Defects of Indigenous Bankers
The organisation and functioning of indigenous bankers suffer from the following defects:
1. Mixing Banking and non-Banking Business:
The indigenous bankers generally combine banking and non-banking business. This is against the principle of sound banking.
2. Un-organised Banking system:
The indigenous banking system is highly unorganized and segmented. Different indigenous bankers operate separately and independently. They have no coordination with each other and have no link with other banking sectors. The transfer of funds is not possible in such a system.
3. Insufficient Capital:
The indigenous bankers largely depend upon their own capital or that of their family members or relatives. The financial resources of these bankers, therefore, are insufficient to meet the demand of the borrowers.
4. Meagre Deposit Business:
The main business of the indigenous .bankers is to give loans and deal in hundies. Their deposit business is very small. They do not mobilize saving of the general public.
5. Higher Interest Rates:
The indigenous bankers charge much higher interest rates from their borrowers than those charged by the commercial banks. High rates of interest adversely affect the inducement to produce. According to Sir Daniel Hamilton, the “secret of successful industry is to buy your finance cheap and to sell your produce dear. The Indian buys his finance dear and sells his produce cheap. His creditor generally fixes the price for both.”
6. Defective Lending:
The indigenous bankers generally do not follow the sound banking principles while granting loans. They provide loans against insufficient securities or even against personal securities. They also extent credit against immovable properties. They also do not distinguish between short-term and long-term loans.
7. Unproductive Loans:
The indigenous bankers do not pay attention to the purpose for which the loan is used. They generally give money for unproductive and speculative activities, for paying interest or for paying off old debts.
8. Secrecy of Accounts:
The indigenous bankers keep secrecy about their accounts and activities. They neither get their accounts audited nor publish annual balance sheets. This raises suspicion in the minds of the people.
9. Exploitation of Customers:
The indigenous bankers indulge in all types of malpractices and exploit their customers in many ways:
(a) They make unauthorised deductions from the loans,
(b) They overstate the amount of loans in the document,
(c) They do not give receipt against payments received.
10. No Control of Reserve Bank:
The indigenous banking business is unregulated. The Reserve Bank of India has not control over these bankers and cannot regulate their activities. In this way, the indigenous bankers are a great hurdle in the way of creating an organised money market in the country.
11. Discouragement to Bill Market:
The indigenous bankers also stand in the way of developing a proper bill market in the country. They very often give cash loans and hundies play a small role.