Role of commercial banks
Banks play a vital role in the economic development of a country. Their role is highlighted in the following points:
- Promotion of savings: The economic development of any country depends on the rate of savings. Banks offer facilities for depositing savings and thus, encourage the habit of thrift in the society.
- Mobilisation of savings: Banks pool the savings of the public and make them available to prospective investors for production and investment in various sectors of the economy. Without banks, these savings would have remained idle.
- Allocation of funds: Banks try to allocate the economic surplus available in the form of savings among different sectors/users/producers to generate maximum social return. Banks are expected to lend to socially desirable sectors like agriculture, small scale industries and economically weaker sections of the society.
- Creation of credit: Apart from mobilising the savings of the public, banks create deposits or credit which serves as money. These deposits are created by the banks in excess of the cash reserves they obtain through savings from the public. They are created when banks lend money to the investors or other users.