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India: from loans to credit since 4000 years and the existence banks for 2500 years

A treatise on the art of politics of ancient India, the Arthasastra (attributed to Kautilya), dating from the 4th or 3rd century BC, mentions the existence of creditors, lenders and interest rates.

From the 12th century AD, banks developed all over India. Indian bankers issued bills of exchange called Hundis which were used for international trade. And that was 2-3 centuries before the bankers in Western Europe issued bills of exchange.

According to the Western media, the first bank to be born on this planet was Italian. It was called Monte dei Paschi, founded in Siena in 1472. However, banks had existed in India for several centuries. W.E. Preston, member, Royal Commission on Indian Currency and Finance set up in 1926, observed “....it may be accepted that a system of banking that was eminently suited to India’s then requirements was in force in that country many centuries before the science of banking became an accomplished fact in England”.

During the British rule over India from the mid-18th century to 1947, English capital dominated Indian banking system. Until independence, the entire banking system was private and poorly regulated.

The weak regulation was aggravated by the abolition of the unlimited liability of bankers. This development was imported from Western Europe. Indeed, capitalists in Europe and North America had obtained a favourable legislation. Until then, if the banks they owned went bankrupt, the courts could order the seizure of all assets to the extent of the amount of damage suffered. Immediately after the abolition of the unlimited liability of bankers, there was an increase in risk-taking and, as a result, an increase of bank failures.

The rural world and in particular the overwhelming majority of peasants had no access to banking services and they were handed over to usurers. Similarly, in the cities, artisans and small entrepreneurs did not have access to banking credit. From the 1900s onward, this led to the creation of credit cooperatives in both urban and rural areas which were hardly little affected by bankruptcies.

On the other hand, from 1913 to independence, there was an uninterrupted series of bank failures. 108 bankruptcies between 1913 and 1921, 215 bankruptcies between 1926 and 1935, 70 bankruptcies between 1936 and 1945.

Bank frauds and banking crises have been an integral part of the financial history of India under British rule. In 1913, John Maynard Keynes, after studying the state of the banking sector characterised “(the) country as dangerous for banks”. In fact, the scams in the Indian banking sector predate Keynes’ observation. The Presidency Bank of Bombay (PBB), set up by the British East India Company in 1840, was stable and prudently managed until the mid-1860s. It was at this time that the British began to rely heavily on the Bombay cotton markets, as supplies from the United States declined due to the civil war. As a result, many cotton companies emerged and banks began to sprout in Mumbai to meet the burgeoning demand for capital.

Read More at https://www.cadtm.org/India-from-loans-to-credit-since-4000-years-and-the-existence-banks-for-2500

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