RESERVE BANKS

Evening Post, Volume CXVI, Issue 95, 19 October 1933, Page 8

RESERVE BANKS

PROPOSAL FOE INDIA

CONSTITUTION OUTLINED

Reserve banks are much in the public eye in New Zealand at the moment, therefore the subject of the institution proposed for India, as" described in Barclay's Bank "Review" may be of interest to those who are following the question in this Dominion. The "Review" states:— "The proposals for Indian Constitutional Reform, so far as they relate to responsibility for the finance of the suggested Federation, are based on the assumption that before the first Federal Ministry comes into being, ■ a reserve bank, free from political influence, will have .been set up by Indian legislation arid will bo successfully operating. . The Secretary of State for India undertook that representative Indian opinion should be consulted in the preparation of the proposals for the Reserve Bank and effect was given to this undertaking in the appointment of the committee which has now submitted its report indicating the lines on which it considers the necessary legislation should be drafted. POLITICAL INFLUENCE QUESTION. Tho former attempts to create a reserve bank in India were unsuccessful, largely owing to diversity vl' opinion upon, tho fundamental principle that it should be free from political influence. ' This principle, however, is fully accepted .by the committee, and, with one dissentient, it is recommended that the capital should be held by private shareholders. They suggest that the control of the bank should be placed in the hands of a board of directors consisting of a! governor and one or two deputy governors appointed by the Governor-General, one officer of Government, and eight, me.mbe.rst represent"frig' .the shareholders, : together with; foiir members nominated by the Gov-ernor-General in Council. The deputy governors and, the Government -officer would have no voting power. The scheme also provides for the establishment of local boards -in five defined areas of India, and most of the- members of these boards will bo elected by-the shareholders. These elected members will choose from among.themselves the eight directors to represent the shareholders on the central board. Tho proposed original share capital of the bank is to be Rs. 5 crores, divided into fully-paid shares of RsvSOO cavch. The committee recommend that the bank should have both atf issue and a banking department, which should.be kept separate as in-the case of the Bank of England. It. would have the\sole right of note,issue and, in addition, would W permitted .;■ to undertake business*! which :'is usually' conducted by central' b&nks.^ In connection with the control "of 'the .credit situation, the bank would be allowed to engage in open market operations. EXCHANGE PROBLEM. , With regard to the difficult question of the exchange obligations to be imposed on the bank, the committee consider that, in view of the prevalent monetary disorganisation throughout the world, the only sound course, for India is to remain on the sterling standard and, on this basis, the exchange obligations, to be incorporated in the Reserve Bank Bill would have to be in accord.with the rupee-sterling ratio existing, at the time the Bill is introduced. The committee .express no opinion on the merits or demerits of the present ratio, but a considerable majority of tho Indian delegates felt it their duty to record their view that a suitable exchange ratio is one of the

essential factors for the successful .working .of -the/Reserve- Bank.' '■■.' The Bill would, of course, prescribe upper and lower rates of exchange at which the bank would bo required to buy and sell on demand sterling for immediate delivery. . In view of the fact that the return of silver rupees from circulation is likely in future to be considerably less ihan in the past few years, the provision of a specific rupee redemption fund is not recommended, but an arrangement is' suggested whereby the bank should have the right to sell to the Government any surplus oyer Rs. 50 crores which it might hold, up to a maximum of Rs.- 5 erores in any year. The committee consider it essential that the reserves- of the bank should, at the outset, provide an ample margin over. the statutory amount, and suggest that the initial proportion of gold and sterling assets should be at least one-half of the liabilities of the issue department. THE RESERVE. The statutory reserve is to consist of gold coin and bullion, sterling securities, rupee coin and' rupee securities, the minimum aggregate proportion of gold coin or bullion and sterling securities to be held at any time being 40 per cent. It is also recommended that the Bill should proscribe a minimum gold holding of Rs. 35 crores. With the previous sanction of the Governor-General in Council, tho Bank should be permitted to suspend the reserve . requirements for certain defined short periods, subject to the payment of a graduated tax on the' amount of tho reduction below the normal minimum. Dealing with the "question of the distribution of profits, the committee propose that, after making provision for various contingencies and the payment of a fixed cumulative dividend, the surplus should be allocated as follows:— (a) One-half to a reserve fund until this fund is equal to one-half of 'the . share capital, and the remainder to the Governor-General in Council. ..;,r. v Cb), •.The.r.eaft.er, i.untij ,th,©, , v re,se.vve '.'- ■■•■'fund "! is equal, to .'the : share.. capital, one-tenthi to the reserve fund a,nd the balance to, the Governor-General in Council. ~'- ..■ ■• : ..;■ . '. (c) When and for so long as the reserve fund is not less than the share capital, a portion to an additional dividend to the shareholders and, the balance to the GovernorGeneral in Council. It is;' however, provided that, so long as-the .'"'reserve fund is less than the shStro' capital, not less than fifty lakhs ofvTupees^bf the surplus, or the whole of the surplus if less than that amount, shall be allocated to the reserve fund. ;rti;is"suggested that the rate of the fixeS;'..dividend, which should, to some extent, depend on the return on comparable securities, should be determined by the •Gov&Knor.-Gen.eral in Council at the time of'thc is's'uo.^pf the shares, subject to \a of . S^ipfii' cent., Although jjin^er the f ojegoing'vprovisiojis the actnal'^clividcjndjmay, in certain ctrc'iilmStanc'e'sjA"li'n'ciiea"se to not more than 6 per cent. : ' RELATIONS WITH OTHER BANKS. A' close relationship between' the Reserve Bank and the. principal com-, mercial. b^nks;: operating ■in India is to be 'ensured by requiring the latter to maintain balances.with the Reserve Bank proportional to their demand arid time liabilities.., It is .recommended that.''an-agreement .for, a period of substantiall' duration should <'be vconcluded with the Imperial Bank of India whereby that hank would be appointed the sole agent of the Reserve Bank in all places in 'British India where there is a branch of the Imperial Bank and no branch of the banking department of the. Reserve Bank. ;' In many respects, tha recommendations of the committee follow closely, the provisions contained in the 1928 I.' "' '' ■'" ' "• .' '/

Reserve Bank Bill, and it has been announced, by the Viceroy ' that 'the Government- intends to move, during the present session of the Legislature, a Bill, based on the proposals, which is to bo referred to a Joint Select Committee of both Houses. For the further stages of the Bill there will bo a special session in November, as the Government desires the most rapid progress so that the bank may be functioning successfully well in advance of the earliest possible inauguration of the new Constitution. '