In this article we will discuss about:- 1. Functions of Indigenous Bankers 2. Importance of Indigenous Bankers 3. defects 4. Suggestions.
Functions of Indigenous Bankers:
The indigenous bankers perform a number of banking and non-banking functions which are explained as under:
1. Accepting Deposits:
The indigenous bankers accept deposits from the public which are of current account and for a fixed period. Higher interest rate is paid on fixed account than on current account. Entries relating to deposits received, amount withdrawn and interest paid are made in the pass-books issued to the clients. The indigenous bankers also get funds from the commercial banks, friends, relatives and even from each other.
2. Advancing Loans:
The indigenous bankers advance loans against security of land, jewellery, crops, goods, etc. Loans are given to known parties on the basis of the promissory notes. Loans given on the security of land and buildings are based on mortgages registered with the Registrar of the area.
3. Discounting Hundis:
Discounting of hundis is an important function of indigenous bankers. They write, buy and sell hundis which are bills of exchange.
Hundis are of two types:
(a) Darshni or sight hundi which is payable on demand, and
(b) Muddati or time hundi which is payable after the period mentioned on the face of the hundi.
4. Remittance Facilities:
The indigenous bankers also provide remittance facilities to their clients. This is done by writing a finance bill to their branches, if they have at other place, or to some other indigenous banker, with whom they have such arrangements.
5. Financing Inland Trade:
They finance both wholesale and retail traders within the country and thus help in buying, selling, and movement of goods to different trading centres.
6. Speculative Activities:
They indulge in speculation of food and non-food crops, and other articles of consumption.
7. Commission Agents:
They act as commission agents to firms.
8. Run Firms:
Some of the non-professional indigenous bankers run their own manufacturing processing or service firms, and on the strength of that they provide expertise and working capital to small industrialists.
9. Subscribe to Shares and Debentures:
They provide long-term finance by subscribing to the shares and debentures of large companies.
Importance of Indigenous Bankers:
The indigenous bankers have been playing a significant role in the economic life of India. When commercial banking had not developed, they were the main source of finance for agriculturists, traders, businessmen, small industrialists, etc.
After nationalisation of commercial banks and the spread of banking in urban and rural areas, the activities of indigenous bankers have declined, but their importance has not become less because of the difficulties still faced by the borrowers in getting loans from the banks.
The borrowers approach them directly and informally and get loans promptly and easily. They do not have any fixed banking hours and do not enter into formalities and procedures followed by commercial banks in advancing loans. That is why they are still popular with traders, businessmen, agriculturists, and ordinary people. They give loans mostly for productive purposes to meet the immediate and short-term needs of the borrowers.
Indigenous bankers provide finance and remittance facilities to traders and small industrialists by advancing loans; writing, buying and selling hundis; writing finance bills and trade bills. Thus they help not only in financing internal trade but also in expanding it. In particular, they help in the movement of agricultural products from rural areas to markets, and of industrial products to different parts of the country.
Those indigenous bankers who combine banking with trading and agriculture help the farmers by lifting their produce from the farms, paying them in cash on the spot, and also giving them loans.
The indigenous bankers act as commission agents when they purchase agricultural products on behalf of firms, mills, and trading houses. In this way, they again help in the development of internal trade.
The importance of indigenous bankers has increased further with the development of capital market in India. They now provide long-term credit to companies by subscribing to their shares and debentures.
Defects of Indigenous Banking:
The following defects are associated with the majority of indigenous bankers:
(1) They are a hindrance in the development of an organised money market in India. The Reserve Bank of India has no control over them.
(2) They follow old methods of business which are based on secrecy of accounts and activities. Accounts are mostly maintained in vernacular. They are neither audited nor published.
(3) They also provide loans for unproductive purposes.
(4) They combine banking with other activities which bring them more profits such as speculation, trading brokerage, etc.
(5) They charge very high rates of interest.
(6) They also indulge in some undesirable practices, such as manipulating accounts, deducting interest in advance, non-issue of receipts for payment of interest and principal, etc.
(7) They are unorganised except at a few places like Mumbai and Kolkata. This has hindered the mobility of funds.
(8) They do not work in co-operation with the commercial and cooperative banks. This has kept dichotomy in the Indian money market.
(9) They are unable to mobilise savings because they prefer giving loans than accepting deposits.
(10) Except in big towns, they have failed to develop the hundi (bill market) in trade and business. They do business in cash.
(11) They are not able to meet the financial needs of borrowers because they operate with insufficient capital.
Suggestions to Reform Indigenous Banking:
From time to time suggestions have been made to reform the working of indigenous bankers by certain committees, commissions, and organisations, such as the Indian Central Banking Enquiry Committee, 1931, the Banking Commission, 1971, etc.
We summarise these suggestions as under:
(1) The indigenous bankers should do only banking business and not any other activity.
(2) They should maintain proper account books in a prescribed and recognised form and get them audited.
(3) They should be registered with the, Reserve Bank of India and licence should be issued to them.
(4) For this purpose, every indigenous banker should have a minimum capital requirement.
(5) The indigenous bankers should be linked with commercial banks and their hundis should be discounted by commercial banks like other bills of exchange.
(6) The indigenous bankers registered with the RBI should be provided remittance facilities by all commercial banks.
(7) They should also be allowed to collect cheques, drafts, etc. like other banks.
(8) The indigenous bankers should form an association at all India level and become its members.
(9) They should develop the hundi in a proper format duly approved, by the RBI so that it may be accepted like other bills by the commercial banks.
(10) They should be encouraged to develop the business of bill-broking like the bill-brokers of the London Money Markets.
(11) The benefit of the Bankers’ Book Evidence Act should also be extended to the indigenous bankers.
These suggestions have failed to elicit any response from the indigenous bankers who are not prepared to give up their non-banking functions, to publish their audited accounts, and to register themselves with the RBI.
The Reserve Bank of India is also not prepared to relax its conditions and provide facilities to them like commercial banks. The best course is to link the indigenous bankers with commercial banks, as suggested by the Banking Commission. The Reserve Bank of India should lay down guidelines for this purpose.