In a previous piece on the history of banking crises in India, we dwelled on nearly 200 years of banking history in India. I then asked the editor if he had any ideas for a follow-up piece. He suggested that now that I had painted a "macro picture" of banking troubles in India, perhaps I should look at "micro case studies"?

So the next question was: Which bank? 

Then it struck me that 2018 marks the 80th anniversary of Travancore and Quilon Bank’s failure. This was a unique failure for several reasons. 

But first the basics. TNQ was a merger of two banks: Travancore National Bank (TNB) and Quilon Bank. TNB was established in 1912 by K.C. Mammen Mappillai in the town of Thiruvalla. Mappillai was a member of the prominent Kandathil Christian community which founded around 15 banks. His family was also founded the famous Malayala Manorama media group. One of the founders was a priest who had experience with running chits. 

This is not surprising as most of the Kerala banks had emerged from the “womb of chit funds" (Travancore Cochin Banking Enquiry, 1955). In fact, most of these banks, including TNB, mobilized most of their deposits and earned profits via chit funds. TNB’s paid-up capital rose from Rs13,000 in 1912 to over Rs11.6 lakh in 1936. The reserve fund in 1936 was as high as 30% of the paid-up capital. Deposits rose from Rs3.75 lakh in 1922 to Rs177.65 lakh, a 60-fold increase in a 24-year period. 

Quilon Bank was established by another Christian, C. Mathen in 1919 with a paid-up capital of Rs56,000. It rose to Rs11.79 lakh in 1936. Deposits rose from Rs54,000 in 1919 to Rs102.57 lakh in 1936, about 190-fold increase in 17 years. In 1936, the reserve fund was nearly 17%of the paid-up capital, and there were 36 branches including three in what was then Ceylon. 

In 1937 both these banks merged to form TNQ. Interestingly, both Mappillai's and Mathen's fathers had earlier partnered in a bank named Thayyil Bank. Thus the merger was very much a family affair. Moreover, the merged TNQ Bank became the fourth largest Indian bank at that time after Imperial Bank, Central Bank of India and Bank of India. It had 75 branches spread over the country with the Central Office at Madras and the Registered Office in Travancore State. The local press hailed it as the ‘greatest banking amalgamation in South Indian history’ (RBI, 1970). 

However, the honeymoon lasted barely a year as the bank wound up under court order in August 1938. Moreover, both Mappillai and Mathen were sent to prison in 1939 to be released in 1941 and 1942 respectively. What was also unsettling was that the crisis led to a run on banks in Southern India. Several banks failed around the region. 

What explains this turnaround of fortunes? 

There were two broad causes ascribed to the failure. First was the obvious one: that the bank’s financials were vulnerable to certain shocks. Which is the case for most bank failures. This piece will argue later how the bank’s position was unsound and it had lent imprudently. 

But it is the second reason which is more interesting and riveting. There were accusations by the Bank promoters that the entity was deliberately brought to a grinding halt by C.P. Ramaswami Iyer, the powerful Dewan of the State of Travancore. 

K.G. Vijayalekshmy in the book Educational Development in South India (1993) highlights how the relationship between the bank and the government were deeply strained. For instance the emblem of the bank was similar to that of the Travancore coat-of-arms and despite requests to change the same, the bank insisted on the status quo. The author further highlights how the failure happened during the Abstention movement in Kerala. The movement was started to secure adequate representation for the Ezhavas, Christians and Muslims in the state legislature. In 1938, the Travancore State Congress was formed, which allied with the movement. The Dewan accused TNQ Bank of supporting the State Congress and decided to take steps to force its closure. 

K.M. Mathew (son of Mappillai) in his autobiography (The Eighth Ring: An Autobiography, 2015) narrates the amazing tale of how the Dewan managed to force a run on TNQ Bank branches in Madras. In March 1938, pamphlets were distributed in Madras revealing that TNQ bank was run by thieves and plunders! 

Most of these pamphlets were apparently printed at the Trivandrum Government Press. In particular, the Mylapore branch of the bank was chosen to orchestrate the run as it had the most deposits and most depositors lived locally. Thus ensuring a rapid and intense run. The plot succeeded as planned, and the run soon spread to other parts of Madras city and then to other regions in the Madras Presidency. Mathew also alleges that K.S. Ramajunam, who was the general manager of the bank, was planted by the Dewan to destroy it! 

Later even C.P. Mathen’s wife, Eliamma Mathen, in her diaries had rebuked role of CP in the whole matter. On 26 August 1938, she wrote, "Grave troubles in Travancore. Civil disobedience begins today. Lord be Thou with the leaders. Let thy will be done in everything. Perfect Thou the leaders in everything. Let them not be found wanting in anything. Psalm 73 is very apt for today. It foretells C.P.’s fall."  

The role of CP is so intriguing in all this, that it requires deeper and continued research on the matter. It is an interesting case of how governments can shut down an organisation to settle scores. 

In all this, the role of RBI begs a closer look. The central bank was established amidst multiple failures (see previous piece) and was supposed to stabilise the banking system. Its relation with TNQ Bank was interesting throughout the period. 

Infact, the central bank facilitated the merger by giving it a large credit line at the start. However, RBI was found wanting when it came to support the bank during this run. 

In its first History Volume (1935-51), RBI discusses the events before the failure in details. It is useful to discuss them in a chronological manner: 

● First week of June, 1938: TNQ Bank had approached RBI to provide financial assistance to the bank. RBI agreed on the conditions that assistance will be provided only after detailed investigation of the bank’s financial position. 

● 20 June: RBI asks TNQ Bank’s auditors to investigate the books as per RBI norms. However, on the same day TNQ Bank asked the auditors to stop investigation as RBI was not providing any help. 

● 21 June: TNQ Bank suspended payment. 

● 22 June: Court proceedings to wind up start in Quilon and Bombay. 

● 23 June: Winding up request presented at Madras. 

● 27 June-29 June: Madras Government meets RBI officials to address the continued unrest. TNQ Bank agrees to the Government suggestion that it gets its books investigated by RBI (again) to understand how much depositors could be paid etc. RBI estimates auditing expenses worth Rs10,000. 

● 2 July: TNQ Bank approached the Madras high court to release Rs10,000 against the assets of the bank. The court refused the request citing it had no such approval powers. It asked RBI to take up the investigation assuring costs will be paid later. 

● 8 July: RBI special officer investigates the books and finds that the bank was in a worse position than reported. It had exhausted all the realisable securities during the run, its balance sheet was incorrect, the bank was buying its own shares presumably with a view to keeping up their market value; and had loaned to directors and other interested parties on inadequate security, etc. 

● 18-20 July: RBI governor visits Madras 

● 28 July: The governor wrote to the government saying best option was to let liquidation continue. 

● 9 Aug: This letter is published in local press. Subsequently, the bank is ordered to be liquidated by the district court of Quilon. 

● 5 September: The Madras high court could not take the orders of Travancore district court. Thus, it issued its own winding-up order. 

● 21 March 1955: The above jurisdictional tangle led to a dragging on of liquidation proceedings. The bulk of the deposits were in British India, but loans in Indian princely states leading to further complications. The liquidation could only be finally completed 17 years later in 1955! 

In this drama, RBI’s role was heavily criticised as it did not provide urgent financial help to the bank. There was a feeling that the bank was solvent but suffered from a liquidity crisis (similar arguments were made 70 years later during Lehman failure in 2008). 

However, RBI's official histories defend its actions, saying this would imply “investing good money after bad". RBI governor C.D. Deshmukh in a speech in 1948, reflecting on the crisis, said that the financial position of the bank was not sound as is perceived. Its depositors could be paid 12-14 annas to a rupee largely due to calling up unpaid capital and war conditions leading to higher valuation for the estates on which loans were made. 

In the above cited book, Mathew disagrees and points out that the bank could have been saved, adn that RBI did not show any mercy. He noted how the promoters of the bank tried to save the bank by appealing to different set of authorities including C. Rajagopalachari. Rajaji told them to appeal to the Dewan instead! 

However, the crisis and eventual discussions made the authorities realise the need for a more elaborate regulation to govern and regulate banks. The regulation, it was appreciated, had to both push banks into building higher reserves for such emergencies, and give the regulator powers to obtain information. But such a regulation could be only enacted in 1949, a decade after the TNQ failure, in the form of the Banking Regulation Act. 

The history of Indian banking is full of stories and lessons which deserve a wider attention by the research community. The author of this article has managed to barely scratch the surface as all the sources are either not available or dispersed across several places. Authorities should build a repository and archive the material in a chronological manner and facilitate research on these matters. The West continues to debate on the causes of Great Depression but here we do not even know about these crises which shook the foundations of the Indian banking system decades ago.

Amol Agrawal blogs on mostlyeconomics.wordpress.com.

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