Indigenous Banking System

The beginning of India’s indigenous banking system can be traced back to the Vedic period. Not much information exists about the banking system from the sixth to sixteenth centuries. However, there are detailed accounts of the process noted by a French man, J.B Tavernier, who visited India. There are also other accounts of the nature of the banking system in the Mughal era and the introduction of concepts like ‘Mughal coinage’ etc. Until the middle of the nineteenth century, the Indian financial system was dominated by indigenous banking institutions, providing credit to the government. However, the arrival of the British had a negative effect on their trade. Foreign (exchange) banks took over the funding of external commerce. Further, with the rise of commercial banks in the mid-1950s, the working of indigenous banking decreased rapidly and was eventually forced to confine to finance internal trade. However, there are still some specific communities and regions of India where this method is used. This information was concerning what is indigenous banking system class 11

Indigenous Banking System Meaning and its Functions

Indigenous Banking is a banking system in which private companies or individuals function as banks by offering services like loans and deposits. The people who carry out these financial services are called Indigenous Bankers. These indigenous bankers are often confused with moneylenders, but they have a clear distinction. While indigenous bankers, apart from providing loans, also accept deposits and deal in ‘hundis,’ which was used as an instrument of exchange, while moneylenders provided loans but did not deal in ‘hundis.’

As we know, there are four main castes in India, namely, the Brahmins, the Kshatriyas, the Vaishyas, and the Shudras, and it is seen that certain castes and communities dominantly engaged in Indigenous banking. Vaishyas were among the ones who were majorly involved in this system. The Jains, Marwaris, and Chettis are among the Vaishyas, and they are India’s most prominent indigenous bankers. In Punjab, there are also Khatri and Arora bankers and Vaishyas. The Aroras are a sub-caste of the Khatris, who claim Kshatriyas. However, all of these castes and sub-castes are collectively referred to as the “banking castes.” Thus, the term “indigenous banker” does not refer to a single group. Gujarati shroffs, Southern Chettiars, Multani shroffs, and Assamese Marwari Kayas were the four primary sub-groups identified by the Banking Commission in 1972.

Methods of Indigenous Banking System

Some of the methods used in the indigenous banking system among the many are discussed below:

• Promissory Note

Lending money on a promissory note is one of the common methods. The one who wants to borrow money goes to a moneylender, negotiates an interest rate with him, and secures the loan after signing a promissory note guaranteeing to pay the principal and interest on demand.

• Dastavez

Dastavez, or bonds, are another type of security against which loans are granted. They are written on legal forms that have been stamped and are correctly executed. Their unique feature is that they record all of the loan’s terms in writing and in a detailed manner, increasing its reliability.

• Rahan

It is also a widely known method and refers to borrowing money through a mortgage on a property or land.

Functions of Indigenous Banking Systems

• Advancing Loans

 Indigenous bankers offer loans in exchange for land, jewellery, crops, and other valuables. On the basis of promissory notes, loans are made to identified parties.

• Discounting Hundis

One of the most significant functions of indigenous bankers is to discount hundis. They write hundis, which are bills of exchange, and buy and sell them. These can be of two types: Darshni or sight hundi, which is paid on-demand, and Muddati or time hundi, which is paid after the period specified on the hundi.

• Accepting Deposits

The indigenous bankers accept current accounts and fixed-term deposits from the general mass. Local bankers also borrow money from commercial banks, acquaintances, relatives, and even others.

• Inland Trade Financing

They support both wholesale and retail traders within the country, assisting in the purchase, sale, and movement of goods to various trading centres.

• Remittance Services

Indigenous bankers offer remittance services as well, which is carried out by sending a finance bill to one of their branches or an indigenous banker they are acquainted with.

Defects of Indigenous Banking System

• Compared to the modern commercial banks, they are comparatively unorganised and not under the control of the Reserve Bank of India

• They adhere to traditional commercial practices, which involve a large amount of confidentiality and very little system transparency

• The majority of accounts are recorded in colloquial language, and they have not been audited or made accessible to the general public

• They mix banking with other profitable businesses such as speculating, brokerage and others

• They include high-interest rates and even engage in many malpractices, like manipulating accounts, deducting interest in advance and so on

• Lack of a discount market- The limited use of hundis which are internal bills of exchange, indicates the absence of a highly effective mechanism for connecting the indigenous to joint-stock banking

Conclusion

As a result, we may conclude that the indigenous banking system aids in financing and developing domestic trade. To cancel out the system’s defects, some ways of reform can be, indigenous bankers performing only banking business and no other activity, keeping accurate account books in a regulated and recognized form, and being registered with the Reserve Bank of India. The above concepts were discussed regarding the indigenous banking system class 11 level, related topics around it can also be focused on.