A. Indigenous Bankers
According to the Indian Central Banking Enquiry Committee, “an indigenous banker is any individual or private firm receiving deposits and dealing in Hundies or lending money”.
Their area of operation is limited, they know their customers intimately. They can watch whether the loan granted is used for the purpose or not. Therefore these types of bankers are existing even now. The Shroffs, the Marwaris, the Multanis, the Jains, the Sowcars, the Mahajans, Kharties, Seths and Banias are some of leading indigenous bankers.
The indigenous bankers can be classified into the following three categories:
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(i) Those whose main business is banking
(ii) Those who combine their banking business with trading activities and
(iii) Those who act as commission agents. (For them the banking business is a side business).
In India the majority of the indigenous bankers belong to the second category. The number of villages in India is too large, while the size of each village is so small that any comprehensive scheme for opening branches of commercial banks to cover all the villages is not possible.
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Therefore, the indigenous bankers have to continue to play a unique part mainly in rural finance. The indigenous bankers do not normally have contacts with other banking institutions in the country. Because, they are operating mostly with their own funds and not depend upon deposits.
But during the busy seasons, they rediscount the bills with the commercial banks and thus, the funds from the organised sector of the money market pass into the indigenous or the unorganized sector of the money market. Presently, they do not have such facility from the banking system.
Functions of Indigenous Bankers
Indigenous banking is mostly conducted as the family business. The banker inherits his banking business from his great grandfathers. His area of operation is limited and he knows his customers intimately. He knows all the details of his customers. Even after granting the loan, he can watch that it is actually utilized for the purpose for which it is obtained.
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Therefore, these types of bankers are existing even now and there is no other system which can replace indigenous banking system. However, their importance has come down recently.
The indigenous bankers are functioning independently of each other. But in India, there are some organisations of these bankers to protect their common interest, viz., Multani, Shikarpuri Bankers’ Association and Marwari Chamber of Commerce in Mumbai, Shroffs’ Association in Ahmedabad, Calcutta and Mumbai, etc.
These organisations are the indigenous bankers. These organisations are in the form of guilds and help in settling disputes among themselves without recourse to courts.
The main functions of the indigenous bankers can be summarised as follows:
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(i) In India they are operating mainly in rural areas besides towns and cities.
(ii) They maintain branches in important towns and cities with small establishment and are managed by their agents called ‘gumastas’.
(iii) They borrow funds by accepting deposits from the people (not permissible now by RBI).
(iv) They provide credit facilities flexibly.
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(v) They lend to the rural people against securing of land, jewellery, etc. or sometimes on mere promissory notes.
(vi) They provide loans to small traders and industrialists who cannot offer security acceptable to commercial banks.
(vii) They provide remittance facilities to their customers.
(viii) They draw and discount bills (known as Hundies) for their customers.
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(ix) They have close contact with their customers and their business. Hence they extend financial facilities according to their needs.
(x) They are the advisors and consultants to their customers.
Indigenous Bankers and Commercial Banks
The indigenous bankers do not normally have contacts with other joint stock banking institutions in the country. Because, they are operating mostly on their own funds and not depend upon deposits from the others. Previously, during the busy seasons, they used to rediscount the bills with commercial banks and thus, the funds from the original sector of the money market pass into the indigenous or unorganized sector of the money market.
They also borrow from the commercial banks against demand promissory notes. The banks extend credit facilities to the approved indigenous bankers and the banks fix limits for the loan amount. Such facilities are not extended to them now because of RBI restrictions.
Indigenous Bankers and the RBI
Despite the predominant role played by the indigenous bankers in India’s economic life’ they have always remained outside the pale of organised banking. As early as 1931, the Banking Enquiry Committee emphasised the necessity to unify the two sectors of the Indian money market and recommended the linking of the indigenous bankers to RBI control.
The committee especially recommended that appropriate steps should be taken to evolve a modern bill market on the western type in which the hundi, the traditional bill of exchange used by the indigenous bankers would figure actively.
Since 1935, when RBI was established many attempts were made by the Bank to bring the indigenous bankers under its orbit. RBI issued a draft scheme for direct linking of these bankers.
RBI suggested that the indigenous bankers should give up their trading and commission business, switch over to western system of accounting, develop the deposit side of banking activities, submit to RBI periodical statements of their affairs, etc. RBI desired that the ambiguous characters of the hundi should cease and that it should become a negotiable instrument always representing a genuine trade transaction.
Besides, the Bank desired the most important of the indigenous banks to play the role of discount houses as in London. An against these obligations, RBI promised to provide them with all the privileges enjoyed by the scheduled banks.
In other words, indigenous bankers would be entitled to borrow from or rediscount bills of exchange at RBI on the same terms and conditions as those available to the scheduled banks.
The indigenous bankers with their age-old traditions of independence, declined to accept the restrictions as well as the compensating benefits of securing accommodation from RBI on favourable terms. They disagreed with the suggestions regarding accepting deposits and giving wide publicity to their accounts and their state of affairs.
They were unwilling to give up their trading and commission business and confine themselves to banking business only. Besides, they did not consider that the privileges offered by RBI were adequate enough to compensate for the loss of their non-banking business. As a result, the scheme proposed by RBI to bring the indigenous bankers under its direct influence failed.
In 1954, the Shroff Committee recommended that RBI should take steps to encourage the rediscounting of hundies of the indigenous bankers by RBI through the scheduled banks. Similar proposals for the linking of the indigenous bankers with RBI and organised money market have been put forward among others by the Bombay Shroffs Association. But RBI has decided not to do anything further in this matter.
The Banking Enquiry Commission, 1972 believed that the best way to control indigenous bankers is through commercial banks. The RBI should exercise indirect influence over the business of indigenous bankers through the medium of commercial banks by laying down certain guidelines for their dealings with indigenous bankers.
The commercial banks, in their turn, should also call for regular returns from the indigenous bankers and require them to maintain adequate internal inspection procedures and be subject to external audit.
In the course of development of Banking Industry and Co-operative banking, the role of indigenous bankers has now, been relegated to the level of ‘pawn brokers’.
Soon after nationalization of major commercial banks in July 1969 and ever since the establishment of Regional Rural Banks from 1975, Government and RBI have followed a policy of rural banking by telling these banks to open up as many rural branches as possible.
Thanks to this policy, today around 33,500 bank branches are operating from rural areas. The access of banking facility to rural masses made the indigenous bankers a non-entity in rural banking. They are now moneylenders for drunkards and lazy. The decent among have converted into Finance Companies and the more decent, into Registered Finance Companies.
Thus, the indigenous bankers have no role to play in today’s rural India except in certain parts of the country where the level of education is very poor.
Defects of Indigenous Bankers
The indigenous bankers suffer from the following defects:
(i) Combining banking and non-banking business:
In India, the indigenous Bankers combine their banking business with their commission and other non-banking business. Hence, they cannot concentrate more on the banking business.
(ii) Un integrated system:
In India, they are unorganised and un integrated. They do not have proper link with commercial banks and RBI. They operate independently.
(iii) Lack of sufficient capital:
In India, most of them operate mainly on their own funds. Hence, they run their business with inadequate capital and are not able to cater to the financial needs of the borrowers.
(iv) Conservative approach:
The majority of the indigenous bankers is conservative, lack adaptability and continues ancient methods of business. They follow the methods that they learnt from their forefathers without any improvement in time to time.
(v) Do not follow the sound policy of lending:
While lending the indigenous banker does not follow the sound principles of lending, viz., safety, liquidity, feasibility, etc. Sometimes they grant loans against insufficient securities or even personnel securities.
(vi) Less importance to discounting of handiest:
While financing to trade, they directly make cash advances and the volume of bills discounted is small.
(vii) Secrecy of accounts:
The indigenous bankers maintain undue secrecy of their business. They do not publish their trading results and activities. Their operations were shrouded with utmost secrecy.
(viii) Not controlled by RBI:
The indigenous bankers are not controlled by the RBI and thus forming part of the unorganised sector of the money market.
(ix) Higher rate of interest:
The rate of interest charged by indigenous bankers is high when compared with the commercial banks.
Suggestions for Improvement
The following are the suggestions given by various committees for reforming indigenous bankers and to link them with the organised structure of banking.
(i) The indigenous bankers should give up their side trade and confine themselves to banking properly.
(ii) They should mordernise their methods of working and run their business like commercial banks.
(iii) They should maintain their accounts properly and get them audited.
(iv) They should concentrate more on deposit business and encourage deposits made by rural people.
(u) Wherever possible, they should be amalgamated into economic units which can maintain adequate capital.
(vi) They should be directly linked with Reserve Bank of India.
(vii) There should not be any unhealthy competition between the indigenous banks and commercial banks.
(viii) The facilities provided by the commercial bankers should be made available to the indigenous bankers also the Commercial banks should freely advance funds to indigenous bankers on Hundies discounted by them.
(ix) With their close contact to intimate knowledge of the traders, they can function on par with that of London bill brokers.
(x) The Bankers Books Evidence Act may be extended to indigenous bankers also.
It may, however, be stated as a matter of caution that indigenous bankers do not have any role to play in the modern banking which require great deal of sophistication, computerization, large capital, greater control and regulation from RBI. Hence, the historical facts are stated only for academic interest.
B. Moneylenders
Moneylenders play an important role in rural financing. The moneylenders in the villages are of two types. They are,
(i) Professional moneylenders, and
(ii) Non-Professional moneylenders.
The professional moneylenders are the persons whose main occupation is money lending. They are known as Banias, Mahajans, Sowkers, etc. But, the non-professional moneylenders do the business of money lending as a side occupation. The rate of interest charged by moneylenders is very high and they indulge in many objectionable trade practices.
Indigenous Bankers vs. Moneylenders
The following are the important differences between Indigenous Bankers and moneylenders:
1. Business of banking
The Indigenous bankers practice their Moneylenders business cannot be banking business in its true meaning. Considered as banking business.
2. Acceptance of Deposits
The Indigenous banker used to accept Moneylenders do not accept deposits on current accounts as well as deposits but they simply fixed deposits (not permissible now). lend money (own funds)
3. Dealing in Hundies
They do not deal in hundies.
4. Purpose of lending
They generally provide finance to agriculture and tn.de and do not finance for consumption.
5. Security sought
They supply finance only for productive purposes on a proper security such as agricultural goods, lands, etc.
They are prepared to lend money even without a proper security. They do not distinguish between productive and unproductive expenditure.
6. Area of operation
They are largely based on rural areas.
7. Rate of Interest
The rates of interest charged by indigenous bankers are moderate and consistent with the market conditions.
The rates of interest charged by the moneylenders are very high.
8. Nature of Practice
They practice their business with accurate accounts and straight dealing with their customers.
They are known for their objectionable practices such as failure to issue receipts for part payments, maintaining false accounts, etc.
9. Relationship with customers
The relationship between indigenous bankers and their customers is always cordial.
They include Shroffs, Seths, Chettis, Kothiwalas, Marwaris, etc.
The moneylenders quarrel, harass and threaten their customers and in most of the cases they do not maintain friendly relations with their customers.
10. Examples
They include Banias, Mahajans, Sowkars, etc.
According to Dr. M. Muranjan, “The moneylenders and indigenous bankers still continue to be the backbone of Indian rural finance. Their part in rural finance is predominant in spite of the good progress made by the co-operative societies and commercial banks in rural areas. The system is well suited to rural areas.