Indigenous Banks - Full Details (SBI Recruitment and IBPS Bank jobs Exam Oriented Free study materials)
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From very ancient days, India has had banking of some type, known as indigenous banking. Indigenous banking peculiar to India had been organized in the form of family or individual business. In different parts of the country the indigenous bankers have been called by different names, such as Shroffs, Sahukars, Mahajans, Chettis, Seths, Kathiwals etc. They vary in size from petty money lenders to substantial shroffs who carry on large and specialised banking business. They are to be found in all parts of the country- in large towns and cities and villages.
Indigenous bankers are individuals or private firms which receive deposits and give loans and thereby operate as banks. Since their activities are not regulated, they belong to the unorganized segment of the money market. The indigenous bankers have been engaged in the banking business in both ancient and medieval periods. They received set back with the introduction of modern banking after the arrival of the British. Over the past two and a half decade with the growth of commercial and cooperative banking the area of the operations of the indigenous bankers has contracted further. Still there are a few thousand indigenous bankers particularly in the western and southern parts of the country who are engaged in
traditional banking business. The volume of their credit operations is however not known.
Indigenous bankers do not constitute a homogeneous group. Broadly they may be classified under four main sub-groups. Gujarati Shroffs, Multani or Shikarpuri Shroffs, Chettiars and Marwari Kayas. The Gujarati shroffs operate in Mumbai, Kolkata and the industrial and trading cities of Gujarat. The Marwari Shroffs are active in Kolkata, Mumbai, tea-gardens of Assam and other parts of North-East India. The Multani or Shikarpuri Shroffs are to be found mainly in Mumbai and Chennai and the Chettiars are concentrated in the South. Of the four main such groups of the indigenous bankers the Gujarati indigenous bankers are the most important in terms of the volume of business.
There are three types of indigenous bankers:
(a) those whose main business is banking,
(b) those who combine their banking business with trading commission business, and
(c) those who are mainly traders and commission agents but who do a little banking business also.
The majority of the indigenous bankers belong to the second group.
Functions of Indigenous Bankers
The main functions of the indigenous bankers are as follows:
1.Accepting Deposits: Indigenous bankers accept deposits from the public. These deposits are of two types:
(a) the deposits which are repayable on demand, and
(b) the deposits which are repayable after a fixed period.
The indigenous bankers pay higher rate of interest than that paid by the commercial banks.
2.Advancing Loans: The indigenous bankers advance loans to their customers against all types of securities, such as land, houses, crops, gold and silver. They also give credit against personal security. They finance inland trade, including the movement of agricultural commodities like sugar, oil seeds etc. But they do not grant direct loans to farmers. They give loans to farmers through money-lenders.
They provide loans to small industries which cannot fulfill the necessary loan conditions of commercial banks. In recent years, they are also providing working capital to the small industrialists.
3.Business in Hundies: The indigenous bankers deal in hundies. They write hundies and buy and sell hundies. They also discount hundies and thereby meet the financial needs of the internal traders. They also transfer funds from one place to another through discounting of hundies.
4. Acceptance of Valuables for Safe Custody: Indigenous bankers accept valuables of their clients for safe custody. Some indigenous bankers provide cheque facility. They provide remittance facilities also.
5. Non-banking Functions: Most of the indigenous banks or bankers also carry on their non-banking business along with the banking activities. They generally have their retail trading business. They also participate in speculative activities. Sometimes, they act as agents to big commercial firms and earn commission.
Defects of Indigenous Bankers
1. Mixing Banking and Non-banking Business: The indigenous bankers, generally combine banking and non-banking business. Many of them undertake speculative activities. Their business is risky as they combine both trading and banking. This is against the principle of sound banking.
2. Unorganized Banking System: The indigenous banking system is highly unorganised and segmented. Different indigenous bankers operate separately and independently. They have no coordination with each other. They have no regular contact with the commercial banks. The transfer of funds is not possible in such a system.
3. Insufficient Capital: The indigenous bankers largely depend upon their own capital. As a result, their financial resources are insufficient to meet the demand of borrowers.
4. Meagre Deposit Business: The main business of the indigenous bankers is to give loans and deal in hundies. Their deposit business is meagre or very small. They have failed to tap and mobilize rural savings effectively.
5. 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 give loans against immovable properties. They also do not distinguish between short-term and long-term loans.
6. Unproductive Loans: The indigenous bankers do not pay attention to the purpose for which the loan is used. They also give money for unproductive and speculative activities or for paying off old debts.
7. Higher Interest Rates: The indigenous bankers charge very higher interest rates for the loans than those charged by the commercial banks. High rates of interest adversely affect the inducement to produce.
8. Exploitation of Customers: The indigenous bankers adopt all types of malpractices and exploit their customers in many ways. For example, they make unauthorized deductions from loans. They overstate the amount of the loan in the document.
9. Discouragement to Bill Market: The indigenous bankers also stand in the way of developing a proper bill market in the country. Bulk of their business is based on cash transactions rather than on hundies.
10. Secrecy of Accounts: They adopt a traditional accounting system in vernacular. 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.
11. No Control of Reserve Bank: The indigenous banking business is unregulated. The Reserve Bank of India has no control over these bankers and cannot regulate their activities. In this way the indigenous banks are a great hurdle in the way of developing an organized money market in the country.
Indigenous Bankers and the Reserve Bank
Since its inception in 1935, the Reserve Bank of India has been making sincere efforts:
(a) to bring the indigenous bankers under its control,
(b) to integrate them with the modern banking system, and
(c) to provide various central banking facilities to them.
But the Reserve Bank failed to achieve success. It is unable to control the activities of the indigenous bankers. They are outside the control and influence of the Reserve Bank. The policy of the Reserve
Bank would become effective only when indigenous banks are directly linked to it. Suggestions for Reform Various suggestions have been made to improve the functioning of indigenous banking in the country.
1. The indigenous bankers should be directly linked with the Reserve Bank.
2. The indigenous banks should separate their non-banking business from banking business.
3. They should re-organize their banking business on modern lines. They should maintain proper accounts and get them audited regularly.
4. The wasteful competition between the indigenous bankers and the commercial banks should be ended.
5. The indigenous bankers should stop various malpractices in their business.
6. The benefits of the Banker�s Book Evidence Act should be extended to the indigenous bankers also.
7. The indigenous bankers should develop bill-broking business, like bill brokers in the London money market.
8. They should be members of an association.
9. The Reserve Bank should supervise and inspect the conduct of indigenous bankers.
10. The Banking Commission, 1972, in its report suggested that the best way to control the business of indigenous bankers should be through commercial banks. The commercial banks should be encouraged to co-operate with the indigenous bankers.
They should provide help to the indigenous bankers. They should provide facilities to indigenous banks to discount their hundies more easily. Thus, commercial banks must take greater responsibility in controlling the activities of indigenous bankers. In view of the great role played by the indigenous bankers in the Indian economy, it is better to improve indigenous banking than to abolish it altogether. It is also better to reform them rather than replacing them by commercial banks. Legislation should be passed for regulating the activities of indigenous bankers by the Reserve Bank of India. This will help the Reserve Bank to secure effective control over the Indian money market. In the interest of the development of the country, the indigenous bankers should change their attitude and consider organizational and operational changes. Indigenous banking has a positive and perspective role to play in the money market of India.