Commercial Banks: The backbone of modern economies

A key component in the growth of a country's economy, commercial banks are vital to the development of industry and trade. They act as guardians of the country's wealth and resources and enable capital to move to productive assets at the appropriate time. 

Commercial banks play a specially crucial role in India since they fuel the country's economic growth while also giving significant insights into financial processes. Banks have long been the engine of India's success, offering financial services to a large population at low costs and satisfying the short- and medium-term credit needs of lakhs of industries, particularly medium and small enterprises (MSMEs).

According to the fundamental structure of the Reserve Bank of India Act 1934, all large banks are classified as commercial. However, under the scheduled bank category, there are additional banking categories such as Small Finance bank, payments bank, and Co-operative bank. The banks are further divided according to ownership into public sector, private sector, foreign, and regional rural banks.

Functions of a commercial bank
 

Here are some of the reasons why a well-organized banking system is essential for any country's economic success, especially a fast-growing one like India.

1. Capital formation - Commercial banks promote savings and investment, which help to eliminate capital deficiency. They then put these resources to productive use, boosting capital formation in the country.
2. Credit creation - Apart from increasing the money in circulation, bank deposits also make their way to industries, to help them create productive assets. This credit has a multiplier effect on the economy. 
3. Trading functions - Commercial banks are permitted to operate as market makers for municipal, government, and corporate bonds. Banks can provide issuers with counseling, advisory, and technical direction through their market-making activities.
4. Growth of entrepreneurship - By providing capital to entrepreneurs and investing in productive purposes, banks encourage self-sufficiency, reduce joblessness and promote the right industries. 
5. Financialization of savings - Commercial banks are a safe place to save money in the form of deposits. 
6. Funds transfer - With the help of commercial banks, sending funds to anywhere in India or abroad has become very easy. 
7. Wealth creation - By providing consulting and advisory services, bank experts can direct investors to mutual funds or direct investments. The bank can operate as custodian for all investment securities, and provide safety deposit boxes, letters of credit for investment opportunities, as well as act as a trustee for wills and investment funds. 

Role of banks today
 

Even in today’s digital age and tough macroeconomic context, the role played by commercial banks continues to be a vital one. While risk and regulatory protection remain a top priority, banks are also searching for innovative methods to address financial performance and rising consumer and investor expectations as they reorganize and optimize operational and business models to generate long-term profitability. Undoubtedly, banks will need to embrace innovation and business-led transformation to stay relevant in the age of digital money. 

At IDFC FIRST Bank, we wholeheartedly believe in the transformative power of technology when used for the greater good. When combined with our principles of integrity, trust and transparency, it gives rise to a people-focused bank that enables economic growth in a socially-responsible manner.

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