By Pratham Mathe
The author is a first-year student at National Law University Odisha.
Introduction
The process of loaning money on interest has been going on for ages. Earlier it was about Sahukars and Zamindars. Now it is a bank that does the job. But there is a vast difference between how the modern banks operate and how these moneylenders lent the money. The model of today’s bank is based upon maximizing the amount deposited and also the loans sanctioned. The model of lenders was based on exploitation. They gave loans on the interest of their own choosing and if there was a dire need for money to a person, they used to charge even more interest. It was their monopoly. There was nobody to regulate lending practices.
So how did it come from exploitation to the current model? This paper is briefly going to discuss it. It will review the banking system of British India at different times and its various policies from the first policy to the very last. It is not possible to cover everything in this brief period so this paper will focus on the most important ones out of almost the three hundred policies passed for the banking sector’s evolution.
It will focus on how EIC passed on various laws and then fill the gap amended and passing on various other laws and finally making it the way it is today.
British India evolved a banking system for the need of funds. They needed funds for two things. First they were at a constant state of war with their competition. They needed funds for financing it. Second, they were traders who needed money obviously. So they established agency houses who managed basic level of banking. First there were Agency houses like Agency House of Calcutta. Then came the Bank of Hindustan which was first fully fledged bank in India. But since it was a totally new thing for India, people were hesitant and it didn’t survive much longer, it lasted from 1770 to 1820.
In 1813 the monopoly of EIC on banking ended. This led to various other banks rise. But most of them couldn’t survive because banking was a tough business. After seeing dozens of banks fail, the, it was realized that banks should be allowed to be jointly owned or else banks wont survive. Three Presidency banks were also established they were allowed to lend money to the common people for a brief period. They also issued bank notes. There is no legal background to most of the happenings above, this paper will only focus on the legal important part. The various acts, statues that were passed will be the soul focus of this paper.
Government Savings Banks Act, 1855 [Repealed]
Repealed by Act 5 of 1873
Passed by the Legislative Council of India.
This was the beginning of statues for the banking sector. It had various provisions directly borrowed from Britain.
ANALYSIS AND EXPLAINATION OF THE PROVISIONS
1. Inheritance- Just like inheritance of land and property[1], right of inheritance of the savings bank account to the relative of the deceased.[2]
2. Security for due administration— Earlier there was little to no concept of security. People got loans even if they owned no property; it just depended on the whim of the sahukar or zamindar. With this act, bank came up with the concept of security against loan which is followed till this date.[3]
3. Power to administer oath, & c. and Penalty for false testimony-
This talked about various oaths required for holding various posts but what matters to us is the provision regarding false testimonywith the inheritance, if someone tried to make false claims and got caught in the investigation the person will be held liable of perjury and will be punished accordingly.[4]
4. Administrator General not to grant certificate in respect of money deposited-
This seems to be an era where even money in banks was not safe unlike the present times and gave no sense of safety like it does today to the modern depositor. Well, even today people’s money is not completely safe in bank. The can get only a limited amount back if the bank reaches bankruptcy[5]. It’s just that modern banks are too big to fail, even if they fail, the government will try to save them. So people blindly trust the bank.
Banks of Bengal (Madras and Bombay) Act, 1855 [Repealed]
ABOUT THE ACT
This act enabled to the banks of Bengal, Madras, and Bombay to conduct business in respect of Government Securities and Shares in the banks.
WHY WAS IT PASSED?
In the 1857 joint stock banks were legalized[6], it was done because it was not an easy task for a single individual to open a bank.
Paper Currency Act, 1861 [Repealed]
Repealed by Act 3 of 1871
Passed by the Legislative Council of India.
This act introduced the government’s paper currency. It said-
“It is expedient to provide for the issue by the Government of India of Promissory Notes payable to bearer on demand, and to regulate the mode of issuing and securing payment of the same; and whereas due notice has been given by the Governor-General of India in Council to the Banks of Bengal, Bombay, and Madras respectively, as required by Acts VI of 1839, III of 1840, and IX of 1843, that the said Banks are to be modified by the power of the said Banks to issue Promissory Notes payable on demand ceasing from and after the day hereinafter provided.”[7]
2. No Body Corporate or person to issue Notes, &c., payable to bearer on demand
WHY WAS IT INTRODUCED?
There were various banks printing their own currency. The need of a common currency was identified. This was needed to facilitate business transactions in British India as having many different currencies proved to be a hassle in business for EIC, so EIC passed this act and became sole issuer of the currency. They passed an act, to enable Banks of Bengal, Madras and Bombay the bodies that will print notes on their behalf.
THE PROBLEM WITH THE PROVISION-
Still there was no single nationalized currency. The three presidencies were operating on three different currencies.
This act got repealed because India got independent and by 1934 act, they made Reserve Bank of India do this work.
Banks of Bengal, Madras and Bombay Act, 1861 [Repealed]
Repealed by Act 3 of 1871
Passed by the Legislative Council of India.
What was the act about?
An act to enable the Banks of Bengal, Madras, and Bombay to enter into arrangements with the Government for managing the issue, payment, and exchange of Government Currency Notes and certain business hitherto transacted by the Government Treasuries.[8]
WHY
This was because the three presidencies were operating on three different currencies.
Treasury of the Secretary of State for India in Council, and of Her Majesty’s Indian Government at Madras and Bombay respectively, shall be established at the Banks of Madras and Bombay respectively
| Emigration Act, 1862 [Repealed] |
Section 36- Establishment of Branch Banks
Explanation
This was about opening branches of banks in other localities.[9]
WHY PASSED?
After the issuance of bank notes, people felt the need of branches of banks all over the country. So in the emigration act 1862, the East India Company brought a provision legalizing business agencies and establishing branches of a bank wherever they could smell profit. However, they could only be formed if the Governor-General of India in council sanctions it.
Receipts of Presidency Banks Act, 1863 [Repealed]
Passed by the Governor-General of India in Council.
An act to declare the receipts of the Banks of Bengal, Madras and Bombay to be sufficient in lieu of the receipts of the Sub-Treasurers of Fort, William, Fort St. George and Bombay respectively.[10]
Receipt of banks is just like normal fee receipts/ bills that indicate that we have successfully made a payment. They are a proof that we have made a deposit.
Repealed by Act 11 of 1876.
The problem of loan defaulters.
Now that the banks were established, the obvious problem started piling up[11] i.e. the problem of loan defaulters. The process of the sale of defaulters’ property was unregulated and a little difficult for the banks. So the EIC came up with the Tamil Nadu recovery act to facilitate the sale of collateral (which was mostly immovable property)
Tamil Nadu Revenue Recovery Act, 1864
Section 36 Procedure in the sale of immovable property
First Public auction—
The sale should be by the method of auction and the highest bidder shall get the property.[12]
Pretty basic and the same as today
Second Notification one month before sale—
A notice in the language of the district and English (since it was the official language) the notice should specify the defaulter’s name; “the position and extent of land and of his buildings; the amount of revenue assessed on the land, or upon its different sections; the proportion of the public revenue due during the remainder of the current sail; and the time, place, and conditions of sale. This notice shall be fixed up one month at least before the sale in the Collector’s office and in the Taluk cutcherry, in the nearest police station-house, and on some conspicuous part of the land.”[13]
Third Deposit by the purchaser—
What is it about?
The person purchasing the land is required to make a down payment of at least fifteen percent of the total value of the land to the collector, or to any other officer empowered by the Collector in that behalf, at the time of the purchase, and if the purchaser fails to make the rest of the payment within a span of thirty days, his deal will be canceled and the down payment will be forfeited.[14]
Problem with the provision
This provision of forfeit seems to be very draconian in nature. The correct method would have been to put a penalty on the person, the entire amount forfeiture shows the trading nature of the company, it doesn’t matter whether the person is being treated In a fair and justified manner, the only thing that mattered to them was maximizing their revenue.
Fourth Re-sale in default of payment—
“If the purchaser is unable to or refuses or omits to deposit the required amount of money, or to complete the payment of the remaining purchase money, the property shall be resold at the expense and hazard of the such purchaser, and the amount of all losses due to not buying of the property to the bank should be recovered from the depositor of fifteen percent too. Where the lands may, on the second sale, sell for a higher price than at the first sale, the difference or increase shall be the property of him on whose account the said the first sale was made.”[15]
If the fifteen percent forfeiture wasn’t enough, they imposed a provision of recovering the losses due to his failure of payment from him, if we go by the EMI standard, the fifteen percent should last for about a year which is more than sufficient time to look for a second buyer but EIC thought in some other manner, which maximized their loot of the failed purchaser’s money, as if not just recovering damages but to punish him too.
Fifth Agents to name principals.—
All those who are bidding are required to specify whether they are bidding for themselves or are they someone’s agents. If they are agents of a person, they are required to show a written proxy that they are representing someone else and if they can’t then their bids will be rejected.[16]
This seems to be quite a fair and justified provision.
| Calcutta Suburban Police Act, 1866 |
Section 51- Interpretation— the Calcutta suburban police act talks about the interpretation of various words that became very common in the banking sector. [17]
“Property” can include any chattel, money, or anything worthy of being a valuable security
“Person” shall include not only a living person but also a corporation
“Oath” Any affirmation or declaration legally recognized shall be considered an oath
“Cattle” shall, besides homed cattle, include horses, asses, mules, sheep, goats, and swine
Government Savings [Promotion] Act, 1873
This was one of the most forward-thinking acts in the world of banking. Not only had it recognized the rights of minors but also lunatics.[18]
11. Legalization of like payments heretofore made
Not only payments to adults but even minors were recognized.
This was a very important step in recognizing the rights, not in just the banking sector but rights of minors because the existence of rights of minors was almost nonexistent before this provision (in the Indian laws made by the Britishers)
12. Payment of deposits belonging to lunatics.—
If any depositor becomes insane or otherwise incapable of managing his affairs, this act deals with such cases.
If the required authority (Authorized Officer) is satisfied with the proof that the said person is a lunatic, any of the banks (Government Savings Bank) in which his deposit may be,[19]
Such authorized Officer may, from time to time, make payments out of the deposit to the guardian[20]
Also, the receipt showing that the amount had been paid to the guardian shall be a sufficient discharge for the officer, therefore.[21]
Where a committee or manager of the depositor’s estate has been duly appointed, nothing in this section authorizes payments to any person other than such committee or manager.
Section 13 Payment of married women’s deposits.—Any deposits made by or on behalf of a married woman, or by or on behalf of a woman who afterward marries, may be paid to her, whether or not the Indian Succession Act, 1865 Section 4, applies to her marriage; and her receipt for money paid to her under this section shall be a sufficient discharge therefore of the duty.[22]
This was also first of a kind thing, giving legal rights to women and should be respected. Even if her marriage is not legally recognized under the succession act, she can claim the money.
Section 4-A Payment on death of depositor—
If a depositor dies and there is in force at the time of the death of the depositor a nomination in favor of any person, the deposit shall be paid to the nominee.
Section 14 Protection of action taken in good faith.—
This provision introduced the concept of immunity to government servants. It talked about actions taken in good faith, that officers are immune even if their action results in some sort of damages i.e. if the action was taken in good faith without any malicious intentions.
Section 4 Nomination by depositor-
Just like property, the depositor can make any person nominee in case of his death. But this had a lot of flaws that time, often, the wealth was distributed unequally. The daughter got nothing whereas the son inherited everything. There was no concept of justice in inheriting. The depositor could play all the favoritisms’ he wanted to play.
Negotiable Instruments Act, 1881
Statement of Objects and Reasons of Amendment.—The Negotiable Instruments Act, 1881 was enacted to define and amend the law relating to Promissory Notes, Bills of Exchange, and Cheques.
Only Promissory Notes, Bills of exchange, and Cheques are considered as negotiable instruments. Negotiable instrument means a document that can be transferred from one person to another. The one who holds it is assumed to be the owner of it.[23]
For the instrument to qualify as a negotiable instrument it needs to be easily transferable by trading between individuals or corporations.[24]
Bihar and Orissa Public Demands Recovery Act, 1914
Section 2- The following enactments are hereby repealed, namely –
(a) The Public Demands Recovery Act, 1895
(b) The Bengal Public Demands Recovery (Amendment) Act, 1897 (Ben. Act I of 1897).
In the year 1914 again the defaulters were on the rise. To recover the loan amount, this act was passed in the nonpresidencies of Bihar and Odisha.[25]
Section 17- Interest, cost, and charges recoverable There shall be recoverable in the proceedings in execution of every certificate filed under this Act.
Banks were running smoothly in the early 1900s so the banks started lessening the minimum cash reserve that they used to maintain giving almost all the deposits as loans, and then World War I broke out. The world war annihilated businesses all across the globe, as a result, there was a financial crisis resulting in the closing of businesses, which created a large number of loan defaulters, and because of the war people went jobless so they started withdrawing their money but since the banks had mortgaged the whole amount, they couldn’t return the money to the customers. This resulted in banks themselves going bankrupt. Dozens of Indian banks died. To save the three presidency banks, the Government merged these banks into one central bank, this came out to be The Imperial Bank of India which was later on named as State Bank of India.[26]
Imperial Bank of India Act, 1920
| Section 12. Establishment of branches and agencies. It became the largest bank of India. To run its functions on a nationwide scale, it needed branches. Branches also mean more accessibility to the common people. So this act was passed[27] |
Section 13. Power of Bank to take over the business of certain other Banks and for that purpose to increase its capital.
The war had caused huge losses to the banks as a result banks started going bankrupt. To save them they were taken over by other banks. Also, it was favorable to their business since it increased their capital.
Section 13-A. Power of Bank to grant loans to certain other Banks
As the crisis due to the war worsened, banks were allowed to take loans from one particular bank. This helped them to keep afloat. This was the Imperial Bank of India.[28]
This function is now carried on by the reserve bank of India and the rate at which the bank gives loans to others is called the repo rate.[29]
Transfer of the undertakings of Presidency Banks to the Imperial Bank
Section 4. Transfer of assets and liabilities- All the assets and liabilities of the presidency bank will now be under the Imperial bank
Section 5. Terms of transfer as regards shareholders in the Presidency Banks— since these were joint stock banks, there were various shareholders of these banks. These share holder’s shares remained unchanged. They got the same number of stocks as they previously had in the presidency bank.
Section 6. Existing officer and servant of Presidency Banks and existing Provident Funds
All the schemes of the provident fund remained unchanged, only the name of the bank changed as far as the common people were concerned.[30]
Section 7. Dissolution of Presidency Banks
Presidency Banks shall cease to exist from now on and all their assets, liabilities, and schemes will be transferred to the central bank i.e. Imperial Bank of India.
| Income Tax Act, 1922 Chapter 1 — Charge of Income-Tax Section 4. Application of Act |
Most of the provisions are not directly related but one provision regarding the interest on savings is. This was the first act that recognized that the income from the interest earned on bank deposits is subject to taxes just like any sort of other income would be.[31]
| Tamil Nadu State Aid to Industries Act, 1922 Section 14. Guaranteeing of loans by banks |
This act talks about cash credit, overdraft, or fixed advances with a bank. That bank will not guarantee any of it with respect to the loans given. There is no guarantee that if some corporation or a person demands a loan, he is bound to get it. Banks are under no such pressure as far as the law is concerned.[32]
19. Power to make rules.— The government has the power to make rules as it sees fit to improve the functioning of the financial sector but they have to do so without any biases or prejudices and generality of the foregoing power, they can make rules to regulate any or all of the following matters listed matters. Example-
When it is done for the sake of industries, businesses and enterprises i.e. to strengthen them overall and facilitate their growth.[33]
Reserve Bank of India Act, 1934
Cash reserves of scheduled banks to be kept with the Bank-
When the great depression of the 1930s occurred, people rushed to banks to take their savings out. This caused bank runs which resulted in the shutdown of many banks. So to prevent this from happening ever again, banks passed this act making it mandatory for the banks to maintain a minimum cash reserve. Also, some were required to keep this reserve with the Reserve Bank of India.
Section 3-B — Provisions Relating to Non-Banking Institutions Receiving Deposits and Financial Institutions
NBFCs do the same things that a normal bank does except that there is no concept of demand deposits and cheques. This provision came into existence to regulate them.
Section 58. Power of the Central Board to make regulations—
The Central Board has the power to pass laws as it sees fit in furtherance of the provisions of this act.
Chapter 2 — Incorporation, [Capital,] Management, and Business
It talks about the management of the banks and also how the businesses will be conducted.
Conclusion
Banking during the British era, had a lot of speed bumps, from the first bank in 1770 to the act of 1934, it took India almost 164 years to come up with today’s banking system. It didn’t become perfect in 1934 nor in 1947 or even today. To this day, billionaires going bankrupt are able to get away without paying back their loans,s and then it takes years for the suit filed in a different nation to bring them back and hold them accountable for the default. Yet there are fewer defaulters than there used to be. Thanks to lesser wars and peaceful times. The only crashes that occur are stock market crashes from which it’s easier to come back than it would have been out of war or the great depression. Banks are getting back on their feet even after the pandemic. The interest rates of banks have gone lower than they ever were. Earlier the banks were a profit-based bodies but now thanks to the government of India, the interest rates are not as high as they used to be. The British developed the banking system from scratch. Even though it was something for their benefit, its development and maturing for over two centuries ultimately benefited the Indians
[1] Hindu Succession Act, 1956
[2] Government Savings Banks Act, 1855
[3]ibid
[4] ibid
[5] The Deposit Insurance and Credit Guarantee Corporation Act, 1961
[6] The Joint-stock Companies Act, 1857
[7] Paper Currency Act, 1861
[8] Banks of Bengal, Madras and Bombay Act, 1861
[9] Emigration Act, 1862
[10] Receipts of Presidency Banks Act, 1863
[11]Amiya Kumar Bagchi, Transition from Indian to British Indian Systems of Money and Banking 1800-1850 Cambridge University, April 1984 (1985), pp. 501-519
[12]Tamil Nadu Revenue Recovery Act, 1864
[13] ibid
[14] ibid
[15] ibid
[16] ibid
[17] Calcutta Suburban Police Act, 1866
[18] Government Savings [Promotion] Act, 1873
[19] ibid
[20] ibid
[21] ibid
[22] ibid
[23] ibid
[24] ibid
[25] Amiya Kumar Bagchi, Transition from Indian to British Indian Systems of Money and Banking 1800-1850 Cambridge University, April 1984 (1985), pp. 501-519
[26] ibid
[27] Imperial Bank of India Act, 1920
[28] Imperial Bank of India Act, 1920
[29] ‘Recent Monetary and Exchange Developments in India’ (1921) 7 Fed Res Bull 2
[30] Imperial Bank of India Act, 1920
[31] Income Tax Act, 1922
[32] Tamil Nadu State Aid to Industries Act, 1922
[33] ibid
