Role of Banks in Economy of India
Last Updated : 14 Jan, 2024
Bank plays an important role in the economic development of the country, without a sound effective banking system, no country can have a healthy economy. It is a financial institution that performs several functions like accepting deposits and lending loans. Banks play the most important role in connecting those who have capital with those who need capital.
Role of Bank in the Economy of India
The role of banks in the economy of India can be categorized as follows:
Removing the deficiency of Capital Formation
The banks provide loans to the investors. This helps in capital formation in an economy. In the developing economy, it helps in removing capital deficiency. The banks also convert the dormant money in the economy into active capital by giving interest to the customers.
Helps in generating Employment Opportunities
The banks give loans to start-ups and finance their expenses. This provides impetus to the generation of employment. The loan also helps in scaling up the firms. The banking sector creates lakhs of jobs every year.
Helps in implementing Monetary Policy
Since the banks are the producers of money, they are very crucial in the implementation of monetary policy. Banks by regulation of the interest rate decide the flow of liquid cash in the economy. It also helps in combating inflation.
Financial Assistance to Industries
The financial assistance rendered by the banks is very helpful to the MSMEs and other small informal businesses. It helps an economy to get through the recession.
Promote Saving Habits of the people
The banks attract the money of the public by giving lucrative interest payments. It helps in promoting saving habits among people.
Banks as Safe Custody
Safe custody services are offered by banks to provide a secure place for customers to store important items that they do not need to access frequently. Customers can store many types of items in safe custody like a bank including important documents like wills, property deeds, and contracts, as well as valuable items like jewelry, precious metals, and artwork. Securities like stocks, bonds, and mutual fund certificates can also be held in safe custody with a bank. Banks may charge fees for safe custody services which can vary depending on the size and value of the items stored and the length of time they are held in custody.
Funds to Organizations
Banks play an important role in promoting economic development by providing funds to organizations. By providing funding to businesses and other organizations, banks help to create jobs, stimulate investment, and contribute to overall economic growth.
Loans by Banks
Banks provide loans to generate profits, manage risk, promote economic growth, and build relationships with customers. By providing loans banks help to support the growth and development of individuals and businesses which can have a positive impact on the broader economy. Banks also provide loans to small businesses, entrepreneurs, and individuals so that they can use this money to increase their business.
Interest on Deposits
Banks need deposits to fund their lending activities. so, they offer lucrative interest rates to attract more depositors. This increases the funds of the banks. And then the bank can use this fund for other activities. Different banks have different interest rates. It also varies depending on the type of account.
What is PMJDY?
PMJDY stands for Pradhan Mantri Jan Dhan Yojana. it is a financial inclusion scheme launched by the Government of India in August 2014. The main objective of the scheme is to ensure access to financial services, such as banking, savings and deposit accounts, remittance, credit, insurance, and pension, to the underprivileged and unbanked sections of society.
Reforms
- Under Pradhan Mantri Jan Dhan Yojna (PMJDY), 250.5 million accounts Have been opened.
- RBI has allowed banks to raise funds via long-term bonds for financing the critical infrastructure sector To make banks more 'credit-friendly'.
- Indian government started Mudra Scheme. Under this scheme Indian banks will be providing cheap and affordable credit to new & small entrepreneurs.
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