History of branch banking in India

Within banking scholarship, research on branches is perhaps the least. And as is usually the case, it is very important. How and why banks go around opening branches is a fascinating tale of history. Studying about these bank branches and why some succeed and others fail gives you signs of local economic progress or lack of it.

In India’s case, we always had something called as indigenous banking which existed for centuries and continues to exist even till date. These bankers were different from the moneylenders as former had much larger operations and were mainly organised around caste/community lines. These indig bankers also collected deposits and facilitated payments using hundi system. Moneylenders loaned small amounts from their capital with much limited operations. Actually anyone with surplus capital and willing to lend was a money lender. But you needed a vast social and financial network to run indig banking system. It is these indig banks that had branches which helped in funds flow from one region to another. They had head offices in major area of trade and commerce and send their agents to set us bases elsewhere.

Like Mr. W.E. Preston, member, Royal Commission on Indian Currency and Finance (1926) said:

“….it may be accepted that a system of banking that was eminently suited to India’s then requirements was in force in that country many centuries before the science of banking became an accomplished fact in England”.

However, what we are interested in branch banking as we know today. There is not likely to be much difference between indig bank branches and modern bank branches but unfortunately we hardly have any data/info about the former.

In a way our story begins from 1839 when Presidency Banks were allowed to open branches.  Most of this information is sourced from Amiya Kumar Bagchi’s seminal work on History of State Bank of India. This is one finance/banking/economics book which is a must must read for all who study Indian economy and finance. But how many are even aware of this mega-tome?

Actually this allowing of branches only applied to Bank of Bengal as Bank of Bombay and Bank of Madras opened only in 1840 and 1843 respectively. But then as these two banks came up, they were allowed to open branches right away but none did as they had enough troubles of their own.

Bank of Bengal opened a lone branch at Mirzapur in 1839 but it closed down in 1848 amidst banking crisis. Infact even before opening a branch, Bank of Bengal had opened an agency at Mirzapur in 1838.

The main issue regarding branches then was lack of a business case for branches. The Presidency Banks were not interested in so called inclusion but exclusion. Their idea was to just facilitate trade finance facilities for British and big Indian merchants. They could only lend for 6 months to begin with which was extended to one year later on. With trading centered around the three Presidency towns, there was no point in opening branches. Plus as said above, times were highly volatile for banking in the first half of 19th century making branching out even more unviable. Then connectivity itself was a big problem with poor infrastructure all around.

All this started changing in the second half of 20th century. Transport and communications picked up due to railways and telegraph. One cannot emphasisze enough how much transport and communications matters to banking and finance. It is only when people begin to travel and have access to information, does flow of money in the economy begin to pick up. So, slowly a case for banks going beyond their head-offices was beginning to make some sense.

In 1861, the British government made sweeping changes in India’s monetary system. Till 1861, these 3 Presidency banks issued their own currency notes. In a country which lacked deposit  liabilities in the scale needed, so banks issued their own notes apart from collecting deposits as well. The typical balance sheet of a Presidency Bank was like this:

Liabilities                   Assets
Share Capital                 Loans
Issued Notes                  Investments
Deposits

In 1861, the government decided to print the notes by itself. It took away this note issuance business from the three banks. Now across the British occupied region, unified currency was to be issued.

This taking away of privilege of note issuance privilege was replaced with this idea of govt agreeing  to keep its treasury deposits in branches of the banks. Thus, now the Presidency banks will open branches in key trading/commerce/government centres where govt local units will park their deposits. The govt deposited its surpluses earlier as well but only in the head-offices. Now the govt promised to maintain branches at branches as well. Thus, they made a business case of these branches.

The balance sheets now looked like this:

Liabilities                    Assets
Share Capital                 Loans
Deposits                          Investments
–Govt
–Public

This led to Presidency banks opening its branches and start of so called retail banking in India albeit in a very limited way.

The Banks obviously went on to open branches only at those places which acted as a feeder to the main centre of Bombay, Calcutta and Madras. However, due to peculiar local economies, Bank of Bengal and Bombay did not rely much on branches. Around 70-80% of profits of these two banks came from head-offfices only.

Only in case of Bank of Madras things were different as Madras was a much smaller economy compared to the other two. So the bank was more reliant on its branches. The branches actually contributed 70-80% of profits of the bank in case of Madras. Madras Presidency was also littered with coastal towns where trading and commerce flourished for centuries. So it also made sense for the bank to reach out to the other trading towns other than just Madras.  Opening branches became more of a compulsion for Bank of Madras whereas it was mostly a formality for the other two. The latter also scoffed at all kinds of Indian practices whereas former had to be more adjusting.

More interestingly, the three most profitable branches of all three Presidency Banks is now no more part of India. For Bengal Bank it was Rangoon, Karachi for Bombay based and Colombo for Madras based bank. This was mainly to do with financing trading in these places.

Despite a start as early as 1861, bank branches barely expanded. By 1916, the three banks had just 63 branches (Bank of Bengal – 25, Bank of Bombay – 14 and Bank of Madras 24). At the same time Indian Joint stock banks had about 160 branches. Most of these branches were just around main towns. Even some of the major towns did not have any banking facility.

A serious attempt to open branches only starts when the three Presidency Banks were merged into Imperial Bank in 1921. The Imperial Bank was given a target of opening 100 new branches within five years, an unheard of target during those days. Even then it was hardly enough given the size of India.

Eventually the branch game is taken up by Indian joint stock banks who collectively replace the might of Imperial Bank.  Due to feeling of nationalism and need to support Indian enterprises, these Indian banks open branches open branches aggressively.

Though, real push only comes post Bank nationalisation in 1969. Branch banking goes into a completely different direction. In 1969, there were 8187 branches which increases fourfold to 32419 by 1980 itself. AS of Dec-2015 there are 135368 branches in the country.

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