The Origins of the Structured Money Lending System in India

Some say money lending is as old as the humans, during the come-up of the homo-sapiens, trade, barter and other rudimentary forms of money lending did exist. However, a structured lending system found its origin in ancient Greece and traces of a faint credit system can be found as early as the Vedic period in India.

Early India

Money lending has been part of the Indian economy since the early Vedic period. The first Indian text talked about usury or ‘kusidin’ – translated to ‘usurer’. At the time usury was the practice of making unethical or immoral monetary loans.

There were some faint references to this practice in the Sutras and the Jatakas too. However, the latter half of the 2nd century CE saw usury as an acceptable practice and Manusmriti considered it an acceptable mode of acquisition of wealth.  

During the Mauryan age, Kautilya’s texts are the firsts to mention the existence of a systematised lending structure – these scriptures mention RNapatra, RNapanna, or RNalekhaya – different forms of loan deeds – that were prevalent and acceptable during the Mauryan empire (321 – 185 BCE). 

Later during the Mauryan period (321–185 BCE), an instrument called adesha came about, which was an order on a banker directing him to pay the sum on the note to a third person, which comes close to the definition of a modern bill of exchange.

The considerable use of these instruments has been recorded In large towns, merchants also gave letters of credit to one another. The Mughal era continued the use of loan deeds, commonly known as dastawez. The dastawez were divided into two forms dastawez-e-indultalab, which was payable on demand and dastawez-e-miadi, which payable after a particular period.  

Apart from this, there is evidence of other credit instruments such as barattes and hundis. Payment orders by the royal treasuries were referred to as barattes. A Hundi or Hundee is a financial instrument that developed in Medieval India for use in trade and credit transactions.

Hundis are used as a form of remittance instrument to transfer money from place to place, as a form of credit instrument or IOU to borrow money and as a bill of exchange in trade transactions. There are also records of Indian bankers using issuing bills of exchange on foreign countries.

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Pre-Independence 

While early India had its credit instruments, and money lending system, all of it changed with the advent of the British rule. The Brits with them brought the very structured and anglicised form of lending and banking. 

Under the British tutelage, the first bank to crop up in India was the Union Bank of Calcutta. The Union Bank was an amalgam of Commercial Bank and the Calcutta Bank. Similarly, the Allahabad Bank was established in 1865 and is still functioning today.  

However, the first entirely Indian bank was the Oudh Commercial Bank, which was established in 1894. The Bank of Oudh saw an early demise, the next to appear was Punjab National Bank in the year 1894.  

The 20th Century saw relative financial stability; Indians established several small banks which served particular ethnic and religious communities. While the small Indian banks cropped up, the exchange banks – that concentrated on financing foreign trade – were mostly owned by Europeans. Indian joint-stock banks struggled with under-capitalised and were not seasoned to compete with the presidency and exchange banks.  

The period between 1906 and 1911 saw the establishment of banks inspired by the Swadeshi movement. Several banks established then have survived to the present such as Catholic Syrian Bank, The South Indian Bank, Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

The zeal of Swadeshi movement led to the establishment of many private banks in Dakshina Kannada and Udupi district, which were unified earlier and known by the name South Canara (South Kanara) district. Four nationalised banks started in this district and also a leading private sector bank. Hence, undivided Dakshina Kannada district is known as Cradle of Indian Banking.

Post-Independence

The period between 1983-46 saw a boom in the Indian Banking Industry. Unfortunately, the partition of 1947 hit the banks adversely especially the economies of Punjab and West Bengal. With independence came the end of the Laissez-faire banking in India. 

The freshly formed government of independent India became actively involved in the economic affairs of the country and introduced some radical changes. Some of the necessary changes included the creation of the Reserve Bank of India, India’s central banking authority. Another crucial introduction was the 1949’s Banking Regulation Act; it empowered the RBI to regulate and control the Indian banks.   

Liberalisation and Globalisation

When the 90’s were the times of the liberalisation and globalisation, India opened itself to the global economy. This helped bring in what we today know as the new generation tech-savvy banks. 

Banks that we know today and trust such as ICICI, HDFC, and Induslnd came about during this era. With foreign direct investment pouring in, the new policy made waves in the banking sector. This ushered in a state of the art methods of lending and borrowing and the introduction of new credit instruments. 

Contemporary banking/money lending in India has evolved to a point where any individuals can sit in any corner of the globe and transact. With the integration and adoption of new technologies applying for loans has never been easier.

With the introduction of peer-to-peer lending, cryptocurrencies, blockchain and artificial intelligence, the possibilities are limitless.