Role of Banks in Economic Growth of Region

In today’s economy, the financial system is critical. Individuals’ funds are collected by banks, who then lend them to companies and manufacturers. The flow of goods and services is made easier with the help of bank loans.

The money needed to buy raw materials and meet other criteria, such as working capital, is borrowed from banks by manufacturers. Banks are a reliable place to store your money. Interest is also accrued as a result of this. Savings volume rises as a result of this increased motivation to save. The money saved can be put to good use in the creation of new capital assets. As a result, banks play an essential role in a country’s capital production and hence contribute to its growth.

Shares and debentures can be sold through banks. As a result, banks are able to provide businesses and manufacturers with access to fixed capital.

Accepting Deposits

A commercial bank’s primary duty is to accept deposits. Deposits of various forms are accepted by the bank as a method of borrowing money from the general population. They can be repaid at any time. Deposits can be made in the following ways:

• Current Deposits – The term “current account” can refer to both current deposits and current accounts. To make financial transactions more convenient, most businesspeople use a current account. Once the bank establishes an initial deposit, a consumer can open a current account. 
• Savings Deposits- Commercial banks keep savings deposit accounts in order to mobilise the savings of salaried, middle, and low-income individuals. People receiving a set monthly salary are more likely to practise frugal spending habits because of this. People and non-profit organisations are the only ones who can open these kinds of accounts. In order to create a savings account with a commercial bank, a minimum initial deposit of Rs.500 is required.
• Fixed Deposits- Time deposits are fixed deposits. The customer puts money for a specified duration that can’t be withdrawn before maturity. The deposit earns interest. These deposits have a greater interest rate than current and savings accounts.

The banker sets the interest rate by assessing the quantity and time of deposits; longer periods and larger amounts result in higher rates. Fixed-deposit customers can borrow money. Fixed deposit receipts aren’t transferable.

• Recurring Deposits- Customers that make recurrent deposits do so on a regular basis, usually every month, for a length of time ranging from 12 months to 120 months. After the final instalment is paid, the whole amount and interest are due. For persons in the medium and lower income brackets, this form of deposit is quite beneficial to their financial situation. Little drops of water add up to vast oceans, as the saying goes.

Anyone can open an account with this bank. It’s also possible to open it under a shared name. This deposit’s interest rate is typically compounded.

Promote Economic Welfare

Welfare economics refers to the distribution of goods and resources in order to improve the well-being of society. It focuses on distributing resources in a way that maximises the well-being of the population. The goal of welfare economics is to influence public policy in such a way that the distribution benefits all members of society, both economically and socially. Economics is concerned with the study of the structure of the economy and its marketplaces in order to ensure an effective distribution of goods and resources in society.

The ultimate goal of welfare economics is to make society as a whole better off. In other words, the goal of welfare economics is to guide public policy toward the best interests of society as a whole through evaluating economic policies. There are several ways to research welfare economics, but cost-benefit analysis and social welfare functions are the most common methods. The study’s fundamental assumptions are that social welfare can be measured and compared across different social groups, as well as ethical and philosophical questions surrounding social well-being.

Utility theory is used in economics in this case. The concept of utility relates to the value that society places on the commodities and services that are available to it. According to the theory of utility, consumers attempt to maximise the value they receive from their transactions with sellers by taking advantage of market forces like supply and demand. There are a number of factors that can be used to determine if the benefits of a change in the economy outweigh the costs. Using Pareto efficiency, it is impossible to allocate resources in a way that benefits one person without harming another. This cost-benefit analysis relies on the premise that utility gains and losses may be quantified in dollars.

Risk Free Rate of Return

The theoretical return on an investment with no risk is known as the risk-free rate of return. Investors who make a risk-free investment will earn income on that investment during the time period described in the term “risk-free rate.”

By subtracting the current inflation rate from the yield on the Treasury bond that corresponds to your investment length, you can arrive at the so-called “real” risk-free rate. To put it simply, an investor is only willing to incur additional risk if the risk-free rate is higher than what they expect to earn from their investment. The investor’s home market must be taken into account when determining a proxy for the risk-free rate of return, and negative interest rates might further complicate matters. Even the safest investments carry a tiny element of risk, therefore a totally risk-free rate does not exist. As a result, for investors headquartered in the United States, the interest rate on a three-month Treasury bill (T-bill) is sometimes used as a proxy for the risk-free rate.

Conclusion

The country’s economy has historically relied heavily on banks. They have a significant impact on the growth of the economy and trade. They are not only the custodians of the country’s riches, but they are also essential resources for a nation’s economic growth. Economic and social stability and long-term economic growth are two of commercial banks’ primary goals. They serve both consumers and businesses by providing financial services. Commercial bank activities in India have grown rapidly in the years following independence. Territorial and functional differences exist. Banking activity will be expanded.

Banks that have traditionally operated in a conservative and traditional manner have emerged to meet the challenges of a planned economic expansion. In recent years, commercial banks in India have been paying more attention to non-conventional sectors. Commercial banks’ pre-nationalization status in the nonconventional sector can help explain the ramifications of nonconventional sector financing.