Importance and Role of Banking Institutions in an Economy

The question would be funny, to keep and get money How and Where ….” These words indicate the importance of bank. The banking system plays an important role in the growth of the economy. The banking sector is the lifeline of any modem economy. It is one of the important pillars of the financial system, which plays a vital role in the success or failure of an economy. It is a well-known fact that banks are one of the oldest financial intermediaries in the financial system. They play a crucial role in the mobilization of deposits from the disbursement of credit to various sectors of the economy. In this way, banks have control over a major part of the supply of money in circulation and they can influence the nature and character of production in the country. Therefore banks are the mainstay of the economic development of a country and the banking system acts as a mirror and reflects the economic health of the country. The strength of the economy of any country basically hinges on the strength and efficiency of its financial system, which in turn depends on a sound and solvent banking system.¹

The contribution of the banking sector in the process of economic development can be summarized as under:

• Banks help in capital formation. Banks mobilize the idle and dormant capital of a community and make it available for productive purposes. In fact, banks have designed a number of schemes to attract prospective customers to encourage the habit of savings among people.
• Banks are the Creator of Money: Banks are described as factories of credit. They have the power to create money and it helps in the economic development of the country.
• Banks act as a link between the organized and unorganized sectors: In India, the money market consists of organized and unorganized sectors. Both of them are required to be linked for the economic development of the country and this function is performed by banks.
• Banks help in the effective implementation of monetary policy: The effective implementation of monetary policy can be done only through the properly organized banking system of the country.
• Banks help in the development of agriculture and industries: The development of a country not only depends upon the industrial development but also on the development of agriculture. The banks cater to the financial needs of these sectors which result in the economic development of the country.
• Banks act as catalysts in social change: In India banks are regarded as catalysts in bringing the desired social change to the community. Banks are able to achieve the desired change through their sectoral priorities and other social development programmers.
• Banks help in the development of entrepreneurship: Banks have special drives and specific schemes for the development of entrepreneurship. Banks help in boosting their strength and health.
• Banks regulate the flow of national savings: Banks regulate the flow of national savings. They ensure the diversion of national savings into productive purposes.
• Banks help in mitigating the effects of trade cycles: The effective banking system can help the government in controlling the circulation of money. It helps in mitigating the effects of trade cycles in a country.
• Banks help -in maintaining the positive balance of trade: Banks also help in promoting imports and maintaining the balance of trade at a favorable position.

For citing this article use:

• Pooja, P. (2011). Management of changes in public sector banks in India after globalization_A case study of Jharkhand state.