Role of Commercial Banks in a Developing Economy

In a developing economy such as India's, commercial banks are far more than convenient places to keep money — they are among the most powerful instruments available for accelerating economic growth. A developing economy is typically short of capital, has large idle savings scattered among small savers, and needs to channel resources into productive investment; the commercial bank is exactly the institution that can do this.

The main ways in which commercial banks help a developing economy are:

• Mobilising savings. By offering safe, interest-bearing deposits and spreading branches into villages and small towns, banks gather the small, scattered savings of the community that would otherwise lie idle, and make them available for investment.
• Capital formation. By turning these savings into loans and investments, banks finance the creation of factories, farms, roads and other productive capital — the essence of capital formation, on which growth depends.
• Financing agriculture. Banks provide crop loans, and finance for irrigation, seeds, fertiliser, machinery and rural development, raising farm productivity in an economy where a large part of the population depends on agriculture.
• Financing industry and trade. Banks supply working capital and term finance to large, medium and small industry, and credit to traders, keeping the wheels of commerce turning.
• Promoting balanced regional development. By opening branches and directing credit to backward and rural regions, banks help reduce the gap between developed and under-developed areas.
• Encouraging entrepreneurship and small industry. By financing small and new entrepreneurs, banks help create employment and broaden the base of ownership in the economy.
• Assisting priority and weaker sections. Directed lending to farmers, artisans, small traders and weaker sections helps make growth more inclusive.
• Implementing monetary policy. As the point through which the central bank's policy reaches the economy, commercial banks help control inflation and stabilise the economy by expanding or contracting credit as policy requires.
• Financing foreign trade. By dealing in foreign exchange and issuing letters of credit, banks finance the exports and imports on which a developing economy's growth partly depends. …