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Impact of Commercial Banks in the Economy

08 December 2021
3 minutes

There are different types of banks that make up the Indian banking system. There are co-operative banks, small finance banks, commercial banks, and payments banks.

Commercial banks make the bulk of the banking system in India. It consists of public sector banks, private sector banks, foreign banks, and rural banks. These commercial banks have been the cornerstone of the modern Indian economy.

Wonder how? Let’s explore the functions and impact of commercial banks on the economy.

What are commercial banks?

Commercial banks are a part of the financial system that form the backbone of our economy. These financial institutions offer services including opening bank accounts, cash deposits, loans, and many other banking services to individuals, small businesses, and corporations.

Commercial banks are the foundation of a strong economy that indicates extensive financial system in the country. These banks aid the financial activities of Government bodies, and boost investment across sectors in the country, thereby help in the country’s growth. 

Impact of commercial banks

Handling financial assets

One of the core banking operations is to handle the money deposited by bank account holders and ensure they can withdraw the money any time they want. This includes timely disbursal of interest on savings accounts. And to have sufficient funds to finance loans and other debt products.

Capital formation 

Commercial banks collect money from bank account holders as deposits and use it as capital. The banks invest this capital in several safe investments for maximum returns. This helps the banks to pay interests on the depositors’ money. 

Help inculcate a saving habit

One of the major attractions for a bank account holder is the stable returns that banks offer as interest income. Various deposit schemes that are linked to rewards and interest make people deposit their money in banks. This helps inculcate a saving habit, which is advantageous for the economy.

Financing businesses

Capital is highly crucial across businesses and industry sectors. It is one of the prerequisites for sustaining a business. It is here that commercial banks jump to the rescue of businesses lending loans. These include entrepreneurs, agriculturists, and small and medium-sized enterprises.  

Increase consumer spending 

The middle-class and the lower middle-class groups have reaped immense benefits of lucrative consumer loans like home loans, car loans, 2-wheeler loans, gold loans, and personal loans.

The EMI structure of repayment has made the capital easily accessible for many people who can now take a loan at minimal interest rates. This has led to an increase in consumer spending, which drives the demand in the economy.

Simplifying trade and commerce

Commercial banks help streamline transactions and help funds exchange hands quickly. It particularly benefit the foreign trade transactions. Where the transactions may be in foreign currencies that can be exchanged in a commercial bank.

Today, trade and commerce are heavily reliant on modern banking features, which allows sending and receiving money in different currencies via the click of a button.

Enhances development 

With commercial banks spreading to tier-2 and tier-3 cities, banking operations witness improvements. This balanced development in semi-urban and rural areas helps in creating awareness about banks and its function. It also increase the access to banking services. People who were used to cash, now opt to deposit it in a commercial bank, thereby increasing liquidity.

Disclaimer: The views expressed in this post are that of the author and not those of Groww

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