Notes on Hindu capitalism – continued: #3

BANKING IN INDIA

Money lending, the predecessor of banking has been prac­tised in India, as in most other countries, from times imme­morial. There are, for example, references to money-lending in Rig Veda and various Hindu scriptures. The Hindu Dharnia­shastra laid down that different rates of interest should be charged to borrowers belonging to different castes and that only people belonging to Vaishya caste should take up the pro­fession of money-lending. In Kautilya’s Arthashastra we get detailed references regarding the rates of interest that might be charged by money-lenders to different type of borrowers. [Sanjeev: this further confirms my view that Chanakya was a statist (although not quite a mercantalist) and had not understood what Adam Smith was to later understand - that the market must be let free to determine its own prices]

Meadows Taylor tells us: “The laws of Manu disclose how thoroughly the scheme of banking was known 3,000 years ago. The bankers understood and followed the fluctuations of money value; they kept account-books, day-books, and ledgers by single and double entry. They charged interest simple and compound, they made insurance by sea and land, they granted bills of ex­change, and in short, they followed the practices of modern times which are little changed from ancient rules.” [Sanjeev: unfortunately, Desai's book has neither an index nor a bibliography, so I'm unable to trace the original source of this quotation. This is a big issue with most Indian scholarship: the lack of proof of assertions/references.]

There are records to show that indigenous bankers in India dealt in hundis (i.e. equivalent of modern bills of exchange) from 12th century onwards when they were in much use. The Indian indigenous bankers used the device of hundis for finan­cing internal as well as foreign trade of India. There are records to show that some prominent indigenous bankers even advanced loans to Government of the day.

During the Mogul period money-lending and indigenous banking activities received some setback because of troubled times and refusal of repayment of debt by some rulers to indi­genous bankers. And yet the money-lending and indigenous banking activities continued as before, the money-lenders and indigenous bankers often making good their losses (due to non­payment of loans) by the activities of money changing which was a fairly common business then because of the prevalence of different types of gold and silver coins circulating at that time in different parts of the country.

During the early days, the East India Company was forced to rely on indigenous bankers in India for personal loans and for remittance facilities. But as the activities of the East India Company grew in dimensions, the above arrangement was felt to be inadequate and unsatisfactory due, among various reasons, to difficulties of language, on both sides, and ignorance on the part of the East India Company servants of the practices of Indian indigenous bankers on the one hand and on the other, inability of indigenous bankers to follow banking practices to which East India Company officials and servants were ac­customed.

The consequence of the above unsatisfactory system was that the English Agency Houses in Calcutta, Bombay, and Madras started conducting banking operations along with their normal commercial operations. Though this system worked for some time, it came to be realised that such mixed activities like trading and banking would pose complex problems for the Agency Houses. It was therefore felt that for meeting the needs of the East India Company officials, merchants and servants, the best way would be to start joint-stock banking in the coun­try of the type already prevalent in England.

2. INDIGENOUS BANKERS

Indian money market is generally divided into organised sector and unorganised sector. The organised sector comprises of the Reserve Bank of India, the Imperial Bank (later renamed as the State Bank of India), Foreign Exchange Banks and com­mercial banks. The Unorganised Sector comprises of indigenous bankers, money-lenders, commission agents, traders, relatives, etc. some of whom combine money-lending with their normal trading and commercial or other activities.

Distinction between Indigenous Bankers and Money-Lenders

As the terms indigenous bankers and money-lenders are generally used together, the distinction between them should be made clear. While money-lenders usually work on their own capital resulting out of their savings, indigenous bankers accept deposits from the public, at least on a selective basis. The indi­genous bankers discount hundis, whereas money-lenders do not do so. Indigenous bankers provide finance to trade and indus­try whereas money-lenders generally lend for small productive activities and for domestic purposes, mostly for consumption purposes. Whereas indigenous bankers are generally careful about the purpose of the loans given, money-lenders are gene­rally indifferent to it caring more for the interest which they are going to get Indigenous bankers carry on their activities on a much wider scale than money-lenders and therefore keep their accounts in a much more detailed and systematic way than money-lenders.

What is common to indigenous bankers and money-lenders is that both are ancient institutions, both are not properly organised (though indigenous bankers appears to be at least in some areas better organised than money-lenders), both are ubiquitous, methods of work of both are flexible, efficient, and cheap and both have evolved methods of business suited to the environment, .needs and customs of the people.

Role and Functions of Indigenous Bankers

In the organised sector of banking in India, indigenous bankers (along with money-lenders) have from ancient times been playing a vital role. Indigenous bankers are to be found in all parts of the country and have existed for centuries.

Generally, indigenous banking is purely a family business and carried on in hereditary fashion. The Chettiyars of Madras and Kerala, Mahajans of Punjab, Sahukars of Maharashtra, Shroff, Marwaries and Banias in U.P., Gujarat, Rajasthan and Bengal are the striking examples of indigenous bankers. In the good old days, indigenous bankers were well-known by their reputation and their hundis were negotiable throughout the country and beyond the borders of India. Chettis were actually providing finance for foreign trade of India with South-East Asian countries much before the advent of the British in India. The well-known indigenous bankers had gumastas or accredited agents throughout the country and they got all the necessary intelligence regarding monetary matters from different parts of the country. It is on record that during ancient times, the well-known indigenous bankers often lent money to the rulers of the day (for example to Peshwas in Maharashtra) and during the early days of the East India Company, to even to the mer­chants of that Company.

Before the advent of modern joint-stock banking in the country (i.e. upto 1850 or 1860), indigenous bankers and money­lenders were the main source of credit in the Indian economy. Even during the first half of the 20th century (or for that matter, even at present), in spite of the growth of joint-stock banking in the country, indigenous bankers and money-lenders supply lion’s share of credit, especially in the rural areas of the country.

The indigenous bankers generally discount hundis and thus provide finance for internal trade. They also discount agricul­tural bills of exchange. The indigenous bankers, unlike joint-stock banks, lend money on personal credit and on first class bills or such other securities. Their methods of work are in­formal and therefore fairly efficient. Many indigenous bankers have branches in other centres, especially at trading centres, which enable the work of discounting of hundis.

Though on the whole indigenous bankers belong to unorganised sector of money market, and though indigenous bankers work and carry on their activities independent of each other, many indigenous bankers are organised into associations or guilds which are of ancient origin. The indigenous bankers are guilds, among other things, for settlement of mutual claims as also disputes. The establishments of the indigenous bankers are run extremely economically and as it is a family business inherited by son from his father, the son growing in the environment from childhood gets his training automatically and without any expenses on training in the art of indigenous banking.

As indigenous bankers have been working at the same centres for generations, they know most of their clients per­sonally and intimately and know their creditworthiness. This enables them to lend money without much ado, unlike in the case of commercial banks. They accept deposits on current ac­count or for a fixed period and they pay interest on them. As indigenous bankers seldom fail to make payments when pay­ments are due, they generally enjoy high reputation for their honesty and efficiency. On the whole, these indigenous bankers have been playing an extremely useful role from ancient times by providing credit to trade and industry when no other source of credit was available in the country.

Even after the establish­ment of modern joint-stock banks in the country, the indigenous bankers (and also money-lenders) proved to be very powerful competitors to them. Some indigenous bankers established con­tacts with modern commercial banks from whom they borrow funds on the basis of discounting of hundis.

The indigenous bankers provide finance for agricultural operations directly and also indirectly through traders. They also provide finance to internal trade and to small industria­lists. They used to keep part of their deposits in textile mills.

The indigenous bankers used to provide finance by various methods such as discounting of hundis, demand promissory notes, on the security of gold, silver, land and other moveable and immoveable property. The rate at which indigenous bankers discounted hundis is called the Bazar Rate which varied depend­ing upon the pressure for funds and nature of demand for funds.

Though some indigenous bankers have been borrowing from commercial banks including the State Bank of India, there is no regular and formal type of relationship between indigenous bankers and joint-stock commercial banks from the beginning to this day. This is because commercial banks do not accept cheques drawn on indigenous bankers as the latter do not publish their balance sheets, or furnish sufficient details or comply with all the formalities insisted upon by commercial banks. The indigenous bankers also do not get easy rediscount­ing facilities from commercial banks.

Defects of Indigenous Bankers

Though indigenous bankers have been playing an impor­tant role from ancient times to the present day, the institution has been characterised by some serious defects such as following antiquated and conservative methods of business, minimising secrecy which means not publishing balance-sheets and other accounts, not making them available for public inspection, have not cared much to develop the deposit side, combining trading and other business activities with their banking activities; have not developed the hundi side; and have never been properly or­ganised thus remaining virtually unconnected with the organised sector of banking in the country from olden days to the present. This makes control by the Reserve Bank of India over the credit structure of the country and successful implementation of the monetary policy difficult.

Attempts at Reform of Indigenous Banking

The Central Banking Enquiry Committee (1930) recom­mended that the Reserve Bank of India should take steps to bring the indigenous bankers within their purview.

After its establishment in 1935, the Reserve Bank of India circulated in 1937 a scheme to link indigenous bankers with the Reserve Bank. The Reserve Bank laid down the conditions that (a) the indigenous bankers ^-should separate trading and com­mercial activities from banking activities in which they should specialise; (b) they should follow modern banking methods of business; (c) they should develop the deposit-side of banking; (d) they should get their accounts audited by certified audi­tors; (e) they should standardize forms of hundis and should take steps to develop true bills; and (f) they should organise themselves and perform the functions similar to ones performed by London Discount Houses.

In return for effecting the above improvements, the Reserve Bank of India offered to indigenous bankers the same conces­sions which the Reserve Bank offered to scheduled commercial banks. The Reserve Bank promised to give to indigenous ban­kers facilities for rediscounting their hundis and give them loans on the same conditions as it did to scheduled commercial banks.

But the indigenous bankers felt that the conditions laid down were too severe in return for the advantages offered by the Reserve Bank. Nothing much came out of the attempt by the Reserve Bank to integrate indigenous bankers with the orga­nised banking sector of the Indian economy. Indigenous bankers continued and still continue as part of unorganised money market in India.