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" ROLE OF INDIAN COMMERCIAL BANKS IN ECONOMY DEVELOPMENT "

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 “ROLE OF INDIAN COMMERCIAL BANKS IN ECONOMY
DEVELOPMENT”

CHETAN DUDHE
Phd Scholar
Faculty of Economics and Business
University of Debrecen, Hungary

Abstract
Banking sector acts as a backbone of modern business. A well organized banking system is
necessity for the economic development of a country. In India all commercial banks excluding
Regional Rural Banks and Local Area Banks have become Basel II compliant as on March31,
2009. Banks being fundamental components of financial system are the most effective way to
generate the credit flow of money in markets. At the same time banking industry like many other
financial services face a rapidly changing market, new technologies, economic fears, nasty
competition and especially more customers demands. The central objective of the study is to
empirically investigate a role of Indian banks in capital formation and economic growth.
Research is based upon the secondary data which provide the findings on commercial banks and
how it is helpful in economic development. The data analysis of the 47 commercial banks of
India revealed increased budget of loans provided every year. It is therefore recommended that
efforts should be made by the monetary authorities to effectively manage the banks maximum
lending of banks. This policy thrust will most likely result into increased investment activities
which will enhance the capital formation in India needed for its real sector investments and
industrial growth.

Key words: - Banking System, Financing Activities of Bank, Economy Development

 1. Introduction
A commercial bank is a type of banks that provides services such as accepting deposits, lending
loans, and investing asset. A large number of formal institutional agencies like Co-operatives
Banks, Regional Rural Banks (RRBs), Scheduled Commercial Banks (SCBs), Non– Banking
Financial Institutions (NBFIs), and Self-help Groups (SHGs), etc. are involved in meeting the
short-term and long-term needs of the customer. The Commercial banks play an important and
active role in the economic development of a country, if the banking system in a country is
effective, efficient and prudent. India is an agricultural country. The agriculture is the backbone
of economy of any country like India. Both public and private banks are now involving
themselves in a lot of agri-based activities as well as manufacturing industry activities. Due to
liberalization, privatization and globalization the role of banking sector changed dramatically.
The credit is one of the critical inputs for agricultural development.

1.1 History of Indian Banking Sector

The Government of India initiated that banks play an vital role in the economic roadmap of the
nation, the Indian government was adopted the mixed economy in 1948. Indian Government took
big decision concerning the Indian Banking Sector Reform after independence. Firstly, Indian
government transformed Imperial Bank of India converted into a nationalized bank and it became
the state bank of India with extensive banking facilities on a large scale especially in rural and
semi-urban areas. Government of India took many banking initiatives. These were aimed to
provide banking coverage to all section of the society and every sector of the economy.

1.2 Nationalization Process

First phase of Indian Banks nationalization process was in 1969. The major objective of
nationalization process was to extend banking infrastructure in rural areas. Fourteen banks were
nationalized in 1969. Before 1969, State Bank of India (SBI) was only the public sector bank in
India. And second phase of Indian banks nationalization process was in 1980. Seven more banks
were nationalized with deposits over 200 crores. Currently 20 public sector banks, 21 private
sector banks and 43 foreign banks are working in India.
Reserve Bank of India Central
Bank & Monetary Authority

Commercial Regional Rural Co-operative Banks

Banks Banks

Public Sector Private Banks State Co-operative

Banks Banks

Central Co-operative
Indian Banks Foreign Banks
Banks

Fig. 1 Indian Banking System (Source: www.rbi.com)

 2. Literature review
Thillairajah (1994) and Padmanabhan (1988) were sharing the same opinions explain the high
marginal propensity to save by the unstable economic conditions that generally prevails in these
areas (unstable incomes, fluctuations in harvest etc).

Birla Institute of Scientific Research (1981) attempted to make a comparative performance

analysis of the public banks and the major private banks concerning the period elapsed after
nationalization. Comparisons was made using financial ratios and growth rates. The study brings
out that the profitability ratios have been higher for selected group of the private sector banks
than for the nationalised banks. Though public sector banks have vast network of branches and
wide coverage, yet the credit of taking banking services to large mass of population goes to
private sector banks.

Agarwal (1993) in his paper analyzed the profits of Public Sector Banks after their
nationalization and determined determinants of profitability. The study covers State Bank Group
and Nationalized Bank Group. Time series data for the period 1970-1987 has been used for the
analysis. The profit equation was estimated by ordinary least square method. Empirical results
indicate that profitability of public sector banks has been adversely affected by increasing
statutory reserve ratios, lending to priority sectors at lower rates of interest, expansion of bank
branches in the rural and semi-urban regions and rising wages of employees. Declining labour
productivity has also adversely affected profitability. Time deposits were found important to
encourage profitability. The two banking groups were found significantly different in their
financial performance.

Mathur (2002) examined the arguments extended to a case for the privatization of public sector
banks mainly nationalized banks. Re-capitalization of Public sector banks is a huge burden on the
government budget. State ownership of banks reduces competition and thus rises inefficiency.
There is no evidence that state ownership banks lower the probability of banking crisis. Private
and foreign banks stimulate efficiency, innovation and economic growth. It is held that the
arguments which are put forward for the privatization of PSBs are not strong. Private ownership
may lead to crisis if the regulatory system is unable to control the adverse extraneous pressures.
State ownership of banks should be maintained until the conditions such as smooth legal system,
strong regulatory framework, reduced fiscal deficit and a sharp reduction in controls on flow of
foreign capital are appropriate for privatization.

3. Role of Banks
A) Mobilizing Saving for Capital Formation:
The commercial banks help in mobilizing savings through network of branch banking. People in
developing countries have low incomes but the banks encourage them to save by introducing
variety of deposit schemes to suit the needs of individual depositors. They also mobilize idle
savings of the few rich. By mobilizing savings, the banks channelize them into productive
investments. Thus they help in the capital formation of a developing country.
 B) Financing Industry:
The commercial banks finance the industrial sector in a number of ways. In generally they
provide short-term, medium-term and long-term loans to industry. In India they provide mainly
short-term loans as well medium-term loans for one to three years. But in Korea, the commercial
banks also advance long-term loans to industry.

C) Financing Agriculture:

The commercial banks help the large agricultural sector in developing countries in a number of
ways. They provide loans to traders in agricultural commodities. They provide finance directly to
farmers for the marketing of their produce, for the modernization and mechanization of their
farms, for providing irrigation facilities, for developing land, etc. They also provide financial
assistance for animal husbandry, dairy farming, sheep breeding, poultry farming, and horticulture.

4. Research Methodology
This paper is the result of a secondary data on Indian banking sector with special reference to
Indian context. To complete this, annual reports, various books, journals and periodicals have
been consulted, several reports on this particular area have been considered, and internet
searching has also been done. In order to carry out the present study the following methodology is
in use. The study is the result of general search of literature in the related field. First of all the
information will provide in annual reports will have been rearranged in terms of Sanctions,
Disbursements, Recovery, Non Performing Assets and also provisioning. The main source of
information is annual reports of all Indian banks. Secondary information was gathered from the
published annual reports and financial statements, project appraisal manual, lending policy
manuals, text books journals and websites etc. and entire banks website.
 5. Statistics And Facts
Table 1: Industry-Wise Deployment of Bank Credit

Note:- Data are provisional and related to select 47 banks, which account for 95% of total non-
food credit extended by all schedule commercial banks (Source :- https://dbie.rbi.org.in)
 6. Results
All the commercial banks in India provide loans in every sector. The banks have been able to
provide necessary capital support to the sectors for development in the form of loans. However
gradual decreased of loan availability was observed in some of the dominant major sectors
namely Textile, Construction, Petroleum, Chemical sectors etc. The loan received by Textile
sector in 2008 (12.56 %) was reduced to 8.11 % in 2016. Its average value during the period was
9.60 %. Similarly loan obtained by Construction, Petroleum and Chemical sectors (3.68 %, 5.48
% and 8.15 %) in 2008 were also reduced gradually to 2.94 %, 2.02 % and 6.49 % respectively in
2016. Fluctuation in the loan status could be observed in some of the sectors like Rubber and
Plastic, Gems and Jewellery and Basis Metal and Metal Products etc.

40
G
r 35
o
w 30
i
n 25 Textiles
g
20 Chemicals &
Chemical Products
r
a 15 Basic Metal &
t Metal Product
e 10
Infrastructure

5
(

%
)

0
2008 2009 2010 2011 2012 2013 2014 2015 2016

Years

Fig. 2: Bank Credit Fluctuation (Source:- https://dbie.rbi.org.in )

Figure 2 shows, some of the major sectors that could avail maximum loan from the banks
includes that include: Textiles, Chemical and chemical products, basic metal & metal products
and infrastructure. But infrastructure and basic metal & metal products sector are increasing in
every year. And chemical & chemical products and textiles sector are decreasing in every year.
Analysis of the loans provided to different sectors by the 47 commercial banks during the period
2008-2016 revealed spontaneous increased in most sectors.
The average value of loans obtained by most of the sectors were increased during the period,
some sectors such as gems and jewellery (Av 2.92), transport equipment (3.11), construction
(3.15), petroleum (4.05), all engineering (6.42) illustrated regular decrease. A total of Rs. 7676
billions was provided by the banks in 2008 as loan to different sectors; the value was increased to
Rs. 20492.14 billion in 2013 then drastically decreased to almost half Rs 624.48 billion in 2016.
It suggests that investment in these sectors were decreased during the periods.
 7. Conclusion
Banking system in India has undergone significant changes during last 10 years. The commercial
banks play a vital role in its economic development. The Statistics helps us to understand the
commercial bank sector in India. Banks in India has a got a great response in terms of service and
quality banking. Banking sector reform has been unique in the world in that it combines a
comprehensive reorientation of competition, regulation and ownership in a non-disruptive and
cost-effective manner. Globalization has encouraged multinationals and foreign banks to set up
their business unit in a developing country like India. The role of these institutions in the
development trajectories of behind industrializing, developing countries cannot be
overemphasized. Growth of all the sectors is directly related to the economic development of the
country.
Reference :-
1) Aggarwal Monika & Sharma Rishi Raj,( 2005) “Indian Banking: Present & Future”, The Indian Journal of
Commerce, Vol.58, No. 03, July-Sept.
2) Goyal, K. A. and Joshi, V. ―Mergers in Banking Industry of India: Some Emerging Issues‖. Asian Journal
of Business and Management Sciences, 1(2): 157-165, 2011a.
3) Govt of India (1998) Report of the Committee on Financial System, Ministry of Finance, (Narasimham
Committee-II), April
4) Pratima singh (2014), “The role of Role Of Commercial Banks In Economic Development: Indian
Perspective”, Tactful Management Research Journal, ISSN:2319-7943 (online).
5) Reserve Bank of India (2004): “Report of the Advisory Committee on Flow of Credit to Agriculture and
Related Activities From the Banking System”. URL (www.rbi.org.in).
6) Saini Priyanka, Sindhu Jyoti,( 2014) “Role of Commercial Bank in the Economic Development of INDIA”
International Journal of Engineering and Management Research,Volume-4, Issue-1, February-, ISSN No.:
2250-0758
7) Statistical Tables Relating to Banks in India (Various Issues), Reserve Bank of India, Mumbai. URL:
(www.rbi.org.in)
8) http://www.ehow.com/about_6607026_role-commercial-banks-economic-development.html
9) https://en.wikipedia.org/wiki/Commercial_bank
10) www.preservearticles.com/201012291875/indigenous-bankers.html
11) www.banknetindia.com/banking/boverview.htm
12) www.ibef.org
13) https://dbie.rbi.org.in/DBIE/dbie.rbi?site=statistics
14) http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=31091782

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