commercial banks_ 7 important role of commercial banks in a developing country
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11/28/2014 Commercial Banks: 7 Important Role of Commercial Banks in a Developing Country
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Commercial Banks: 7 Important Roleof Commercial Banks in a DevelopingCountryby Smriti Chand Banking
Some of the major important role of commercial banks in adeveloping country are as follows:
Besides performing the usual commercial banking functions, banks indeveloping countries play an effective role in their economicdevelopment. The majority of people in such countries are poor,unemployed and engaged in traditional agriculture.
11/28/2014 Commercial Banks: 7 Important Role of Commercial Banks in a Developing Country
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There is acute shortage of capital. People lack initiative and enterprise.Means of transport are undeveloped. Industry is depressed. Thecommercial banks help in overcoming these obstacles and promotingeconomic development. The role of a commercial bank in a developingcountry is discussed as under.
1. Mobilising Saving for Capital Formation:
The commercial banks help in mobilising savings through network ofbranch banking. People in developing countries have low incomes butthe banks induce them to save by introducing variety of deposit schemesto suit the needs of individual depositors. They also mobilise idle savingsof the few rich. By mobilising savings, the banks channelise them intoproductive investments. Thus they help in the capital formation of adeveloping country.
2. Financing Industry:
The commercial banks finance the industrial sector in a number of ways.They provide short-term, medium-term and long-term loans to industry.In India they provide short-term loans. Income of the Latin Americancountries like Guatemala, they advance medium-term loans for one to
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three years. But in Korea, the commercial banks also advance long-termloans to industry.
In India, the commercial banks undertake short-term and medium-termfinancing of small scale industries, and also provide hire- purchasefinance. Besides, they underwrite the shares and debentures of largescale industries. Thus they not only provide finance for industry but alsohelp in developing the capital market which is undeveloped in suchcountries.
3. Financing Trade:
The commercial banks help in financing both internal and external trade.The banks provide loans to retailers and wholesalers to stock goods inwhich they deal. They also help in the movement of goods from one placeto another by providing all types of facilities such as discounting andaccepting bills of exchange, providing overdraft facilities, issuing drafts,etc. Moreover, they finance both exports and imports of developingcountries by providing foreign exchange facilities to importers andexporters of goods.
4. Financing Agriculture:
The commercial banks help the large agricultural sector in developingcountries in a number of ways. They provide loans to traders inagricultural commodities. They open a network of branches in rural areasto provide agricultural credit. They provide finance directly toagriculturists for the marketing of their produce, for the modernisationand mechanisation of their farms, for providing irrigation facilities, fordeveloping land, etc.
They also provide financial assistance for animal husbandry, dairyfarming, sheep breeding, poultry farming, pisciculture and horticulture.The small and marginal farmers and landless agricultural workers,artisans and petty shopkeepers in rural areas are provided financialassistance through the regional rural banks in India. These regional ruralbanks operate under a commercial bank. Thus the commercial banksmeet the credit requirements of all types of rural people.
5. Financing Consumer Activities:
People in underdeveloped countries being poor and having low incomesdo not possess sufficient financial resources to buy durable consumer
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goods. The commercial banks advance loans to consumers for thepurchase of such items as houses, scooters, fans, refrigerators, etc. In thisway, they also help in raising the standard of living of the people indeveloping countries by providing loans for consumptive activities.
6. Financing Employment Generating Activities:
The commercial banks finance employment generating activities indeveloping countries. They provide loans for the education of youngperson’s studying in engineering, medical and other vocational institutesof higher learning. They advance loans to young entrepreneurs, medicaland engineering graduates, and other technically trained persons inestablishing their own business. Such loan facilities are being providedby a number of commercial banks in India. Thus the banks not only helpinhuman capital formation but also in increasing entrepreneurialactivities in developing countries.
7. Help in Monetary Policy:
The commercial banks help the economic development of a country byfaithfully following the monetary policy of the central bank. In fact, thecentral bank depends upon the commercial banks for the success of itspolicy of monetary management in keeping with requirements of adeveloping economy.
Thus the commercial banks contribute much to the growth of adeveloping economy by granting loans to agriculture, trade and industry,by helping in physical and human capital formation and by following themonetary policy of the country.
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