Indian banks at that time were hardly bankable
Once you have gone through this story of banking in colonial India, you will wonder if banking regulation in India is really as unwanted as it is touted to be. During a short period of 5 years from 1913 to 1918, as many as 87 banks (like People’s Bank, Indian Specie Bank, Credit Bank of India, Peshawar Bank, Hindustan Bank, Marwar Bank, et al) with a total paid up capital of nearly Rs.20 million failed. Prof. Amiya K. Bagchi, Former Director, Institute of Development Studies, in his book Private Investment in India 1900-1939, cites “the extremely small ratio maintained by Indian banks between cash balances and deposits” as the main cause.
In the absence of a central regulator, the directors and offices of these banks often indulged in gross and fraudulent misuse of funds to feather their own nests. Consider the case of Multan (now in Pakistan) based Peshawar Bank – bogus entries on the credit side had been made to show a profit when there was actually a loss, and dividends were paid out of capital. Hindustan Bank’s MD had advanced money to his own concern and friends without adequate safeguards of security! The promoters (following the footsteps of Indian sahukars) opted for reckless expansion without any understanding of banking theory or practice and fixed their own deposit and lending rates and in turn dug their own graves.
Once you have gone through this story of banking in colonial India, you will wonder if banking regulation in India is really as unwanted as it is touted to be. During a short period of 5 years from 1913 to 1918, as many as 87 banks (like People’s Bank, Indian Specie Bank, Credit Bank of India, Peshawar Bank, Hindustan Bank, Marwar Bank, et al) with a total paid up capital of nearly Rs.20 million failed. Prof. Amiya K. Bagchi, Former Director, Institute of Development Studies, in his book Private Investment in India 1900-1939, cites “the extremely small ratio maintained by Indian banks between cash balances and deposits” as the main cause.
In the absence of a central regulator, the directors and offices of these banks often indulged in gross and fraudulent misuse of funds to feather their own nests. Consider the case of Multan (now in Pakistan) based Peshawar Bank – bogus entries on the credit side had been made to show a profit when there was actually a loss, and dividends were paid out of capital. Hindustan Bank’s MD had advanced money to his own concern and friends without adequate safeguards of security! The promoters (following the footsteps of Indian sahukars) opted for reckless expansion without any understanding of banking theory or practice and fixed their own deposit and lending rates and in turn dug their own graves.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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