Role of Commercial Banks - Financial Institutions, Financial Markets and Institutions | Financial Markets and Institutions - B Com PDF Download

Role # 1. Mobilising Savings for Capital Formation:

People in developing countries have low incomes but the banks induce them to save by introducing variety of deposit schemes to suit the needs to individual depositors.

To mobilize dormant savings and to make them available to the entrepreneurs for productive purposes, the development of a sound system of commercial banking is essential.

Role # 2. Existence of a Large Non-monetized Sector:

A developing economy is characterized by the existence of a large non-monetized sector, particularly, in the backward and inaccessible areas of the country. The existence of this non-monetized sector is a hindrance in the economic development of the country. The banks by opening branches in rural and backward areas can promote the process of monetization in the economy.

Role # 3. Financing Industrial Sector:

Commercial Banks provide short-term and medium- term loans in the industry. In India, they undertake financing of small scale industries and also provide hire-purchase finance. These banks not only provide finance for industry but also help in developing the capital market which is underdeveloped in such countries.

Role # 4. They Help in Monetary Policy:

The Commercial Banks help the economic develop­ment of a country by following the monetary policy of the Central Bank. The Central Bank is dependent upon those Commercial Banks for the success of the monetary management in keeping with requirements of a developing economy.

Role # 5. Commercial Banks Help in Financing Internal and External Trade:

The banks provide loans to wholesalers and retailers to stock goods in which they deal. They also help in the movement of goods from one place to another by providing all types of facilities such as discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts etc. They help by giving finance both exports and imports of developing countries.

Role # 6. Provision for Long-term Finance for the Improvement of Agriculture:

Normally, commercial banks grant short-term loans to the trade and industries in developed countries. But in developing countries new businesses and improvement in agriculture need long-term loans for proper development. Therefore, the commercial banks should change their policies in favour of granting long-term loans to trade and industries.

Role # 7. They Help in Financing various Consumers’ Activities:

People in developing countries do not possess sufficient financial resources to buy costlier goods like house, scooter, refrigerator etc. They help by giving loans to purchase these items which raises the standard of living of the people in developing countries

Role # 8. Need for Sound Banking System:

For the improvement of the banking system in a developing country the following points need special stress:

(i) In developing countries, there should be proper facility of cheap remittance facilities to enable the movement of funds from one place to another, so as to meet the requirements of trade and industry.

(ii) It should always be remembered that in developing countries loans should be given for productive purposes only and not for consumption and speculative purposes.

(iii) It will be better and encouraging if long-term credit is given to agriculture and small scale industries.

(iv) The use of cheques, drafts etc. is popularized among the people.

If the above written facts are taken into consideration commercial banks can play a useful role in promoting the economic development in developing countries.