In the words of Thirlwall “Banks can encourage thrift and allocate savings wore productively than otherwise by offering a return on savings to be used outside the sector in which they may operate. Banks can help to breakdown sectoral bottlenecks and to unit interest rates”.
1. Helpful in Mobilisation of Savings and Capital Formation:
Commercial banks offer facilities of deposits and that too on lucrative terms. This stimulates thrift as well as attracts idle savings into organised capital market of the country.
By extending credit facility to the investors and entrepreneurs, banks convert savings into capital formation which is an instrumental variable of growth and development of less developed countries.
2. Helpful in Innovations:
Also, commercial banks are helpful in innovations, yet another vital parameter of growth and development. Innovations stimulate the process of growth through new technology, discovery of new markets for the existing products as well as new products for the existing markets. Innovations are the off-shoots of Research and Development Divisions of different producing units in the country.
And these divisions are lucratively financed by the commercial banks. But for the patronization by commercial banks of the country, research and development activity would remain to be a far cry. Offering judicious financial assistance, banks facilitate the percolation of new technology across different sectors of the economy.
3. Helpful in the Effective Implementation of Monetary Policy:
But for active cooperation of commercial banks, it would not be possible to carry out effective implementation of any monetary policy in the country. In fact commercial banks constitute the centre-stage of any monetary programme of the Government or the Central Bank of the country.
An organised system of commercial banking is almost a pre-condition for any monetary discipline sought to be achieved through any type of monetary policy. Greater the intensive expansion of commercial banking system of a nation, savings broaden is the base of deposits and accordingly greater is the responsiveness of Banking System of a country to the various instruments of monetary policy. This facilitates control of credit in assonance with credit needs of diverse sectors of the economy.
4. Banks Influence Interest Rates:
Banks influence the rate of interest as well as structure of interest rates by means of credit creation. Accordingly, the banks influence the volume and pattern of investment, so very vital in the context of growth and development in less developed countries like India.
5. Helpful in the Development of Priority Sectors:
Commercial Banks contribute their might in the development of priority sectors of the economy. The banks help achieve this objective by means of its selective credit policy. Banks in less developed countries are often engaged in fostering the enterprising interest of farmers and small scale industrialists with a view to improving the rate of production, attaining self-sufficiency in food grain production and achieving equitable distribution of income and property.
6. Helpful in Productive activities and Exports:
Commercial Banks are helpful in stimulating economic activity and expanding exports in less developed countries. Productive activity both in agricultural as well as industrial sectors of this economy can be sustained and stimulated only when credit needs of the sectors are judiciously fulfilled at reasonably low rate of interest.
Also export-base can be expanded only when exporters are offered easy finance facility. Commercial banks are expected to play a constructive role in this context.
Thus, commercial banks play a crucial role in the context of growth and development—in less developed countries by offering a well organised credit market catering to all the financial needs of various sectors of the economy.