Building an Indian bank: PNB’s Swadeshi roots
Punjab National Bank may have become synonymous with the Nirav Modi scam today, but in the late 19th century, the bank was a dream shared by Swadeshi pioneers of pre-Independent India
Her school was near the Punjab National Bank (PNB) in Lahore. That’s how an 80-year-old living in Toronto remembers the location of the educational institution she had attended in the mid-1940s in pre-Partition India. “I believe they were not so good with road names at the time, so the big bank building must have been a landmark,” says Aanchal Malhotra, co-curator of the Museum of Material Memory, a digital archive of the material culture of the Indian subcontinent. She heard the little anecdote about PNB from her grand aunt.
When PNB was set up in Lahore in 1894 (the bank was incorporated in May 1894, but opened for business in April 1895), however, it was more than just a physical landmark. In the past two months, PNB may have been in the news only because of the scam by jeweller Nirav Modi, accused of perpetrating a loan fraud worth thousands of crores on the bank, but back in the nineteenth century, the setting up of PNB was hailed in the Tribune newspaper, which felt that the bank “will endeavour to encourage and assist the more important native industries which are now withering for want of capital and guidance…”.
As political economist Amiya Kumar Bagchi points out, PNB was not the first bank to have opened in the country. India, writes Prakash Tandon in his book ‘Banking Century: A Short History of Banking in India & The Pioneer – Punjab National Bank,’ had a fairly well-developed system of money lenders. Some of them were also bankers who accepted deposits. But when the English traders came to India in the 17th century, they began to conduct their own banking businesses, in addition to other trades.
Thus started the Western model of banking in India. The Government Bank of Bombay opened in 1720, the Bank of Hindostan in 1770. The Bank of Bengal and Bihar came in 1773. Then followed the Presidency Banks – in Calcutta, Bombay and Madras. While these were state run or opened by business agencies, there were also private joint-stock banks – where owners shared profits and liabilities, but stocks were also issued for shareholders to buy and sell on exchange. One such was Allahabad Bank, started by a group of Europeans in 1865. Big European banks also opened branches in India – such as the National de Paris, which came in 1860.
“Most of these foreign-owned or operated banks did not give credit to Indian businessmen, and when they did it was only on a government security,” says Bagchi. The withholding of loans from Indian businesses seems natural if one reads about the systematic destruction of these businesses – textiles, steel, shipbuilding and exports – by the British, especially the officials of the East India Company, as portrayed by writer-parliamentarian Shashi Tharoor in his book ‘An Era of Darkness: The British Empire in India.’
Citing British economic historian Angus Maddison in the book, Tharoor says, “At the beginning of the eighteenth century… India’s share of the world economy was 23 per cent, as large as all of Europe put together… By the time the British departed India, it had dropped to just over 3 per cent... India was governed for the benefit of Britain.”
In 1894, when PNB started, Tharoor says the condition of the Indian economy would have been pretty grim. “British exploitation was its peak... The economy’s growth rate was well below one per cent,” he says. The Presidency banks and other European-operated banks, he says, would give loans to Indians, but “only to a handful of rich and well-connected Indians. The vast majority were still reliant on rapacious money-lenders and over 95 per cent of the population was unbanked. An Indian bank, it was presumed, would be more sensitive to the needs of Indian depositors and borrowers, especially the latter.”
Doubtless, the founding fathers of PNB felt the same. The economic situation in Punjab, despite colonial rule, was a little different from the dismal one presented by Tharoor for the rest of India. Punjab was annexed in 1849. “With two hundred years of experience behind it,” writes Tandon, “and having dropped trading fifteen years earlier and turned solely to administration, the East India Company approached Punjab with a difference... Land revenue was fixed in cash and collected directly, with a degree of equity and flexibility”, he writes.
The use of new technologies in agriculture, combined with the boost in export of cotton from Punjab to Europe during the American Civil War, helped in the economic growth of the region. However, except for some small agro-based industries – such as those for processing grains, cotton, sugarcane, wood or leather – by and large Punjab remained an agro-economy, with little attention given to industrial growth. But it gave rise to a class of educated locals, fired with a zeal for independence from the British. As an article on the PNB website about the history of the bank points out, one of the dreams of this new class was a Swadeshi bank, started with Indian capital and managed and operated by Indians.
The Birth Of PNB
The idea of an Indian bank, writes Tandon, referring to a statement made by the famous freedom fighter, Lala Lajpat Rai, was long cherished by Rai Mul Raj, an Arya Samajist. Rai Mul Raj, he writes, was deeply concerned by the fact that though Indian capital was being used to run English banks and companies, the profits went entirely to the British and Indians had to satisfy themselves with a tiny interest on their capital. Tandon, also a former chairperson of PNB, writes that it was at Rai Mul Raj’s insistence that Lala Lajpat Rai sent a circular to some friends sharing the idea of an Indian joint-stock bank as the “first step in constructive Swadeshi”. The idea caught on and PNB was formed.
In May 1894, an eclectic group of six – from various communities and walks of life – met at the residence of Dyal Singh Majithia. A member of the well-known Majithia sardars of Punjab, Dyal Singh was a Western-educated social reformer, founder of the Tribune newspaper and Dyal Singh College in Lahore. The other six included EC Jessawala, a Parsi merchant; Babu Kali Prasono Roy, who had been chairman of the reception committee of the Indian National Congress at its Lahore session in 1900; Bakshi Jaishi Ram, a civil lawyer in Lahore; Lala Harkishen Lal, an entrepreneur who later set up the Bharat Insurance company and the People’s Bank; Lala Bulaki Ram and Lala Lal Chand, one of the founders of DAV College. Most of them didn’t have any experience of running a bank, but they were all fired with the passion of starting an Indian bank. Five of them – Dyal Singh, KP Roy, Lala Lal Chand, Jessawala and Harkishen Lal, along with Lala Prabhu Dyal, a merchant and philanthropist of Multan and Lala Dholan Das, a banker and merchant from Amritsar – would go on to form the bank’s first Board.
At that meeting at Dyal Singh’s house, it was decided “to hire a house in the famous Anarkali Bazar of Lahore opposite the post office and near the well known stores of Rama Brothers.” Harkishen Lala and Bulaki Ram were entrusted with the job of framing the business rules. A few days later, Dyal Singh Majithia was elected chairman of the bank, Harkishen Lal secretary and Bulak Ram Shastri manager at a monthly salary of ₹150. Eight staff members were also appointed at a total monthly wage of ₹170, writes Tandon – an accountant, a treasurer, a daftari, two peons and two security guards. In November, 14 shareholders met and took shares of ₹100 each. But right from the start, it was clear that the control of the bank was to lie with the people – the large, dispersed shareholders. And as a result, the 14 original shareholders and directors kept only a limited number of shares with themselves.
On April 12, 1895, day before the festival of Baisakhi, PNB opened for business.
The Golden Years
Lala Lajpat Rai was the first to open an account at the bank. In May 1895 an auditor was appointed. The clear rules, the attempt at transparency and the passbook – a new thing for Indians – helped build confidence in the bank. On June 30, 1896, barely a year after opening, the bank’s total deposits had risen to ₹3,46,046, as against ₹1,65,337 on December 31, 1895.
The Swadeshi Movement of 1905 saw the setting up of many more Indian commercial banks between 1906 and 1913. It also boosted the co-operative credit movement and helped establish agricultural credit societies and urban co-operatives.
But then came the first world war (1914-18) and the years of economic turbulence as the US stock exchange crash of 1929 and the resultant economic depression, plunged finances the world over into a crisis. Almost all banks suffered huge losses. It was about this time that the account of the Jallianwala Bagh Committee – set up by the Congress to enquire into the massacre of 1919 – was opened at PNB. The account was operated by Mahatma Gandhi and Pandit Nehru.
The post-depression years of 1941 to 1946, were good ones for the bank. The number of branches grew to 278 and deposits rose to ₹62 crores. But the shadow of Partition loomed large, and the then director, Lala Yodh Raj, decided to shift PNB’s registered office from Lahore to New Delhi.
The Move To Delhi
But Partition took its toll. Many staff members reportedly became victims of the widespread riots during the discharge of their duties. “The bank didn’t have all its documents. Many account holders had lost their passbooks in the migration,” recalls SS Kohli, who was chairman of the bank from 2000 to 2005. “But the bank ensured that account holders affected by Partition got all their deposits.”
Over the years, PNB managed to stay among the top public sector banks in the country. When it started, its operations were restricted to Punjab. But as smaller banks were merged with it, especially after Independence, and newer branches were opened across the country, it acquired a pan-Indian presence, says Kohli. In 1969 it was one of 14 commercial banks to be nationalised. The very fact that PNB was nationalised is an indication that it was doing well, says Saurabh Mukherjea, CEO of Ambit Capital. “Had it not been for nationalisation, the spread of banking to the small towns would not have happened. But the fallout of nationalisation is the politicisation of the banks,” he says.
PNB was not the first Indian joint-stock bank to open. The Oudh Commercial Bank, established in 1881 in Faizabad had that honour. But the Oudh Commercial Bank closed down in the 1950s, while PNB continued.
The past 123 years have not been without crises. The first stumbling block came just about two years after the opening of the bank, in the form of a very public spat between Lala Harkishen Lal and Lala Lajpat Rai. Lala Lajpat Rai’s brother, Dalpat Rai, had been joined the bank in 1895. After he resigned in 1897, Lajpat Rai wrote, “As secretary, my brother had done something under Harkishen Lal’s orders in which another director was concerned. The transaction brought a loss to the Bank, and the Board asked the manager to submit his explanation to Lala Harkishen Lal. My brother showed Lala Harkishen Lal his own signed instructions... Harkishen Lal wanted Dalpat Rai to destroy the document. By refusing to do so, he incurred Harkishen Lal’s displeasure and resigned.”
The infighting continued. In 1901, Harkishen Lal started the People’s Bank (which later closed down). But when his term as director of PNB expired, Harkishen Lal sought re-election. People took a keen interest in the fight. Between February and March 1902, the Tribune published 14 letters on the subject, writes Tandon.
The bank had captured people’s sentiments. At a time when the country was desperately trying to assert its identity and shake off colonial chains, banks like PNB were more than mere commercial ventures. They represented a dream, which made every account holder feel a personal tie with them. No wonder then that Dr Santokh Singh, whose family moved from Lahore to Amritsar when the country was partitioned, remembers that they had maintained an account at the PNB as long as his father was alive. “I don’t recall how or why we closed our account after that,” he muses. Perhaps it was because, for the next generation PNB had stopped being anything more than a commercial establishment and practical considerations like interest rates, proximity to residence and ease of conducting business began dictating one’s choice of bank.