Indian Currency and Finance

by John Maynard Keynes

In the first group there are six Banks—the Delhi and London Bank (1844), the Chartered Bank of India, Australia, and China (1853), the National Bank of India (1863), the Hong Kong and Shanghai Banking Corporation (1864), the Mercantile Bank of India (1893[97]), and the Eastern Bank (1910). The dates after these Banks give the years when they were established. Of these, two, the Chartered and the Hong Kong Banks, do a very large business in other parts of the East, especially China[98]; but this does not prevent their Indian connexion from being important. The other four are primarily Indian.[99] It is noticeable that no entirely new Exchange Bank now surviving[100] was founded between 1864 and 1910. This is in spite of the fact that most of the above, especially in the last decade, have proved enormously successful from the point of view of their shareholders. The Delhi and London Bank,[101] the oldest established of all, has not shown the vitality or power of expansion of the others; and the Eastern Bank, though it seems to have made a good start, is still too young to pass judgment on. But the shares of the rest, if the issue of bonus shares be allowed for, stand at a premium of about 200 per cent or more. It is probable, however, that it would be exceedingly difficult to start a new Exchange Bank at the present time, except under the aegis of some important financial house already established in a strong position in India.[102] Indian Exchange Banking is no business for speculative or enterprising outsiders, and the large profits which it earns are protected by established and not easily assailable advantages.

12. This summary leads us, therefore, to the important conclusion that the business of financing Indian trade, so far as it is carried out by Banks with their seat in London,[103] is in the hands of a very small number of Banks. They stand, broadly speaking, in an exceedingly strong financial position supported by large reserve funds. In this matter India is now enjoying the fruit of past disasters and of conditions in which the struggle for existence was too keen to allow any but the fittest to survive. If the present spell of prosperity lasts too long, she will no doubt lose it.

13. I shall not attempt any complete account of the activities of a typical Exchange Bank. Much of their business is very like that of any other Bank. But it will be worth while to describe in rather more detail the most characteristic part of their transactions and the part which is most relevant to the topics of this book.

14. In addition to its capital and the reserves accumulated from profits, an Exchange Bank obtains its funds by receiving deposits either for fixed periods or on current account. These deposits are received both in India and in London; but it is a principal object of Exchange Banks to obtain as much as they can in London, and they seek to attract such deposits by offering better terms than an English Bank will allow. On fixed deposits, received for a year or more, 4 or 3½ per cent will be paid; for shorter periods a more variable rate; and on current accounts 2 per cent will be allowed on the minimum monthly balance or on the amount by which the balance exceeds a certain fixed minimum. Apart from the cash, money at call, and investments, which every Bank must hold, a certain part of these funds are employed in making loans either in India or elsewhere. But a large part is employed in the purchase (or discount) of bills of exchange. Some of these bills will be negotiated in London and drawn on India, but the bulk of them will be negotiated in India and drawn on London. A busy Exchange Bank discounts far more of these trade bills in India than it can afford to hold until maturity. But as they are drawn on London houses there is no difficulty in rediscounting them in London. As the majority of the bills are bought by the Banks in India, while cash is received for them, either at maturity or through rediscount, in London, the Banks are constantly in the position of finding themselves in funds in London and of wishing to have funds (for the purchase of more bills) in India. They proceed, therefore, to even up their accounts as between London and India by buying, in London, Council Bills (or transfers) or sovereigns (from the Bank of England or from the agents of Egyptian or Australian Banks) for delivery in India, or, perhaps, silver (though their dealings in silver bullion are probably much less important than formerly)[104] for remittance to India. The question of what determines the relative advantages of these methods has been discussed in Chapter V.

The demand for Council Bills, therefore, chiefly depends on how much new business the Exchange Banks are entering into in India. The method of telegraphic transfers enables them to act with great despatch on receiving advices from their Indian agents. The Indian branches obtain immediately the funds enabling them to take the trade bills, the offer of which had seemed to them to be at sufficiently satisfactory rates to make the transaction taken as a whole worth while. A few weeks later the bills reach England, are duly accepted, and are capable of being rediscounted if the Bank needs additional free funds to buy more Council Bills and turn its money over again in another transaction of the same kind.

We are now in a position to understand what the Secretary of State means when he says that he has sold bills to meet the needs of trade. If he withdraws the convenience of telegraphic transfers or forces the Banks to put themselves in funds in India by sending sovereigns, he causes delay or additional expense in the discounting of bills in India. In other words, Indian traders are less easily able to turn the goods they are exporting into money. On the other hand, if the Indian season is a poor one and the exports fall off, the offer of bills for discount is reduced and the need of the Exchange Banks in London to buy Council Bills correspondingly less.

It is worth noticing that, from the point of view of the London Money Market as a whole, it is a mere difference of machinery whether the Exchange Banks finance the Indian trade by attracting deposits in London and hold the bills themselves, or whether the Discount Houses and London Banks attract the deposits and use them to rediscount bills for the Exchange Banks. In so far as the Exchange Banks can attract deposits themselves without paying too high a rate for them, this alternative is usually the more profitable for them,—especially since, if they are able to hold in this way a considerable proportion of the bills they discount, they can afford to wait for a favourable moment before rediscounting such bills as they have eventually to dispose of. But, apart from private profits, the important point is the extent to which Indian trade is financed by the purchase of Council Bills in London with borrowed money, whether this money is supplied by the depositors in Exchange Banks or by those who rediscount the bills.

15. There is, prima facie, some danger to the stability of the Indian financial system in the fact that its money market is largely financed by funds raised, not permanently but for short periods, in a far–distant foreign centre.[105] In order to judge accurately whether this danger is in any way a real one, it would be necessary to have before us certain facts which are not ordinarily published. We do not know what proportion of the Exchange Banks’ total deposits are held in England; or to what extent those which are so held are fixed for a year or more and how far they are at call or short notice. As is often the case when banking is under discussion in other countries, those who are in a position to know are not in a position to speak, while those who are in a position to speak are not in a position to know. I will make my guess for what it is worth in § 18. In the meantime let us discuss the principle which should guide us, had we knowledge.

It is plain that if Banks were to borrow money at short notice in England and use it in India—certainly if they were to do this on a large scale,—the situation might be dangerous. They might be called on to return what they had borrowed in England, and unable at short notice to bring back what they had lent in India. The principle of which we are in search is, therefore, that the sums borrowed on relatively short notice in either country should not exceed the assets located there. Where, however, bills of exchange between England and India are in question, it is not immediately plain what part of the Banks’ funds may properly be regarded as located in England and what part in India. The answer is, I think, that a bill which has been accepted in England, and is payable there at maturity, is an English asset, wherever it may have been originally negotiated. Thus in the case of Indian Exchange Banks, their deposits in London (other than those fixed for long periods) should be at least balanced by their short–term loans in London, their cash in London, their portfolio of trade bills having a London domicile, and such of their securities as may be readily marketable in London. Similarly their liquid assets in India should at least balance their short–period liabilities there.

16. How far these conditions are as a matter of fact satisfied, it is, as I have said above, impossible to know for certain. The Exchange Banks do not distinguish in their published accounts between their Indian and London deposits. They do, however, give private information to the Indian authorities of their deposits in India and elsewhere respectively in each year. These aggregates for all the Exchange Banks together are published in the Statistics of British India, Part II., and are, therefore, available to the public two or three years after the period to which they refer.[106]