Role and importance of Commercial Banks


The functions of commercial banks explain their importance in the economic development of a country. Banks help in accelerating the economic growth of a country in the following ways

1. Accelerating the Rate of Capital Formation: Commercial banks encourage the habit of
thrift and mobilise the savings of people. These savings are effectively allocated among
the ultimate users of funds, ie, investors for productive investment. So, savings of people
result in capital formation which forms the basis of economic development.

2. Provision of Finance and Credit: Commercial banks are a very important source of finance
and credit for trade and industry. The activities of commercial banks are not only confined
to domestic trade and commerce, but extend to foreign trade also.

3. Developing Entrepreneurship: Banks promote entrepreneurship by underwriting the
shares of new and existing companies and granting assistance in promoting new venture
or financing promotional activities. Banks finance sick (loss-making) industries for making
them viable units.

4. Promoting Balanced Regional Development Commercial banks provide credit facilities to
rural people by opening branches in the backward areas. The funds collected in developed
regions may be channelised for investments in the underdeveloped regions of the country
In this way, they bring about more balanced regional development.

5. Help to Consumers Commercial banks advance credit for purchase of douche
items like Vehicles, T.V., refrigerator etc., which are out of reach for some consumers due
in capacity. In this way, banks help in creating demand for such
consumer goods.

Strucure of Commercial Banks in India

The commercial banks can be broadly classified under two head:

1. Scheduled Banks: Scheduled Banks refer to those banks which have been included in the
Second Schedule of Reserve Bank of India Act, 1934. In India, scheduled commercial banks
are of three types:
(i) Public Sector Banks: These banks are owned and controlled by the government
The main objective of these banks is to provide service to the society, not to make
profits. State Bank of India, Bank of India, Punjab National Bank, Canara Bank and
Corporation Bank are some examples of public sector banks. Public sector banks are
of two types: (a) SBI and its subsidiaries; (b) Other nationalized banks
(ii)Private Sector Banks: These banks are owned and controlled by private businessmen
Their main objective is to earn profits. ICICI Bank, HDFC Bank, IDBI Bank are someexamples of private sector banks.
(iii)Foreign Banks: These banks are owned and controlled by foreign promoters. Their
number has grown rapidly since 1991, when the process of economic liberalization
had started in India. Bank of America, American Express Bank, Standard Chartered
Bank are examples of foreign banks
2 Non-Scheduled Banks: Non-Scheduled banks refer to those banks which are not included
in the Second Schedule of Reserve Bank of India Act, 1934.

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