Banks occupy an important place in the industrial and commercial life of a country. They help in the economic development in the following ways :
(i) Supply of Institutional Credit for Agriculture : Improvement in agricultural productivity needs huge amounts of credit. Gradual expansion of institutional sources of finance (e.g., nationalised commercial banks, regional rural banks, etc.) in rural areas has solved the problem of rural credit to a large extent and helped in the growth of agricultural productivity and production.
(ii) Fulfilment of Credit Needs of the Industrial Sector : Regular flow of finance for meeting both fixed and working capital requirements of the industrial sector (consisting of cottage and small-scale industries, medium and large-scale industries) is a vital factor for the promotion of industrial production. The development banks like IDBI, SIDBI, etc., fulfil the long-term credit needs of this sector, while the commercial banks meet their short-term credit needs.
(iii) Distribution of Funds : Banks help in the distribution of surplus capital from regions where it is not wanted to those regions where it can be most usefully used. Thus, they pave way for the economic development of backward regions.
(iv) Promote Capital Formation : Banks also promote capital formation. They accept deposits from the public and advance loans to the investors. In this way, they help in encouraging production, income, saving and finally investment.
(v) Banks Encourage the Right Type of Industries : Banks prefer to advance loans only to those industries whose products are in great demand. Thus, they encourage the right type of industries.
(vi) Advances to Priority Sectors : Public sector banks and various specialised financial institutions give credit to the priority sectors, like agriculture and small-scale industries, on highly concessional rates.
(vii) Credit to Weaker Sections : As part of the government policy, public sector banks play an important role in providing credit to weaker sections of the society, such as poor farmers, village artisans, etc.
In short, a developed banking system is a necessary condition of economic development of a country. It lays the most solid foundation of agricultural and industrial development.