Role of Banks in economic development

Banks play a very useful and crucial role in the economic life of every nation. They
have control over a large part of the supply of money in circulation, and they can
influence the nature and character of production in any country. In order to study
the economic significance of banks, we have to review the general and important
functions of banks.

1) Removing the deficiency of capital formation

In any economy, economic development is not possible unless there is an adequate

degree of capital accumulation (or) formation. Deficiency of capital formation is
the result of low saving made by the community. The serious capital deficiency in
developing economies is reflected in small amount of capital equipment per worker
and the limited knowledge, training and scientific advance. At this juncture, banks
play a useful role. Banks stimulate saving and investment to remove this
deficiency. A sound banking system mobilizes small savings of the community and
makes them available for investment in productive enterprises. The important
implications of this activity include Banks mobilise deposits by offering attractive
rates of interest and thus convert savings into active capital. Otherwise that amount
would have remained idle.

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.

2) Provision of finance and credit

Banks are very important sources of finance and credit for industry and trade. It is
observed that credit is the lubricant of all commerce and trade. Hence, banks
become nerve centers of all trade activities and therefore commerce and trade
could function in the presence of sound banking system.

The banks cover foreign trade transactions also. Big banks also undertake foreign
exchange business. They help in concluding deferred payments, arrangements
between the domestic industrial undertakings and foreign firms to enable the
former import machinery and other essential equipment.

3) Extension of the size of the market

Commercial bankers help commerce and industry in yet another way. With the
sound banking system, it is possible for commerce and industry for extending their
field of operation. Commercial banks act as an intermediary between buyers and
the sellers. Goods are supplied on bank guarantees, making it viable for industry
and commerce to cultivate and locate markets for their products. The risks are

undertaken by the bank. When the risks have been set free by the banks, the
industry can look forward to derive economies of the large size of the market.

4) Act as an engine of balanced regional development

Commercial banks help in proper allocation of funds among different regions of

the economy. The banks operate primarily for profits. When the banks lend their
funds for more productive uses, their profits will be maximized. Introduction of
branch banking makes it possible to choose between different regions. A region
with growth potential attracts more bank funds. But in recent years, the approach
of banks towards regional growth has been undergoing a change. Banks help create
infrastructure essential for economic development. Thus banks are engines of
balanced regional development in the country.

5) Financing agriculture and allied activities

The commercial bank helps the farmers in extending credit for agricultural
development. Farmers require credit for various purposes like making their
produce, for the modernization and mechanization of their agriculture, for
providing irrigation facilities and for developing land.

The banks also extend their financial assistance in the areas of animal husbanding,
dairy farming, sheep breeding, poultry farming and horticulture.

6) For improving the standard of living of the people

The standard of living of the people is estimated on the basis of the consumption
pattern. The banks advance loans to consumers for the purchase of consumer
durables and other immovable property, which will raise the standard of living of
the people.

Stimulating human capital formation, facilitating monetary policy formulation and

developing entrepreneurs are some of the other roles played by commercial banks
in the economic life of every nation.

Banking
Banks get a big boost: Rs 25,000 crore towards recapitalisation of public sector banks. Jaitley says:
Banking Board Bureau will be operationalised, we stand solidly behind public sector banks.
Target of disbursement under MUDRA increased to 1,80,000 crore
Process of transfer of government stake in IDBI Bank below 50% started
General Insurance companies will be listed in the stock exchange
Govt to increase ATMs, micro-ATMs in post offices in next three years

ROLE OF BANKS IN A DEVELOPING ECONOMY-----

Banks play a very useful and dynamic role in the economic life of every modern state.
A study of the economic history of western country shows that without the evolution of
commercial banks in the 18th and 19th centuries, the industrial revolution wou1ld not have
taken place in Europe.
The economic importance of commercial banks to the developing countries may be viewed
thus:
1. Promoting capital formation
2. Encouraging innovation
3. Monetsation
4. Influence economic activity
5. Facilitator of monetary policy
Above all view we can see in briefly, which are given below:
PROMOTING CAPITAL FORMATION:-

A developing economy needs a high rate of capital formation to accelerate the tempo of
economic development, but the rate of capital formation depends upon the rate of saving.
Unfortunately, in underdeveloped countries, saving is very low.
Banks afford facilities for saving and, thus encourage the habits of thrift and industry in the
community.

They mobilize the ideal and dormant capital of the country and make it available for
productive purposes.
ENCOURAGING INNOVATION:Innovation is another factor responsible for economic development.
The
entrepreneur in innovation is largely dependent on the manner in which bank credit is
allocated and utilized in the process of economic growth.
Bank credit enables entrepreneurs to innovate and invest, and thus uplift economic activity
and progress.
MONETSATION:Banks are the manufactures of money and they allow many to play its role freely in the
economy.
Banks monetize debts and also assist the backward subsistence sector of the rural economy
by extending their branches in to the rural areas.
They must be replaced by the modern commercial banks branches.
INFLUENCE ECONOMIC ACTIVITY:Banks are in a position to influence economic activity in a country by their
influence on the rate interest.
They can influence the rate of interest in the money market through its supply of funds.
Banks may follow a cheap money policy with low interest rates which will tend to stimulate
economic activity.
FACILITATOR OF MONETARY POLICY:-

Thus monetary policy of a country should be conductive to economic

development.
But a well-developed banking system is on essential pre-condition to the effective
implementation of monetary policy. Under-developed countries cannot afford to ignore this
fact.

A fine, an efficient and comprehensive banking system is a crucial factor of the

developmental process
.

"Information technology used by the banks, by the banking correspondents and the
clients is going to be made different from what it was in the past," Rajan said,
adding "but there will be many opportunities outside of the derivatives and the IT
sector."

As per recently report of World Bank, India remained the worlds largest
remittance recipient in 2015. It was revealed by the World Banks annual report
Migration and Development Brief. In 2015, India attracted about 69 billion US
dollars in remittances, down from 70 billion in 2014 Key Highlights of Report
Other large remittance recipients in 2015 were China (64 billion dollars),
Philippines (28 billion), Mexico (25 billion) and Nigeria (21 billion dollar). Global
scenario: In 2015, global remittances which include those to high-income countries
contracted by 1.7% to 581 billion US dollar compared to 592 billion in 2014.
Indian scenario: Remittances to India in 2015 decreased by 2.1 per cent to USD
68.9 billion. This marks the first decline in remittances since 2009. Developing
countries: Officially recorded remittances to developing countries amounted to
431.6 billion dollars in 2015, an increase of 0.4 per cent over 430 billion dollars in
2014. The growth pace of remittances to developing countries in 2015 was seen as
the slowest since the global financial crisis. Indias neighbours: The growth of
remittances in 2015 slowed from 8% in 2014 to 2.5% for Bangladesh, from 16.7%
to 12.8% for Pakistan, and from 9.6% to 0.5% for Sri Lanka. Tags: Business
China Economy India Remittances World Bank NPCI launches Unified
Payments Interface April 14, 2016No comments The National Payments
Corporation of India (NPCI) has launched Unified Payments Interface (UPI) to
revolutionise mobile payment system in the country. It was launched by the
Reserve Bank of India (RBI) Governor Raghuram Rajan. 29 banks have agreed to
join the platform. UPI seeks to provide uniform mobile payment system by
leveraging digital trends such as increasing smart phone adoption and deeper
penetration of mobile data. Key features of UPI The UPI is for mobile based
payment method that powers multiple bank accounts into a single mobile
application (of any bank) of a participating bank. It merges several banking

features, seamless fund routing and merchant payments into one hood. Thus, it will
be a single app for accessing different bank accounts. It facilitates virtual address
as a single payment identifier for sending and collecting money and works on
single click 2 factor authentication. The single identifier will eliminate the need to
exchange sensitive information such as bank account numbers during a financial
transaction. It also provides an option for scheduling push and pull transactions for
various purposes like sharing bills among peers. UIP is an advanced version of
NPCIs Immediate Payment Service (IMPS) which is a 24X7 funds transfer
service. It provides round the clock availability and faster checkout.