Question

Explain the role of Commercial Banks in economic development.

Answer 1

Role of Commercial Banks in Economic Development of a Country Role of Commercial Banks:

1. Capital Formation
2. Creation of Credit
3. Channelizing the funds
4. Encouraging Rights Type of Industries
5. Banks Monetize Debt
6. Finance to Government
7. Employment Generation
8. Bank Promote Entrepreneurship

1. Capital Formation:

1. Banks play an important role in capital formation, which is essential for the economic development of a country.
2. They mobilize the small savings of the people scattered over a wide area through their network of branches all over the country and make it available for productive purposes.

2. Creation of Credit:

1. Banks create a credit for the purpose of providing more funds for development projects.
2. Credit creation leads to increased production, employment, sales, and prices and thereby they bring about faster economic development.

3. Channelizing the Funds towards Productive Investment:

1. Banks invest the savings mobilized by them for productive purposes.
2. Capital formation is not the only function of commercial banks.

4. Encouraging Right Type of Industries:

1. Many banks help in the development of the right type of industries by extending loans to the right type of persons.
2. In this way, they help not only for industrialization of the country but also the economic development of the country.
3. They grant loans and advances to manufacturers whose products are in great demand.

5. Banks Monetize Debt:

1. Commercial banks transform the loan to be repaid after a certain period into cash, which can be immediately used for business activities.
2. Manufacturers and wholesale traders cannot increase their sales without selling goods on a credit basis.

6. Finance to Government:

1. The government is acting as the promoter of industries in underdeveloped countries for which finance is needed it.
2. Banks provide long–term credit to the Government by investing their funds in Government securities and short-term finance by purchasing Treasury Bills.

7. Employment Generation:

1. After the nationalization of big banks, the banking industry has grown to a great extent.
2. Bank’s branches are opened frequently, which leads to the creation of new employment opportunities.

8. Banks Promote Entrepreneurship:

• In recent days, banks have assumed the role of developing entrepreneurship particularly in developing countries like India by inducing new entrepreneurs to take up well-formulated projects and provides counseling services like technical and managerial guidance.