, which may hereafter be taken into
consideration, must be viewed in its general bearings, and not with
special reference to the circumstances, of a particular Presidency, or
of a particular crisis.
The project was smothered in the magnificent and empty maxims of
political wisdom.[123]
Before the Fowler Committee of 1898, there was some desultory
discussion of proposals for a Central Bank of India, which were
supported by a few of the witnesses; but, apart from Mr. Hambro’s
memorandum, no attempt was made to deal with the question in
detail.[124]
29. At the present time the arguments in favour of a State Bank for
India are very strong,—far stronger than they were in 1867 or even
in 1898. The Government have taken over so many of the functions of a
Central Bank, that they cannot wisely neglect the rest. A note issue of
growing importance, the management of the Government’s cash balances,
the regulation of the foreign exchanges,—all these are controlled
together and treated as a whole in a compact and admirably conceived
scheme. But other benefits cannot be obtained easily, so long as
these functions are utterly divorced from those of banking proper. I
summarise the arguments thus:—
(i.) The existing divorce between responsibility for the note issue and
that for banking generally is contrary to modern banking practice, and
is, in several respects, a source of weakness.
(ii.) In particular it leads to the keeping of two distinct
reserves—the Government’s reserves and the bankers’ reserves—with
no clearly defined relation between them, so that the reserves of the
latter may be insufficient, without the assumption by the former of the
fact or the machinery of responsibility.
(iii.) It leads also to a want of elasticity in the system, since in
modern conditions this elasticity is most commonly provided by exactly
that co–operation between banking and note issue which is lacking in
India.
(iv.) The absence of a State Bank makes it difficult for the Government
to use its cash balances or any other part of its liquid funds to the
best advantage,—since it cannot prudently place the whole of its free
resources in the hands of a private institution.
(v.) The absence of a central banking authority leads to a general
lack of direction in the banking policy of the country: it is no one’s
business to look at the matter as a whole, to know the position of the
market’s component units, or to enforce prudence when it is needed.
There is a multiple reserve system in theory, but hardly an adequate
one in fact; and a danger exists that every one is reckoning, in a
crisis, upon every one else.
(vi.) The absence of the advice and experience, which the officers
of a State Bank would possess, is a source of weakness to Government
itself. There are no high officials whose business it is to make
finance the chief study of their life. The Financial Secretaryship is
an incident in the career of a successful civilian. A Financial Member
of Council is apt to come to the peculiar problems of his office with
a fresh mind. Thus the financial officers of Government spend five
years or so in mastering a difficult subject and have then reached
a seniority which warrants promotion to duties of some other kind.
So far as the Government of India is concerned, questions of finance
and currency are in the hands of intelligent amateurs who begin with
the timidity of ignorance and leave off just when they are becoming
properly secure of their ground. It is not astonishing that the centre
of power in these matters has tended to gravitate to the India Office
and the India Council in London. For the officials and advisers of
the Secretary of State have grown up in familiarity with the problems
of Indian currency. Control from the India Office is always looked
on, from an instinct often founded on wisdom, with jealousy and with
suspicion; but in questions of currency they are likely, as things now
are, to have the wider knowledge and experience. Yet the element of
continuity supplied by the India Office—though, as I read the history
of the last decade, it has been invaluable in guiding the evolution
of the currency—is no proper solution of the difficulty. With Indian
banking this authority cannot be adequately in touch, and it would be
much better if trained experience were to be found in India herself.
It is a remarkable thing that the two classical pronouncements on the
fundamental problems of Indian Finance, which have stood the test of
time—Mr. Dickson’s, in 1867, on the question of a Central Bank, and
Mr. A. M. Lindsay’s, in 1878 and subsequently, on the regulation of a
Gold Standard—should both have come from Secretaries of the Bank of
Bengal, not from high officials of State. (Yet this last argument for
a State Bank, though I have amplified it in my summary at greatest
length, is not at all the most important. The arguments given first are
those which govern the question.)
30. On the other hand, a fairly good case can be made out against a
State Bank. Several of the defects, outlined above, could be remedied,
in part at least, by less drastic proposals. The reasons on this side
are mainly, nevertheless, those of conservatism and of caution (or
timidity). The question, as soon as one attempts to frame practical
suggestions, bristles with difficulties. The Government are naturally
afraid of so troublesome a proposal—and one so far removed from
what they are used to; while there is no important body which is
sufficiently interested in forcing it on their attention. The Banks
fear a possible rival; merchants are content with present prosperity;
and no one else knows anything about it. I shall be astonished,
therefore, if action is taken while times are good. Perhaps we may have
to wait for the lessons of a severe crisis. Only under some such strong
influence as this is it likely that the responsible Government will
nerve itself to the task, or the business community acquiesce in it.
31. If some day sufficient constructive energy is stirred into activity
to undertake the task, let the framers of the new Bank’s constitution
put far from their minds all thoughts of the Bank of England. It is in
the State Banks of Europe, especially in that of Germany, or in those,
perhaps, of Holland or Russia, that the proper model is to be found.