Palai Central Bank

Palai Central Bank was a commercial bank headquartered in Kerala, South India and that functioned 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. The Kerala High Court in 1960 ordered the liquidation of Palai Central Bank on a petition from the Reserve Bank of India.[1]

From the time of its founding in 1927 to its closure in 1960, Palai Central Bank had an eventful history. The bank's existence spanned the period 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.

Beginning

An enterprising young man Jacob Cherian Maruthukunnel who had returned from England had the idea of starting a large private sector bank. Till then only local banks, which were nothing more than money lending businesses existed. Since he alone could not raise the large financial resources required, he gathered a group of wealthy businessmen and planters in Meenachil Taluk of Travancore to form the bank. The Palai Central Bank was established in 1927. The kayyalakakom and the Kottukapallil families were the major share holders.

The bank was incorporated under the Travancore Companies Regulation (1092) with the following persons as the initial Promoter-Directors:-

Joseph Augusti Kayalackakom

Jacob Cherian was the public face of the bank. He was a man of great vision and set the bank on a professional approach with modern ideas of banking from the beginning. 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.[2] Jacob Cherian understood the need for proper liaison with the government and shifted his residence to Thiruvananthapuram, the capital of Travancore. He quickly established a close relationship with the de facto ruler, Diwan Sir. C.P. Ramaswamy Iyer. Christians, Muslims, Ezhavas etc. had marginal representation in government jobs leading to great resentment among these communists. Eventually a movement took shape under the leadership of the State Congress. Though Pattom Thanu Pillai was the leader, the State Congress struggle was maintained with the active support of the Christian community. The Diwan was determined to crush the struggle. He suspected another leading bank, The National Quilon Bank, of financing the agitation. He closed down the bank and put the directors in jail. Jacob Cherian knew the thinking of the powerful Diwan and kept himself and the Palai bank away from involving in any manner in the activities of the State Congress. This saved the bank and led to its unprecedented growth. In 1935, the director board was reconstituted and George Thomas Kottukapally joined the board. Sir C.P. recognising the growing clout of the bank nominated jacob Cherian to the Sree Chithra State Council. He was also appointed Director in the pioneering cement Travancore Cements Kottayam) and rayon industries Travancore Rayons Perumbavoor). 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.[3]

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.

The substantial deposits available with the bank led some of the directors to avail to themselves unsecured loans to finance the acquisition of large tracts of agricultural land across the country. The banking laws of Travancore were very lax, But after independence new laws had come into effect. The Reserve bank of India was the national bank in charge of banking regulations. Palai Central Bank had been included as a scheduled bank. naturally the activities of the Palai Central Bank also came under the scrutiny of the bank. The immense clout of the bank had enabled its director George Thomas Kottukapally to be elected member of Parliament in 1957 representing Indian national Congress, even though he had played no major role in the party or the State Congress.

A routine audit of the bank found several irregularities. Some of the directors had continued taking unsecured loans though against the current banking regulations. The sons and relatives of some directors, mainly the managing directors were the managers of major branches. They were sanctioning large unsecured loans even without the sanction of the director board. The managing director had little educational qualifications. He did not possess the knowledge to understand the complex banking regulations nor had the ability and qualifications to lead such a large national bank.

The Reserve bank made the following recommendations. To ensure recovery of all unsecured loans with immediate effect. To appoint a qualified and experienced banking professional as managing director. The bank agreed to the former but strongly opposed any move to replace the managing director. However the RBI found little improvement in the recoveries of unsecured loans. Even the directors had not complied. Instead the bank relied on the clout Kottukapally had in the central government to tide over the difficulties. The arrogant treatment by the managing director of the Deputy Governor Ramanathan angered him so much that he recommended liquidation of the bank. The Reserve bank Governor HVR Iyengar agreed with the recommendations. Jacob Cherian understood the seriousness of the situation but his voice was in a minority. Being a minority stakeholder, he had no way to force the majority to change course. He had no other choice but to resign from the director board.

As a result of the intense lobbying by the Syrian Catholic community led by Kottukapally MP with Prime Minister Nehru, The finance minister Morarjee Desai decided to give the bank one last chance. A retired senior officer of the Imperial Bank was appointed adviser, but even he failed to influence the managing director to take drastic action. Though the deposits were steadily increasing, as many as 15 branches were running at a loss. The RBI Governor was convinced that matters were beyond redumption and again recommended liquidation of the bank. Finance Minister Morarjee Desai agreed and even Prime Minister Nehru could not persuade him to cancel the decision. RBI filed for liquidation and the High Court gave the final orders for liquidation.

Almost every single Catholic family had deposits in the bank and the liquidation meant penury to thousands of investors. Ironically, it was later determined that the cash reserves were sufficient to repay all the depositors. But by then it was too little too late.Thus ended an eventful era in the history of banking in India, where a bank from a " one street village" Palai had grown to be one of the largest in the country.

Dominant position

In 1935, George Thomas Kottukapally, 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 Maruthukunnel, 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 merged to form Travancore National and Quilon (TNQ) Bank. However, 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. However, Palai Central Bank, which was the leading bank then, remained unaffected.[4]

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.

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, as a friendly gesture of Joseph Augusti towards a close family friend. 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. KM George took his MBA degree from New York University in 1948, thus becoming the first MBA degree holder in Travancore. 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.[5]

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. 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 Kottukapally, 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.

Hurdles

In January 1955, the ruling Indian National Congress party, at their national conference held at Avadi in Tamil Nadu, passed the resolution to establish socialism 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 nationalised the Imperial Bank of India and formed State Bank of India. In January 1956, life insurance was nationalised 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. From 1956 onwards RBI started turning down the Bank's repeated requests for opening new branches. 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 bank's depositors lost confidence in the institution and withdrew their deposits. Some people felt that RBI wanted to create a crisis in the Bank to facilitate its closure. However, the crisis did not occur as the run on deposits soon ceased, and some of the depositors even made re-deposits.[6]

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 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.

A banking crisis followed the liquidation of Palai Central Bank. Most of the banks in the State faced a 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. 20218.4 million 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. 19719.7 million before the crisis, fell by more than 10% to Rs. 17418.0 million in the 6 months following the crisis. 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.[7]

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.[8]

After the closure of the bank the first impression of the public was that Palai Central Bank had failed. 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 assets, 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,[9] 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'." [10]

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 away 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 away back in 1960. The Christian community, therefore, suffered in silence.

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, 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.

References

  1. ↑ History of the Reserve Bank of India - Volumes I & II - Oxford University Press.
  2. ↑ A Sreedhara Menon - A Survey of Kerala History - D C Books - 2008.
  3. ↑ K M Joseph - Pala Innale Innu ['Palai Yesterday and Today' in Malayalam] - Deepanalam Press - 1981.
  4. ↑ Manorama Year Book (1965 Edition) - Malayala Manorama Publications.
  5. ↑ Banking Regulation Act, 1949 - Government of India.
  6. ↑ Report of the Travancore-Cochin Banking Enquiry Commission - Manager of Publications, Government of India - 1956.
  7. ↑ Selected Banking Indicators 1947-1997 - Reserve Bank of India.
  8. ↑ http://indiankanoon.org/doc/103959/
  9. ↑ http://www.rbi.org.in/scripts/RHvol-2.aspx
  10. ↑ http://rbidocs.rbi.org.in/rdocs/content/PDFs/90044.pdf

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