Discuss the development of the indigenous banking system in the Indian subcontinent.


By Harshvardhan, the Subject Matter Expert at Edumarz

Solution: India has a long history of Indigenous Banking Institutions. The Seth and Sahukars used to finance the Businessmen and Peasants. It was also seen that they used to charge exorbitant rates of Interest to the mainly poor Agricultural class and extracted Very high Securities like land. Over time, the banking sector has been regulated and currently, the RBI regulates the banking system in India. Modern banking in India originated in the last decade of the 18th century. Among the first banks were the Bank of Hindustan, which was established in 1770 and liquidated in 1829–32, and the General Bank of India, established in 1786 but failed in 1791. 

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1894, which has survived to the present and is now one of the largest banks in India.

Foreign banks also started opening up mainly in Kolkata as Kolkata was the most active trading port in India, mainly due to the trade of the British Empire and so it became a banking center. The goods were traded both internally and to the foreign lands, which generated surplus income. As a result, the people were engaged in various economic activities such as agriculture and domestication of animals, weaving cotton, dyeing fabrics, making clay pots, utensils, and handicrafts, sculpting, cottage industries, masonry, etc. Family-based workshops called karkhanas, for manufacturing, were important components of economic life. This money was channeled into further investment and led to the dominant growth of the indigenous banking system to finance trading activities. An example of it is the use of age-old Hundi and Chitties used in south India. These were used as documents to facilitate the transfer of money from one hand to another for trading activities. As an instrument of exchange, it involved a contract which 

(i) warranted the payment of money, the promise or order which is unconditional

(ii) capable of change through transfer by valid negotiation.

There was a need to create an intangible form of exchange of money because traveling long distances either by land or sea involved the risk of theft and robbery. Hundi which literally means ‘to collect’ was written in vernacular language and facilitated the safe transfer of money between parties and helped the promotion of trading activities. The emergence of credit transactions and the availability of loans and advances enhanced commercial operations. Indian subcontinent enjoyed the fruits of a favorable balance of trade, where exports exceeded imports with large margins and the indigenous banking system benefitted the manufacturers, traders, and merchants with additional capital funds for expansion and development. Commercial and Industrial banks later evolved to finance trade and commerce and agricultural banks to provide both short and long-term loans to finance agriculturists.

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