Banks have become an essential part of economic life in every field. The development of agriculture and industry are not possible without banks. Modern trade also cannot be thought of without commercial banks.
Economic activities in the fields of consumption, production, distribution and other branches of economics cannot be carried on properly without banks. Government also cannot effectively use various monetary and fiscal measures without banks for the accomplishment of various socio-economic objectives.
Therefore, the statement of Wicksell seems to be perfectly appropriate when he says that bank is the heart and central point of modern exchange economy. The significance of banks becomes clear looking at the following points.
1. Banking and Capital Formation:
Capital formation is the basic factor for economic development. Capital formation means creation of physical assets like machines and buildings which increase productive capacity of a country. For capital formation savings are required which are largely mobilised by commercial banks.
2. Banking and Investment:
The pattern of investment and its quantum that are carried on depend to a large extent on the banking system. An entrepreneur may wish to introduce innovations and this affects economic development positively. Bank credit enables entrepreneurs to innovate and invest, and thus promote economic activity.
3. Banking and Industry:
Banks are helping industries by providing them credit for establishing new units and updating and expanding the old units.
4. Banking and Agriculture:
Banks are helping farmers to develop agriculture for providing them long term finance for buying tractors and installing tube-wells.
5. Banking and Trade:
Banks are helping trade by providing short-term and long-term finance.