India
has a well-developed banking system. Most of the banks in India were founded by
Indian entrepreneurs and visionaries in the pre-independence time to provide
financial assistance to traders, farmers, budding Indian industry and so on. Commercial
banks play an important role in the economic development and welfare of the
country. Every commercial banks have great functions to strengthen the
development of the country.

1.     Capital
formation: commercial banks mobilize idle savings of the people and invest the
same in productive activities. Hence they help in promoting capital formation
and accelerating the rate of economic development of the country.

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2.     Inducement
to innovations: by providing credit to the business people, bank encourages
innovations. Thus new products come to the market. It plays a vital role in the
development of economic growth in the country. Economic development depends on
demand and supply of the commodity in the market.

3.     Motivate
investments: Banks determine the interest rate and thus encourage people to
invest their money in the bank. Hence they can in return give loan to the
entrepreneurs and traders to encourage their business and innovations. Thus
production and trade get stimulated and economic development get fast.

4.     Development
of Rural Sector: the duty of bank to help them and make develop the rural
sector. They provide loans with reasonable interest rate to the farmers and
thus encourage them to use goods seeds, advanced technology hence the outcome
would be best. Banks open their branches in the rural areas to mobilize the
savings and make use them in a productive manner. It also has a positive impact
on economic development of the country.

5.     Helpful
in Increasing Demand:  Demand for
consumer goods is low in underdeveloped countries because of low income and low
living slandered. By providing loans, banks help in pushing up the aggregative
demand. Consequently, the productivity of the farmers also gets strengthened.
Thus it helps in creating more income and employment.  Banks help in raising the standard of living
and promoting economic development.

6.     Monetary
Policy: In order to implement their monetary policy effectively, the government
and the central bank of each underdeveloped country require a sound banking
system. Cooperation of commercial banks is of prime importance to achieve the
objectives of the monetary policy. Effective implementation of monetary policy
makes it possible to achieve the objectives of economic development.

7.     Employment:
Unemployment is the problem in underdeveloped countries. In order to reduce the
number and growth of unemployment, banks provide loans at low rate of interest
under various schemes. Thus banks help in increasing employment opportunities
and total output.

8.     Arrangement
of Foreign Exchange: Foreign Exchange Banks finance foreign trade by
discounting foreign bills of exchange. (p 17-19)