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AN ASSIGNMENT ON - ''THE ROLE OF

COMMERCIAL BANKS IN THE ECONOMIC


DEVELOPMENT OF THE COUNTRY''
SUBJECT: MT553-BANK MANAGEMENT

SUBMITTED BY- MBA/40007/18


KUNAL BHUI
INTRODUCTION
Commercial banks have always played an important position in the
country’s economy. They play a decisive role in the development of the
industry and trade. They are acting not only as the custodian of the
wealth of the country but also as resources of the country, which are
necessary for the economic development of a nation.
Commercial banks are one source of financing for small businesses.
The role of commercial banks in economic development rests chiefly on
their role as financial intermediaries.

ROLE OF COMMERCIAL BANKS IN THE ECONOMIC


DEVELOPMENT OF THE COUNTRY

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.

Channelizing the Funds to Productive Investment


Banks invest the savings mobilized by them for productive purposes.
Pooled savings should be distributed to various sectors of the economy
with a view to increase the productivity of the nation. Commercial
Banks aid the economic development of the nation through the capital
formed by them.
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.

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.

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.

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.
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.

Small Business
Commercial banks also finance business lending in a variety of ways. A
business owner may solicit a loan to finance the start-up costs of a small
business. Once funded, the small business may begin operations and
embark on a growth plan. The aggregate effect of small business activity
generates a significant portion of employment around the country.

Risk
One of the most significant roles of commercial banks in economic
development is as arbiters of risk. This occurs primarily when banks
make loans to businesses or individuals.

Wealth
Commercial banks also offer types of accounts to hold or generate
individual wealth. In turn, the deposits commercial banks attract with
account services are used for lending and investment. For example,
commercial banks commonly attract deposits by offering a traditional
menu of savings and checking accounts for businesses and individuals.
Similarly, banks offer other types of timed deposit accounts, such as
money market accounts and certificates of deposit.
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.

Financing Consumer
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.

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.

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.

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.
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 over-
emphasized. 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.

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