Indigenous Bankers

In Brief about Indigenous Bankers:

The indigenous bankers occupy an important place in the Indian money market and play a vital role in financing the internal trade. They are especially popular in the areas, which lack joint stock banks or are not properly served by these banks.

Although with the growth of joint stock banking in the country, the activities of the indigenous bankers have declined considerably, still these bankers have control over a good deal of financial business.

The popularity of indigenous bankers is mainly due to the following reasons:

(a) They provide prompt and flexible credit,

(b) They give loans to the small productive units not fully catered by the commercial banks,

(c) They have cordial relationship with the customers,

(d) They keep close contact with their customers and remain fully acquainted with their problems and financial requirements;

(e) They are not merely bankers to their customers, but are also their friends and advisers.

The main functions of the indigenous bankers are as follows:

1. Accepting Deposits:

The 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 fired 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, crops, gold and silver, etc. They also give credit against personal security. They provide loans to small industrialists who cannot fulfill the necessary loan conditions of commercial banks.

3. Business in Hundies:

The indigenous bankers deal in hundies. They write hundies, 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. Non-Banking Functions:

Most of the indigenous bankers also carry on their non-banking business along with the banking activities,

(a) They generally have their retail trading business,

(b) Sometimes, they act as agents to large commercial firms and earn income in the form of commission,

(c) They also participate in speculative activities.

 

In Detail about Indigenous Banks:

Indigenous bankers are private firms or individuals who operate as banks and as such both receive deposits and give loans. Like banks, they are also financial intermediaries. They should be distinguished h professional moneylenders whose primary business is not banking but money lending.

A pure moneylender lends his own funds an indigenous banker raises a part of his loanable funds from the public in deposits or other forms. A moneylender conducts his transactions in cash, while a large pan of die transactions of an indigenous banker are based on dealings in short term credit instru­ments like hundis and commercial bills.

The system of indigenous banking in India dates back to ancient times. Until the middle of the nineteenth century the indigenous financial agencies constituted the bulk of the Indian financial system. They provided credit not only to traders and producers but also to the governments of the day.

The advent of the British had an adverse impact on their business. The European bankers began to enjoy state patronage and prestige. The foreign (exchange) banks took over the financing of external trade. In metropolitan areas and important commercial centres the setting up of modern commercial banks took away more and more the business of indigenous financial agencies who, were gradually pushed to the financing of internal trade.

With the growth of commercial and co-operative banking geographically as well as functionally, especially since the mid 1950s, the area of operations of these agencies has contracted further. Still there are thousands of family firms, especially in the western and southern parts of India, who continue to operate as traditional-style bankers. Many of these firms have continued in this business for several hundred years. Indigenous bankers are, by and large, urban-based. Their business, besides being hereditary, is confined to a few castes and communities.

The size of the indigenous banking class and the volume of their credit operations are not known with certainty. The Banking Commis­sion (1972) had estimated their number to be in the neighbourhood of 2,000 to 2,500. Timberg and Aiyar (1980) have placed this number at a minimum of20, 000 leaving out Central India and Eastern India outside Calcutta. They have further estimated that in late 1970s the total credit extended by these bankers was in the neighbourhood of Rs. 1,500 crores, which was equal to 10 per cent of the total commercial bank credit in the year 1977-8.

Indigenous bankers do not constitute one homogeneous category. The Banking Commission (1972) had grouped them under four main sub-groups Gujarati shroffs, Shikarpuri or Multani shroffs, Chettiars of the South, and Marwari Kayas of Assam. Timberg and Aiyar (1980) do not cover Assam and so leave out Marwari Kayas. But they have found that Rastogi bankers numbering about 500 are also an important sub-group serving craftsmen and traders in the Oudh area of U.P. and providing about Rs. 100 crores of credit.

The Gujarati shroffs are active in the industrial and trading centres of Gujarat, Bomaby, and Calcutta, joined by the Marwari shrofis in Bombay and Calcutta. The Shikarpuris operate mainly in the metropolitan areas of Bombay and Madras and elsewhere in the South where the Chettiars are also active. The Marwari’s operate also in the tea gardens of Assam and other parts of North-East India.

Thus, the major concentration of indigenous bankers is in the West and South. According to Timberg and Aiyar (1980), the Chettiar bankers, numbering about 2,500, extended credit of about Rs. 380 crores (in late 1970s) at rates ranging between 18 and 30 per cent per annum. They have further estimated that about 40,000 Chettiar pawnbrokers extended credit (of an incredibly large amount) of Rs. 1,250 crores.

Of the four main types of indigenous bankers, the Gujarati shroffs are the most important. In recent years Shikarpuri shroffs have lost more and more their old character of indigenous bankers and taken on the role of ‘commercial financiers’, who mainly lend out of their owned funds. We study only about these two types. This will also throw light on the main functions performed by other types of indigenous bankers as bankers, once we remember that none of them performs all these functions, and that there are differences in the methods of operation of various types of indigenous bankers.

Gujarati Shroffs:

The Gujarati shroffs are of two types:

(a) Pure bankers and

(b) Bankers and commission agents.

Timberg and Aiyar (1980) have estimated their total number to be about 5,000 of whom, about 1500 is pure bankers. The comparable estimates of the Banking Commission were only 350 and 150 respectively. The pure bankers are limited only to Gujarat itself, with heavy concentration in Ahmedabad.

The more numerous Gujarati and Marwari firms in Bombay and Calcutta combine banking with commission agency or trade in cloth, grains, and other commodities and their banking operations are more or less ancillary to their trade.

The Gujarati shroffs, especially pure bankers, perform most of the major functions of a commercial bank. They accept deposits, make loans, and provide means of remittance and collection of money. They accept both current and fixed deposits and pay interest even on current deposits at a rate of 7.5 per cent in Gujarat and 6 per cent in Bombay.

On longer-term deposits they pay up to 12 per cent per year. These deposits represent anywhere from 30 to 90 per cent of their total funds. Some bankers also offer chequing facility to their Current-account depositors. But the cheques have only a limited local circulation and are not accepted by commercial banks.

They advance money on call and for short periods on personal credit or on security most part, this is done by issue of darshani hundis drawn on their firms or other shroffs at other centres and by discounting mudoati hundis and commercial paper of various kinds, out-of-station current cheques and post-dated cheques, etc. For Bombay alone, Timberg and Aiyar (1980) have estimated an annual hundi turnover of Rs. 1500 crores with Gujaratis and of Rs. 500 crores with Marwaris.

The Gujarati shroffs arrange for the remittance of funds by issuing darshani hundis and also undertake the collection of hundis for their clients. Some big shroffs have branches in mofussil centres. For example, one Gujarati shroff had 93 branches. Besides these branches, shroffs have arrangements of mutual accommodation for acceptance and payment of hundis at various places both within and outside the state boundaries.

This arrangement enables these shroffs to conduct commission agency work and exchange operations, raise and lend funds in the most profitable manner, and direct surplus funds to those places where they are needed.

The working capital of Gujarati shroffs comes from their own funds, deposits from the public and inter-firm borrowings. Deposits (estimated at about Rs. 800 crores by Timberg and Aiyar) represent about half of their total funds. They hardly borrow from commercial banks to finance their banking operations. The Gujarati shroffs have developed their own call-money market, analogous to the inter-bank call-money market, in which short-term surplus funds are lent and borrowed. This call market and the associated inter-firm borrowings are a very distinctive feature of the operations of Gujarati shroffs.

Shikarpuri or Multani Shroffs:

Next to Gujarati shroffs, they are the most important sub-group of indigenous financiers. The Banking Commission (1972) had estimated their number at about 400. But Timberg and Aiyar (1980) put this number at 1200, of which about one half is members of local Shikarpuri Bankers’ Associations and the other halt are non-members. Their capital resources arc variously estimated at between Rs. 30& crores and 600 crores. These bankers operate mostly in Bombay and South India.

Functionally, what distinguishes Shikarpuri financiers from Gujarati shroffs is their major reliance on their owned funds and borrowings from commercial banks rather than deposits from the public as the source of their funds.

Since 1970 banks have reduced drastically their refinance to Shikarpuris and the latter have come to rely largely on their own funds. As a result the Shikarpuri business has not grown with the economy, the character of Shikarpuris has changed from that of bankers to that of’ commercial financiers’, and the cost of their credit to their borrowers has almost doubled.

The Shikarpuri traditionally used to lend mainly by discounting ‘Multani hundis’, which are 90-day term notes. In the past they used to borrow from commercial banks by getting these hundis rediscounted. With the decline of rediscount facilities with banks, they have moved more and more towards lending against demand pro­missory notes (endorsed for a term) and giving instalment credit.

In the smaller centres in the South 90 per cent of Shikarpuri advances are done on the basis of demand notes. On overall basis, 45 per cent of Shikarpuri advances in the South are in the form of instalment credit. The instalment notes are commonly supported by post-dated cheques, one for each installment payment; the main borrowers of Shikarpuris are traders and small manufacturers.

Other (less important) borrowers are transport operators and small exporters. These borrowers are often in urgent need of clean (or unsecured) loans for marginal short-term requirements of their business. The Shikarpuri banker tries to meet this kind of demand.

The clientele is varied and not limited to a few communities as in the case of Gujaratis; The Shikarpuri finance is much more costly than that provided by the Gujarati shroffs. The Shikarpuris have developed a system of sharing risks among themselves.

If a borrower’s requirements are large, a broker will arrange to break it up into smaller notes taken by several Shikarpuri shroffs thereby reducing the risk of any single banker. Shikarpuri-type financiers are found in every major market.

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