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9 Main Functions of Credit | Banks

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The following points highlight the nine main functions of credit. The functions are: 1. Economy in the use of money 2. Easy exchange and remittance 3. Helpful to production 4. Promotion of trade especially foreign trade 5. Expansion of bank credit 6. Financial accommodation to industries 7. Benefits to consumers 8. Credit to the government sector 9. Stability.

Function # 1. Economy in the use of money:

The credit system economises the use of metallic money and paper notes. The credit instruments like promissory notes, bills of exchange, cheques, credit cards, etc. are used in the modern society as money-substitutes, and so they have reduced the cost of issuing metallic money and paper notes. Likewise they have minimized or eliminated the risks and inconveniences involved in cash transactions.

Function # 2. Easy exchange and remittance:

The credit instruments minimize the cash transactions and thereby make the scope of exchange wider and the remittance of funds easier. They permit wealth to be transferred to places where more economic use can be made of it.

Function # 3. Helpful to production:

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The credit system facilitates large- scale pro­duction. It stimulates and finances production in anticipation of demand. Producers nowadays very often obtain credit from banks to begin and expand their operations. Even the farmers and the small artisans depend on bank credit for production. The wholesale and retail traders conduct their trading with bank credit.

It is rightly said that the credit system lubricates the production processes and keeps the wheels of production constantly moving. There is a steady flow of goods from the wholesaler to the retailer and from the latter to the consumer with the help of credit.

Function # 4. Promotion of trade especially foreign trade:

The bills of exchange have increased the scope of both internal and external trade as the trade- payments can now be made without the transfer of funds or gold. The commercial credit enables the buyers to make payments for the value received at convenient times. So, the credit system enables the traders to tide over periods of difficulty.

Function # 5. Expansion of bank credit:

The credit system enables the banks to create a large amount of credit out of a small amount of deposit. This has resulted in the vast expansion of bank deposits.

Function # 6. Financial accommodation to industries:

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Industries get short-term credit from foe commercial banks and the long-term credit from the development banks. This enables them not only to tide over the temporary financial stringency but also to maintain continuity in their activities.

Function # 7. Benefits to consumers:

Bank credit to the consumers enables them to buy durable consumer goods, especially household goods on installment basis.

Function # 8. Credit to the government sector:

The credit to the government also helps them to meet both temporary necessities and growth requirements.

Function # 9. Stability:

If the issue of credit is properly regulated, it tends to stabilise trade and reduce fluctuations in prices.

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