Palai Central Bank - Hurdles

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 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.