Role of Commercial Banks in Development

manipulation of mer basetile message rims in growth. INTRODUCTION A m aneymaking(prenominal) confide is something with which twain(prenominal) one of us is well k right awayn. However diverse entrusters and economists obligate defined it in a dispa put way correspond to Kent An organization whose principal trading operations atomic number 18 concerned with the accumulation of the temporarily idle funds of the general public for the purpose of go to new(prenominal)s for expenditure. accord to Banking Companies Ordinance 1962 Banking means the birthing for the purpose of instituteing or expend of puts of money from the public re break competent in assume or otherwisewise and withdraw-able by cheque, draft order or otherwise. Various economists have polar views most the federal agency of commercial banks in stinting ontogenesis. Schumpeter says,It is the banking administration which serves as a key agent a eagle-eyed with the entrepreneur in the accomp lish of scotch development. According toProf. Cameronin his Banking and Economic Development, a banking system may concord a collateral contri entirelyion to scotch fruit and development. Evolution of commercial Banks The foundation for building a considerable base of boorish impute structure was laid by the track of the All-India Rural Credit Survey (AIRCS) of 1954. The provision of cultivator reliance in 1951-52 was less(prenominal) than 1% for commercial banks. In the report it was observed that agricultural reference fell short of the right quantity, was not of the right subject, did not fit the right purpose and often failed to go to the right people.With a view to achieve an impetus to commercial banks, particularly, in the sphere of enthronement address, the nationalization of the Imperial Bank of India and its re-designation as the State Bank of India (SBI) was recommended. addition in Outreach 1951-91 From the position prevalent in 1951-52, commercial banks came a long way with a real spread of 32,224 branches in homespun and semi-urban beas comprising 68% of their center outlets as on 31 M emissionh 1991. The corking deposits of much(prenominal) branches at Rs. 7,855 crores as on the same date constituted nearly 35% of their total deposits, while loans outstanding at Rs. 43,797 crore comprised 36% of outstanding acknowledgment. The agricultural advances of the commercial banking system aggregated Rs. 16,687 crore and constituted 14% of total advances in March 1991. The folksy and semi-urban branches of commercial banks covered 17. 6 crore deposit accounts while the do of loan accounts serviced aggregated 3. 7 crore. Growth during 1991-92 to 2003-04 The accomplishment since 1991-92 has seen a fairly rapid expansion of credit to f encounterory farm.Available data advise that the full point of credit to agriculture by commercial banks and RRBs taken in concert gaind to Rs. 60,022 crore in 2003-04. This implies a compounde d annual result rate of 22. 2%. In fact, as compared with commercial banks (including RRBs), the flow of credit from the concerted sphere of influence was much diminisher through this decimal point. The compounded annual appendage rate of credit for agriculture from cooperative institutions was only 13. 7%. Further, the similarity of agriculture credit to total credit came grim beca wont of the rapid growth in non agriculture credit.The Government took some major initiatives during the pointedness to elevate agriculture merchandise and productivity through enhanced credit flow and by way of building agricultural infrastructure, particularly irrigation and connectivity in hobnailed areas. Special Agricultural Credit Plan (SACP) was introduced by RBI for humans area commercial Banks in 1994-95. Credit growth for agriculture and affiliate sectors under this caption reflected a CAGR of 36. 45% during 2001-02 to 2005-06. SACP has since been extended to Private Sector mone ymaking(prenominal) Banks from 2005-06.The SHG Bank Linkage Programme was started as a fender project by NABARD in 1992. It led to the evolution of a clan of RBI approved guidelines to banks to enable SHGs to transact with banks. Initially there was slow progress in the programme up to 1999 as only 32,995 groups were credit linked during the period 1992 to 1999. Since then the programme has been growing rapidly and the additive number of SHGs financed increased from 4. 61 lakhs on 31 March 2002 to 10. 73 lakhs on 31 March 2004 and further to 29. 25 lakh groups as on 31 March 2007.Rural Infrastructure Development Fund (RIDF) was set-up in NABARD by GoI during 1995-96 with an initial corpus of Rs. 2000 crore, to accelerate the 47 completion of on-going projects of rural infrastructure. Banks which did not fulfill the priority sector credit requirement and agriculture credit mandate were required to contribute to this Fund. The fund has been strengthened every year with additional allocations in the Union Budget. A large number of irrigation and rural connectivity projects could get completed under RIDF. RBI carapaced down its contribution to the Rural Credit funds with NABARD to a token meter of Rs. crore per annum since 1993-94. However to enable NABARD to have reasonably strong leverage for accessing grocery funds, the share superior of NABARD was strengthened and increased to Rs. 2000 crore (paid up) from Rs. 100 crore at the metre of its formation in 1982. Contributions to enhanced share capital have set out from GoI and RBI. By prudent funds management, the institution has also built a strong base of reserves and has been using it in its business operations judiciously to intimidate lending rates to rural financial institutions at significantly lower than market costs. Developments Post 2003-04Since 2003-04, there has been a substantial increase in the flow of credit to agriculture through commercial banks. Disbursements have increased from Rs. 52,441 crore in 2003-04 to Rs. 1,16,447 crore in 2005-06, reaching an annual growth of 43% each year. As envisaged in the GoIs strategy for doubling of credit, 95 lakh new farmers have been brought under the institutional congregating and 1,383 agri-clinics opened. Commercial banks have also executeed a major berth in the promotion of the SHG bank linkage movement with more than 11. 88 lakh groups being linked to banks for provision of credit.Reforms in the commercial banking system include removal of procedural and transactional bottlenecks including elimination of Service Area Approach, cut back margins, redefining overdues to coincide with crop cycles, new debt restructuring policies, one sequence settlement and eternal rest measures for farmers indebted to non-institutional sources. Banks play a vital role in the economical development of a country. They accumulate the idle nest egg of the people and educate them available for arrangement. They also relieve oneself new demand deposits in the figure out of granting loans and purchasing investment ecurities. They facilitate swop both inside and out of doors the country by accepting and discounting of bills of exchange. Banks also increase the mobility of capital. They win a variety of facilities for remitting a large choose sense of money from one smirch to other(prenominal) by the transfer of a mere slip of paper. Commercial banks play an valuable and active role in the economic development of a country, if the banking system in a country is effective, economic and train it brings about a rapid growth in the various sectors of the economy. The Functions of Commercial BanksIn the modern world, banks perform such a variety of functions that it is not executable to make an all-inclusive list of their functions and services. However, some basic functions per organise by the banks are discussed infra. 1. AcceptingDeposits The first important function of a bank is to accept deposits fro m those who can save but cannot profitably utilize this saving themselves. wad consider it more rational to deposit their savings in a bank beca subprogram by doing so they, on the one hand, earn occupy, and on the other, avoid the danger of theft.To attract savings from all sorts of individuals, the banks maintain different types of accounts (i) Fixed Deposit look property in these accounts is deposited for better period of meter (say one, two, or five years) and cannot be withdrawn before the termination of that period. The rate of spare-time activity on this account is higher than that on other types of deposits. The longer the period, the higher will be the rate of pastime. Fixed deposits arc also called time deposits or time liabilities. (ii) Current Deposit Account These accounts are generally maintained by the swaprs and businessmen who have to make a number of generatements every day.Money from these accounts can be withdrawn in as many times and in as much add u p as desired by the depositors. Normally, no interest is paid on these accounts rather, the depositors have to wage reliable incidental charges to the bank for the services rendered by it. Current deposits are also called demand deposits or demand liabilities. (iii) parsimony Deposit Account The aim of these accounts is to throw out and mobilise small savings of the public. Certain restrictions are imposed on the depositors regarding the number of withdrawals and the step to be withdrawn in a given period.Cheque facility is provided to the depositors. Rate of interest paid on these deposits is low as compared to that on fixed deposits. (iv) revenant Deposit Account The purpose of these accounts is to encourage regular savings by the public, particularly by the fixed income group. generally money in these accounts is deposited in monthly installments for a fixed period and is repaid to the depositors along with interest on maturity. The rate of interest on these deposits is near ly the same 3s on fixed deposits. (v) Home Safe Account Home safe account is another scheme aiming at promoting saving habits among the people.Under this scheme, a safe is supplied to the depositor to keep it at home and to put his small savings in it. Periodically, the safe is taken to the bank where the measurement of safe is credited to his account. 2. Advancingof loans The second important function of a bank is advancing of loans to the public. After keeping certain cash reserves, the banks lend their deposits to the needy borrowers. Before advancing loans, the banks satisfy themselves about the credits worthness of the borrowers. Various types of loans granted by the banks are discussed below (i) Money at CallSuch loans are very short period loans and can be called back by the bank at a very short notice of say one day to xiv days. These loans are generally made to other banks or financial institutions. (ii) notes Credit It is a type of loan, which is given to the borrower ag ainst his current assets, such as shares, stocks, bonds, etc. Such loans are not based on ain security. The bank opens the account in the name of the borrowers and allows him to withdraw borrowed money from time to time up to a certain limit as contumacious by the value of his current assets.Interest is charged only on the amount actually withdrawn from the account. (iii) Overdraft Sometimes, the bank provides overdraft facilities to its customers though which they are allowed to withdraw more than their deposits. Interest is charged from the customers on the overdrawn amount. (iv) Discounting of Bills of Exchange This is another popular type of lending by the modern banks. through with(predicate) this method, a holder of a bill of exchange can get it discounted by the bank. In a bill of exchange, the debtor accepts the bill drawn upon him by the creditor(i. e,holder of the bill) and agrees to repair the amount mentioned on maturity.After making some marginal deductions (in the form of commission), the bank pays the value of the bill to the holder. When the bill of exchange matures, the bank gets its payment from the party, which had certain the bill. Thus, such a loan is self-liquidating. (v)Term Loans The banks have also started advancing medium-term and semipermanent loans. The maturity period for such loans is more than one year. The amount sanctioned is both paid or credited to the account of the borrower. The interest is charged on the entire amount of the loan and the loan is repaid either on maturity or in installments. . Credit Creation A unique function of the bank is to create credit. In fact, credit humanity is the natural outcome of the process of advancing loan as adopted by the banks. When a bank advances a loan to its customer, it does not lend cash but opens an account in the borrowers name and credits the amount of loan to this account. Thus, whenever a bank grants a loan, it creates an equal amount of bank deposit. Creation of such d eposits is called credit institution which results in a wage increase in the money stock of the economy.Banks have the ability to create credit many times more than their deposits and this ability of multiple credit grounding depends upon the cash-reserve ratio of the banks. 4. Promoting Cheque System Banks also render a very useful medium of exchange in the form of cheques. Through a cheque, the depositor directs the bankers to make payment to the payee. Cheque is the most developed credit instrument in the money market. In the modern business transactions, cheques have become much more convenient method of settling debts than the use of cash. 5. Agency FunctionsBanks also perform certain agency functions for and on behalf of their customers (i) absolution of Funds Banks tending their customers in transferring funds from one place to another through cheques, drafts, etc. (ii) Collection and Payment of Credit Instruments Banks collect and pay various credit instruments kindred cheques, bills of exchange, promissory notes, etc. (iii) Execution of stand Orders Banks break away the standing instructions of their customers for making various periodic payments. They pay subscriptions, rents, insurance premium, etc. on behalf of their customers. (iv) Purchasing and Sale of SecuritiesBanks get down bargain for and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers. Banks neither give any advice to their customers regarding these investments nor levy any charge on them for their service, but scarcely perform the function of a broker. (v) Collection of Dividends on Shares Banks collect dividends, interest on shares and debentures of their customers. (vi) Income Tax Consultancy Banks may also employ income-tax experts lo prepare income-tax returns for their customers and to help them to get refund of income-tax. (vii) Acting as Trustee and ExecutorBanks preserve the wills of their customers and execute them aft er their death. (viii) Acting as Representative and Correspondent Sometimes the banks act as representatives and correspondents of their customers. They get passports, travelers tickets, book vehicles, plots for their customers and receive letters on their behalf. 6. General Utility Function In addition to agency services, the modern banks provide many general utility services as given below (i) Locker Facility Banks provide locker facility to their customers. The customers can keep their valuables and important documents in these lockers for safe custody. ii) Travellers Cheques Banks issue travellers cheques to help their customers lo travel without the fear of theft or loss of money. With this facility, the customers need not take the assay of carrying cash with them during their travels. (iii) Letter of Credit Letters of credit are issued by the banks to their customers certifying their creditworthiness. Letters of credit are very useful in exotic trade. (iv) Collection of Stat istics Banks collect statistics giving important information relating to industry, trade and commerce, money and banking.They also publish journals and bulletins containing research articles on economic and financial matters. (v) Underwriting Securities Banks guarantee the securities issued by the government, public or private bodies. Because of its full faith in banks, the public will not hesitate in buying securities carrying the signatures of a bank. (vi) Gift Cheques Some banks issue cheques of various denominations (say of Rs. 11, 21, 31, 51. 101, etc. ) to be use on auspicious occasions. (vii) Acting as Referee Banks may be referred for seeking information regarding the financial position, business reputation and respectability of their customers. viii) extraneous Exchange Business Banks also deal in the business of contrasted currencies. Again, they may finance foreign trade by discounting foreign bills of exchange. Role of Commercial Banks In Economic Development Of A Coun try Commercial banksplay 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 robust purposes in the country. The banks are, therefore, not only store houses of the countrys wealth, but also provide stream of resources necessary for economic development. (2) Investment in new enterprises.Businessmen normally hesitate to invest their money in unsound 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 development 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 exploitation regions.The traders, industrialists etc of less developed regions are able to get adequate capital for confrontation their business needs. This, in turn, increases investment, trade and production in the economy. (6) Influencing economy activity. The banks can also find out 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. Which finally increases the growth of the nation. (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 indoors 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 helpof commercial banks. (9) export promotion cells. In order to increase the exports of the country, the commercial banks have constituted 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 a la mode(p) 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 mettle 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. CONCLUSIONCommercial 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 countrys 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 congenital for the economic development of a country. The Industrial Revolution in europium 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.The Banking Sector has for centuries now formed one of the pillars of economic prosperity. Indeed history provides us with some kickoff information regarding how banks provided finance for imperialist ventures in newly acquired colonies. Over time banks have formed an important part in providing an avenue for both savings and investments. Land, Labor, capital and entrepreneurs are the basic economic resources available to business. However, to make the use of these resources, a business requires finance to purchase of the land, hire labor, pay for capital goods and pay for individuals with specialized skills.The commercial banks provide capital, technical economic aid and other facilities to businessmen according to their need, which leads to development in trade. Commercial banks finance the most important sector of the developing economics i. e. agriculture, short, medium and long-term loans are provided for the purchase of seeds and fertilizer, installation of tube wells, construction of warehouses, purchase of tractor and thresher etc. Commercial banks help in increase the rate of capital formation in a country. Capital formation means increase in number of production units, technology, plant and machinery.They finance the projects responsible for increasing the rate of capital formation. Commercial banks help the traders of two different countries to undertake business. Letter of credit is issued by the importers bank to the exporters to ensure the payment. The banks also arrange foreign exchange. Commercial banks provide the facility of transferring funds from one place to another which leads to the growth of trade. The commercial banks financed the impartation sector. It has reduced unemployment on one hand and increased the transport facility on the other hand. Remote areas are linked to main markets through developed transport system.These are the few ways in which the commercial banks had helped in developing the economy of a country. BIBLIOGRAPHY * Samuelson Norhaus, economics, eighteenth edn, Tata McGraw Hill Publishing Co. Ltd. , 2008 * Xam idea, economics, F K Publication, 2009 * Chitta Ranjan Basu, Commercial Banking in the Planned sparing of India, Mittal Publications, 1991 * N. Gregory Mankiw, Principles of Economics, cengage learning, 2012 * www. preservearticles. com 2 . N. Gregory Mankiw, Principles of Economics, cengage learning, 2012 3 . www. bankingsector. co. in 4 .N. Gregory Mankiw, Principles of Economics, cengage learning, 2012 5 . Xam idea, economics. 6 . N. Gregory Mankiw, Principles of Economics, cengage learning, 2012 7 . www. preservearticles. com 8 . www. ehow. com 9 . Samuelson Norhaus, economics, 18th edn, Tata McGraw Hill Publishing Co. Ltd. , 2008 10 . Chitta Ranjan Basu, Commercial Banking in the Planned Economy of India 11 . Samuelson Norhaus, economics, 18th edn, Tata McGraw Hill Publishing Co. Ltd. , 2008 12 . www. ehow. com 13 . N. Gregory Mankiw, Principles of Economics, cengage learning, 2012 14 . www. preservearticles. com