Need and importance of commercial banks. Importance of Commercial Banks 2022-11-16

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Commercial banks are financial institutions that provide a wide range of services to businesses and individuals, including accepting deposits, making loans, and facilitating the transfer of funds. They play a crucial role in the economy by providing the necessary liquidity and credit needed for economic growth and development. In this essay, we will discuss the need and importance of commercial banks in detail.

First and foremost, commercial banks serve as an important source of financing for businesses. Small and medium-sized enterprises (SMEs) often rely on banks for loans and lines of credit to fund their operations and expansion. Without access to such financing, many businesses would struggle to survive, let alone grow. Commercial banks also provide financing for individuals looking to buy a home or start a small business, helping to support economic growth and opportunity.

In addition to providing financing, commercial banks also offer a range of other financial services that are essential to individuals and businesses. These services include checking and savings accounts, debit and credit cards, and electronic payment systems such as wire transfers and online banking. These services make it easier for people to manage their money, pay bills, and make purchases, which in turn helps to facilitate economic activity and increase efficiency.

Another important role of commercial banks is that they act as a financial intermediary, facilitating the transfer of funds between borrowers and lenders. When an individual or business takes out a loan from a bank, the bank uses the funds from its depositors to make the loan. This process helps to match those who have excess funds with those who need them, and ensures that capital is put to productive use.

In addition to their role in the economy, commercial banks also play a vital role in society by providing financial services to underserved communities. Many low-income and underserved areas lack access to traditional financial services, and commercial banks can help to bridge this gap by providing basic banking services such as checking and savings accounts and small loans. This can help to promote economic inclusion and financial stability for those who may otherwise be left out of the financial system.

In conclusion, commercial banks are essential to the economy and society. They provide vital financing and financial services to businesses and individuals, facilitate the transfer of funds between borrowers and lenders, and help to promote economic inclusion and financial stability. Without commercial banks, the economy would struggle to function effectively, and many people would be left without access to basic financial services.

The Importance of Commercial Banks

need and importance of commercial banks

Correspondingly, without the bank industry, there is no industry to replace them as the conduit for social and economic policy. Commercial banks are also called joint stock banks, retail or high street banks. The government nationalized six banks. Financing Agriculture: The commercial banks help the large agricultural sector in developing countries in a number of ways. It is necessary for commercial and social development in India.

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Importance of Commercial Banks in Economics: Functions and Aims

need and importance of commercial banks

The commercial banks help in overcoming these obstacles and promoting economic development. But it also provides a service to investors by acting as a filter for who gets allocated how much capital. Instead, we can look at the actions all commercial banks share. When banks accept personal deposits and aggregate them, they typically only keep a low percentage of deposits on-hand and lend out as much as possible. In practice, though, banks try to avoid doing this by checking very carefully whether the person seeking a loan will be able to repay it. These products provide individuals and businesses with a way to save and grow their money over time.

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🎉 Importance of commercial bank. How Do Commercial Banks Work and Why Do They Matter?. 2022

need and importance of commercial banks

While yours may be more locally owned and operated than a national chain bank like Citibank or Wells Fargo, it is still a commercial bank that offers deposit accounts, savings accounts, and other products, and uses the money you deposit to invest in stocks, securities, and so on. Commercial banks, especially public sector banks, undertook a program of massive expansion of bank branches in rural, under banked and non-banked areas which aimed at ensuring regional development of banking sector in the country. However, if they tie up all their money in such loans, they would not be able to pay out cash to the customers requesting it. The bank encouraged development of a national currency. They provide short-term, medium-term and long-term loans to industry. In addition to accepting deposits, commercial banks also provide loans to individuals, businesses, and organizations. This is to ensure that if the loan is not repaid, the asset given as collateral can be sold and the money recovered.


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The Role of Commercial Banks in the Economy

need and importance of commercial banks

Lockbox Services Commercial banks offer lockbox services to businesses. When banks accept deposits its liabilities increase and it becomes a debtor, but when it makes advances its assets increase and it becomes a creditor. They play a vital role in the economy and are crucial for the smooth functioning of the financial system. All four names tell us something about them. They also make it easier for their customers to repay the money through the arrangement of long-term financial plans where the money will be spread over a determined length of time.

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Importance of Commercial Banks

need and importance of commercial banks

In most countries, the majority of banks are public limited companies but there is usually a number of private limited banks also. In recent years the commercial bank assist the Agricultural Refinance Corporation and the Industrial Development Banks. Commercial banks play a key role in a nation's economy since they provide various businesses' short- and medium-term financing needs. They provide banking services to all the neglected areas and economically backward sector but to all the sectors like industries, agriculture, traders, salaried employees, villagers, self employed person etc. Financing Domestic and International Trade: This is a major function of commercial banks. Commercial Banks: 7 Important Role of Commercial Banks in a Developing Country Agricultural Banks finance agriculture and provide long-term loans for buying tractors and installing tube wells. They are the banks we are most familiar with.

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What Is the Importance of Commercial Banks?

need and importance of commercial banks

Thus they help in the capital formation of a developing country. Something else that contributes to the importance of commercial banks is the fact that the money held on behalf of customers in the form of savings deposits cannot be categorized as idle money. The interest rate charged is typically higher than the rate paid on deposits. There is easy and immediate access to money in this type of account but usually interest is not paid on money held in such an account. These deposits provide the banks with a source of funding, which they can then use to lend to borrowers. As banks increasingly reach out to the Internet to connect with customers, this factor of convenience which saves time and money will only increase.

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Commercial Banks: 7 Important Role of Commercial Banks in a Developing Country

need and importance of commercial banks

Commercial banks have evolved from a long tradition, dating back at least to Italian moneylenders and merchants in the 12th century, of accepting deposits and writing checks. Nationalization of banks is essential for agricultural and industrial development. This is because many Muslims regard charging of interest, sometimes called usury, as a sin. Banks are highly important for the economy because by engaging in their activities, they actually create money. The liquidity principle of a commercial bank is the strategy of conserving the desired amount of liquid assets in order to be able to pay the checks of the customers on demand.


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How Do Commercial Banks Work and Why Do They Matter?

need and importance of commercial banks

They also mobilise idle savings of the few rich. This helps to ensure that money can flow smoothly throughout the economy and facilitates trade and commerce. The organizing group then sends its plan, along with information on the board and management, to regulators who review it and decide if the bank can be granted a charter. Discounting bills of exchange is another type of advance granted by the banks in which a genuine trade bill discount by the banks and the holder of the bill gives the amount and the banks arrange to collect the due from the drawer of the bill on the date of maturity. Since every deposit is equal to money, banks are said to be creating money in the form of credit. Other Functions of Commercial Banks: Over a period of time, commercial banks have built up a range of other services that they offer their customers. .

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need and importance of commercial banks

While it tore down the commercial and investment bank wall, the Gramm-Leach-Bliley Act did maintain some safeguards: It forbids a bank and a nonbank subsidiary of the same holding company from marketing the products or services of the other entity—to prevent banks from promoting securities underwritten by other subsidiaries to their customers—and placed size limitations on subsidiaries. On the other hand, cooperative banks are classified into urban and rural. Banks are highly important for the economy because by engaging in their activities, they actually create money. Commercial banks play a key role in the economy both at a national and global level. Commercial banks play a major role in economic activities by providing banking services to all types of people. Banks make most of their profit by charging higher interest from borrowers than that paid on the money held with the banks. In fact, commercial banks, as their name suggests, axe profit-seeking institutions, i.

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need and importance of commercial banks

The fractional-reserve system, universal in modern banking, means that banks only hold a certain percentage of deposits on-site. By providing loans, commercial banks help to stimulate economic growth and development. While commercial banks have traditionally provided services to individuals and businesses, investment banking offers banking services to large companies and institutional investors. However, if you have strengths you have weaknesses. Most employ Islamic sharia scholars and experts who can issue religious edicts fatwas that approve financial products including loans. High street tells us that these banks are found in most of the towns and cities. Banks not only acquire business due to their convenience, but they also serve to reduce the average cost of settlement between parties.

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