Banking in Kerala 91 Chapter VI HISTORY OF BANKING IN KERALA AND THE CURRENT STATUS OF PRIVATE SECTOR BANKS This chapter makes an overview of the emergence of the banking system in Kerala, with special reference to its unique history of private sector banking. The current status of the four Kerala-based private sector banks are also included in this chapter. 6.1. History of Banking in Kerala Kerala has got an enviable history of banking. Kerala had to its credit a very conducive climate for banking development right from historical times. When there were only five banking establishments in the whole country during the nineteenth century, one was in Kerala viz. Nedungadi Bank established in 1899, in Calicut (Kozhikode). Private banking used to occupy a very significant place in the financial system of Kerala. The two prominent categories of indigenous bankers in Kerala were Private money-lenders and Hundi I merchants. The activities of these indigenous bankers were mostly concentrated in regions like Thrissur and Thiruvalla. Tamil Brahmins who were Hundi merchants undertook early dealings in money matters in Thrissur. Another very significant feature of the history of financial system in Kerala is the prominence of a large number of Chit II Finance companies since historic times. This traditional mode of financing represents the earliest form of crude banking, and even at present these companies exist in Kerala in a significant manner. The emergence of organized forms of banking activities was because of the growing demand for money and credit for productive activities which could not be met by the traditional financing means. The Nedungadi Bank started by Sri. Appu Nedungadi in 1899, but registered only in 1910 is the first bank in Kerala. The first registered bank in Kerala was the Travancore Permanent Funds. Travancore Bank
Banking in Kerala 92 Ltd. based at Thiruvalla, however, was the earliest bank established in the Travancore Cochin area. Afterwards many enterprising people came forward to establish banking firms and by the time the new Companies Regulation of 1917 (Act I of Malayalam Era 1092) was passed, six banks were in existence. Modern banking methods were initiated in Kerala mainly by Syrian Christians of Thrissur, who formed joint stock companies for undertaking banking business and made good progress in it. Among the early banks all except Dhanalakshmi Bank belong to them, the most important among these being The Catholic Syrian Bank and South Indian Bank. Though the Hindu-Nair community had started The Cochin Nair Bank it was subsequently merged with State Bank of Travancore. In other Christian denominated areas also, like, Thiruvalla, Palai, Kottayam etc. many banks were started during those days. One of such leading banks was the Travancore National Quilon Bank. It had about 80 branches all over India. It went into liquidation in 1938. Another prominent bank was The Palai Central Bank, which met with a similar disastrous end in 1960. In spite of many such bank failures, the private banks have contributed tremendously to the growth of banking system in Kerala. After the passing of Companies Regulation of 1917, many banks were registered under the said Act. The first to be registered as above was Ambalapuzha Christian Bank, followed by the Catholic Syrian Bank in 1918. Other such banking initiatives included Bank of Deccan (1919), The Central Banking Corporation of Travancore (1926), Kottayam Bank (1926), The Palai Central Bank (1927), Bank of Cochin (1928), South Indian Bank (1929), Travancore Forward Bank (1929), Travancore Federal Bank (later changed its name as The Federal Bank), The Oriental Insurance and Banking Union (1933), The Indian Insurance Banking Corporation (1933) and the The Nanchanad Bank (1937). Total number of banks functioning in the Travancore state increased from just 5 in 1917-18 to as high as 274 by 1932-33 which was the highest ever in the history of the state. A substantial number of these newly formed banks were located in the central taluks, especially Thiruvalla. During
Banking in Kerala 93 the period from 1927 to 1930, a period which coincided with the peak level of world prosperity net addition to the number of banks was of the order of about 200. The number of banks in 1929-30 was as high as 258. This constituted nearly one-fifth of the total number of banks existing in the whole of the erstwhile British India. Table 6.1 shows the number of banks working in the erstwhile Travancore and Cochin states during the period 1092 to 1130 (Malayalam Era) or 1916-17 to 1954-55 (Christian Era): Number of Banks at the end of the year Travancore State Cochin State 1916-17 6 NA 1920-21 43 NA 1928-29 195 64 1929-30 258 NA 1932-33 274 NA 1936-37 241 155 1954-55 85 68 Table 6.1 : Number of Banks functioning in Travancore and Cochin States (Source: Menon, K Ramunni (1956) Report of the Travancore-Cochin Banking Inquiry Commission, Para 65; Travancore-Cochin Banking Enquiry Commission (1955), Trivandrum.) Of the banks in the Cochin state, most of them were based at Thrissur, a commercial town mostly dominated by Christians, with extensive rural areas all around which had their own banking concerns. Kerala had got an excellent banking infrastructure right from historical times and one among the five banking establishments in the whole of India during the nineteenth century was in Kerala (viz. Nedungadi Bank, started in 1899) as noted
Banking in Kerala 94 earlier. Regarding the banking network in Kerala, the observation by The Travancore Cochin Banking Inquiry Commission in 1955 was as follows: The average number of people per banking office at present work out to 15,891 which is incidentally the smallest figure as compared to any other state in India, while for India as a whole the corresponding figure is 87,765. The Travancore Cochin state thus stands foremost in regard to the number of banking offices with PEPSU as the second, having one banking office for an average of 45,970 persons. This will be more pronounced if it is seen in juxtaposition to the similar figures in respect of the foreign countries as for example in the UK, the average number of people per banking office works out to 4600, in the US 7600 and in Japan 15,900 which almost approximates to the figure in respect of the Travancore Cochin state. Another peculiarity of Kerala banking, as pointed out earlier, was that banks were not concentrated in the cities and larger towns alone. Rather, they were generally spread out into the rural interiors of the state as well. The Travancore Cochin Banking Inquiry Commission (1955) observes: Whereas in Bombay state only 73 out of a total of 577 offices or 13 percent, are in places with a population of less than 10,000 and in the Madras state 135 out of a total of 780 bank offices or about 18%; no less than 197 bank offices or 35% (out of 571) are located in places with a population less than 10,000 in the Travancore Cochin state. Regarding the reason for such a large network of branches in the state the Commission observed as follows: People in this state, more than elsewhere in India, are split up into numerous castes, creeds and communities, and in spite of the great advance in education in the state, this difference has continued to remain. There are numerous banking institutions with different shades of religion and castes catering to their respective communities. The business profile of the Kerala-based banks, particularly during the early days was not limited to the traditional activities of acceptance of deposits and
Banking in Kerala 95 dispensing credit. The business of Kuries or Chitties constituted a considerable portion of their total business portfolio. As many as 166 banks were undertaking Kuries business during the thirties. As on 31 st December 1955, the total number of banks in the state was 153. The district-wise distribution of banking offices in Travancore Cochin state in 1955 given in Table 6.2 also points to the predominance of Thrissur district in respect of bank offices: Name of the District Number of Banking Offices Quilon 152 Kottayam 111 Trichur 252 Trivandrum 56 Total 571 Table 6.2: District-wise Distribution of Bank offices in Travancore Cochin State. (Source: Menon, K Ramunni (1956) Report of the Travancore-Cochin Banking Inquiry Commission, Para 65; Travancore-Cochin Banking Enquiry Commission (1955), Trivandrum.) Another noteworthy feature Kerala-based private banks of early days was their small size while number was very large, compared with national figures. For instance, in the Travancore Cochin state, the total paid up capital of commercial banks in 1928-29 was about Rs.42.5 lakhs averaging Rs.0.22 lakhs per bank which in turn was, roughly one-eighth of a commercial bank in British India in the corresponding period. Out of the total number of banks, only five banks had paid up capital above Rs.1 lakh. Considering the above state of affairs, Bank Award Commission (1955) pointed that the Travancore-Cochin state was definitely overbanked and that the position of most of the banks was illiquid. The Commission
Banking in Kerala 96 had accordingly suggested the weeding out of the unsound banks for strengthening the banking system in the state. The total number of non-award banks in Travancore Cochin area was 143 at the time of Bank Award Commission (1955), but this had fallen to about 90 by the end of 1958. This indicates that many of the small and uneconomic banking units were amalgamated or eliminated. A few developments that occurred in Kerala banking were instrumental in bringing about some measures of vital significance and long-lasting repercussions on the banking system of the country as a whole. This is evident from the following observation of the Banking Commission (1972): (a) (b) (c) The failure of the Laxmi Bank and the Palai Central Bank highlighted the risks of loss of the savings of depositors of banks. This ultimately resulted in the enactment of the Deposit Insurance Corporation Act, 1961, which led to the establishment of the Deposit Insurance Corporation in January, 1962. The failure of the Travancore National Quilon Bank Ltd., in 1938 also drew attention to the urgent need for comprehensive banking reforms and legislation. In November 1939, the proposals for a comprehensive Banking Act were submitted to the Government by the Reserve Bank The process of weeding out substandard and non-viable banks which started with the recommendations of the Travancore Cochin Banking Inquiry Commission was accelerated after the failure of the two Scheduled Banks in 1960 (Laxmi Bank and The Palai Central Bank). A number of small local banks which had developed at small towns were absorbed into larger banks with the result that as the number of smaller banks declined, the number of branches of bigger size increased.
Banking in Kerala 97 6.2. Bank Failures, Mergers and Consolidations in Kerala Banking There were 482 banks failures in India during the period 1939-45. Of these 185 bank failures related to Travancore Cochin area; 132 being in Travancore area and the balance 53 in Cochin area. Private banking in Kerala had witnessed several devastating changes in 1960s also. This was mainly as a consequence of the fall of The Palai Central Bank which was one of the most prominent private banks in Kerala at that time. This made survival of small banks very difficult. Accordingly, some of the small banks were merged with stronger ones like Federal Bank, South Indian Bank and State Bank group III banks. In 1985, the Cochin Bank was merged with State Bank of India. Further, in 1988, the Parur Central Bank was acquired by Bank of India. In 2002, Nedungadi Bank was taken over by Punjab National Bank as per the directives of the Reserve Bank of India. Further, in August 2007 Lord Krishna Bank was acquired by Centurion Bank of Punjab Ltd. As a result of the various developments like liquidations, amalgamations, mergers etc. total number of banks registered in Kerala has finally shrunk to just 5 (ie. 4 private sector banks and 1 public sector bank viz. State Bank of Travancore) by 2007. The latest position in respect of scheduled commercial banks registered in Kerala is as follows (2009). Sl. No. Name of the Bank Ownership Year of Promotion Class of Bank 01. The Catholic Syrian Bank Ltd. Private Sector 1918 A 02. The Dhanalaksmi Bank Ltd. Private Sector 1927 B 03. The Federal Bank Ltd. Private Sector 1931 A 04. The South Indian Bank Ltd. Private Sector 1929 A 05. State Bank of Travancore* Public Sector 1945 A Table 6.3 : Kerala-Based Scheduled Commercial Banks (2009) (* Note: This public sector bank in the State Bank group is not coming under the purview of this study. Only the other four private sector banks are under detailed study).
Banking in Kerala 98 6.3. Current Status of Private Sector Banks in Kerala: an Overview As already noted in the last paragraph, at present there are only four private sector banks in Kerala, all being under the category of Old Private sector Banks (OPBs). A brief profile of these four OPBs are given in the following paragraphs. 6.3.1. The Catholic Syrian Bank Limited (CSB) The Catholic Syrian Bank (CSB) was founded on November 26, 1920 in Thrissur city in Kerala and commenced business on January 1, 1921 with an authorised capital of Rs 5 lakhs and a paid up capital of Rs 4,5270. In August 1969, the bank was included in the Second Schedule to the Reserve Bank of India Act 1934. In 1975, the bank attained the status of "A" Class Scheduled Bank when its total deposits crossed Rs 25 crores. Since 2008, there has been a move from another Kerala-based OPB viz. Federal Bank to take over CSB, though it is yet to be materialized. (Table 6.4). Particulars FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 No. of offices 314 327 345 358 360 No. of employees 2863 2863 2791 2723 2676 Business per employee (in Rs. lakh) 220.00 247.00 278.00 317.00 374.00 Profit per employee (in Rs. lakh) 0.37 0.22 0.68 1.34 1.39 Capital and Reserves & surplus 210 216 229 305 388 Deposits 4021 4289 4749 5318 6333 Investments 1323 1432 1553 1819 2184 Advances 2289 2695 3013 3314 3684 Interest income 368 365 409 481 557 Other income 46 40 43 60 100 Interest expended 222 218 252 317 391 Operating expenses 114 150 137 151 187 Cost of Funds (CoF) 5.46 5.08 5.33 6.11 6.55 Return on advances adjusted to CoF 4.51 4.58 4.87 5.11 5.21 Wages as % to total expenses 22.80 30.43 23.78 21.01 20.65 Return on Assets 0.24 0.13 0.37 0.64 0.57 CRAR 11.35 11.26 9.58 11.21 12.29 Net NPA ratio 3.80 2.78 1.98 1.61 2.39 Table 6.4 : The Catholic Syrian Bank Ltd. Financial Highlights (2009) (Source: A Profile of Banks: 2008-09, Reserve Bank of India, Central Office, Mumbai).
Banking in Kerala 99 6.3.2. The Dhanalakshmi Bank Limited (DB) The Dhanalakshmi Bank was incorporated on 14 November, 1927 by a group of entrepreneurs at Thrissur, the cultural capital of Kerala. It became a scheduled commercialbank in 1977. It has now attained national stature with 181 branches and 26 Extension Counters spread over the states of Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, Maharashtra, Gujarat, Delhi and West Bengal (Table 6.5). Particulars FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 No. of offices 182 186 189 181 181 No. of employees 1313 1385 1385 1411 1402 Business per employee (in Rs. lakh) 292.70 311.71 366.68 409.08 585.88 Profit per employee (in Rs. lakh) -1.65 0.72 1.18 2.02 4.10 Capital and Reserves & surplus 114 134 147 172 424 Deposits 2339 2533 3088 3608 4969 Investments 708 710 865 1075 1567 Advances 1410 1594 1837 2102 3196 Interest income 192 210 249 312 408 Other income 15 22 28 42 79 Interest expended 119 127 150 214 287 Operating expenses 69 82 88 97 113 Cost of Funds (CoF) 5.07 4.97 5.10 6.17 6.53 Return on advances adjusted to CoF 4.62 4.65 5.22 4.98 4.50 Wages as % to total expenses 20.92 20.04 18.40 15.28 15.65 Return on Assets -0.83 0.33 0.47 0.76 1.21 CRAR 10.16 9.75 9.77 9.21 15.38 Net NPA ratio 3.92 2.82 1.75 0.88 0.88 Table 6.5 : The Dhanalakshmi Bank Ltd. Financial Highlights (2009) (Source: A Profile of Banks: 2008-09, Reserve Bank of India, Central Office, Mumbai). 6.3.3. The Federal Bank Limited (FB) In 1931, Kulangara Paulo Hormis established the Travancore Federal Bank at Nedumpuram, a place near Tiruvalla in Central Travancore. After initial moderate success, the bank came to the verge of bankruptcy. In 1944, K P Hormis,and his close relatives and friends obtained a controlling interest in the bank. The next year, the bank shifted its registered office to Aluva and the Bank commenced business by opening its first branch at Aluva. In 1947 it changed its name to Federal Bank.
Banking in Kerala 100 In 1964, the bank embarked on a series of acquisitions that would substantially increase its size. It acquired the Chalakudy Public Bank in Chalakudy, the Cochin Union Bank in Trichur, and the Alleppey Bank in Alleppey. The next year it acquired the St.George Union Bank in Puthenpally. Lastly, in 1968, it acquired the Marthandom Commercial Bank in Trivandrum. In 1970, the bank became a Scheduled Commercial Bank. In 2006, Federal Bank acquired Ganesh Bank of Kurundwad after the Reserve Bank of India suspended the bank. Since 2008, there has been a move to take over Catholic Syrian Bank. (Table 6.6) Particulars FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 No. of offices 471 483 552 602 611 No. of employees 6474 6015 6029 6945 7570 Business per employee (in Rs. lakh) 366.00 431.00 544.00 655.00 750.00 Profit per employee (in Rs. lakh) 1.39 3.54 4.43 5.43 6.90 Capital and Reserves & surplus 723 1250 1502 3926 4326 Deposits 15193 17879 21584 25913 32198 Investments 5799 6272 7033 10027 12119 Advances 8823 11736 14899 18905 22392 Interest income 1191 1437 1801 2515 3315 Other income 212 217 303 395 516 Interest expended 689 837 1085 1647 2000 Operating expenses 314 365 406 469 571 Cost of Funds (CoF) 4.54 4.73 5.11 6.32 6.36 Return on advances adjusted to CoF 4.81 4.18 4.51 4.49 6.05 Wages as % to total expenses 18.53 19.01 17.47 12.82 12.35 Return on Assets 0.62 1.28 1.38 1.34 1.48 CRAR 11.27 13.75 13.43 22.46 20.22 Net NPA ratio 2.21 0.95 0.44 0.23 0.30 Table 6.6: The Federal Bank Ltd. Financial Highlights (2009) (Source: A Profile of Banks: 2008-09, Reserve Bank of India, Central Office, Mumbai). 6.3.4. The South Indian Bank Limited (SIB) South Indian Bank was formed on the 25th January 1929 by a group of 44 enterprising men, who with a capital of only Rs 22,000.00, joined together at Thrissur city to liberate the business community from the clutches of greedy money lenders. The bank gained the confidence and received the patronage of the public in
Banking in Kerala 101 increasing measure over the years and in the 1960s when there was a crisis in the banking industry in Kerala, South Indian Bank took over fifteen other smaller banks. Ever since its inception in 1928, SIB has covered major milestones. In 1963-64, it went on an acquisition spree, acquiring 11 banks across Kerala. SIB was the first private sector bank to open a currency chest on behalf of RBI in April 1992. In November the same year, it became the first to open an NRI branch. It was first among private sector banks in Kerala to issue credit cards and also to open an overseas branch besides many more firsts to its name. (Table 6.7) Particulars FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 No. of offices 439 458 484 491 439 No. of employees 3588 3709 3868 4223 3588 Business per employee (in Rs. lakh) 352.00 422.00 508.00 600.43 352.00 Profit per employee (in Rs. lakh) 0.24 1.37 2.69 3.59 0.24 Capital and Reserves & surplus 456 641 724 1161 456 Deposits 8492 9579 12239 15156 8492 Investments 3133 2739 3430 4572 3133 Advances 5365 6370 7919 10454 5365 Interest income 709 761 977 1291 709 Other income 102 72 103 143 102 Interest expended 452 451 609 915 452 Operating expenses 187 226 219 248 187 Cost of Funds (CoF) 5.18 4.81 5.43 6.57 5.18 Return on advances adjusted to CoF 3.97 4.55 4.29 3.89 3.97 Wages as % to total expenses 18.54 20.58 16.09 12.58 18.54 Return on Assets 0.09 0.53 0.88 1.01 0.09 CRAR 9.89 13.02 11.08 13.80 9.89 Net NPA ratio 3.81 1.86 0.98 0.33 3.81 Table 6.7: The South Indian Bank Ltd. Financial Highlights (2009) (Source: A Profile of Banks: 2008-09, Reserve Bank of India, Central Office, Mumbai). REFERENCES (1) Menon, K Ramunni (1956) Report of the Travancore-Cochin Banking Inquiry Commission Travancore-Cochin Banking Enquiry Commission (1955), Trivandrum. (2) www.kerala.gov.in, Official Website of Kerala State Government. (3) www.keralaplanningboard.org, Official Website of Kerala State Planning Board, Government of Kerala. (4) www.rbi.org.in, Official Website of the Reserve Bank of India (RBI).
Banking in Kerala 102 (5) www.keralahistory.ac.in Website on Kerala history developed by Centre for Development of Information Technology (C-DIT), Trivandrum -17 (Kerala). (www.cdit.org) END NOTES I Hundi a traditional financial product prevalent in Kerala. This was popular among the merchants. II Chitty (or, Kuri) A Chitty is conducted by a person or an institution. This entity is called the foreman of the Chitty. In the case of Chit Finance institutions (say, a company or a partnership firm or a proprietorship concern) the respective institution is the foreman. Likewise, in the case of an individual running this business, the concerned person is the forman. A chitty is basically a contract between the foreman and the subscribers. As per the contract, each subscriber agrees to remit a fixed amount of money at the end of a fixed interval (say, at the end of every month, quarter, half-year etc.) for a fixed period like, 60 months, 20 half-years, 24 quarters etc. The number of tickets enrolling in a chitty will be equal to the number of intervals months for which the remittance have to be made or the duration of chitty; eg. 60 tickets in the case of 60 months Chitty or 20 tickets in the case of 20 half-years Chitty or the like. The total of the periodic subscription, called the chitty amount, will be given out as prize money to the person who bids by allowing for the maximum reduction in the prize money. The maximum reduction possible is 25% as per the prevailing Chitty Act in Kerala and if there are more than one subscriber interested in bidding at 25% reduction, the numbers of the such bidders will be put to a draw. Thus each subscriber gets an opportunity to receive the prize money once during the tenure of the chitty. All the promoters have to contribute the periodic subscription till the end of the chitty. The foreman is entitled to a certain percentage of the chitty amount (not more than 5% of the chitty amount) as his commission from each member. III. State Bank Group banks These include State Bank of India (SBI) and its seven associate (subsidiary) banks. This group of eight public sector (government controlled) banks represent the single largest bank group in India. One of the associates of SBI viz. State Bank of Travancore (SBT) is based at Trivandrum, Kerala. (Table 3). SBT is the commercial bank with the largest branch network in Kerala. At present (2004) it has got 555 branches in Kerala. The total number of branches is 668 branches. IV Private Banks: These are banks in the private sector. These banks are broadly classified into two groups viz. Old Private sector Banks (OPBs) and New generation Private Sector Banks (NPBs). Whereas OPBs are the private sector banks which were registered prior to the implementation of economic deregulation measures in India (1991), NPBs have been given license during the deregulated economic scenario. At present, there are 4 Kerralabased OPBs (Table 6.3).