Commercial Banks in economic development

Bank play very important role in economic development. The growth rate of economy largely depends on the rate of investment which, in fact depends on the level of saving. Higher saving leads to higher level of capital formation which is crucial for economic growth and development. The primary function of commercial banks is to accept deposit and provide loans. Thus, the commercial banks play major role in mobilizing saving for capital formation. Now days in Nepal commercial bank are in competition and they are launching different offer to their customer. So it's play important role in Nepal. The role of commercial banks in development is explained below:

a) Saving Promotion and Saving Mobilization
As mentioned above, the commercial banks accept deposits and provide loans of various types. The banks pay interest to the depositors against their deposits. The rate of interest to the depositors against their deposits. The rate of interest and amount of saving are directly related. This means higher the rate of interest higher will be the level of saving. Thus, banks can promote saving by offering higher interest rate to the depositors. This action of banks helps promote saving which can be utilized for investment in various of economy.
The commercial banks collect fragmented saving from the various groups of depositors and utilize them for investment. These scattered savings would not have been utilized for productive investment without banks. The individual savers deposit their money in the banks that allocate them for competing borrowers in the from of loans or directly invest in the productive sectors of the economy. Thus, banks play very import role in promoting as well as mobilizing saving.

b) Allocation of Funds
The banks help to allocate funds for optimum utilization of financial resources in the economy. As the banks use their financial experts to judge the returns or productivity from the funds they lend out, this helps in maximization of returns from the scarce financial resources. The banks collect funds from the surplus units and channel them to the deficit units of the economy. The banks serve as the bridge to eliminate the gap between demand for and supply of funds. For achieving desired profits and avoiding the risk of incurring losses, the banks try to allocate the funds so as to maximize the expected return. Thus, banks play important role in resource allocation which is an important for economic development.

c) Promotion of Trade, Industry and Employment
The banks facilitate the trade and industry by providing long as well as short-term loans and supplying various kinds of banking services and products such as L/C operations, foreign exchange facilities, payments, settlement etc. The banks not only accept deposits and provide loans but also create credit while extending loans. In the modern banking, most of the transactions are done through banks. Banks serve as the major agent of international trade while making imports or exports of goods and services. Similarly, the banks help to promote industries by providing financial resources needed for capital investment and monitoring investment projects so as to minimize the risk. The banks also make direct investment in the productive industries by accumulating scattered and idle resources in the form of deposits. This helps to create more employment in the economy. These all actions of banks help to promote domestic as well as international trade and industry which are essential for economic development.

d) Transfer of Money
In the modern globalized world, citizens of a country are not limited to work within their own territory. They move from one country to another in search of better employment opportunities. While working abroad they send their earnings to the family members or relatives in their own countries through banks. Thus, banks help to transfer remittance which is one of the main sources of income for the developing countries like Nepal. Transferring remittance through banking channel not only increases recipients and banks income and country's foreign currency reserve but also helps to construct macroeconomic indicators based on the real statistical records from banks through which remittances are transferred. The increasing volume of remittance has become one of the major sources of investments for economic development in underdeveloped countries.