Banking plays an important role in the financial life of a business, and the importance of banks can be seen from the fact that they are considered as to be the life-blood of modern economy. Although no wealth is created by Bank, but their essential activities facilitates the process of production, exchange and distribution of wealth. In this way they become the effective partners in the process of economic development and growth. In the words of Stephenson & Britain “Banks are the custodians and distribution of liquid capital, which is the life-blood of our commercial and industrial activities and upon the prudence of their administration depend the economic well-being of the nation”.
Importance of Banks for Business
On the basis of these Important Functions of Banks, we may easily describe the importance of banks in today’s global life.
- Collections of Savings and Advancing Loans
Acceptance of deposit and advancing the loans is the basic function of commercial banks. On this function, all other functions depend accordingly. Bank operates different types of accounts for their customers.
- Money Transfer
Banks have facilitated the making of payments from one place or persons to another by means of cheques, bill of exchange and drafts, instead of cash. Payment though cheques, draft is more safe and convenient, especially in case of huge payments, this facility is a great help for traders and businessmen. It really enhances the importance of banks for business community.
- Encourages Savings
Banks perform an invaluable service by encouraging savings among the people. They induce them to save for profitable investment for themselves and for national interest. These savings help in capital formation.
- Transfer Savings into Investment
Bank transfer the savings collected from the people into investment and thus increase the amount of effective capital, which helps the process of economic growth.
- Overdraft Facilities
The banks allow the overdraft facilities to their trusted customers and thus help them in overcoming of temporary financial difficulties.
- Discounting Bill of Exchange
Importance of banks can be seen through the facility of discounting bill of exchange. Banks discount their bill of exchange of consumers and help them in the financial difficulties. By discounting bill of exchange, they able to get the desire amount for investment they want.
- Financing Internal & External Trade
Banks help merchants and traders in financing internal and external trade by discounting foreign bill of exchange, issuing of letter of credit and other guarantees for their customers.
- Act as an Agent
The bank act as a agent and help their customers in the purchase and sales of shares, provision of lockers payment of monthly and dividends on stock.
- Issue of Traveler’s Cheques
For the convenience and security of money for travelers and tourists, bank provides the facility of traveler’s cheques. These cheques enable the travelers and tourists to meet their expenses during their journey, as these are accepted by issuing bankers, restaurants, and other businessmen both at home and abroad. No doubt, this is also one of the great functions of banks and shows the importance of banks for us in more precise ways.
- General Utility Services
Existence of commercial banks is essential for contribution to general prosperity. Banks are the main factors in raising the level of economic development of the world. In addition to above-cited advantages, banks also provide many services of general utilities to the customers and the general public.
Role of Commercial Banks in the Economy
As we know that main objectives of a commercial bank is to earn profit by the process of accepting of deposits and advancing loans through different methods. Although these functions are the basic function of commercial banks, but there are a lot more functions which enhances the importance of banks today.
- Acceptance of deposits, by opening different kinds of bank accounts
- Advancing of loans to needy persons through different methods and requirements
- Provisions of agency and general utility services to his customers
- Making new investments in different organizations and increasing the productive capacity of the country
- Promote capital formation in the country by mobilizing and collection of savings for the purpose of investments
- Development of industries in the country according to the requirements of the economy
- A balanced development in the economy is achieved in different sectors & regions through the resources of bank funds
- Development in agricultural production is made possible by providing different kinds of loans
- These banks help in reducing reliance in foreign assistance by their efforts in the mobilization of domestic savings
- These banks help in the implementation of an effective monetary policy according to the objective to central bank.
- Commercial banks also help in the creation and distribution of money through the sales and purchase of securities.
- Commercial banks are the custodian and distributor of liquid capital of the country, which is the life blood of all commercial and economic activities of a country.