Role of commercial Banks in a developing economy

Role of commercial Banks in a developing economy

A well-developed banking system is a necessary precondition for economic development in a modern economy. Besides providing financial resources for the growth of industrialization. banks\an also influence the direction in which these resources are to be utilized, in the underdeveloped and developing countries, not only the banking facilities are limited to a few developed urban areas, but also the banking activities are limited mostly to trade and commerce, paying little attention to industry and agriculture. Structural as well as functional reforms in the banking system are needed to enable the banks perform developmental role in underdeveloped countries. Banks and Economic Development
In a modern economy, banks are to be considered not merely as dealers in money hut also the leaders in development. They are not only the store houses of the country’s wealth but also are the reservoirs of resources necessary for economic development. Banks play an important role in the development of a country. It is the growth of commercial banking in the 18th and 19th centuries that facilitated the occurrence of industrial revolution in Europe. Similarly, the economic progress in the present day developing economies largely depends upon the growth of sound banking system in these economies. Commercial banks can contribute to a country’s economic development in the following way.

Role of commercial Banks in a developing economy

1. Capital Formation. Capital formation is the most important determinant of economic development and banks promote capital formation. Capital formation has three well-defined stages:
(a) generation of saving,

(b) mobilisation of saving, and

(c) canalisation of saving in productive uses.

Banks play a crucial role in all the three stages of capital formation : (a) They stimulate savings by providing a number of incentives to the savers, such as, interest on deposits, free and cheap remittance of funds, safe custody of valuables, etc. (b) By expanding their branches in different areas and giving various incentives, they succeed in mobilizing the savings generated in the economy. They not only mobilise resources.

2. Financing Industry:

The commercial banks finance the industrial sector in a number of ways. They provide short-term, medium-term and long-term loans to industry. In India they provide short-term loans. Income of the Latin American countries like Guatemala, they advance medium-term loans for one to three years. But in Korea, the commercial banks also advance long-term loans to industry.

In India, the commercial banks undertake short-term and medium-term financing of small scale industries, and also provide hire- purchase finance. Besides, they underwrite the shares and debentures of large scale industries. Thus they not only provide finance for industry but also help in developing the capital market which is undeveloped in such countries.

Role of commercial Banks in a developing economy

3. Financing Trade:

The commercial banks help in financing both internal and external trade. The banks provide loans to retailers and wholesalers to stock goods in which they deal. They also help in the movement of goods from one place to another by providing all types of facilities such as discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc. Moreover, they finance both exports and imports of developing countries by providing foreign exchange facilities to importers and exporters of goods.

4. 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 open a network 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.

They also provide financial assistance for animal husbandry, dairy farming, sheep breeding, poultry farming, pisciculture and horticulture. The small and marginal farmers and landless agricultural workers, artisans and petty shopkeepers in rural areas are provided financial assistance through the regional rural banks in India. These regional rural banks operate under a commercial bank. Thus the commercial banks meet the credit requirements of all types of rural people.

5. Financing Consumer Activities:

People in underdeveloped countries being poor and having low incomes do not possess sufficient financial resources to buy durable consumer goods. The commercial banks advance loans to consumers for the purchase of such items as houses, scooters, fans, refrigerators, etc. In this way, they also help in raising the standard of living of the people in developing countries by providing loans for consumptive activities.

Role of commercial Banks in a developing economy

6. Financing Employment Generating Activities:

The commercial banks finance employment generating activities in developing countries. They provide loans for the education of young person’s studying in engineering, medical and other vocational institutes of higher learning. They advance loans to young entrepreneurs, medical and engineering graduates, and other technically trained persons in establishing their own business. Such loan facilities are being provided by a number of commercial banks in India. Thus the banks not only help inhuman capital formation but also in increasing entrepreneurial activities in developing countries.

7. Help in Monetary Policy:

The commercial banks help the economic development of a country by faithfully following the monetary policy of the central bank. In fact, the central bank 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 physical and human capital formation and by following the monetary policy of the country.

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