Folio 05 · about 5 minutes

Networks of Trust

What made a hundi good was less the courts than the merchant communities who would know, and remember, if a firm failed to pay.

How did Indian merchants lend without collateral?

Within a merchant network, Claude Markovits observes, credit moved at lower than market rates and without collateral. The usual explanation is trust, often tied to kinship, caste and community. Markovits is sceptical of how far kinship and caste explain it, because partnerships were often formed between people who were not kin.¹ His alternative emphasis is on place. Networks were centred on a particular town or micro-region, where capital was raised. Colonies of merchants and employees were dispersed from that centre, and goods, credit, people and information flowed back and forth. Information was the key to success.²

The point is worth holding onto because it resists a lazy story. It would be easy to say that a community simply trusted its own. The historians suggest something more like an institution: a set of people who could see each other's books, knew each other's families, and could make a defaulter's life very difficult.

Who enforced the rules?

Often, the merchants themselves. L. C. Jain's 1929 survey describes guilds of traders and bankers, often called the Mahajan, which handled religious and social matters but also settled trade disputes and acted as insolvency courts.³ He gives two examples:

• Indore's Gyarah Panch (“Eleven Leaders”). Elected leaders, approved by the Maharaja, acted as an insolvency court. They sold a bankrupt's property and divided the proceeds among creditors, and the state recognised their decrees. Jain says the body had then existed for more than a century.⁴
• The Kovilvasal Mariyal, the temple council of the Nattukottai Chettiars. It heard disputes over marriages, money and family matters and gave its awards orally. Someone who refused an award could be denied the temple garland, without which no marriage could be celebrated.⁵

Newer associations did the same work. Jain was told that the Bombay Shroffs' Association settled twenty to twenty-five disputes a day, and that its awards were rarely overturned in court. The Multani Bankers' Association met every Sunday to fix the “bazaar rate” at which small traders' hundis were discounted.⁶

Half a century later the government's own experts reached the same conclusion. R. Krishnan, secretary of the Banking Laws Committee, credited the sharafi associations with keeping the hundi system alive against Western competition and repeated attempts at abolition. He found that most hundi disputes in Calcutta were resolved through them, cheaply and quickly, and that courts deferred to their rules.⁷ The anthropologist David Rudner makes the same point from the other side. A purely legal view of the hundi, he argues, ignores customary sanctions that were rigorously enforced by business communities spread across many places, regions and even countries.⁸

The Nattukottai Chettiars

Rudner's study of the Nattukottai Chettiars, who call themselves Nakarattars, is the most detailed account of one such network. They were the major banking caste of south India between 1870 and 1930. They numbered perhaps 10,000 in 1896 and 40,000 in 1920, and about 100,000 by the time of his fieldwork in 1980–81.⁹ They first appear in the record in the seventeenth century as small, itinerant salt traders. After the Suez Canal opened, they became a major source of finance across Burma, Ceylon, Malaya and the Madras Presidency.¹⁰ By their own evidence to the Madras Provincial Banking Enquiry Committee, their capital grew from Rs 100 million in 1896 to Rs 800 million in 1930.¹¹

That story has a hard edge, and Rudner does not hide it. Chettiar interest rates in Southeast Asia were exorbitant by today's standards, though often far lower than competitors'. Borrowers in Burma and elsewhere, lacking legal protections, often lost the land they had improved.¹² A history of trust between merchants is not a history of fairness to everyone they lent to.

The Sindhi networks

Markovits traces two networks from Sind that worked very differently. The Shikarpuri network, from Shikarpur in upper Sind, grew in the second half of the eighteenth century with the Durrani empire and was closely tied to Kandahar. After the 1840s it rebuilt itself by financing the caravan trade with the Uzbek khanates of Central Asia. The Sindworkies of Hyderabad had served the Amirs whom the British overthrew in 1843. They then turned to selling local craft goods to European customers, first in Bombay, then in Egypt and eventually around the world.¹³ One network was land-based and financial, the other sea-based and commercial, yet both kept “traditional” methods of business and accounting.¹³

North India and the Jagat Seths

In the north, the best-known name is Jagat Seth, “banker of the world”. Jain records that the Mughal emperor Farrukhsiyar gave Fateh Chand, a banker of Murshidabad, this hereditary title in return for large loans to the emperor's campaign.¹⁴ The house's dealings with the British were close and costly. In 1759 Robert Clive entertained Jagat Seth for four days at a cost of Rs 17,374, and in 1764 the English government borrowed five lakhs from the family's sons.¹⁵ Thomas Timberg's history of the Marwaris follows the longer arc: a community from the deserts of Rajasthan that spread across India in the nineteenth century and dominated inland trade before the First World War.¹⁶ C. A. Bayly's study of north Indian towns between 1770 and 1870 gives a whole section to the merchant family's culture and business methods, drawing in part on families' private records.¹⁷

Why the moneylender stereotype misleads

Jain, himself from a banking community, wrote his 1929 survey partly to correct a caricature. Writers who painted India's bankers as a tribe of “Shylocks”, he argued, were thinking of the moneylender, not the banker. He defined the banker as someone who, besides lending, took deposits or dealt in hundis.¹⁸ Rudner identifies three stereotypes that shaped colonial and later scholarship: the irrational moneylender, the coldly usurious one, and the strictly small-scale village lender. The third, he argues, kept the scale of Indian finance invisible.¹⁹

The communities named in this chapter, among them Marwari, Gujarati, Chettiar and Sindhi, were networks with institutions, rules and internal disagreements, not characters in a morality play. They are described here as their historians describe them.

The people who did the daily work of these networks sat at the books. They are the subject of the next chapter.