The Birth of State Bank of India - Informational

The Imperial Bank of India was formed in January 1921 by bringing together the Presidency Banks of Bombay (now Mumbai), Calcutta (now Kolkata) and Madras (now Chennai). It was the predecessor to today’s SBI.

The interesting thing is that the bank was privately owned (by both Europeans and Indians), even though it worked closely with the British government in India and was governed by it. The Governor-General of the British Crown* had the power to issue instructions to the Imperial Bank in order to safeguard the financial policy of the British government in India, or its balances, for that matter. In fact, the Controller of Currency, who was appointed on to the Central Board of the Imperial Bank, had to act as the watchdog of the government when it came to the bank.¹⁵

It’s worth remembering here that the RBI was formed only in 1935. Given this, the Imperial Bank of India carried out some central banking functions as well.

It managed the public debt of the British government in India. It also acted as a banker’s bank, with most of the leading banks of the day maintaining a portion of their cash balance as a deposit with it (the modern equivalent being the cash reserve ratio that banks need to maintain with the RBI). One of the objectives of the Imperial Bank was to expand banking facilities across India and introduce a banking habit (something we are still trying to achieve nearly a hundred years later). Hence, the bank pursued a very aggressive policy when it came to opening branches across different parts of the country. By 1928, it had 202 branches against the seventy when it started.

The interesting thing is that the private deposits of the bank (it had a lot of government deposits, given that it received all the government dues from the public) amounted to around one-third of the total deposits of the banking system in India. This confidence of the public came from the fact that despite being a privately owned bank, it worked closely with the government and was seen as the government’s bank.

The Birth of State Bank of India - Informational

As Bakhtiar K. Dadabhoy writes in Barons of Banking: Glimpses of Indian Banking History: ‘The general confidence [arose] out of the belief that the government was deeply concerned in and could be trusted to take measures to ensure its stability and solvency.

It’s this confidence that people had in the Imperial Bank of India (which later became the SBI) that rubbed off on the PSBs, as and when they came into the picture. And it’s this confidence which continues to the present day, where people have let their deposits lie in banks, which have a bad loans rate of 15 per cent or more.

Calls for the nationalization of the Imperial Bank started as soon as India gained independence. On 4 February 1948, Mohanlal Saksena, a politician from Uttar Pradesh, who served as the Union minister of rehabilitation, became the first person to raise a query on the subject, to the finance minister, R.K. Shanmukham Chetty, in the Constituent Assembly. The query and the concerns around the Imperial Bank were genuine as the bank continued to be a British bank, with the top management of the bank being British personnel, with no Indian having broken through Chetty gave a politically correct answer to Saksena’s query and said that the government accepted the policy of nationalizing the bank, but it first needed to figure out the various technical questions that would come up if such a step were taken.

One of the reasons why the government and most of the politicians of the day wanted to nationalize the Imperial Bank was to ensure that rural savings could also become a part of the banking system. At the same time, with increased deposits, these savings could then be made available as loans to a large part of the population which wanted to borrow money but was unable to borrow from banks.

The Rural Banking Enquiry Committee (RBEC), which submitted its report in May 1950, found that the extension of banking had been lopsided ‘with a heavy concentration in larger towns and cities’. The committee recommended that the Imperial Bank, along with other commercial banks, should be encouraged to expand to mandis, or market towns, and other towns which have commercial or industrial importance.

After the RBEC, another committee, the All-India Rural Credit Survey Committee (AIRCS) was appointed in August 1951. The AIRCS took more than three years to submit its report, which it finally did in December 1954.

It recommended the nationalization of the Imperial Bank and the government accepted it. The committee, with a lot of help from the RBI, had carried out field enquiries, which covered 1,27,343 families in 600 villages across seventy-five districts across the country. These enquiries revealed that the professional moneylender, the agriculturist moneylender and the trader ruled rural credit and supplied close to 70 per cent or more of it.

This would have been a major point that led the then government to nationalize the Imperial Bank of India and establish the State Bank of India (SBI). It was established on 1 July 1955, with all the assets and liabilities of the Imperial Bank being transferred to it. In fact, initially, the idea was even to amalgamate ten more banks with the SBI. These banks were the Bank of Bikaner, the Bank of Jaipur, the Bank of Rajasthan, the Bank of Baroda, the Bank of Indore, the Bank of Mysore, the Travancore Bank, the Hyderabad State Bank, the Bank of Patiala and the State Bank of Saurashtra. This did not happen primarily because the RBI Governor Benegal Rama Rau was of the view that the SBI need not immediately be burdened with the responsibility of integrating these banks into it. Over the years, eight of these banks became subsidiaries of the SBI, with the Bank of Bikaner and Jaipur being merged.

The Birth of State Bank of India - Informational

The Imperial Bank was primarily nationalized to spread the banking habit in the country. It was stipulated that the SBI would open 400 branches within five years, which it did by 1 June 1960. By 1967, the bank had been reasonably successful in mobilizing the Indian savings by getting people to deposit them in the bank. Personal deposits accounted for 90 per cent of the total deposit accounts and 39 per cent of the total deposits in the bank.²² The fact that the bank was government-owned helped.

The interesting thing is that until the SBI came along when it came to industrial lending, the banks in India stuck to financing the working capital of industries. This was, of course, a very safe and a risk-free way of lending. But in a newly independent nation, just risk-free lending wouldn’t help. The bank’s lending to industry increased from Rs 49.3 crore in December 1955, a few months after its nationalization, to Rs 533.2 crore in April 1968. Also, much of this lending was carried out to basic industries like iron and steel, fertilisers, chemicals, cement and mining, engineering, etc. The bank gave out loans to other sectors as well, from the cooperative sector to small-scale industries to agriculture.

The Birth of State Bank of India - Informational

This was how the first round of nationalization played out in India. The second round happened in 1969 and it had nothing to do with spreading the banking habit, but everything to do with politics.

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