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|
The story changes when we look at A,B category of banks.
- 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|
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|
|Faridpur Banking Corporation||Faridpur||1870||1946||939||376||383||25||1914||974||3|
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:
|B||Sind Commercial Bank||Karachi||1946||972|
|B||Sind National Bank||Sind||1946||3295|
|B||Sylhet Loan and Banking Co||Sylhet||1946||967|
|C||Bengal Union Bank||Chandpur||1946||1914|
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.
|A1||Punjab and Sindh Bank||Amritsar||1945||29714|
|A1||Punjab Cooperative Bank||Amritsar||1945||20067|
|A1||Punjab National Bank||Delhi||1945||515246||196|
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…