Q. 245.0( 2 Votes )

How do banks play an important role in the economy of India? Explain.

Answer :

Banks play a very crucial role in the country’s economic development. Banks are the only link between the savers and investors. Banks accept the excess savings from the people, and they lend to investors after keeping a fraction of ratio with the central bank. The producers and manufacturer borrow the money from the bank, and they invest the amount in their business. They will expand the business, or they will create new enterprises in which a number of people will be employed which will, in turn, increase the employment opportunity. The banks provide the interest for the deposit we keep in the bank which is better than holding the cash in hand. But the lending rate of interest will always higher than saving interest because that is the only profit for the bank. The new investments will create new capital formations, employment, and infrastructure and so on. The importance of the banking system through further points is discussed below:

Credit creation


One of the main functions of the banking system is credit creation. It is the banks that create credit for the producers to invest in the economy. The banks make the credit available by accepting the deposit from the people. The investment of the investors makes the economy better off, and investment is made available by the bank.


Capital formation


The essential part of economic development is capital formation which can be efficiently done by the banking system. Capital formation means the increase in the capital stock of the country. Capital stock is one of the indicators that will provide the growth of the country.


Transfer the fund from unproductive to productive channel


Banks help transfer the fund which is kept ideal with people as excess money to investment which is a productive channel. The saving is pulled from the various sources to increase the productivity of the economy.


Governments bank


The government gets a loan for introducing new schemes and financing debt from the Reserve Bank of India (RBI). The RBI acts as a bank for the government for proposing the developmental activities.


Special banks


Modern banking has emerged with a wide range of network throughout the country. There are some banks which are specialized for some sectors of the economy such as National Bank for Agriculture and Rural Development (NABARD) which is especially for agriculture and rural development, Industrial Development Bank of India (IDBI) which is only for industrial development and so on. These type of sector banks concentrate on their sectors activities which lead to growth in all the sectors simultaneously.


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