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Banking System, Pre-modern

Banking System, Pre-modern The essential aspects of banking, as it is understood, were practiced in ancient India though not on a large and well-organised scale. The bankers in those days were generally moneylenders, moneychangers, village merchants and shopkeepers. During Muslim rule the local financiers played the role of bankers. The credit instruments issued by them were known as Hundis, by which the drawee was able to transfer money from one place to another.

In medieval Bengal the extent of circulation of money in the economy brought the village into the orbit of money economy. This made the functions of the bankers and moneychangers, locally called sarraf, essential for everyday transactions of the people. Indeed the functions of these sarrafs were to a large extent determined by the complex currency system of the country. Thus the primary functions of the local sarrafs was to test coins as it was necessary to determine the degree of purity of the coins issued from different mints of the country.

Although ordinary people were free to get bullion coined at the mints, nevertheless in practice this task was reserved for the local bankers who brought old and debased coins to the mint to be re-minted and also purchased bullion for the same purpose. It became a normal practice of the government to employ some of the influential and wealthy bankers as revenue collectors, moneychangers and treasurers to the government. The house of jagat sheth, hereditary bankers of the nawabs of Bengal, is a unique example of the important role played by these bankers in controlling the finance of the country.

Besides testing and changing money the local bankers also issued hundis or bills of exchange. This was necessary to avoid the need to carry large amounts of coins over long distances, which was both risky and costly. The house of Jagat Sheth, for example, had its branches in important cities of Northern India between Dhaka and Delhi and provided bills for any amount to be drawn on its branches. Other important functions of the bankers were connected with government finance in respect of revenue receipt and remittance and extension of loans to governments. The house of Jagat Sheth was the receiver and treasurer of the government revenue of Bengal from the time of murshid quli khan.

The banking house also extended loans to private parties. The European Companies often borrowed money from the local houses to finance their purchases in Bengal. Most of bankers in practice combined trade and banking. The personal relations which grew out of trade had largely been responsible for making the function of banking attractive to the traders; conversely lending of money undertaken by a trader had the effect of securing an advantage in his trading, for loans made to the producers virtually bound them to the lending trader to sell their produce to the latter. Furthermore the banking business was of primary importance to the traders in the remittance of funds.

The financial transactions at the upper level, especially with the government, zamindars and with the European companies, were confined to a few banking houses, those of Jagat Sheth and, later, of Manohar Das and Gopal Das. But there must have been many more bankers who extended their business over the province. Besides the houses of Jagat Sheth and Gopal Das, the collector of Murshidabad borrowed money from bankers like Kishore Mohan, Jagabandhu Roy, Bahadur Sing, Bijoyram Roy and Kashinath. During the early nineteenth century these bankers, called Kuthiwallas, had their agents at important places. They also advanced loans to rural artisans through their agents.

The rise of modern banking and the commercial organisation of banking reduced the functions of the indigenous bankers, but the moneylenders continued as before. The influence over the currency and government finance, which the local bankers acquired under the nawabs, could not be retained after the east india company gained control over the diwani administration of Bengal. As time passed, most of these banking houses declined as the sources of their income dried up. The reduction of the house of Jagat Sheth, which had held a unique position in the country and played a prominent part in the economic as well as political life of the province to minor importance during this period, is an illustration of the general trend. Their trade in money passed into the hands of other smaller bankers. When the state controlled general bank was established in 1773, new people from Calcutta's commercial circles gradually became prominent. With the advent of modern business methods, therefore, the local bankers lost their previous dominant role in business and banking. The creation of a government treasury and the foundation of banking institutions on western lines, abolition of mints outside Calcutta and the consequent shortage of bullion struck a further blow to the local bankers. [KM Mohsin]