Role Of Commercial Banks In The Economic Development Of A Country

Monday 11th of April 2011 | By: Administrator | Views: 10092 | Comments: 0 | Rating: 3 Star Content3 Star Content3 Star Content3 Star Content3 Star Content |  

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Commercial banks play an important and active role in the economic development of a country. If the banking system in a country is effective’, efficient and disciplined, it brings about a rapid growth in the various sectors of the economy. The economic significance of commercial banks is given in brief.

(1) Banks promote capital formation. The commercial banks play an important role in rising of the financial resources. They encourage savings by giving various types of incentives to the savers. They expand branches of the banks in rural and urban areas and mobilize savings even at far of places. These savings are then made available to the businesses which make use of them for productive purposes in the country. The banks are, therefore, not only store houses of the country’s wealth, but also provide stream of resources necessary for economic development.

(2) Investment in new enterprises. Businessmen normally hesitate to invest their money in risky enterprises. The commercial banks generally provide short and medium term loans to entrepreneurs to invest in new enterprises and adopt new methods of production. The provision of timely credit increases the productive capacity of the economy.

(3) Promotion of trade and industry. With the growth of commercial banking in the 19th and 20th centuries, there is vast expansion in trade and industry. The use of bank draft, cheque, bill of exchange credit cards etc has revolutionized both national and international trade.

(4) Development of agriculture. The commercial banks, particularly in developing countries, are now providing credit for the development of agriculture and small scale industries in rural areas. The provision of credit to agriculture sector has greatly helped in raising agricultural productivity and income of the farmers. This has led to increased demand for industrial goods and expansion of industry.

(5) Balanced development of different regions. The commercial banks play an important role in achieving balanced in different regions of the country. They help in transferring surplus capital from developed regions to the less developing regions. The traders, industrialists etc of less developed regions are able to get adequate capital for meeting their business needs. This, in turn, increases investment, trade and production in the economy.

(6) Influencing economy activity. The banks can also influence the economic activity of the country through its influence on (a) availability of credit and (b) the rate of interest. If the commercial banks are able to increase the amount of money in circulation through credit creation or by lowering the rate of interest, it directly affects economic development. A low rate of interest can encourage investment. The credit creation activity can raise aggregate demand which leads to more production in the economy.

(7) Implementation of monetary policy. The central bank of the country controls and regulates volume of credit through the active cooperation of the banking system in the country. If helps in bringing price stability and promotes economic growth within shortest possible period to time.

(8) Monetization of the economy. The commercial banks by opening branches in the rural and backward areas are reducing the exchange of goods through barter. The use of money has now greatly increased the volume of production of goods. The non-monetized sector (barter economy) is now being converted into monetized sector with the help of commercial banks.

(9) Export promotion cells. In order to increase the exports of the country, the commercial banks have established export promotion cells. They provide information about general trade and economic conditions both inside and outside the country to its customers. The banks are, therefore, making positive contribution in the process of economic development.

Role of banks in 21st century.
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.

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