How India’s Banks Navigated The Last Global Pandemic

Economists are relying on past pandemics to develop some understanding of the ongoing Covid-19 crisis on the economy. An earlier column studied the impact of Bombay Plague in 1890s on the general economy and the banking system.

Two decades after that disruption, in 1918, the world was hit by a pandemic that came to be called the Spanish Influenza/Flu. The disease did not originate from Spain as one might think, but apparently the Spanish media covered the spread more extensively, leading to the name. This pandemic impacted 50-70 million people across the world, and as per the 1921 Census, it killed 10-15 million people in India. Chinmay Tumbe estimated in his research that in 1918, the Indian economy suffered from one of its worst crises with growth contracting by 10% and inflation rising by 25%.

This article analyses the impact of the 1918 pandemic on India’s banking sector.

The Spanish Flu Comes Amidst A Wave Of Crises

The virus first struck Bombay with World War I soldiers returning to Colonial India and then spreading the disease across the country. Amiya Bagchi’s ‘The Presidency Banks and the Indian Economy’ notes that the Spanish Flu “visited almost every portion of the country and wiped out in a few months practically the whole natural increase in the population for the previous seven years.”

The pandemic impacted the Bombay Presidency severely, resulting in depopulation as found in the 1921 Census. The birth rate for the region declined from 35-36 per thousand in the 1901-1917 period to 27-30 in 1918-20, before recovering. The influenza was more severe in the age group 15-40 and affected women to a greater degree.

The scale of the epidemic alone was enough to create an economic crisis, potentially posing troubles for the banking sector. Meanwhile, other crises were unfolding as well.

The Statistical Tables related to Banks in India for the year 1918 recorded that: “The year 1918 was a year crowded with events, such as a silver crisis, rise in exchange, a failure of the monsoon over wide areas, a virulent epidemic of influenza, and, last but not least, an unusual vigour in the production of munitions for export to the Allies.”

First, World War-I, which while exacting a heavy toll on Indian soldiers, also created opportunities for businesses engaged in war production and for banks that financed such businesses.

Second, there was a monetary crisis. Higher spending by the government and trade surpluses led to high demand for rupee which translated to rising demand for gold and silver. The belligerent countries had curbed gold exports leading to pressure on silver whose prices rose sharply. The government issued currency notes of Re 1 and Rs 2.5 to tide over the silver crisis.

Third, the government had to revalue the Rupee, whose value rose from 1s. 4d to touch 2s 4d by 1919.

Fourth, the failure of the monsoon led to widespread famine.

Bagchi aptly summed this economic situation as the “multiplicity of disequilibria and their suppression that constituted the essence of the managed disequilibrium system.”

In this state of affairs, how did the banking system fare? On the eve of Spanish Flu pandemic, the Indian banking system comprised of several players. The three Presidency Banks mainly catered to British interests. Indian Joint-Stock Banks had risen in number following the swadeshi movement prompted by the partition of Bengal in 1905. Then there were Exchange Banks that mainly financed the international trade between Britain and its colony. The rural economy was catered to by cooperative banks which had emerged following the start of the cooperative movement in India in 1904.  The so-called unorganised market comprised of indigenous banks and moneylenders. This article focuses on the performance of the presidency banks and the joint-stock banks during and after the 1918 pandemic.

Presidency Banks: Quick Recovery

In 1918, deposits declined in all three Presidency banks but majorly in the Bank of Bombay whose deposits declined by 37% from Rs 30.5 crore to Rs 19 crore. The declines for the Presidency Banks of Bengal and Madras were 12% and 5% respectively. With deposits, Bank of Bombay saw a decline in both public and government deposits. The impact was short-lived, though, as these banks quickly recovered ,in 1919.

On the asset side, loans and bills discounted increased in the case of all three banks.

The bank rates which were the interest rates charged for demand loans declined in 1918 for all three banks, aiding a rise in loans.

The three banks took different approaches to handle the drop in deposits and the rise in loans. Bank of Bombay lowered its investments whereas Bengal and Madras reduced their cash balances. In Bengal, there was a large demand for jute loans, while in Bombay government finances were under pressure leading to Ways and Means Advances.

Meanwhile, Bank of Bombay actually increased its dividend ratio from 17.5% to 18.5% in the year 1918. Bank of Bengal paid an unchanged dividend rate of 17% whereas Bank of Madras maintained its dividend rate of 12% throughout the period.

The profits not distributed as dividends are kept as reserves. Bank of Bengal and Bombay maintained reasonable reserves despite an increase in dividend ratio in the period. This means that the two banks generated high profits in the period. The same cannot be said of Bank of Madras whose reserves declined despite constant dividend rate.

Indian Banks Do Even Better

Let us now review the conditions of Indian banks. The number of A-class banks (with capital and reserves greater than Rs 5 lakh) and B-class banks (with capital and reserves between Rs 1 lakh and Rs 5 lakh) remained steady. The number of banks that closed in 1918 and 1919 declined as well. This period also sowed the seeds for the establishment of a large number of industrial banks in the country. The one big name was Tata Industrial Bank which started amidst big fanfare but could not sustain and was merged with Central Bank of India in 1923.

Apart from Tata Industrial Bank, other industrial banks were – Industrial Bank of Western India (Ahmedabad), Industrial and Exchange Bank of India (Bombay), Karnani Industrial Bank, Calcutta Industrial Bank, Indian Industrial Bank (all three in Calcutta), Mysore Industrial Bank (Mysore), etc. But their fate was similar to that of Tata Industrial Bank.

Insurance was another industry that mushroomed after WW-I and in which the pandemic could have played a role. The Tatas established New India Assurance in 1919, followed by other insurance firms named Laxmi, Jupiter etc.

In terms of financials, there was growth in A-class as well as B-class banks. The year following the pandemic could have impacted B-class banks severely as these were graded as banks with lower capital and governance than the top rung, but that did not play out in the financials. In fact, they grew significantly after the end of WW-I.

A study of the five largest A-class banks offers a picture of how the banking system was managed during the pandemic.

Deposits and cash balances rose in all the banks barring Punjab National Bank. The financials rose significantly as WWI came to an end. The period saw the two Bombay-based banks – Bank of India and Central Bank of India making rapid strides to emerge as top banks in the country.

Conclusion

Economic historians often point to the role of World War II in helping the world get out of the Great Depression. It appears that high government expenditure due to World War I helped the banking sector in Colonial India at the time to tide over the 1918 Spanish Flu pandemic.

While there were some brief fluctuations in the Presidency banks, Indian joint-stock banks remained unaffected. Both had targeted their loans mainly towards war activities and increased investments. This is perhaps one of the reasons why the impact of the Spanish Flu pandemic is missing from most discussions on Indian monetary and banking history.

The pandemic may have instead impacted the indigenous bankers and moneylenders who provided the bulk of the loans towards local activity, but data on those is scarce. This period also saw the government implement the Usurious Loan Act of 1918, which gave civil courts powers to deal with loans given on high-interest rates.

The present Covid-19 scenario is, of course, very different with the banking system deeply entrenched into the Indian economy. There was no Reserve Bank of India during the 1918 pandemic which was a double-edged sword. The disadvantage was there was no lender of last resort, and as a result, banks maintained high cash buffers. The advantage was banks had the freedom to channelise loans to the most profitable ventures without bothering about priority sector activities.

Indian banks were doing badly even without Covid-19 and would need a miracle to escape the painful journey towards healthier balance sheets. One solution which emerges from history is that if the government could increase its expenditure and target it towards productive activities on a war-like footing, the banking system might have a less painful recovery.

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.