The government has decided to go ahead with the merger of Vijaya Bank and Dena Bank with Bank of Baroda. The decision has led to huge protests in the Mangalore region where Vijaya Bank was established by AB Shetty in 1931. Vijaya Bank touched the hearts of the people of the region by giving jobs and low cost loans to locals. They continue to have strong social ties and memories with Vijaya Bank leading to protests over its loss of identity. The reactions have been muted in case of Dena Bank which was formed by Devekaran Nanjee in what was then Bombay in 1938. The victor obviously is Bank of Baroda which was established in the Princely State of Baroda by Maharaja Sayajirao in 1908. The two banks join a long list of banks in India which either became moribund or were declared so by the authorities.
The 19th Century
We start the story with Union Bank formed by Dwarkanath Tagore, grandfather of Rabindranath Tagore. The bank was established in 1829 and was an able competitor to Presidency Bank of Bengal before its quick demise in 1848. Back then, banks did not have a limited liability clause barring Presidency Bank, creating unfair play in the banking system. But then limited liability alone was not the cause of the demise of Union Bank. The major reason was imprudent and concentrated lending towards indigo plantations, which remains the main reason for the demise of today’s banks as well.
The next major bank demise was, surprisingly, Presidency Bank of Bombay in 1868. The American Civil War in 1861 stopped cotton supplies from America leading to demand from Bombay. This soon became a mania fuelling huge demand for finances and even engulfed the otherwise steady and staid Bank of Bombay which lent large sums to cotton merchants and financiers.
As the American Civil war ended, this mania too turned into a crash like most other manias.
This led to the demise of Bank of Bombay along with many other Bombay-based banks. However, given the importance of the port-city a new Bank of Bombay was formed the same year.
The 20th Century
Banking became a dull industry following bank failures in Calcutta and Bombay. The wave again started due to the swadesi movement which led to the formation of many banks. I would specifically point to Indian Specie Bank formed in Bombay amidst aplomb, but crashed soon in 1913. Indian Specie Bank is connected to Bank of Baroda’s history. The Maharaja of Baroda was considering whether, instead of setting up a new bank, to allow one of the major banks to establish their branch in Baroda. He had even shortlisted Bank of Bombay and Indian Specie Bank but later rejected the proposal fearing that these banks will simply take away savings of local Baroda people to Bombay. Talk about premonition!
One would like to mention two Kerala based banks now, which perhaps shaped Indian banking like no other banks. The Travancore National Bank and Quilon Bank merged in 1937 and this was hailed by the local media as the ‘greatest banking amalgamation in South Indian history’. However, once again, the merger fell through. The failure of this bank was slightly twisted as the downfall was plotted by CP Ramaswami Iyer, the powerful Dewan of the State of Travancore. The second Kerala based bank—Palai Central Bank—was liquidated in 1960 amidst an equally huge drama.
Palai Central Bank had emerged as one of the largest banks in India but its financial position was under question for a long time which led to its downfall.
Both these banks changed the scope of Indian banking regulation. RBI was established just a few years before merger and closure of TNQ Bank and was criticised for not doing enough to stabilise the bank. This led to thinking over the need for a more comprehensive banking regulation under RBI which eventually came into being in 1949 after World War-II and Partition. The Palai Central Bank liquidation led to a run on banks across Kerala pointing to the need for protection for depositors. This gave way to deposit insurance in India, making it the second country after United States to have such a scheme. It also gave RBI the legislative empowerment to forcibly merge banks, as pointed by YV Reddy in the recent Kale memorial lecture in Pune.
On the eve of bank nationalisation in 1969, India had 72 banks. Unfortunately, most of them have also vanished.
Also Read: There Was Once An IDBI
Post-Nationalisaiton
Of the 72 banks, 15, including SBI, were nationalised. Six more were nationalised in 1980. Of these 21 public sector banks, New Bank of India was merged with PNB in 1992 followed by Vijaya and Dena Bank being merged with Bank of Baroda in 2019.
There were 14 princely state banks of which the seven largest ones were made part of the State Bank of India group.
The seven other princely state banks continued as private banks of which only J&K Bank continues to function until today.
The seven SBI associate banks have all been merged with SBI starting from 2008.
Of the remaining 37 banks, 27 have already been merged and 10 continue to serve as old private sector banks. Since the liquidation of Palai Central Bank, RBI has clearly made mergers its main strategy in order to protect the depositors. Only Jharia Industrial Bank was forced into liquidation.
Post-Liberalisation
After nationalisation, no new bank was allowed to be set up in the private sector. After the 1991 reforms, 10 new banks were licenced but, again, just six of these banks remain.
- The Times Bank was the first of the new private sector banks to be merged by HDFC Bank.
- Global Trust Bank was involved in the 2001 stock market scandal, and was then merged with Oriental Bank of Commerce.
- Bank of Punjab was merged by Centurion Bank in 2005 and the merged entity was also absorbed by HDFC Bank in 2008.
Seeing this decline in banking compeition, RBI licenced four more banks in the 2000s: Kotak Mahindra Bank, Yes Bank, IDFC Bank and Bandhan Bank. RBI had also licenced Bhartiya Mahila Bank as a public sector bank in 2013 which was merged with SBI in 2017. Meanwhile, IDBI Bank which later became a government-owned bank is also headed for a merger with LIC, marking the entry of the insurance company into banking.
As of today, India has 21 public sector banks of which two banks are going to be merged – Dena and Vijaya. There are 21 private sector banks of which 11 are old and 10 are new ones. Thus, there are going to be 40 domestic banks and we also have 45 foreign sector banks. India has also licenced different kinds of banks in the 2000s but experiences have been mixed.
- Out of the 10 licenced local area banks, only four are working.
- Among payment banks, 11 were given licences but only 7 are working.
- Only in the case small finance banks, all the 10 that were licenced are functional.
This essay was an attempt to document the long history of failed banks of India which have either faded or will fade from our memories.
The history is full of big names with big promoters starting banks amidst euphoria only to decline very quickly thereafter.
In a way, our banking history is not very different from similar banking histories in other countries where successes and failures are part of the game. However, where we differ is our failure to archive and preserve the history of these outgoing organisations. One wonders whether the current RBI Governor, who is a history major, can help bridge this gap.
Amol Agrawal is a faculty member at Ahmedabad University. He has a PhD in Indian Banking History and writes the Mostly Economics blog.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.
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