In this article we will discuss about the role of banks in the economic development of a country.
The banking system plays an important role in the modern economic world. Banks collect the savings of the individuals and lend them out to business- people and manufacturers. Bank loans facilitate commerce.
Manufacturers borrow from banks the money needed for the purchase of raw materials and to meet other requirements such as working capital. It is safe to keep money in banks. Interest is also earned thereby. Thus, the desire to save is stimulated and the volume of savings increases. The savings can be utilised to produce new capital assets.
Thus, the banks play an important role in the creation of new capital (or capital formation) in a country and thus help the growth process.
Banks arrange for the sale of shares and debentures. Thus, business houses and manufacturers can get fixed capital with the aid of banks. There are banks known as industrial banks, which assist the formation of new companies and new industrial enterprises and give long-term loans to manufacturers.
The banking system can create money. When business expands, more money is needed for exchange transactions. The legal tender money of a country cannot usually be expanded quickly. Bank money can be increased quickly and used when there is need of more money. In a developing economy (like that of India) banks play an important part as supplier of money.
The banking system facilitates internal and international trade. A large part of trade is done on credit. Banks provide references and guarantees, on behalf of their customers, on the basis of which sellers can supply goods on credit. This is particularly important in international trade when the parties reside in different countries and are very often unknown to one another.
Trade is also assisted by the grant of loans by discounting bills of exchange and in other ways. Foreign exchange transactions (the exchange of one currency for another) are also done through banks.
Finally, banks act as advisers, counsellors and agents of business and industrial organisations. They help the development of trade and industry.
There are special types of banks which provide facilities to different kinds of economic activities. Now-a-days in every country there is a central bank which controls the activities of all other banks, endeavours to keep the price level steady, and controls the rates of foreign exchange.