ROLE OF COMMERCIAL BANKS IN ECONOMICS DEVELOPMENTS

Banks play very importance role in economic development. The growth rate of economy largely depends on the rate of investment which, in fact, depends on the level of saving. Higher saving leads to higher level of capital formulation which is crucial for economic growth and developments. The primary function of commercial banks is accept deposits and provides loans. Thus the commercial banks plays major role in mobilizing saving for capital formulation. The role of commercial banks in development is explained below.

SAVING PROMOTING AND SAVING MOBILIZATION

As mentioned above, the commercial banks accept deposits and provide loans of various types. The banks pay interest to the depositors against their deposits. The rate of interest and amount of saving are directly related. This means higher the rate of interest higher will be the level of saving. Thus, banks can promote saving by offering higher interest rate of deposits. This action of banks helps promoting saving which can be utilized for investment in various sectors of the economy.

ALLOCIATION OF FUNDS

The banks help to allocate funds for optimum utilizations of financial resources in the economy. As the bank use their financial expect to judge the returns or productivity from the funds they lead out, this helps to maximization of returns from the scarce financial resources. The banks collect funds from the surplus units and channel them to the deficits unit of economy. The banks save as the bridge to eliminate the gap between demand for and supply of the funds. For achieving desired profit and avoiding the risk of incurring losses, the banks try to allocate the fund so as to maximized the expect return. Although it is not always possible to allocate the funds optimally, the banks as the profit making institutions seek to manage their portfolio by providing loans to the competing borrowers who invest in the various sectors of the economy and also make direct investment so as to utilize their funds optimally. Thus, banks play important role in resource allocation which is an important prerequisite for economic development.

3. PROMOTION OF TRADE, INDUSTRY AND EMPLOYMENT

The banks facilitate the trade and industry by providing long as well as short-term loans and supplying various kinds of banking services and products such as L/C operations, foreign exchange facilities, payments settlement, etc. The banks not only accept deposits and provide loans but also create credit while extending loans. In the modern banking, most of the transactions are done through banks. Banks serve as the major agent of international trade while making imports or exports of goods and services. Similarly, the banks helps to promote industries by providing financial resources needed for capital investment and monitoring investment projects so as to minimize the risk. The banks also make direct investment in the productive industries by accumulating scattered and idle resource in the form of deposits. This helps to create more employment opportunities and reduces the rate of unemployment in the economy. These all actions of banks help

Promote domestic as well as international trade and industry which are essential for economic development.

4. TRANSFER OF MONEY

In the modern globalizes world, citizens of a country are not limited to work within their own territory. They move from one country to another in search of better employment opportunities. While working abroad they send their earnings to the family members or relatives in their own countries through bank Thus, banks help to transfer remittance which is one of the mains sources of income and country’s foreign currency reserve but also helps to construct macroeconomic indicators based on the real statistical records from banks through which remittances are transferred. The increasing volume of remittance has become one of the major sources of investments for economic development in underdeveloped countries.