Essay on the Role of Banking in India's Developing Economy

One of the major considerations that led to the nationalization of the fourteen major commercial banks of India in 1969 was the fact that banks, in general, had been negligent of the vital priority sectors of the economy, viz., agriculture and small-scale industries. The commercial banks had remained largely indifferent to the credit needs of the farmers for agricultural operations and land improve­ment. A handful of people were able to exploit the bank finance to serve their own individual interests and convenience. Very often, they used bank funds for the hoarding of essential articles and for specialization, thus nurturing anti-social elements. Nationalization brought about a major policy shift in the working of these banks.

The economic development of our country depends more on real factors like the industrial development, modernization of agri­culture, organization of internal trade and expansion of foreign trade, especially exports, and less on the monetary factors contri­buted by banking— Economic planning like laying down of specific targets and allocating particular sums of money that constitute the economic policy of the government also plays a significant role. Still we cannot under-estimate the importance of banking and the monetary mechanism.

One of the most important problems of a developing economy is that of capital formation. There is a good deal of difference between hoarding and saving and the people in the countryside have to be made to realize the difference. This can be easily done by banks. They can undertake to educate the rural populace and thus mobilize their savings. A number of leading economists have con­firmed the fact that the amount of capital available in India for investment is surprisingly and inexplicably large. Only we need exploiting this idle capital. Who else can exploit it, if not banks? Both in rural and urban areas, huge amounts of money are wasted on celebrations like marriages and births. If banks can offer hand­some interest on savings, people can be induced to direct their savings from wasteful activities to banks. Promoting attractive deposit schemes needs some very active work on the part of the banks, but it can certainly mobilize a large amount of saving for capital formation.

The Government of India has now undertaken a large number of projects for the economic reconstruction of the country. Banks can generate an adequate volume of credit and conduct it along useful productive channels. They can distinguish between the essential and non-essential factors of the economy between produc­tive and non-productive investment, between speculative arid non-speculative borrowing and thus help in the growth of the economy.

Two other acute problems faced by our low and middle income groups are the housing problem and gnawing unemployment prob­lem. If the banks undertake to help these groups, they will also be making a significant contribution to our economy. It will also help in removing the economic imbalance of the various sections of our society.

Before nationalization, our banks could not play this cons­tructive role expected of them. But after nationalization, the entire banking machinery has now been geared to the economic develop­ment of the country. They have started looking after the needs of the small farmer and the new entrepreneur. It is earnestly hoped that the Government will take some more positive steps to ensure that the real benefits of an organized banking system percolate down to the poor illiterate masses of India.