List of top four earlier period banks of India:- 1. Bank of Hindustan (1770-1832) 2. The General Bank or General Bank of India (1786) and Bengal Bank 3. Bank of Calcutta (1806) or Bank of Bengal 4. The Presidency Banks.
1. Bank of Hindustan (1770-1832):
In 1690 one of the Agents of East India Company Mr. Job Charnok selected Calcutta as a suitable place for British Trade settlement. In the year of 1696 the British bought three villages namely Satanuti, Gobindapur and Kalikata from the local land lords (Perhaps from the grandson of Aurangjeb) and the East India Company obtained permission from Mughal Emperor for starting trade in return of a yearly payment of Rs. 3000/-.
Before the coming of British Calcutta was just a village. Murshidabad was capital of Bengal. It became capital of British in 1771 after the defeat of Siraj-uddullah. Calcutta became Presidency Town of East India Company in 1699 but the Bengal Presidency came into existence in 1765 after a treaty was signed between East India Company, Mughal Emperor and the Nawab of Audh.
By this time English Agency houses had already started creating business hubs in Calcutta. Two British Managing Agency houses namely Ferguson and Co. and Alexander & Co. had set up banks also. The BANK OF Hindustan was set up by Alexander & Co. in 1770 as a Private Bank. This was period (say late 18th century) of intense political turmoil.
In the wake of the collapse of Mughal Empire there was great uncertainty day by day which also supported British Agency Houses. In such circumstances the indigenous bankers were fading away. The Private Bank set up by Alexander & Co. The Bank of Hindustan was the first bank to introduce Bank Notes for the first time in India.
These Bank notes were representative money only. The actual money was Gold and Silver coins. The Bank of Hindustan maintained reserves of actual money i.e., coins of Gold and Silver which were known as Rupia. The notes issued by the Bank always contained a Promise Clause to pay the bearer the actual money (Gold or Silver) on demand in exchange of notes issued by the Bank.
Run on is a banking term when some sort of panic is created among the general public creating a fear that the Bank is not able to exchange its notes by the actual money(Gold or Silver) and depositors start running towards the bank to withdraw their money from the bank. In modern day banking it is called Bank Failure.
The Bank Of Hindustan faced such run on three times but it survived every time only because of the fact that the bank was keeping sufficient stock of actual money and only that much notes were issued which were backed by eqalent or more reserves.
In commercial crises of 1832 the Bank of Hindustan was closed and went under its parent firm M/S Alexander & Co.
2. The General Bank or General Bank of India (1786) and Bengal Bank:
By the late 18th century Calcutta had become a centre of Major trade and commercial activities of the East India Co, Most of British Agency houses, Business Hubs, Export Agencies and Private companies were concentrated in Calcutta and were being managed by British people.
The need of a Bank was therefore felt to cater to the specific needs of these people. With the result in 1786 General Bank was formed in Calcutta. Most of the activities of this Bank were looked after the Employees of the East India Co.
The Bengal Bank was already functioning in this area which was operated mainly for Europeans and was contemporary of General Bank. In 1791 the name of General Bank was changed as General Bank of India. Both banks were managed by local officers and were functioning like corporate venture. In 1806 both the Banks failed.
3. Bank of Calcutta (1806) or Bank of Bengal:
The Bank of Calcutta was launched on 2nd June, 1806 as Regional Bank. Among its founders were East India Company, Some European Merchants and a few wealthy Indians.
The Govt. of East India company was in financial crises during this period mainly because of General Wellesley’s Wars against Tipu Sultan and Marathas. The Bank was formed to provide financial assistance to Eat India Company to fund such wars. The Bank was started with share capital of Rs. 50 lacs.
Originally started to serve the company’s interests the Bank was granted a Charter in 1809 to serve all of the Bengal. The Charter granted by British Parliament provided the privilege of limited liability for share holders and the bank was renamed as BANK OF BENGAL being first Joint stock bank of India.
Inspite of the fact that the Govt’s shareholding was in minority the Bank was dominated by the Government Officials. In the beginning there was one Indian Director on the Board of the Bank Maharaja Sukhmoy Roy Chaudhory. All others were British Directors and employees. Although the Bank was incorporated in India but for all purposes it was almost a foreign bank catering to mostly to white customers.
4. The Presidency Banks:
After 1766, the East India Company’s Calcutta Administration was known as the BENGAL PRESIDENCY. In fact the British India was than divided into three Presidencies. The Presidency of Bengal, the Presidency of Bombay and the Presidency of Madras. The Bank of Bengal was also known as the Presidency bank of Bengal. One fifth of its capital was contributed by the state and remaining by the East India Company.
(i) Presidency Bank of Bombay (1840):
The Bank of Bombay was established on 15th April, 1840 by an Act of Indian Legislature. Like other two Banks (Bank of Bengal and Bank of Madras) the Govt. was also share holder in this Bank. The Govt. was empowered to appoint 1/3 i.e., three out of nine Directors to the board of the Bank. The bank was started with initial capital of 5,20000 Pounds.
For all the three Presidency Banks the provisions of the Act were same. This Bank very soon won the trust of the public like other two Presidency Banks. Its operations were thought to be safe and profitable.
People preferred to keep and invest their money in the Bank. All the three Presidency Banks were authorized to issue currency notes but with passage of Paper Currency Act 1861 Government took away powers to issue Bank currency/notes.
The Bank was operating satisfactorily but due amendment made in 1863 (original Act 1940) gave powers to Directors to make advances of any amount to any person on Promissory Notes. In Presidency Banks the rate of interest was comparatively less than other Private Banks, As such people preferred to take loans from Presidency Banks. The Bank of Bombay also started advancing money on large scale.
The Power conferred by the amendment had enabled the bank for extending credit facilities. But it also started advancing for speculative transactions. Mr. Birich a very high officer of Government of Bombay was appointed its President. Mr. Blair was appointed as Secretary and Mr. Ryland was appointed as Deputy Secretary.
In the middle of 19th century due to American civil war and increased speculative transactions of the Bank the prices of Indian cotton and Property raised alarmingly in Bombay., empowered with the amended Act of 1863 the Bank of Bombay lost no time in doing reckless and desperate banking.
By 1856 the Bank had made losses mainly because of unsecured loans given to many Private Firms & Non-banking Finance companies like Alliance Financial Co., Asatic Banking Corporation, Amanchand Bechandas co, etc. In May 1866 the Asiatic Bank had become insolvent.
Lacs of rupees had been advanced on the basis of merely Prommisory Notes without any other security required as per sound principles of ordinary banking. Principle of sound and ordinary banking were neglected. Resultantly with the end of civil war the Bank of Bombay became bankrupt for unsecured reckless lending to speculators in Real Estate and phony companies.
In 1876 under the company law A New Bank of Bombay was established with limited liability of Joint Stock Banks. This became the Bank of Bombay under the Presidency Bank Act 1876. As per the provisions of the Act., the shareholding of the Government was withdrawn.
(ii) Bank of Madras (1843):
The Bank of Madras was constituted under the Presidency Bank Act 1876 as a Joint Stock company with a capital of Rs. 30 lacs. Earlier Governor William Gyfferd on the recommendations of his council had established a Bank in Madras on 21.6.1693. It functioned on the old system of banking with laxed regulations. It was known by the name of “MADRAS BANK”.
In this town some other banks were also functioning. The Carnatic Bank was opened in 1788, British Bank of Madras in 1795, Asiatic Bank in 1804. Among other banks operated by English Agency Houses in Madras was a Bank of Arbuthnot & Co. also. Later on it became Arbuthnot de Monte & Co. Inspite of the fact that it was considered a soundest mercantile Bank, it failed on 20-10-1906
On the recommendations of Finance committee constituted by Governor William Gyfford a Government Bank (Bank of Madras) was formed in 1805 which started functioning w.e.f. 1-2-1806. Although the banks mainly managed by English Agency Houses conducted ordinary banking business and were joint stock companies but with unlimited liability.
There was gross mismanagement and wide speculation in these banks vulnerable to panic and defalcations. In view of the functioning of these banks there was a pressure to introduce some financial reforms particularly to increase the revenue of British East India Company.
With the result Madras Bank, Carnatic Bank, The British Bank of Madras were amalgamated and BANK OF MADRAS came into being on 1st July, 1843. In the absence of any central bank authority, The Bank of Madras in addition to ordinary banking business also conducted certain functions which otherwise are done by a Central Bank.
(iii) Imperial Bank of India (1921):
In chronology of western style and joint stock companies observing certain regulations of banking business under one or other law of the banks first Indian Bank was Bank of Bengal(1809), Second Bank of Bombay(1840) and the Third Bank of Madras (1843). All these three banks were known as Presidency Banks regulated under the Presidency Bank Act 1876.
These banks primarily helped the Government to raise loans cheaply from the market including European businessmen. All of these banks were governed by the Royal Charters which were revised from time to time to bring the required amendments with the developments in economic conditions. These banks dominated banking in India but there some other banks like exchange banks and joint banks also mostly owned by Europeans.
The style working of all these banks were different from each other. While exchange banks mostly dealt in Foreign Trade, Indian joint stock banks were not having sufficient capital and also lacked experience. They were therefore not able to compete with Exchange or Presidency Banks. While exchange banks were managed mostly by Europeans, the Presidency banks operated as joint stock, companies.
With Imperial Government held 1/5 share in each Presidency Bank remaining shares were sold to private subscribers. In the beginning all these banks confined their functions to discounting bills of exchange, Negotiate private securities, maintaining cash accounts, deposit and cash circulation.
The Royal Charters had authorized these banks to issue bank notes, circulation of currency and right to establish branch offices. In race of competing with each other these banks, including Exchange Banks (Exchange Banks were having their Head Offices out of India) mostly worked from single office unconcerned of expanding efforts.
The state of affairs of banks was not satisfactory. Most of banks confined their activities under deregulated atmosphere even Lending to speculations.
The different segmentation of their working culture led Lord Curzon to observe:
“In respect of banking it seems we are behind the time. We are like sole old fashioned sailing ship divided by solid wooden bulkheads into separate and cumbersome compartments.”
It is not that working style only differed from each other and that too confined to some specific fields. The credit portfolio was also subjected to different limitations for different banks. The loan was restricted to Rs. One Lac with tenure of 3 months only for general public.
For prominent, renounced and highly placed Officials and established businessmen there was no limit. Moreover there were different parameters of lending to different type of people some of which were Caste based also. A Brahmin was given loan at 15-20% rate of interest whereas the rate of interest for Shudra was not less than 60%.
The Presidency Banks were confined within themselves and with Royal charters were very strict in observing the than rules. The rule based banking and different type of business restrictions prevented the business expansion also.
Obsessed with old prevailing strictly followed systems the than Governor General of India had remarked:
“This was the bank to do business with which would not violate its rules in the smallest, particular for the Governor General himself.”
One of the Presidency Banks had returned his cheque unpaid because his balance fell short by Four Annas.
The scenario changed with the passage of Paper Currency Act 1861. The legislation had taken away the Presidency Bank’s authority to issue currency. The Govt. of India assumed sole power w.e.f. 1st March,1862 of issuing Paper Currency within British India.
However job of the management and circulation of New currency remained with Presidency Banks. By 1876 these presidency banks had covered most of the trade centres and cities by opening their branches, agencies, and sub-agencies.
Bank of Bengal Had 18 Branches. Bank of Bombay and Bank of Madras 15 Each:
By the end of 19th century the economic development in India started growing rapidly. The National Rail Road network paved a path of economic progress. With rise of cash-crop farming, Mining, Industry and wide spread industrial development, the International trade of India also improved many folds.
With the result it gave boost to the commercial activities of all the banks and by the beginning of 20th century India’s banking sector boasted a host of new events particularly foreign banks authorized to exchange currency.
The expanding field of banking sector and the development of indigenous banks, particularly because of partition of Bengal and the Swedish movement a number of banks started functioning to fulfill the credit gap required for such economic developments. During this period a number of Indian banks were opened.
The Allahabad Bank 1865, Punjab National Bank 1895, People Bank 1901,Bank of India 1906,Bank of Baroda 1908, Bank of India 1911. No doubt first and oldest Indian bank the commercial bank of Audh was opened in 1881.
Most of the agency houses and a number of small banks were characterized by gross mismanagement and wide spread speculations. There were number of instances of forgery, speculation, losses, panic and run on banks. All these circumstances created a need for a larger bank which can be Banker’s Bank also. The Indian Government was also thinking to establish a more centralized banking institution.
The concept was not a new one. The concept of establishing a Central Banking Institution in India dates back to the late 18th century. Although on the recommendations of Governor general of Bengal in British India a General Bank of Bengal and Bihar was established in 1773 but it was short lived.
Latter on in early 20th century The Chamberlain Commission(1914) recommended amalgamation of all the three Presidency Banks. The prevailing circumstances and the affairs of banking companies at that time alongwith recommendations of Chambertian Commission’s report led to the decision to merge the three Presidency Banks into a New, Single and Centralised Banking Institution.
Consequently on 27th January, 1921 all the three Presidency Banks were merged together to form the IMPERIAL BANK OF INDIA By Passing The Imperial Bank of India Act 1920. Although the Bank was not authorized to issue notes but it had the permission to manage the Clearing House and to hold Government balances.
The merger of three Presidency Banks, the Bank of Bengal, Bank of Bombay and the Bank of Madras into Imperial Bank of India provided a sufficiently large Indian commercial Bank. It took on the triple role. The role of a commercial bank, A Banker’s Bank and a Bank to the Government. It also took the role of a CETRAL BANK.
Under the Imperial Bank of India Act the nominal capital of the Bank was trebled. The total capital of three Presidency Banks was Rs. 3.75 Crores and the authorized capital of Imperial Bank of India was Rs.11.25 Crores. The general control of the functioning of bank was vested in a Central Board of Governors, while local affairs were controlled by Local Boards at Calcutta, Bombay and Madras.
The creation of Imperial bank of India was to make banking facilities and monetary resources more accessible to the business, trade and commerce etc.
In the beginning years of its establishment the Imperial Bank of India discharged functions both as a QUASI CETRAL BANKA AS WELL AS A COMMERCIAL BANK. It operated its branches all over the India including Karachi (now in Pakistan) and Rangoon (Now in Myanmar) and achieved phi nominal growth.