Banking Functions and Economic Importance of Banks
Bank is a financial institution that facilitates transfer of money from one person or business to another person or business. Basically it is an institution for keeping, lending, transferring and exchanging money. Banks lend money that they receive from public as deposits. The money borrowed from bank is then invested in business, agriculture and other income generating opportunities, creating more income, assets and employment opportunities. Such activities have direct impact on the economic growth of the country. Apart from these basic functions, banks perform many other duties also to speed up economic development of the country. Establishing a formal financial system in rural areas, bringing all citizens of the country under banking system through financial inclusion, ensuring even growth of different geographies of the country are some of the other major roles being performed by the banks in India. Sound banking system paves way for industrialization and agricultural development. There are also other types of regulated financial institutions that are permitted to undertake functions similar to that of banks.
Definition of banking as per BR Act, 1949
Banking is defined by Banking Regulation Act of India, 1949 as “accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, draft, and order or otherwise”. By definition, bank is a financial institution that deals with money, savings and credit. It accumulates idle money with public for extending credit to those in need. In effect, it creates need for money and facilitates flow of savings to satisfy genuine needs. Deriving from this definition, these finacial intermediaries perform a number of banking functions in the modern era.
Major Banking Functions
Banks essentially perform the following banking functions to play a decisive role in the socio-economic development of the country.
• Accepting savings from general public/others and others as deposits ( Deposits )
• Lending money to meet financial needs of public ( Loans )
• Transferring money from one place to another thereby facilitating money flow (Remittances )
• Credit creation and satisfaction
• Acting as trustees and keeping valuables in safe custody
• Investments
• Carrying out government business and collection of taxes
• Distribution of financial products like insurance, mutual funds, tax saving products, NPS etc for investment purposes and financial security
• Financial inclusion
• Spreading banking system across the country saving public from clutches of money lenders
Economic importance of banks
Development of any country is depended on the strength of formal structure of banking system in that country. Banks materialize the financial needs of millions of people spread across different geographies, sections and segments. Banking derives economic importance for the following reasons:
• Banks fosters savings habit of public
• Facilitates capital formation
• Finances industry ( IFCI, SIDBI, SFC)
• Promotes agriculture ( Co-operative banks, RRBs, LDBs, NABARD)
• Encourages small scale industries, MSMEs ( SIDBI, NSIC)
• Enables implementation of monetary policy
• Facilitates and promotes international trade through imports and exports
• Spreads banking structure to interior parts of the country
• Ensures balanced development of the country by supporting marginalized sections
• Ensures inclusive growth through financial inclusion
Thus, banks are reservoirs of funds and channelize these funds for developmental purpose of the country through diversified operations. They satisfy the needs of savers, industry, trade and commerce. They simultaneously fulfill social responsibilities too.
