Question 1

Discuss the development of indigenous banking system in Indian subcontinent.


Following are the points which highlight the development of indigenous banking system in Indian Subcontinent:

1. Metal as money: As economic life progressed, metals began to supplement other commodities as money because of its durability and divisibility. As money served as a medium of exchange, the introduction of metallic money and its use accelerated economic activities.

2. Use of Hundi and Chitti: Documents such as Hundi and Chitti were in use for carrying out transactions in which money passed from hand to hand. Hundi as an instrument of exchange, which was prominent in the subcontinent. It involved a contract which-
(i)  Warrant the payment of money, the promise or order which is unconditional.
(ii)  Capable of change through transfer by valid negotiation.

3. Development of banks: Indigenous banking system played a prominent role in lending money and financing domestic and foreign trade with currency and letter of credit. With the development of banking, people began to deposit precious metals with lending individuals functioning as banker or Seths, and money became an instrument for supplying with a means of producing more goods.

4. Agriculture and livelihood opportunities: Agriculture and the domestication of animals were important components of the economic life of ancient people. Due to the favourable climatic conditions they were able to raise two or sometimes three crops in a year. In addition to this, by resorting to weaving cotton, dyeing fabrics, making clay pots, utensils, and handicrafts, sculpting, cottage industries, masonry, manufacturing, transports etc, they were able to generate surpluses and saving for further investment.

5. Role of intermediaries: Intermediaries played a prominent role in the promotion of trade. They provided considerable financial security to the manufacturers by assuming responsibility for the risks involved, especially in foreign trade. It comprised commission agents, brokers and distributors both for wholesale and retail goods. An expanding trade brought in huge amounts of silver bullion into Asia and a large share of that bullion gravitated towards India.

6. Credit transactions: The emergence of credit transactions and availability of loans and advances enhanced commercial operations. The Indian subcontinent enjoyed the fruits of favourable 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 to provide both short and long-term loans to finance agriculturists.

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