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September 04, 2014

Indigenous Bankers - RBI and the Banking Commission (1972)


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Friends, as you know, we have been discussing about the Indigenous Banking. We've already learnt about the characteristics and defects of Indigenous Banking. Today we shall discuss the suggestions of Central Banking Enquiry Committee (1931) and the Banking Commission (1972).

Indigenous Bankers and the RBI

The Central Banking Enquiry Committee (1931) recognized the need to integrate the unorganized and the organized sectors of money market. The Committee suggested that the indigenous bankers should be linked with the Reserve Bank of India. In 1937, the RBI prepared a scheme for direct linking with indigenous bankers on certain conditions. They are,
  1. The indigenous bankers should have a minimum working capital or Rs. 1 lakh, which should be increased to Rs. 6 lakhs within five years. 
  2. They should give up non-banking and trading activities and concentrate only on banking business.
  3. They should switch over from traditional accounting system to western accounting system, get their accounts audited by qualified auditors. They should allow their records to be inspected by the RBI. They should also submit periodic statement of affairs to the RBI.
  4. RBI should have the power to regulate the operations and business of the indigenous bankers. 
  5. They should start dealing in negotiable instruments recognized by the law, and not confine themselves to hundies only.
  6. Indigenous bankers who are financially strong should take up the financing through buying and selling bills of exchange like the discount houses in London.
  7. The RBI assured the indigenous bankers that it would extend all the privileges enjoyed by the scheduled banks, i.e., borrowing from the RBI, facility of rediscounting eligible securities and bills of exchange.
The indigenous bankers did not accept the conditions of the RBI. They were comfortable in their traditional practices and were not attracted by the benefits offered by the RBI. The efforts made by the RBI to integrate them into the organized money market did not succeed.

Indigenous Bankers and the Banking Commission (1972)

The Banking Commission (1972) also recognized the useful role played by the indigenous bankers in financing the small traders and the businessmen. These sections have generally been regulated by the commercial banks. The Commission agrees that indigenous bankers should be integrated into the organized sector through a process of institutionalization. The Commission was not in favor of linking indigenous bankers with the Reserve Bank, directly. It suggested that the RBI should only exercise indirect control over them in the form of laying down norms and guidelines issued to the commercial banks to deal with them. Commercial bankers should be required to provide resounding facilities if the latter satisfies certain conditions. The Commission also recommended that the Reserve Bank should regulate the working of the indigenous bankers. The recommendations of the Commission were ignored. 

This ends the lesson of Indigenous Bankers. In our next post we shall discuss about the Rural Co-Operative Credit Institutions. Happy Reading :)

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