A Clear Idea of the Role of Banking

Banks are the only ones who can manage a complicated economy with relative ease. Banks manage various kinds of complicated transactions, including those involving products, labour, and financial capital markets. A savings or current account may be opened by individuals and corporations so that they can access their cash money at any time by writing a check or using a debit card. Banks are the safest place to keep the money for both payment systems and personal use.

Banks are always willing to assist investors who wish to purchase common stock or debentures. Because of this, banks provide businesses and manufacturers with set capital. The second type of financial institution is an industrial bank, which lends money to start-up businesses. Long-term loans for manufacturing companies are also available from these institutions. Banks make money in an unconventional manner. As the firm grows, so does the amount of money needed to keep it running. However, an issue persists. The currency’s legal tender can’t be enlarged at a rapid pace. Bank money may be easily extended, creating a need for more money. For this reason, money plays a crucial part in developing infrastructure. Banks lend money for both domestic and foreign transactions. Thus a big part of trades is done over credit money from banks. 

Role of Banks in Financial Inclusion

The new priority for economic progress in the country is financial inclusion. Providing financial services to the public at reasonable costs is a key duty of this institution. Because of this, it is one of the country’s most critical economic and social priorities. It bridges the wealth gap between the wealthy and the rest of society. Economic progress and prosperity have historically relied on financial institutions, and this is no longer the case. For the time being, researchers are focusing on the seven-year impact of financial inclusion on economic development.

Multiple progression models can make many macroeconomic analyses from the secondary data produced by these financial institutions. There is a correlation between the number of bank branches in the nation and the country’s GDP. Hence the findings of this study are encouraging. Similarly, innovative payment methods like UPI made a solid impact on India’s GDP growth and ensured a wide level of financial inclusion. People in the developing world require financial inclusion, as it offers them customised financial goods and services.

Importance of Banks

Banks safely accommodate the savings of individuals and lend them out to people or manufacturers. 

1. When necessary, manufacturers take out loans from banks. In order to finance the acquisition of raw materials and other necessities, loans are required. The safest method of obtaining funds is through a bank. As a result, interest can be accrued. New capital assets can be created by utilising the deposits in banks.

2. Shares and debentures can also be sold through banks, as well as other financial instruments. Industrial banks provide long-term loans to manufacturers and aid in the development of new companies and industrial firms.

3. More money is required for exchange transactions as a result of the company’s growth. There is typically a limit to how much a country’s currency may grow. When additional funds are required, they may be immediately withdrawn from a bank account. Banks play a vital role in a developing economy since they are the primary providers of money.

4. Using the banking system allows for both domestic and international commerce. Many transactions are carried out on credit. Sellers can get items on loan from banks since they have a lot of references and assurances about their clients, especially when the parties are located in separate countries and have never met before.

5. Bank loans granted through discounts on bills of exchange also help commerce. Banks are also used to conduct foreign exchange transactions.

6. Finally, banks act as advisers, counsellors and agents of business and indus­trial organisations. They help the development of trade and industry.

Role of Banks

Deposits are funds that banks take in from those who have money and lend to others who don’t. They serve as a conduit for money moving from one bank to another. Interest is a term used by banks to describe both the interest they pay on deposits and the interest they earn on their loans.

On-demand or with limits, deposits are available. To make up for this, banks in most countries keep the difference between what they pay depositors and what they get from borrowers. A part of a bank’s deposits should be held in cash or insecurities that can be promptly turned into cash, but banks also create money through lending. Depending on the bank’s evaluation of the needs of its depositors, the amount of cash they reserve is determined. Federal Reserve, Bank of Japan, and European Central Bank (ECB) reserve requirements are held in trust by banks. When banks lend the money depositors give them, they generate money.

Conclusion

The banking system serves as a safety net for economic expansion. Bankruptcy and loss of funds were not permitted. There would be a lack of funds available for lending if there were a cash withdrawal. “Bank run” is another name for this type of issue. For this reason, central banks operate as sources of credit.