19. The principles which underlie the preceding analysis may be illustrated by reference to a hypothetical balance sheet, simplified, but less simplified than those commonly published.
| £m. | £m. | ||||
| (i.) | Capital and Reserve Fund | 1½ | (vii.) | Loans and Advances in London | 3 |
| (ii.) | Fixed Deposits in London | 3½ | (viii.) | Loans and Advances in India | 3 |
| (iii.) | Current Accounts in London | 2½ | (ix.) | Trade Bills on London negotiated in India | 6½ |
| (iv.) | Fixed Deposits in India | 2 | (x.) | Trade Bills on India negotiated in London | 1½ |
| (v.) | Current Accounts in India | 2½ | (xi.) | Cash, etc., in London | 1½ |
| (vi.) | Trade Bills on London negotiated in India and rediscounted in London | 5½ | (xii.) | Cash, etc., in India | –½ |
| (xiii.) | Securities | 1 | |||
| (xiv.) | Miscellaneous assets including silver bullion | –½ | |||
| —— | —— | ||||
| 17½ | 17½ | ||||
| ═══ | ═══ | ||||
This would probably be published as follows:—
| £m. | £m. | ||
| Capital and Reserve Fund | 1½ | Loans, Advances, etc. | 6 |
| Deposits, etc. | 10½ | Bills of Exchange | 2½ |
| Cash, etc. | 2 | ||
| Securities | 1 | ||
| Miscellaneous assets | –½ | ||
| —— | —— | ||
| 12 | 12 | ||
| ═══ | ═══ | ||
[Bills rediscounted and outstanding, £m5½.]
Acceptances have been omitted in the above, the amount of bills payable is supposed to be deducted from cash, and various minor items are omitted. The “capital employed in India” seems to be (viii.) + (x.) + (xii.) = £m5. The “capital employed in London” is (vii.) + (ix.)–(vi.) + (xi.) = £m5½.[110] The securities and miscellaneous assets (xiii.) + (xiv.) = £m1½, may be regarded perhaps as equally available in either centre. If there is a run in India, assets must be available there in a liquid form equal to (v.). If there is a run in London, liquid assets must be available there equal to (iii.). The second condition, but not the first, is, in this hypothetical example, fulfilled. If the Bank had to remit funds back from India to London, this would be most simply effected by not entering into new business under (ix.). It would not then be necessary to buy Council Bills, and the trade bills already bought under (ix.), being rediscounted or allowed to mature in London, would swell the available funds there automatically. If it were possible to call in loans in India and reduce (viii.), then it would be possible to buy more trade bills under (ix.) in India (or Government sterling drafts if trade were depressed), without having to buy Council Bills in London, and these trade bills could then be rediscounted in London. If the Exchange Banks are remitting funds back to London, this shows itself, therefore, in a poor demand for Council Bills; and conversely when they are remitting funds to India, there is a strong demand for Council Bills. Thus the weakness of the demand for Council Bills in times of depression (and the strength of the demand for Government sterling drafts) partly depends on the action of the Exchange Banks. What their action would be in a situation of acute stringency bordering on financial panic, it is not easy to predict.
20. So far the only apparent element of danger in the banking position seems to lie in the growth of deposits attracted by the Exchange Banks in India without a corresponding growth in their Indian cash reserves. It would be a good thing if the Exchange Banks were compelled to distinguish in their balance sheets between their Indian and extra–Indian business, much in the manner set out in the hypothetical balance sheet on p. 218, except that for “London” “outside India” would have to be substituted.[111] They should also distinguish, as two already do distinguish, between fixed deposits and accounts at call or for short periods. When, as in the case of the Exchange Banks, we have to deal with a small number of Banks of established position, an insistence on due publicity, rather than compulsion or regulation in matters of policy, is likely to be the proper remedy for any weaknesses which may possibly exist.
21. The next section of the Indian banking world comprises the Indian Joint Stock Banks, i.e. those Banks, other than the three Presidency Banks, registered in India and having their head offices there. This is a confusing group, because a great number of small money–lending establishments are registered as Banks under the Indian Companies Act—in 1910–11 492 businesses were classified as Banks.[112] The official statistics separate off, however, those of the Banks proper which are of any considerable size,—those, namely, which have a paid–up capital and reserve of at least 5 lakhs (£33,000).
The earlier Banks, coming under this description, were usually under European management. Out of seven existing in 1870, only two now survive,—the Bank of Upper India (1863) and the Allahabad Bank (1865).[113] Between 1870 and 1894 seven more Banks, conforming on the whole to this same type, were founded, of which four now survive,—the Alliance Bank of Simla (1874), the Oudh Commercial Bank (1881), the Punjab Banking Company (1889), and the Punjab National Bank (1894).[114] All these Banks are on a very small scale compared with the Presidency and Exchange Banks; but they are distinguished in type from most of the more recent creations.