Without a sound and effective banking system, no country can ever have a healthy economy.
In the modern’s economic system, banks play a very important role in economic development of country. They collect the surplus savings of the people and make them available for investment. They also create new demand deposits in the process of granting loans and purchasing investment securities. They facilitate trade both inside and outside the country. Commercial banks, which is an important part of the financial system of the country.
Bank is a financial institution that performs several functions like accepting deposits, lending loans thus helps in agriculture and rural development etc. Bank plays an important role in the economic development of the country. Without a sound and effective banking system, no country can have a healthy economy. For the past three decades, India’s banking system has several outstanding achievements. This is one of the reasons of India’s growth process.
Banks role in the economic development of country can be explained under following headings.
Removing the deficiency of capital formation:
The serious capital deficiency in developing Countries is removed by banks. A sound banking system mobilizes small savings of the community and makes them available for investment in productive enterprises. Banks mobilise deposits by offering attractive rates of interest and thus convert savings into active capital. Banks distribute these savings through loans among productive enterprises which are helpful in nation building. It facilitates the optimum utilization of the financial resources of the community.
Helps in generating employment opportunity: Banks helps in providing financial resources to industries and that helps in automatically generate employment opportunity. Equally revenue generation through tax and dividend collection by the government invested every year. While revenue and employment generation are two very important contributions, successfully maintaining healthy credit line to industrial sector as well as to overall economy is another important contribution of financial sector.
Financial assistance to Industries:
The commercial banks finance the industrial sector in a number of ways. They provide short-term, medium-term and long-term loans to industry. The Industrial Development Bank of India is the main institution in India providing financial assistance to the industrial sector. It provides direct financial assistance to the industrial enterprises in the form of granting loans and advances, and purchasing or underwriting the issues of stocks, bonds or debentures.
Promote saving Habits of the people: Bank attracts depositors by introducing attractive deposit schemes and providing higher rates of interest. Banks providing different kinds of deposit schemes to its customers. It enables to create saving habits among people. Bank open different accounts to attract customer. These accounts are opened as per the requirements of customers such as current account, fixed deposit account, saving account and recurring account etc.
Financial assistance to Consumer Activities:
People in underdeveloped countries being poor and having low incomes do not have sufficient financial resources to buy durable consumer goods. The commercial banks advance loans to consumers for the purchase of such items as houses, furniture, refrigerators, etc. In this way, they also help in raising the standard of living of the people in developing countries by providing loans for consumption activities.
Helps in implementing Monetary Policy:
The commercial banks help the economic development of a country by implementing the monetary policy of the RBI. RBI depends upon the commercial banks for the success of its policy of monetary management in keeping with requirements of a developing economy. Thus, the commercial banks contribute much to the growth of a developing economy by granting loans to agriculture, trade and industry, by helping in capital formation and by following the monetary policy of the country
Financial facilities for Trade:
The commercial banks help in financing both internal and external trade. The banks provide loans to retailers and wholesalers to purchase goods in which they deal. They also help in the movement of goods from one place to another. Banks provide all types of facilities such as discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc. for promoting the trade. Moreover, they finance both exports and imports of developing countries by providing foreign exchange facilities to importers and exporters of goods.
Promotion of New Entrepreneurs:
Development banks in India have also achieved a success in creating a new class of entrepreneurs and spreading the industrial culture. Special capital and seed Capital schemes have been introduced to provide equity type of assistance to new and technically skilled entrepreneurs who lack financial resources of their own.
Balanced Development:
Modern banks spreading its operations throughout the world. We can see number of big banks like citi bank, SBI, PNB, Baroda bank etc. It helps a country to spread banking activities in rural and semi urban areas. With the spreading of banking operations all over the country, helps to attain balanced regional development by promoting rural areas. Financial assistance to agriculture sector: Agriculture is the backbone of economy of any country like India. The commercial banks help the large agricultural sector in developing countries. They provide loans to traders in agricultural commodities. They open a number of branches in rural areas to provide agricultural credit. They provide finance directly to agriculturists for the marketing of their produce, for the modernisation and mechanisation of their farms, for providing irrigation facilities, for developing land, etc.
Thus, the banks have come to play a useful role in promoting economic development by- mobilising the financial resources of the community and by making them flow into the productive channels. The Indian banks are now playing a very active role in fostering economic development of the country.
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