A Short Note on the Role of Commercial Bank

A Short Note on the Role of Commercial Bank

A complicated economy is best handled by banks since they have the resources and expertise to do it. Financial capital markets, goods, and labour transactions are all handled by banks. When consumers and companies need to withdraw cash money, they may do it either by writing a check or using a debit card from their bank accounts. To facilitate the flow of products and services in return for cash or other assets, banks serve as the most reliable payment mechanism and the safest place for individuals to keep their cash.

As a new strategy for boosting the economy, financial inclusion is gaining traction in India. It plays a significant role in bringing financial services to the public at reasonable costs. Economically, it is the country’s most essential goal since it has a significant impact on society. As a result, it bridges the wealth divide. A strong foundation for advancement, economic growth, and economic development is provided by financial institutions. Currently, researchers are looking at the effects of financial inclusion on economic development over the course of seven years.

Banks are always willing to accommodate the funds required for the purchase of common stock and preferred stock. For this reason, banks provide fixed capital to corporations and manufacturers. The industrial banks, on the other hand, aid in the establishment of new businesses. 

These financial institutions also provide manufacturers with long-term financing options for their enterprises. Sideways, money creation is the hallmark of the financial system. The more money a company makes, the more money it needs. However, there is still an issue. Increasing the legal tender of the currency is not an option at this time. To meet the growing demand for money, the bank’s money can be easily enlarged. As a result, money plays a significant role in the supply of money in an infrastructure that is still being developed. In addition, the banking system loans money for both domestic and foreign transactions.

Thus a big part of trades is done over credit money from banks. 

Role of Commercial Banks

Deposits are funds that commercial 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.

Because these banks should not keep and lend out part of their deposits in cash or assets that may be easily turned into money, they also generate money. 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. A portion of the money that’s spent on products and services can be deposited into another bank, which can subsequently lend the rest. The multiplier effect is a phenomenon in which the practice of re-lending can be repeated a number of times.

In addition to facilitating trade between countries, loaning money facilitates international transactions. This means that foreign exchange deals are also carried out using bank money. Larger industrialisation projects employ banks as consultants, counsellors, and agents. They have a positive impact on a country’s economic progress.

Importance of Commercial Banks

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

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.

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

Conclusion

The banking system is there to provide security to economic growth. Banks were not allowed to go bankrupt, or consumers lost savings. If there were a withdrawal of money, it would cause a shortage of funds for lending. This is also known as a Bank run. That is the reason why the Central banks act as lenders.