Reserve Bank of India: Journey into History of Bank of the Bankers

Sameer Pushp

Reserve Bank of India (RBI) did not become the ‘Bank of the Bankers’ in a day. It’s been a long and tough journey of evolution, consolidation, policy changes and reforms that shaped it to be an institution with a difference. Legislation to set up the RBI was first introduced in January 1927, and after seven years in March 1934, the enactment became an accomplished fact. It is one of the oldest central banks in the developing countries. Its formative years have been eventful. Its efforts to adapt central banking functions was neither deep-rooted nor widespread, the special responsibilities including those of exchange control to shoulder with the outbreak of World War II was a great responsibility thrust upon in the very first decade of its existence. Its transformation from a privately owned institution to a nationalized undertaking and its new role in the economy with the advent of independence was formidable. Over the years when RBI embarked upon the path of its growth there are many anecdotes that are wrapped in the footprints of time.

Prior to the establishment of the RBI in 1935, the principal functions of a central bank were performed by the Government of India primarily, and to a smaller extent, by the Imperial Bank of India, since its establishment in 1921. The regulation of note issue, the management of foreign exchange and the custody of the nation are metallic and foreign exchange reserves were the responsibilities of the Government of India. The Imperial Bank acted as banker to Government and to a limited extent as a bankers’ bank, in addition to its primary functions as a commercial bank. By the time the Reserve Bank came to be established, organized banking in India had developed to an extent and an important element of this sector which comprised foreign banks were generally referred to as Exchange Banks.

In 1941, Karachi office was mainly a currency office having a small strength of about 75 staff members. At that time currency notes, which were mostly in the domination of Rs. 100 and Rs. 1000 were issued circle wise; they were a legal tender throughout undivided India. Names of circles of issue, viz; Mumbai, Kanpur, Calcutta, Madras, Karachi, Lahore; used to be printed on the notes. Each circle has to maintain member- wise record of notes issued and cancelled from time to time. If issued notes of Karachi circle were collected in Calcutta, they had to be brought to Karachi and brunt there after noting the cancelled numbers in the issue ledgers. The ledgers containing individual number of notes issued & cancelled. In any case any note having the same number as the one on the cancelled note was detected, an inquiry used to be conducted.

In 1946, when Rs. 1000 notes were demonetize some people exchanged their notes for Rs. 500 to Rs. 600 per piece, which were individually exchanged at the RBI counters- one or two pieces to the income-tax department. Banks and other corporate bodies had changed their higher denomination notes with smaller denomination. Thus, they could oblige their customers and acquaintances by exchange of notes in their names. In those days, one-rupee silver coins used to be examined by cashiers for their genuineness by striking them on the wooden counter or wooden tables at a very fast speed. They could identify counterfeit coins just by listening to the sound of each coin. The RBI was truly musical those days.

In early 40’s, senior officials posts in RBI were filled up by the promotions from the existing staff and/or taking staff in deputation from the Imperial Bank of India. The final interview used to be held at central board of Directors at Calcutta. After partition officers from Karachi were asked to report to Mumbai office in 1947. When it came to women staff, there were hardly any on the Bank’s rolls on that time. The few who joined being mainly telephone operators. The first lady to be taken up for a clerical work joined in early forties and the first to be recruited directly as an officer was Dharma Venkatraman who joined in March 1949. Gradually the numbers increased. According to a data women formed less than 8 per cent of the total staff in January 1968; which is around 18 per cent.

Pages of history tell us that there were in fact very few Europeans recruits other than those who originally came from the Imperial Bank. This was mainly due to the efforts of Deputy Governor Nanavati who wanted the maximum opportunities to be given to the Indians. In the matter of staff he stood for Indianisation of as much as buying India made articles. In this connection, it is of interest to know that when the office raised objections to buying of India made clocks on the ground that they stopped working frequently. Shri Nanavati remarked that, “it did not matter even if all clocks in the bank come to a standstill.”

However, it is very interesting to learn that the Secretary of State for India favored a leisurely time-table, for several reasons for the enactment of RBI as an institution. First, apart from the time necessary to make the preliminary arrangements, some of the pre-conditions envisaged for the establishment of the Bank, such as, improvement of the budgetary position of the Government and the return of the normal export surplus, required to be fulfilled. These preconditions were time consuming and burdensome. Further, the Secretary of State was of the view that ‘ it would be unfair to hasten the opening of the Reserve Bank until he (the new Finance Member) has had an opportunity of acquainting himself personally with the situation on the spot and been able to form his own judgment on matters. A suggestion put forth by the Government of India that the Bank should start without the function of currency regulation was rejected by the Secretary of State. In the end, a compromise emerged in that the Bank started functioning not as early as the Government of India had desired but not as late as the Secretary of State had envisaged.

One of the important agreements was ‘British Debt Pact with India’ which was signed on the 15th August, 1947. The Government of UK & Government of India signed an interim agreement, to cover the period up to the end of 1947, relating to India’s sterling balances that time. After the meeting of officials from both sides reviewed on economic and financial problems between two countries and probable requirements of India was taken. In the meeting it was agreed that a sum of £ 35 million should be available from India’s existing balance for expenditure in any currency, to be arranged up to December 31st, 1947. In addition, a working balance of £ 30 million will be at the disposal of Reserve Bank of India. In particular both the Governments also agreed that no restrictions will be placed by either Government on the remittances of savings belongings to persons of UK origin who are proceedings to UK to take up permanent residence or a voluntary repatriation of Investments in India by persons resident in UK.

Today, RBI is an institution with a difference which works with the objective of ensuring monetary stability, monetary management, foreign exchange, reserves management, government debt management, financial regulation and supervision. It core duties also entails: currency management and operating the credit system to India’s advantage. In addition, since inception the bank has played an active developmental role, particularly for the agriculture and rural sectors. These are the snap shots from pages of history which I could snatch from the long and distinguished journey of the Bank of the Bankers.

PIB Feature



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