Introduction
Commercial banks are
considered not merely as dealers in money but also the leaders in economic
development. They are not only the store houses of the country’s wealth but
also the reservoirs of resources necessary for economic development. They play
an important role in the economic development of a country. A well-developed
banking system is essential for the economic development of a country. The
“Industrial Revolution” in Europe in the 19th century would not have been
possible without a sound system of commercial banking. In case of developing
countries like India, the commercial banks are considered to be the backbone of
the economy. Commercial banks can contribute to a country’s economic
development in the following ways :
Capital formation is the
most important determinant of economic development. The basic problem of a
developing economy is slow rate of capital formation. Banks promote capital
formation. They encourage the habit of saving among people. They mobilize idle
resources for production purposes. Economic development depends upon the
diversion of economic resources from consumption to capital formation. Banks
help in this direction by encouraging saving and mobilizing them for productive
uses.
Commercial banks are a
very important source of finance and credit for industry and trade. Credit is a
pillar of development. Credit lubricates all commerce and trade. Banks become
the nerve center of all commerce and trade. Banks are instruments for
developing internal as well as external trade.
An underdeveloped economy
is characterized by the existence of a large non-monetized sector. The
existence of this non-monetized sector is a hindrance in the economic
development of the country. The banks, by opening branches in rural and
backward areas can promote the process of monetization (conversion of debt into
money) in the economy.
Innovations are an
essential prerequisite for economic development. These innovations are mostly
financed by bank credit in the developed countries. But in underdeveloped
countries, entrepreneurs hesitate to invest in new ventures and undertake
innovations largely due to lack of funds. Facilities of bank loans enable the
entrepreneurs to step up their investment on innovational activities, adopt new
methods of production and increase productive capacity of the economy.
Economic development need
an appropriate monetary policy. But a well-developed banking is a necessary
pre-condition for the effective implementation of the monetary policy. Control
and regulation of credit by the monetary authority is not possible without the
active co-operation of the banking system in the country.
Banks generally provide
financial resources to the right type of industries to secure the necessary
material, machines and other inputs. In this way they influence the nature and
volume of industrial production.
Underdeveloped economies
are primarily agricultural economies. Majority of the population in these
economies live in rural areas. Therefore, economic development in these
economies requires the development of agriculture and small scale industries in
rural areas. So far banks in underdeveloped countries have been paying more
attention to trade and commerce and have almost neglected agriculture and
industry. Banks must provide loans to agriculture for development and modernization of agriculture. In recent years, the State Bank of India and
other commercial banks are granting short term, medium-term and long-term loans
to agriculture and small-scale industries.
Banks can also play an
important role in achieving balanced development in different regions of the
country. They transfer surplus capital from the developed regions to the less
developed regions, where it is scarce and most needed. This reallocation of
funds between regions will promote economic development in underdeveloped areas
of the country.
Industrial development
needs finance. In some countries, commercial banks encouraged industrial
development by granting long-term loans also. Loan or credit is a pillar to
development. In underdeveloped countries like India, commercial banks are
granting short-term and medium-term loans to industries. They are also
underwriting the issue of shares and debentures by industrial concerns. This
helps industrial concerns to secure adequate capital for their establishment,
expansion and modernization. Commercial banks are also helping manufacturers to
secure machinery and equipment from foreign countries under instalment system
by guaranteeing deferred payments. Thus, banks promote or encourage industrial
development.
The businessmen are more
afraid of a banker than a preacher. The businessmen should have certain
business qualities like industry, forethought, honesty and punctuality. These qualities
are called “commercial virtues” which are essential for rapid economic
progress. The banker is in a better position to promote commercial virtues.
Banks are called “public conservators of commercial virtues.”
In recent years,
commercial banks, particularly in developing countries, have been called upon
to help achieve certain socio-economic objectives laid down by the state. For
example, nationalized bank in India have framed special innovative schemes of
credit to help small agriculturists, self-employed persons and retailers
through loans and advances at concessional rates of interest. Banking is thus
used to achieve the national policy objectives of reducing inequalities of
income and wealth, removal of poverty and elimination of unemployment in the
country.
The businessmen are more
afraid of a banker than a preacher. The businessmen should have certain
business qualities like industry, forethought, honesty and punctuality. These
qualities are called “commercial virtues” which are essential for rapid
economic progress. The banker is in a better position to promote commercial
virtues. Banks are called “public conservators of commercial virtues.”
In recent years,
commercial banks, particularly in developing countries, have been called upon
to help achieve certain socio-economic objectives laid down by the state. For
example, nationalized bank in India have framed special innovative schemes of
credit to help small agriculturists, self-employed persons and retailers
through loans and advances at concessional rates of interest. Banking is thus
used to achieve the national policy objectives of reducing inequalities of
income and wealth, removal of poverty and elimination of unemployment in the
country.
Thus, banks in a
developing country have to play a dynamic role. Economic development places
heavy demand on the resources and ingenuity of the banking system. It has to
respond to the multifarious economic needs of a developing country. Traditional
views and methods may have to be discarded. “An Institution, such as the
banking system, which touches and should touch the lives of millions, has necessarily
to be inspired by a larger social purpose and has to subservice national
priorities and objectives.” A well-developed banking system provides a firm and
durable foundation for the economic development of the country.
From the above
discussion, undoubtedly, we can say that, commercial banks form the most
important part of financial intermediaries. It accepts deposits from the
general public and extends loans to the households, firms and the government.
Banks form a significant part of the infrastructure essential for breaking
vicious circle of poverty and promoting economic growth.