APPENDIX TO 11 SUI:E·tlRY STUDY OF THE ECOrm:Y CF HTDI A 11 THE BA11(TNG SYSTE£.1 OF IITDI A Banking in India may be divided into two categories; the orgar1ized banking system and incUgenous banldng. Organized banking is of relatively recent origin a.Dd is essentially a lrlestern importation rather than an ot:t- grmrth of domestic financial and credit institutions. Indigenous bar:ldt~g, on the other hand, is probably as ancient as cornnerce i tse1f in India. Q.n::anized Ba.'1king consists of (a) The Reserve Bank of India, (b) the so-called Schedtiled Banks including the Imperial Be...'1k of Inc:ia, the foreign controlled Exchange Banks, and the larger Joint-·3tock Ban::cs, (c) the Hen- Scheduled Banks composed, primarily, of the s.t;'!aller joint-steele barL.cs i::.1cor- porated under the Indian Companies Act of 1913, and (d) special types of banking and saving ~nsti tutions such as the Postal Savings Ba."1ks, the Cooperative Credit Banks and the Land r.::Ortgage Bar.ks. ~genous Banking in India comprises a large and heterogenous group of individuals and partnerships throughout India (most col1'31on~y called shroffs) engaged in lending money, dealing in internal bills (hundis), and accepting deposits. Their number is perhaps something betueen ,300, 000 end 400 ~ OCO. They are not registered under the Indian Companies Act and are not bUbj ect to central ban1c or governmental regulation, except for certain provincial laus prescribing methods for rilaintaining account a:1d li;ni ting interest rates. Hevertheless, their rates are high, renging from 8 to 12 per cent on loa.11s with good security and up to as much as 100 pGr cent on other typeb .,)£' 1,..,.,'1"\s and credits. Usually their bwJcing functions o.re al') ac.'.junct of Lrac'ing or some other form of commercial activity. Lic..bili ty is unli1:--.d. ted anc; 2. major I I ._f.. tJ -2- part of their cred..i. t activities are n:o st commonly based upon personal capital rather than deposits. Tl:.e indigenous bankers seldom permit ui th- dra-vral by check and consequently do not participate in cleari~1g operations. They are not obliged to publish their accounts. The principal lirJ.k betueen organized and indigenous banking is the practice by the larger shroffs during periods of heaviel' credit demand of discounting part of their bills -vJi th the joint-stock banks. The Im:periel Bank of Ind..i.a is the most important source of such financing. These larger shroffs in turn discount bills for cnd extend crecli t to the sr.1aller indigenous bankers. Consequently there is some tendency toHard un:i.forni ty betHeen the indigenous bill rate and the joint-stock ba.l".k cl.iscount rate during the season of heaviest crop movements. In general, hmrever, there is tlide variation in credit rates between organized and incigenous banl:ers, on one hand, and &~ong the indigenous bankers, on the other. R~~_Qrtance of Variou.s Banl:ing Institution_§ The role of different t;;rpes of banking insti tut:ions varies uith respect to different moneta!"'J and financial aspects of the Ind:tan economy. Hhile there is little quantitative data on indigenous banldng, it is generally agreed that it predominates by far in internal· financing. One estimate during the 1 thirties placed its i:nportance in this respect a.s of the order of 90 per cent of the v!hole. lw.ile this may be someuhat exagger- ated, figures in the follmJing table on the relative proportions in India and certain other countries of currency and deposit money indicate, in the absence of more accurate measures, the limited development of an org8L"1ized banking system in India. -3- Table I Percentage of Currency and Deposit Money in the Honetary Supply of Various Countries Curr_sgc_x DeP,o s,;L t liOI'l;.P~ 1938 1947 1938 1947 ('J ()'/ c' 7o % /J /') United States 18 23 82 77 United Kingdom 28 26 72 71;. Italy 47 49 53 51 Brazil 33 39 67 61 Australia 26 22 74 78 India 70 63 30 37 Source: International Finan_gial Statistics Hhile the al::ove figures are only a ve!""J roue-h indicator of the b1portance of organized banking, most discussions of the sulJj ect state that the bulk of fina.'1cing in internal trade, small scale industry, and agriculture ts lle,;:11led by the indigenous bankers while internal financing by the joint-stock benl's is of major importance orly in the principal cities and among the larger co:n- mercial and industrial firms. On the other har.'1d, the financing of external trade is tl1e e::clusi ve domain of organized bankine. But this field is virtually a no'1oply of the handful of foreign controlled Excha.'1ge Barll~s. In the mobilization and cha.rmelinr; of savings there is no 1Jasis for deter- mining the relative importance of annual increases in the savings de:::osi ts of joint-stocl~, postal, and cooperative banks to the total annual supply of liquid savings in India. It is generally agreed, houever, that the flo1-1 of -4- small savings into orga.Jl..ized savings insti tutioi1S is small in co~1parison '.Ji th cash and ornament hoardings, inoividud :n:oney lending, and investment in l:md, buildings, and small scale enterprises. During the period from 19.38 l:bro,·,_gh 1947 \·Then the volume of currency in circulation increased by more than Rs 13,000 million, the annual average addition to time deposits of al1 joint- stock banks and to all deposits and investments ui th postal saviDgs bo.rl:s amounted to only al::out Rs 475 million. In general, it may be stated that outside the sphere of e;cternal finance, organized banking along 1·Jestern lines in India is relatively underdeveloped in relation to the financial rec:_uire1:1ents a..."':ld capital needs of the country. Consequently the Indian money market is a loose ancl heterogenous system uith little unifor:rr.i ty among rates and credit practices. QUalitative cont1·ols over credit are limited l>y the restricted area of central bank jurisdiction, and quantitative controls are handicapped by the disorganization and lack of integration in the money mad::et, and by the absence of a developed bill market. Throughout large sectors of the economy credit is e.vailahle only at eYnr- bi tant rates, vJHle a history of frequent faih;res has tended to underr·line confidence in barJdng institutions. PJ. though the development of brarwh bar:k- ing has been particularly rapid in the past ten years, facilities both for credit and deposits are still far from adequate, leaving a vrlde field for the usurious practices of the small money-lender. Finally, the system as a 11hole lacks the high degree of fle~:i bili ty necessary to the sharp seasonal fluctua- tions in the demand for financing. Comnonents of the O-rganized Banldrcg Syste;·n 1. Jbe Reserve Bank of India. This Has organized in 1935 to perform the usual functions of a central bank. It is a shareholders bank but has recently -5- been nationalized under legislation to become effective on January 1, 1949. The principal elements of its control over the organized banking system con- sist of (a) requirements that Scheduled Ban1cs nai21tain minirnum deposits '.:i th i t--5 per cent on dema..."ld and 2 per cent on time deposits--and submit Heokly returns of their accounts, (b) open me..rket operations, and (c) regulation of the rediscount rate. The latter, ho\·Tever, is of only limited iral:Jorto:u::e in vieu of the absence of an organized bill market. Legislation extending and strengthening its povrers of control has been pending for some time Lut has not as yet been enacted. Hm:ever, by Orc'ine.nce of September 18, 191:.8 the Reserve Bank was granted additional pouers to exercise qualitative con- trols over unsecured loans and advances and other leneing practices of banking compenies. In addition to its control and credit functions t 11e Reserve Bank accepts deposits, acts as seal agent for the goverrilllent, and has responsibility for the currency issue a.Yld the maintena.nce of the excha.r"ge rate of the rupee in relation to sterling. 2. Scheduled Banks. BanJdng conpanies desig.ns.ted as Sched:uled Banks by the Reserve Bank of India comprise the major part of the organized Indian banking system. Hith minor qualifications they include banks having paid-up capital and reserves -vli th a market value in excess of Rs 500 s 000. As of March 1948 there i.fere 101 Scheduled Banks in India. Branches of Scheduled Banks numbered almost 3, 500 at the end of l9L;6 and accounted for almost 90 per cent of all deposits held in joint-stock banks in India. The Scheduled Banks may be divided into three categories: (a) The ExchangE!_ Ba'1...1cs. These are Indian subsidiaries of foreign bwJi:- ing institutions. They specialize in the financing of India's external trade ...6- where they have a near monoply. They also accept deposits and do some financing of internal trade although this is a relatively minor aspect of their operations. There are 15 Exchange Ba11Jcs. A.t the end of 19,~6 they had 77 branches and held deposits in India amounting to a'tout 15 per cent of total joint-stock bank deposits. Seven of the Exchange Eames are British, 2 each are Dutch, f\u';l_erican, end Chinese, one is Portuguese, a:.K1 one is French. (b) !he Im2erial B~ of InQJ....a. The Imperial Bank occupies a special position by reason of its large resources, vlidespread facilities, and special relations 'Hi th the Reserve Baruc. It is the largest bank in India. A.s of the end of 1946 it had 443 branches and held deposits an'o'l.mting to 23 per cent of the deposits in India of all barnes 1-Ji th capital and reserves in excess of Rs 500,000. ~li thin the orgen i zed banking system it is the pr:inci pal source of short term agricultural financing. It is also the chief lender of inter- bank call money. It is authorized to deal in foreign e:~change but this fvnc- tion is left primarily to the Exchange Ban.'k:. The Government of India has indicated approval, in principle, of nation- alization of the Imperial Bank although no specific steps in this direction have been taken. The directorate and me.nafternent of the bank is mainly non- Indian. (c) Other Schec1uled Banks. The most important of these are the Central Bank of India, the Bank of India, the Allahabad Baruc, the Punjab Fational Bank, the Bank of Baroda, the Bharat Bar..k, and the United Commercial Bank. These seven accounted for 57 per cent of all deposits of Scheduled Banl::s, excluding the Exchange Banks and the Imperial Ban'k:, in 191,6. Information on the extent of foreign participation in their m-mership is limited. The Allahabad Bank is primarily British. There is apparently -7- also an important element of British control in the Bank of Incia, the Bank of Baroda, the Bharat Bank, and the United Commercial Bank. Ifanagement of the Central Bank of India and the Punjab national Banl<:: is reporte(ny aJ.ro st entirely Indian although securities of the former are quoted on the London stock exchange • .3. Non-Scheduled Bgnks. This category covers joint-stock banks, other than the Scheduled Ba.r:Ucs, reeistered under the Indian Companies Act. It includes primarily banks uhose paid-up capital and rese:cve has a market va1ue of less than Rs 500,0CO. According to the Reserve Bank of India there uere 706 such ba11king com- panies in British India and the prindpaJ native states in 1946. Their deposits amounted to only about 10 per cent of total joint-stock bar.lc deposits, and the majority had less than Rs 100,000 in r<>id-up capi tt'~ and reserves. i::ost of these barJcs are required to submit ::r.onthly returns a."l.d to hold mini-- mum cash reserves in proportion to demand and time liabilities. 4. Other Organized Banking Insti tut;i.Q.ll.§. (a) The PostaLSavi.r~J~1!lli.§ have been established in India for over hW.f a century. Their total deposits at the time of partition amounted to about Rs 1, 500 million as compared i.Ji th Scheduled Bank time liabilities of Rs .3,400 million. Uhile the Postal Savings Banks constitute one of the pl"in~ cipal depositaries for small savings, they are not available in many of the Indian towns and are in only a small fraction of the Indian villages. (b) The Coonerative Banks are organized by urban and rural cooperative credit societies. These are in turn federated into Central Cooperative Banks which are further federated into Provincial Cooperative Banks. The basic societies are associations of individual borrovrers ar1d non-borrowers usually -8- in a single locality. Their funds are raisGd from entrance fees, sh3.re capi- tal, deposits, cmd loans from the Central Cooperative Bru1k ·ui th t-Thich they are associated. The Central Ba.Tl.ks obtain financing from the Provincial raru:s and coth accept deposits from the public. 1-\t present there are more than 125,000 cooperative crecli t societies, almost all of uhich are in rural areas. Em-rever, they serve tlJe fine.ncicJ.. needs of only a small p:~oportion of the agricultural population. Furt~1ermore they have had a high record of insolvency and overdue indebtedness. (c) Land I:Ortgage Banl~ are a relatively recent development in India and have been organized, usually on cooperative }inos, for extension of long term agricultural credit, for funding of old debts and for land purchase and improvement. IvJOrtgage bankin& generally consists of prima.I'"'J mortgs.ge banks linked to a central mortgage bank. In 1946 there uere 28!+ primexy mortgage banks. Over 40 per cent of these l·lere in Madras. The role of the Land Eortgage Banks is relatively minor in terms of the financial requirements of Indian agriculture. In 1946 the total uorking capital of the prime.ry mortgage banks amounted to only Rs 37 million and out- standing loans 1.-1ere Rs 34 million. Louns made during 194.5-46 totaled onJy Rs 6.5 million. Table II ~istics of Organ:t~S'.fl_fuuiking in India 1946 Cash Loans and Branches Position Investments Advances Deposits _No. ( Rs coo •coo) ( Rs coo , coo) ( Rs ooo •ooo1 ( Rs coo ;Loco). Imperial Bank of India 443 425 1545 943 2717 Exchange Barks 77 320 11 11 181;/ Other Scheduled Banks Z149 1208 2793 3070 6242 Non-Scheduled Banks 2688 339 376 681 1224 Cooperative Banks 11 579 74 353 71!;. Postal Savings Bar.ks 12h31y NA HA HA 25502/ I'A :: Not Available 11 Available figures combine operations outside as well as wi tl<..in India. Ho information for India alone. 2/ Exchange Bank deposits ui thin India. 11 Cooperative Banks i4th capital in excess of Rs 100,000. it/ Number of Postal Savings Banks in 1938. 2/ Includes savings deposits, cash certificates, defense savings certificates, d~fense savings deposits, and national savings certificates. Source: Reserve Bank of India, Statistic_sl Ta.:QJ.~.§ .J:k!J.ating to Ban.ks ill Infu, 1946.