Indigenous Banking System in Pre-Colonial India
India’s banking evolution spans several centuries, beginning with informal moneylending and temple-based finance and gradually progressing towards an organised, regulated banking system. An understanding of the indigenous banking system in pre-colonial India is essential for appreciating how traditional financial practices supported trade, agriculture, and state administration long before the advent of modern banks. This historical background is particularly important from an examination perspective, as it explains the foundations upon which contemporary Indian banking developed.
Ancient and Medieval Banking Practices
Banking activities in India can be traced back to ancient times. During the Vedic period, references in texts such as the Rigveda and the Manusmriti indicate the existence of moneylending, borrowing, deposits, and trade credit. These texts reflect an early awareness of financial transactions and contractual obligations, suggesting that rudimentary banking practices were already embedded in economic life.
In the Mauryan period (around the 4th century BCE), banking activities became more organised. The Arthashastra, authored by Kautilya, provides detailed accounts of financial administration, including references to professional bankers. These bankers, often known as shroffs or seths, were involved in moneylending, deposit-taking, and financing trade. The state recognised their role in economic activity, and certain regulations existed regarding interest rates and lending practices.
Temples also played a crucial role in ancient Indian banking. Owing to their sanctity and security, temples acted as repositories of wealth. They accepted deposits of gold, silver, and grain and extended loans to individuals, traders, and even rulers. In this sense, temple treasuries functioned as early banking institutions, combining safe custody with credit provision.
Indigenous Bankers and the Use of Hundis
By the medieval period, India had developed a well-established indigenous banking system. Various community-based financiers operated across regions, adapting their practices to local economic needs. Prominent among these were shroffs, sahukars, chettiars, marwaris, and multanis. These indigenous bankers accepted deposits, advanced loans, financed trade, and supported agricultural activities.
A distinctive feature of indigenous banking was the extensive use of hundis. Hundis were informal credit instruments resembling bills of exchange. They enabled merchants to remit funds over long distances without physically transporting cash, thereby reducing the risk of theft. A hundi issued in one town could be encashed in another through trusted banking networks, functioning in a manner similar to modern cheques or demand drafts.
Hundis were widely used for financing internal and external trade and were particularly effective in supporting long-distance commerce. They also facilitated credit transactions in agriculture and handicrafts, making indigenous bankers indispensable to the pre-colonial economy. The efficiency and flexibility of the hundi system allowed it to operate successfully for centuries without formal institutional backing.
Role in the Pre-Colonial Economy
Indigenous bankers played a vital economic role in pre-colonial India. They provided credit to farmers for seeds and tools, financed artisans and craft guilds, and supported traders engaged in regional and inter-regional commerce. In many cases, they also extended loans to local rulers and administrations, especially during periods of fiscal stress.
These bankers possessed detailed local knowledge and strong community ties, which enabled them to assess creditworthiness effectively. Their operations were deeply integrated into the social and economic fabric of Indian society, particularly in rural and semi-urban areas where formal institutions were absent.
Limitations of the Indigenous Banking System
Despite their importance, indigenous banking systems had several limitations. They operated without central regulation, relying on customary practices and personal trust rather than standardised rules. Interest rates were often high, especially for agricultural loans, which sometimes led to indebtedness among farmers. Record-keeping was informal and non-uniform, making transparency and accountability limited.
Moreover, banking activities were usually confined to family, caste, or community networks, restricting their expansion and inclusiveness. With the arrival of European trading companies and the establishment of modern banks during the colonial period, indigenous bankers gradually faced competition from institutionally organised banking systems. Over time, the prominence of traditional bankers declined as colonial banking structures expanded and formal regulations were introduced.