Colonial India’s Banking Panics: From the 1913 Swadeshi Crash to Travancore’s 1938 Run

Between the eve of the First World War and the outbreak of the Second, commercial banking in British India operated across a fractured landscape lacking deposit insurance, statutory capital adequacy rules, or a comprehensive banking code. Governed only by general provisions of the Indian Companies Act of 1913, joint-stock banks proliferated rapidly during nationalist credit booms, only to disintegrate when insider lending, commodity speculation, or political confrontation triggered depositor runs. Three successive crises—the 1913–1917 Swadeshi banking panic that began with Lala Harkishen Lal’s People’s Bank of India and wiped out 87 institutions, the April 1923 failure of the British-managed Alliance Bank of Simla that forced an unprecedented bailout by the newly created Imperial Bank of India, and the June 1938 collapse of South India’s Travancore National and Quilon Bank (TNQB)—demonstrated the fatal limits of colonial laissez-faire and forged the regulatory mandate of the Reserve Bank of India and the Banking Regulation Act of 1949. ^[1]

The Swadeshi Banking Boom and the Insider-Lending Trap (1906–1913)#

Prior to 1905, formal credit in British India was dominated by two tiers of European-controlled institutions: the three semi-official Presidency Banks—the Bank of Bengal (founded in 1806), the Bank of Bombay (1840), and the Bank of Madras (1843)—which held government treasury balances, and the foreign-owned Exchange Banks that monopolized international trade finance. The Swadeshi movement, sparked by Lord Curzon’s 1905 Partition of Bengal, ignited a wave of Indian financial nationalism. Indigenous merchants, lawyers, and industrialists established scores of Indian-owned joint-stock commercial banks across Punjab, Bombay, and the United Provinces to mobilize domestic savings for Indian enterprise. ^[2]

While several enduring institutions emerged from this era—including Bank of India (1906), Indian Bank (1907), Central Bank of India (1911), and the earlier Punjab National Bank (1894)—dozens of smaller mushroom banks opened with wafer-thin paid-up capital and aggressive promotional advertising. Because the Indian Companies Act placed no restrictions on bank nomenclature or balance-sheet ratios, promoters routinely advertised an impressive “authorized capital” of millions of rupees while operating with less than 5 percent of that sum actually paid in. To attract fixed deposits away from established Presidency Banks, these new joint-stock lenders offered interest rates of 6 to 8 percent per annum and invested the short-term proceeds into illiquid cotton mills, ginning factories, real estate, and speculative bullion trades controlled by the banks’ own directors. ^[3]

The towering symbol of this Swadeshi industrial-banking nexus in northern India was Lala Harkishen Lal. A Cambridge-educated barrister and charismatic industrial promoter who had helped found Punjab National Bank before breaking with its conservative board, Harkishen Lal established the People’s Bank of India in Lahore in 1901. By 1913, the People’s Bank had grown into the largest indigenous joint-stock bank in northern India, operating nearly seventy branches and holding over ₹1.25 crore (12.5 million rupees) in deposits. Unknown to ordinary depositors, official liquidation inquiries later revealed that roughly 70 percent of the bank’s loan portfolio had been advanced—frequently without adequate collateral—to spinning mills, flour mills, timber ventures, and insurance companies promoted or directed by Harkishen Lal and his close associates. ^[4]

The 1913–1917 Panic: People’s Bank of India, Indian Specie Bank, and 87 Failures#

The fragile maturity mismatch of the Swadeshi banks shattered in September 1913. When tight money conditions and industrial losses in Punjab delayed loan repayments from Harkishen Lal’s affiliated enterprises, rumors of illiquidity sparked a relentless depositor run on the Lahore headquarters and regional branches of the People’s Bank of India. With no central bank in existence and the Presidency Banks bound by charter restrictions that barred them from lending against non-liquid industrial paper, the People’s Bank exhausted its cash reserves and suspended payments on September 17, 1913. Its collapse immediately dragged down its sister institutions in Punjab, including the Amritsar Bank and the Lahore Bank. ^[5]

Two months later, the panic leaped from Punjab to the financial capital of Bombay with the dramatic collapse of the Indian Specie Bank. Founded in 1906 and managed by Chunilal Dharamdas Saraiya, a former physician turned bold financier, the Indian Specie Bank had amassed ₹2.7 crore in deposits while secretly wagering vast sums on pearls and attempting to corner the global silver market through London bullion brokers. When international silver prices fell and rumors of Saraiya’s hidden syndicate losses swept Dalal Street in November 1913, panicked depositors besieged the bank’s Bombay headquarters. On November 29, 1913, the Indian Specie Bank filed for liquidation, and Saraiya died suddenly of heart failure the same day. ^[6]

Contagion cascaded across British India throughout 1914 and the war years. Between 1913 and 1917, a total of 87 joint-stock banks failed across India, wiping out more than ₹1.78 crore in paid-up capital—over half the total paid-up capital of all banks that failed during the entire interwar era. While conservatively managed Indian institutions like Punjab National Bank and Central Bank of India survived intense runs by liquidating government securities and displaying stacks of silver rupees in their banking halls, the crash discredited indigenous joint-stock banking for a generation and prompted the colonial government and John Maynard Keynes (then serving on the Chamberlain Commission of 1913–1914) to examine proposals for a state bank. ^[7]

The 1921 Imperial Bank of India and the 1923 Failure of Alliance Bank of Simla#

As a partial step toward unified banking oversight, the colonial legislature passed the Imperial Bank of India Act in September 1920. Taking effect on January 27, 1921, the Act amalgamated the three Presidency Banks of Bengal, Bombay, and Madras into a single giant institution: the Imperial Bank of India. Acting as banker to the government and custodian of public cash balances while expanding its commercial branch network across the subcontinent, the Imperial Bank served as a quasi-central bank, though it did not hold the monopoly of note issue (which remained with the Government of India’s Controller of the Currency) and remained a profit-seeking commercial rival to other joint-stock banks. ^[8]

Barely two years after its formation, the Imperial Bank faced a major test when the Alliance Bank of Simla collapsed on April 27, 1923. Founded in 1874 and headquartered in the summer capital of Simla with a grand Calcutta office on Council House Street, the Alliance Bank was one of the oldest and most prestigious British-managed joint-stock banks in India, holding nearly ₹8.7 crore in deposits—primarily from British military officers, civil servants, and Anglo-Indian commercial firms. Behind its respectable facade, the bank’s London agents and general management, Boulton Brothers & Co., had engaged in reckless postwar speculation and overextended credit to failing industrial ventures, leaving a multi-crore hole in the balance sheet. ^[9]

Because the failure of a prominent European-managed bank threatened both the personal savings of colonial officials and confidence in the London-India exchange market, the Government of India intervened immediately—standing in stark contrast to its complete inaction when Indian-owned Swadeshi banks failed in 1913. Acting under direct instructions and an indemnity guarantee from the Finance Department of the Government of India, the Imperial Bank of India stepped in as liquidating agent and agreed to advance 50 percent of their verified deposits immediately to all creditors of the Alliance Bank of Simla. This emergency payout prevented a wider panic among European and Calcutta commercial banks, though Indian nationalists sharply criticized the racial double standard of the rescue and litigation later questioned whether the Imperial Bank’s charter legally permitted such bailout advances. By a twist of history, when the Reserve Bank of India finally opened on April 1, 1935, it established its first central office inside the Alliance Bank of Simla’s former building at 8 Council House Street in Calcutta.

The June 1938 Collapse of the Travancore National and Quilon Bank (TNQB)#

Following the recommendations of the 1926 Hilton Young Commission (Royal Commission on Indian Currency and Finance), the Reserve Bank of India (RBI) was enacted in 1934 and commenced operations in April 1935 as India’s formal central bank. Yet only three years later, the infant central bank confronted a crisis that exposed its legal and jurisdictional blind spots: the collapse of the Travancore National and Quilon Bank (TNQB) in June 1938.

Formed in September 1937 through the amalgamation of two pioneering Syrian Christian banks in the princely state of Travancore—the Travancore National Bank (founded in 1912 by K. C. Mammen Mappillai, editor of Malayala Manorama) and the Quilon Bank (founded in 1919 by C. P. Matthen)—TNQB swiftly became the largest commercial bank in South India and the fourth-largest Indian joint-stock bank by branch network, operating eighty branches across Madras Presidency, Bombay, Ceylon, and the princely state of Travancore with over ₹3.5 crore in deposits.

TNQB’s rapid ascent collided with the autocratic rule of Sir C. P. Ramaswami Aiyar, appointed Diwan (Prime Minister) of Travancore in 1936. Convinced that Mammen Mappillai and TNQB were financing the newly formed Travancore State Congress and its campaign for responsible democratic government, Diwan Ramaswami Aiyar launched a state-backed campaign to undermine the bank in early 1938. Circulars and police whispers encouraged withdrawals of public and private funds, igniting a sustained run that drained cash across TNQB’s South Indian branches from April through June 1938.

When TNQB’s management appealed to the Reserve Bank of India under Governor Sir James Braid Taylor for emergency liquidity against its portfolio of promissory notes and assets, the encounter ended in paralysis. Because TNQB was legally incorporated inside the princely state of Travancore rather than British India—even though the majority of its deposits and branches lay inside British Madras—the RBI lacked statutory authority to compel an independent audit prior to the crisis. When TNQB refused to grant unconditional inspection of its books unless guaranteed an advance in advance, and when preliminary checks suggested that the bank had masked bad loans from the 1937 merger and lacked eligible self-liquidating commercial paper required under Section 17 of the RBI Act, the Reserve Bank declined to mount a rescue.

On the night of June 20–21, 1938, the Travancore National and Quilon Bank suspended payments. Diwan Ramaswami Aiyar immediately had Mammen Mappillai, C. P. Matthen, and the bank’s key directors extradited, prosecuted, and imprisoned in Travancore, while the Madras High Court oversaw a protracted liquidation that eventually paid depositors roughly 12 annas in the rupee (75 percent). The collapse triggered a systemic banking panic across South India, forcing the RBI to open emergency credit lines for solvent Madras banks and prompting Governor James Taylor to circulate comprehensive proposals for a dedicated Indian Bank Act in 1939.

From Laissez-Faire to the Banking Regulation Act of 1949#

Although the outbreak of the Second World War delayed immediate parliamentary passage of Governor Taylor’s 1939 draft bill, the cumulative trauma of the 1913–1917 Swadeshi crash, the 1923 Alliance Bank failure, and the 1938 TNQB collapse reshaped Indian financial law. Recognizing that general company law could not police commercial banks, the Indian legislature enacted the Banking Companies Act in March 1949 (later renamed the Banking Regulation Act, 1949). The statute finally abolished non-banking trading by commercial banks, imposed strict statutory liquidity ratios and minimum paid-up capital requirements, prohibited unsecured loans to directors’ own firms, and vested the Reserve Bank of India with sweeping authority to license, inspect, and amalgamate every commercial bank across the nation.

Theoretical & Balance-Sheet Transmission Mechanism#

In the Kindleberger–Minsky taxonomy of financial instability (Kindleberger, 1978; Minsky, 1986) and Irving Fisher’s (1933) debt-deflation framework, speculative asset booms become systemic crises when credit expansion shifts balance sheets from hedge finance (cash flows covering principal and interest) to speculative and Ponzi finance (relying on rising asset prices and short-term margin roll-overs).

Once monetary tightening or an exogenous shock halts price appreciation, forced margin liquidations trigger Fisherian debt-deflation: fire-sale asset discounts erode bank collateral values, contracting credit supply across the real economy.

Sources and Further Reading

1. Reserve Bank of India, “ Brief History of the Reserve Bank of India,” Reserve Bank of India, 2005. Historical & Financial Reference
2. Reserve Bank of India, “ RBI History: Brief Chronology of Events, 1935 to 1949,” Reserve Bank of India, 2005. Historical & Financial Reference
3. Reserve Bank of India, “ Evolution of Deposit Insurance in India and the Travancore National and Quilon Bank Crisis,” Reserve Bank of India, 2005. Historical & Financial Reference
4. Reserve Bank of India, “ Evolution of Central Banking in India,” Report on Currency and Finance, 2006. Historical & Financial Reference
5. Punjab National Bank, “ Origin of PNB – The History of Punjab National Bank and the 1913 Banking Crisis,” Punjab National Bank, 2020. Historical & Financial Reference
6. Bakhtiar K. Dadabhoy, “ Excerpt: Barons of Banking on the 1913–1914 Banking Crisis and People’s Bank of India,” Mint, 2018-10-26. Historical & Financial Reference
7. Vikram Doctor, “ The Rise and Fall of TNQ Bank,” Mint, 2016-06-19. Historical & Financial Reference
8. Irving Fisher — "The Debt-Deflation Theory of Great Depressions," Econometrica 1, no. 4 (FRASER Federal Reserve Archive, 1933): 337–357 Central Bank / Monetary Authority
9. Charles P. Kindleberger & Robert Z. Aliber — Manias, Panics, and Crashes: A History of Financial Crises (Palgrave Macmillan) Peer-Reviewed / Academic Research

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