Contribution of the Banking System to Economic Growth

Contribution of the Banking System to Economic Growth

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Contribution of the Banking System to Economic Growth

(a)Savings Promotion - Commercial banks encourage saving by offering a variety of deposits with varied liquidity and interest rate combinations to meet the needs and preferences of various depositors. Household savings increase when the commercial banking enlarges within areas not under the ambit of banking. Bank deposits have some advantages over tangible assets (physical capital, commodity inventories, and other financial assets) as a store of value. The savers would prefer to utilise their savings to purchase gold and silver, other commodities, and real estate whose values are also growing if the cost of products is rising, which is a sign that inflation has taken hold of the economy. This is due to the fact that the real rate of interest on bank deposits declines significantly.

(b) Savings Mobilisation - In addition to encouraging saving, banks also pool household savings and make them available to entrepreneurs in a variety of economic sectors for use in production and investment. The act of saving has been divorced from the act of actual investment in the modern monetary economy, making this function of mobilising savings extremely significant. It is clear from the information above that banks serve as a conduit for money between lenders and borrowers. Primary securities and secondary securities are two categories into which the financial assets can be divided. Primary securities for business entities include equity shares, debentures, and company deposits. When households purchase these securities, they lend money to the investor directly or invest themselves at risk.

(c) Funds Allocation - Another crucial task carried out by the banks is the distribution of funds or economic surplus among various industries, consumers, and producers in order to maximise societal return and ensure optimal use of savings. While corporate businesses can raise money through the sale of equity shares and debentures, non-corporate businesses and borrowers heavily rely on banks to meet their funding requirements for capital investments and fixed capital.

(d) Promotions of Investment, Production and Trade - Banks contribute to raising the overall rate of investment in the economy by promoting savings incentives and mobilising public savings. Not only do banks marshal public savings but they also also generate credit or, deposits which could be utilized as currency. When banks lend money to investors or other users, they also establish new deposits. The banks have made more deposits than they have in cash reserves as a result of public deposits.

Demand deposits in particular are now just as valuable as cash issued by the government or Reserve Bank of India in terms of purchasing power. If this credit is created for productive uses, it considerably accelerates investment and production, which encourages economic growth.