Mumbai: Last week, the government acquired the Reserve Bank of India’s (RBI) entire 59.73% equity stake in State Bank of India (SBI) for about Rs35,531 crore. The deal is a reversal of a 131-year-old decision.
In 1876, West Bengal, Bombay and Madras gave up the ownership in three presidency banks that eventually formed SBI, as they felt that the government ownership would come on the way of the efficient running of a bank. The government of Bengal held 20% stake in Bank of Calcutta, the government of Bombay close to 10% in Bank of Bombay and the government of Madras held 10% in Bank of Madras.
Even 52 years back, when the Imperial Bank of India was converted into SBI, the government was not allowed to own it to ensure against any ’interference’ by government in its day-to-day working. In a sense, that was the third avatar of India’s largest commercial bank as the Imperial Bank itself was a result of the merger of the three presidency banks.
That the government should not be in the business of running businesses is widely accepted now. But it has been the case throughout the history of SBI. Let me narrate the tale of the 200-year-old bank.
Bank of Calcutta was born in 1806 and in 1809 it became the first joint stock banking company with limited liability in India through a charter of the East India Company. The government of Bengal contributed Rs10 lakh to the bank’s Rs50 lakh equity capital and the rest was contributed to by a handful of wealthy individuals and commercial firms. Bank of Bombay was set up in 1840 and Bank of Madras 1843.
All three were doing well until Bank of Bombay went bust lending aggressively to cotton traders against shares. The European cotton market opened up for India in mid-1860 when America, plagued by a civil war, stopped exporting cotton to Europe. The end of American civil war rang the death knell for Indian cotton trade and Bank of Bombay closed doors in 1867. The very next year, the government resurrected the bank and brought all three presidency banks under a uniform statute—Presidency Banks’ Act—but gave up ownership to bring in professionalism and efficiency.
At the next stage, the three banks were merged to form the Imperial Bank. On 27 January 1921, when Imperial Bank opened doors to its customers, it was also doing most of the central banking activities except for printing notes. (Incidentally, until 1862, when the government introduced paper currency, the three presidency banks used to have their own currency, minted in London and shipped to India.)
Imperial Bank became SBI in 1955 following the recommendation of the government-appointed All India Rural Credit Survey (AIRCS) committee.
You may find it interesting to see the progress of the bank between 1921, when Imperial Bank was born, and 1955, its transformation into SBI. In 34 years, the bank’s office network rose from 70 to 481 including a branch in London. There was not much change in its paid-up capital (from Rs5.48 crore to Rs5.62 crore) but its reserves almost doubled, from Rs3.71 crore to Rs6.35 crore. In 1921, Imperial Bank had a government deposit of Rs22.20 crore and public deposit of Rs70 crore. SBI, in 1955, had no government deposit (as RBI came into existence in 1935), but its public deposit swelled to Rs211 crore. The bank’s investment in government bond rose from Rs15 crore to Rs100 crore and loan advances, which were negligible in 1921, crossed Rs117 crore in 1955.
Today, when the government assumes the ownership of SBI, it has an equity base of Rs526 crore, reserves of Rs30,772 crore, Rs4.36 trillion in deposits, advances of Rs3.37 trillion, investment in bonds of Rs1.49 billion and a branch network of 9,654, including 83 overseas offices.
Had RBI not put its foot down to the AIRCS panel’s suggestion on ownership, the government would have taken over the bank in 1955. A ”secret note” prepared by RBI’s central board outlined why the government should not be the owner.
The first advantage, according to the note, was that by vesting its capital in RBI rather than the central government, it would provide SBI “greater flexibility, and eliminate delays and red tape”. Also, RBI’s ownership of SBI’s capital would prevent it from turning into a department of the government. Second, it would inspire “greater confidence” in the public in SBI’s capacity to provide quick, efficient and satisfactory service. Third, RBI’s ownership would ensure against any ‘interference’ by government in the day-to-day working of the bank. Fourth, the overall supervision and control would be ”more purposeful” if the capital was vested in RBI. Fifth, SBI at least in the early stages should have freedom to pursue its operational and financial initiatives which the government audit would have restricted.
The note cited more reasons to support the RBI argument and most of them hold water even today. When the SBI Act was passed in 1955, C.D. Deshmukh, the then finance minister, assured Parliament that the government would not interfere in the bank’s day-to-day affairs. One hopes that the present government too, even after becoming a majority owner, sticks to that principle.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai Bureau Chief of Mint. Please email comments to firstname.lastname@example.org