Role of Financial Institution in Economy

Role of Banks and Financial Institutions in Economy Money impart in one pulp or the other has evolved along with the history of the mankind. Even in the ancient times there are references to the moneylenders. Shakespeare too referred to Shylocks who made unreasonable demands in subject field the loans were not repaid in time along with interest. Indian history is also replete with the instances referring to indigenous money lenders, Sahukars and Zamindars involved in the business of money lending by mortgaging the landed property of the borrowers.Towards the beginning of the twentieth century, with the on determined of youthful industry in the clownish, the need for brass regulated banking establishment was felt. The British government began to pay attention towards the need for an organised banking domain in the country and Reserve Bank of India was set up to regulate the formal banking sector in the country. But the growth of novel banking remained slow mainly due to lack of surplus capital in the Indian economic system at that leg of time. Modern banking institutions came up only in big cities and industrial centres.The rural areas, representing vast major(ip)ity of Indian society, remained dependent on the indigenous money lenders for their confidence needfully. Independence of the country heralded a new era in the growth of modern banking. Many new commercial banks came up in mingled parts of the country. As the modern banking network grew, the government began to realise that the banking sector was catering only to the needs of the well-to-do and the capitalists. The interests of the poorer sections as well as those of the coarse man were being ignored. In 1969, Indian government took a historic decision to nationalise 14 biggest private commercial banks.A few more were nationalised subsequently a couple of years. This resulted in transferring the ownership of these banks to the State and the Reserve Bank of India could then issue directio ns to these banks to fund the national programmes, the rural sector, the plan priorities and the priority sector at differential rate of interest. This resulted in providing fillip the banking facilities to the rural areas, to the under-privileged and the downtrodden. It also resulted in pecuniary inclusion of every(prenominal) categories of people in almost all the regions of the country.However, after almost two decades of bank nationalisation some new issues became contextual. The service standards of the public sector banks began to decline. Their profitability came down and the efficiency of the staff became suspect. Non-performing assets of these banks began to rise. The cycle per second of time had turned a full circle by early nineties and the government after the introduction of structural and economic reforms in the financial sector, allowed the setting up of new banks in the private sector. The new generation private banks have now established themselves in the system and have set new standards of service and efficiency.These banks have also disposed(p) tough but healthy competition to the public sector banks. Modern Day Role Banking system and the Financial Institutions play very significant role in the economy. First and foremost is in the form of catering to the need of credit for all the sections of society. The modern economies in the world have developed primarily by making best use of the credit availability in their systems. An efficient banking system essential cater to the needs of high end investors by making available high amounts of capital for big projects in the industrial, infrastructure and service sectors.At the same time, the median(a) and small ventures must also have credit available to them for new investment and expansion of the existing units. uncouth sector in a country standardized India can grow only if cheaper credit is available to the farmers for their short and medium term needs. Credit availability for infrast ructure sector is also extremely of import. The success of any financial system can be fathomed by finding out the availability of reliable and adequate credit for infrastructure projects.Fortunately, during the preceding(a) about one decade there has been increased participation of the private sector in infrastructure projects. The banks and the financial institutions also cater to another important need of the society i. e. mopping up small savings at reasonable rates with several resources. The common man has the option to park his savings under a few alternatives, including the small savings schemes introduced by the government from time to time and in bank deposits in the form of savings accounts, pass deposits and time deposits. Another option is to invest in the stocks or mutual funds.In addition to the above traditional role, the banks and the financial institutions also perform certain new-age functions which could not be thought of a couple of decades ago. The adroit ness of internet banking enables a consumer to access and operate his bank account without actually visiting the bank premises. The facility of ATMs and the credit/debit cards has revolutionised the choices available with the customers. The banks also serve as alternative gateways for making payments on account of income tax and online payment of various bills like the telephone, electricity and tax.The bank customers can also invest their funds in various stocks or mutual funds straight from their bank accounts. In the modern day economy, where people have no time to make these payments by standing in queue, the service provided by the banks is commendable. While the commercial banks cater to the banking needs of the people in the cities and towns, there is another category of banks that looks after the credit and banking needs of the people living in the rural areas, particularly the farmers. Regional Rural Banks (RRBs) have been sponsored by many commercial banks in several State s.These banks, along with the cooperative banks, take care of the farmer-specific needs of credit and other banking facilities. Future gutter a few years ago, the government largely patro-nized the small savings schemes in which not only the interest rates were higher, but the income tax rebates and incentives were also in plenty. The bank deposits, on the other hand, did not entail such benefits. As a result, the small savings were the first choice of the investors. But for the farthest few years the trend has been reversed. The small savings, the bank deposits and the mutual funds have een brought at par for the purpose of incentives under the income tax. Moreover, the interest rates in the small savings schemes are no longer higher than those offered by the banks. Banks today are free to determine their interest rates within the given limits prescribed by the RBI. It is now easier for the banks to open new branches. But the banking sector reforms are still not complete. A lot m ore is required to be done to revamp the public sector banks. Mergers and amalgamation is the next measure on the agenda of the government.The government is also preparing to disinvest some of its equity from the PSU banks. The option of allowing foreign direct investment beyond 50 per cent in the Indian banking sector has also been under consideration. Banks and financial intuitions have played major role in the economic development of the country and most of the credit- related schemes of the government to uplift the poorer and the under-privileged sections have been implemented through the banking sector. The role of the banks has been important, but it is passing to be even more important in the future.