There were 54 Princely State banks in 1950s! (The thinking to merge these banks started in 1951..)

As the 5 remaining State Associate banks are going to merge with parent SBI, the blog has been interested in knowing more about these banks. The blog has put up some posts as well: one, two, three.

However, this amazing chapter drawn from Second Volume of RBI History (1951-67) pretty much sums up how these banks became part of SBI. The thinking on this process started almost as early as 1951 (more on this later in the post).

Moreover, it is fascinating to know that RBI counted 54 such State banks in 1952:

There were, according to the Bank’s admittedly incomplete count, fifty-four ‘state-owned or controlled’ banks (hereafter referred to as state banks or state-associated banks) of various sizes in March 1952. In the changed political conditions, governments of states as they were constituted in independent India came to inherit the interests which the former princely states held in these institutions. State banks varied enormously in size, with the Bank of Baroda which was the largest of them all having, for instance, deposits running into several crores of rupees. At the other extreme, the aggregate deposits of the Bank of Barwani amounted to a princely sum of Rs 3,000.

Apart from deposit differences, these banking institutions differed widely:

The integration of the banking systems of the princely states merging into the Indian Union acquired importance soon after independence. Several of these states had banks associated with them which discharged important banking and treasury responsibilities on their behalf. One of them, the Hyderabad State Bank was earlier a bank of issue in the Nizam’s dominions. Many of the other banks too, were important in their own right or were the most significant local banking institutions in the areas where they operated.

Inevitably, given the diversity of circumstance, forms of ownership, and organization, relations and functional arrangements between governments of the princely states and their associated banks varied widely. Some of the former princely states owned banks which they ran as government departments, while others owned a major portion of the share capital in their ‘state’ banks.

In a few cases, state-associated banks were almost entirely privately-owned, in one case-that of the Krishna Ram Baldeo Bank, Gwalior-by the ruler himself. Some states had banking arrangements with commercial banks and conducted treasury work, either wholly or partly, through government departments. Diversity also marked the constitution of these enterprises. Some state banks were constituted by acts passed or promulgated locally while the Bank of Baroda, notably, was incorporated under the Companies Act of the Baroda state. At the other extreme, the Bank of Patiala was set up by a firman of the ruler while the Sri Ramchandra Laxman Bank, Dungarpur, which too did not have a written constitution, was probably set up on the basis of a verbal order of the ruler.

Setting a bank on just a firman or verbal order!

The chapter does not give names of all the 54 banks. However, one could draw some names from the chapter. The names and their locations are as follows:

 

	The 7 State Associate Banks
1	State Bank of Hyderabad	Hyderabad
2	State Bank of Patiala	Patiala
3	State Bank of Travancore	Travancore
4	State Bank of Bikaner and Jaipur	Jaipur
5	State Bank of Mysore	Mysore
6	State Bank of Indore	Indore
7	State Bank of Saurashtra	Saurashtra
1	Other State Banks
2	Krishna Ram Baldeo Bank	Gwalior
3	Sri Ramchandra Laxman Bank	Dungarpur
4	Bank of Barwani	Barwani
5	Bank of Baroda	Baroda
6	Bhavnagar Darbar Bank	Bhavnagar
7	Bank of Rajasthan	Jaipur
8	Bank of Kurundwad (Junior)	Kurundwad
9	Bank of Sirmur	Sirmur
10	Bank of Bhopal	Bhopal
11	Mayurbhanj State Bank	Mayurbhanj
12	Bank of Bagelkhand	Bagelkhand
13	Manipur State Bank	Imphal
14	Sangli Bank	Sangli
15	State Bank of Dholpur	Dholpur
16	Jammu and Kashmir Bank	Srinagar

This is some list and still incomplete.  In 1952, Bank of Bikaner and Bank of Jaipur were seperate entities. So, we have a total of 24 banks drawn from the chapter. The names of 30 banks are still not there!

Rajasthan actually had 3 State banks. Bank of Rajasthan remained a private entity before being merged by ICICI Bank in 2010.

What is also interesting is that there was a Bank of Kurundwad (junior). Perhaps the name was kept as there was another Ganesh Bank of Kurundwad which was established in 1920. But then why the name junior was ascribed to a State Bank? It should be a senior bank, no?

From the above list, Bank of Bagelkhand, Manipur State Bank and Mayurbhanj State Bank were merged with SBI in 1960. Then Bank of Kurundwad (junior), Bank of Sirmur and Bank of Bhopal were converted into land mortgage and central/state coop banks

Many others not in the above list closed down as well. By 1969, we have following State banks (apart from the 7). The list has some names which do not feature in RBI chapter (size based on total assets and liabilities):

Name	Paid up capital	Deposits	Total Liabs or Assets	Loans and advances	Profits	Offices
State Bank of Bikaner and Jaipur	7993	564461	851753	430735	952	241
State Bank of Hyderabad	5000	525315	800351	453637	1330	182
State Bank of Travancore	10000	490461	720578	429347	-33	151
State Bank of Patiala	3500	531146	638072	354672	373	94
State Bank of Mysore	10030	490813	591250	364247	1510	124
State Bank of Saurashtra	10000	386833	519851	275209	198	94
State Bank of Indore	3500	260559	316535	151939	-182	56
Bank of Rajasthan	2000	160187	196889	52627	520	67
Sangli Bank	2509	159946	186754	86037	411	57
Jammu and Kashmir Bank	1137	83516	92823	16927	301	22
Benaras State Bank	1000	50214	74901	24042	71	41
Krishnaram Baldeo Bank	2500	33438	43817	16119	-42	6
Bank of Karad	542	20456	25873	13473	90	10
Miraj State Bank	600	19629	22502	10087	71	10

So three more names come up here: Benaras State Bank, Bank of Karad and Miraj State Bank. SBBJ was the largest and Miraj State Bank was the smallest.

It will be fascinating to add to the list.

The financial integration of Princely State Banks witcan h Indian banking must have been some exercise. The RBI chapter provides wonderful details.

AS said above the process to think about State banks and make them part of SBI started in 1951. The Rural Banking Enquiry Committee had (first?) proposed to merge 10 major and 4 minor State banks with SBI.

It was the political economy forces which kept the issue continuing to be discussed. The government wanted immediate integration under the same idea as touted today: Pan India bank. Just that we have added global to the tag as well. However, RBI wanted government to go slow on the move. RBI wanted SBI to be nationalised first and then gradually make these banks part of the SBI Group. RBI was also not interested in including all the State banks as some were really weak and so on. RBI wanted to play a wait and watch game and hopefully weaker banks will go away in time. This will make only stronger State banks to be a part of the SBI Group. It was this tussle between RBI and Government which went through a lot of discussions and few committees were set up to study the issue. Multiple plans were laid out.

But finally the State Reorganisation Committee in 1956 played a huge role. The boundaries of the erstwhile Princely States had to be redrawn and this impacted these banks as well. Parts of Hyderabad were to move to Karnataka and Bombay. SBH had branches in the both these areas as well. This led to confusion over the capital allocation between the two states.

Likewise there were issues in most of the major 7 Associate Banks. It was a slow gradual process. In a way RBI was partly successful as by then some of the weaker banks had indeed been merged, converted, liquidated and so on. RBI had to think about multiple issues like Associate banks having higher deposit rates, lower wages and so on. So it should not happen that SBI becomes unviable via the integration.

Another thing which tilted the game in favor of the government was RBI Governor Rama Rau resigning in 1955. He throughout his tenure raised concerns about a quick takeover of these banks.   The new management under HVR Iengar (who before RBI was a former chairperson of SBI!) was more open to the idea of integration. Central bank appointments are so crucial!

Even then, RBI had left an impact on the matter. A middle way was taken. Instead of plain merger with SBI, these banks were made subsidiaries of SBI. This appealed to the then promoters as the banks would continue to function. The functional autonomy and local character of these banks would be preserved (this continues till date). Accordingly, a bill was introduced in March 1959 and passed in Parliament in Aug-1959. Thus, this was the third banking nationalisation: RBI in 1949, SBI in 1955 and Princely State Banks in 1959-60.

What was also interesting was funding of these banks. RBI placed long term deposits with SBI which were then used to buy stakes in these banks. RBI placed a total of Rs 6.8 crores and was not happy that SBI did not raise funds by itself. Then later SBI said it shall pay just 1.5% interest on deposits after deducting costs of running these banks. RBI was not happy again and said should pay similar interest as paid to other depositors for similar tenure. The battles between RBI and SBI have been running ever since the central bank came in the picture. This one was no different.

Overall, just a fascinating account of political economy of Indian banking all through. It is just that there has been no follow up work done on these banks. We just know the RBI side of story. What was the thinking within different state banks? Even the period from 1960-2017 (2008 for Saurashtra and 2010 for Indore) has just been allowed to pass without much discussion on these unique institutions.

It is perhaps only in a country like India which is so rich in financial history, that we can allow such research issues to just go by and  be wasted…

 

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