THE ECONOMIC WEEKLY

February' 10, 1951

Exchange Banks in India J. J. P a r d i w a l a

T h e o p e r a t i o n s of the Exchange Banks h a d r e m a i n e d a closed book for l o n g , because u n t i l the pass-

i n g o f the B a n k i n g C o m p a n i e s A c t 1949, these banks p u b l i s h e d n o separate balance sheet for t h e i r I n d i a n
business. As these banks have a n e t w o r k of branches a l l over the w o r l d , a n d as t h e i r business in I n d i a
is o f t e n o n l y a s m a l l f r a c t i o n of t h e i r t o t a l business, n o t h i n g m u c h c o u l d be l e a r n t a b o u t t h e i r operations
i n I n d i a f r o m t h e i r consolidated balance sheet.
T h e f o l l o w i n g survey o f the w o r k i n g o f E x c h a n g e Banks i n I n d i a i n recent years i n the l i g h t o f f u l l e r
i n f o r m a t i o n n o w m a d e a v a i l a b l e for the first t i m e f r o m the author's thesis o n " E x c h a n g e b a n k s i n I n d i a " ,
w h i c h has been a p p r o v e d for the P h . D . degree o f the B o m b a y U n i v e r s i t y m a y h e l p t o d e a r u p the m a n y
obscurities t h a t h a d h i t h e r t o covered this special field of b a n k i n g .

T H O U G H E x c h a n g e Banks used
to supply to the Secretary of
State for I n d i a , perhaps as a m a t t e r
of courtesy, the figures of t h e i r de-
posits a n d cash balances held in
I n d i a as on D e c e m b e r 31 every
year, a n d this i n f o r m a t i o n in a con-
solidated f o r m was m a d e available
to the p u b l i c m a n y years later in
the official p u b l i c a t i o n Statistical
Tables Relating to Banks in India,
u n t i l very recently this was the only
i n f o r m a t i o n available about t h e i r
I n d i a n business. I n the absence o f
figures o f t h e i r advances and i n -
vestments i n I n d i a , a n d o f the bills
h e l d b y t h e m i n t h e i r portfolios a n d
s o o n , n o t h i n g m u c h c o u l d b e learnt
a b o u t their operations. T h i s defi-
ciency was not r e m o v e d altogether
even after the Reserve B a n k came
o n the scene, a n d started p u b l i s h i n g
weekly statements of the consolidat-
ed position of scheduled banks,
though a l i t t l e more c o u l d be
g a t h e r e d by e s t i m a t i n g the figures
f o r the exchange banks as balanc-
i n g items, b y d e d u c t i n g f r o m the
consolidated statement the figures
of the I m p e r i a l Bank and the I n d i a n
J o i n t Stock Bank. the t w o other
constituents of o u r scheduled hanks.
T h e w a r p e r i o d is perhaps
least interesting for a study of ex-
change b a n k i n g , since exchange
c o n t r o l robs i t o f m u c h o f its signi-
ficance. T h e accompanying table,
h o w e v e r , w h i c h brings together the
relevant i n f o r m a t i o n for the past
ten years, provides an i n t e r e s t i n g
a c c o u n t of the c o m p a r a t i v e deve-
l o p m e n t s of the exchange a n d other
scheduled banks d u r i n g this p e r i o d .
Deposits
F r o m this t a b l e i t w i l l be seen
t h a t the deposit l i a b i l i t i e s of the
exchange banks rose over t w o - f o l d
in undivided India between 1938
a n d 1946, f r o m Rs. 70 crores to
Rs, 170 crores. T h i s t r e n d is in
correspondence w i t h t h a t o f the
o t h e r scheduled banks whose depo-
sit l i a b i l i t i e s rose m o r e t h a n five-
f o l d i n the same p e r i o d . T h i s i n -
crease in the deposit liabilities of
b o t h these types of banks reflects
the general i n f l a t i o n a r y c o n d i t i o n s
of the e c o n o m y d u r i n g the w a r
years.
In the post-war years 1947 to
1949, the deposit liabilities of ex-
change banks r e m a i n e d f a i r l y stable
a r o u n d Rs. 104 crores ( t h o u g h there
was a t e m p o r a r y f a l l of Rs. 3 crores
in 1948) w h i l e the other scheduled
banks were l a c e d w i t h a drastic de-
cline of Rs. 112 crores in their de-
posits by the e n d of 1949. T h i s
heavy f a l l , as is w e l l k n o w n , was
due to the effects of the p a r t i t i o n
a n d the p o s t - p a r t i t i o n disturbance's
o n business life. I n fact, i n the
year i m m e d i a t e l y f o l l o w i n g p a r t i t i o n ,
i.e. in 1948, the deposits of exchange
banks was also affected. t h o u g h o n l y
slightly. I n the f o l l o w i n g year, h o w -
ever, their deposits were restored to
their o r i g i n a l level.
T h e drastic f a l l i n o t h e r schedul-
ed hanks' deposits was in p a r t also
a n a t u r a l sequel to the sudden en-
largement of t h e i r deposit liabilities
in 1947, w h i c h was caused by the
transfer of funds on a huge scale- by
refugees w h o were c o m i n g away or
the p r e p a r i n g to come away f r o m Pa-
kistan. D u r i n g the subsequent t w o
years, these refugees h a d to d r a w
on their cash balances, p a r t l y f o r
c o n s u m p t i o n purposes a n d p a r t l y for
business investments in the I n d i a n
U n i o n . As a m a t t e r of f a c t . it was
not u n t i l last year t h a t these sche-
d u l e d banks c o u l d achieve some
measure of stability in the v o l u m e
of their deposits. I n c i d e n t a l l y , we
m i g h t observe f r o m the table t h a t
on the w h o l e the deposits of ex-
change banks, c o n t r a r y to p o p u l a r
supposition, have not risen at the
cost of those of the Indian joint
stock banks. O n the c o n t r a r y , w h i l e
the deposits of o t h e r scheduled
banks increased over five-fold d u r -
i n g the w a r p e r i o d , the deposits of
the exchange banks increased h a r d -
ly three-fold.
Cash Balances
T h e cash balances of the exchange
banks increased f o u r f o l d d u r i n g the
w a r years a n d stood at Rs. 20 crores
in 1946 as against Rs. 5 crores in
1938. The cash balances of other
scheduled banks rose sevenfold d u r -
i n g the same p e r i o d f r o m Rs. 13
crores in 1938 to Rs. 97 crores in
1946.
I n 1947. however, w h i l e their
was an increase of Rs. 7 crores in
the cash balances of the exchange
banks, there was a f a l l of the same
magnitude in t h e i r deposits a n d t h e i r
r a t i o of cash to deposits was over
in per cent, whereas in 1946 the
r a t i o was r o u n d about 12 per cent.
A s i m i l a r t r e n d is to be n o t i c e d
in the Case of o t h e r scheduled banks
as w e l l . O v e r the year 1947 there
was an increase of t h e i r cash ba-
lances by Rs. 13 crores while t h e i r
deposits d e c l i n e d by a b o u t Rs. 90
crores. T h e cash r a t i o consequent-
ly i m p r o v e d to 14 per cent, in 1947
f r o m 11 per cent, in 1946. T h e de-
cline in deposit was largely due to
the unsettled conditions brought
about by p a r t i t i o n .
D u r i n g the year 1948 the cash
balances of the exchange banks de-
c l i n e d by about Rs. 1 1 crores, w h i l e
loans a n d advances increased by
Rs. 20 crores, In the case of o t h e r
scheduled banks the cash balances
dec lined in the. same year by about
Rs. 9 crores, w h i l e loans a n d a d -
vances rose by a b o u t Rs. 17 crores.
T h i s indicates that b o t h these type,
of banks utilised t h e i r smaller cash
balances for an extension of credit
by l o w e r i n g their respective cash
ratios, in response to i m p r o v e d busi-
ness c o n d i t i o n s .
O v e r the- year 1949 the cash ba-
lances of the exchange banks d e c l i n -
ed r o u g h l y by a b o u t a crore of
rupees. In the case of other .sche-
d u l e d banks the- p o s i t i o n was very
m u c h different d u r i n g this year.
Whereas t h e i r e ash balances w e n t up
by a b o u t Rs. 7 crores, their loans
a n d advances declined by a b o u t

153
February 10, 1951
Rs. 2 6 crores. T h e reason f o r t h i s n o t i c e d , w h i l e there was a f a l l of a
w i l l b e discussed i n the f o l l o w i n g c r o r e of rupees in the cash balances
section. o f exchange banks d u r i n g t h e year,
t h e i r loans a n d advances fell by
Loans A n d Advances
about Rs. 5 crores. T h i s c a n be
T h e loans a n d advances of the v i e w e d as an i n e v i t a b l e a f t e r m a t h
e x c h a n g e banks rose s h a r p l y d u r i n g of the d e v a l u t i o n of the r u p e e . B u t
the w a r p e r i o d b y m o r e t h a n 100 i n t h e case o f o t h e r scheduled banks,
p e r cent, a n d stood at Rs. 69 crores w h i l e t h e r e was a n a c t u a l rise i n
at the e n d of 1946 as against o n l y t h e i r cash balance by a b o u t Rs. 7
Rs. 3 3 crores i n 1938. i n the case crores, there was a s h a r p d e c l i n e of
o f t h e o t h e r scheduled banks, t h e Rs. 26 crores in t h e i r loans and
rise in loans a n d advances was v e r y advances. T h i s is in consonance
m u c h steeper, b e i n g n e a r l y f i v e - f o l d . w i t h the o t h e r feature of these sche-
T h e a c t u a l e x t e n t o f rise was f r o m d u l e d banks d u r i n g t h a t year v i z . a
Rs. 85 crores in 1938 to Rs. 396 d e p l e t i o n o f Rs. 114 crores i n t h e i r
crores i n 1946. v o l u m e o f deposits, f r o m Rs. 803
D u r i n g 1947 despite a f a l l of crores in 1948 to Rs. 689 crores in
a b o u t Rs. 7 crores in t h e deposit of 1949. T h i s was p r e s u m a b l y due to
the e x c h a n g e banks (a fall w h i c h the fact t h a t refugee businessmen
m i g h t be attributed t o t h e after- f r o m Pakistan h a d been largely
m a t h of partition and w h i c h is in w i t h d r a w i n g t h e i r cash balances f o r
consonance w i t h the general t r e n d ) , business purposes, t a k i n g l i t t l e re-
t h e i r advances rose steeply by a b o u t course to loans a n d advances f r o m
Rs.21 crores, p r e s u m a b l y because the banks.
t h e exchange banks f i n a n c e m o r e o f
t h e e x t e r n a l t r a d e t h a n the i n t e r n a l Investments
o r i n t e r - d o m i n i o n trade. T h i s i s a l l It h a d been a l o n g s t a n d i n g c r i -
the m o r e s t r i k i n g if we take note of t i c i s m against the E x c h a n g e Banks
t h e fact t h a t o v e r the same year, t h a t t h e y h a d been k e e p i n g their
the loans a n d advances of schedul- assets in I n d i a at a low level t h o u g h
ed banks as a w h o l e d e c l i n e d by such c r i t i c i s m c o u l d n e i t h e r be c o n -
a b o u t Rs. 60 crores, a p h e n o m e n o n f i r m e d n o r r e f u t e d i n the absence o f
caused by a drastic f a l l in loans a n d r e l e v a n t statistics. This defect has
advances of the o t h e r scheduled now been r e m o v e d by the B a n k i n g
banks to the t u n e of Rs. 81 crores. C o m p a n i e s A c t 1949.
I n 1948, h o w e v e r , there was a n T h e A c t makes i t o b l i g a t o r y o n
increase i n loans a n d advances o f the p a r t of the f o r e i g n banks ope-
e x c h a n g e banks by a b o u t Rs. 20 r a t i n g i n I n d i a t o m a i n t a i n 7 5 per
crores a n d a s i m i l a r increase in cent, o f t h e i r l i a b i l i t i e s i n the f o r m
those of scheduled banks by a b o u t of assets inside I n d i a . T h i s , w h i l e
Rs, 17 crores. 'This w o u l d a p p e a r to r e s t r i c t i n g the free f l o w of funds
be due to the increased imports between I n d i a and other financial
d u r i n g the year as a result of the centres o f the w o r l d a n d thus g r e a t l y
l i b e r a l i s a t i o n o f i m p o r t restrictions. c u r t a i l i n g the o p p o r t u n i t i e s f o r ex-
T h e year 1949 p r o v i d e s a n i n t e r - change banks to make profits
esting contrast between t h e p o s i t i o n t h r o u g h s h o r t - t e r m transfer o f funds,
of the exchange banks a n d the m i g h t a c t u a l l y c o m p e l these banks
o t h e r scheduled banks. As already to undertake certain types o f i n -
C o m p a r a t i v e Position of Exchange and other Scheduled
d u r i n g t h e W a r a n d Post W a r P e r i o d *
154
THE ECONOMIC WEEKLY
l a n d b a n k i n g business; B u t j u d g i n g
f r o m the past history, it m a y be
s u r m i s e d t h a t these f o r e i g n banks
may not find it w o r t h their while
t o e x p a n d b a n k i n g business i n the
interior. It is likely, however, that
they m i g h t utilise t h e i r surplus
fund in internal trade f i n a n c i n g
i n centres w h e r e they h a v e a l r e a d y
their established offices. This
m a y t o some e x t e n t increase c o m -
petition between I n d i a a n d foreign
banks, b u t i t c a n n o t b e h e l p e d i f the
above measure is t h o u g h t necessary
t o safeguard t h e interests o f I n d i a n
depositors a n d I n d i a n c l i e n t e l e i n
the event of a f o r e i g n b a n k g o i n g
into liquidation. Such an eventu-
a l i t y , h o w e v e r , m u s t be e x t r e m e l y
r e m o t e , f o r o n l y i n case o f w a r o r
a great p o l i t i c a l u p h e a v a l c a n such
powerful institutions be o v e r t h r o w n .
F u r t h e r , the A c t also makes it
o b l i g a t o r y o n a l l banks i n c l u d i n g
f o r e i g n exchange banks t o m a i n t a i n
20 per cent, of t h e i r t i m e a n d de-
m a n d l i a b i l i t i e s i n cash o r u n e n c u m -
bered a p p r o v e d securities. T h o u g h
this is p r i n c i p a l l y i n t e n d e d to p r o -
h i b i t banks i n general f r o m over-
t r a d i n g at the expense of t h e i r
l i q u i d i t y , it i n c i d e n t a l l y serves as a n -
o t h e r measure to p r o t e c t the i n t e r -
ests of the I n d i a n depositors and
I n d i a n clientele o f the f o r e i g n o w n e d
banks. H e r e a g a i n , there appears
to be no reason w h y this r e q u i r e -
m e n t s h o u l d seriously i n c o n v e n i e n c e
the exchange banks. A c c o r d i n g to
the advocates of the exchange banks,
the p r o p o s e d r e s t r i c t i o n o n invest-
ments w i l l h i n d e r the n o r m a l o p e r a -
tions o f f o r e i g n trade a n d w i l l c o m -
pel exchange banks t o lock u p t h e i r
funds i n g i l t - e d g e d securities r a t h e r
t h a n u t i l i s i n g t h e m i n seasonal a d -
vances against m a r k e t a b l e c o m m o -
dities w i t h the usual m a r g i n s . I t i s
f u r t h e r a r g u e d that as no f o r e i g n
Banks
 THE ECONOMIC WEEKLY
February 10, 1951

securities are a p p r o v e d by t h e Re- this s h o u l d have a f a v o u r a b l e effect countries have f o r these reasons e l i -
serve B a n k o f I n d i a , this w i l l result as i t w i l l o n l y serve t o strengthen the m i n a t e d a n i m a l p o w e r altogether.
in some, cases in t h e i r h a v i n g to sell I n d i a n m o n e y a n d c a p i t a l markets. I n I n d i a , w h e r e a g r i c u l t u r a l me-
f o r e i g n securities a n d buy I n d i a n T h e balance sheets w h i c h t h e ex- thods are a d m i t t e d l y b a c k w a r d , me-
securities. I f the exchange banks change banks p u b l i s h e d for t h e i r c h a n i z a t i o n has been h a m p e r e d by
are, in fact, c o m p e l l e d to sell some business in I n d i a for the year 1949 the lack o f experienced, skilled a n d
of t h e i r f o r e i g n securities a n d invest for the first t i m e in fullest details mechanically-minded personnel t o
in Indian Government securities. disclosed some interesting features. handle f a r m machinery and to make
m i n o r repairs a n d adjustments.
A f a r m e r w h o is bent on d e r i v i n g
Mechanisation of Agriculture to the advantages f r o m mechanisation
by increasing his present yields a n d
Speed up " G r o w M o r e Food " by u t i l i s i n g a d d i t i o n a l l a n d t h a t has
been l y i n g b a r r e n so far, is faced
Campaign w i t h the. p r o b l e m o f purchasing the
r i g h t t r a c t o r for the r i g h t j o b . N o t

I T is an established fact t h a t me-

chanisation of a g r i c u l t u r e neces-
sarily leads to far greater yields, in
W h e n tractors are used, the l a n d
set a p a r t f o r the p r o d u c t i o n of f o d -
b e i n g an engineer himself, he is na-
t u r a l l y scared by the technical c o m -
plexities o f the m a c h i n e r y which
as m u c h as the t r a c t o r can p l o u g h der becomes available f o r the p r o -
w i l l have to be h a n d l e d either by
the l a n d a t the r i g h t time, right d u c t i o n of food grains, thus again
himself or by his m e n h i t h e r t o u n -
speed a n d to the r i g h t d e p t h needed h e l p i n g to replenish o u r depleted
acquainted w i t h its use. He w i l l ,
for the p a r t i c u l a r c r o p . Countries food stocks. Countries w i t h h i g h l y therefore, in his o w n interest have
like the U n i t e d States, Australia, mechanised a g r i c u l t u r e in Europe to make sure that he gets a t r a c t o r
C a n a d a a n d those i n E u r o p e c o u l d and A m e r i c a have l o n g recognised t h a t is ( a ) as simple as possible in
n o t h a w fed their people a n d even these facts a n d most farmers in these. design, (b) easy to m a i n t a i n by u n -
e x p o r t surplus food to o t h e r parts
of the w o r l d h a d they not mechanis-
ed t h e i r a g r i c u l t u r e to a h i g h degree.
In some E u r o p e a n countries it has
been estimated that there is on an
average one t r a c t o r for every 300
acres of arable land and in the
U S A the p r o p o r t i o n of tractors is
even higher.
M e c h a n i z a t i o n of a g r i c u l t u r e has
by no means caused u n e m p l o y m e n t
amongst a g r i c u l t u r a l labourers; o n
the c o n t r a r y , workers rendered sur-
plus for the actual process of p l o u g h -
i n g , h a r r o w i n g , harvesting, etc., can
he usefully employed for other i n -
tensive operations on the f a r m w h i c h
still require the skill of h a n d labour,
thereby increasing still f u r t h e r the
production of food. M o n machi-
nery, again, means d e m a n d for m o r e
fitters, mechanics a n d engineers a n d
m o r e food means m o r e trade a n d
m o r e well-fed people, thereby ab-
sorbing i n t o the process of e m -
ployment additional numlx-rs o f
people.
T h e p l o u g h i n g capacity of a p a i r
of bullocks per 8-hour day is on an
average estimated at half-an-aerc
w h i l s t a t r a c t o r of m e d i u m size w i l l
p l o u g h 5 to 8 acres a day, a c c o r d i n g
to w o r k i n g d e p t h a n d soil c o n d i t i o n s ,
not to speak of the. superior w o r k
o f the tractor. T h e r u n n i n g cost
of a t r a c t o r - - e s p e c i a l l y of a h i g h -
grade kerosene-consuming type—is
extremely l o w a n d it is a f u r t h e r
advantage o f the t r a c t o r t h a t i t re-
quires no fuel a n d very l i t t l e atten-
t i o n d u r i n g the i d l e periods w h i l s t
bullocks have to be f e d a n d to be
attended t o w h e t h e r t h e y a r e w o r k -
i n g or not.

155