Between 1894 and 1904[115] no new Banks were founded with as much as 5 lakhs of paid–up capital. But since 1904 there has been a great outburst of fresh activity, and a type of Bank new to India has become important. The way was led in 1904 by the foundation of the Bank of Burma. This Bank failed in 1911, two directors and the general manager being found guilty of cheating and sentenced to imprisonment in 1913. In 1906 three Banks were founded, all of some importance,—the Bank of India (under important Parsee auspices), the Bank of Rangoon, and the Indian Specie Bank. Until 1910 these three Banks remained alone amongst the new creations in having a paid–up capital in excess of 15 lakhs (£100,000).[116] Since 1906 numerous Banks have been started, amongst the most important of which in respect of paid–up capital may be mentioned the Bengal National Bank (1907), the Bombay Merchants’ Bank (1909), the Credit Bank of India (1909), the Kathiawar and Ahmedabad Banking Corporation (1910), and the Central Bank of India (1911).
The main object of most of these Banks is, of course, to attract deposits (though some of them are almost as much concerned at present with placing a further part of their unissued capital). For deposits fixed for a year the rate offered varies, as a rule, from 4½ to 5 per cent, the newer creations generally favouring the higher rate. Some Banks offer 6 per cent. About the rates for shorter periods there is more vagueness. On current accounts 2 per cent is generally allowed, though the eagerness of some of the newest Banks has led them to offer 2½. I have the advertisement before me of a Bank which offers 3 per cent on the daily balance, and up to 6 per cent on sums deposited for longer periods; at the head of the advertisement appears in large letters—Capital, Rs. 50,000,000; but it appears below that applications for shares are invited, and the paid–up capital is probably negligible. Some Banks advertise such advantages as “Special Marriage Deposits, 50 per cent added to Principal in five years’ time.”[117]
4½ per cent on deposits fixed for a year and 2 per cent on current accounts in excess of a certain minimum are very likely reasonable rates to offer in Indian conditions, provided that the funds thus attracted are not used for speculation and that adequate reserves are maintained in a liquid form. It is in this respect that the more substantial of these Banks are chiefly open to criticism. The official statistics are, unfortunately, very much out of date. But for the Banks which had a paid–up capital and reserve of at least 5 lakhs the available figures up to 1910 are as follows:—
Indian Joint Stock Banks
| No. of Banks. | Capital, Reserve, and Rest. | Deposits. | Cash Balances. | |
| 1890 | 5 | £340,000 | £1,810,000 | £370,000 |
| 1895 | 9 | 630,000 | 3,780,000 | 640,000 |
| 1900 | 9 | 850,000 | 5,380,000 | 790,000 |
| 1905 | 9 | 1,080,000 | 7,990,000 | 1,160,000 |
| 1906 | 10 | 1,270,000 | 7,700,000 | 1,000,000 |
| 1907 | 11 | 1,950,000 | 9,340,000 | 1,300,000 |
| 1908 | 14 | 2,060,000 | 10,840,000 | 1,630,000 |
| 1909 | 15 | 2,360,000 | 13,660,000 | 1,860,000 |
| 1910 | 16 | 2,510,000 | 17,110,000 | 1,870,000 |
22. These figures reveal, in my opinion, an exceedingly serious state of affairs. If they could be brought up to date, they would probably appear even worse. As late as 1900 these Banks were comparatively insignificant. Since that time they have succeeded in attracting so large a volume of deposits as to make them an important part of the banking system of the country. Only six of them date back long enough to remember any real financial crisis in India (for the depression of 1907–8 was not accompanied by the symptoms of financial crisis). Growing up in smooth times, they have thought more of attracting deposits than of retaining cash reserves; and in 1910 we find sixteen Banks with deposits of £17,000,000 and cash reserves of not quite 11 per cent.[118] Even of these reserves the greater part is probably held by the older and more established of the Banks belonging to this class. In the case of the smaller Banks, dealing, as they are, with clients to whom banking is a new thing and in a country where hoarding is still dominant, the cash balances seem, from the available indications, to be hopelessly inadequate; and it is hard to doubt that in the next bad times they will go down like ninepins. If such a catastrophe occurs, the damage inflicted on India will be far greater than the direct loss falling on the depositors. The growth of banking habits in India is, of course, of the utmost importance to the country’s economic development. A startling series of failures will do much to retard it.
In this connexion the history of the Bank of Burma, the first Bank of the new order to be founded, is instructive. This Bank was started in 1904 under European management by a firm engaged in floating oil companies and other highly speculative enterprises. The Bank’s capital was £117,500, and by 1911, when it failed, deposits had been attracted to the extent of £792,701, a large part of which is said to have come from Bombay and Calcutta. To obtain these deposits the Bank had offered interest at the rate of 6 per cent for deposits placed with it for a year; and many persons, it seems, were deceived by its title into believing that it was in some sense a Presidency Bank. In the autumn of 1911, after a year in which the Burma rice crop had been good and had sold at very high prices, and when the province generally was prosperous, the Bank failed. The balance sheet turned out to be false, and one–third of the assets had been advanced against worthless security to a firm in which the directors were interested.
23. Both in the case of the Exchange Banks and in that of the Indian Joint Stock Banks, the “Cash Balances” include, I think, balances held at other Banks.[119] It is impossible, therefore, to summarise accurately the figures for the Indian Banking System as a whole—Presidency Banks, Exchange Banks, and Joint Stock Banks together. The figures given below state accurately the total of private deposits; but in the total of cash balances some items must be counted twice over.