Role of banks in economic development

Role of banks in economic development

Role of banks in economic development – Banks play a positive role in economic development of a country as repositories of community’s saving and as purveyors of credit.

Indian banking has aided the economic development during the last 50 years in an effective way. The banking sector has shown a remarkable responsiveness to the needs of planned economy. It has brought about a considerable progress in its effort at deposit mobilisation and has taken a number of measures in the recent past for accelerating the rate of growth of deposits. As recourse to this, the commercial banks opened branches in urban, semi-urban and the rural areas and have introduced a number of attractive schemes to foster economic development.

The activities of commercial banking have growth in multi directional ways as well as Multi-dimensional manner. Banks have been playing a catalytic role in area development, backward area development, extended assistance to rural development all along helping agriculture, industry, international trade in a significant manner. In a way, commercial banks have emerged as key financial agencies for rapid economic development.

By pulling the savings together, banks can make available funds to specialised institutions which finance different sectors of the economy, needing capital for various purposes, risks and durations. By contributing to government securities, bonds and debentures of term-lending institutions in the fields of agriculture, industries and now housing, banks are also providing these institutions with an access to the common pool of savings mobilised by them, to that extent relieving done of the responsibility of directly approaching the saver.

This intermediation role of banks is particularly important in the early stages of economic development and financial specification. A country like India, with different regions at different stages of development, presents an interesting spectrum of the evolving role of banks, in the matter of intermediation and beyond.

Mobilisation of resources forms an integral part of the development process in India. In this process of mobilisation, banks or at a great advantage, chiefly because of their network of branches in the country. And banks have to place considerable reliance on the mobilisation of deposits from the public to finance development programmes. Further, deposit mobilisation by banks in India acquired a greater significance in their  new role in economic development.

commercial banks provide short-term and medium-term and financial assistance. The short-term credit facilities are granted for working capital requirements. The medium-term loans are for the acquisition of land, construction of factory premises and purchase of machinery and equipment. These loans are generally granted for periods ranging from 5 to 7 years.

They also establish letters of credit on behalf of their clients favouring suppliers of raw materials machinery (both Indian and foreign) which extend the bankers assurance for payment and thus help their delivery. Certain transaction, particularly those in contract of sale of government departments, may require guarantees being issued in lieu of security earnest money deposit for release of advance money, supply of raw materials for processing full payment of bills on the assurance of the performance etc. Commercial banks issue such guarantees also.


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