1. Introduction

India’s financial history is deeply entwined with traditional, informal banking practices that long predate modern institutions. Known as the indigenous banking system, this network of private individuals and regional banker‑merchants enabled credit, remittance, and trade finance across ancient and medieval India.

2. What Is the Indigenous Banking System?

The indigenous banking system refers to community‑based lenders such as Shroffs, Chettiars, Marwaris, Seths and Multani bankers who provided financial services—accepting deposits, advancing loans, discounting hundis and facilitating internal trade—outside formal regulatory frameworks

These bankers were not typical money‑lenders; unlike simple lenders, indigenous bankers accepted deposits and dealt extensively in hundis, a native bill-of-exchange instrument

3. Historical Evolution

Ancient & Medieval Periods

• Earliest references appear even in Vedic, Dharmashastra and Mauryan texts—loan records (rnapatra), orders (adesha) and credit instruments show organized finance networks as early as 700–200 BCE .

• Classic trade centres such as Harappa, Taxila, Ujjain, Varanasi and Surat leveraged indigenous bankers and hundi systems to finance long‑distance commerce, domestic trade and export flows.

Mughal & Pre‑Colonial Era

• Wealthy trading communities like the Jagat Seths rose to prominence financing Mughal state needs with deposits and hundis and acted as key intermediaries in business and government finance.

• Regional traditions flourished: Southern Chettiars built self‑regulated lending networks with clearinghouses, interest‑rate norms, and informal deposit insurance—precursors of modern community banking .

Colonial Decline

• Arrival of British-established joint-stock banks (e.g. Bank of Hindostan, Bank of Bengal, Bombay, Madras etc.) during 18th–19th centuries gradually marginalized indigenous systems.

• By the mid-19th century and especially post independence, formal cooperative and commercial banks overshadowed informal native banking systems.

4. Core Functions of Indigenous Bankers

• Accepting deposits: Fixed‑term and demand deposits from individuals and merchants.

• Providing loans: Secured advances against assets (land, jewellery, goods, hundis).

• Discounting hundis: Purchase of hundis at a discount before maturity—offering liquidity to merchants and traders.

• Remittance & credit instruments: Providing hundis for internal and external trade flows, eliminating physical money movement risks.

5. Popular Methods & Instruments

Hundis: The Pillar Instrument

Hundi was a negotiable instrument akin to a bill of exchange. Common variants included:

• Darshani Hundi: Payable on sight (demand)

• Muddati Hundi: Time‑based payment (deferred)

• Shahjog, Namjog, Dhanijog, Jawabee, Zikri hundis: Tailored via payee restrictions or purpose-specific terms.

Promissory Notes & Dastavez

Written agreements or collateral pledges used as security for loans within the informal system.

Rohan or Chit‑style Pools

In certain regional systems, rotating savings schemes (“rohan”) pooled community funds and redistributed them periodically among members for investments or personal needs.

6. Strengths & Limitations

Strengths

• Ubiquity & accessibility: Especially in rural & semi‑urban areas long before modern banking reached them.

• Trust‑based credit: Operated on local reputation and social capital.

• Flexible financing: Tailored loans, remittances in underserved regions.

• Community self-regulation: Chettiars and others maintained internal rules, rate norms, clearinghouses and informal insurance systems.

Limitations / Defects

• Lack of regulation: High risk of fraud, depositor insecurity, inconsistent practices.

• Limited scale and products: Couldn’t mobilize wide savings or diversify into modern services.

• High interest charges: Informal rates often excessive compared to formal banking.

• Absence of standardized accounting or transparency.

7. Lasting Legacy & Modern Relevance

Though largely overshadowed by modern banks, some elements of indigenous banking remain relevant:

• Hundi-like remittance networks still exist in informal trade channels.

• Cultural banking castes such as Chettiars, Marwaris, Seth families continue in decentralized finance roles in some regions.

• Influence on cooperative credit models: Early community pooling and credit trust influenced later rural banking and cooperative societies.

Today proposals exist to integrate regulated versions of informal practices—like localized community credit centers—into formal frameworks, to reach underbanked areas while preserving trust-based relationships.

8. Conclusion

The indigenous banking system in India not only enabled trade and credit before the arrival of formal banks—but also shaped the social and economic DNA of Indian entrepreneurship. Understanding its history, instruments like hundi, and organizational mechanisms offers insights into how finance evolved in India.