Role of Commercial Banks

Deposits are funds that commercial banks take in from those who
have money and lend to others who don’t. They serve as a conduit
for money moving from one bank to another. Interest is a term
used by banks to describe both the interest they pay on deposits
and the interest they earn on their loans.

On-demand or with limits, deposits are available. To make up for

this, banks in most countries keep the difference between what
they pay depositors and what they get from borrowers.

Because these banks should not keep and lend out part of their
deposits in cash or assets that may be easily turned into money,
they also generate money. Depending on the bank’s evaluation of
the needs of its depositors, the amount of cash they reserve is
determined. Federal Reserve, Bank of Japan, and European Central
Bank (ECB) reserve requirements are held in trust by banks. When
banks lend the money depositors give them, they generate money.
A portion of the money that’s spent on products and services can
be deposited into another bank, which can subsequently lend the
rest. The multiplier effect is a phenomenon in which the practice of
re-lending can be repeated a number of times.

In addition to facilitating trade between countries, loaning money

facilitates international transactions. This means that foreign
exchange deals are also carried out using bank money. Larger
industrialisation projects employ banks as consultants, counsellors,
and agents. They have a positive impact on a country’s economic
progress.

Importance of Commercial Banks

 Commercial Banks safely accommodate the savings of individuals
and lend them out to people or manufacturers.

Banks safely accommodate the savings of individuals and lend

them out to people or manufacturers.

1. When necessary, manufacturers take out loans from banks. In order

to finance the acquisition of raw materials and other necessities,
loans are required. The safest method of obtaining funds is through
a bank. As a result, interest can be accrued. New capital assets
can be created by utilising the deposits in banks.
2. Shares and debentures can also be sold through banks, as well as
other financial instruments. Industrial banks provide long-term
loans to manufacturers and aid in the development of new
companies and industrial firms.
3. More money is required for exchange transactions as a result of
the company’s growth. There is typically a limit to how much a
country’s currency may grow. When additional funds are required,
they may be immediately withdrawn from a bank account. Banks
play a vital role in a developing economy since they are the primary
providers of money.
4. Using the banking system allows for both domestic and
international commerce. Many transactions are carried out on
credit. Sellers can get items on loan from banks since they have a
lot of references and assurances about their clients, especially
when the parties are located in separate countries and have never
met before.
5. Bank loans granted through discounts on bills of exchange also
help commerce. Banks are also used to conduct foreign exchange
transactions.