Relevance of Arthasastra in modern banking system

Dr. Mukul Chandra Bora

(The writer isState Project Administrator, Ministry of Education.)

Indians were the torch bearers of knowledge for the entire world in ancient times. India was a rich country from its origin and this holy motherland has given birth to too many Philosophers and Scientists who have made valuable contribution to the whole world. It is quite clear that there was no single instance of attack to the rest of the world but the number of Invaders who have attacked our motherland in the past starting from the age of Kingdom. It is a common logic that no one in the world will attack a poor country as it is only a stage of adventurism which is itself a proof of our richness in wealth and knowledge. The destruction of the world oldest University physically and intellectually by the outsiders indicate that India had a glorious past in terms of knowledge too. The banking system in India was there since the Vedic age and the formal description was not obtained due to the loss of the written materials at Nalanda University. If University could be saved in the past in its original form, then we might have felt proud as on today for its existence as the world's oldest University.

The ancient Hindu Scriptures refer to the existence of Banking System in the Vedic period in India and money-lending can be traced back to the Vedic period which is taken by some authorities to range from at least 2,000 to 1,400 BC; but no evidence of its then being followed as a profession by any section of the people, or details about the terms on which the money was lent, are available. It is from the fifth century B.C. that Indian literature supplies us with definite evidence of the details of money-lending and of remittance of money in cash or by credit instruments.

Kautilya's Arthashastra is a famous book of ancient India and is regarded as a library rather than a book and was written around 300 B.C. and deals with economics, administration, political ideas, ecology and various other topics related to the development of human values. The Arthashastra predates any similar body of work from the Greek, Roman or Chinese civilizations and is the source of many modern practices such as double-entry book keeping method, audits, etc. In this paper I am going to take up some economic ideas of Kautilya's which may be proved very useful in present era.

The Arthashastra (Kautilya) prescribes the maximum legal rate of interest on secured loans as 15% and that on unsecured loans as 60% without any discrimination as to caste, though the rate might go up to 120% to 240% per annum according to the risk involved in special circumstances. The Dharma Shastra are in general agreement with the Arthashastra except that they introduce caste as an important factor in money-lending. They lay down that a particular caste (the Vaisya) alone can take to the profession of money-lending, and they also prescribe a variation from 15% to 60% in the interest on unsecured loans according' to the caste of the borrower.

During the Moghul period, bankers were fairly prominent in the financing of trade and the use of instruments of trade and rendered service to the East India Company in the early days of British occupation. All through the period of ancient Indian history, moneylenders who were called either bankers, or Seths, or Shroff's are recorded to have carried on a roaring business in money lending and banking. The first European Bank in India was started in Calcutta in 1770 by one of the leading agency houses viz., M/S Alexander & Company under the name "The Bank of Hindoostan". The Bank was started mostly to meet the needs of foreign trade during the period. The Bank of Hindoostan failed in the year 1832, with the fall of the agency house of M/S Alexander & Company. Banking in true sense was found in India with the establishment of three Presidency Banks; viz; The Bank of Bengal (1806), The Bank of Bombay (1840) and The Bank of Madras (1843) in the city of Kolkata, Bombay and Madras. The Presidency Banks were functioned like central banks for their respective areas as they performed central banking functions and were the Government's banker in that region. The banking sector developments can be divided into the following periods and discussed in detail below.

The first Indian bank was Oudh Commercial Bank which started in 1881 and was followed by the Punjab National Bank in 1894. The Swadeshi Movement, prompted Indians to start many new banking institutions. The number of joint stock banks in India increased remarkably during the boom of 1906-13. The Peoples Bank of India Ltd., The Bank of India Ltd., The Central Bank of India Ltd., The Indian Bank Ltd., and The Bank of Baroda Ltd., were started during this period and continued till it was overtaken by the crash of 1913-17 due to severe crisis faced by the Indian joint stock banks.

The Indian Companies Act was passed in 1913 and was contained only a few regulations applicable to banks. In 1920, the Imperial Bank of India Act was passed which brought into existence on January 27, 1921 the Imperial Bank of India. The Imperial Bank of India was the result of the fusion of the three Presidency Banks. The Reserve Bank of India was started as a private shareholders bank in April 1935 to act as the central bank of the country. The amendment of the Indian Companies Act (1913) in 1936 to bring in control over the mushroom growth and failure of the banks in the country is found to be ineffective. Although a good proportion of bank stood from bankruptcy yet at least an equal number of them failed and the Reserve Bank of India could not be done much to prevent banks from failures.

The post-independence period had witnessed a massive growth of the Indian banking system and the first step of nationalisation was taken under the directives of the Reserve Bank of India in September, 1948. To have sound and balanced growth of banking in the country, the Banking Regulation Act 1949 was passed. The Act, first of its kind to regulate the banks, has extensively enlarged the control of the Reserve Bank of India over the banking industry. It came into effect from March 16, 1949. The Banking Regulation Act gave wide powers to the Reserve Bank of India to regulate, supervise and develop the banking system. The fifties witnessed the consolidation of banking structure and the emergence of big commercial banks through amalgamations and mergers.

On the basis of the recommendations of the All India Rural Credit Survey Committee (1954), the Imperial Bank of India was nationalized and renamed as State Bank of India from July 1, 1955. The State Bank of India (Subsidiary Banks) Act was passed in 1959 enabling State Bank of India to take over the then eight state associated banks as its subsidiaries and merged the State Bank of Bikaner and State Bank of Jaipur into a single bank called as State Bank of Bikaner and Jaipur. All other state-associated banks were made subsidiaries of State Bank of India and called as State bank of Patiala, State Bank of Saurashtra, State Bank of Indore, State Bank of Hyderabad, State Bank of Mysore and State Bank of Travancore. Deposit Insurance Corporation (DIC) was formed in 1962 to build the confidence of the public in the banks and to stabilize the banking system which further made compulsory mergers and amalgamation of the banks of weak financial structure with other healthy banks and the impact of the DIC was observed through the rapid progress made by the banks in the sixties. In December 1967, the scheme of Social Control over banks was announced in the Parliament with basic objectives of social control to ensure an equitable and purposive distribution of credit within the resources available and relative priorities of developmental needs in the country.

It is evident from the above discussion that the concept of present banking system prevailing in the world may be supposed to be mostly contributed by the Indians. Like that of Science and Technological contribution to the rest of the world by the Indian scientists, the system of money lending and borrowing had originated in India. Details of its course of development are elaborately described in the article and hence the people of India can feel proud of our ancestor's contribution in the area of banking and finance. The present generation of youth population should be made aware of our glorious past so that they can think like our ancient philosopher and contribute to the world. In short, this is the beginning and lot more things are going to arrive in the coming days so that the creation of our submissive nature by the invader can be overtaken. Indeed regulation evolved during the first two centuries A.D. when a law code, Dharmashastras, was written regulating loan deeds, law courts and debt procedures in detail. Moneylending and banking became licensed and tax-paying professions. Interest payments could also be made in kind, but at a substantially higher rate. The system of written off unrecovered loans to be written off after 10 years was also there in ancient India and there was a system of social banking which was only meant for interest-free loans to the deserving and the poor people of the country.