Banking in ancient and British Period

2.1.1 Banking in ancient and British Period
Banking in India is traceable in ancient Vedic era, Ancient bankers performed the functions such as accepting deposit, granting loan against security, acting as bailee to customers, or as treasurers and bankers to the state, and managing the currency of the country. Also they used loan deeds. During Buddhist period, Brahmins and Kshatriyas entered banking business. The concept of hundis or indigenous bills of exchange came in use (Ahmad 1992.25).
During Mughal rule, indigenous banks granted loans for both domestic and foreign trade, assisted the state, issued metallic coin, and acted as moneychanger, revenue influence and power. They financed trade, performed treasury function and were trusted custodians of deposit (Ahmad 1992:27). However, the Jagath Seth Seths did not provide banking services, per se.
The tradition and culture of the Bengalis reflect their conscious of money and assets. They have been exposed to the principles of cash transaction, saving, investment, credit, interest, and several kinds of mortgages since Indian classical civilization. By the third century BC, Mauryan urban economy extended up to Mahasthan (Bogra), where its silver coins have been found (Maloney and Ahmed, 1988:1).
In seventeenth century, the English traders and the East India Company utilized indigerons bankers for borowings, and collection of land revenue. But the business and power of indigenous bankers declined due to the emergence of the English Agency Houses (in Calcutta and Bombay) which began banking business in addition to their commercial business. Other causes of decline of the indigenous bankers can be attributed to the break up of the Mughal Empire, and establishment of uniform currency throughout the country in 1835. Also changes in trade routes and trade relaingons with other countries due to development of railways, steamships, post and telegraph etc. badly affected the indigenous bankers. Indigenous bankers lost their business in urban areas and the European bankers captured the urban banking. Then, the indigenous bankers existed in rural areas by concentrating on banking services to agriculture and internal trade. The Agency Houses were bankers of the East India Company, and the European merchants in India. The Agency Houses financed the crops trade, issued paper money, and paved the way for the establishment of joint stock banks (Ahmad 1992:28).
Commercial banks in Bangladesh territory have been functioning for the last two centuries. “The Bank of Hindustan” was the first modern bank formed in 1770 by an English Agency House in Calcutta, but was wound up in 1832 (Guru Datta 1987:5 in Abrol, (1987); Ahmad 1992:30). The Bengal Bank and the General Bank of India were established in about 1785chartered by the East India Company (Ahmad 1932:30). In the first quarter of the nineteenth century, the state aided bank facilitated government borrowing and helped the trading class. In the year 1806 the first presidency bank, the Bank of Bengal, was established, followed by the Bank of Bombay (1840) and the Bank of Madras (1843). The East India Company and European private shareholders mostly owned these banks. The presidency banks had the monopoly of government banking and the issue of notes. In 1876, the Presidency Banks Act was passed and government had withdrawn its capital. The government’s balances were kept in three reserve treasuries. The policy of the Presidency Banks Act was to safeguard the interest of the government, and also it imposed restriction on all three banks to carry out the business of banking only (Ahmad 1992:30). In that period, the English agencies established mostly the joint stock banks. After 1813, several joint stock banks were established by the British settlers in India, but most of them could not stay long as they failed to confine to banking business only (Ahmad 1992:31). Between 1861 and 1865 there was a mushroom growth of banking companies. Under the Indian management, the Oudh Commercial Bank’ was first formed in 1880 followed by the Punjab National Bank and the Alliance Bank of Simla (Srinivasaraghavan, 1955:567). The three presidency banks and Indian joint stock banks were established by the acts of Indian legislature. In 1860, the principal of limited liability was first applied to the banks (Ahmad 1992:30).
The failure of Indian banks (up to 1935) was mostly because they indulged in other activities. Such as large sums of money were locked up in speculative business, the banks had provided ling-term financed to businesses without efficient investigations into their soundness, for getting the chance of earning large profits and also short term deposits were invested for this purpose. Many of the directors and managers of these banks were incapable and dishonest. Loans to directors and concerns in which they were interested were unrestricted (Ahmad 1992:32).
The political stimulus of the “Swadeshi movement” of the early twentieth century inspired the opening of important joint stock banks. (Such as Bank of India, the Cenara Bank of Baroda) Srinivasaraghavan, 1985:568; Ahmad 1992:31). In order to face the competition of foreign banks, the three presidency banks were amalgamated and the Imperial Bank of India was formed in 1920 (Ahmed 1992:31). In order to face the competition of foreign banks, the three presidency banks were amalgamated and the Imperial Bank of India was formed in 1920 (Ahmed 1992:31). The Imperial Bank of India Act was passed in 1920. Before the establishment of RBI, commercial banks were regulated by different acts. The establishment of RBI was the first organized initiative to bring banking and monetary system of the sub-continent in a disciplined way.
After 1942, circumstantial forces changed the traditional pattern of banking policy in India. The subcontinent experienced a tremendous inflow of money due to expenditure in war and post-war reconstruction Ismail in Uzair 1967:42]. The British rulers pursued a policy package that had two characteristics: (i) the exploitative relation between the United Kingdom and India, and (ii) the dominance of the British over the Indians. The maintenance of imperial systems received the highest priority. The philosophy and socioeconomic intent of the British rules concentrated mostly on administration for laws and regulations for protecting the imperial interest. The government monopoly was retained in the sphere of post, telegraph, and telecommunication. The banking and insurance etc. were encouraged for private enterprises (Ahmad 1987:68). The foreign exchange banks, which were fifteen in number, were not under the control of the Indian government.
2.1.3 Banking during Pakistan Period
In Bengal, the rural informal credit was part of the social, economic and trade culture. Traditional mahajans were goldsmiths, and Hindu businessmen, especially “baniyas” who acted as moneylender since long. But, many have left for other areas of India and their place in money lending was taken by Muslim landowners (Maloney and Ahmed, 1988:49).
The areas that fall within the boundaries of Pakistan had been fairly well provided with commercial banking facilities during the pre-1947 period. In March 1947, the number of Indian scheduled bank offices in undivided India was 3,496, of which 631 were in Pakistan. Of the total number of bank offices, 487 (77%) were in the West Pakistan and 144 (33%) were in the East Pakistan. Small and mostly non-scheduled banks mainly provided banking facilities in the then East Pakistan. After the announcement of independence of Pakistan in August 1947, the banking services in Pakistan were seriously hampered and the number of banks declined to 38 with 195 bank offices. Many funds and accounts were transferred to India. Most of the bank offices, which belonged to India, had closed their business.
This resulted in a sharp curtailment of banking business in Pakistan the country had only two banks owned by Pakistani nationals. In East Pakistan, number of bank offices remained unchanged but banking functions reduced harply due to the fact that non-Muslims had withdrawn all their deposits and went to India. In June 1948, of the 195 bank offices that remained in Pakistan, 81 were in the West Pakistan and 114 were in East Pakistan (Srinivasaraghavan, 1955:569).
At that time, Pakistan banking system consisted primarily of non-Indian foreign banks. The Australisia Bank had been functioning in Pakistan prior to June 1947. Nineteen non-Indian foreign bank offices and a number of Indian banks were in limited operation. Prior to June 1947, only one Muslim-managed schedule bank, Bank of Bahawalpur Limited, was functioning in the Pakistan territory. The Habib Bank Limited, established in 1941, had transferred its head office to Karachi after partition (Andrus and Mohammed, 1966:105). The number of Pakistan bank on the 30th June, 1948 was 4 with 23 branches (Banking Statistics of Pakistan, 1960-61, 1964-65).
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