The Banking Habit in India

The development of banking in any country depends vitally upon the growth of saving and investment in the country, as banks are agencies dealing in other people’s money, collecting the small savings of the individuals. These tiny streamlets of capital that flow into the vaults of the banks become rivers falling into the ocean of national finance. The growth of saving and investment in any society or community or country is, in its turn, largely dependent on the power of the people to save and on their will to save. The findings of the various Provincial Banking Enquiry Committees go to establish beyond all doubt that the saving capacity of the agriculturists, who make up the larger portion of the population of our country, is not worth the name as it is not much even in fat years. The few well-to-do agriculturists that can, and therefore should, lay by substantially in periods of boom spend away their surplus funds for the purchase of land, for effecting costly improvements on land or for adding to the jewellery of the inmates of the house, not to speak of their money-lending operations. The middle class comprising the salaried and professional sections who generally seem to be content with a low but secure yield from their savings seem to prefer depositing their small savings in the Post Office Savings Banks that are primarily thrift-promoting agencies, and in postal cash certificates. The commercial and trading classes invest their surplus funds in joint stock securities though a substantial proportion also prefer short-term deposits in the banks and the short-dated obligations of the Government that generally take the form of Treasury Bills. The orthodox Mahommedans employ their savings for the improvement of their lands as their religion prohibits the receipt of interest. The most popular form of investment, if it be investment at all, next to land is generally that of ornaments, both gold and silver. Gold jewels have always played an important part in the social ceremonies sanctioned by religion and tradition. The Hindu law of inheritance that makes a woman ineligible for a share of the property of her father led to the practice of what has come to be known as ‘stridhan’ to the women, mostly in the form of ornaments at the time of marriage. An ostentatious display of gold by some people tends to confer social prestige and so it is not merely the aesthetic taste of women that accounts for the inordinate use of precious metals as ornaments. The joint family system also encourages the same tendency and the husband that earns spends his earnings in jewellery for his wife lest his savings should be compounded in the property of the joint family. Another reason why we Indians have got addicted to these ways of unprofitably locking up our savings has been the lack of banking facilities and of facilities for safe and sound investment. Banking has not developed in our country to the extent it has done in the West. The reasons for this state of affairs are not far to seek. The frequent failure of banks in our country explains the general lack of confidence on the part of the people in banks and banking.¹ An important bank failure spells ruin and misery for its clientele. The failure of a big bank gives a thorough shaking to the entire banking and currency system of the country as the strength of the banking system depends on the strength of the weakest link in the banking chain. As banks are the acknowledged factors of industry and trade in a country and as the industrial development of a nation is largely dependent on the growth of sound banking, their failure arrests all economic progress in the country. Banking is essentially a confidence game, and once public confidence is rudely shaken, banking business cannot be brisk and banks cannot push their way through, and when all customers and clients draw out their money, banks that carry on their business with other people’s money may be obliged to close their doors. The habitual and recurring failure of banking establishments due to unsound, unsafe and injudicious banking is a real reason why banking has not progressed to the extent of the needs of our country. It may not be out of place here to add that the unfair competition of non-Indian banks is also responsible, to no inconsiderable extent, for the slow progress of banking in our country. All these led to the growth of the hoarding habit in our country and the tendency on the part of our people in the past to sink their savings in land and jewellery, and thus lock up unproductively or bury in pits or safes their surplus income.

The hoarding habit to which our Indians have been supposed to be addicted in an unusual degree has been the subject of comment both among the Indian and non-Indian economists, selfishly interested in an India that has been depicted as a bottomless sink of precious metals. The Indian hoards have been differently estimated by different people. Probably the earliest estimate was that of H. D. Macleod who worried himself to get the Indian hoards on his brain, and he estimated that the Indian hoards must be no less than £300 millions. Lord Curzon calculated them at Rs. 825 crores, while Arnold Wright, referring to the same in the "Financial Review of Reviews," puts them at £700 millions. So that, with every fresh investigator, the calculations seem to proceed in a regular crescendo trend. Though some allowance may be made for the exaggerated versions regarding the total hoards in India, it is an indisputable fact that the evil did exist and does exist to some extent mostly in rural India, and an analysis of the factors contributing to this state of affairs goes to show that the causes have been economic, social and political. The principal cause is to be found in the numerous invasions that our country was subjected to in the past and the continued misrule and the consequent insecurity of life and property to which she was a prey. The social causes are, as referred to already, the joint family system and the practice of giving ‘stridhan’ to women, practices that seem to have received sanction by the experience of centuries in India. Apart from the political and social causes, certain economic causes explain the development of the hoarding habit. The lack of multifarious agencies for looking after the savings, as exist in the case of all the advanced countries, is the economic cause.

It now remains to discuss the ways whereby the hoarding habit can be fought and the banking or depositing habit can be stimulated and developed. Various suggestions have been made by the many Banking Committees, the foreign banking experts and the leading Indian writers, for promoting the banking habit or practice on the part of the people, of laying by a part of their savings and entrusting the same to banks, for idle and dead money is as bad as lack of capital.

As the law of inheritance of the Hindus, debarring their women from receiving any share of the landed estates and other immoveable property, induces the father or the husband to bestow gold on their beneficiaries, the Hindu law relating to inheritance of property should be so altered and amended as to make women eligible for a share of the paternal property. So long as the legal rights of women, such as inheritance of real estate and property, are restricted as at present, this sort of conferring property in the shape of jewellery on them will not be given up, and without any modification in the law of inheritance it would be difficult to check the inordinate use of precious metals as ornaments.² Further, as suggested by the Bihar Banking Committee, the issue of women’s cash certificates, at perhaps a rate slightly higher than the current rate of interest, is well worth trying to induce women to convert their ornaments into paying investments. No doubt with the educated and cultured women jewellery is at a discount: there is still much that can be done in this direction of discouraging women from investing their money on ornaments.

It is necessary to carry on extensive and systematic propaganda for stimulating the banking habit among the people of all classes, particularly the masses. Banking facilities and facilities for sound investment should be increased, and the advantages of a banking account should be brought home to the proverbially simple and illiterate rural folk. It is a matter for regret that even those who are aware of the many advantages of a banking account do not seem to come forward to open one. The quick disappearance of mushroom banks that spring up now and then strengthens such disinclination to open a bank account. In this connection it must be pointed out that the bigger banks, that have grown grey in their banking business and hence ate more likely to be above suspicion like the proverbial ‘Caesar’s wife,’ should enlarge their activities by opening branches through-out the length and breadth of the country so that the newly born banks may not be allowed to spoil public confidence in banks and in banking.

Modern banking systems are divisible into three classes, namely, Unit Banking, Chain Banking, and Branch Banking. In a Unit Banking system every bank will have only one office managed by a man familiar with local clientele. The Chain Banking group consists of a number of banks whose controlling interest will be linked to a powerful bank located in a monetary centre. Lastly there is the Branch Banking type wherein a bank will have a branch or a number of branches spread all over the country with the entire Control vested in the head office. In our country we have neither Unit Banking nor Chain Banking, but Branch Banking has been developed though not to the extent that may be deemed necessary. The number of banks in India as compared with the other civilised countries is wholly inadequate for the real needs of the country. That the scope for the expansion of banking in India is plenty can be made out by the facts, that out of 25,000 towns in India only 480 can boast of a bank or a branch of a bank, that the total number of banking offices in India in 1938 has not been more than 1,300 as against 25,000 in U. S. A., 13,200 in United Kingdom, 4,500 in France, and that there is a banking office for every 276,000 persons in India as against 3,056 in U. S. A., 4,816 in Great Britain, and 9,491 in Japan. If the fact that India is a land of villages and consequently that the vast bulk of the people of India live in villages and not in towns is taken into account, the absence of banking facilities in our country becomes still more striking.³

As the premier commercial bank of the country, the Imperial Bank of India has done much in the direction of branch banking and in promoting the banking habit. Now that the Reserve Bank of India has been started, the Imperial Bank of India is free to open new branches in places where there is a rural need for a branch and where other banks have not yet opened their branches, and to provide banking facilities and facilities for sound and safe investments. Though it is true that India should have a far larger number of banks and branch-banks than at present, still it is not so much the number of banking establishments that matters as the number of people that keep banking accounts. As an eminent writer on Banking remarks, "the beneficial effects of banking are produced not by the number of banks but by the number of people that open bank accounts." The Branch Banking system, though not quite an unmixed good, may easily be extended to places too small to support a regular bank requiring a full complement of officers and reserve of coin. It is the duty of the bank or the branch-bank to implant, foster, develop and universalise the banking habit. The main problem of a bank or banker is to gather the unorganised capital of the people. The useful services of the Co-operative Movement may be enlisted in this connection. A more rigorous policy on the part of the village co-operative societies for attracting deposits would go a long way not only in making them independent of District Co-operative Central Banks for funds but also in combating the pernicious disease of hoarding. As it is, only 18 % of the total capital of the village co-operative banks consists of deposits from their members, while in Germany, the home of co-operation, the corresponding percentage is more than 87%.⁴ Further, Thrift Savings Associations should be started throughout the country on the model of the National Savings Associations of England, as they will be in a position to stimulate and develop the saving habit among persons of small means, to remove their timidity and make them familiar with safe and sound investments by education and propaganda.

The banking habit, being a habit, has to be inculcated, cultivated and developed from boyhood and a pice bank may be attached to every high school and an anna bank to every college to promote thrift among young men and young women, and the encouragement of such practical thrift would be desirable in every way.

Education, of course, is the sine qua non of this reform as the Indian masses cannot easily imbibe the idea that the proper place for their savings is not the person of their women but the coffers of the bank that may use them productively by granting financial accommodation and promptly return the same if and whenever the depositor so desires. A somewhat substantial use of cheque currency today is an indication of the development of the cheque habit and the villagers should be enlightened as to the immense advantages of the cheque system; and if the cheque habit is to be stimulated to promote the banking habit, the delay involved in encashing cheques should be minimised. Banks should permit cheques to be drawn in the mother-tongue of the province served by the bank and not in a language known only to a fraction of the population.⁵ Moreover the wide-spread use of cheques depends on the economic prosperity of the people and a greater number of people becoming customers of banks. Our country is a land of men of small means and petty transactions, and hence too much cannot be expected of the cheque system for promoting the banking habit.

It may safely be said by way of conclusion that if the hoarding habit is to be uprooted and if the banking habit is to take a deep root in the Indian soil, a few but sound banking concerns should be promoted, the Branch Banking policy should be successfully pursued, the Hindu law of inheritance should be modified so as to permit of equal distribution of a father’s property among his sons and daughters, confidence in banks and banking should be promoted, banking facilities and facilities for investment should be increased by the Reserve Bank of India, "the friend, philosopher and guide" of the banks of our banking system, the competition of foreign banks should be lessened, and our Hindu women should still learn not to be too fond of jewellery. Education of the right type as recommended by the grey hairs of Wardha is the sine qua non of reform in all the above directions.

1Vide J. M. Keynes: "Indian Currency And Finance."

2 Vide Dr. B. R. Rau: "Present-day Banking in India."

3 Vide Dr. Panandikar: "Banking in India."

4 Vide The Report of the Central Banking Enquiry Committee.

5 Vide "Banking Law and Practice in India."