Friday, December 2, 2011

200 Bags of Groundnut Oilcake

There is a general impression that Banking is carried on in Bank premises.  This is an impression not only with the general public, but also among bankers themselves.  What is done within the four walls of a bank branch is mainly Accounting and very little of actual banking.   Banking is mostly in outdoors and that is where the real action is.  Practical Banking is actually in Agricultural fields, factories manufacturing various products, markets and bazaars.   A banker who loses touch with the outside world will be put to lot of difficulties.  An arm chair banker is no banker and without constant touch with realities of happenings outside his four walls, he is a lame duck and an easy prey.

One of the first lessons I learnt in Banking was through 200 bags of groundnut oil cakes.

This was nearly four decades ago.  I had just started working in a bank branch at a place well known for agriculture produce.  Cotton, ground nuts, pulses, jowar (a type of corn), chillies were the main crops grown in the area and there was a big trading market as well in that place.  The major customers of the branch were traders in these commodities.  Just as mobilization of resources in the form of deposits is important for banks, profitable deployment of such resources by lending to all sectors of the economy is also equally important.   Traders are an integral segment of market economy and this branch was known for lending to traders in these commodities.   Many of the traders were in this line for generations and enjoyed excellent reputation in the market.

During the 1960s and 1970s, there was a severe strain on the resources and lending was subjected to several restrictions and strict supervision by the Reserve Bank of India.   Guidelines famously known as "Selective Credit Control" and "Credit Squeeze" were in force and lending to trading sector was specially marked for additional controls to curb hoarding.  In order to reduce availability of funds to traders, margins were increased suddenly, thus bringing down the drawing limits (Please read blog:  for effect of margins on borrowing) even though traders were able to provide adequate physical securities and stocks as security.  In short, traders were finding it difficult to raise funds despite having sufficient stocks.

There was another difficulty for the traders.  Sanctions of borrowing limits to them (and also other sectors) were in many forms, main types being Cash Credit  (popularly called as "Overdraft") and Discounting of Bills. Limits against discounting of bills were further divided as against clean bills and documentary bills.  Clean bills discounting limits were without any security backing and such limits were very frugal and almost negligible in relation to the volume of business of the trader.  Documentary bills limits were relatively better as they had the security of documents of title to goods in transit; general examples being Railway Receipts and Motor Transport Receipts (RRs and MTRs).  Limits against RRs were sanctioned relatively more liberally as against MTRs on the reliability factor.  In case of default by the party, banks could take delivery of the goods sent by Railway wagons or Lorries and realize the lent money by selling the goods.

There were some reporting requirements by banks to RBI for monitoring purposes.  One of the statements was called Form-C, in which details of loan outstanding against different commodities, classified as sensitive commodities, was to be reported periodically.  Entire working in those days was manual and not even electronic calculators were available.  All of us were provided with a book called "Kapoor's Calculator",  using which interest chargeable was manually calculated and checked.   Any wrong calculation would result in loss of income to the bank and audit objections on these issues were dealt severely.

One of the well know traders in the locality was sanctioned  big borrowing limits for his trade in my branch.   The limits were adequately secured by mortgage of shop and big open area attached to it where large quantities of commodities were stocked.  The party was financially sound and was quite solvent.  Each day some bills would be given for discounting and the funds thereof would be used for further buying the commodities.  I had just joined the bank and put on the seat for discounting of bills.  Arrival of the party's representative at the branch meant more work for me as he would bring bundle of bills for discounting.  A senior official who was preparing the statements of disclosures to RBI taught me how to handle the work. It basically consisted of entering the details, accounting the bill amount, calculating the interest and discount charges, sending the bills to another branch for presenting to the buyer for recovering the money and also accounting the payments properly when received.  One of the things he specifically told me was to note the item dispatched against which the bill was drawn in the last column of the register.  The description of item consigned would be available in the RR or MTR, usually with words like "200 bags said to contain groundnut seeds" etc. The disclosure statements would be prepared by aggregating such entries at the end of the month.

During the first month of my working the party had produced several bills covering consignments of several commodities like Groundnuts, Groundnut seeds, Groundnut oil cakes and grains like rice and jowar.  I had noted the consignment items dutifully in the last column.  At the end of the month, the senior official advised me to total the amounts item-wise to enable him to classify in the reporting statement.  I complied with the advice and found something amiss in the case of Groundnut oil cakes.  While all consignments were for 200 bags of oil cakes, the amount of bills in rupees was 17,000 initially and had gone up to 34,000 during the middle of the month and was as high as 45,000 at the end of the month.  I mentioned this aloud while handing over the summary of the month's bills.  There was sudden activity in the branch and the matter was reported to the Branch Manager.  Branch Manager called for the entire records and after scrutiny telephoned the party's office and called the representative to the Bank.  There were some discussion on the issue.  In the course of next two weeks all these bills were paid  and thereafter the branch stopped accepting bills covering dispatch of oil cake consignments for discounting.

Oil cake is a mass of seed from which oil has been extracted or expressed, and is used as feed for livestock.  In India nearly half of the area for cultivation of oil seeds was covered by groundnut and the nuts have as much as 40% oil content.  Groundnut is a native of South American Countries, mainly Brazil, Peru and Argentina.  It is said to have been introduced to India in the 16th century from one of the Pacific islands after traveling from South America.  Since most of the oils now used in cooking is hydrogenated oils, we are  denied the pleasure of  the taste and aroma of items cooked in oils like groundnut oil, til oil, coconut oil etc.  Sesame oil alone appears to be used in original form in some parts of the country.

The actual value of  200 bags of oil cake was much less than shown in the bills given to the bank.  As and when the credit availability became tight and margin was increased on stocks at the godowns, the party increased the value in the bills and started obtaining higher level of funds against oil cake bills.  There was an understanding between the buyer and seller and the bills would be paid by the buyer for full amount after getting the difference amount from the seller through telegraphic transfers.  Such bills are called as "Accommodation Bills" in banking language and in case the party fails to pay the bills, banks are exposed to loss as the value of goods will be much less than the funds advanced against them.  In those days banks were maintaining  a register called "Daily Rate Register" in which market rates of various commodities were noted on daily basis to enable the branch to keep track of price movements and safeguard bank's interests.  As groundnut oil cakes were not being advanced against except as bills, the rates were not monitored.  Party took advantage of this loophole and drew additional funds from the bank through such bills.  Today such register is not required as a visit to will give daily rates for all agricultural commodities in Karnataka and similar websites are available for other areas as well.

After about one year I was transferred from that branch.  On the day of my leaving the branch, this party's representative, who came to the branch daily for the firm's banking work, requested me to join him for lunch.  When I declined due to last minute arrangements and winding up, he insisted to have dinner before boarding the bus in the night.  While having dinner he thanked me for the favour to him.  I did not understand what he had in mind.  When I asked him what was the favour, he told me that he was opposed to getting the oil cake bills discounted for higher value but his mota seth (head of the firm) directed him to follow instructions.  Due to my pointing out the discrepancy bank stopped accepting such bills and he and the firm were spared of further embarrassment and loss of reputation.  How long this practice was going on and whether experienced people in the branch were not aware of it,  was a question I never asked. 


  1. made very nice reading. People in that zamana were really honest as indicated by your allusion to the gentleman who thanked you for stopping the discounting of bills!

  2. excellent narration. It revived in me the memories of good(!) old days of Kapoor's Interest calculators and RBI's eternal credit squeeze. Alas, what was considered as prudent banking those days is frowned upon as irrelevant today. Your article throws a very valuable lesson on credit monitoring to the genext bankers.

  3. An honest and prudent person is honest and prudent wherever and whenever he is. It does not depend on time or place, he does his job prudently and honestly. It further depends on his higher authorities and te philosophy of that institution, what steps they will take based on his report.

  4. An excellent example to learn how bank staff should be alert in detecting such misuses by traders/borrowers.

  5. Sir its ultimate u pointed out. It teach us a lesson of not to trust party in respect of his satisfaction track