Folio 04 · about 9 minutes

The Hundi

A hundi is a written order from one merchant to another to pay a sum to a named person. For centuries it let money cross India without any coin moving at all.

What is a hundi?

The Reserve Bank of India's museum gives a technical definition. A hundi is an unconditional order in writing, by which one person directs another to pay a sum of money to a person named in the order.¹ It did three jobs. It moved money from one place to another, it served as a loan or IOU, and it financed trade as a bill of exchange.² The RBI's 1998 history calls the hundi the most important class of credit instrument to evolve in India. It says hundis were in widespread use by the twelfth century and are “the oldest surviving form of credit instrument”.² That dating is the RBI's own claim; this site has not checked its basis. The museum adds that although hundis were usually classed as bills of exchange, indigenous bankers more often used them the way we use cheques.¹

Older literature confirms the hundi's place in ordinary merchant life. Marina Martin notes that the Ardhakathānak, the verse autobiography of the Jain merchant Banarasidas of Jaunpur (1641), mentions a hundi against which the author's father had borrowed, and which the author paid when it fell due.³

What does a real hundi say?

The RBI museum shows a darshani hundi from the early twentieth century, with a translation, and it repays slow reading.¹ A Jaipur merchant, Brijkishore Bhargava, writes to a firm in Patna, Rikhabchand Bridhichand. He asks them to pay Rs 2,000 to the firm of Punamchand Harakchand, “on presentation in the current money”. Three features stand out:

• The sum is written four ways. It appears in figures, in words, as “one thousand, doubled” and as “five hundred, four times”. Repetition like this makes a figure hard to alter. That is the likely purpose, though the museum's text does not say so.
• It assumes an account. The top line tells the Patna firm to “place it to the debit of our account”.¹ The hundi does not create a debt from nothing. It draws on a running account between two firms that already trust each other.
• It is dated by the Vikram Samvat. The date is Sambat 1990, Miti Mangsir, in the merchant calendar described in the first chapter.¹

The museum also displays revenue seals and adhesive stamps that appear on hundis, from embossed Queen Victoria seals to Ashoka-pillar revenue forms.¹ As the section on colonial law below explains, the colonial state taxed the hundi long before it understood it.

What is the difference between a darshani and a muddati hundi?

A दर्शनी (darshani) hundi was a demand bill, payable on presentation according to the custom of the place. A मुद्दती (muddati) hundi was a usance bill, payable after a stated time, on a stated date or when a stated event happened.⁴ Martin finds the same two broad categories in north and south India alike: sight hundis payable at once or within a few days, and usance hundis maturing in anywhere from thirty to a hundred and twenty days.⁵ A special kind of muddati hundi, the jokhami, was a documentary bill. Payment depended on the safe arrival of the goods it was drawn against.⁴

What was a shah-jog hundi?

Within those two categories, hundis differed by who could be paid. The RBI lists four darshani forms.⁴

• Sah-jog (shah-jog): payable only to a shah, a respectable person of substance known in the market, or to his order.
• Dhani-jog: payable only to the named payee, and not negotiable.
• Firman-jog: payable to order, from the Persian firman, “order”.
• Dekhavanhar: payable to whoever presented it, like a bearer cheque.

The shah-jog was the clever one. Martin, drawing on the 1978 report of the Banking Laws Committee, explains the mechanics. The drawee paid only a shah. The shah had to satisfy himself that the hundi was genuine before he presented it. If it later proved forged or stolen, the loss fell on the shah, and the drawee could claim a full refund from him.⁶ The trust had a named owner. By the 1970s, the committee noted, “shah” had in eastern India become a mere honorific, “To Shri”. It proposed adding two crossed lines to make the shah-jog work like a crossed cheque.⁷

How could a merchant in Surat pay one in Calcutta without moving coin?

Because the hundi moved a claim, not money. The Surat merchant pays a Surat banker, who writes a hundi on his correspondent in Calcutta. The supplier in Calcutta presents it to the correspondent and is paid. The correspondent debits the Surat banker's account, just as the Jaipur hundi asks.¹ Over a season, money owed in one direction is set against money owed in the other, and only the balance ever needs to move as cash or bullion. This is a summary of the logic, not a description of any single firm's books.

Distance and risk had a price. The French traveller Jean-Baptiste Tavernier, in India several times in the mid-seventeenth century, recorded what it cost to remit money to Surat by bill. From Dacca the rate reached ten per cent, from Patna seven to eight, from Benares six and from Sironj three. Bankers also stood to lose if goods were stolen on the road.⁸ The RBI notes that bills financing Mughal-era sea trade were discounted heavily because the discount included insurance against the goods not arriving.⁹

Governments used the same machinery. Claude Markovits notes that the East India Company relied on the hundis of Indian sahukars and sarrafs until about 1820, when it switched to a treasury system.¹⁰ In 1770s Bengal, district records show bankers standing surety for landholders and paying land revenue to the Company in bills at fifteen or twenty days' date.¹¹

What did colonial law do with the hundi?

It taxed the hundi first and tried to understand it later. Martin identifies two laws that shaped it. The Indian Stamp Act of 1879 classed the hundi as a bill of exchange and so made it a source of revenue. The Negotiable Instruments Act of 1881 left hundis outside its scope wherever local custom could be applied.¹⁵ The Act's first section, still in force, says that nothing in it:

“affects any local usage relating to any instrument in an oriental language”

Parties could still opt into the Act by saying so in the instrument.¹⁶ Officials were aware of how little they knew. When the government asked in the early 1890s whether “hundi” should be defined in the Stamp Act, an officer in Ajmer advised against it, on the grounds that a complete definition would be hard to find and was more likely to embarrass the courts than help them.¹⁷

Attempts to codify the hundi failed one after another. A first effort at the time of the 1881 Act and a second by the Law Commission in 1958 both broke down. The 1958 Commission found “no less than a dozen varieties” of hundi in use, with usages differing widely by place.¹⁸ A Banking Commission set up in 1969 revived the question. Its 1971 Study Group on Indigenous Bankers called hundi-discounting shroffs vital intermediaries between banks and small borrowers.¹⁹ By 1975 the Banking Laws Committee had concluded that some hundis were conditional instruments, unlike the unconditional bills of the 1881 Act, and so needed a law of their own. In 1978 it drafted a Hundi Code bill. The bill was never passed.²⁰

What does the RBI say about hundis today?

The RBI museum's position is blunt. Hundis are part of the informal system, have no legal status and are not covered by the Negotiable Instruments Act.¹ That sits alongside the Act's own text, which does not ban hundis but saves local usage. The 1978 committee recorded that Indian courts had held shah-jog hundis to be neither bills, nor cheques, nor promissory notes, and so wholly outside the Act.²¹ Martin describes the hundi as a living institution that twenty-first-century law has largely driven underground, and notes that it became illegal at some point after 1978. Her own suggestion, which she offers tentatively, is that stringent currency regulation may have pushed it there.²² Today the word is mostly heard in connection with hawala, which is one reason its long history as a legitimate merchant instrument is so easily forgotten.

This chapter is history, not legal guidance.

A hundi was only as good as the names on it. The next chapter is about what kept those names good.