Role Of Nationalised Banks In The Economy 5j1u3l

INTRODUCTION The banking system is an integral part of any economy. It is one of the many institutions that impinges on the economy and affect its performance. Economists have expressed a variety of opinions on the effectiveness of the banking systems in promoting or facilitating economic development. As an economic institution, the bank is expected to be more directly and more positively related to the performance of the economy than most non-economic institutions. Banks are considered to be the mart of the world, the nerve centre of economies and finance of a nation and the barometer of its economic perspective. They are not merely dealers in money but are in fact dealers in development. In the Indian financial system, commercial banks are the major mobilisers and disbursers of financial resources. They have an all pervasive role in the growth of a developing country like India. The role of banks in accelerating the economic development of a country like India has been increasingly recognised following the nationalisation of fourteen major commercial banks in July 1969 and six more banks in April 1980. With nationalisation, the concept of banking has undergone significant changes. Banks are no longer viewed as mere lending institutions. They are to serve the society in a much bigger way with a socio-economic development oriented outlook. They are specially called upon to use their resources to attain social upliftment and speedier economic development.

OBJECTIVES The main objectives of this report are: 

to understand the role of nationalised banks in the economy.



to discuss the relationship between nationalised banks and economic growth.

METHODOLOGY The seminar report is prepared from the secondary sources like books and related websites. No primary data has been used in it.

1

FINDINGS AND ANALYSIS OVERVIEW OF ROLE OF NATIONALISED BANKS IN THE ECONOMY Banks play a crucial role in economic development. For the local community, banks provide access to funding and financial services to both local business and citizens, as well as the money banks invest back into the community through employee payroll, business investments, and taxes. On a larger scale, national banks offer similar access to credit and financial services to larger businesses, local governments, and in some cases international customers. Investments made by national banks are spread widely across the nation, therefore influencing economical development across an entire country or geographic region. The specific role of banks in economic development varies, depending on scope. Primarily, the participation of banks in economic development focus around providing credit and services to generate revenues, which are then invested back into a local, national, or international community. The specific roles banks play in the economic development of a small community differ from the role banks play in national or international economic development. Although the role can vary, factors such as access to credit and bank investment policies or practices remain constant, no matter the scope of economic development. To illustrate the different roles of various banks in economic development, one may consider a national bank with numerous local branches throughout a particular region. Locally, the bank provides both consumers and commercial organizations with mortgages, lines of credit, bank s, and various financial services, such as portfolio management and employee payroll services. Fees generated for services are invested back into the local community through sponsorships, providing low-cost funding for socioeconomic programs and investing in local government or business ventures. Nationally, the bank provides the same financial services to large corporations and state or regional governments, in addition to consumers and small business. Rather than investing revenues in just local economies however, the bank also invests in state-wide, regional, or national businesses; socioeconomic programs; and traditional stock market investments.

2

International banking influences economic development on a grand scale. A bank that does business internationally plays a much different role than local or national banks in economic development. Providing loans and other financial services to entire countries and national governments gives such banks sweeping influence over the economic growth of a particular country or region. Both positive and negative effects are realized, depending on the actions of international banks toward governments. The economic hardships of the early 21st century provide a prime example of the possible negative role of banks in economic development. Many countries have experienced a slowing of economic growth early in the 21st century. Numerous factors such as high unemployment, bad investment performance, and political uncertainty helped create an environment of distrust and decreased confidence between international banks and governments with formerly strong national economies. This resulted in reduced credit rankings of several countries and increased interest rates for credit extended to those governments. Such increased costs rippled, raising interest rates for government loans to businesses and individuals and reducing the funding available for socioeconomic programs like education and healthcare. RELATIONSHIP BETWEEN NATIONALISED BANKS AND ECONOMIC GROWTH Examining the relationship between banks and economic growth often points to conflicting conclusions based on the banking system’s ability or inability to spur economic growth. Over the years, in particular since 1976, there have been multiple research studies carried out to examine this relationship. Results from this research most often conclude that the more developed a banking system is in a nation, the more efficient and healthy will be that nation’s economic growth. Leading economists most often cite sound financial reforms, sound legal framework, a reliable infrastructure to the banking system, and prudent macroeconomic management and policy as being central to a healthy banking system that aids economic growth. Nation’s that focus on developing and refining these keys areas often enjoy consistent economic growth, with economies that usually grow at a faster rate.

3

Banking systems bring five major responsibilities to an economy, which rely on the aforementioned principles cited by leading economists: information production required for asset allocation and investments; overseeing effective corporate governance; encouragement of diversification, trading and risk management; providing a vehicle for savings; and facilitating the exchange of goods and services. Each key area relates directly to uninhibited growth opportunity. For example, sound financial reforms and transparent legal structure help to stem corruption, thereby encouraging investment, innovation and lending. As another example, reliable infrastructure facilitates the efficient production and dissemination of information often required to make decisions regarding the allocation of assets or investment. Macroeconomic

policy

and

prudent

management

decisions

in

relation

to

macroeconomics is also crucial for the development of a sound banking system that encourages economic growth. A government that decides on, effectively implements, and efficiently monitors macroeconomic policies that encourage growth of the financial sector free from corrupt practices, will at the same time, strengthen the banking system. While researchers do not always agree on the exact relationship between banks and economic growth, causality of this relationship is evident in that sound banking systems either spur economic growth or encourage investment that results in increased productivity and economic output. Mechanisms that solidify the relationship between banks and economic growth are also debated among researchers; however, evidence does suggest that some mechanisms are inherent to the relationship. Policy that effectively reduces financial constraints helps firms that rely on outside financing to advanced projects, thereby directly linking banks and economic growth. Whether a cancer research center relying on funding, a new corporation relying on investments in its stock, or the many businesses that rely on the banking system for loans to grow, access to capital is crucial and the banking system is the prime influencer in this domain. Noted as well, this may for differences in the rate of economic growth between smaller and larger communities, where banking policy may differ substantially, with larger banks reducing constraints for accessing capital, while smaller banks in smaller communities may do the opposite to minimize exposure to risk.

4

CONCLUSION The banking system in India has undergone significant changes during last 16 years. There have been new banks, new instruments, new windows, new opportunities and, along with all this, new challenges. While deregulation has opened up new vistas for banks to augment incomes, it has also entailed greater competition and consequently greater risks. India adopted prudential measures aimed at imparting strength to the banking system and ensuring its safety and soundness, through greater transparency, ability and public credibility. Banking sector reform has been unique in the world in that it combines a comprehensive reorientation of competition, regulation and ownership in a non-disruptive and cost-effective manner. Indeed banking reform is a good illustration of the dynamism of the public sector in managing the overhang problems and the pragmatism of public policy in enabling the domestic and foreign private sectors to compete and expand. There has been no banking crisis in India. The Government took steps to reduce its ownership in nationalised banks and inducted private ownership but without altering their public sector character. The underlying rationale of this approach is to assure that the salutary features of public sector banking were not lost in the transformation process. On of healthy market value of the banks’ shares, the capital infusion into the banks by the Government has turned out to be profitable for the Government.

BIBLIOGRAPHY Book: 

Misra & Puri, “Indian Economy”, Himalaya Publishing House Mumbai 2010

Websites: 

http://www.sbank.in/2013/02/role-of-banks-in-indian-economy.html



http://www.wisegeek.com/what-is-the-role-of-banks-in-economicdevelopment.htm

5