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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