The chequered history of Kolkata based banks..

Bandhan microfinance kickstarted its operations as a bank last weekend. The emergence of Bandhan is nothing short of a fairy tale story from starting as a small microfinance institution to becoming a large bank. It is even more interesting to see the bank emerge from Kolkata, capital of West Bengal. One has not seen any major activity from the eastern part of India. Moreover, this banking bit has been restricted to either Mumbai or Southern India.

Though, this is actually going back to history as Presidency Bank’s first base was at Kolkata and even the first bank in India- Bank of Hindoostan-  started operations in Kolkata.  But as Kolkata lost its importance in Indian economic geography, so did banks from the place as well.

Aniek Paul of Mint has this interesting piece on history of Kolkata/Calcutta based banks.  It has been a fairly chequered journey:

West Bengal has a chequered history in banking. It was in Kolkata—then Calcutta—where the first deposit-taking bank was founded in the early 1770s.  Alexander and Co.—a British managing agency, or a diversified conglomerate—launched Bank of Hindostan in partnership with local moneylenders, or indigenous bankers called shroffs or banians in those days.

De was at that time one of the leading banians. Many more banks were launched in the late 18th century, but all of them collapsed within 50-60 years. The reason? Speculation and overtrading by their founders. Bank of Hindostan survived three runs, but eventually went under in 1832 along with its founder Alexander and Co.

In 1806, Bank of Calcutta—one of the forebears of today’s State Bank of India—was established by a government charter. But because it was risk-averse and wouldn’t lend for more than three months, local businessmen—both British and Indian—continued to launch private banks.

The result was the same—more bank failures. The most storied failure was that of Union Bank Ltd (1829-48), founded by illustrious Bengalis such as prince Dwarkanath Tagore (poet Rabindranath Tagore’s grandfather) in partnership with British companies. When it collapsed, De’s sons Asutosh and Pramatha Nath had to pick up the tab for its bankruptcy. Whereas their father remained a banian, they had become shareholders of Union Bank. According to some historians, Bengalis turned to safe-haven investments such as real estate following the collapse of Union Bank. Property prices zoomed.

Described by many historians as reckless destroyers of wealth, Bengalis returned to banking again in the early 20th century, ostensibly with the noble purpose of backing Indian businessmen to compete against the British. These ventures were even more short-lived. Some wound up within years.

Between the early 1940s and the mid-1960s, West Bengal had gained unparalleled notoriety in bank failures, and former SBI chairman D.N. Ghosh blames it on greed, corruption and lack of regulation. In the 20th century alone, hundreds of banks went belly up in Kolkata, leaving many landed families in ruin. The state’s inglorious past has weighed on the minds of regulators, according to D.N. Ghosh.

So, it will be interesting to see how Bandhan fares given the tragic history of banking sector in the region.

Though, one major reason for decline was this continuous decline of Kolkata as a commercial hub. Bank/Finance follows commerce and somehow the historic city of Kolkata could not maintain its huge first mover advantage over other cities. It was British political and commercial capital for most part of British Raj but due to politics and destiny, it just lost out. Mumbai developed gradually and being closer to London gained prominence. Calcutta’s loss was Mumbai’s gains.

Speculation is mostly the key reason for such banking collapses but does not explain the long term evolution. Out of the three Presidency banks, the one in Mumbai actually collapsed as well due to speculation. It was then revamped and restarted. This did not effect Mumbai’s emergence of a financial centre as gradually commerce shifted from Calcutta to Mumbai. It was Mumbai which saw the first stock exchange, a place where levels of speculation is even much higher.

It is also interesting to note as the author also suggests that Calcutta actually gave birth to far more number of banks than Mumbai. Till even some years after independence, quite a few authors called Calcutta as the first financial centre of India with Mumbai being second. Actually given Mumbai’s prominence now, it is amazing that it actually was a laggard in birthing banks. But then overtime most banks ended up being based in Mumbai. Economic geography of banking/financial services is a fascinating area of study.

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