Discuss the Development of the Indigenous Banking System in the Indian Subcontinent

By Devyani Singh|Updated : October 3rd, 2022

The Indigenous banking system in the Indian subcontinent has private companies/individuals acting like a bank by their provisions of financial services like loans and depositing money. This system has existed in our country for a long period of time. Their origin dates back to medieval times. In ancient times, indigenous bankers formed a major part of the Indian financial system. These bankers sometimes provided credit facilities to individuals and businesses as well as governments.

Development of the Indigenous Banking System

The development of Indigenous Banking Systems has been traced with the help of the following points:

  • Metals Money:  The concept of money has always existed in various forms and forms. Metals were used as money because of their high durability and divisibility. In fact, the use of metal currency boosted the number of transactions and spurred economic activity.
  • Hundi and Chitti: During the Indian Middle Ages, commerce and credit transactions were carried out using financial instruments known as hundi and chitti. Hundi is basically an unconditional agreement or order that justifies the transfer of money through legal negotiation.
  • Bank development: The Indian banking system began lending money and financing both local and international trade in India with the help of currency and letters of credit. Along with this, the growth of the banking system encouraged individuals to deposit precious metals with the authorities responsible for lending money, such as bankers, Seths, etc. Over time, money came to be used as a medium of exchange.
  • Agriculture and livelihood opportunities: Opportunities for agriculture-based livelihoods: Agriculture and the domestication of animals were major sources of income in the Indian subcontinent. Along with this, people also relied on other kinds of income, such as cotton weaving, fabric dyeing, the creation of pottery and other household items out of clay, handicrafts, sculpture, cottage industries, construction, manufacturing, and transportation, among other things. People were able to generate surpluses as a consequence, which they could then save up for expenditures.
  • Role of Intermediaries: During the reign of the Mughals and the East India Company, intermediaries and other organisations, such as Jagat Seths, grew to be quite powerful and exercised significant authority. They were instrumental in advancing trade, commerce, and banking in India.
  • Credit transactions: The expansion of credit facilities and the accessibility of advances and loans resulted in an increase in commercial transactions and activities, and the Indian subcontinent began to reap the rewards of a favourable trade balance.
  • The evolvement of indigenous banking: The local banking system assisted merchants with additional finances who were searching for expansion and development, in addition to helping manufacturers or traders by enabling commerce. Later, when commercial and industrial banks developed, the banking system began to offer short- and long-term loans to support Indian agricultural enterprises.

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FAQs on Development of the Indigenous Banking System in Indian Subcontinent

  • The Indigenous banking system is the system of banking that involves private firms or individuals who act as banks by providing financial services such as loans and accepting deposits

  • The first bank purely managed by Indians was Punjab National Bank, established in Lahore in 1895. The Punjab National Bank has not only survived to date but is also one of the largest banks in India.

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