Role of Commercial Banks
There is an urgent scarcity of capital. People lack initiative and entrepreneurship. Transportation infrastructure is underdeveloped. The industry is depressed. Commercial banks assist to overcome these barriers and promote economic growth. The function of a commercial bank in emerging countries is explained below.
Commercial banks provide many financing options for the industrial sector. They provide short-, medium-, and long-term loans to industry. In India, they provide short-term loans. They offer medium-term loans for one to three years to Latin American nations such as Guatemala based on their income. However, in Korea, commercial banks also provide long-term loans to industry.
In India, commercial banks offer short- and medium-term financing to small-scale companies, as well as hire purchase loans. Furthermore, they underwrite the shares and debentures of huge corporations. As a result, they not only fund industry but also contribute to the development of such nations’ underdeveloped capital markets.
Commercial banks facilitate capital formation by mobilizing savings via their branch banking networks. People in underdeveloped nations have modest salaries, but banks encourage them to save by offering a range of deposit programs tailored to the requirements of individual depositors. They also tap on the few wealthy people’s idle savings. Banks mobilise savings and redirect them into profitable ventures. As a result, they contribute to the generation of capital in developing countries.
Commercial banks support the agriculture industry in emerging nations via various financing options. They provide loans to dealers of agricultural goods. They establish a network of branches in rural regions to provide agricultural finance. They give direct financing to farmers for selling their products, modernizing and mechanizing their farms, providing irrigation infrastructure, developing land, and so on.
They also provide financial help in animal husbandry, dairy farming, sheep breeding, poultry farming, pisciculture, and gardening. Small and marginal farmers, landless agricultural laborers, craftsmen, and tiny merchants in rural regions get financial help from regional rural banks in India. These regional rural banks are operated by a commercial bank. Thus, commercial banks satisfy the credit needs of all sorts of rural residents.
Commercial banks assist finance both internal and external commerce. Banks make loans to merchants and wholesalers so that they can stock the items with which they trade. They also facilitate the flow of products from one location to another by offering a variety of services such as discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, and so on. Furthermore, they fund developing nations’ exports and imports by offering foreign currency services to importers and exporters of products.
Commercial banks fund employment-generating activities in emerging nations. They give loans for young people who are studying engineering, medicine, or other vocational colleges of higher learning. They provide loans to young entrepreneurs, medical and engineering graduates, and other technically qualified individuals interested in starting their own businesses. Several commercial banks in India provide such lending arrangements. Thus, banks contribute not only to the building of human capital but also to the expansion of entrepreneurial activity in emerging nations.
Financing Consumer Activities:
People in developing nations are impoverished and have low wages, therefore they lack the financial means to purchase durable consumer items. Commercial banks provide loans to clients for the purchase of commodities such as homes, scooters, fans, refrigerators, etc. In this manner, they also contribute to raise the quality of life in poor nations by providing loans for consumptive purposes.
Help with Monetary Policy:
Commercial banks contribute to a country’s economic progress by rigorously implementing the central bank’s monetary policies. In truth, the central bank relies on commercial banks to ensure that its monetary management strategy meets the needs of an expanding economy.
Thus, commercial banks provide significant contributions to the progress of a developing economy by lending to agriculture, commerce, and industry, assisting in the construction of physical and human capital, and adhering to the country’s monetary policy.