so on. The total deposits will now grow into ₹ + + +…….till ultimately the excess cash reserve peters out. It can be shown that when that stage is reached the total of the above will be ₹ . Money Multiplier = / % = = /20x100= Credit creation is 1000x5 = ₹ .
. . . Role of Commercial Banks in Economic Development of a Country .
Capital Formation Banks play an important role in capital formation, which is essential for the economic development of a country. They mobilize the small savings of the people scattered over a wide area through their network of branches all over the country and make it available for productive purposes. Now-a-days, banks offer very attractive schemes to induce the people to save their money with them and bring the savings mobilized to the organized money market. If the banks do not perform this function, savings either remains idle or used in creating other assets,(eg.gold) which are low in scale of plan priorities.
. Creation of Credit Banks create credit for the purpose of providing more funds for development projects. Credit creation leads to increased production, employment, sales and prices and thereby they bring about faster economic development. .
Channelizing the Funds towards Productive Investment Banks invest the savings mobilized by them for productive purposes. Capital formation is not the only function of commercial banks. Pooled savings should be allocated to various sectors of the economy with a view to increase the productivity. Then only it can be said to have performed an important role in the economic development.
. Capital Formation . Creation of Credit . Channelizing the funds .
Encouraging Right Type of Industries . Banks Monetize Debt . Finance to Government . Employment Generation .
Banks Promote Entrepreneurship Role of Commercial Banks - - Banking