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Role of Commercial Banks in the Economic Development of India

IndianMoney.com Research Team | Posted On Wednesday, February 26,2020, 03:37 PM

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Role of Commercial Banks in the Economic Development of India

 

 

Commercial banks are financial institutions that play a vital role in the economic development of a country. After the nationalization of banks in the year 1969, the commercial banks have seen a major boost in the business with a larger customer base and expansion of the initial structure. Economic development is a multi-dimensional aspect that depends on several factors to realize actual growth. Commercial banks sit at a high rank when it comes to supporting the economy and serve as the custodians of a country's wealth.

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Role of Commercial Banks in the Economic Development of India

Here are 5 major roles that commercial banks play in the economic development of a country:

1. Capital Preservation and Appreciation

Commercial banks have successfully tapped the customer base at all levels in India. Be it a rural or urban branch, the facilities and processes are almost alike with slight variations depending on the demography and customer's needs. The commercial banks have been highly instrumental in the preservation of capital across customers in the form of savings.

See Also: Commercial Banks: Its Functions and Types

These savings are in turn mobilized and optimally utilized by the banks for a greater benefit. With this move of the banks (of mobilizing the money at appropriate avenues), the productivity factor of the money increases. This means the saved capital appreciates over time, providing mutual benefits to both the parties- customers and the bank ultimately leading to economic development.

2. Credit Creation

Credit creation essentially means producing credit or liquidity in the system to leverage the daily operations and developments at the national level. Banks serve as the economic backbone of a country that infuses funds in the economy for development at various levels.

A more flexible credit influx accounts for higher productivity, more jobs, sales and services, and hence greater economic development.

3. Increasing Productivity

Productivity is a derived state of several measures and efforts made by the government and the banks. Increased productivity comes from the proper channelization of resources at the requisite places. Once the banks get hold of the savings, proper deployment of these resources must be done in order to boost development in the economy.

See Also: Commercial Banks in India

One such important channel is the trade and industry sector that needs special attention from the banks. Commercial banks have been highly instrumental in providing sound monetary support to this sector, leading to the fast growth of trade and industry in India. This industrial development boosts economic development by encouraging exports of the produced goods and services.

The commercial banks finance the projects for small scale industries and enhance business within the nation as well.

4. Development of Agriculture and Foreign Trade

Commercial banks have been highly instrumental in the development of agriculture and foreign trade in the country. Off-late, with recent infrastructural and technological developments, the agricultural sector has been left in neglect requiring more focus to revive it in a hurry.

Both agriculture and allied industries are an excellent source of growth and national income. With the inclusive outreach of commercial banks at rural levels as well, the small scale farmers, agro-related industries and other allied partners are getting easy access to loans and funds to conduct business in India.

See Also: Top 14 Functions of Commercial Banks – Discussed!

The foreign trade has been highly institutionalized by commercial banks, with the provision of funding and easy trading policies. With banks accepting payments in all forms like cheques, cash, drafts, money order, and so on, the process has been highly simplified eliminating the need for a typical and particular payment system. This easy fund transfer has led to several foreign buyers utilizing products and services from India, adding to the economic growth of the country.

5. Implementation and Execution of Monetary Policies

The Reserve bank of India has laid down several acts and regimes under the monetary policy that ensure fair and transparent monetary transactions across the country. This however, can only be possible if commercial banks agree to abide by and help in the implementation of these policies. A sound and robust monetary policy lays the foundation for the future of a country's economy and its development.

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