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Insight into the progress of banking


Traces the history of the precursors of the State Bank of India during the 19th century

THE EVOLUTION OF THE STATE BANK OF INDIA, Vol.1 — The Roots 1806-1876: Amiya Kumar Bagchi; Penguin/ Portfolio, 11, Community Centre, Panchsheel Park, New Delhi-110001. Rs. 1295.

This massive book traces the history of the precursors of the State Bank of India during the 19th century. The three Presidency banks (of Bengal, Bombay and Madras) were ultimately consolidated into the Imperial Bank in 1921, which in turn became the State Bank of India after Independence. This book is the reviewers' nightmare, densely packed as it is with information and analysis running to a thousand pages and more.

The East India Company had felt the need for a bank even in its early years, primarily because of its requirement for capital for the annual "investment" of piecegoods and other merchandise to be exported from India, which was far in excess of the value of goods imported from Europe. The sophisticated commercial institutions that prevailed in the indigenous economy strangely did not include deposit banks. The English needed to mobilise capital locally in adequate quantities, and at relatively more moderate rates of interest. An attempt to start a bank was made as early as in 1683 in Madras, the oldest of the English presidency towns, but it proved a failure.

Trade triangle

By the beginning of the 19th century, the larger economic picture had changed, but the need to mobilise local resources remained. India was no longer an exporter of manufactured goods and China was the new centre of trade between Europe and Asia. But European imports could pay for Chinese goods, primarily tea, no more than they could for textiles in the earlier centuries. Thus a new trade triangle emerged, with opium and cotton from India being exported to China and in return Chinese tea to England, which was most profitable if the resources could be raised within India. The extensive commerce of private traders in intra-Asian and "country" trade, whether licensed or not, was another important factor in the growing need for a bank — as a channel for remittances to England at more favourable rates of exchange. The extended wars of the East India Company, which also had to be financed through revenues raised within the country, heightened the need for keeping a reasonable volume of money in circulation. Bagchi contrasts the changing contours of the colonial economy with the grim picture of the growing impoverishment of the local population, especially in Bengal, maintaining a comparative perspective throughout the book.

Thus in addition to mobilising resources through deposits, the banks had to maintain a certain level of money in circulation through issuing bank notes, maintain equilibrium in the credit market, and promote and aid commercial interests. All this had to be balanced through a strategy of risk management, of judging the credit worthiness and business prospects of borrowers, and deciding on the kind of securities against which loans could be issued. In short, it was not very different from the functions of any commercial bank of the present day.

First banks

The first banks were experimentally started in Madras, and when Bentinck was the Governor of Madras, he even promoted a government bank. However, a private bank was the favoured choice and ultimately the Bank of Bengal was established in 1809. The Banks of Bombay and Madras were started much later, around 1840. These were officially private banks, but had the backing of a government charter. The composition of the board of directors of the Bank of Bombay, reflected the strength of the Indian business community in that city. The Bank of Bengal gets an extensive treatment in the book; how it managed the often conflicting claims of banking prudence and commercial interests during the first 50 years of its existence makes an interesting story. The latter half of the book gives an account of the various economic upheavals after the 1850s, and how the three presidency banks came through those difficult periods.

Readers looking for a "straight" or linear history of the presidency banks will be in for disappointment. This book is a serious work by an eminent economic historian, who locates the beginnings of the central banks firmly in the context of the imperatives of the colonial government and the changing economic and commercial situation in Bengal, Bombay and Madras during the 19th century. It also fills a gap in the earlier Cambridge Economic History of India (vol. 2) — the absence of a chapter on the rise of banking in India during the 19th century.

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