Why West Bengal continues to be a place for unauthorised money raising (This time is hardly different)?

In the same event when certain players were blamed for being too optimistic while bidding for payment banks, there was another development.

SEBI chief (who never really get much media space despite stellar work) UK Sinha made a statement about illegal deposits/funds raising in West Bengal:

U K Sinha, chairman of the Securities and Exchange Board of India (Sebi) expressed surprise at the number of firms raising unauthorised deposits from West Bengal, a state where the new Bandhan Bank is based.

“Unauthorised money-raising is a major issue in east India. West Bengal is also the place where such mushrooming of firms has come up. The story needs to go much deeper as how such a large number of people get duped there,” Sinha said, adding the capital markets regulator has already shut down about 250 such illegal entities, with one crossing deposits worth more than Rs 50,000 crore.

“Perhaps in eastern part of India, the economic activity, job opportunity (and) growth have not been in an egalitarian or disbursed way. This has been one of the primary causes (for chit fund scams),” he said here.  Sinha added that even though one can argue that deepening of network could have been helpful, the “story goes much deeper”.

Hmm. Deeper it is.

Just when Bandhan started there was an article which looked at this Bengal connection with messing finance. It said Bandhan’s story is even more credible given how hopeless banking and finance have been in this region.

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 this goes back to many years ago. This time is hardly different.

In the period 1913-66, 1502 banks failed in India out of which 171 banks were from Bengal alone, which is nearly 11.3% of total failures.

Apart from these banks, West Bengal had something called loan offices. These were many in number and created much trouble. Bengal Banking Inquiry Commission said:

There is a peculiar class of institution called loan offices, which play an important part in the banking organisation of Bengal. They are ,joint stock companies, registered under the Indian Companies Act and are mostly owned and managed by Bengalis. Their paid-up c’apital is small, but some of them,specially the oldest concerns’, have attracted a fair volume of deposits, so that the working fund is considerable in .the aggregate. The total’ on the 31st March 1929, has been estimated… at not less than Rs. 9 crores, distributed among 782 companies. It is true that some of these concerns are unwilling to describe themselves as “loan offices” and call themselves banks, but as they perform much the same functions, it will be convenient to consider them under the same general heading.

….in a narrower sense, many of the loan offices are merely joint stock organisations for lending money, not to trade and industry, but chiefly to landlords and tenants, often for unproductive purposes.

Why did they emerge? The land revenue system:

The most important factor giving rise to these institutions is the Permanent Settlement of 1793, which made ·landed property a more valuable form of investment in Bengal than in other parts of India, -where land revenue is subject to periodical revision. But ‘land revenue fixed in perpetuity in 1793 was inordinately high and was exacted with the utmost rigour. Some of the zamindars saved themselves from ruin ‘by creating permanent tenures in their estates. This process went on -with the subsequent growth. of population and the rise’ of prices. These ‘factors reduced the incidence of the land tax and a large class of  intermediaries arose between the zamindars and the actual raiyat. Before the passing of the Bengal Tenancy Act of 1885, the raiyat’s right to his holdings was quite undefined and the lending of money to him under such conditions was very risky.

This state of things continued till the sixties of the last century when Act, VII of 1860 granted the privilege of  limited liability to joint stock banks in India .. It is interesting to note-that the same princinle was extended to. bank shares in England only in 1858, though the liability for notes issued still remained unlimited as “before. This Act made it possible for joint stock banks with limited liability to take up the work hitherto undertaken by private money· lenders. 423( (c) Example of the Land Mortgage Bank of India, Ltd.-

The ‘intelligentsia of Bengal were not slow to take advantage of the  opportunity. ‘While in other ‘Provinces joint stock commercial banks were started in the ‘sixties and ‘seventies;-the development in Bengal ‘Was along the line of land mortgage banking. There was already one such institution in the province, viz., the Land Mortgage Bank of India, Ltd., incorporated in ‘London in· 1863, which, through its. agency in Calcutta, was doing considerable business. This served as an object lesson for Bengali enterprise.

The first loan office was the Faridpur loan Office, Limited} founded in 1865 in. the town, of Faridpur and registered on 4th March 1871. Started by middle ·Class people with  moderate means, its paid-up capital was quite small and unlike the Land Mortgage Bank·of India, Ltd., which ‘had floated £1,000,000 of debentures in London within three years of its establishment, the Faridpur Loan Office, Ltd., had to rely mainly on deposits for its working funds. It was not possible for a mufassal loan company to raise its funds by long-term debentures. 

And then several mushroomed. And all of them closed down by 1940s/50s.

Coming to 2016, again some hundreds have been closed down after collecting thousands of crores of deposits.

What is it about Bengal? How is it that large number of people continue to be duped here of their savings? Why aren’t lessons learnt? Banking penetration has increased significantly in the region since the early or mid 20th century. Why people choose to go to these scrupulous operators than banks?

Actually, come to think of it India is this huge diaspora of cultures where beliefs over money differ from one region to another. Some people dont trust anyone with their money and some are just too casual. The entire idea of financial/banking habits in different parts of the country is going to such a great study. As Mr Sinha and the short research here shows it is far more historical and deeper.

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