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.

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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 accounts, 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.

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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

support 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.

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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 account 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.

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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,

accountability 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 account 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-economic-

development.htm

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