Banking is probably one of the oldest professions in the world. The invention of currency led people to quickly realise the value of money lending and credit creation. A part of India’s rich history is the development of the banking system. In 1770, the Bank of Hindustan became the first of its kind, with headquarters set up in the then-capital city of Calcutta.
The bank didn’t survive and closed within a century. The concept of banking, however, began to thrive. Before independence, over 600 banks popped up across the country, but only a few of them managed to stay in business post-1947.
The late ‘60s kicked off the nationalisation phase, where the government took 50 per cent ownership of the larger banks. The last decade of the twentieth century saw many private banks come into play, and they have enjoyed a very successful run to date.
So what is the importance of commercial banks in a developing economy? Why do they have such a significant impact on our country’s financial evolution? Commercial banks accept deposits and lend money to small businesses and entrepreneurs. They can help people in rural areas and small towns who don’t have access to financial assistance. They financially support the country and take it to greater financial heights.
The importance of commercial banking in India
Funds rural and agricultural development
Over 55 percent of the Indian population are farmers. 80 per cent of farmers need credit to cultivate their crops. One of the main roles of commercial banks in India is to help these farmers get the funding they need. The banks have launched several financial services customised towards rural sectors. For example, SBI, one of India’s largest commercial banks, is known for creating a line of financial products aimed at the humble farmer. They offer specialised agricultural loans, saving accounts and Kisan credit cards aimed at the rural customer base. Through these schemes, farmers can purchase seeds, tractors, fertilisers and other farming tools. Commercial banks are a safer borrowing option than local money lenders as banks follow government regulations and proper protocol.
Funding women entrepreneurs
The role of commercial banks in entrepreneurial development is massive, especially when it comes to women. In a country like India, women rarely get the resources, means and support they need to pursue a business. How can a nation prosper when half the population can’t make a healthy financial contribution to the economy?
The role of commercial banks in India includes providing much-needed funds to women entrepreneurs to kick-start their businesses, empower them financially and make them independent.
An example of this is the Svyam Siddha scheme launched by the State Bank of India. It is a loan offer to businesswomen from smaller towns and rural villages who don’t have access to capital. The scheme offers a loan for any amount up to 5 lakhs. It is different from a traditional bank loan as it involves less paperwork and quicker processing time.
Also Read – Different Types of Commercial Banks and Their Roles in the Economy
Finances small businesses
It is not easy for start-ups and small businesses to operate without a steady cash flow. Very often, these companies struggle to grow as they lack the funds for development. This brings us to another important role of commercial banks in a developing economy — providing MSME and SME loans. These are Micro, Small and Medium Enterprises loans and Small Medium enterprises loans that help small businesses with financial support. Different commercial banks offer various loan schemes to help these companies receive funding up to 2 crores. The loans come with quick approvals and flexible payment plans. Between 2020 and 2023, there were applications for over 31 million MSME loans. With the loans, these businesses can stay afloat, enhance their infrastructure, create new jobs, widen their reach and directly boost India’s economic development.
Creates credit
One of the key roles of commercial banks in entrepreneurial development is the creation of credit. Banks create credit to boost businesses, enabling them to buy equipment, build inventory or pay vendors. These companies get purchasing power even if they do not have the funds at the moment. Banks such as ICICI, Axis and HDFC offer small business credit cards to small and medium enterprises. They also create credit through grants loans and buying securities.
Also Read – Breaking Down the Functions of Commercial Banking: An Essential Guide
Generate savings to create capital
When you motivate a population to save a part of their income by depositing money in a bank, you are encouraging them to slowly build their wealth. You also use the cash deposits to fund loans for small and medium-sized companies so they can expand their businesses, create more jobs and eventually contribute to the economy. Without commercial banks, none of this would be possible. The role of commercial banks in a developing economy like India is vital to capital creation.
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Highlights of learning with Proschool:
- Teachers use active learning methodologies and innovative training techniques to engage the students.
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Proschool’s finance courses for commercial banking
- CFA – Chartered Financial Analyst program
One of the world’s best finance certifications, CFA teaches students essential topics such as portfolio management, risk management, equity investments, economics and financial markets.
- CFP – Certified Financial Planner
CFP professionals are known for their expertise in financial planning and are qualified in various financial products such as insurance, taxation, investments, wealth management and financial planning.
- Financial modelling
Learn how to analyse and summarise financial data using spreadsheet-based software like MS Excel. Financial modelling is a highly relevant tool that is an integral skill set for many professions within the industry.
- PG Investment Banking
This course helps you understand the complex nature of the finance and investment field. Subjects include M&A, financial modelling, financial markets, investment banking operations and other topics that have great importance in commercial banking.
FAQs
Why are deposits important for commercial banks?
A crucial role of commercial banks in a developing economy is to take money from people and put it in a savings or current account. Banks also offer fixed and term deposit schemes to help people save money and earn a sizeable interest.
Why is this so important? Commercial banks help people save money while using a part of that fund to boost the economy by granting loans to businesses. This cycle of cash flow fuels a growing economy and helps people increase their wealth and profit from this system.
What are the main functions of commercial banks?
The importance of commercial banking lies in its two main functions — borrowing and lending money. Banks provide accounts for people to save their money. A part of that money is kept in reserves while the other part is capital for their money lending services.
How do commercial banks boost economic growth in rural areas?
In rural areas, commercial banks play a role in entrepreneurial development. There are many lending schemes and activities that are aimed at financing entrepreneurs in cash-strapped small towns and villages. The banks also help residents of these areas to slowly build wealth through bank account savings. These schemes allow the rural population to explore their economic options, fund various business ventures and receive financial support for agricultural development.
Do commercial banks help large corporations with funding?
While commercial banks are known to provide loans to micro, small and medium-sized organisations, they have a separate corporate finance division which offers loans to mega-corporations. For example, Tata & Sons was granted a loan of Rs 10,000 crore from SBI and a loan of Rs 5,000 crore from the Bank of Baroda. Both are commercial banks but they have a separate department for such high-profile cases.
Conclusion
There is no denying the significant role of commercial banks in a developing economy.
India could never have prospered without a strong banking network that mobilises funds and generates new financial opportunities. Commercial banks have helped impact the lives of people living in rural areas and enrich many small businesses with much-needed capital. The importance of commercial banks in India is increasing every day, making it a very lucrative financial field.
