Do you know about the Role of Banks in the Development of Indian Economy - Must read this article

Banking in its crude form is in vogue in society for long. It existed even in ancient times. Report a French writer has mentioned the existence of banks and banknotes in Babylon as far back as 600 B.C. i.e., more than 26 centuries since now. Manu Smiriti, a prehistoric piece of literature has references to money lending business in Indian society. History of Egypt and neighboring countries bears a record of the existence of banks in rudimentary form in early times. In India's regular banking system came into existence in the eighteenth century.

Role of Banks in the Development of Indian Economy

Role of Banks in the Development

Word "bank” has been derived either from the Greek word "Benque" a from the Italian word "benque" both of which refer to a bench on which the money lenders and money chequers used to sit in order to display their money and also carry out transactions in the market place. Banking in India started with the opening of The General Bank of India in 1786 and the Bank of Hindustan. Both these banks are not in existence now. The oldest bank still in existence is the State Bank of India which started operating in Calcutta in June 1806. Just after the start, it was named Bank of Bengal. This was one of three Presidency banks, the other two being the Bank of Madras and the Bank of Bombay. All three Presidency Banks were established under the Charter of the East India Company. For quite some time the Presidency Bank acted as east Central Bank as did their successors. The three Presidency banks merged together to form the Imperial Bank of India. after independence Imperial Bank of India was renamed "Reserve Bank of India". In 1947 the Reserve Bank was nationalized and was given broader powers. In 1969 Govt. of India nationalized the 14 largest banks operating in India and in 1980 next biggest six banks were also nationalized.

The Allahabad Bank is the oldest Joint Stock Bank which is still in operation. Actually speaking Upper India Bank established in 1863 was the oldest one but it survived only up to 1913.

Classification of Banks

Role of Banks In accordance with the provisions of "Reserve Bank of India Act, 1936" banks were divided into two classes :

(1) Scheduled banks and (ii) Non-scheduled Banks

The banks which fulfilled the provisions of the 2nd schedule of RBI Act was called a scheduled bank. Thereby all the commercial banks either Indian or foreign, regional rural banks, and State Co-operative Bank came under
the category of scheduled banks whereas non-scheduled banks are scheduled for scheduled banks in India.
reserve bank of India Act. 1934. To be specific there are only three non-

Progress of Banking

The progress of the banking industry was quite slow during the first half of 20 century or say during the period of the foreign rule because during that period Indian Banking System had to face a series of crises whereby bank failure was a common event. But with the planned economic growth after independence, their growth has been rapid. It is also the result of an increase in the money supply and cultivation of banking habits as also the guidance provided by the Reserve Bank of India. The contribution of the nationalization of banks proved to be a milestone in the progress and development of the banking industry.

After nationalization within 33 years, there were 800% increases in the number of branches of the banks, the major progress being in rural areas. The number grew from 1880 to 30,600. This increase in the number of
branches have no parallel in the world.

Development Oriented Banks

During its expansion period after independence, the banking industry has covered new segments of the economy in addition to the traditional ones. The area of banking has widened from accepting more deposits and bending of funds to development-oriented banking. They are now catering to the needs of the industrial and agriculture sectors. From short term financing, they have now shifted to long term and medium-term financing. The small and weak industrial units small formers and artisans and other groups hitherto neglected are now having properly assisted by banks.

The most significant factor of the awareness and involvement in the development program is the promulgation of lead bank scheme under which each district of all the states of the country is allocated some bank or the other to perform the following functions:

(1) Opening of bank branches in all important locations.

(2) Providing maximum credit facilities for development in the district allocated to the bank.

(3) Mobilizing the savings of the people in the respective districts.

The performance of the lead banks is judged by the number of projects assisted by them in order to improve productivity or creating new employment opportunities.

Priority Sector Lending by Bank

Before nationalization the banks usually neglected priority sector lending as these were owned and controlled by big industrial houses but after nationalization commercial banks have started financing of priority sectors such as agriculture. The Union Finance Minister on 18th June, 2004 announced certain measures to double the flow of credit for agriculture sector within a period of three years, a target that was comfortably achieved.

Social Banking: Govt. of India has made use of the public sector banks to finance money for its programs such as poverty reduction and poverty eradication. Programs like Integrated Rural Scheme for Urban Micro Enterprises, credit to minority communities, Prime Development Programme, Prime Minister Rozgar Yojna for educated unemployed.
Enterprises and weaker sections are showing an increasing trend. Minister's Employment Generation Programme is financed by commercial banks. Lending from public sector banks to priority sectors, micro, and small enterprises, and weaker sections are showing an increasing trend.

Diversification in Banking Services

Banking Regulation Act of 1949 authorizes the banks to diversify their functions in accordance with the needs of their customers. The diversification can be observed in the following fields :

1. Merchant Banking and underwriting

 2. Mutual Funds

3. Rural Banking

4. ATMs

5. Anywhere Banking

6. Internet Banking

7. Venture Capital Funds

8. Factorship

Many banks have now been permitted to introduce the stock investment scheme thereby increasing the number of such banks to 51. Some banks have set up Asset Management Companies to manage their mutual funds.


The banking industry is committed to growth in the future with a more qualitative rather than quantitative approach and taking the main Role of Banks in the Development of the Indian Economy. Barring the asset side on the liability perspective there will be a huge addition to the capital base and reserves. People may rely more on borrowed funds, the pace of deposit slowing down at the same time. However, advances and investments would not see a healthy growth rate.

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