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The State Bank of India — going on 200

Amiya Kumar Bagchi

The SBI should be allowed to go on being a bank for the big company and the small borrower, the e-savvy customer and the poor man seeking the help of another customer to fill up his bank scroll.

BORN ON March 27, 1806, as the Bank of Calcutta, the State Bank of India (SBI) will celebrate its 200th birthday in 2006. Initially owned by the East India Company's government and managed by its top officials, it was transformed into the Bank of Bengal, a joint-stock bank with limited liability, with effect from January 2, 1809. The privilege of limited liability for shareholders was obtained by a charter granted by the British Parliament. Under British law of the time, limited liability could be claimed by a joint-stock company only under a parliamentary charter. Thus the SBI, as the lineal descendant of the Bank of Bengal, is also the oldest joint-stock company in the Indian subcontinent.

The Bank of Bengal had a minority government shareholding but a directorate dominated by government officials of whom one served as chairman. British India was then divided into the three presidencies of Bengal, Bombay, and Madras. The other two presidencies acquired the Banks of Bombay and Madras in 1840 and 1843 respectively, organised on lines very similar to those of the Bank of Bengal.

These banks primarily helped the government to raise loans cheaply from the market and the European businessmen to secure credit on privileged terms. For example, Dwarkanath Tagore, the grandfather of the poet Rabindranath, was probably the greatest Indian entrepreneur of Calcutta in his time. But he could obtain a loan only by depositing Company's paper, and never on terms of cash credit. The latter was reserved for European agency houses and their senior partners. The situation in Bombay was slightly different, because unlike in Bengal and Madras, the business world of Bombay had a big presence of Parsi and Gujarati entrepreneurs.

The speculative boom and bust attending the U.S. Civil War raised the price of Indian cotton and property values in Bombay to dizzy heights, only to dash them to the bottom when the Civil War ended. The Bank of Bombay went bankrupt through reckless lending to speculators in real estate and phony companies. A New Bank of Bombay was established under the new company law authorising limited liability for joint-stock banks. This became the Bank of Bombay in 1876 when the Presidency Banks Act was passed. That Act ended government shareholding in all the three presidency banks. But they conducted much of the banking for the government and received interest-free government deposits; hence they were strictly regulated by it.

The three banks were merged to form the Imperial Bank of India (IBI), which began functioning from January 1921. The IBI was privately owned and managed but remained banker to the government. It was ultimately nationalised in 1955 and renamed the State Bank of India (SBI). From then on, the appointment of the chairman and the managing director has been the prerogative of the Government of India.

Over this 200-year history, the SBI has gone through many transformations. The Bank of Bengal (BoB) was the nearest to the seat of power and the most hoity-toity of the three presidency banks. In the 1830s, it had as its khazanchee (cash-keeper), Ram Comul Sen, who was, among his other accomplishments, assistant secretary of the Asiatic Society, a pioneer compiler of a Bengali-English dictionary, and had a better head for management than the nominal manager of BoB, a British civil servant. But despite this record, BoB continued to treat its Indian employees even worse than the other two presidency banks, which also had only Europeans in their managerial cadre until World War I.

The three banks mainly financed the big European merchants, and the bigger of the Indian sahukars, who lent out money to Indian traders and zamindars. These banks were supposed to extend only short-term loans. But their favoured customers (mainly European managing agency houses) could convert short-term loans into long-term finance (for, say, floating a jute mill) by rolling the loans over. BoB had a huge area of operation but penetrated very little into the interior. But the other two banks had branches in some of the bigger trade centres in the interior. For example, in 1920, just before the birth of the Imperial Bank, BoB had only seven branches in the provinces of Bengal, Bihar, and Orissa, whereas the Bank of Madras had 18 branches in an area with less than half of the population of Bengal, Bihar, and Orissa. These differences persisted into the era of the IBI.

Unfortunately, the IBI, as the amalgamated successor of the three banks, retained the BoB ethos. It became a tool for the colonial government's monetary policy and resisted going to the smaller towns, let alone the villages.

Even after Independence, it flouted government directions to extend its branches, and for a time, the Indian Finance Ministers swallowed its argument that its nationalisation would imperil the financial system. It is only since the creation of the SBI through nationalisation that the giant of Indian banking has served the needs of Indian economic development.

Belying the predictions of the British management of the Imperial Bank and their supporters, the newborn SBI increased both its income and profits by taking over the Government's monetary transactions and rapidly extending branches to unbanked centres of trade and industry. The net profits of the SBI increased from Rs.15.6 million in 1956 to Rs.27.1 million in 1961. Over the same period, the number of branches and sub-offices of the bank increased from 502 to 944. In contrast, the total number of IBI branches had expanded from 177 to 191 over the whole decade of the 1940s, and from 191 at end-1951 to 229 at end-1954.

By an Act passed in 1959, most of the banks, such as the State Bank of Bikaner and the State Bank of Travancore, that had earlier been floated by native states were converted into SBI subsidiaries. The SBI grew into a massive institution, spreading its branches into every corner of India. The requirements of priority sector lending imposed on all scheduled commercial banks from 1969 facilitated this expansion. By end-March 1990, the SBI offices numbered 8,422 and its employees numbered 2,19,000. The SBI in tandem with other nationalised banks spread into the small towns and large villages of practically all the regions of India. It performed major developmental functions for industry and agriculture, raised loans for the Central Government, and financed large projects. This was the period of its glory.

Reforms and change

The economic reforms starting in 1991 led to many changes in its structure and function. The rate of branch expansion slowed down, despite the opening of a number of foreign branches. Including the latter, the number of branches stood at 9,093 on March 31, 2004. Priority sector lending that constituted 43 per cent of the advances of the State Bank Group in 1989-90 had come down to 38.69 per cent in 2003-04. More ominously, the advances to agriculture had fallen to 12.79 per cent of the net bank credit, far short of the prescribed limit of 18 per cent.

Under the reforms, the SBI has been closely linked to foreign exchange and stock markets. The SBI management created a number of new subsidiaries or entered into joint ventures such as SBI Capital Markets, State Bank of India (California), SBI Life Insurance, GE Capital Business Process Management Services. The SBI, in line with the economic liberalisation package, has also introduced several product innovations especially in the area of personal banking. With the floating of the Indian exchange rate, the SBI has become the single most important player in the foreign exchange market. During 2003-04, for example, it commanded a market share of 35.63 per cent with a forex turnover of Rs.2,655 billion.

From the 1980s, an increasing proportion of the SBI shares has been sold to individuals and companies, so that by 2003-04 more than 40 per cent was in private ownership. This change has also impelled the SBI to look for profitability rather than national development as the major criterion for its performance.

I would not say that it has come out unscathed in the era of financial liberalisation and the associated turbulence. It suffered a big loss in the Harshad Mehta scam, for example. But it has continued to remain profitable and the price of its shares has become a major index of performance of the Indian stock market. But it would be a tragedy if in the name of economic reforms it is handed over to private players. The latter will have no concern for anything except their pocket books, and the SBI will be as vulnerable as all other banks in a financial system that has abolished all distinctions between banking and speculation in shares, currencies, and bank credit. The SBI should be allowed to go on being a bank for the big company and the small borrower, the e-savvy customer and the poor man seeking the help of another customer to fill up his bank scroll. At the 200th anniversary, its future should not be handed over to a bunch of greedy foreigners and their Indian collaborators.

(Dr. Bagchi, an eminent economic historian, was in charge of the SBI's history project, which produced two authoritative volumes.)

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