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August 30, 2014

Defects in Indigenous Banking


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Friends, in our previous post, we have discussed about the introduction and characteristics of Indigenous Bankers. Today we shall see the defects in Indigenous Banking. Happy Reading.
  1. Indigenous bankers combine banking and non-banking activities. Non-banking activities may involve commission agency and speculative activities. This results in their inability to concentrate on banking activities. 
  2. Interest rates charged by them are very high, ranging between 18-36 per cent p.a. At the time of disbursing loan they also deduct interest in advance. They may charge brokerage in addition to interest. All these are additional costs to the borrower. 
  3. Indigenous bankers maintain accounts in the traditional system. In the vernacular language, Accounts are neither audited nor published.
  4. There is very little control and regulation over the operations and activities of the indigenous bankers. 
  5. Different indigenous bankers operate independently and separately without any coordination among them. Their activities do not come under the purview of the Reserve Bank of India.
  6. The operations of the indigenous bankers are not based on sound principles of banking. Although they are expected to deal in hundies, they actually deal more in cash.
  7. Contribution of indigenous bankers to the farming class is negotiable. They have concentrated their activities more in cities and towns. 
In spite of these drawbacks indigenous bankers, are making their presence in the financial system of our country.

Suggestions for reforms : Following are suggestions offered for improving their role and making their operations more effective.
  1. A system of licensing of indigenous bankers must be introduce.
  2. Indigenous bankers must be brought under the control of Reserve Bank of India.
  3. Their operations should be more regulated and made more transparent by the RBI.
  4. RBI must inspect the records, books of indigenous bankers, periodically. 
  5. They should recognize their banking business on modern lines and separate their banking and non-banking activities. 
  6. They should maintain accounts in a systematic and scientific manner and get them audited regularly. 

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  3. Thanx.... alot


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