Amol Agrawal on the Bankers who Built Modern India

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University. 

Today my guest is Amol Agrawal, who is the author of History of Private Banking in South Canara District (1906-69). He teaches economics at Ahmedabad University and blogs at the excellent blog Mostly Economics. 

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts.

Hi, Amol, welcome to the show. It is such a pleasure to have you. I have been a fan of your work for so long.

AMOL AGRAWAL: Hi, Shruti, it’s an absolute pleasure to be on this podcast. I’ve been hearing you and the podcast for such a long time. I’m a big fan of your work and how you go about getting all these guys around and talking about them and taking these thoughts from them. 

History of Private Banking in India

RAJAGOPALAN: It’s all thanks to folks like you who actually write really good papers and books. The book is right here. I’m talking about the “History of Private Banking in South Canara District (1906-1969).” It ends with bank nationalization. Before I get to the book, I also follow you on your blog, which is a prolific blog. One of the few I actually go to and actually read very frequently. I want to pick your mind as not just a historian of the banking system in South Canara, but you also know a lot about the banking history of India.

Before we get to South Canara, can you tell me about the kind of private banking industry that we’ve had since, let’s say, the mid-18th century or something like that? Most people they call them money lenders, it’s indigenous banking, informal banking. I hate all those words, you probably know why. Because the idea of this formality versus informality is completely a colonial idea, but at that time, we had the famous like Oshwal Jains from Nagaur, Rajasthan. There’s the famous Jagat Seths.

We’ve had Surat Sarrafs we’ve had the Multani Sarrafs we’ve had Nattukottai Chettiars, and then, of course, we’ve had private banks in Bengal, which are modeling themselves around the British banks that come in. Then finally, the South Canara region, which you document so well. Can you just walk us through—take as much time as you need—but sort of this long arc of private banking?

AGRAWAL: Yes, okay. Now, this is really a big question. In fact, I did a podcast with Puja Mehra on the private banking evolution.

RAJAGOPALAN: We’ll link to that too.

AGRAWAL: Just to summarize that in the time. 1770 is when we have the first records of banking in terms of Bank of Hindostan after the 1757 Battle of Plassey. These agency banks come up but you’ll have these managing agencies, and they see that India is not like the other colonies where you don’t have people, there are places in which there is already business and so on. All they have to do is to start setting up enterprises and start trading.

When you start trading, you start thinking about finance, and the British start coming in here. Salaries have to be paid, salaries have to be remitted back home. You start thinking about banking institutions. There are records by Amiya Bagchi. In fact, there’s a very promising person who could be on your podcast in Q2 who’s working on Parsis and banking, history of Parsis.

RAJAGOPALAN: Oh, fantastic.

AGRAWAL: He’s a Mumbai University student. I just met him. He gave me some records. In fact, I told him about your blog. I’m also parallelly pitching your blog to other people so that they come and talk because it’s such a—

RAJAGOPALAN: You’re so kind.

AGRAWAL: —fascinating platform. He showed me some records about some banks being there in 1720 and all that. Now, there is Amiya Kumar Bagchi’s work and other works which do suggest that banks existed before 1770 but the RBI Museum and whatever recorded history they have, The Bank of Hindostan is where we know that banking typically starts. We have records from the RBI museum of that. Then couple of these banks start setting up in Calcutta because Calcutta is where things start right then.

1799 is when you have the battle with Tipu Sultan, the final one, in which there are major losses. Just like Bank of England was set up because of these Anglo-French wars, the British got this idea that you need to set up a bank in India too in order to finance the wars and so on and so forth in future. 

1806 is when the first Presidency Bank of Calcutta comes up, which is then converted into Presidency Bank of Bengal in 1809. Once this Presidency Bank comes up and you have some of these managing agency banks, Calcutta starts to become some kind of a hub of banking. Rabindranath Tagore’s grandfather, Dwarkanath Tagore, set up a bank, Union Bank.

RAJAGOPALAN: Union Bank, yes.

AGRAWAL: Accordingly, there were some of these guys who come up and they set up these banks largely in partnership with the British, because at that time, you didn’t really understand the banking system. And as you said, the indigenous banks and money lenders they’ve already been here. The British are trying to understand what’s going on here and then they call all these agencies which are Indian agencies as indigenous banks and whatever is set up on the British line as some joint stock or commercial banks and so on.

In Calcutta there is the jute market, starts to pick up here and there’s a shock, like all commodity shocks. Some of these banking setups are not even set up on the right kind of prudent banking norm that we understand today. The capital norms are not there and so on. A lot of these banks closed down. 1840 is when the Bank of Bombay comes up, just like the Presidency Bank. And then 1843 Bank of Madras comes up. By then Bombay is gradually shaping up as one of those commercial hubs and the British are also trying to shape it in some way.

1861 is when the Civil War in America starts and the cotton boom shifts from U.S. to India. Again, a lot of banks come up in Bombay at that time, just to facilitate this kind of trading. The Civil War ends and the cotton boom in India ends, and just like all the other booms, the banks also collapse here. We have this very famous case of Bank of Bombay actually also collapsing. Very quickly, the old Bank of Bombay is closed down and a new Bank of Bombay set up by the British, because Bombay by then had become very important center.

There was some interest in banking but it recedes because you see large number of failures and so on and so forth. That’s what Professor Dwijendra Tripathi in his business history book has been telling us, that there was a general lack of interest in banking. We have in 1880s Allied Bank of Shimla coming up, 1894. 1865 is also the oldest bank, Allahabad Bank which comes up. 1894 is when we have Punjab National Bank, which is the first Swadeshi bank, which was just basically set up by the Indian nationalists—no partnership, nothing and set up in Lahore at that time.

We have the Bengal Swadeshi movement, where the Bengal Swadeshi movement in 1905 leads to this interest in Swadeshi capitals, Swadeshi businesses and Swadeshi banking. That’s also the period where the first set of South Canara Banks come up 1906. There, again, there is a big rush for banking, Punjab and Sindh Bank comes up at that time. Central Bank of India. But all these big banking entities start to come up, some of them also fail.

All this while, the British are just interested in the Presidency Banks and not too worried about the general banking in India but there are some large-scale failures in Punjab region at that time in this after the Swadeshi movement gets petered down. 1913 is when the British start to first time document the state of banking in India. There is a publication of statistical tables related to banks in India, which still continues till today. That is set up in 1913. That gives us some understanding of the number of banks in the country, what capital they have, what deposits they have.

Gradually, this is done under the government at that time so we start getting some information about the state of banking in the country. 1921 is when these three presidency banks are merged into an imperial bank, which goes on to become State Bank of India when it’s nationalized in 1955. In this period, what we are generally seeing is that there have been waves of bank rises and bank failure. Again, we see the same story.

In 1920s, discussion around RBI starts to come in after the Hilton Young Commission and then the British also set up central banking inquiry committee. The central banking inquiry committee is basically to understand the banking developments in British India. Parallelly, what happens is that some of these princely states like Baroda and so on and so forth, they also set up their banking inquiries, and that also acts as a ready portal for us to understand what was banking like in some of these places.

1935, RBI comes in. Finally, RBI established. The banking developments move from the government to the RBI and once RBI gets the handle of it, RBI realizes that there is no formal definition of banking. In all this while, even though British had started documenting the number of banks, there’s no definition of banking. So first time RBI starts to defines a bank.

Before RBI, the banks are divided to two categories: A category and B category banks. A category banks are those with capital more than five lakhs, and B category is less than five lakhs. When the RBI comes in, it realizes that A category is not necessary that if your capital is better than five lakhs, you are a safe bank. RBI Act has a second schedule under which the good banks will be part of the second schedule. RBI starts to clean up the banking system. In the B category banks, now you have B, C and D, right? It says that capital less than five lakhs to one lakh, one lakh to 50,000, less than 50,000 at D category banks to the very small bank.

The British was not really collecting all this data. RBI comes in and you see a significant change in that publication with RBI publishing. You suddenly see expansion of number of banks, and you have banks all around the country, very small banks in the south, loan banks, loan offices in the east. There are all these different nomenclatures of what we call a bank. Then ’47 is when independence happens and ’49 is when Bank Regulation Act comes in. Before Bank Regulation Act comes in 1938, we have this major bank failure, Travancore National and Quilon Bank.

Where RBI realizes that it does not understand banking as much, it understands banking, but it needs a separate regulation. Because RBI Act based on Bank of England Act did not have adequate regulatory power. The discussion started to have a separate banking regulation act, but that didn’t happen. In 1949 is when the Bank Regulation Act comes. When Bank Regulation Act comes in RBI starts to clean up the banking system much more formally. In 1935 to ’49, it’s up to you whether you wanted to be supervised. RBI couldn’t force you to be supervised but after that, every bank had to be supervised. And then RBI starts to clean up the system.

Between 1930 to 1960s, we see about 2,000 banks failing, merging, liquidating and all kinds of things are done. What also happens is that after 1949, another major event, which comes in is the Palai Central Bank fail in 1960, again, at Kerala-based bank, which fails. At that time, despite RBI’s best efforts, the bank failed. RBI decides, and at that time, you had no choice but to liquidate the bank and the depositors then had to wait for a long time.

Then RBI worked out an arrangement at that time, which is used in the banking system today where you put all these banks under this protocol where the deposits are frozen. The depositors can only withdraw some 5,000 rupees, 10,000 rupees based on the balance sheet, and then the RBI tries to find somebody who can buy the bank, and as a result, stabilize the bank. Banking is all about history. About understanding this longer connect. We finally come to ’69 is when banks are nationalized and that’s a major turning point.

Lending and Deposits

RAJAGOPALAN: Before we get to the modern part of it, nowadays we have a very interesting banking system where there’s a lending function and a deposit function, which is necessarily under the same umbrella, right? That was not the case before. There were money lenders who lent, and these were typically rich landlords, or they were sometimes even relatives or monarchs and things like that. Then there wasn’t much of a deposit function. There were things like chit funds, but the chits were relatively small portion of the market.

The largest portion of the banking function was seigniorage because each bank was essentially issuing its own notes and its own currency. When I think about the history of banking, especially after the East India Company, the way I think about it is the deposit function was never really that important, so they just kind of left it to chits and indigenous money lenders. The lending function was very important and the Indian bankers were making a killing lending to the East India Company to finance wars. That was one impetus to start banks so that they could actually finance their own wars.

The even bigger function is the seigniorage function which is the East India Company very deliberately starts spreading rumors and talking about debasement that’s taking place across the different saraffs and different private banknotes and coins that are issued in India. This is happening in the early 19th century, somewhat. Is that a good way of splitting this up, like thinking about that, that the deposit function really only comes in post independence as a very important banking priority? Before that, these things are quite separate.

AGRAWAL: Well, that’s a very, very interesting question. In fact, I’ve been thinking about it, and as you rightly said, you earlier had these types of banks of deposit. You had loan offices which were specifically looking at—obviously, the deposit activity was never really paid much attention to, barring British remittances and that’s just a transfer function. But that concern for deposits was never really there. It was mainly around loans.

It’s only when the nationalist movement starts to pick up and you realize that you need to also channelize these deposits, is when you start thinking about banking as also a deposit activity, which I explain in my book how all these South Canara Banks were largely focused around deposits and so on and so forth. Because they understood that this is the way to which we can finance the Swadeshi movement and so on and so forth and the Swadeshi Enterprises.

This whole idea of looking at bank as just a silo thing where both deposits and loans are there, this is not how banking has originated. And yes, we’ve had all these banks which issued currencies, currency notes. Before 1861, you could pretty much issue your own, then the Paper Currency Act, which unifies the currency. In fact, the Presidency Bank also used to issue their own currency, which was taxed as a seigniorage for the East India Company.

Then once the Paper Currency Act comes in and this currency function is unified, it’s an interesting thing that in the Presidency Banks also what they do. Before this, the branches are not allowed. After 1861, you allow these Presidency Banks to set up branches because the idea is that the liability of the banks which mainly comprise currency, since that currency is now taken over by the government and deposits were not really there, so the government decided that it will deposit its own money in some of these major centers of wherever they set up these branches.

All these Presidency Bank branches were set up in these major trading centers, major commercial centers, major political centers, where the government had either some political center or something or something where the government could deposit in order to let the bank function. There are obviously all these very interesting changes which have happened over a period of time that form a loan focus to bringing deposits into the picture. And as we are talking, again, we are seeing this very interesting picture in Indian banking today that the deposit growth is lagging behind the loan growth, and there’s a lot of discussion around it. 

Industrial Development and Banking

RAJAGOPALAN: This also brings me to the idea of what comes first. When I was reading your history of South Canara, normally, one would think that industrial development comes first and banks follow industrial development, because the moment you have industry taking off, you need people—it’s a fairly long production chain, there is trading activity—so you need people to actually lend money for a short period of time and then pay it back and so on. And banks come in to serve that particular function. When I was reading your history of South Canara district, I figured that what happened in that region alone is the opposite.

It’s a highly agricultural area, there are these agricultural surpluses. The weather is fantastic so there’s really no problem when it comes to famines and droughts and things like that. It is really the T.M.A. Pai family that figures out that, “Oh, we can get industrial development if we start training people and lending to people for very specific things.”

Now, of course, we know the famous Manipal education system, comes from them. Even before that, they gave money for people, for fisheries—I have family members who worked at Syndicate Bank, so they told me—for an ice factory. Because there is a big seafood industry so maybe it makes sense to have an ice factory. Maybe it makes sense to start giving money to people who are making Mangalorean tiles and the smaller factories that come around that industry and so on. Here I figured it’s the opposite. Is that a good way to think about this difference? Are there other bankers like the Pais who also brought in industrial development through banking?

AGRAWAL: Before answering that, maybe I’ll just go back to what really interested me into this topic. I was working on one of those Ph.D. courses, international trade term papers. I wanted to look at development of financial centers as to how international financial centers come up. There was a paper which discusses that just like your international trade center, the international financial center so there’s a lot of history.

I’m going through the IIM Bangalore library, and I see this pile of books on Syndicate Bank written by Dr. Thingalaya and where he’s pointing out some of these things. All these years, I worked as an economist in Mumbai but you do come across Kamath, Shenoy, Pais, but it never strikes you that they’re all from the same region. That’s where banking has started.

I started looking at it and I realized that’s a very interesting area of research. As one probed in deeper, you realize that when you look at the Indian banking system—and especially ’69 is when I end—when you end at ’69, you see that 14 banks are nationalized, in 1980 another six, so 20 banks are nationalized. Out of those 20 banks, you see that there are four from Bombay, four from Delhi, three from Kolkata, two from Madras. One would imagine that in these 20 large banks, you will automatically see that they will come from these main commercial centers.

In this, you have four from South Canara, which is equivalent to Bombay and more than Madras. Only two came from Madras, whereas South Canara was part of Madras presidency. That leads some to an inquiry saying that, as you rightly said, it’s basically the trading centers which lead to development of banking. It’s very difficult to argue what comes first. One would generally imagine that trading starts first and then banks start to happen.

Here we see the opposite, as you rightly said, and when you go in deeper, you realize that they set up these banks first to promote. Obviously, that goes back to the Schumpeter argument where he said that you can have these banking entrepreneurs come up in these rural areas or these local areas who could set up banks to promote industrialization. That’s what some things which come in this history of South Canara banking and why it’s such a special region on what it does. 

Now coming back to your next second question as to whether there were other regions. Now yes, we do see which I have tried to document that there were some of these banks which came up in Kerala also in that region, Malabar Travancore, Cochin.

Then they couldn’t really cope with the banking developments and banking changes. They remained asset funds. They call themselves banks but their operations remained asset funds and so on. They didn’t really expand as the South Canara banks expanded which, in several ways, impeded some industrialization or the activities which the South Canara Bank could promote in South Canara.

That kind of an initiative does not come in the other region. Then I also document about Coimbatore which had Nidhis. Now the Coimbatore is a major textile area and there the industrialization is happening before. Then these entities come up, but none of them really work. All these banks basically closed down. There’s obviously something about South Canara banks to not just industrialization but doing the banking practices which became much of India’s focus after 1969 in terms of financial inclusion and all that.

A lot of the South Canara bankers were able to do this without any government mandate. They were basically doing inclusion, they were promoting small industries, they were promoting agriculture. It’s a very fascinating story.

Bank Runs in India

RAJAGOPALAN: This is going to be a bit of a long and complex question because the book and everything you’ve written on banking is so rich. When I think about bank failures, there are a few different reasons. One is just banks lend to industrial sector, so they ebb and flow with the business cycle of an industrial sector. If there’s the Civil War, you may have cotton trade which moves. When that cotton trade moves back, you suddenly, the banks that are lending through cotton trade collapse and so on. That is one bank run. 

A second bank run is a classic depositors run. There is the idea that a bank has a solvency problem and a liquidity problem, and that rumor turns the liquidity problem into a solvency problem. This is your typical Frank Capra movie bank run that you think of.

Then the third bank failure is because the central bank has not appropriately regulated a bank potentially. We have more examples of that in very, very recent times—Global Trust, the troubles that were there with ICICI Bank, Punjab National Bank, so on.

To me, it seems like India has never really had too many of the bank runs of the second kind, the Frank Capra kind. Is that because the depositors were never a large enough group to deposit funds? We never had a broad-based banking system, so that was always Hundis, chit funds. Those were ebb and flow, but they were not integrated into the global banking system. There was no run, there was no systemic risk.

India has really only faced the industrial sector-related bank collapses, and then, of course, the government lack of good supervision by the RBI kind of bank collapses. That’s part one of the question, and then I’ll ask you part two.

AGRAWAL: No, it’s again a superb question. I wish you were one of my Ph.D. advisers. One could have looked at these things in more detail. The bank runs, I think we’ve seen, as you rightly said, we do see in the early 1910s, there’s a famous People’s Specie Bank, if I recollect, which speculated in commodities. As a result, as you rightly said, the commodity cycle went down. Then we’ve seen that in the past, also with the jute and the cotton, that these commodities go down.

The Travancore National Quilion Bank is a bank run which is forced by the diwan of the region who had some conflict with the owners of the bank, and he didn’t like them. He started pushing some bad news about the bank, which one can argue was partly some a depositor-based bank run because the bank did not really have that asset problem. Palai Central Bank is a long-standing problem which happens because of the RBI wanting the bank to sort its ways, and then the bank does not sort its way. It’s more of a government problem with the bank.

The bank is not willing to learn, and RBI has understood the banking regulation very well by that time, but it’s not willing to mend its ways. And I think partly also because we had deposit insurance fairly early on 1962 is when we, after the Palai Central Bank failure—after U.S., we were the second country to introduce deposit insurance. Then once banks are nationalized, that also—

RAJAGOPALAN: There’s a question of runs.

AGRAWAL: —that also takes care of the fact that this depositor-based runs will not happen. Even when we’ve had these recent YES Bank or Lakshmi Vilas Bank failures, RBI was very quick. One can always debate with RBI, it was quick or slow. As RBI figured it out. It forced these banks to increase their balance sheets and then just allowed them to deposit and very quickly found the buyer. In YES Bank’s case, it was a consortium of buyers, which now we are seeing that they are exiting from the bank.

Again, I think it’s just, firstly, one thing which comes across in banking history is that despite it being very rich, the records are still very scanty. If one wants to, let’s say, investigate the number of bank failures—the 2,000 from 1913 to ’65—one doesn’t get bank records. The British who are recording all this information, by nature, will not really write about bank runs and so on and so forth, because that’s happening largely because of their poor policies and all that. That does not come across, and the archiving, that’s been a long-standing problem with all of us. Barring these British reports, we don’t really have archives.

This student who is doing his Ph.D. on banking history, he’s also struggling to get records. If one has to investigate some of these failures, the 2,000 bank failures in that period, whether it was because of runs that were happening, we really don’t know. I mean, with a lot of confidence as to whether it was just the commodities or whether we saw some depositor-based runs and so on.

Success of South Canara Banks

RAJAGOPALAN: The reason I asked that as part one of the question is, to me, when I was reading the book, it seemed like between 1925, when we’re really talking about setting up these banks—Syndicate Bank, particularly, before that, there are other banks in the region—up to, say 1960s when we get deposit insurance, I feel like one of the reasons the South Canara region did so well is it’s one of the few banking areas which figured out how to deal with depositors. Because everyone else is really relying on industrial clients and there is stock market speculation which is coming in a big way, even pre-independence, and the bank failures are really being caused by the ebb and flow of that. Whereas these guys are quite different.

RBI, in a very derogatory way, says, “Oh, they like quantity over quality and all these other sorts of things.” It seems to me like the Canara folks are the first ones who really figure out how to deal with depositors and small depositors and diversify that pool of risk.

AGRAWAL: That’s absolutely the case. In fact, Syndicate Bank starts also with this idea. They started early, in 1945, but ’28 is when T.M.A. Pai figures out the pigmy deposit scheme and you wanted to really reach out. I couldn’t find records but when I spoke to some of the folks, they said that during this Great Depression phase, there was this concern over the bank, but because of the fact that the bank really gave banking facilities to people who had no such facilities, they reposed their faith into the bank. These are all small-time depositors, really far and widely spread.

It’s not really the case that one big deposit or a couple of big depositors could really cause a problem. These are all very small folks with very small savings and because of the fact that every day there was this deposit collector who was going to his people, there was a lot of faith. They could create that vital five-letter word trust with these guys. We had the Presidency Bank of Madras, which set up a branch in Mangalore, but it was not really very active. It was only giving loans to some big British merchants and all that. For the first time, you turn around the story saying that banking is largely urban, metropolitan and so on and so forth, driven to very rural. There are others who also do this, but the South Canara folks really figure these things out. Their strategies and their ways of reaching out and saying that, “Okay, nobody had trust in you. We opened this bank and we gave you all these facilities.” 

Whenever that push came to shove, wherever there were all these concerns, all these bad news, the South Canara banks were doing completely fine. Moreover, also the loan book was not really tied to the big industries, but again, to the small folks. They could really create some circular economy and a productive one around the South Canara region, which they benefited from.

Systemic Risk in South Canara

RAJAGOPALAN: When I think of the South Canara region, again, there are now potentially two kinds of systemic risk. Let’s compare the South Canara Syndicate Bank to something like the Mangalore branch of the Presidency of Madras Bank. One systemic risk is you are plugged into the global supply chain and therefore, in some sense, you’re plugged into the kinds of business cycles that affect the global trading and banking system which could then come home to you. Basically, what’s happening in the Great Depression in the ’30s, it starts infecting a number of banks. It finds its way all the way to Bombay and Surat and you see bank failures at those of trading posts. 

A second systemic risk which we see much more in modern India is agriculture-related. If you have large number of people that you’ve given loans to, who are all in the same agricultural area, and if there’s a big drought or a crop failure, then suddenly, all those loans are going to fail at the same time. Now, the interesting thing is Canara Bank’s customers look like the latter. They’re not plugged into that big business trading post global chain. It’s really the small-scale farmers, landless farmers sometimes we’re taking small loans to actually go on.

They never have this systematic agricultural crop failure-lead risk. The question there is, is it because that region just didn’t have any agricultural problems like droughts, it was just a very fertile region with good rainfall? Or is it because they managed to figure out how to cut through that systemic risk and not have that become an issue?

AGRAWAL: It was both. Obviously, the rainfall of the region was very consistent. You really didn’t have drought, and all these adverse weather shocks which are apparent. You really didn’t need a canal system here, you didn’t really need water system here. The rainfall was adequate and good enough for you to plant crops and deal with it. 

Then the bank’s strategies which is obviously learning by doing, because there’s no rule book over there, where you understand that you’ve got to really lend to large number [of people], [at a] small value, which in several ways diversifies the risk compared to other places which are clued into either the wider India shock or a global shock. Some of those things did not really affect the South Canara bankers.

RAJAGOPALAN: They must have had floods, right? You have cyclones, you have floods. It is, at the end of the day, a coastal region. Now, too little rainfall is a problem, but too much is also a problem. Is it just a question of good luck and being in a great region? They must have done something in terms of their risk management. Did they have a risk management officer? Something must be going on with them, right? 

AGRAWAL: One thing is obviously there, that they’re also very early on, they are trying to diversify away from South Canara, right?

RAJAGOPALAN: Yes, that’s true.

AGRAWAL: They are open to the fact that we need to move to other regions. They are open to buying banks, merging banks from other places. Because of their track record, even the regulator is quite happy that the South Canara banks are merging some of these—after the bank regulation that comes in and some of these south-based banks. Obviously, they are not just based in South Canara alone. They are gradually trying to diversify and move on.

I didn’t really come across records of a flood or something because what we have is the balance sheet data. When you look at the balance sheet data, it comes across as if it’s some magic going on where everywhere there are these banking troubles, but this region pretty much, especially the Canara Bank, Corporation Bank, Syndicate Bank, they pretty much manage it in a very effortless way, if one can use the word. But I’m sure there is a lot of strategizing and a lot of thinking through some of these things, opening branches in strategic places, understanding the crop patterns because they are deeply connected to the roots.

They understand what’s going on. TMA Pai, because he’s a doctor, so he understands the region. He pretty much is treating every patient over there. He’s the only doctor in the region, the second doctor in the region, and his mother wanted him to stay and he stays, he wanted to go. But as destiny would have it, his brother sets up the bank and then he realizes that, “Okay, I understand this medicine, but I see a lot of poverty around me. I see that people don’t have even basic money to have basic treatment. What can I do?” Those are some of those fundamental questions they’re asking. They’re trying to work around them. Obviously this trust, I think, is a big deal there. Even today—

RAJAGOPALAN: Absolutely.

AGRAWAL: —after nationalization, 50 years down the line, you go to that region and you ask people about foundation branches, there is a lot of pride in the fact that when this Vijaya Bank was merged into Bank of Baroda, there were a lot of protests in that region because that’s their identity. Again, it’s also the promoters. They played a major role. They were all these guys who were eminent individuals who had a lot of respect in the society. That also shaped all these. Even if there were these floods, there were this and that—I do show that there was some of these banks because there were 22 banks that came up in the region.

RAJAGOPALAN: Yes. That was the follow-up. What’s the secret sauce that Syndicate Bank had? Even though in that region, there aren’t major failures and catastrophic events and things like that, but Syndicate Banks still seems to have done way better than the other banks to the extent that eventually, I think about 20 or 22 banks get merged with Syndicate Bank, something like that. It actually becomes bigger and bigger and it’s stabilizing potential banking failures in that area.

AGRAWAL: Absolutely.

RAJAGOPALAN: What is it that they are doing differently?

AGRAWAL: Again Syndicate Bank with the T.M.A. Pai factor where he is one of the most respected individuals in the region. Everybody else tried to open up banks. Another thing about South Canara, it’s a very cosmopolitan area. There are a lot of people who are there. Everybody sets up a community bank. There’s a Pangalai Bank. There are all these Pai money banks. There are many banks which open up in this region catering to a particular community. A lot of these, again, the promoters are well known to each other.

Banking is not something which is everybody’s cup of tea. You can set up a bank but then you’ve got to be very vigilant to the fact that you have to raise capital consistently. You have to basically follow certain prudential norms, which obviously at that time, RBI did not come up with any of these norms, but it’s learning by doing. They understand what leads to stability in banking and so on and so forth. Whereas all these others who set up these entities, they’re not raising capital.

They are giving loans to all kinds of different people who may not be giving back loans. Then very quickly each time—this is another feature—of the 22 banks, 17 don’t do too well. All these 17 are merged by the South Canara Bank. They were playing an RBI role where if there’s a bank in trouble before it comes to us, let’s just buy this entity and move ahead.

As a result, Syndicate Bank and Canara Bank and all these guys, they merged most of these South Canara Banks themselves. That did two things. Firstly, it prevented some kind of a bank failure in the region, which could spread. Another thing was that other regional banks could not come to South Canara region. In that sense, they could also prevent some kind of competition. The South Canara Banks are very aggressive. They were very okay with the fact that didn’t go to other states and merge. Multiple things they do over a period which prevents some of these failures from happening.

Banking Castes?

RAJAGOPALAN: How important is caste and community in this entire setup because if you look at the history of, as they call it, indigenous banking, again, it’s a phrase I don’t like. They talk about the marwaris. That is a very tight-knit community. Everyone knows everyone. A lot of the lending is done based on trust. The same is true for the saraffs from Gujrat. The same is true for the chettiar community where there the caste plays a really important role, especially because they’re trading overseas. They start setting up trading posts in Malaysia and Singapore and Indonesia and that maritime trade in India. 

On the face of it, the South Canara banking system looks extremely modern. It doesn’t look like that typical caste community trading relationship. It seems like they’re willing to trade with strangers. But at the same time, if you look at the list of promoters and the banks that are merging with them and things like that, it does seem like there is some caste and family and community network at play. So how do you view that region?

AGRAWAL: People who looked at the banking of South Canara, there were all these folks like D.V. Bhat and so on who look at the banking, and D.V. Bhat was one of the Syndicate Bank executive directors, so he tries to get this message around about the Syndicate Bank and one of the researchers also called it a bank which had this indigenous banking caste network, but in terms of balance sheet, it was very modern.

That’s a very unique combination which they could figure out that, yes, they were open to trading, but I think all their main appointments were largely the local caste, and so on and so forth, that the Goud Saraswat Brahmins played a major role. Most of these, the Corporation Bank which was set up by one of the Muslims, by one of the very foremost members of South Canara region, but then the Corporation Bank over a period of time was managed by Goud Saraswat Brahmins.

Obviously, there was this caste network, but then they don’t really overplay that too much. They are very careful that at the end of the day, this is not just a caste-driven thing, it’s a banking thing. We have to raise capital, we have to build more branches, we have to be very careful with our loans and where the deposits are going, and so on and so forth. 

They are in this very interesting unique combination of combining the goods of indigenous banking with the modern joint stock banking. That’s a very rare and a very unique combination. And another thing is that, historically, the bank is more connected to the Bombay region, so the South Canara region is closer to Bombay, though it is included in Madras Presidency.

RAJAGOPALAN: It’s also because it splits, right, the Canara region splits and the northern part goes to Bombay.

AGRAWAL: The northern part goes to Bombay. These are all very interesting snippets that there is no bank which comes up in North Canara despite it being a very similar region. It’s only in the south where all these activities concentrate, so we do see that in records of these South Canara Banks that they are extremely excited about the fact that we will open a branch in Bombay, it’s not Madras.

For them, they highlight the main point—because there is some learning happening. We do see that in the case of Canara Bank, it was initially called the Canara Hindu Permanent Fund when it was set up based on Nidhi. Because the Subba Rao Pai who set up the—he was a lawyer who studied in Madras, he understood that Nidhi is from that region. He set it up as a Canara Hindu Permanent Fund, but then there was a promoter of the region, or there was a well-wisher from the region in Bombay, or well-wisher of the bank from Bombay who was known to him, who told him, who advised him to call it Canara Bank. So there is some discussion. They’re actually watching the Bombay guys as to how they’re doing banking in terms of balance sheets, in terms of all this.

They’re very careful that you also can’t upset this caste network and so on, because that was very crucial to their function. The balance sheet should look like Bombay, and whereas it should look like a local bank, it’s a fantastic combination to have.

What was the RBI so wrong about with South Canara banking?

RAJAGOPALAN: Yes, of course, everything comes to head in 1969 when these banks are nationalized, but from the very beginning, Syndicate Bank precedes the Reserve Bank of India. But from the 1930s onwards, when you start having these committees, which are looking at the banking system in India, then, of course, you have officially the Reserve Bank of India, there’s this constant tussle between the reserve bank and the South Canara Banks, because it’s almost a derision, they feel like these guys don’t know what they’re doing. Some of that derision comes from not having sophisticated depositors, I guess, or like sophisticated borrowers. 

AGRAWAL: Even promoters.

RAJAGOPALAN: Even promoters, yes, exactly. They’re not coming from like these major industrial families or like these long-term banking families, and they’re also not lending to these really big businesses. There are these weird things like quantity over quality, which one would think from a central bank’s perspective is you want, a large number of small deposits. It’s a great way of pooling risk, but that’s not how the RBI is viewing it. 

What is the RBI getting wrong about the South Canara region? Is this just one of those instances where a bunch of elite bureaucrats simply don’t understand what’s happening on the ground? It’s like James C. Scott’s “Seeing Like a State.” They don’t understand the banking system, they don’t understand the depositors, the industry, or are they really onto something that there was at different points, different kinds of systemic risk built into the balance sheet? Syndicate Bank being a forward-thinking bank started taking action the moment RBI pointed something out, they started acting upon it, there was some learning that was built into the mechanism through these reports. The Syndicate Bank future never quite plays out the way the RBI is predicting it’s going to play out.

AGRAWAL: Again, fascinating question. Again, when RBI comes in, RBI is set up on Bank of England lines. They don’t really have an understanding of the way banking is happening. Then the Bank Regulation Act comes in, which gives them powers. RBI strengthens its banking regulation and they start looking at banking in a very vigorous and very rigorous way, if one can use that word. RBI offices are in Bombay, Calcutta, where all these big banks are there. You’re talking to all of them and just like me some 50 years later, I was trying to ask this question that how South Canara is doing what it is doing? A similar question is obviously coming to the RBI as well, that look, “How can these guys do banking, which is so different, and how can they do a good job of it?”

What’s going on here? I mean, that question is still a very interesting question to look at. If you look at the top 10 banks, even at that time you have these Bombay-based banks, Calcutta-based banks, and then you suddenly see South Canara Bank, which have a fairly decent size. Canara Bank and Syndicate Bank have been the fifth and the seventh largest bank throughout the ’50s and throughout the ’60s. What’s going on there? When you kind of break it up, then you don’t understand what’s going on here in terms of promoters, in terms of, as you rightly said, the customer, the depositors. RBI is not sure whether they’re doing the banking right. And RBI thinks that this is too lucky a story and maybe something is going to break up. 

RBI starts looking at all these problems that Syndicate Bank has, these Pigmy deposits where you are collecting deposits from people who have very low incomes. Syndicate Bank is sending these door-to-door deposit collectors who are their own employees. The RBI has a problem with that because there’s a Bank Regulation Act, which says that the bank, those who work for banks, cannot go and collect deposits. Syndicate Bank has to explain that, “Look, people will not otherwise give us these deposits,” and so on and so forth. It’s an exercise to promote banking but RBI does not understand why do you really need to do this. That whole idea of inclusive banking you generally thought that cooperatives are good, cooperatives should be doing it.

Why should a commercial bank be looking at some of these things? These guys also start an insurance firm. They have an asset management firm. Again, that’s another part of the strategy where they’re trying to diversify their risk. It’s not just a banking play. They’re trying to look at other financial services. Very quickly they understand that banking and insurance go hand in hand, but then RBI is also uncomfortable with the fact that the bank should not really be offering an insurance thing. The promoters of the bank, you really don’t know anyone. There are no big Bombay guys or the big Bombay or big Madras guys. 

RAJAGOPALAN: The first one is also female, which is also I’m sure, something that puzzles them.

AGRAWAL: Again, all these things are going on and so as a result, it’s a very unconventional kind of a banking. What’s interesting is that all these years, these guys are fighting a lone battle in trying to be relevant. Finally, when this social control of banking is being pushed, when Morarji Desai is thinking that nationalization is impending, and the way to prevent this is to make banks more social. 

A one-man committee, V.A. Pai Panandiker—who I mentioned, and I had the privilege to meet in person—that committee was set up, and that committee was basically also told that, “Why don’t you go and visit South Canara? I keep hearing that they are not doing the right kind of banking. There’s a lot of problems going on there.” Whereas, Morarji Desai was of the view that maybe they’re doing something right. You need to tell us what is it. When Pai Panandiker, when he goes to the South Canara Bank, and he’s received by Syndicate Bank Chairperson T.A. Pai, T.A. Pai takes him around. He shows that at these banks, all these checkbooks and all these depositor books, they’re all of fisherwomen, and so on and so forth. A lot of small agriculturalists, and so on and so forth.

He gets a complete shock saying that, “Oh, I visited all these big banks, and none of them have any social plans.” Whereas these guys are doing social banking, and are profitable and are growing. But that report is never made public. I tried my best to get a hand of that report. There were very few copies anyways. So that report is never made public. To find a copy of that report was very difficult. 

But apparently, a lot of the social control of banking, those ideas came from the South Canara guys. It’s very interesting, this whole Hayekian kind of banking where there are no controls. These guys are doing inclusive banking without any mandate, but they’re doing inclusive banking because that’s their main business. They understand it. Like an entrepreneur, like a banking entrepreneur, they kept their banking policies in such a way that it leads to phenomenal growth, they are very profitable.

Usually, inclusive banking, even today is not seen as a profitable activity but these guys were not just inclusive, they were large, they were profitable, they did everything collectively in very interesting ways. That’s really the meat of the South Canara story. Despite all these regulators not really having a very good view of them. All these policies were implemented later. 

Pigmy Deposit Scheme 

RAJAGOPALAN: And badly. Speaking of policies, can you walk us through this Pigmy deposits and how that eventually became the basis for lending, using the deposit as collateral and so on. Can you just walk us through that? It’s such an interesting example. It started so early in India, and completely through a private banking system, without the government forcing people to do this inclusive lending or to lend to high-risk people or something like that. This was just done in a very smart way. Can you tell us what that scheme was like and then we can talk more about it?

AGRAWAL: The Pigmy deposit scheme, T.M.A Pai, as I just mentioned, he’s a medicine person. At that time, his brother, Upendra Pai, just starts this bank, because there’s a major Gandhian movement in the country, everybody’s deeply influenced by Gandhi. He’s also very religious. He thinks that maybe setting up a bank is a good idea to serve the nationalist, Gandhian, Gandhi-based nationalists. A lot of banks, Union Bank, and so on also started with this Gandhian wave, which comes in. He’s not very interested in banking at that time. 

T.M.A. Pai has this clinic, right next to the bank because this is operating out of their home. There’s a small bank, and there’s a clinic. He’s watching what’s going on here, that, and his brother makes him the joint promoter, but T.M.A. Pai is not very sure what to do. He realizes through his experiences in the district that people don’t have basic savings and so on and so forth.

What can you do? He starts thinking of some small deposit scheme. Like an entrepreneur, or whatever you may call him, a visionary person who understands that, firstly, people have very small savings. Those amounts are going to be very little. Most of these people will not come to my bank to deposit. There is no way because these guys are all caught up in their own functions, in their own businesses. Late evening, let’s say, a fisherwoman or a fisherman has come in the late evening after fishing in the morning and selling the stuff in the afternoon and evening. It’s unlikely he will come or she will come to my door. In fact, even she, a lot of women.

RAJAGOPALAN: Yes, it was mostly fisherwomen. Yes.

AGRAWAL: You figure out that, let me try and do this. Let me have these door-to-door deposit collectors who will go, and we will give them a 3.5% interest rate. That 3.5% interest rate is much lower than the interest rate other banks are paying at that time. As a result, your cost of funds really go down and you are basically reaching out to people who nobody really cares about.

RAJAGOPALAN: These are like one anna, two anna kind of deposits, right?

AGRAWAL: Absolutely.

RAJAGOPALAN: These are tiny deposits.

AGRAWAL: Very, very tiny. You start collecting them, and it’s a very religious thing that every day somebody’s going, so that trust is being built. Then some problems in the bank happen, but none of these depositors withdraw funds and so on and so forth. As a result, gradually this thing starts to pick up. They start setting up these branches in remote locations. Again, these branches are set up in a family’s house or some relative’s house or some friend’s house and usually a prominent person in that place so that people understand that there’s something important happening.

These Pigmy deposits become a very important instrument for the Syndicate Bank because liability, unlike the other depositors who could withdraw funds, the large depositors, these guys don’t even know. Somebody is taking an anna from them. Then very quickly in seven years’ time, if you collect so many annas, over a 3.5% interest, it gives you 350 rupees.

RAJAGOPALAN: It’s like a couple of annas a day, and they can’t even believe that it will lead to such a large sum of money.

AGRAWAL: When these 350 rupees are given to people, they faint. They have no understanding. They start crying because they have never seen this kind of money. That demonstration effect starts to kick in. Gradually, more and more people are interested in being part of this case, which also, because of the trust and all that. Then the bank balance sheet starts to become bigger because of these Pigmy deposits. Then you also start giving loans to these guys.

Once somebody is your depositor and he needs money for fisher nets or he needs or she needs money for something, then you’re very happy giving it because you know that these guys are not really going to not give loans, not give it back, because it’s such a small a community over there and most of their employees are not really graduates and so on. 

RAJAGOPALAN: Initially, it’s an apprenticeship model. They just get people from the community and teach them banking.

AGRAWAL: Teach them banking. As a result, you know who’s to give loans to, where these deposits are coming from. You are able to build this wider fisher net, wider banking net. As a result, it’s a major story in the entire Syndicate Bank movement. Parallelly, many banks in that region also start a similar sort of deposit scheme.

RAJAGOPALAN: This Pigmy deposit, at one point, there’s again an issue and a tussle with RBI, because the idea is that the Pigmy deposits are small. The cost of collection is relatively speaking high because you have collectors literally going daily door-to-door to collect those one or two annas. If I remember correctly, the interest rate at which they lend it out is 7% or 8%, like any loan made off of the back of a Pigmy deposit, whereas it’s like 3.5, 4% paid on the Pigmy deposit. This 4% gap seems to be the end of the world for RBI. That this is like usurious and it’s too large a gap and it shouldn’t be done.

One, what is going on there? This is why the RBI seems bizarre to me, because they must have known that money lenders are charging double digits daily, that kind of crazy interest rate. This 7, 8% is nothing in comparison to their actual true cost of borrowing on the ground through money lenders. Why is there this big gap between what’s happening on the ground, what Syndicate Bank is doing and then what RBI perceives Syndicate Bank to be doing?

AGRAWAL: Again, a million-dollar question, million-rupee question, million Pigmy-deposit question. As I said, RBI is talking to very different bankers. It has no understanding of the way these things are being done. You’re absolutely right. In fact, there’s this great book by Menefee who is this anthropologist who goes in this region, is completely shocked that in places where you don’t have anything, you have a bank branch. These bank branches are doing a very good job and so on and so forth. Money lenders have almost been wiped out of the region. There is no real case of a money lender.

This is later, after ’69 when the first records on district-level banking is set up in the country to monitor banks, South Canara region is really at the top in banking accounts, in loan accounts, in deposit accounts. RBI should be seeing all this, but then there’s a perception saying that, “How can you be so good at something which nobody is being able to do this?”

There’s no rule, there’s no playbook, there is no such understanding. Nobody’s able to do this so effectively. One can identify one bank. There’s this Bank of Italy which became Bank of America, which also has similar origins and similar history as Syndicate Bank. That’s the lone bank. Here, you’re talking about many banks doing a similar thing. The banking understanding I think is not that great with RBI at that time. They really don’t understand what’s going on because again, there’s no such region. There’s nobody else who’s been able to do this as effectively as these guys are able to. You are always thinking, “There’s something fishy going on. How is it possible?” 

RAJAGOPALAN: At this time, Syndicate Bank and a bunch of the banks in the South Canara region, they are setting up branches outside of that region. Right?

AGRAWAL: Right.

RAJAGOPALAN: They venture far into the Madras Presidency area. They venture into Travancore-Cochin and, of course, post-independence, they start venturing further north and so on.

AGRAWAL: Right.

RAJAGOPALAN: Is it because the Pais are not interested in evangelizing their model? They’re all English speakers, they come from an educated region. One would imagine there’s a literature on this, so I’m just so baffled by the disconnect, so to speak. Is it just elitism? 

AGRAWAL: Partly, elitism. I wouldn’t really call—because there are some very competent RBI folks over there. I think it’s partly that this region was classified to Madras. If this region was part of Bombay Presidency, then there would’ve been more understanding of the way this region is organized, the banking in this region. This region is part of Madras Presidency. Madras guys are completely disconnected from the region.

RAJAGOPALAN: Yes because of the east and west coast. The west coast has completely different politics, caste, agriculture, everything.

AGRAWAL: They don’t understand them. The Madras guys don’t understand what’s happening here. The guys who would’ve understand it’s not really part of them. If you look at any of these records, you look at Amiya Bagchi’s excellent work on Presidency Bank,—

RAJAGOPALAN: SBI.

AGRAWAL: —SBI history, you look at the banking committee reports of the 1930s, it’s only the Madras Presidency report which briefly mentioned about South—South Canara is completely missing. It’s not really there isn’t any historiography. It’s not really there though, very early on 1960s, they appoint Thingalya as the chief economist of the bank. Thingalya, young man at that time, just a graduate from Bombay University. They also understand the role of an economist. 

Dr. Thingalya has been instrumental. I dedicate my book to him. Unfortunately, he passed away. I wish I could have presented this book to him. He was disseminating all of this information, but this is mid-’60s. By then, a lot of the work had already been done. In ’40, ’41 they also started the printing press. Again, which also starts disseminating this information about banking. There’s this pamphlet, which I got in the RBI archive, which is telling you about that, when there’s this concern around the Palai Central Bank failure. These guys are talking about that their banks are stable. They’re using these printing presses to disseminate this information. Again, one needs more and more material to understand because in the RBI archives, a lot of records have been destroyed. I don’t know the way RBI archiving processes work.

RAJAGOPALAN: Nobody does.

AGRAWAL: As a result, you only have very few of [these records] where these conversations are happening between T.M.A. Pai and the RBI governor and so on and so forth. Some of it from Dr. Thingalya’s work, some of it from here, some of it from there. It’s a massive jigsaw puzzle in which I still have holes. Despite writing a book on it, I think there is still more to be done to understand the kind of questions you’re asking because why RBI couldn’t understand. You are trying to solve the money lender problem all around.

There is this region which does not have money lender problem. It’s basically being done through the commercial banking system over there. Why does it take you so much time to understand some of these things? That whole idea of maybe disseminating information has not been that great. 

RAJAGOPALAN: I have another weird question. This is not directly coming from your book, but it just got me thinking. There are two communities that are very good at banking and at fast food. One is the Marwari community which set up all these Agarwal food joints all over the country. The second are the Udupis, right?

AGRAWAL: Right.

RAJAGOPALAN: How much of the success of the Udupi fast food chain do you attribute to this kind of a banking system? You get wings to fly to other parts of the country because you have people who are solid lenders. You can get into a business which is cash heavy, a daily transaction cash heavy model. Or is it because of this Marwari and Udupi people had to travel to other parts of the country, you need something that’s familiar to you? You need familiar food. What exactly is going on? This seems too much of a coincidence to me.

AGRAWAL: No, great question. In fact, I missed answering the earlier part. One question which Dr. Thingalya always used to ask, and he used to say that you had Marwaris, all these money lending communities, the main ones, the Marwaris, the Bhatias, the Parsis, the Tatas set up the Central Bank of India, the Gujaratis, where I am currently. The Gujarat you had mainly the Bank of Baroda, which was a princely state bank, and Saurashtra Bank. Bank of Saurashtra, which was a combination.

RAJAGOPALAN: An amalgamation.

AGRAWAL: You had Bank of Western India, which was set up by the industrialists in Gujarat in Ahmedabad, but that didn’t really do well. That’s another question which comes in. That out of all these major money lending castes, none of them are really able to take on banking like the way South Canara, which didn’t really have a banking lending culture. They didn’t really come from a lending caste, most of them are professionals, educated folks.

There is this major migrant history that they are settled in Goa, and then there’s a Portuguese attack, some of them go south, some of them go north in Bombay. That leads to these ties between Bombay and South Canara, in terms of the caste network and so on. 

When it comes to the food, obviously, food, the Udupi food is an all-time favorite. Who doesn’t like that kind of food? But then the Udupi movement starts in Bangalore, where these guys go to Bangalore and there’s this familiarity with temple cuisine.

RAJAGOPALAN: It’s really the Madhava temple cuisine that starts being disseminated all over.

AGRAWAL: I did try and study that. Chinmay Tumbe forwarded some papers around it. I read through them, but I could not really see some direct connection, but I think I’m sure there was an influence. They could see that because largely the service orientation, very professional in running these things, running it in a very small setup, not really worrying too much about setting up a fancy restaurant, but just keep it very basic, very quick, very efficient. I think some of those practices they could have picked up, but not really the banking of South Canara leading to funding some of these Udupi outfits, that sort of a connection I didn’t really find.

RAJAGOPALAN: Do the Udupi outfits bank with South Canara banks as their sole banker?

AGRAWAL: Actually, I didn’t really investigate that question because, again, when I went into this region in Mangalore, Udupi, because these banks have been nationalized, there’s been no real history. You have to find some very old folks who were there before independence and had some ideas about all these things and whether they set up some of these. I didn’t really go to some of these major Udupi chains to find out.

RAJAGOPALAN: No, it’s fine. I’m just curious about it. 

AGRAWAL: I’ll not be surprised. Why not?

RAJAGOPALAN: Why not?

AGRAWAL: Canara Bank did shift its headquarters to Bangalore. I’m sure they did Mangalore outfits definitely yes, because those are the only banking services available, but I’m sure the Bangalore ones and so on and so forth were also—I studied Vijaya Bank layout in Bangalore, which was set up by the Vijaya Bank folks largely. Again, I’m sure there’s a deep community network if one can get the hotel archives, the restaurant archives, then one can find that out.

RAJAGOPALAN: Yes, and historically the Shettys and the Pais have also had a different region, some conflicts also, depending on money lending practices and things like that. That would be an interesting thing to think about.

AGRAWAL: That’s also the reason why Vijaya Bank was set up separately. The Shettys set it up, mainly catering to the Shettys and they built it up in a very different way.

RAJAGOPALAN: Yes, and it’s funny, right? It’s not exactly the Pigmy deposits, but the Shettys do have some version of that, right? That you keep collecting money over a 10-year or an 18-year period and at the end of it, they pay it back. I believe they weren’t as faithful in paying that money back to depositors as one would have wished. It was a lot more based on religion and community and some hand-waving juju as opposed to actual prudential banking norms.

AGRAWAL: Yes, Vijaya Bank’s story suddenly picks up after S.S. Shetty comes in. It’s a very interesting thing, which I.G. Patel mentioned in his memoir, where he says that, “In ’69, I was against nationalization. In ’80, I was the RBI governor, and I asked Indira Gandhi to nationalize the six banks.” I.G. Patel mentions that Indira Gandhi asked me, “Okay, why is it that you want to nationalize these banks?” He says that “I’m not very happy with the practices of these banks.” In which Vijaya Bank is one of the banks in which he’s not very sure of the kind of growth which is going on and which he thinks that since the bank is very large, maybe nationalizing it would stabilize it and not really lead to trouble.

Again, since this whole historiography goes to ’69 kind of a period, and these banks have been nationalized and we’ve not been very good with archiving material and all that, I couldn’t really get any help from any of these banks to go into the deep archives and look at it. Because none of them have maintained it or whatever it may be. One has relied on RBI records and all these inquiry committees and Dr. Thingalya’s work and so on and so forth, just to fit the story.

Why Were India’s Banks Nationalized?

RAJAGOPALAN: Coming to bank nationalization, it’s a weird thing because I’ve been thinking about that question. I’ve read the court case, everything, but I don’t understand the reason why it happened. The kinds of banks that were nationalized don’t exactly give you a good picture, right? One reason people say is, “Oh, it’s all about financial inclusion and making credit facilities available to rural areas.” If that were the case, there was no reason to nationalize the South Canara regional banks, right? They were already doing that. Some of it says, “Oh, it’s because, they were worried about bank runs and failures and things like that, which, after deposit insurance kicks in in the ’60s, you don’t really need to be very concerned about that.

Again, then the South Canara Bank region, some of the princely state banks, which had already been associated with or attached to SBI, you didn’t really have to nationalize these banks wholesale. The third is, of course, “Oh, it’s all about the vanity of one person, Indira Gandhi, want to reach the commanding heights. One-half of every transaction is money and credit. You have to, of course, nationalize that part of the economy.” Do you have a good handle on what is the fundamental reason for nationalization? I can’t quite pinpoint to it. It keeps shifting.

AGRAWAL: Yes, I wanted to investigate this question in the second follow-up book. I think Srinath Raghavan is, in his upcoming book here on Indira Gandhi on which he’s recently given a talk at Azim Premji University, also is explaining some of the historiography of the ’60s. I’m looking forward to that book where I think Srinath is hopefully, given his extremely interesting, extremely wide-ranging scholarship, perhaps, he’ll answer this question finally that why these banks are nationalized. My own understanding of this is that, again, a lot of events happened in the ’60s. Indira Gandhi is not really seen as a prime minister material. ’67, she loses these major elections. 

RAJAGOPALAN: The other syndicate.

AGRAWAL: There is a ’62 war, ’64 PM Nehru passes away, ’66 Lal Bahadur Shastri unfortunately passes away. You have this war, then droughts and many problems.

RAJAGOPALAN: Foreign exchange crisis and the Bell Mission.

AGRAWAL: Inflation crisis. Indira Gandhi’s at sea and, nobody is really taking her seriously. I don’t know who’s really advising her on bank nationalization. And then, Morarji Desai gets a whiff of it, and Morarji is deeply connected to Bombay’s capital world. He goes on to advise these guys that we need social control and that’s where social control comes in.

I think Indira has made up her mind that the only way I can pull-push this narrative is by nationalizing these banks, and then how do you go about nationalizing them? We have two records, I.G. Patel and D.N. Ghosh, where randomly, you have to come up with some number. You say, the banks which have a deposit level of 50 crores will be nationalized. Andhra Bank, which is very close to that number, and if that nationalization happened in December, then Andhra Bank will also be nationalized. Maybe there would have been 15 banks or 14 in the initial slot. L.K. Jha is not really involved in the discussions, he is an RBI governor. They just do it with the bureaucrats and just announce next like this.

RAJAGOPALAN: That’s an ordinance because otherwise money is so liquid. It’s just going to move out of the accounts.

AGRAWAL: The monsoon session is just about to start but Indira Gandhi overruled all that and Atal Bihari Vajpayee and so on and so forth. Basically, there’s these questions that session was to start. You had Swatantra Party. Rajaji and so on, the people who were basically anyways very upset with what’s going on. There is a Lok Sabha debate where they they’re constantly asking Indira to respond. Indira Gandhi is either not there, but then all she can basically say is that, “There are multiple factors. Firstly, the big banks are not really lending to the poor and the agricultural and so on. Second, that these banks continue to be dominated by the large businesses, large merchants, and, we want to take that away. And the socialism of Indian economy, that initial plan always had banking involved in it. It’s just that it got delayed for some x, y, z reasons and now I’m doing it.”

These multiple reasons were given by Indira Gandhi in her speech. I think, largely, it is these politically economic shocks which are there in the ’60s. Indira wants to—that vanity or wants to just use this. I think after ’69, one need not ask who’s controlling the show. It was Indira all the way. ’69 and then she nationalizes the insurance businesses. The general insurance is nationalized, and then, the Bangladesh War happened ’71 and then Indira Gandhi basically got the entire control.

History of Consolidation

RAJAGOPALAN: How much of this is path dependence? I’m going to take a slightly longer arc of history here. India doesn’t have a central bank and, of course, famously John Maynard Keynes comes and writes this report. The question is, “Should India set up a separate central bank, or should it amalgamate and consolidate the Presidency Banks into a central bank?” That is sort of the first round. Which is you just pull the Presidency Banks together and there’s the Imperial Bank.

There’s a second round which is when British India merges with the princely states. Sardar Patel is actually stitching the Union together, but there’s a stitching of the banking union also that is simultaneously going on. This Bank of Saurashtra comes along, Baroda, all these things then become affiliates of the State Bank of India, which is not exactly a central bank, but it is the primary state-owned bank.

Then you have this nationalization. Is it a sensible thing to view all this as one long path-dependent arc. There has been this tendency for the government to consolidate power over the banking sector? Sometimes it’s done through the regulatory supervision role. Sometimes it’s done through the seigniorage role if we’re talking about the second half of the 19th century. Then of course, it’s done through nationalization or taking over banks that seem like they’re failing. Is that a good way to think about it or is 1969 bank nationalization, just that crazy outlier event because we had crazy economic policy during that period of socialism?

AGRAWAL: I think it’s again a bit of both because Bank of England is set up in 1694, nurtured a chartered bank to fund these wars. It is a shareholder bank but then the people at that time realized that it’s a very important entity and you begin to shape a lot of banking around Bank of England. And then Bank of England gradually in 1844 goes on to become this numero uno central bank.

Napoleon also realizes that one reason why England gets its act together is because of the banking facilities and that needs to get Banque de France set up. Historically, we’ve seen that some kind of a central government-owned or the king-owned bank really can dominate affairs. That’s the second level of the economy, there’s the real side and there is financial side. If you control that, a lot of action anyways you control.

When they think about setting up a central bank in India and as you rightly said, Keynes comes in and he’s thinking that it’s not a good idea to set up a new central bank. State Bank of India anyways does those activities. The Hilton Young Commission comes in and he basically gives you a separate idea that all this state bank will not work. You need to set up a separate bank, Reserve Bank of India. Reserve Bank of India, model of Bank of England is a shareholder bank, but largely its policies, its governance is again determined by the British government.

Then the independence happens and the first thing you do is to nationalize the reserve bank, which is one of the first things the government does and that’s also the way even Bank of England is nationalized. A lot of nationalization is happening all around the world anyway. Hayek writes “The Road to Serfdom,” largely again protesting against all these. He is seeing that these outcomes of the Second World War and so on so forth will lead to rise of nationalism. These colonial states will become independent agencies, and most likely they will end up nationalizing industries, and so on and so forth.

Again, there is a larger narrative at play. I think there is France which also nationalizes banks. We are one of those countries which nationalizes in a very large way the banking system. In one swoop, you take away 80%. It was still okay to do it in the ’50s and so on, but ’69 you were getting a sense that these things are not really working. You’ve nationalized industries in the past. None of them are really doing well.

Though the banking history when one takes a larger play, you realize that the governments and the kings have always wanted to have the central agency, so you would want to do it that way, but to do it in ’69 in such a large swoop, and especially, this 50-crore criteria was a very random criteria. You could have looked at the South Canara Banks away because they were anyways doing what you wanted; the banks do inclusive banking and so on and so forth. That could have been a very interesting case for us to study that if the nationalized banks do better or the South Canara Banks do better in terms of inclusion. I’m sure I can already bet my horses that who would have won that race.

The private enterprise-driven model of the South Canara guys would have won over the government bureaucratic diktat. Again, by nationalization, you not just intervened with some of these entities, which may have had a case that they were not really lending to the rural and all that, but you also upset some of these South Canara Banks, which were anyways doing a fine job.

You killed that private enterprise banking, you took that initiative away, and everybody was very scared that their banks would be nationalized. Some of these south-based banks, the Lakshmi Vilas Bank, Karur Vysya Bank, by purpose, remain small. Why would you want to grow? If you grow, you’ll be nationalized. 

I think Arvind Subramanian also mentioned it, that he could still understand this large scale of nationalization in industries and so on, but in ’69, why would you nationalize banks in such a large way, disconnected kind of an event—but when one connected to history, long history, then there is a case. When you look at that ‘60s kind of a period and you see that things are not really working out, you really didn’t have to. Maybe couple of banks, yes, but not such a large scale.

RAJAGOPALAN: Last question on South Canara Bank. Why didn’t they protest more when they were nationalized? Famously, even the court case starts with R.C. Cooper, who’s a shareholder in these banks. Why didn’t the owners and promoters organize themselves better? Because, we have examples of this in the previous decades. There have been nationalizations, famously, of course, zamindari abolition.

They all get together. These are relatively rich people with means could have hired the best of lawyers, fought this tooth and nail, made it a big campaign. Somehow it seems like the South Canara folks, I won’t say they go along with it, but they don’t fight it in the way one would’ve expected, especially given that they weren’t failing, and they were doing well, and they were doing all the things that the government ostensibly nationalized the banks for.

AGRAWAL: I still want to understand this question, not just South Canara Bank, but even larger Bombay-based banks, who definitely had more clout. It was just an ordinance, and it was passed. I think the times were such that maybe they thought that protesting will not help. It will just land us into more trouble. Just because this is an ordinance and, how do you really go around rejecting a presidential ordinance and so what do you do about it? I think that there was already some history of nationalization, and this is how it was done.

I don’t know why they didn’t organize and why obviously, as you rightly said, there were these cases and so on, and some of these guys, but then you usually win these cases, the court might say that, “Okay, the government may not have paid them properly,” or something. In the court, those who even filed these cases, the court only said that, “Okay, it is within the constitutional thing that there’s nothing written that you can’t nationalize these things.” Yes, maybe compensation matters, and that’s where some disagreement happens. Then they revise the compensation terms.

I think they did protest, but through the courts and so on, but not really going through the streets. I think they were unhappy, obviously. There are these T.M.A. Pai statements, that, “We were anyways doing what you wanted us to do, so why do you want to nationalize?” I think they were also shell-shocked by the decision, the way it came in, that somebody can really do this in such a large way, without the RBI, without any consultation process, without anything happening. With social control, if one looks at the social control, the National Credit Council and all that which had come up, they were trying to do things which the inclusive banking was supposed to do.

They were under the impression that, “We’ve bought this problem. We’ve bought some time on this. Maybe it’s not going to happen so quickly because they will allow the social control policy to work for some years.” I think it happened so quickly that Morarji Desai resigned and Indira Gandhi forced his resignation. I think these things happened way too quickly for them to react and weigh. You just realize that, “Oh, all these years we built these banks and they’ve gone away.”

RAJAGOPALAN: Something to think about. Do you think something like the Air India reversal to Tatas will happen if we ever start reducing the control of state-owned banks, if we start privatizing them, do you think the family will try to get control back or try to buy it? They’re bigger than ever, given the educational institutions and everything else. They’re still a very dominant, business enterprise in that region.

AGRAWAL: No, I have my doubts because, a lot of these families have completely lost interest. And for them to pick up these things—unlike the Tatas who had this airline experience, they set up Vistara, they were in agreement with Singapore Airlines. They’ve not really given up their plans. All that history of deep pride. That pride is there, but unlike the others who continued, these guys—

RAJAGOPALAN: Just moved on to other things.

AGRAWAL: —moved on to other things. For them to take these things up is very difficult. But obviously this idea of reprivatizing these banks, Viral Acharya and several others are there. In fact, the government has in the couple of budgets earlier, they had said that they’ll be looking at two public sector banks and reprivatize them, so that’s not off the table. We have to see how this kind of thing pans out. You look at these histories, you do see that, I wish these banks had continued in their avatar. 

We would’ve seen a Dr. T.M.A. Pai again. I get goosebumps when I say this, but I think that that legacy of T.M.A. Pai and all these guys is completely lost. We’ve not done anything to preserve it. When some of these names come up of people who promoted inclusive banking and so on and so forth, unfortunately, none of these names come up. T.M.A. Pai, T.A. Pai, those Canara Bank folks, Corporation Bank folks.

They all did some phenomenal, fantastic work, and the region as a whole, I think it serves as an example of how do you do these things the right way. You don’t need to necessarily get government and all these diktats. In fact, they create more trouble. They don’t understand these things. I think there’s a lot of learning still in fintech and all these spaces, that how do you ensure that you don’t overregulate these things and you allow private enterprise to flourish.

RAJAGOPALAN: Yes. I want to do one whole episode with you just on that. Like how RBI, is it too careful or it does it come to the party too late? At least on South Canara, we have an excellent documentation of the history thanks to your book. Thank you so much for doing this. This was such a pleasure.

AGRAWAL: Thank you, Shruti. Thank you so much. I’ve been wanting to be on your show for a long time, and we’ve been talking about this. For me, though I’ve spoken about this book at multiple forums here, there, but this is like one of those cricket test matches. You have to go to one of those tricky pitches, and you have to do well there.

RAJAGOPALAN: Please don’t embarrass me. No, no. The book is great. I have to say one more thing. It is the most readable book on banking.

AGRAWAL: Oh, okay. Thank you.

RAJAGOPALAN: It’s actually written exactly like you write your blog, which I think is extremely well written. Normally when you pick up one of these university press books on banking, I just start with a sigh. I kind of, I’m like, “Okay, here we go.” Yours is actually really, really accessible. 

AGRAWAL: I mean, credit to the Manipal Universal Press, that’s another story, for this book.

RAJAGOPALAN: They’re fantastic.

AGRAWAL: They were very kind and they were very open to the idea because at the end of the day, that entire family, which is behind all these banks—it’s that whole process also. To get through these university presses was very difficult. None of them were interested to take this very niche topic.

RAJAGOPALAN: Well, because your book is so readable, and I think the precondition for a university press book is that it is incomprehensible these days.

AGRAWAL: Okay. I take that as a compliment. Thank you so much.

RAJAGOPALAN: No, absolutely. This is great. I hope you come back and we can chat more.

AGRAWAL: Sure. Absolutely. That goes without saying.