What are the main features and functions of indigenous bankers in India?
The Indigenous Banking System in India is an important topic for commerce and economics students, especially for school and competitive exams. This system, involving private individuals or firms acting as bankers, played a vital role in India’s trade and finance before the rise of modern banks. Understanding its meaning, methods, functions, and drawbacks is key for conceptual clarity and exam success.
| Group/Type | Key Regions | Main Activities |
|---|---|---|
| Shroffs | Gujarat, Maharashtra | Trade Finance, Hundis, Remittance |
| Chettiars | Tamil Nadu, South India | Loans, Remittance, Rural Credit |
| Marwaris | North-East, Bengal, Assam | Deposits, Lending, Trade Finance |
| Multanis | Punjab, Sindh | Loans, Discounting Hundis |
Indigenous Banking System Meaning
The indigenous banking system refers to traditional banking carried out by private individuals or firms, known as indigenous bankers. They accept deposits, give loans, discount hundis (traditional bills of exchange), and perform remittance services. Unlike moneylenders, indigenous bankers also operate deposit accounts and facilitate regional trade through financial instruments like hundis.
History and Evolution of Indigenous Banking in India
Indigenous banking has existed in the Indian subcontinent for centuries. Groups like Shroffs in the west, Chettiars in the south, and Marwaris in the east, became renowned for their reliability and extensive credit networks. These bankers helped finance agriculture and trade long before the advent of modern commercial banks. Their influence extended across cities and rural markets, shaping India's economic structure.
Functions of Indigenous Banking System
Indigenous bankers perform several core functions, vital for supporting local commerce and trade. Their services include deposit acceptance, lending, hundi discounting, and remittance.
- Accepting deposits (fixed and current accounts)
- Advancing loans (secured by assets or promissory notes)
- Discounting and issuing hundis (darshni/sight and muddati/time hundis)
- Providing remittance services across regions
- Financing trade and agriculture, supporting small traders and rural markets
Methods and Operations in Indigenous Banking
Indigenous bankers use various methods to carry out transactions and ensure repayment. These traditional methods have adapted over time to regional business needs.
| Method | Description | Example |
|---|---|---|
| Promissory Note | Borrower promises in writing to repay the loan on demand or at a set time. | Short-term trade finance |
| Dastavez (Bond) | Stamped legal document detailing loan terms and security. | Longer-term loans, often against land |
| Rahan (Mortgage) | Loan secured by property or land as collateral. | Financing agriculture or business expansion |
| Hundis | Traditional bill of exchange used for remittance and trade settlements. Two types: Darshni (payable on demand) and Muddati (payable after a period). | Settlement of goods sold across cities |
Defects and Challenges of Indigenous Banking System
Despite its historical importance, the indigenous banking system has several drawbacks compared to regulated modern banks. These defects have limited its role in present-day financial markets.
- Lack of centralized regulation and oversight (not under Reserve Bank of India control)
- Poor transparency and confidential, non-standard accounting
- Mixing banking with brokerage/speculative businesses
- High interest rates, especially on rural loans
- Limited integration with formal discount markets and commercial banks
Importance of Indigenous Banking System
Despite challenges, indigenous bankers played a crucial role in India's business history. They provided essential financial services in regions where commercial banks were absent. Their hundi system enabled secure, fast trade remittance. Indigenous banking contributed significantly to the growth of internal trade and the rural economy.
Conclusion
The indigenous banking system in India has fostered domestic trade and commerce for centuries. While now overshadowed by commercial banks, its role in credit, remittance, and trade financing is undeniable. Modern reforms such as regulatory oversight and transparent practices can help integrate valuable aspects of indigenous banking with India’s formal financial sector. Students can use this topic for Commerce exams and a better understanding of India’s financial history. For further reading, visit Money and Banking and Financial Market for related topics.
In summary, the Indigenous Banking System in India consists of traditional financial activities like deposit acceptance, lending, and hundi-based remittance, led by private individuals and firms. Its methods and functions supported trade before modern banks. Although it has several defects today, the system’s historical importance makes it essential knowledge for commerce students preparing for board exams and interviews. At Vedantu, we make such concepts simple and exam-ready for everyone.
FAQs on Indigenous Banking System in India Explained
1. What is the indigenous banking system in India?
The indigenous banking system in India refers to traditional banking practices carried out by private individuals or firms, known as indigenous bankers. These bankers provided essential financial services before the rise of modern commercial banks.
2. Who are indigenous bankers? Give examples.
Indigenous bankers were private individuals or firms acting as traditional bankers. Prominent examples include Shroffs, Chettiars, Marwaris, and Multanis. They played a crucial role in facilitating trade and commerce in India.
3. What is a hundi in the indigenous banking system?
A hundi is a traditional negotiable instrument, similar to a bill of exchange, used for trade finance and remittance within the indigenous banking system. Types included darshni (sight) and muddati (time) hundis.
4. What are the main functions of indigenous bankers?
Indigenous bankers performed several key functions: accepting deposits, providing loans, discounting and issuing hundis, and facilitating remittance services. These functions were vital for the smooth functioning of the Indian economy.
5. How is an indigenous banker different from a moneylender?
While both moneylenders and indigenous bankers offered credit, indigenous bankers also accepted deposits and engaged in hundi transactions, providing a broader range of financial services.
6. What is the difference between Darshni and Muddati Hundis?
A Darshni Hundi is payable on sight, while a Muddati Hundi is payable after a specified period. Understanding these differences is key to grasping the nuances of hundi operations within the indigenous banking system.
7. What were the key challenges faced by indigenous bankers post-independence?
Post-independence, indigenous bankers faced challenges such as increased regulation, competition from modern commercial banks, and the need for modernization of their practices. The Reserve Bank of India played a major role in overseeing these changes.
8. What reforms can improve the indigenous banking sector?
Reforms to improve the indigenous banking sector could include greater regulation by the RBI, increased transparency in record-keeping, adoption of standardized accounting practices, and a focus on reducing links to non-banking activities.
9. How did indigenous banking help in the development of trade in ancient India?
Indigenous banking significantly contributed to the growth of trade in ancient India by providing crucial financial services like credit, remittance, and hundi-based settlements, thereby facilitating the smooth flow of goods and services across different regions.
10. What were some of the defects of the indigenous banking system?
Some common defects of the indigenous banking system included a lack of formal organization, limited regulation leading to inconsistencies, high interest rates, and instances of malpractices. These issues highlighted the need for reform and modernization.
11. How did the practices of indigenous bankers influence modern Indian banking?
Practices of indigenous bankers, such as accepting deposits and providing remittance services, significantly influenced the development of modern Indian banking, shaping aspects of early cooperative and commercial bank operations.
12. Discuss the importance of the indigenous banking system in India.
The indigenous banking system played a vital role in the Indian economy. Before the establishment of modern banks, it provided essential financial services such as credit and remittance, contributing significantly to the growth of trade and commerce, particularly in rural areas.
