Role of Commercial Banks in Development

Topics: Bank, Cheque, Money Pages: 13 (3979 words) Published: April 16, 2013
Role of commercial banks in development.


A commercial bank is something with which every one of us is well known. However different bankers and economists have defined it in a different way:  According to Kent:
“An organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditure.” According to Banking Companies Ordinance 1962:

“Banking means the accepting for the purpose of lending or investing of deposits of money from the public repayable in demand or otherwise and withdraw-able by cheque, draft order or otherwise.”

Various economists have different views about the role of commercial banks in economic development. Schumpeter says, “It is the banking system which serves as a key agent along with the entrepreneur in the process of economic development”. According to Prof. Cameron in his “Banking and Economic Development”, “a banking system may make a positive contribution to economic growth and development.” Evolution of Commercial Banks

The foundation for building a broad base of agricultural credit structure was laid by the Report of the All-India Rural Credit Survey (AIRCS) of 1954. The provision of cultivator credit in 1951-52 was less than 1% for commercial banks. In the report it was observed that agricultural credit fell short of the right quantity, was not of the right type, did not fit the right purpose and often failed to go to the right people. With a view to give an impetus to commercial banks, particularly, in the sphere of investment credit, the nationalization of the Imperial Bank of India and its re-designation as the State Bank of India (SBI) was recommended.

Growth in Outreach 1951-91
From the position prevalent in 1951-52, commercial banks came a long way with a substantial spread of 32,224 branches in rural and semi-urban areas comprising 68% of their total outlets as on 31 March 1991. The outstanding deposits of such branches at Rs.67,855 crores as on the same date constituted around 35% of their total deposits, while loans outstanding at Rs. 43,797 crore comprised 36% of outstanding credit. The agricultural advances of the commercial banking system aggregated Rs. 16,687 crore and constituted 14% of total advances in March 1991. The rural and semi-urban branches of commercial banks covered 17.6 crore deposit accounts while the number of loan accounts serviced aggregated 3.7 crore.

Growth during 1991-92 to 2003-04
The period since 1991-92 has seen a fairly rapid expansion of credit to agriculture. Available data indicate that the flow of credit to agriculture by commercial banks and RRBs taken together increased to Rs. 60,022 crore in 2003-04. This implies a compounded annual growth rate of 22.2%. In fact, as compared with commercial banks (including RRBs), the flow of credit from the cooperative sector was much slower through this period. The compounded annual growth rate of credit for agriculture from cooperative institutions was only 13.7%. Further, the proportion of agriculture credit to total credit came down because of the rapid growth in non agriculture credit. The Government took some major initiatives during the period to boost agriculture production and productivity through enhanced credit flow and by way of building agricultural infrastructure, particularly irrigation and connectivity in rural areas. Special Agricultural Credit Plan (SACP) was introduced by RBI for Public Sector Commercial Banks in 1994-95. Credit growth for agriculture and allied sectors under this caption reflected a CAGR of 36.45% during 2001-02 to 2005-06. SACP has since been extended to Private Sector Commercial Banks from 2005-06. The SHG – Bank Linkage Programme was started as a pilot project by NABARD in 1992. It led to the evolution of a set of RBI approved guidelines to banks to enable SHGs to transact with banks. Initially there was slow...

Bibliography: * Samuelson Norhaus, economics, 18th edn, Tata McGraw Hill Publishing Co. Ltd., 2008
* Xam idea, economics, F K Publication, 2009
* Chitta Ranjan Basu, Commercial Banking in the Planned Economy of India, Mittal Publications, 1991

* N. Gregory Mankiw, Principles of Economics, cengage learning, 2012
[ 6 ]. N. Gregory Mankiw, Principles of Economics, cengage learning, 2012
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