International Journal of Education, Modern Management, Applied Science & Social Science (IJEMMASSS) 151

ISSN : 2581-9925, Impact Factor: 5.143, Volume 02, No. 03, July - September, 2020, pp.151-154

THE ROLE OF COMMERCIAL BANKS IN ECONOMIC GROWTH IN INDIA:

A PERSPECTIVE STUDY

Dr. Mritunjay Kumar Manish

ABSTRACT

Banks have always played an important role in the national economy. They play a crucial role in
the development of industry and trade. They are not only supporting the country’s wealth but also acting
as the country’s resources, which are essential for a nation’s economic development. The general role of
commercial banks is to provide financial services to the general public and businesses while ensuring
economic and social stability and sustainable economic growth. Commercial Bank in India consists of
State Bank of India (SBI) and its subsidiaries, nationalized banks, foreign banks and other scheduled
commercial banks, regional rural banks and unscheduled commercial banks. The total number of
branches of commercial banks is more than 50,000 and there are about 8,000 regional rural banks
covering 280 districts in the country. Commercial banks mostly provide short-term loans and, in some
cases, medium-term financing to small-scale units. To take care of the financial needs of small
commercial units. Most commercial banks have got special units in their management structure. As we
know, agriculture is the backbone of the economy of any country like India. The research is based on
secondary data, which provides results about commercial banks and how they help in economic growth.
The main purpose of this study is to critically analyze the role of commercial banks in economic growth in
India. This study presents how loans and credit affect Gross domestic product (GDP)and consequently
the level of economic growth in India.

Keywords: Economic Growth, Commercial Bank, Gross Domestic Product (GDP).

________________
Introduction
In the post-independence period, the activities of commercial banks in India have been
expanding rapidly. Both regional and active. Expansion of bank activities. Banks that are conservative
and conventional face the challenges of planned economic growth. In recent years, non-traditional
sectors have been gaining the attention of commercial banks in India. A better understanding of the
implications of financing the non-traditional sector through commercial banks is possible only if one looks
at the position of commercial banks in the pre-national era. Banking in India before nationalization.
Commercial banks are institutions that generally accept deposits from people and extend loans.
Commercial banks are also formed in India. Such banks are called commercial banks only if they are
established in accordance with the provisions of the Banking Regulation Act, 1949. Commercial banks
can be scheduled banks of non-scheduled banks. Banking Regulation Act, (BR Act), 1949. According to
Section 5 (c) of the BR Act, a banking company is a company that conducts banking business in India.
According to the Reserve Banks of India Act, 1934, a scheduled bank is a bank which has been included
in the second schedule of the Reserve Bank.
Objectives of the Study
 To study the primary and secondary function of Bank
 To study the role of banking sector in economic development
 To study the commercial banks its impact on economic growth
Research Methodology
This paper is based on the secondary data and drained from annual reports of RBI and from
various articles, reports, and websites.


Faculty of BBA, Marwari College, Bhagalpur, Bihar, India.
152 International Journal of Education, Modern Management, Applied Science & Social Science (IJEMMASSS) - July - Sept., 2020

Functions of Commercial Banks

Commercial banks act as the kingpin of the country’s financial system. They offer many valuable
services. Commercial banks provide banking services to businesses and customers through a network of
branches. These banks are in the business of making profits for their owners and they are usually public
limited companies managed by shareholders. In India, however, utmost of the top commercial banks is
maintained by the govt. But many private commercial banks have sprung up in recent years. Commercial
banks are all-purpose banks that perform a wide range of tasks such as accepting demand deposits,
issuing cheques against savings and fixed deposits, making short-term business and consumer loans,
providing brokerage services, buying and selling foreign exchange, etc. The functions of commercial
banks are described below:
Primary Functions
 Collection of deposits
 Making loans and advances
Collection of Deposits
The prime function of commercial banks is to collect deposits from the public. Such deposits fall
into three main categories: current, savings and fixed.
 Current account is used to make payments. A user can deposit and withdraw money from the
current account subject to a minimum required balance. If the user overdraws on the account,
he may need to pay interest to the bank. Cash credit facility is permitted in the current account.
 Savings account is an interest-bearing account. Save money deposited in the savings account.
The savings bank account holder needs to maintain a minimum balance in his account to avail
the cheques facility.
 Fixed or term deposits for 7 days to 3 years or more and used by customers to save money
for a specified period. The interest rate is related to the Friday period. For example, a fixed
deposit with a maturity of 3 years will yield a higher rate of return than deposits with a maturity of
1 year. But usually the money cannot be withdrawn before the due date. Some banks have also
imposed fines if the deposit is withdrawn before the due date. However, the customer can get a
loan from the bank as opposed to a receipt of a fixed deposit.
Loans and Advances
Commercial banks have to keep a certain portion of their reserves as legal reserves. The
balance is used to make loans and advances to lenders. Individuals and firms can borrow this money and
banks can make a profit by charging interest on these loans. Commercial banks take different types of
loans such as:
 Loan to a person or a firm against a collateral contract;
 Cash credit (loan in installments against some security)
 Overdraft facilities (allowing customers to withdraw more than their deposits allow)
 Loan by discounting bills of exchange.
Secondary Functions
 Agency services
 General utility services
Agency Services
Consumers can instruct banks to accept payments on their own or to make payments. The
relationship between the banker and the customer is that of principal and agent. The succeeding agency
services are on condition that by the bankers:
 Payment of rent, insurance premium, telephone bill, installments on rental purchase, etc.
Obviously, it has been paid from the user's account. Banks can also collect such receipts from
customers.
 The bank collects cheques, drafts and bills from the customer.
 Banks can exchange domestic currency for foreign currencies as per regulations.
 Banks can act as trustees / executors for their customers. For example, banks may carry out
this will after the death of their clients, if so, as directed by the latter.
Dr. Mritunjay Kumar Manish: The Role of Commercial Banks in Economic Growth in India: A..... 153
General Utility Services
Commercial banks also provide various general utility services to their customers. Some of
these services are discussed below:
 Money and Valuables Security: People feel safe and secure by depositing their money and
valuables in the safe custody of commercial banks. Many banks handle valuable documents
such as household chores and property, and jewelry.
 Money Transfer: Money can be transferred from one place to another. Similarly, banks deposit
their customers’ funds from other banks and similarly deposit them in the customer’s account.
 Merchant Banking: Many commercial banks provide merchant banking services to investors
and firms. Merchant Banking activities cover project advisory services and loan syndication,
corporate advisory services such as mergers and acquisitions advice, equity valuation,
disinvestment, identification of joint venture partners and so on.
 Automated Teller Machines (ATMs): ATMs are cash withdrawal machines. In the last 10
years, most banks have introduced ATM services in metropolitan and semi-urban areas. A/c
holders as well as credit card holders can withdraw cash from ATMs.
 Credit Cards: Another important means of payment is credit cards. Visa and MasterCard are
operated by commercial banks. A person can use a credit card to withdraw cash from an ATM
as well as make payments at commercial establishments.
Importance of Banks in the Growth of the Our Country
Banks are one of the furthermost important part of any country. Money and the need for it are
very important in this modern age. The country’s developed financial system ensures growth. A modern
bank offers valuable services to a country. Achieving growth requires a well-developed financial system
that can support not only the economy but also society. Therefore, a modern bank plays an important
role in the socio-economic affairs of a country. The following are some of the important roles of banks in
the development of a country.
 Promoting People’s Savings Habits: The bank attracts savers by introducing attractive
deposit schemes and providing returns in the form of rewards or interest. Banks offer a variety
of deposit schemes to their customers. It enables people to develop banking habits or savings
habits.
 Create Employment Opportunities: As a bank promotes industry and investment, it
automatically creates jobs. Therefore, a bank enables the economy to create jobs.
 Support Agricultural Development: The agricultural sector is an integral part of any economy.
Food self-sufficiency is the biggest challenge and goal of any country. Modern Bank promotes
the agricultural sector by providing loans and promotions at lower interest rates than other loans
and advance schemes.
 Monetary Policy Application: Monetary policy is an important policy of any government. The
main purpose of monetary policy is to strengthen the country’s financial system from the
dangerous dangers of inflation, crisis, etc.
 Balanced Development: Modern banks are expanding their businesses around the world. We
can see the number of big banks like Citibank, Baroda Bank etc. It helps a country expand its
banking activities in rural and semi-urban areas. With the proliferation of banking operations
across the country, promoting rural areas helps achieve balanced development. Modern Bank
plays an important role in the socio-economic development of the country. An advanced banking
system enables the country to achieve balanced development without focusing on rich and poor,
urban and rural areas etc.
 Capital Formation and Industry Promotion: Capital is the most important part of any business
or industry. This is the lifeblood of business. Banks are raising capital by accumulating reserves
from depositors and will convert these reserves into loan advances in industries.
 Facilitating Trade and Commerce: In this modern age, trade and commerce play an important
role between any country. Therefore, money transactions should be user friendly. A modern
bank helps its customers to send and receive funds from anywhere in the world. A well-
developed banking system provides various attractive services like mobile banking, internet
banking, debit cards, credit cards etc. Such services speed up and facilitate transactions.
Therefore, the bank helps to promote trade and commerce
154 International Journal of Education, Modern Management, Applied Science & Social Science (IJEMMASSS) - July - Sept., 2020

Role of Commercial Banks in Economic Development

Commercial banks are a source of finance for small businesses. The role of commercial banks
in economic growth depends on their role as financial intermediaries. In this capacity, commercial banks
help drive the flow of investment capital across the market. The main method of allocating this capital in
the economy is through the lending process which helps commercial banks.
 Risk: The most important role of commercial banks in economic growth is to act as a risk
mediator. This is mainly when banks lend to businesses or individuals. For example, when
individuals apply for a loan from a bank, the bank examines the borrower's financing, among
other factors, including income, credit score, and loan level. The results of this analysis help the
bank determine the borrower's predetermined probability. Eliminating risky borrowers reduces
the risk of financial losses to commercial banks.
 Small Business: Commercial banks also finance business loans in a variety of ways. A
business owner can ask for a loan to finance the start-up costs of a small business. After
providing financial support, small businesses can start work and implement development plans.
The overall impact of small business activity creates a significant portion of employment across
the country.
 Wealth: Commercial banks also offer different types of accounts to hold or generate individual
wealth. As a result, it is used to lend and invest in commercial banks attracted with account
services. For example, commercial banks typically attract deposits by offering a traditional
savings menu and checking the accounts of businesses and individuals. Similarly, banks offer
other types of deposit accounts, such as money market accounts and certificates of deposit.
 Government Expenditure: Commercial banks also support the role of the federal government
as an agent of economic growth. Typically, commercial banks help fund government spending
by purchasing bonds issued by the Treasury Department. Both long-term and short-term
treasury bonds support government operations, programs and deficit spending.
Conclusion
For a long time, countries have been pursuing their own development. The framework of mixed,
capitalist economies has sought to use the banking function embedded in available or specially created
institutions to further its development goals. The role of these institutions in the development moves of
the late industrialized, developing countries cannot be overstated. However, as mentioned above,
changing the financial structure with the financial liberalization of the neo-liberal type; Some countries are
eliminating special development banking institutions on the grounds that the equity and bond markets will
work. This will reduce long-term investment, especially for medium and small businesses. Fortunately,
there are some countries like Brazil that have not yet chosen this pace.
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