Note 131 — Chapter II

It should, however, be noted that between 1862 and 1876, at some centres comprising the head offices and branch offices of the Presidency banks, the Independent Treasury System was suspended. By way of compensation for the loss of their right of note issue, the Presidency banks were given certain concessions by the Government under agreements entered into in accordance with Act XXIV of 1861. Among the concessions one was the use by the banks of Government balances. The first agreement, that of 1862, conceded to the banks the following privileges in regard to the Government balances: (1) The unrestricted use for banking purposes “of all moneys and balances which but for the agreement would have been received or held at the General Treasury” up to the limit of 70 lakhs in the case of the Bank of Bengal, 40 lakhs in the case of the Bank of Bombay, and 15 lakhs in the case of the Bank of Madras. (2) The option of setting aside the excess over these sums in a separate strong room for production when demanded, or of investing it in Government paper or other authorized securities, the power of investment being subject to the condition that the banks should be “at all times answerable and accountable to Government for the surplus cash balance for the time being.” (3) The right to interest from Government on the difference between the actual balance and 50 lakhs in the case of the Bank of Bengal, 30 lakhs in the case of the Bank of Bombay, and 10 lakhs in the case of the Bank of Madras, whenever the balances at these banks fell below these minima. (4) Permission to the banks to use the Government balances at their branches on similar terms, suitable limits being fixed in each case, as in the head office agreements. A year after the agreements were executed difficulties arose with the Bank of Bengal, which had locked up the funds to such an extent that it was unable to meet the demands of the Government on the public balances it held. Negotiations were therefore opened in 1863 for the revision of the agreements, and the revised agreements came into force on January 2, 1866. They contained the following provisions regarding the public balances: (1) Undertaking by Government to maintain in the hands of the banks at their head offices an “average cash balance” of 70 lakhs at the Bank of Bengal, 40 lakhs at the Bank of Bombay, and 25 lakhs at the Bank of Madras, “so far as the same may conveniently be done.” (2) Permission to the banks to use the whole balances for the time being deposited with them for banking purposes. (3) The right to interest from Government when the Government balance at the head offices of the Bank of Bengal, Bank of Bombay, and Bank of Madras fell below the minima of 45 lakhs, 25 lakhs, and 20 lakhs respectively. (4) Permission to employ “the whole of the balances (at branches) however large for the time being” for banking purposes, subject to the condition that each branch should “at all times be ready to meet the drafts of the Government" to the extent of the Government balances at the branch. These revised agreements were to remain in force till March 1, 1874. In 1874 the question of the revision of the charters of the Presidency banks was under consideration, and it was the aim of the Government to continue to the banks the right to use the whole Government balances. Just at this time (1874) difficulties occurred with the Bank of Bombay and the Government could not draw upon their balances. This led to a reconsideration of the policy of merging the Government balances with the bank balances and leaving them in the custody of the banks. After a somewhat lengthy discussion the Government of India reverted to the system of Independent Treasury by instituting what were called Reserve Treasuries at the headquarters of the Presidencies which held the Government balances previously held by the Presidency banks. For a history of this episode see House of Commons Returns 109 and 506 of 1864; also J. B. Brunyate, An Account of the Presidency Banks, Chap. VII.