‘Swadeshi’ and the banking industry
In Barons of Banking: Glimpses of Indian Banking History, Bakhtiar K. Dadabhoy revisits the story of the country’s banking industry, beginning at the turn of the 20th century. Dadabhoy follows the careers of six eminent bankers; Sir Sorabji Pochkhanawala, Sir Purshotamdas Thakurdas, Sir Chintaman D. Deshmukh, A.D. Shroff, H.T. Parekh and R.K. Talwar. What emerges is a tapestry rich with anecdotes and data on how the industry developed and fared up till the early 1990s.
Dadabhoy has previously authored Jeh: A Life of JRD Tata and Sugar in Milk: Lives of Eminent Parsis. In a section titled “Weathering the Storm”, the civil servant talks about the banking crisis of 1913, triggered in equal parts by greed, deceit, ineptitude, and the absence of a central bank. Edited excerpts:
A number of banks mushroomed under the stimulus of swadeshi or the lure of profits in the closing decade of the nineteenth century and the opening decade of the twentieth century. By 1913 the number of banking and loan companies had risen to 451 and between the years 1906–11, deposits had doubled from Rs.12 crore to Rs.25 crore. Deposits had registered an increase of 950 percent between 1890 and 1911. Many of these institutions adopted very questionable methods of working. They carried on business without getting the values of shares paid-up, kept no (or a negligible) reserve fund, published no (or misleading) balance sheets, and accepted
deposits without any regard to the amount of their paid-up capital or reserve fund. A large number of the so-called swadeshi banks were promoted and run by persons utterly ignorant of the basic principles of banking, finance, and economics.
Vithaldas Thackersey (later Sir), Chairman of the Indian Specie Bank had warned in early 1912 that ‘every banking institution has to work with extreme caution in selecting its investments and to insist on larger cash balances in hand.’ It was ironic that his own bank collapsed within a year—Thackersey failed to build an ark for his own establishment after sounding the warning of the impending deluge. Greed, as in most cases, was at the bottom of this bubble as well. In their desire to make quick profits, unscrupulous promoters and management coupled trading with banking. Inadequate reserves, a precariously low percentage of cash to liabilities, and an imposing capital (with very little of it paid-up) were a recipe for disaster. And it was not long in coming.
The year 1913 saw the worst ever banking crisis in India, starting before the First World War and accentuated by it. It was much worse than the earlier crises of 1829–32 and 1863–66 and ninety-four banks failed. The crisis of 1913–14 was triggered by a run on the People’s Bank of India, Lahore, of which Lala Harkishen Lal, a merchant and barrister, was for long its Managing Director. The Liquidator’s Report showed that nearly 70 percent of the loans had been advanced to companies or other concerns in which the Directors of the bank had an interest. A large percentage of loans had been made without sufficient security with the principal beneficiary being none other than Lala Harkishen himself who was closely associated with some of the firms. Within nine days of the failure of the People’s Bank, the Amritsar Bank, in which the Lala was also interested, closed its doors.
The Punjab was the worst hit with thirty-five failures accounting for a total paid-up capital of Rs.36.74 lakhs. Within four years as much as 34 percent of the total paid-up capital of Indian joint stock banks was lost. Bank failures reported in India did not have the same significance as in other countries with stricter banking or company laws. Till the amendment of the Indian Company Law in 1936, no attempt was made to define the word bank or to ensure that only respectable concerns used that description in their title. As a consequence many doubtful ventures registered themselves as banks and when they failed, served to inflate the number of so-called bank failures. The government did nothing to either regulate the banks or to create an institution which might act as a lender of the last resort.
The financial crisis which had spread in Punjab rapidly spread to Bombay. It was further aggravated by the collapse of the Credit Bank of India in October 1913. The Bombay Banking Company, the Crown Bank of India, and the Kathiawar and Ahmedabad Banking Corporation followed soon after. The Jam-e-Jamshed, a Bombay daily, ascribed the collapse of the Credit Bank and other banks to the ‘cliques which are running the banks making them the tools of their own gambling adventures.’ By the end of October 1913, several Indian brokers had collapsed and the share market had virtually closed down.
It was at this time that the Indian Specie Bank started experiencing difficulties. The bank had speculated heavily in pearls and shares, and the precipitous fall in the price of the former, and the difficulties faced by a number of pearl merchants caused problems for the bank which started calling in loans in desperation. The failure of Jehangir Byramji Dalal, one of the biggest pearl merchants, with liabilities between Rs.15–20 lakhs and assets of only Rs.2–3 lakhs was ascribed to Chunilal Saraiya the Managing Director of the Indian Specie Bank. The bank finally shut shop on November 29, 1913. Saraiya died on the same day, a case of suspected suicide.
Justice Macleod of the Bombay High Court while hearing a petition of alleged malpractices brought against the bank narrated the sordid story in some detail. It was a tale of dishonesty, inefficiency, and negligence in which the chief villain was Saraiya, a former employee of the Bank of Bombay, whose knowledge and efficiency were never in doubt but whose ‘innocence was another pair of shoes.’ All the senior employees were Saraiya’s own men and the Directors exercised virtually no control over him. The grossly underpaid auditors saw only what Saraiya chose to show them, and the Liquidator’s Report observed that the bank had gone on paying large dividends and bonuses though it had in reality been suffering considerable losses every year. Thus, a promising experiment in swadeshi enterprise, started at an opportune moment and fraught with great pot