Meaning:
Commercial banks are vital financial institutions that deal primarily with accepting deposits from the public and lending money for investment, production, and consumption purposes. These banks function with the objective of earning profit while offering a wide range of financial services to individuals, businesses, and government entities. They are considered the backbone of the modern financial and economic systems due to their significant role in the circulation of money, credit creation, and financial inclusion. Through their diverse services, commercial banks help in capital formation, encourage savings, and promote overall economic development.
History of Commercial Banks:
The origins of commercial banking can be traced back to ancient civilizations, where early forms of banking activities like money lending and safe storage of valuables were carried out by merchants and traders. In India, modern commercial banking began with the establishment of the Bank of Hindustan in 1770, which was the first joint-stock bank. During the colonial period, the British established Presidency Banks in Bombay (now Mumbai), Calcutta (now Kolkata), and Madras (now Chennai) to serve their administrative and trade interests. These banks were later merged to form the Imperial Bank of India in 1921.
In 1955, the Imperial Bank of India was nationalized and renamed the State Bank of India (SBI), marking a significant development in India's banking history. Following this, 14 major commercial banks were nationalized in 1969 by the Government of India to bring the banking system under state control and promote equitable growth. Another six banks were nationalized in 1980. These moves aimed to expand the banking network, promote rural banking, and ensure credit flow to priority sectors such as agriculture, small-scale industries, and self-employment initiatives. Liberalization in the 1990s further transformed the banking landscape with the entry of private and foreign banks, enhancing competition, efficiency, and service quality.
Functions of Commercial Banks:
- Accepting Deposits: Commercial banks offer various deposit schemes like savings accounts, current accounts, recurring deposits, and fixed deposits to attract funds from the public. These deposits form the core resources for lending and other banking operations.
- Granting Loans and Advances: Banks provide credit facilities in the form of loans, cash credit, overdrafts, and bills discounting to individuals, corporate entities, and traders. These loans support working capital needs, personal expenditures, and business expansions.
- Credit Creation: One of the most crucial roles of commercial banks is credit creation. By lending more than what is deposited, banks multiply the money supply in the economy, which contributes to increased investment and consumption activities.
- Agency Functions: Banks act as agents of their customers by providing services like collection and payment of cheques, drafts, dividends, rent, utility bills, and acting as executors, administrators, and trustees.
- General Utility Services: They offer numerous value-added services including safe deposit lockers, fund transfers, foreign exchange dealings, issuing traveler's cheques, credit/debit cards, mobile and internet banking, and financial consultancy.
Role in Agriculture and Rural Development:
Commercial banks play a crucial role in promoting agricultural growth and rural development in India. They extend financial support to farmers for purchasing seeds, fertilizers, pesticides, machinery, irrigation equipment, and land development. Through schemes like the Kisan Credit Card (KCC), banks provide timely and affordable credit to farmers, enabling them to carry out agricultural operations without financial stress.
Banks also collaborate with institutions like NABARD (National Bank for Agriculture and Rural Development) for refinancing and implementation of rural development schemes. They fund self-help groups (SHGs), farmer producer organizations (FPOs), and rural entrepreneurs, contributing to employment generation and poverty alleviation. Commercial banks help in building rural infrastructure, promoting financial literacy, and encouraging savings habits among the rural population.
Examples in India:
- State Bank of India (SBI): The largest public sector bank with a vast network in rural and urban areas.
- Punjab National Bank (PNB): One of the oldest and most trusted public sector banks.
- Bank of Baroda (BoB): Known for its wide international presence and rural outreach.
- HDFC Bank: A leading private sector bank known for innovation and customer service.
- ICICI Bank: Offers a range of digital banking services and has a strong retail base.
- Other examples include Canara Bank, Axis Bank, Union Bank of India, and Kotak Mahindra Bank.
Commercial banks serve as the lifeline of a country's economy by facilitating monetary transactions, mobilizing public savings, and channeling funds into productive sectors. Their multifaceted roles not only support industrial and commercial growth but also contribute to rural development and financial inclusion. In the Indian context, commercial banks have been instrumental in supporting government initiatives for poverty reduction, rural upliftment, and agricultural enhancement. With ongoing digitalization and financial reforms, their contribution to economic development is expected to grow even more significant in the coming years.