The following points highlight the role of commercial banks in developing the economy. The roles are: 1. Accelerating the Rate of Savings and Capital Formation 2. Mobilisation of Resources and Granting of Adequate Credit for Development 3. Credit for the Priority Sectors 4. Involvement in Development Planning 5. Strengthening Institutional Facilities 6. Promoting Growth with Stability.
Role # 1. Accelerating the Rate of Savings and Capital Formation:
A developing economy requires a higher rate of savings and capital formation. Banks can play a significant role in stimulating the habits of thrift among the people by offering various attractive schemes of deposit (such as cumulative deposit, recurring deposits, long-term deposit, monthly income deposit, pension deposit, etc. as in our country).
Similarly, the banks can open branches in the under-banked and unbanked places, especially in rural areas, for tapping the hitherto hidden springs of rural savings. The mobilisation of these savings would go a long way in accelerating the rate of capital formation.
Role # 2. Mobilisation of Resources and Granting of Adequate Credit for Development:
A developing economy, aspiring to develop rapidly through planning, requires the effective resource mobilisation for development purposes. The banking sector with network of branches spread over wider areas can assist effectively the government in mobilising development resources.
Along with it the banks should provide adequate finance for genuine development needs. Schumpeter in his theory of growth relied mainly on the contribution of banking system for financing economic development.
Role # 3. Credit for the Priority Sectors:
The laying down of priorities in the spheres of development is one of the distinguishing characters of development planning. Accordingly, a developing economy must have a system of priorities in relation to disbursement of credit by the banking sector.
The commercial banks, under the active guidance and control of the Central Bank, are to give loans and advances in accordance with the plan priorities Thus, in India the commercial banks have been giving preference, in accordance with the directives of the Reserve Bank of India in gaming credit in larger amount to the priority sectors such as agriculture, small industries specified large industries and exports.
Besides, banks are to extend Credit facilities to the neglected and weaker sections of the society such as small and marginal farmers, small and medium entrepreneurs transport operators, self-employed persons of limited means, etc.
This becomes necessary for the equitable distribution of bank credit among the different classes of people. At the same time, banks should refrain from giving credit to speculators and hoarders. In fact, the banks in such an economy are to implement the credit policy of controlled expansion of bank credit as in India.
Role # 4. Involvement in Development Planning:
Commercial banks cannot keep themselves aloof from the country’s development planning. They are to infuse dynamism in the development activities by initiating special programmes, such as survey of the growth potentials in the particular area leadership of a particular bank in a particular district (e.g., lead bank scheme in India) for the supply of credit, special development credit for agriculture and small industries,” etc.
They can also take part in financing special development credit for agriculture and small industries, etc. They can also take part in financing special development projects in block-level P Besides, they may implement credit planning for the development of backward areas in the sphere of regional economic planning.
Role # 5. Strengthening Institutional Facilities:
Commercial banks, along with the Central Bank, can render immense help in organising term-lending specialised institutions like the Industrial Finance Corporation, State Financial Corporations by subscribing to a portion of their share capital. Similarly they can sponsor the setting up of specialised institutions like the Regional Rural banks in the rural areas for extending banking service in the un- banked areas.
Role # 6. Promoting Growth with Stability:
In a developing economy growth by itself is not everything; growth with stability is considered the right objective to be pursued. As bank credit constitutes a major part of a country’s money supply, banks can play a significant role in stabilizing the internal price level. Speculative credit is to be drastically curbed, hoarders should not be accommodated, holding of stocks can be discouraged and the genuine need of the economy can be met by banks for this purpose.
The above description shows the significant and constructive role of commercial banks in promoting development and growth in a developing economy. The effectiveness of this role depends, however on the leadership of the Central Bank.
But the commercial banks under no circumstances, in discharging this role, should sacrifice the basic principles of their operations i.e., safety of public deposits, liquidity of assets, profitability of their operations, etc.
The functioning of this task on the part of commercial banks is really a decline one for which some regulation in the form of social control is to be imposed on their operations. In extreme cases banks, particularly leading banks, may be taken over by the government itself as found in India where 14 leading commercial banks were nationalised in July 1969 and another 6 banks in April 1980.