The money market in India is not only underdeveloped but is also a heterogeneous entity. As such, it has a number of drawbacks some of which have been enlisted as under:

1. Dichotomy:

The Indian money market is dichotomised into organised and unorganised sectors.

The organised sector consists of modern well-organised and scientifically operating financial institutions, with the Reserve Bank of India at the apex, scheduled and non-scheduled commercial banks in the private as well as the public sectors, foreign banks, post-office savings banks, and co-operative banks.

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The unorganised sector comprises the widely scattered, indigenous banks (called Shroffs, Multanis, Khatris, Chettiars, and others), money­lenders, chit funds etc. This unorganised part lacks scientific organisation, being orthodox in approach, stagnant and ill-organised.

2. Lack of Co-ordination:

There exists no cohesion or coordination between these organsied and unorganised parts of the Indian money market. Thus, the Indian money market may be characterised as unbalanced and loose, its sub-components having no ties with one another.

3. Divergence of Lending Rates and Policies:

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Due to lack of homogeneity in the composition of the Indian market, there is wide divergence not only in the structure of interest rates, but also in the lending policies of the different financial institutions. Money­lenders especially charge exorbitant rates of interest and lend mainly for unproductive purposes.

4. Inadequate Control by the Reserve Bank:

The Reserve Bank has no adequate control over the policies and functioning of the unorganised part of the money market, which is quite large in size which plays a significant role in rural finance.

5. Inelasticity and Instability:

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The Indian money market is inelastic as well as unstable; hence, it becomes a great hindrance to the rapid economic development of the country.

6. Underdeveloped Bill Market:

The bill market, an important constituent of the organised part of the money market, is also underdeveloped in India. As compared to advanced countries, there is a great paucity of sound and first class commercial bills of exchange in our country.

Indian traders resort to hundis, rather than draw bills of exchange. Further, there is lack of standardisation in drawing of bills and hundis in India.

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Again, the banking habit is not much developed in our country; so cash transactions are more popular than credit transactions. As a consequence of all these conditions, no adequate supply of bills can take place.

7. Improper Care of Rural Finance:

An important weakness of the Indian banking system is that till recently agricultural finance was divorced from the organised sector of the money market.

8. No Bankers’ Acceptance:

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There is no development of bankers’ acceptance or acceptance of credit by the banks in India.

9. Blending of Lending and Trading Activities:

In the unorganised sector, the financial agencies do not resort to money dealings only. They usually carry on retail trade agriculture and other business activities, along with lending operations.

10. Banking Gap:

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Banking facilities are either entirely non-existent or inadequate in the villages of India. In 1969, there were 617 towns and 5,000 villages without any banking facilities. Scientifically run institutions like commercial banks have a largely urban-orientation in our country.

11. Small Working Funds:

Though indigenous bankers are large in number in our country (as per the Banking Commission’s Report, 1972, it was about 2,500), most of them have a comparatively small deposit business.

They also lack any regularity or co-ordination with the commercial banks and other organised sectors of the money market.

Moreover, indigenous bankers themselves lack sufficient organisation. Thus, there is no co-ordination or team work among them.