Role of Banking Sector in Economic Development PDF

Role of Banking Sector in Economic Development 1. Removing the deficiency of capital formation In any economy, economic development is not possible unless there is an adequate amount of capital formation. A sound banking system mobilizes small savings of the community and makes them avail...

Role of Banking Sector in Economic Development 1. Removing the deficiency of capital formation In any economy, economic development is not possible unless there is an adequate amount of capital formation. A sound banking system mobilizes small savings of the community and makes them available for investment in productive enterprises. Banks mobilise deposits by offering attractive rates of interest and thus convert savings into active capital. Otherwise that amount would have remained idle. 2. Helps in generating employment opportunity Banks helps in providing financial resources to industries and that helps in automatically generate employment opportunity. Infact, the Contribution of the banking sector to GDP is about 7.7% of GDP and Banking sector has generated employment for about 1.5 million people in the economy. 3. Financial assistance to Industries The commercial banks finance the industrial sector in a number of ways. They provide short-term, nedium-term and long-term loans to industry. The Industrial Development Bank of India is the main institution in India providing financial assistance to the industrial sector. It provides direct financial assistance to the industrial enterprises in the form of granting loans and  advances, and purchasing or underwriting the issues of stocks, bonds or debentures. 4. Promote saving Habits of the people Bank attracts dépositors by introducing safe and attractive deposit schemes and providing higher` rates of interest. These accounts are opened as per the requirements of customers such as current account, fixed deposit account, saving account and recurring account etc. 5. Financial assistance to Consumer Activities People in underdeveloped countries being poor and having low incomes do not have sufficient financial resources to buy durable consumer goods. The commercial banks advance loans to consumers for the purchase of such items as houses, furniture, refrigerators, etc. In this way, they also help in raising the standard of living of the people in developing countries by providing loans for consumption activities. 6. Helps in implementing Monetary Policy RBI depends upon the commercial banks for the successful implementation of its monetary policy keeping with requirements of economic development of its country. Thus, commercial banks contribute to the growth of a developing economy by granting loans to  agriculture, trade and industry, by helping in capital formation as per monetary policy. 7. Financial facilities for Trade The commercial banks help in financing both internal and external trade. Banks provide all types of facilities such as discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc. for promoting the trade. Moreover, they finance both exports and imports of developing countries by providing foreign exchange facilities to importers and exporters of goods. 8. Foreign Currency Loans Foreign currency loans are meant for setting up of new industrial projects. Banks help in providing loans for expansion, diversification, modernization or renovation of existing units. Banks also helps in financing import of equipment from abroad and/or technical knowhow. 9. Promotion of New Entrepreneurs Banks facilitate innovation by providing, venture capital, Special capital and Seed Capital to new and technically skilled entrepreneurs who lack financial resources of their own. 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, 10. Balanced Development With the spreading of banking activities to rural and semi urban areas, the banks have enabled transfer surplus capital from the developed regions to the less developed regions, where it is scarce and most needed. This reallocation of funds between different regions promotes economic development in underdeveloped areas of the country. 11. Financial assistance to agriculture sector They provide finance directly to agriculturists for developing land, providing irrigation facilities, for the modernization and mechanisation of their farms, marketing of their produce etc. They also provide financial resources for animal husbandry, dairy farming, sheep breeding, poultry farming, 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. 12. Government Spending They also act s an agent of the government. Commercial banks help fund government spending by purchasing bonds issued by the Department of the Treasury. Both long and short term Treasury bonds help finance government operations, programs and support deficit spending,.