Role of Banks in Indian Economy

Banking system plays a very significant role in the economy of a country. It is central to a nation’s economy as it caters to the needs of credit for all the sections of the society. Money-lending in one form or the other has evolved along with the history of mankind. Even in the ancient times, there are references to the money-lenders, in the form of sahukars and zamindars who lend money by mortgaging the land property of the borrowers.

Towards the beginning of the 20 century, with the onset of modern industry in our country, the need for government-regulated banking system was felt. The British government began to pay attention towards the need for an organized banking sector in the country and the Reserve Bank of India was set up to regulate the formal banking sector in the country. Ever since they were nationalized in 1969, banks have been playing a major role in the socio-economic life of the country. The have to act not only as purveyors of credit, but also as harbingers of social and economic development through a variety of enterprises, many of which may tiny and yet capable of generating productive energies.

India is not only the world’s largest independent democracy, but also an emerging economic giant. Without a sound and effective banking system, no country can have a health economy. For the past three decades, India’s banking system has several outstanding achievements to its credit. It is no longer confined to only the metropolitans, but have reached even to the remote corners of the country. This is one of the reasons of India’s growth process.

Agriculture in India has a significant history and it is demographically the broadest economic sector and plays a significant role in the overall socio-economic fabric of India. Finance in agriculture is an important as development of technologies. A dynamic and growing agricultural sector needs adequate finance through banks to accelerate overall growth. Most of the credit-related schemes of the government to uplift the poorer and the under-privileged sections have been implemented through the banking sector. With the passing of the Reserve Bank of India Act 1934, there were improvements in agricultural credit. Earlier, the co-operative banks were the main institutional agencies providing finance to agriculture. But after nationalization of 14 major commercial banks, it was mandatory for them to provide finance to agriculture as a priority sector. Thus, agricultural credit acquired multi-agency dimension.

The government has allocated `10000 crore to the National Bank for Agriculture and Rural Development (NABARD) for refinancing Regional Rural Banks (RRBs) to disburse short term crop loans to small and marginal farmers. The short-term crop loans scheme offers credit to farmers at 7 per cent interest rate. Besides, in order to reduce post-harvest losses, farmers are eligible to get post-harvest loans up to six months at 4 per cent interest rate provided they keep their produce in warehouses. The rural sector in a country like India can growth only if cheaper credit is available to the farmers for their short-and medium-term loans. In addition, the farmers get loans for purchase of electric motors with pump, tractors and other machinery, digging wells or boring wells, purchase of dairy animals and for many other allied enterprises.

The Industrial Development Bank of India (IDBI) is the premier institution in India purveying financial assistance to the industrial sector projects. It provides direct financial assistance to the industrial concerns in the form of granting loans and advances, and purchasing or underwriting the issues of stocks, bonds or debentures. The creation of the Development Assistance Fund is the special of the IDBI. The Fund is used to provide assistance to those industries which are not able to obtain funds mainly because of heavy investment involved or low expected rate of returns. Assistance from the Fund requires the prior approval by the government. Apart from this, the IDBI even gives guidance to start a business.

In addition to the above traditional roles, banks also perform certain new age functions which could not be thought of a couple of decades ago. Today, the banking sector is one of the biggest service sectors in India. Availability of quality services is vital for the well-being of the economy. The focus of banks has shifted from customer acquisition to customer retention. With the stepping in of information technology in the banking sector, the working strategy of the banking sector has been revolutionary changes. Various customer-oriented products like internet banking, ATM services, telebanking and electronic payment have lessened the workload of customers. The facility of internet banking enables a consumer to access and operate his bank account without actually visiting the bank premises. The facility of ATMs and credit/debit cards has revolutionized the choices available with the customers. Banks also serve as alternative gateways for making payments on account of income-tax and online payment of various bills like the telephone, electricity and tax. In the modern-day economy where people have not time to make these payments by standing in queue, the services provided by banks are commendable.

To conclude, we can say that the modern economies of the world have developed primarily by making best use of the credit availability in their systems. India is on the march; far reaching socio-economic changes are taking place and Indian banks should come forward to play this role in the process. The role of banks has been important, but it is going to be even more important in the future.