HC Deb 08 May 1868 vol 191 cc2055-60

said, he supposed the House would not go into Committee that night, and he therefore rose to call attention to the Papers laid on the table with reference to the Bank of Bombay, and to ask a Question thereupon. The Question was one of pressing importance, relating as it did to the existence of an institution in Bombay, which had a very great effect upon the state of public credit and credit generally in Bombay, and might indirectly seriously affect the credit of this country. In consequence of the failure of the Bank of Bombay, a new bank had been established, and the Government had established relations with it, resembling those which it had sustained with the late Bank. To this he should have felt no objection but for the extraordinary circumstance that all the evils that existed in the old Bank, and that led to its failure, had been re-created in the new Bank, which was to be supported by the Government of India. The old Bank was founded in 1840. It was established by an Act of the Legislative Council, which defined the powers and duties of the directors. The Court of Directors in England sent out instructions on which the Bank Act was passed; and they adopted this fundamental policy, that it was improper to give to a bank in India those unlimited powers which were given to similar institutions in this country; that no funds should be advanced, except on security, either of public loans of the Government of India, or merchandize, or bills of exchange having the security of an independent and solvent person in addition to the drawer and acceptor; and further, that no one should obtain upon his own credit loans exceeding £30,000. There was a further provision that the length of credit to be given should be limited to three months; and there was a strict prohibition against the funds being appropriated in any other manner. Under this admirable system the Bank was carried on for many years, and its credit stood higher than the credit of any bank in the world. Unfortunately, however, a change was made in the constitution of the Bank. A new law was passed empowering the directors to advance money on cash credit, and to buy and sell bills of exchange without those restrictions. Thus they were at liberty to advance what they pleased on the security of a single person, without any collateral security. Then began in Bombay an inflation of credit, before that time unknown; and when, on the failure of the Bank, the Government called for an explanation of the cause, a schedule was delivered, from which it was apparent that it arose from the changes which had been made. In that schedule he found this — Financial company, bill discounted £100,000, no security; fixed loan, £113,000, no security; a merchant, £50,000, cash credit, and no security. And those three items represented the character of the institution which had failed. In proposing the establishment of a new bank one would have expected that there would be an avoidance of the errors that had brought the old Bank to grief. But looking at the constitution of the new Bank he was surprised to find that there was precisely the same power given to invest funds without security that existed in the old Bank. Under these circumstances he was surprised to find that the Government of Bombay proposed to take shares in the Bank, and that the only security they proposed for their own protection was the appointment of an auditor or inspector, who would not be able to control any laches in the management of the business of the Bank as it proceeded from day to day. The reason assigned for the Government taking shares was, that persons of influence would not take shares unless the Government did so. On making inquiry who those persons of influence were, he was surprised to find that one distinguished member of the Council of the Governor General had applied for shares while these negotiations Mere pending, and that he threatened to withdraw his application unless matters were thus arranged to his satisfaction. Now, he had always thought the besetting sin of Indian administration was the tendency of its members to embark in joint-stock companies, but he did not expect to find this instance of it. He knew the gentleman in question to be a man of the highest sense of honour; but there were hundreds who would imitate his example for one that would imitate his motive, and in India people did not discriminate. He thought that the Government of India should merely watch over the accuracy of its own account, and that it should be made clear that the Government had no intention of securing either the public or the shareholders against loss. He wished, therefore, to know, what were the views of the Secretary of State for India on these points, and he ventured to suggest that—if it had not already been done—orders should be sent out to India directing and insisting on the constitution of the new Bank on the same principle as that which at its outset regulated the old Bank; that the powers of the directors should be regulated, not by a mere deed of incorporation, but by an Act of the Legislative Council, which should make it penal for the directors to misappropriate the funds of the institution.


said: I will not detain the House beyond urging, in the strongest manner, on the right hon. Baronet the Secretary of State for India the severing of the present connection between the Bombay Government and the Bank of Bombay, a continuance of which exposes the Government to a repetition of the difficulty in which they are now involved with the old Bank—calculated, as it is, to degrade the authority of the Government in India, and placing it in an entirely false position by assuming a responsibility before the public which, when called on to fulfil, it is under the necessity of repudiating. The present time appears, also, opportune for dissolving this commercial partnership. The community of Bombay have in a great measure recovered from the effects of their insane speculations, and have been the chief recipients of the millions expended in the Abyssinian, expedition, while the chief article of export—namely, cotton—has, within the last few months, increased in value 100 per cent, there can be no longer any claim for the interposition of the Government credit in banking operations. I trust, therefore, that the right hon. Baronet will give early notice of the withdrawal of the Government from this co-partnership, and to intimate to the Banks of Bengal and Madras the intention of Government of adopting the same course with those institutions at the expiry of their present charters.


said, he wished to explain to the hon. Member who, last spoke that he (Sir Stafford Northcote) was in error when he told him the other day, in answer to a question, that the Act of 1863, which made an alteration of the charter of the Bombay Bank, had not been sent home before it was sanctioned. It had not been sent to the usual Department to which these dispatches came—he meant the Judicial Department; but he now found it had been sent to the Finance Department, and was therefore submitted to the Secretary of State before it was considered by the Legislative Council. With regard to what had fallen from the hon. Member for the Tower Hamlets (Mr. Ayrton) he agreed with most of what the hon. Member had said; but he had to state that the Bank had only been temporarily constituted under articles of association which had been considered by the Home Government. The Secretary of State in Council had already sent a dispatch to Bombay pointing out that the articles of association were not satisfactory, and expressing a desire that an Act should pass, and that a draft of this Act should be sent home to the Secretary of State, in order that its details might be considered here before it was submitted to the Legislature of Bombay. When the draft came home it would be considered carefully, with a view to making it as perfect as possible. With inspect to the question of the connection of the Government with banks, it was one on which his general opinion had in no way changed, but was rather strengthened by what had occurred. It was his opinion, as a general principle, that it was inexpedient for the Government to be shareholders in Presidency banks, and so rendered, to all appearance, responsible for their management. When the question of allowing the Government to take shares in the new Bank at Bombay came up for decision, he felt so strongly upon it that he overruled the opinions of a large majority of his Council, and sent out a despatch objecting to take shares. In the particular case of Bombay, however, he subsequently surrendered his own opinions upon finding that without the co-operation of the Government it would be impossible to reestablish the Bank, and that if it were not re-established great difficulties would arise and great injustice would be done to the mercantile community in Bombay. His assent, however, had been accompanied with this condition—that a Commission should inquire into the whole subject, and should examine whether the precautions taken were sufficient, or whether it was desirable that any other arrangements should be made. He hoped that by that inquiry some conclusions might be arrived at which would regulate the future relations between the Governor General of India and the Presidency banks generally. In the case to which reference had been made there would be no ground for comment or censure, either as to the spirit or intention of the distinguished person referred to. He was a shareholder in the old Bank of Bombay, and when the new Bank was proposed to be re-constituted, he made an application in the ordinary course for shares, under the impression that the Government were to be shareholders as before. Finding, however, that an objection was raised by the Secretary of State, he at once said that altered the position of affairs, and withdrew his application. There could be no doubt that both the application and the withdrawal were perfectly right; but it was equally true that this proceeding on the part of a person so exalted in position exercised an immense effect throughout a country like India. The question whether it was possible to lay down any rules forbidding Members of the Government or persons employed in Government Departments to hold shares in banks, he had discussed privately in letters with Sir John Lawrence and with menbers of his own Council; but it was exceedingly difficult to arrive at a decision as to putting limits to private investments; and he could only hope that the Report of the Commission would throw some light upon it. He did not commit himself to any positive opinion upon the point, but owned that he thought the present arrangement undesirable. Power would be given—probably had been given by this time—to the Commission to take evidence in India; and he had desired the Governor General to facilitate, if necessary, the adjournment of the Commission to England, though he did not expect that such a course would be necessary. Sir C. Jackson had sailed that day for Bombay, and had directions from him (Sir Stafford Northcote) to obtain power, if necessary, to carry on the inquiry without delay.


said, he did not intend to offer one word of hostile criticism upon what had been done by the right hon. Baronet. Not the least satisfactory part of his explanation was that in which he stated his views as to the undesirable-ness of the Government becoming shareholders in a bank. But there was one moral to be drawn from the case of the old Bank of Bombay which ought not to be overlooked—namely, the inefficiency and unreliable character of Government inspection and Government interference in commercial matters. Where there was Government inspection the public was always likely to cease to be vigilant or to contest the action of the directors; and then if anything went wrong they held the Government responsible for what really was the result of their own want of caution. It was very desirable, now that there was a constant demand for Government supervision and direction in a variety of ways, that from the recent occurrences in India a lesson should be drawn and that it should be impressed both upon the Government and the mercantile community. Anything more disastrous than this case of the Bank of Bombay he could hardly conceive, for it had covered the Government of Bombay with a kind of discredit, at the same time that the supervision of the Government had wholly failed to avert that ruin against which it was supposed to operate as a complete safeguard.


said, he thought it certain that the fact of a member of the Council of Government in India being connected with the management of a bank must give a great impulse to speculation. As matters stood in India, it appeared as if there were an irresponsible Council which was continually reversing the opinions of the Secretary of State and the House of Commons. He hoped that the right hon. Baronet the Secretary of State for India would adopt effective measures to prevent a recurrence of the evils complained of. The right hon. Baronet had not distinctly stated that he had taken steps to prevent the possibility of a member of the Governor's Council becoming a shareholder.

Motion, by leave, withdrawn.

Committee deferred till Monday next.