Question

Describe the importance of banks.

Answer 1

1. Supply of Institutional Credit for Agriculture: Agricultural productivity improvement requires substantial credit. The gradual expansion of institutional sources of finance (e.g., nationalised commercial banks, regional rural banks, etc.) in rural areas has, to a large extent, solved the problem of rural credit and helped increase agricultural productivity and production.
2. Fulfilment of Credit Needs of the Industrial Sector: A regular flow of finance to meet both fixed and working capital requirements of the industrial sector (consisting of cottage and small-scale industries, medium and large-scale industries) is a vital factor for promoting industrial production. Development banks such as IDBI and SIDBI fulfil the long-term credit needs of this sector, while commercial banks meet its short-term credit needs.
3. Distribution of Funds: Banks help distribute surplus capital from regions where it is not wanted to those where it can be used most usefully. Thus, they pave way for the economic development of backward regions.
4. Promote Capital Formation: Banks also promote capital formation. They accept deposits from the public and lend to investors. In this way, they help in encouraging production, income, saving and finally investment.
5. Banks Encourage the Right Types of Industries: Banks prefer to lend only to industries whose products are in high demand. Thus, they encourage the right type of industries.
6. Advances to Priority Sectors: Public sector banks and specialised financial institutions extend credit to priority sectors, such as agriculture and small-scale industries, at highly concessional rates.
7. Credit to Weaker Sections: As part of government policy, public sector banks play an important role in providing credit to weaker sections of society, such as poor farmers and village artisans.