Palai Central Bank
Encyclopedia
Palai Central Bank was a commercial bank
that functioned with its headquarters in Kerala
, South India
during the middle of last century. Although it was started in a small remote town, the Bank grew up to become not only the biggest bank but the biggest institution in Kerala
, after the state Government, and the 17th largest among the 94 scheduled banks in India. It was ordered to be liquidated in 1960 by Kerala High Court
on a petition moved by the Reserve Bank of India
.
From the time of its founding in 1927 to its closure in 1960, the Bank had an eventful period. The history of the Bank gives an insight into a period of history preceding and immediately following India’s independence, when Kerala
– a small State in the far south – could exert only very little influence in the nation’s capital. It was also a period when the need for protecting the interests of different segments of society was not a major consideration when policy decisions were taken by the Central Government.
in Pala (Palai), a small town in the central part of the then native state of Travancore
(which later became part of the Kerala
State). His Uncle, Augusti Mathai Kayalackakom, funded the start up capital. Joseph Augusti, who belonged to a family of agriculturists and traders, had carried on some other businesses before going into banking. He had run textile business initially in Pala, and later on in Thiruvananthapuram
(Trivandrum) in 1910, besides bus service in Thiruvananthapuram from 1913 onwards.
Some of the major Banks in India were formed during the beginning of last century. Between 1906 and 1913, Bank of India
, Central Bank of India
, Bank of Baroda
, Canara Bank
, Indian Bank
, and Bank of Mysore were set up. In 1921 Imperial Bank of India
was established through the amalgamation of three Presidency Banks which were earlier set up by the English East India Company. The native states of Travancore
and Cochin, as well as Malabar forming part of Madras Presidency
, also saw the formation of many banks.
It was in this scenario that a bank by name ‘The Central Bank Limited’ was started by Joseph Augusti in Palai in 1927. It was incorporated under the Travancore Companies Regulation 1092 with the following persons as the initial Promoter-Directors:-
The Bank was on a growth track right from the beginning. Its style of functioning was quite different from the other banks of the day. It was more of 'mass banking' than the 'class banking' practised by other banks of those days. This was a welcome change for the people who, for their needs, had largely depended on small moneylenders, most of whom were from Kalladaikurichi in Tamil Nadu
. The Tamilians were charging exorbitant rates of interest on loans.
In 1929, when the Great Depression
struck and Travancore
's plantation sector was badly hit, the Bank gave liberal assistance to the plantations. The Bank, which later changed its name to ‘Palai Central Bank’, started expanding its activities by opening branches at several places. When the Bank opened a branch in New Delhi
, India's new capital city in 1932, it was the very first bank to do so, ahead of even the established north-Indian banks. The Bank also discovered the potential of Aluva
(Alwaye) by opening a branch there, years before Aluva became a major industrial town.
In 1935, the Bank introduced electricity in its head office building in Pala by installing oil-powered generator, years before Government's first power project was commissioned at Pallivasal and electricity became common. The Bank was also a pioneer in introducing modern advertising, which was quite different from the staid advertisements of other banks of the day.
Employees – both executives and staff – were trained to project the Bank's motto of customer service. A young boy coming to deposit the scholarship amount he got received the same service that large depositors enjoyed. It was, therefore, natural that years later, when the bright youngster became District Collector, he still regarded the Bank as 'his' bank. The Bank’s branch managers followed an ‘open door’ policy making them accessible to everyone. This was in sharp contrast with their counterparts of the Imperial Bank of India
, who were totally unapproachable to the common man. The Bank's managers, KM Joseph and later KM Augustine in Thiruvananthapuram
, George Joseph in Chennai
(Madras), KM Chacko in Nagercoil
, C J Thomas in Delhi
and others enjoyed exceptional popularity and influence.
was established to take over from Government of India the functions performed by the Controller of Currency and from the Imperial Bank of India
, the management of Government accounts and public debt. It was a privately owned institution with its Central Office initially in Kolkatta.
In the same year, George Thomas Kottukappally, the brother of Director George Joseph Kottukappally, became a Director of Palai Central Bank. As the Travancore
Debt Relief Act was coming into existence in 1937, one of the first Directors of the Bank, Jacob Cherian Maruthikkunnel, was nominated to the Sree Chitra State Council to pilot the relative Debt Relief Bill, as it was expected that banks would be affected by the Act.
In 1937, two of the major banks of Travancore – Travancore National Bank and Quilon Bank – were amalgamated to form a large bank by name Travancore National and Quilon (TNQ) Bank. However, the large entity could get only a very brief period of existence, as in the very next year it was liquidated on the orders of C. P. Ramaswami Iyer, Dewan
of Travancore
. This led to the collapse of more than 60 small banks. But Palai Central Bank, which was the leading bank then, remained unaffected.
In 1940, industrialisation received a boost as power supply was started in Travancore
from Pallivasal Project and a stream of industries like FACT
and Ceramics, Kundara were started. In 1945, the State had another milestone in banking as the State Bank of Travancore
was started.
With India's independence in 1947, the first popular government assumed power in Travancore
in 1948 with Pattom Thanu Pillai as Chief Minister. The new Chief Minister told the Bank’s Management that with the dawn of independence, the Bank could make a major contribution in nation building. The Bank rose to the occasion, taking the leadership in subscribing to government bonds for large amounts. Development projects of the State that the Bank financed included the construction of the Trivandrum-Nagercoil
Cement Concrete Road, which now forms part of NH-47.
At the time of independence, the level of deposits and advances of the Imperial Bank of India
, the largest bank in the country, was Rs.275.14 crores and Rs.72.94 crores respectively, which today gives an idea about the value of Rupee then.
In the 1940s the Bank enjoyed an unprecedented financial position and influence. The chief editor of Malayala Manorama
Daily spoke in a TV interview (decades later) about the Palai Central Bank management helping their founder Mammen Mappilai – who was struggling to revive the newspaper – by offering to take over the paper as a whole or to invest in its shares. Eventually, an investment of 20% in shares was made.
In 1948, K M Joseph Kayalackakom – who had become a Director of the Bank in 1940 following the death of his father and the first Chairman of the Bank, Augusty Mathai – moved from Trivandrum to the Bank's head office at Pala. He then became the virtual General Manager of the institution.
In 1947, at a time when there were no Management Schools anywhere in the British Empire, Joseph Augusti sent his cousin KM George to the United States
for management studies. This gives an indication of Augusti's vision and farsight. KM George took his MBA degree from New York University
in 1948 thus becoming the first MBA holder of the State. In 1949, he joined the Bank as an executive. He was to later become the Secretary and Chief Executive Officer of the Bank.
In the late forties it was found that during the previous few years, the institution had drifted and slowed down from its previous spectacular growth rate. Officials, who had the charge of advances, had not been successful in controlling subordinates sufficiently to ensure discipline over making of advances. Several advances had proved to be doubtful, although their percentage in total advances was not high. Strict discipline was now enforced. A series of innovative schemes, were also introduced which brought not only order to the Bank but also set it on a course of further rapid growth.
In 1949, the Reserve Bank of India
(RBI) was nationalised and the Banking Companies Act came into existence (later renamed as Banking Regulation Act). This legislation gave RBI complete control over commercial banks. As RBI entered the picture, it continuously pursued the question of the old doubtful advances of the Bank, although it was satisfied with the Bank’s subsequent operations.
In 1950, when a new Diocese of the Catholic Church was formed in Pala, it was an open secret that the Bank was the prime mover in bringing the Diocese to Pala. The founder Managing Director of the Bank Joseph Augusti led a delegation that accompanied the new Bishop Mar Sebastian Vayalil to Rome
for the investiture ceremony. The Bank also took keen interest in extending assistance to the initial ventures of the new Diocese of Palai
. In 1953, the Bank had the honour of according a grand reception to Eugene Tisserant, Dean of Vatican
's Sacred College of Cardinals, at the residence of the Managing Director in Palai during the Cardinal's historic visit to Kerala
.
In 1953, George Thomas Kottukappally, who was still a Director of the Bank, became a Member of Parliament. Even after that, he continued to be a Director. In the same year, when A. J. John, Anaparambil
(who had become Chief Minister of the integrated Travancore-Cochin
State) resigned, he accepted the Bank’s invitation to join its Board of Directors.
party, at their national conference held at Avadi
in Tamil Nadu
, passed the resolution to establish a socialistic pattern of society in India "where the principal means of production are under social ownership or control". As the implementation of this began and the nation started moving along the socialist path, in that year itself Government of India nationalized the Imperial Bank of India
and formed State Bank of India
. In January 1956, life insurance was nationalized and Life Insurance Corporation of India
was formed. In 1957, with a view to further advancing socialism, four new taxes were introduced in the country, viz. Wealth Tax, Expenditure Tax, Capital Gains Tax and Gift Tax.
Palai Central Bank had by then emerged not only as the biggest enterprise in Kerala – bigger than all the private and public undertakings and banks in the State – but also as the 17th largest bank in the country, bigger than even some of the State banks. The north Indian bankers were naturally jealous of its phenomenal growth. From 1956 onwards RBI started turning down the Bank's repeated requests for opening new branches. That was the only way of arresting the run-away growth of the institution. In 1956, when RBI asked for the communal break-up of the Bank's depositors, not many could foresee what was to follow.
Even without branch expansion, the Bank was, however, making steady growth. With a view to strengthening the calibre of its executives, KM Mathai was sent for training to USA at the Kings County Trust Company and the First National City Bank of New York(Citibank
), as well as at Midland Bank
in UK. K M Ignatius, another executive, was trained at the First National City Bank of the US.
In March 1957, H V R Iyengar became Governor of RBI. He had succeeded B Rama Rau who had resigned due to differences with the Finance Minister after a long period of nearly eight years in office. Iyengar's tenure as Governor was a tumultuous period in the history of Indian banking.
The year 1956 saw the birth of Kerala
State and a year later in 1957 Kerala registered another first by voting to power the world's first communist government to be elected through the ballot box. Meanwhile, in Delhi, Jawaharlal Nehru
's two finance ministers had resigned in quick succession and Morarji Desai
became the new Finance Minister in March, 1958. Nehru soon became aware of the adamant and uncompromising attitude of Desai.
In 1959, seven banks controlled by the erstwhile native states – including State Bank of Travancore
– were nationalised by Government of India and made subsidiaries of State Bank of India
. Towards the end of that year RBI, under the influence of the north Indian bankers' lobby, initiated a series of steps in Palai Central Bank. These steps, taken with the stated object of improving the Bank's working, were apparently aimed at wrecking the institution. It asked Joseph Augusti to retire from the Board of Directors of the Bank. Also, K M George was asked to step down from the post of Chief Executive Officer and to continue as Secretary of the Bank. An outsider - an official of the State Bank of India
- was appointed as the Bank's new Chief Executive Officer. Following these moves, some of the depositors of the Bank started losing their confidence in the institution. Some of them asked for return of their deposits. Some people felt that RBI wanted to create a crisis in the Bank to facilitate its closure. However, the 'intended' crisis did not occur as the run on deposits soon decreased, and some of the depositors even made re-deposits.
RBI moved the application in Kerala High Court
for the winding up of the Bank under Section 38(3)(b)(iii) of the Banking Regulation Act, 1949. It may be noted that the Banking Regulation Act does not allow the High Court to go into the merits of RBI's application but specifies that the Court "shall order the winding up" if an application is made by RBI. Also, RBI can move an application if in the opinion of the RBI "the continuance of the banking company is prejudicial to the interests of its depositors", which is a rather vague provision. Justice P T Raman Nair, the presiding Judge of the Kerala High Court
ordered the winding up on 8 August, 1960.
After the winding up, Desai vehemently defended his action in Parliament. He, however, had to admit later that the reasons earlier stated were not correct.
The liquidation of the Bank was followed by a banking crisis. Most of the Banks in the State faced 'run' on their deposits. Even some of the Banks outside Kerala were affected. The total deposits of all the 339 commercial banks in India stood at Rs. 2021.84 crores in 1960. Out of the 339 commercial banks, 94 were Scheduled Banks and 245 were Non-Scheduled banks. The total deposits of all the 94 scheduled commercial banks, which was Rs. 1971.97 crores before the crisis, fell by more than 10% to Rs. 1741.80 crores in the 6 months following the crisis. RBI had a tough time proving that all is well with its running of the country's banking system. Punjab National Bank
, the worst affected among the northern Banks, received special support. But the affected Kerala banks were less lucky. They were amalgamated with other banks in the State or outside.
When the closure of the State's largest Bank also led to a crisis in the entire banking system, there was a hue and cry in all quarters, including the press. But out of sheer obstinacy, Desai refused to reconsider the matter. When a group of Kerala MPs met Nehru requesting that the Bank be revived, he told them that he would like to, but his insistence will lead to the resignation of Desai. He said there is a feeling that Finance Ministers did not thrive under him and so he did not want another resignation. In the larger interests of the nation, he asked the Kerala MPs to put up with the whole thing. When Chief Minister Pattom Thanu Pillai met Desai to make a personal appeal, he cut him out by asking as to how much money he had lost. A furious Pattom Thanu Pillai told him that like Desai he was also a true Gandhian and he has never had a bank account in his life. He then angrily walked out. With that, all doors for a revival from Government side were closed.
A legal battle was then fought. But the delay of the legal process made a revival impossible. In the Supreme Court, the Bank's case was argued among others by Gopal Swarup Pathak
, who later became Vice-President of India. The Court ruled in a 3-2 judgement that with the delay, a revival has been rendered infructuous .
After the closure of the Bank the first impression of the public was that the Bank had gone bust. They assumed foul play. When the Finance Minister of the country states in Parliament that the Bank's deposits had hardly 15% asset backing, the people had no reason to disbelieve. They had to wait for years to know that even after bearing several years of liquidation expenses, the depositors got more than 90% of their money – but in petty instalments. The people knew only then that as a going concern, the Bank could very well have repaid its depositors fully.
About 30 years later, in the early 1990s when banks in India faced a crisis of mounting losses and high levels of non-performing asset
s, an interviewer asked a now-retired Justice P T Raman Nair about his thoughts on the winding-up order of Palai Central Bank three decades ago. He then remarked that today's banks were in much worse condition and that if the current yard stick were applied Palai Central Bank would not have been ordered to be closed.
In Volume II of the History of RBI covering the years 1951-1967 , a 27-page appendix viz. "Appendix C: The Palai Central Bank" extensively covers the history of the Bank. The following is an extract:
"While defending the Reserve Bank as 'one of the best central banks in the world' maintaining a 'high level of efficiency', the Prime Minister, Jawaharlal Nehru
, was reported to have acknowledged that it may have made a 'mistake' in closing down the Palai Central Bank.
"Defending the (Reserve) Bank's action, the (RBI) Governor recalled the representations received from the Kerala Bankers' Association and the Travancore-Cochin Banking Inquiry Commission to 'go slow' on refusing licences to banks in Kerala and pointed out that if the (Reserve) Bank had taken the action it had now taken in any of the previous three years, it would have been subject to even greater criticism. 'This has been the considered judgement of my colleagues and myself in the Bank.' However, (Governor) Iengar conceded, 'someone else could have exercised his judgement differently'."
The crisis that shook the banking sector of the country led to some changes in that sector. The demand for protecting the interests of depositors in the event of similar crises led to the passing of the Deposit Insurance Act by Parliament in 1961 and the eventual formation of the Deposit Insurance & Credit Guarantee Corporation (DICGC). Another demand arose from the allegation that RBI is a bureaucratic institution insensitive to the needs of the banking sector. Its advocates called for the formation of a Superintendent of Banking like that in the US to carry out the function of supervision of banking in the country. This demand was partially met years later when Government introduced a policy to appoint a career banker as one of the Deputy Governors of RBI.
There was also another aspect. The Bank was considered to be an institution of the Christian community, although members of every religion and community were present among the Bank’s innumerable account holders, employees, advisors and well-wishers. Today, if an institution of a minority community is touched by the Government, that community would create such a furore that anyone will think twice before taking a step forward. But minorities were much less aware of their rights way back in 1960. The Christian community, therefore, suffered in silence then.
In 1964, barely 3 years after the closure of Palai Central Bank, a major upheaval occurred in the Congress Party in Kerala. Fifteen of its MLAs – mainly those from central Kerala – split and formed a new party by name Kerala Congress
. It was the beginning of a change in the political equations in the State. The closure of Palai Central Bank is considered by many to be one of the root causes that led to the new chain of events.
In the same year, under an ingenious scheme which came to be known as ‘Kamaraj Plan
’, the irrepressible Desai was removed from the Union Cabinet.
Commercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
that functioned with its headquarters in Kerala
Kerala
or Keralam is an Indian state located on the Malabar coast of south-west India. It was created on 1 November 1956 by the States Reorganisation Act by combining various Malayalam speaking regions....
, South India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
during the middle of last century. Although it was started in a small remote town, the Bank grew up to become not only the biggest bank but the biggest institution in Kerala
Kerala
or Keralam is an Indian state located on the Malabar coast of south-west India. It was created on 1 November 1956 by the States Reorganisation Act by combining various Malayalam speaking regions....
, after the state Government, and the 17th largest among the 94 scheduled banks in India. It was ordered to be liquidated in 1960 by Kerala High Court
Kerala High Court
High Court of Kerala is the highest court in the Indian state of Kerala and in the Union Territory of Lakshadweep. The High Court of Kerala is headquartered at Kochi...
on a petition moved by the Reserve Bank of India
Reserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
.
From the time of its founding in 1927 to its closure in 1960, the Bank had an eventful period. The history of the Bank gives an insight into a period of history preceding and immediately following India’s independence, when Kerala
Kerala
or Keralam is an Indian state located on the Malabar coast of south-west India. It was created on 1 November 1956 by the States Reorganisation Act by combining various Malayalam speaking regions....
– a small State in the far south – could exert only very little influence in the nation’s capital. It was also a period when the need for protecting the interests of different segments of society was not a major consideration when policy decisions were taken by the Central Government.
Beginning
The Bank was founded by Joseph Augusti KayalackakomJoseph Augusti Kayalackakom
Joseph Augusti Kayalackakom was an outstanding entrepreneur of Kerala, India. He made pioneering ventures in diverse spheres during the first half of the 20th century, and was a major figure in the financial and social arena of the State for nearly fifty years.He was born in 1884 in Palai, a small...
in Pala (Palai), a small town in the central part of the then native state of Travancore
Travancore
Kingdom of Travancore was a former Hindu feudal kingdom and Indian Princely State with its capital at Padmanabhapuram or Trivandrum ruled by the Travancore Royal Family. The Kingdom of Travancore comprised most of modern day southern Kerala, Kanyakumari district, and the southernmost parts of...
(which later became part of the Kerala
Kerala
or Keralam is an Indian state located on the Malabar coast of south-west India. It was created on 1 November 1956 by the States Reorganisation Act by combining various Malayalam speaking regions....
State). His Uncle, Augusti Mathai Kayalackakom, funded the start up capital. Joseph Augusti, who belonged to a family of agriculturists and traders, had carried on some other businesses before going into banking. He had run textile business initially in Pala, and later on in Thiruvananthapuram
Thiruvananthapuram
Thiruvananthapuram , formerly known as Trivandrum, is the capital of the Indian state of Kerala and the headquarters of the Thiruvananthapuram District. It is located on the west coast of India near the extreme south of the mainland...
(Trivandrum) in 1910, besides bus service in Thiruvananthapuram from 1913 onwards.
Some of the major Banks in India were formed during the beginning of last century. Between 1906 and 1913, Bank of India
Bank of India
Bank of India is a state-owned commercial bank with headquarters in Mumbai. Government-owned since nationalization in 1969, It is India's 4th largest bank, after State Bank of India, Punjab National Bank and Bank of Baroda. It has 3415 branches, including 29 branches outside India...
, Central Bank of India
Central Bank of India
Central Bank of India , a government-owned bank, is one of the oldest and largest commercial banks in India. It is based in Mumbai...
, Bank of Baroda
Bank of Baroda
Bank of Baroda is the third largest bank in India, after the State Bank of India and the Punjab National Bank and ahead of ICICI Bank. BoB is ranked 763 in Forbes Global 2000 list. BoB has total assets in excess of Rs. 3.58 lakh crores, or Rs. 3,583 billion, a network of over 3,409 branches and...
, Canara Bank
Canara Bank
Canara Bank is a state-owned financial services company in India. It was established in 1906, making it one of the oldest banks in the country. As on 2009 November, the bank had a network of 3057 branches, spread across India...
, Indian Bank
Indian Bank
Indian Bank is a major Indian Commercial Bank headquartered in Chennai , India. It has 22,000 employees, 1923 branches and is one of the big public sector banks of India. It has overseas branches in Colombo, Sri Lanka, Singapore, and 229 correspondent banks in 69 countries...
, and Bank of Mysore were set up. In 1921 Imperial Bank of India
Imperial Bank of India
The Imperial Bank of India was the oldest and the largest commercial bank of the Indian subcontinent, and was subsequently transformed into State Bank of India in 1955.-Origin:...
was established through the amalgamation of three Presidency Banks which were earlier set up by the English East India Company. The native states of Travancore
Travancore
Kingdom of Travancore was a former Hindu feudal kingdom and Indian Princely State with its capital at Padmanabhapuram or Trivandrum ruled by the Travancore Royal Family. The Kingdom of Travancore comprised most of modern day southern Kerala, Kanyakumari district, and the southernmost parts of...
and Cochin, as well as Malabar forming part of Madras Presidency
Madras Presidency
The Madras Presidency , officially the Presidency of Fort St. George and also known as Madras Province, was an administrative subdivision of British India...
, also saw the formation of many banks.
It was in this scenario that a bank by name ‘The Central Bank Limited’ was started by Joseph Augusti in Palai in 1927. It was incorporated under the Travancore Companies Regulation 1092 with the following persons as the initial Promoter-Directors:-
- Chairman: Augusti Mathai Kayalackakom
- Mg. Director: Joseph Augusti KayalackakomJoseph Augusti KayalackakomJoseph Augusti Kayalackakom was an outstanding entrepreneur of Kerala, India. He made pioneering ventures in diverse spheres during the first half of the 20th century, and was a major figure in the financial and social arena of the State for nearly fifty years.He was born in 1884 in Palai, a small...
- Directors: Outha Ouseph Thottumkal, Varkey Ouseph Vellookunnel, Cheriyathu Thommen Menamparambil, George Joseph Kottukappallil and Jacob Cherian Maruthikkunnel
Tamil Nadu
Tamil Nadu is one of the 28 states of India. Its capital and largest city is Chennai. Tamil Nadu lies in the southernmost part of the Indian Peninsula and is bordered by the union territory of Pondicherry, and the states of Kerala, Karnataka, and Andhra Pradesh...
. The Tamilians were charging exorbitant rates of interest on loans.
In 1929, when the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
struck and Travancore
Travancore
Kingdom of Travancore was a former Hindu feudal kingdom and Indian Princely State with its capital at Padmanabhapuram or Trivandrum ruled by the Travancore Royal Family. The Kingdom of Travancore comprised most of modern day southern Kerala, Kanyakumari district, and the southernmost parts of...
's plantation sector was badly hit, the Bank gave liberal assistance to the plantations. The Bank, which later changed its name to ‘Palai Central Bank’, started expanding its activities by opening branches at several places. When the Bank opened a branch in New Delhi
New Delhi
New Delhi is the capital city of India. It serves as the centre of the Government of India and the Government of the National Capital Territory of Delhi. New Delhi is situated within the metropolis of Delhi. It is one of the nine districts of Delhi Union Territory. The total area of the city is...
, India's new capital city in 1932, it was the very first bank to do so, ahead of even the established north-Indian banks. The Bank also discovered the potential of Aluva
Aluva
Aluva , is a suburb of the city of Kochi, situated north of the city center and a municipality in Ernakulam district, Kerala, India. Aluva is also a major industrial center of the state....
(Alwaye) by opening a branch there, years before Aluva became a major industrial town.
In 1935, the Bank introduced electricity in its head office building in Pala by installing oil-powered generator, years before Government's first power project was commissioned at Pallivasal and electricity became common. The Bank was also a pioneer in introducing modern advertising, which was quite different from the staid advertisements of other banks of the day.
Employees – both executives and staff – were trained to project the Bank's motto of customer service. A young boy coming to deposit the scholarship amount he got received the same service that large depositors enjoyed. It was, therefore, natural that years later, when the bright youngster became District Collector, he still regarded the Bank as 'his' bank. The Bank’s branch managers followed an ‘open door’ policy making them accessible to everyone. This was in sharp contrast with their counterparts of the Imperial Bank of India
Imperial Bank of India
The Imperial Bank of India was the oldest and the largest commercial bank of the Indian subcontinent, and was subsequently transformed into State Bank of India in 1955.-Origin:...
, who were totally unapproachable to the common man. The Bank's managers, KM Joseph and later KM Augustine in Thiruvananthapuram
Thiruvananthapuram
Thiruvananthapuram , formerly known as Trivandrum, is the capital of the Indian state of Kerala and the headquarters of the Thiruvananthapuram District. It is located on the west coast of India near the extreme south of the mainland...
, George Joseph in Chennai
Chennai
Chennai , formerly known as Madras or Madarasapatinam , is the capital city of the Indian state of Tamil Nadu, located on the Coromandel Coast off the Bay of Bengal. Chennai is the fourth most populous metropolitan area and the sixth most populous city in India...
(Madras), KM Chacko in Nagercoil
Nagercoil
Nagercoil is the 12th largest city in the southernmost Indian state of Tamil Nadu and a municipality and administrative headquarters of Kanyakumari District...
, C J Thomas in Delhi
Delhi
Delhi , officially National Capital Territory of Delhi , is the largest metropolis by area and the second-largest by population in India, next to Mumbai. It is the eighth largest metropolis in the world by population with 16,753,265 inhabitants in the Territory at the 2011 Census...
and others enjoyed exceptional popularity and influence.
Dominant position
In 1935, the Reserve Bank of IndiaReserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
was established to take over from Government of India the functions performed by the Controller of Currency and from the Imperial Bank of India
Imperial Bank of India
The Imperial Bank of India was the oldest and the largest commercial bank of the Indian subcontinent, and was subsequently transformed into State Bank of India in 1955.-Origin:...
, the management of Government accounts and public debt. It was a privately owned institution with its Central Office initially in Kolkatta.
In the same year, George Thomas Kottukappally, the brother of Director George Joseph Kottukappally, became a Director of Palai Central Bank. As the Travancore
Travancore
Kingdom of Travancore was a former Hindu feudal kingdom and Indian Princely State with its capital at Padmanabhapuram or Trivandrum ruled by the Travancore Royal Family. The Kingdom of Travancore comprised most of modern day southern Kerala, Kanyakumari district, and the southernmost parts of...
Debt Relief Act was coming into existence in 1937, one of the first Directors of the Bank, Jacob Cherian Maruthikkunnel, was nominated to the Sree Chitra State Council to pilot the relative Debt Relief Bill, as it was expected that banks would be affected by the Act.
In 1937, two of the major banks of Travancore – Travancore National Bank and Quilon Bank – were amalgamated to form a large bank by name Travancore National and Quilon (TNQ) Bank. However, the large entity could get only a very brief period of existence, as in the very next year it was liquidated on the orders of C. P. Ramaswami Iyer, Dewan
Dewan
The originally Persian title of dewan has, at various points in Islamic history, designated various differing though similar functions.-Etymology:...
of Travancore
Travancore
Kingdom of Travancore was a former Hindu feudal kingdom and Indian Princely State with its capital at Padmanabhapuram or Trivandrum ruled by the Travancore Royal Family. The Kingdom of Travancore comprised most of modern day southern Kerala, Kanyakumari district, and the southernmost parts of...
. This led to the collapse of more than 60 small banks. But Palai Central Bank, which was the leading bank then, remained unaffected.
In 1940, industrialisation received a boost as power supply was started in Travancore
Travancore
Kingdom of Travancore was a former Hindu feudal kingdom and Indian Princely State with its capital at Padmanabhapuram or Trivandrum ruled by the Travancore Royal Family. The Kingdom of Travancore comprised most of modern day southern Kerala, Kanyakumari district, and the southernmost parts of...
from Pallivasal Project and a stream of industries like FACT
FACT
FACT may refer to:*Federation Against Copyright Theft*Federation of American Consumers and Travelers*FACT , a protein factor affecting eukaryotic cells...
and Ceramics, Kundara were started. In 1945, the State had another milestone in banking as the State Bank of Travancore
State Bank of Travancore
State Bank of Travancore , is a subsidiary of the State Bank Group and also has private share-holders. It is the premier bank of Kerala State, India, where it has 700 branches...
was started.
With India's independence in 1947, the first popular government assumed power in Travancore
Travancore
Kingdom of Travancore was a former Hindu feudal kingdom and Indian Princely State with its capital at Padmanabhapuram or Trivandrum ruled by the Travancore Royal Family. The Kingdom of Travancore comprised most of modern day southern Kerala, Kanyakumari district, and the southernmost parts of...
in 1948 with Pattom Thanu Pillai as Chief Minister. The new Chief Minister told the Bank’s Management that with the dawn of independence, the Bank could make a major contribution in nation building. The Bank rose to the occasion, taking the leadership in subscribing to government bonds for large amounts. Development projects of the State that the Bank financed included the construction of the Trivandrum-Nagercoil
Nagercoil
Nagercoil is the 12th largest city in the southernmost Indian state of Tamil Nadu and a municipality and administrative headquarters of Kanyakumari District...
Cement Concrete Road, which now forms part of NH-47.
At the time of independence, the level of deposits and advances of the Imperial Bank of India
Imperial Bank of India
The Imperial Bank of India was the oldest and the largest commercial bank of the Indian subcontinent, and was subsequently transformed into State Bank of India in 1955.-Origin:...
, the largest bank in the country, was Rs.275.14 crores and Rs.72.94 crores respectively, which today gives an idea about the value of Rupee then.
In the 1940s the Bank enjoyed an unprecedented financial position and influence. The chief editor of Malayala Manorama
Malayala Manorama
Malayala Manorama is a daily news paper, in Malayalam language, published in the state of Kerala, India. It was first published as a weekly on 14 March 1890, and currently has a readership of over 16 million . The Malayalam word "manorama" roughly translates to "entertainer"...
Daily spoke in a TV interview (decades later) about the Palai Central Bank management helping their founder Mammen Mappilai – who was struggling to revive the newspaper – by offering to take over the paper as a whole or to invest in its shares. Eventually, an investment of 20% in shares was made.
In 1948, K M Joseph Kayalackakom – who had become a Director of the Bank in 1940 following the death of his father and the first Chairman of the Bank, Augusty Mathai – moved from Trivandrum to the Bank's head office at Pala. He then became the virtual General Manager of the institution.
In 1947, at a time when there were no Management Schools anywhere in the British Empire, Joseph Augusti sent his cousin KM George to the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
for management studies. This gives an indication of Augusti's vision and farsight. KM George took his MBA degree from New York University
New York University
New York University is a private, nonsectarian research university based in New York City. NYU's main campus is situated in the Greenwich Village section of Manhattan...
in 1948 thus becoming the first MBA holder of the State. In 1949, he joined the Bank as an executive. He was to later become the Secretary and Chief Executive Officer of the Bank.
In the late forties it was found that during the previous few years, the institution had drifted and slowed down from its previous spectacular growth rate. Officials, who had the charge of advances, had not been successful in controlling subordinates sufficiently to ensure discipline over making of advances. Several advances had proved to be doubtful, although their percentage in total advances was not high. Strict discipline was now enforced. A series of innovative schemes, were also introduced which brought not only order to the Bank but also set it on a course of further rapid growth.
In 1949, the Reserve Bank of India
Reserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
(RBI) was nationalised and the Banking Companies Act came into existence (later renamed as Banking Regulation Act). This legislation gave RBI complete control over commercial banks. As RBI entered the picture, it continuously pursued the question of the old doubtful advances of the Bank, although it was satisfied with the Bank’s subsequent operations.
In 1950, when a new Diocese of the Catholic Church was formed in Pala, it was an open secret that the Bank was the prime mover in bringing the Diocese to Pala. The founder Managing Director of the Bank Joseph Augusti led a delegation that accompanied the new Bishop Mar Sebastian Vayalil to Rome
Rome
Rome is the capital of Italy and the country's largest and most populated city and comune, with over 2.7 million residents in . The city is located in the central-western portion of the Italian Peninsula, on the Tiber River within the Lazio region of Italy.Rome's history spans two and a half...
for the investiture ceremony. The Bank also took keen interest in extending assistance to the initial ventures of the new Diocese of Palai
Diocese of Palai
The Syro-Malabar Catholic Diocese of Palai is a Syro-Malabar Catholic Church diocese in the Kottayam district of Kerala, India. The bishop is Mar Joseph Kallarangatt.-External links:* *...
. In 1953, the Bank had the honour of according a grand reception to Eugene Tisserant, Dean of Vatican
Holy See
The Holy See is the episcopal jurisdiction of the Catholic Church in Rome, in which its Bishop is commonly known as the Pope. It is the preeminent episcopal see of the Catholic Church, forming the central government of the Church. As such, diplomatically, and in other spheres the Holy See acts and...
's Sacred College of Cardinals, at the residence of the Managing Director in Palai during the Cardinal's historic visit to Kerala
Kerala
or Keralam is an Indian state located on the Malabar coast of south-west India. It was created on 1 November 1956 by the States Reorganisation Act by combining various Malayalam speaking regions....
.
In 1953, George Thomas Kottukappally, who was still a Director of the Bank, became a Member of Parliament. Even after that, he continued to be a Director. In the same year, when A. J. John, Anaparambil
A. J. John, Anaparambil
Anaparambil Joseph John was an Indian nationalist, freedom fighter, and statesman. He was Chief Minister of Travancore-Cochin and Governor of Madras....
(who had become Chief Minister of the integrated Travancore-Cochin
Travancore-Cochin
Travancore-Cochin or Thiru-Kochi is a former state of India . It was created on 1 July 1949 by the merger of two former princely states, the kingdoms of Travancore and Cochin....
State) resigned, he accepted the Bank’s invitation to join its Board of Directors.
Hurdles
In January 1955, the ruling Indian National CongressIndian National Congress
The Indian National Congress is one of the two major political parties in India, the other being the Bharatiya Janata Party. It is the largest and one of the oldest democratic political parties in the world. The party's modern liberal platform is largely considered center-left in the Indian...
party, at their national conference held at Avadi
Avadi
Avadi is a suburb of chennai and a municipality in Thiruvallur district in the state of Tamil Nadu, India. Avadi is an acronym for "Armoured Vehicles and Ammunition Depot of India". Situated about 23 km north west of Chennai, it is surrounded by major defence establishments.-Geography:Avadi...
in Tamil Nadu
Tamil Nadu
Tamil Nadu is one of the 28 states of India. Its capital and largest city is Chennai. Tamil Nadu lies in the southernmost part of the Indian Peninsula and is bordered by the union territory of Pondicherry, and the states of Kerala, Karnataka, and Andhra Pradesh...
, passed the resolution to establish a socialistic pattern of society in India "where the principal means of production are under social ownership or control". As the implementation of this began and the nation started moving along the socialist path, in that year itself Government of India nationalized the Imperial Bank of India
Imperial Bank of India
The Imperial Bank of India was the oldest and the largest commercial bank of the Indian subcontinent, and was subsequently transformed into State Bank of India in 1955.-Origin:...
and formed State Bank of India
State Bank of India
The State Bank of India is the largest Indian banking and financial services company with its headquarters in Mumbai, India. It is state-owned. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest...
. In January 1956, life insurance was nationalized and Life Insurance Corporation of India
Life Insurance Corporation of India
The Life Insurance Corporation of India is the largest state-owned life insurance company in India, and also the country's largest investor. It is fully owned by the Government of India. It also funds close to 24.6% of the Indian Government's expenses. It has assets estimated of...
was formed. In 1957, with a view to further advancing socialism, four new taxes were introduced in the country, viz. Wealth Tax, Expenditure Tax, Capital Gains Tax and Gift Tax.
Palai Central Bank had by then emerged not only as the biggest enterprise in Kerala – bigger than all the private and public undertakings and banks in the State – but also as the 17th largest bank in the country, bigger than even some of the State banks. The north Indian bankers were naturally jealous of its phenomenal growth. From 1956 onwards RBI started turning down the Bank's repeated requests for opening new branches. That was the only way of arresting the run-away growth of the institution. In 1956, when RBI asked for the communal break-up of the Bank's depositors, not many could foresee what was to follow.
Even without branch expansion, the Bank was, however, making steady growth. With a view to strengthening the calibre of its executives, KM Mathai was sent for training to USA at the Kings County Trust Company and the First National City Bank of New York(Citibank
Citibank
Citibank, a major international bank, is the consumer banking arm of financial services giant Citigroup. Citibank was founded in 1812 as the City Bank of New York, later First National City Bank of New York...
), as well as at Midland Bank
Midland Bank
Midland Bank Plc was one of the Big Four banking groups in the United Kingdom for most of the 20th century. It is now part of HSBC. The bank was founded as the Birmingham and Midland Bank in Union Street, Birmingham, England in August 1836...
in UK. K M Ignatius, another executive, was trained at the First National City Bank of the US.
In March 1957, H V R Iyengar became Governor of RBI. He had succeeded B Rama Rau who had resigned due to differences with the Finance Minister after a long period of nearly eight years in office. Iyengar's tenure as Governor was a tumultuous period in the history of Indian banking.
The year 1956 saw the birth of Kerala
Kerala
or Keralam is an Indian state located on the Malabar coast of south-west India. It was created on 1 November 1956 by the States Reorganisation Act by combining various Malayalam speaking regions....
State and a year later in 1957 Kerala registered another first by voting to power the world's first communist government to be elected through the ballot box. Meanwhile, in Delhi, Jawaharlal Nehru
Jawaharlal Nehru
Jawaharlal Nehru , often referred to with the epithet of Panditji, was an Indian statesman who became the first Prime Minister of independent India and became noted for his “neutralist” policies in foreign affairs. He was also one of the principal leaders of India’s independence movement in the...
's two finance ministers had resigned in quick succession and Morarji Desai
Morarji Desai
Morarji Ranchhodji Desai was an Indian independence activist and the fourth Prime Minister of India from 1977–79. He was the first Indian Prime Minister who did not belong to the Indian National Congress...
became the new Finance Minister in March, 1958. Nehru soon became aware of the adamant and uncompromising attitude of Desai.
In 1959, seven banks controlled by the erstwhile native states – including State Bank of Travancore
State Bank of Travancore
State Bank of Travancore , is a subsidiary of the State Bank Group and also has private share-holders. It is the premier bank of Kerala State, India, where it has 700 branches...
– were nationalised by Government of India and made subsidiaries of State Bank of India
State Bank of India
The State Bank of India is the largest Indian banking and financial services company with its headquarters in Mumbai, India. It is state-owned. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest...
. Towards the end of that year RBI, under the influence of the north Indian bankers' lobby, initiated a series of steps in Palai Central Bank. These steps, taken with the stated object of improving the Bank's working, were apparently aimed at wrecking the institution. It asked Joseph Augusti to retire from the Board of Directors of the Bank. Also, K M George was asked to step down from the post of Chief Executive Officer and to continue as Secretary of the Bank. An outsider - an official of the State Bank of India
State Bank of India
The State Bank of India is the largest Indian banking and financial services company with its headquarters in Mumbai, India. It is state-owned. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest...
- was appointed as the Bank's new Chief Executive Officer. Following these moves, some of the depositors of the Bank started losing their confidence in the institution. Some of them asked for return of their deposits. Some people felt that RBI wanted to create a crisis in the Bank to facilitate its closure. However, the 'intended' crisis did not occur as the run on deposits soon decreased, and some of the depositors even made re-deposits.
Banking crisis
In 1960 February, a new ministry assumed office in Kerala with Pattom Thanu Pillai as Chief Minister. In August that year, the Governor of RBI succeeded in persuading Desai for the closure of Palai Central Bank which, he told him, had too much of doubtful advances. That RBI gave misleading and false data to convince him is something which Desai himself would come to know only much later. The fact that all the doubtful advances were more than a decade old, and related to the period before the introduction of the Banking Regulation Act was not conveyed to him.RBI moved the application in Kerala High Court
Kerala High Court
High Court of Kerala is the highest court in the Indian state of Kerala and in the Union Territory of Lakshadweep. The High Court of Kerala is headquartered at Kochi...
for the winding up of the Bank under Section 38(3)(b)(iii) of the Banking Regulation Act, 1949. It may be noted that the Banking Regulation Act does not allow the High Court to go into the merits of RBI's application but specifies that the Court "shall order the winding up" if an application is made by RBI. Also, RBI can move an application if in the opinion of the RBI "the continuance of the banking company is prejudicial to the interests of its depositors", which is a rather vague provision. Justice P T Raman Nair, the presiding Judge of the Kerala High Court
Kerala High Court
High Court of Kerala is the highest court in the Indian state of Kerala and in the Union Territory of Lakshadweep. The High Court of Kerala is headquartered at Kochi...
ordered the winding up on 8 August, 1960.
After the winding up, Desai vehemently defended his action in Parliament. He, however, had to admit later that the reasons earlier stated were not correct.
The liquidation of the Bank was followed by a banking crisis. Most of the Banks in the State faced 'run' on their deposits. Even some of the Banks outside Kerala were affected. The total deposits of all the 339 commercial banks in India stood at Rs. 2021.84 crores in 1960. Out of the 339 commercial banks, 94 were Scheduled Banks and 245 were Non-Scheduled banks. The total deposits of all the 94 scheduled commercial banks, which was Rs. 1971.97 crores before the crisis, fell by more than 10% to Rs. 1741.80 crores in the 6 months following the crisis. RBI had a tough time proving that all is well with its running of the country's banking system. Punjab National Bank
Punjab National Bank
Punjab National Bank , was founded in 1894 and is currently the second largest state-owned commercial bank in India ahead of Bank of Baroda with about 5000 branches across 764 cities. It serves over 37 million customers. The bank has been ranked 248th biggest bank in the world by the Bankers...
, the worst affected among the northern Banks, received special support. But the affected Kerala banks were less lucky. They were amalgamated with other banks in the State or outside.
When the closure of the State's largest Bank also led to a crisis in the entire banking system, there was a hue and cry in all quarters, including the press. But out of sheer obstinacy, Desai refused to reconsider the matter. When a group of Kerala MPs met Nehru requesting that the Bank be revived, he told them that he would like to, but his insistence will lead to the resignation of Desai. He said there is a feeling that Finance Ministers did not thrive under him and so he did not want another resignation. In the larger interests of the nation, he asked the Kerala MPs to put up with the whole thing. When Chief Minister Pattom Thanu Pillai met Desai to make a personal appeal, he cut him out by asking as to how much money he had lost. A furious Pattom Thanu Pillai told him that like Desai he was also a true Gandhian and he has never had a bank account in his life. He then angrily walked out. With that, all doors for a revival from Government side were closed.
A legal battle was then fought. But the delay of the legal process made a revival impossible. In the Supreme Court, the Bank's case was argued among others by Gopal Swarup Pathak
Gopal Swarup Pathak
Gopal Swarup Pathak was the fourth Vice President of India from August 1969 to August 1974.Born on February 26, 1896 at Bareilly in Uttar Pradesh, he studied law at Allahabad University ....
, who later became Vice-President of India. The Court ruled in a 3-2 judgement that with the delay, a revival has been rendered infructuous .
After the closure of the Bank the first impression of the public was that the Bank had gone bust. They assumed foul play. When the Finance Minister of the country states in Parliament that the Bank's deposits had hardly 15% asset backing, the people had no reason to disbelieve. They had to wait for years to know that even after bearing several years of liquidation expenses, the depositors got more than 90% of their money – but in petty instalments. The people knew only then that as a going concern, the Bank could very well have repaid its depositors fully.
About 30 years later, in the early 1990s when banks in India faced a crisis of mounting losses and high levels of non-performing asset
Non-performing asset
A Non-performing asset is defined as a credit facility in respect of which the interest and/or instalment of principal has remained ‘past due’ for a specified period of time.-Identification:...
s, an interviewer asked a now-retired Justice P T Raman Nair about his thoughts on the winding-up order of Palai Central Bank three decades ago. He then remarked that today's banks were in much worse condition and that if the current yard stick were applied Palai Central Bank would not have been ordered to be closed.
In Volume II of the History of RBI covering the years 1951-1967 , a 27-page appendix viz. "Appendix C: The Palai Central Bank" extensively covers the history of the Bank. The following is an extract:
"While defending the Reserve Bank as 'one of the best central banks in the world' maintaining a 'high level of efficiency', the Prime Minister, Jawaharlal Nehru
Jawaharlal Nehru
Jawaharlal Nehru , often referred to with the epithet of Panditji, was an Indian statesman who became the first Prime Minister of independent India and became noted for his “neutralist” policies in foreign affairs. He was also one of the principal leaders of India’s independence movement in the...
, was reported to have acknowledged that it may have made a 'mistake' in closing down the Palai Central Bank.
"Defending the (Reserve) Bank's action, the (RBI) Governor recalled the representations received from the Kerala Bankers' Association and the Travancore-Cochin Banking Inquiry Commission to 'go slow' on refusing licences to banks in Kerala and pointed out that if the (Reserve) Bank had taken the action it had now taken in any of the previous three years, it would have been subject to even greater criticism. 'This has been the considered judgement of my colleagues and myself in the Bank.' However, (Governor) Iengar conceded, 'someone else could have exercised his judgement differently'."
The crisis that shook the banking sector of the country led to some changes in that sector. The demand for protecting the interests of depositors in the event of similar crises led to the passing of the Deposit Insurance Act by Parliament in 1961 and the eventual formation of the Deposit Insurance & Credit Guarantee Corporation (DICGC). Another demand arose from the allegation that RBI is a bureaucratic institution insensitive to the needs of the banking sector. Its advocates called for the formation of a Superintendent of Banking like that in the US to carry out the function of supervision of banking in the country. This demand was partially met years later when Government introduced a policy to appoint a career banker as one of the Deputy Governors of RBI.
Political fallout
When one looks now at the forced closure of an institution like Palai Central Bank, one sees it as a political failure too. Today, if the Central Government considers the closure of an institution (or even its shifting or merger or modification), all-party delegations of MPs and Ministers are seen rushing to Delhi to ensure that no such decision is taken. But way back in 1960, when the nation was barely 13 years into its independent status, the MPs and MLAs and even the Ministers were far less effective. When the largest institution of Kerala was being ordered to be closed by a Central Government agency, Kerala’s politicians could not prevent it but had to meekly abide by the dictates of their national leadership. The people of central Kerala, however, felt abandoned, if not betrayed.There was also another aspect. The Bank was considered to be an institution of the Christian community, although members of every religion and community were present among the Bank’s innumerable account holders, employees, advisors and well-wishers. Today, if an institution of a minority community is touched by the Government, that community would create such a furore that anyone will think twice before taking a step forward. But minorities were much less aware of their rights way back in 1960. The Christian community, therefore, suffered in silence then.
In 1964, barely 3 years after the closure of Palai Central Bank, a major upheaval occurred in the Congress Party in Kerala. Fifteen of its MLAs – mainly those from central Kerala – split and formed a new party by name Kerala Congress
Kerala Congress
The Kerala Congress is a recognized State political party in Kerala, India. The party was founded by K. M. George in October 1964 after a group of legislators decided to break from the Indian National Congress...
. It was the beginning of a change in the political equations in the State. The closure of Palai Central Bank is considered by many to be one of the root causes that led to the new chain of events.
In the same year, under an ingenious scheme which came to be known as ‘Kamaraj Plan
Kamaraj Plan
Kamaraj Plan was a political plan formulated in 1963 by K. Kamaraj, a senior leader of Indian National Congress, proposing that all senior Congress leaders should resign form their posts and devote all their energy to the re-vitalization of the Congress...
’, the irrepressible Desai was removed from the Union Cabinet.