INTRODUCTION:-

Every country needs the services of financial institutions for

accelerating the pace of development. Commercial banks have played
a critical role in the economic development of a country. Now a day’s
commercial banks are important not just from the point of view of
economic growth, but also financial stability. In emerging economies,
commercial banks are special for three important reasons. First, they
take a leading role in developing other financial intermediaries and
markets. Second, due to the absence of well-developed equity and
bond markets, the corporate sector depends heavily on banks to meet
its financing needs. Finally, in emerging markets such as India,
commercial banks cater to the needs of a vast number of savers from
the household sector, which prefer assured income and liquidity and
safety of funds, because of their inadequate capacity to manage
financial risks.

Forms of banking have changed over the years and evolved with the
needs of the economy. The transformation of the banking system has
been brought about by deregulation, technological innovation and
globalization. While banks have been expanding into areas which
were traditionally out of bounds for them, non-bank intermediaries
have begun to perform many of the functions of commercial banks.
Thus compete not only among themselves, but also with non-bank
financial intermediaries, and over the years, this competition has only
grown in intensity. Globally, this has forced the commercial banks to
introduce innovative products, seek newer sources of income and
diversify into non-traditional activities.

The commercial bank primarily lending and borrowing of money,

accepted deposit from the public and payable on demand and
withdrawn able by cheque, draft etc. They provide and maintained
different type of account like current account, saving account, and
fixed deposit and also provide different type of loan, cash credit etc.
They help the new class of entrepreneur to setting up their enterprise
and different type of facilities for lending money such as e-banking
facilities, credit card, debit card, ATM card etc.

OBJECTIVES OF COMMERCIAL BANK IN ECONOMIC

DEVELOPMENT:-
To Know helpful in Mobilisation of Savings and Capital Formation.
To Know helpful in Innovations.
To Know helpful in the Effective Implementation of Monetary Policy.
To Know helpful in Productive activities and Exports.
To Know helpful in the Development of Priority Sectors.

SIGNIFICENT:-
Commercial banks play a significant role in economic development of
developing countries like India. It has become an essential part of our
working life. It provides accelerating the Rate of Capital Formation for
economic growth of our country, short and medium term loans to
entrepreneurs to invest in new enterprises and adopt new methods of
production, promotion of trade and industry, providing credit for
development of agriculture and small scale industries in rural areas. It
can also influence the economic activity of the country through its
influence on- a. Availability of credit, b. The rate of interest
Commercial banks by opening branches in the rural and backward
areas are reducing the exchange of goods through barter. The
commercial banks are now not confined to local banking. They are
fast changing into global banking i.e., understanding the global
customer, using latest information technology, competing in the open
market with high technology system, changing from domestic banking
to investment banking etc. The commercial banks are now considered
the nerve centre of all economic development in the country. The use
of online banking is now on the increase. It has brought revolution in
banking industry.
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. 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 bangladesh, 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. Capital Formation :

Banks play an important role in capital formation, which is essential for the
economic development of a country. 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.

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.

Now-a-days, banks offer very attractive schemes to attract the people to save
their money with them and bring the savings mobilized to the organized money
market. If the banks do not perform this function, savings either remains idle or
used in creating assets, which are low in scale of plan priorities.

8. Creation of Credit

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

9. Channelizing the Funds to Productive Investment

Banks invest the savings mobilized by them for productive purposes. Capital
formation is not the only function of commercial banks. Pooled savings should
be distributed to various sectors of the economy with a view to increase the
productivity of the nation. Then only it can be said to have performed an
important role in the economic development of the nation.

Commercial Banks aid the economic development of the nation through the
capital formed by them. In India, loan lending operation of commercial banks
subject to the control of the RBI. So our banks cannot lend loan, as they like.

10. Fuller Utilization of Resources

Savings pooled by banks are utilized to a greater extent for development
purposes of various regions in the country. It ensures fuller utilization of
resources.

11. Encouraging Right Type of Industries

The banks help in the development of the right type of industries by extending
loan to right type of persons. In this way, they help not only for industrialization
of the country but also for the economic development of the country. They grant
loans and advances to manufacturers whose products are in great demand. The
manufacturers in turn increase their products by introducing new methods of
production and assist in raising the national income of the country.

12. Bank Rate Policy

Economists are of the view that by changing the bank rates, changes can be
made in the money supply of a country. In our country, the RBI regulates the
rate of interest to be paid by banks for the deposits accepted by them and also
the rate of interest to be charged by them on the loans granted by them.

13. Bank Monetize Debt

Commercial banks transform the loan to be repaid after a certain period into
cash, which can be immediately used for business activities. Manufacturers and
wholesale traders cannot increase their sales without selling goods on credit
basis. But credit sales may lead to locking up of capital. As a result, production
may also be reduced. As banks are lending money by discounting bills of
exchange, business concerns are able to carryout the economic activities without
any interruption.

8. Finance to Government

Government is acting as the promoter of industries in underdeveloped

countries for which finance is needed for it. Banks provide long-term credit to
Government by investing their funds in Government securities and short-term
finance by purchasing Treasury Bills.

9. Bankers as Employers

After the nationalization of big banks, banking industry has grown to a great
extent. Bank’s branches are opened in almost all the villages, which leads to the
creation of new employment opportunities. Banks are also improving people for
occupying various posts in their office.

10. Banks are Entrepreneurs

In recent days, banks have assumed the role of developing entrepreneurship

particularly in developing countries like India. Developing of entrepreneurship
is a complex process. It includes the formation of project ideas, identification of
specific projects suitable to local conditions, inducing new entrepreneurs to
take up these well-formulated projects and provision of counseling services like
technical and managerial guidance.

Banks provide 100% credit for worthwhile projects, which is also technically
feasible and economically viable. Thus commercial banks help for the
development of entrepreneurship in the country.
Commercial banks play an important role in the financial system and
the economy. As a key component of the financial system, banks
allocate funds from savers to borrowers in an efficient manner. They
provide specialized financial services, which reduce the cost of
obtaining information about both savings and borrowing opportunities.
These financial services help to make the overall economy more
efficient.

Imagine a World Without Banks

 One way to answer your question is to imagine, for a moment, a world
without banking institutions, and then to ask yourself a few questions.
This is not just an academic exercise; many former eastern-block
nations began facing this question when they began to create financial
markets and develop market-oriented banks and other financial
institutions.

If there were no banks…

 Where would you go to borrow money?

 What would you do with your savings?
 Would you be able to borrow (save) as much as you need, when you
need it, in a form that would be convenient for you?
 What risks might you face as a saver (borrower)?

How Banks Work

Banks operate by borrowing funds-usually by accepting deposits or by

borrowing in the money markets. Banks borrow from individuals,
businesses, financial institutions, and governments with surplus funds
(savings). They then use those deposits and borrowed funds (liabilities
of the bank) to make loans or to purchase securities (assets of the
bank). Banks make these loans to businesses, other financial
institutions, individuals, and governments (that need the funds for
investments or other purposes). Interest rates provide the price
signals for borrowers, lenders, and banks.

Through the process of taking deposits, making loans, and responding

to interest rate signals, the banking system helps channel funds from
savers to borrowers in an efficient manner. Savers range from an
individual with a $1,000 certificate of deposit to a corporation with
millions of dollars in temporary savings. Banks also service a wide
array of borrowers, from an individual who takes a loan of $100 on a
credit card to a major corporation financing a billion-dollar corporate
merger.

The table below provides a June 2001 snapshot of the balance sheet
for the entire U.S. commercial banking industry. It shows that the bulk
of banks' sources of funds comes from deposits - checking, savings,
money market deposit accounts, and time certificates. The most
common uses of these funds are to make real estate and commercial
and industrial loans. Individual banks' asset and liability composition
may vary widely from the industry figures, because some institutions
provide specialized or limited banking services.
Banks Are Only One Type of Financial Intermediary
Finally, the U.S. financial services industry and financial markets are
highly developed. In recent decades, many new products and services
have been created, as well as new financial instruments and
institutions. Today, in addition to banks, there are several other
important types of financial intermediaries. These include savings
institutions, credit unions, insurance companies, mutual funds,
pension funds, finance companies, and real estate investment trusts
(REITS).

Banks' assets have grown in recent decades in absolute terms;

however, banks have tended to lose market share to even faster
growing intermediaries such as pension funds and mutual funds. Still,
banks continue to account for a significant share-over 23 percent-of
the assets of all financial intermediaries at the end of year 2000, as
the chart below shows.
 4rth
CONCLUSION:
Over a significantly long period of time, countries embarking on a
process of development within the framework of mixed, capitalist
economies have sought to use the developing banking function,
embedded in available or specially created institutions, to further their
development goals. The role of these institutions in the development
trajectories of late industrializing, developing countries cannot be
overemphasized. However, as noted above, with financial liberalization
of the neoliberal variety transforming financial structures, some
countries are doing away with specialized development banking
institutions on the grounds that equity and bond markets would do the
job. This is bound to lead to a shortfall in finance for long-term
investments, especially for medium and small enterprises. Fortunately,
there are some countries such as Brazil that have thus far not opted for
this trajectory.