What happened to Pakistan based Banks (West and East) during the Partition in 1947?

This question has fascinated me for a while.

During India’s partition, there were mainly two parallel forces at work. One was that of partition of India into two countries. Second was integration of British Indian Union with Princely States. These political fores partition impacted economic and financial developments as well. This blog is more interested in financial history/developments as there is hardly any emphasis on the same.

In terms of integration with princely states, the issue was of State Associate Banks. This blog looked at fascinating history of these State Banks which were 54 in number! How government and RBI integrated these banks which had varied structure is quite something.Out of 54 banks, just five remained. These banks were lately in news for their merger with SBI. With them goes the fascinating history as well. In case of Hyderabad, the integration also involved a monetary union of sorts as the State had its own currency (will blog about the exchange ratio soon).

Let us now look at the partition side of the story. Here, the case was of division of banks’ assets and liabilities.

There were two types of banks here:

  • First were banks which originated in Pakistan (West and East) and remained in these two countries.
  • Second were migration banks. There were some banks which migrated from Pakistan to India and others which migrated from India to Pakistan.

In this blog, I shall focus mainly on the first type banks and those that migrated to Pakistan. I will try and cover the banks that migrated to India later.

One dug out the names of these categories of banks from RBI’s Statistical Tables Related to Banks in India (1947). Within these categories, banks are classified on the basis of capital and reserves:

  • A1: Banks with capital and reserves more than Rs 5 lakh and included in RBI’s second Schedule. Thus called as scheduled banks.
  • A2: Banks with C&R more than Rs 5 lakhs but not included in Second Schedule.
  • B: C&R between Rs 1 lakh and Rs 5 lakh
  • C: C&R between Rs 50,000 and Rs 1 lakh

All A2, B and C are unscheduled banks.

Now let us see these numbers.

First let us see banks which originated in Pakistan – both West and East. Interestingly, East had more number of banks than West.

No of Banks
East Pakistan 22
West Pakistan 14
Grand Total 36

The story changes when we look at A,B category of banks.

A1 A2 B C Grand Total
East Pakistan 3 11 8 22
West Pakistan 2 2 6 4 14
Grand Total 2 5 17 12 36
  • In East Pakistan, 19 of the 22 banks were in B and C categories. Three are in A2 category
  • In West, we see 2 banks in A1 and A2 each.

Next bit is to see the impact on these banks during Partition. We will stick to deposits data and cover A1 and A2 banks of both regions. The data on B and C category banks is patchy.

The two A1 banks of West Pakistan are Habib Bank and Australasia Bank. Interestingly, Habib Bank was formed in Bombay in 1942. Jinnah had requested Habib Family to open a bank to reach out to Indian Muslims. Jinah saw the importance of having a muslim run bank as most banks were with other communities. Post Partition, Jinnah again requested the bank to shift its base to Pakistan. Again the family obliged and shifted to Karachi. It is perhaps the only bank which did this. The bank was nationalised in 1947 and privatised in 1915.

The financials of these two banks looks like this (figures in Rs thousands):

 Foundation Date Capital Reserves Deposits Profits Total Liabs/Assets Loans Total Branches of which Branches in Pakistan
Australasia Bank Lahore 03-12-1942 1945 500 2 3098 20 3794 905 4
1946 500 5 3868 29 4666 1252 7
1947 673 11 7728 19 9963 3378 11 5
Habib Bank Karachi 25-08-1941 1945 5000 750 57343 366 69330 5820 12
1946 5000 2500 122442 1677 143081 17160 22
1947 5000 2500 266158 1492 321158 55058 28 8
1948 6250 2500 324689 3245 371748 76553 31 9

Interestingly, both the banks increased in size post-Partition. With Habib bank, one would expect that as it had strong State backing. But it seems depositors rallied with Australasia Bank as well.

Habib Bank just had 9 out of 31 branches in Pakistan. So the transition must have been something. It also makes steady profits in the period. Habib bank size increases by 6 times (and Australasia Bank by 3 times) during a period, one would expect banks to shrink dramatically.

Now to the A2 banks. Here out of a total 5 banks, we just have data for 2 banks:

Capital Reserves Deposits Profits Total Liabs/Assets Loans Total Branches of which Branches in Pakistan
Central Exchange Bank Lahore 1936 1946 489 85 2670 -1 3287 1571 4
1947 489 85 3663 2 4303 2165 7 6
Faridpur Banking Corporation Faridpur 1870 1946 939 376 383 25 1914 974 3
1947 939 381 317 20 1732 717 3 2

Here, one is West Pakistan based and other is East Pakistan based. We see rise in size of Lahore based bank but decline in Faridpur based bank.  Both these banks has most branches in Pakistan areas only.

One also got some data of B and C banks. For sake of brevity, just including the deposit data of these banks:

West Pakistan Deposits
B Sind Commercial Bank Karachi 1946 972
1947 194
 
B Sind National Bank Sind 1946 3295
1947 831
East Pakistan
B Sylhet Loan and Banking Co Sylhet 1946 967
1947 818
C Allied Bank Dacca 1946 1463
1947 1413
C Bengal Union Bank Chandpur 1946 1914
1947 1274

We see decline in deposits in both, Sindh based banks and East Pakistan banks. Was the decline in East Pakistan banks due to complete lack of support from political establishment which was primarily interested in West Pakistan? But then we see decline in Sindh based banks as well. So there is more to the story.

The data is patchy and we need more data to understand the trends.

How about comparing this data with Indian side banks? We just pulled data from 3 A1 banks which were based in India – East Punjab and Delhi.

Class Name Location Deposits Branches in Pakistan
A1 Punjab and Sindh Bank Amritsar 1945 29714
1946 31609
1947 21492 11
A1 Punjab Cooperative Bank Amritsar 1945 20067
1946 19139
1947 15641 3
A1 Punjab National Bank Delhi 1945 515246 196
1946 620230 279
1947 596400 275 79

Interestingly, we see decline in deposits in all three banks. This despite India having a central bank. Though, RBI was a central bank for both India and Pakistan post-Partition till latter formed its own central bank. But it must have been easier to provide funds to Indian side banks. So it seems the political support really worked for West Pakistan banks like nothing else could.

PNB had 79 branches in Pakistan. This is not surprising  as PNB started from Lahore in 1894. It moved to Delhi in June 1947 before the Partition.

So, on one hand we see Habib Bank move from India to Pakistan. On the other, we see PNB move from Pakistan to India. Habib Bank was supported by political forces and grew during partition. But PNB declined as perhaps there was no such political support.

Infact. all these three banks continued to decline till 1950-51 before recovering. We don’t know similar figure for Pakistan based banks.

All this is fascinating bit of history much of which has been lost. There is a lot of literature on tragedy of 1947 from a political lens but very little from a financial lens. Looking at these numbers tells you a lot about several forces at work. This is just one simplistic attempt to look at the subject…

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