Indigenous Bankers

Indigenous bankers refer to the traditional banking and credit institutions that operated in India prior to the emergence of modern commercial banks. They played a crucial role in India’s pre-colonial and colonial financial system by mobilising savings, providing credit, facilitating trade and enabling money transfers across regions. In the context of banking, finance and the Indian economy, indigenous bankers represent the foundations of India’s financial intermediation and the early evolution of organised banking practices.
These institutions functioned largely on the basis of custom, reputation and personal relationships rather than formal regulation. Despite their informal nature, indigenous bankers formed an extensive and resilient financial network that supported agriculture, trade and commerce for centuries.

Historical background and evolution

Indigenous banking in India can be traced back several centuries, well before the advent of European banking institutions. Merchant communities, moneylenders and trading houses developed sophisticated systems for lending, deposit-taking and remittance, tailored to India’s economic and social conditions.
During the medieval and early modern periods, indigenous bankers were closely linked to internal and international trade. They financed caravans, agricultural cycles and long-distance commerce, adapting their practices to regional needs. Even under colonial rule, when presidency banks and exchange banks expanded, indigenous bankers continued to dominate rural credit and a significant portion of inland trade finance.

Types of indigenous bankers

Indigenous bankers were not a homogeneous group. They varied in size, function and regional presence.
Major categories included:

• Shroffs – engaged in money changing, deposit-taking and trade finance.
• Sahukars and Mahajans – primarily moneylenders, especially in rural areas.
• Chettiars – known for extensive trade finance networks, particularly in southern India and overseas.
• Multanis and Marwaris – active in commercial lending and mercantile finance.

Each group developed specialised knowledge of local markets, crop cycles and trading routes, enabling efficient credit allocation in the absence of formal banking infrastructure.

Functions and financial operations

Indigenous bankers performed a wide range of banking functions. They accepted deposits, extended short- and medium-term loans, financed trade and facilitated remittances. Interest rates varied depending on risk, purpose and borrower profile.
A distinctive feature of their operations was the use of hundi, a traditional financial instrument functioning as a bill of exchange, promissory note or remittance order. Hundis enabled the transfer of funds across distant locations without physical movement of cash, reducing risk and transaction costs.
These practices demonstrate that indigenous bankers had developed instruments comparable in economic function to modern banking tools, albeit without formal standardisation.

Role in agriculture and rural credit

Indigenous bankers were the primary source of credit for agriculture in pre-independence India. Farmers depended on them for seasonal loans to finance seeds, tools and subsistence during cultivation periods.
While this ensured credit availability in areas untouched by formal banks, it also led to problems such as high interest rates and perpetual indebtedness. The absence of regulation and borrower protection often resulted in exploitative practices, particularly during periods of crop failure or economic distress.

Relationship with trade and commerce

Trade and commerce were closely intertwined with indigenous banking. Merchants relied on these bankers for working capital, inventory finance and long-distance trade settlements. Indigenous bankers often possessed detailed knowledge of commodity prices, trade routes and market conditions.
Their ability to quickly mobilise funds and assess creditworthiness based on reputation made them highly effective in supporting commercial activity, especially in an economy with limited formal documentation.

Limitations and weaknesses

Despite their strengths, indigenous bankers had significant limitations. Their operations lacked transparency, standard accounting practices and regulatory oversight. Credit decisions were often based on personal judgement rather than systematic risk assessment.
High interest rates, limited access to long-term credit and vulnerability to local economic shocks constrained their developmental impact. These weaknesses became more apparent as the economy expanded and required larger, more stable sources of finance.

Interaction with modern banking institutions

With the establishment of modern banks and the eventual creation of the Reserve Bank of India, the relative importance of indigenous bankers declined. Formal banking institutions offered regulated deposit facilities, lower interest rates and broader access to credit.
However, indigenous bankers did not disappear entirely. In many rural and informal sectors, they continued to coexist with formal banks, often filling gaps left by institutional credit. Even today, informal lending remains relevant where access to formal finance is limited.