SHANTO-MARIAM UNIVERSITY OF CREATIVE

TECHNOLOGY

Module Name: Shipping and Banking

Module Code: AMM-4323

Topic: Role of Bank for economic development of a country

SUBMITTED TO
Suhal Ahmad
Lecturer
Department of AMMT
Shanto-Mariam University of Creative Technology

SUBMITTED BY
Ahasan Uz Zaman
ID: 162051015
Group: A
Semester: 12th
Batch: 27th
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Introduction:

Savings and investments are the most important ingredients of capital

formation, for an economy, therefore, the promotion of domestic savings is
must boost the process of capital formation and development. The commercial
banks are in the nature of a catalyst, converting savings into capital for
productive investment. It is needless to say that capital formation largely
depends on the effectiveness of these institutions. Thus, the commercial banks
play stupendous role converting potential investments into real and can make a
significant contribution in eradicating poverty, unemployment and in bringing
about a progressive reduction in inter-regional and inter-sector disparities
through the rapid expansion of banking services.

The commercial banks help in developing both internal and external trade of a
country. Banks provide loans to retailers, traders, wholesalers for their
inventory and also help in transporting of goods from one place to another by
providing all types of facilities, such as discounting and accepting bills of
exchange, providing overdraft facilities, issuing drafts, etc. The industrial sector
is also not away from the help of commercial banks. Banks finance the
industrial sector in many ways. They provide short term, medium-term and
long-term loans to the industry. Export promotion requires adequate pre-
shipment packing credit, which is also, made available by these banks in the
form of loans, cash credit, and overdraft facilities.

Banks by providing loans to the investors and consumers are not only helping in
increasing the standards of living of the people but also help in reducing the
recession in the economy through enhancing the demand for raw material and
finished goods that ultimately leads to increase in the employment
opportunities. Apart from the basic banking services such as deposits, loans and
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advances banks have been traditionally rendering certain ancillary services also
to their customers, such as remittances; demand drafts, mail transfers, and
telegraphic transfers, sale and purchase of exchange, locker facilities, safe
custody and safe deposit vaults, guarantee facilities, sale of traveller’s cheques,
trustier and executor services, etc. Among the services introduced by modem
commercial banks during the last quarter of the century, the bank giro is a
system by which a bank’s customers with many payments to make, instead of
drawing a cheque for each item, may simply instruct the bank to transfer to the
accounts of his creditors the sum due from him and he writes one cheque
debiting his account with the total amount. By providing these diversified
services, banks help in the growth of trade and industry to a great extent.

Modem commercial banks, to diversify their activities, entered into new non-
traditional areas of business, and these new areas include mutual funds,
merchant-banking activities, portfolio management, corporate counseling, hire
purchase finance, equipment leasing, venture capital, and factoring service.
These new activities result in the development of industry and trade in the
country. In brief, it can be said that banks constitute the very lifeblood of
economic society.

Role of Banks in economic development:

India is a developing country. The factors hindering the development of the

country are many. Some of them can be attributed to the low per capita income
and a larger chunk of the population living under the poverty line. India is a
country with poor people but with rich natural resources. It can be said that the
country’s Potential either the human resource potential or the natural resources
are not adequately utilized to the maximum extent and that resulted in low per
capita income. India is an agrarian economy. The economy is marred with

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unemployment and underemployment. Since the economy is basically agrarian
disguised unemployment is also rampant among the farmer community.

Apart from the reasons mentioned, the money, as well as capital market, is the
presence of private moneylenders, landlords, etc. They have acted as bankers
for centuries and have amassed major wealth from the people of India that
adversely affected capital formation. The need for a better financial institution
and credit infrastructure was thus felt necessary by the Planning Commission
when the Five-Year Plans were initiated.

The importance of commercial banks in the process of economic development

has been stressed from time to time by economic thinkers and policymakers in
the country. Commercial banks play a very important role in the Indian
economy as they are well known as the heart of the financial structure. The
activities of banks in lending, investment and related activities facilitate the
economic process of production, distribution, and consumption. In fact, the
success of economic development depends essentially on the extent of
mobilization of resources and investment, the operational efficiency and
economic discipline displayed by the various segments of the economy. From
the economic point of view, the major task of banks and other financial
institutions is to act, as intermediaries channeling savings to investment and
consumption, through them, the investment requirements of savers are
reconciled with the credit needs of investors and consumers. The role of banks
in the process of economic development via production, distribution, and
consumption is shown in the following Figure 1.1.

Indian banking system helped the country in rapid economic development in an

effective way, both during the pre and post-independence period. The banking
sector has shown remarkable responsiveness to the needs of the planned
economy. It has brought about considerable progress in its efforts towards

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branch expansion, deposit mobilization, priority sector lending, and other
economic and social responsibilities. The role of commercial banks in the
process of economic development can be discussed here.

a) Infrastructure:

Financial infrastructure’ of a country plays an important role in utilizing the

scarce productive resources and removing market imperfections. It is a
spectrum of financial institutions of diverse types. The capacity creation,
income generation and changing structure of the working population can be
achieved by effecting the transfer of funds from savers to investors. Commercial
banks, acting as a major part of the financial infrastructure, provide both
“savings intermediation” and “money market intermediation.” The process
brings about consistency among the asset preferences of the households, the
ultimate saving units, and the liability preferences of business firms and the
fundamental investing units. This is being facilitated by the ability of these
banks and the size of the money market to emit liabilities with risk attributes
that households prefer to absorb while absorbing assets instruments with risk
attribute that • business firms prefer to emit. This apart the development of
commercial banking helps the money market to grow, for its progress would be
the progress and expansion of the money market, as it constitutes itself a major
part of the latter. It is, in this context banks are important as they provide the
basic financial infrastructure, which facilitates the uninterrupted functioning of
the economic system.

It is pertinent to discuss the role of the apex bank in this context. The Reserve
Bank of India Act, 1934 envisaged that there would be an apex bank for the
entire banking system which would control the entire gamut of banking as a
whole. Thus the Reserve Bank of India was formed in the year 1935. The
policies framed by the Government of India from time to time are to be

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implemented and should be in consonance with the economic policies of the
apex bank. The apex bank, from time to time, describes certain guidelines in
consultation with the Government and would implement the same taking into
account the necessities of the people of the land. The economic stability of a
country would largely depend upon the employment potential, price
management, foreign exchange levels and rise in living standards of the people.
It is to be noted that the monetary policy of the Government can further
economic growth or vice versa. Hence, in the situations where savings are
meager and fiscal position is unstable and when the need arises for adequate
monetary resources, the Reserve Bank assumes importance. The apex bank tries
to stabilize the economy by synchronizing the rate of growth of the credit
creating the capacity of the banking system with the rates of growth of output
and productive capacities.

The apex bank performs both promotion and regulation roles. Since the
economic development can be achieved with the development of sound banking
system, the apex bank would assume the promotion role and construct the
banking system in such a way that it would accelerate the process of economic
development. This promotion role of the apex bank is long term and relates to
widening the area of institutional savings and credit and providing for monetary
expansion so as to keep the process of development uninterrupted. The apex
bank does this by providing opportunities for refinancing and re-discount to
banks for enhancing the liquidity of their funds through increased suitability of
their assets. Consequently, more public confidence is created in the banking
system which facilitates the expansion of the area of institutional savings. For
monetary expansion, the apex bank’s role calls for a reorientation of other
institutions concerned with the investment and necessitates changes in the
organization and structure of the banking system. The regulatory role is short
term and includes regulation of bank credit through various credit control

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measures to the levels dictated by the economy’s current supply availability and
to control its direction in accordance with the overall priorities of development.
However, the effectiveness of the regulatory role depends much upon how the
promotion role is performed.

b) Capital Formation:

The production of capital goods needs investments. The savings in a country are
to be canalized towards investment. This role is taken up by the’ commercial
banks which act as intermediaries by bridging the gap between savings and
investments. Banks, as “repositories of people’s savings” mobilize small and
scattered savings and act as “surveyors of credit” by channelizing the savings so
mobilized into the production of capital goods and thereby facilitate capital
formation. Commercial banks encourage people to invest in them the funds
lying idle with savers and the small funds scattered across the country are
mobilized to invest in capital goods production. By channelizing and mobilizing
the funds and transferring them from savers to investors have a number of
functions, such as

i) lucrative opportunities of investment to the savers,

ii) funds for investment to the entrepreneurs, and

iii) capital formation in the country. The banking system performs this role by
money market intermediations.

c) Entrepreneurial ability:

Entrepreneurial ability may be defined as the propensity to take calculated risks

with confidence so as to make his enterprise a success. Commercial banks play
an important role in encouraging entrepreneurial abilities. It is done by
providing a timely and adequate amount of credit to those with technical skills
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and entrepreneurial talents, who are not coming forward on a higher economic
plane for want of sufficient capital, and by attenuating uncertainty and
absorbing risk in arranging capital needed for their plans. The availability of
bank credit enables entrepreneurs to harness innovations by bringing about a
new combination of productive resources, drawing resources away from their
existing comparatively low yielding employment and also gain an advantage of
utilizing unemployed resources. This, in turn, helps the economic system to get
on a higher plane of economic activity.

d) Consumption, Production, and Distribution of goods and services:

Economic development demands an adequate and flexible amount of credit. The

basic function of credit is to enable business firms and individuals to purchase
goods and services ahead of their ability to pay. Commercial banks are the
major suppliers of credit in the form of ‘primary suppliers’ and ‘residual
suppliers’. Commercial banks become primary suppliers of credit when they
meet all the credit needs of individuals as well as business firms when the latter
have little savings of their own. Commercial banks become residual suppliers of
credit when they advance credit to supplement the savings of individuals and
firms.

‘Commercial banking system provides more credit than its primary resources
through the process of credit-creation, within the limits set in by the volume of
primary deposits, the necessary liquidity requirements and the size of the money
market. Commercial banks, through their process of creation of credit, bridge
the gap between actual savings and desired savings warranted for a rapid rate of
economic development. The absence of desired savings otherwise would have
been limited the productive activities in the economy to the extent that the
savings are actually available for investment. Apart from this, the gap is also
bridged by mobilizing actual savings of the community which would otherwise

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be reduced due to imperfections in the financial markets. Moreover, immobility
of funds including small and scattered savings, lying either idle or spent on
luxury goods, jewelry and other un-production purposes also aims at bridging
the gap. Nowadays banks are coming with innovative schemes such as
‘Financial Inclusion’ that aims at providing credit to customers for all activities
including activities that create consumption and distribution value.

e) Stabilization of Prices:

The erratic behavior of prices is not helpful in the steady and rapid rate of
economic growth. It demands the stability of prices of goods and services. The
commercial banking system, through their decisions, to provide or not to
provide credit, plays an important role in stabilizing prices. The direction of the
flow of credit has important bearing price stability. Credit, which stimulates
production, has one type of impact and credit, which raises the levels of
consumption, has another. Even the credit, which goes to production purposes,
can have different repercussions depending on the time lag between the increase
in demand and the increase in supply which the credit generates. If too much
credit goes to longer gestation, it can have an adverse effect on the price level.
Cheap and timely credit, assuming adequate availability of other things, helps
producers in getting things produced at a lower cost, which is one of the
important considerations for fixing up the prices. Besides, it also helps in
balancing demand and supply conditions, and its absence causes disequilibrium
in these conditions, thereby, causing price fluctuations. A growing economy
needs an increasing supply of money but its supply should be elastic to the
extent that is geared to the seasonal demands of business, otherwise, it would
have adverse effects on the general price line.

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I) Support to the Government:

Commercial banks also facilitates the activation of the Government motive

force for economic development. They provide and help in arranging finance to
the Government through various methods like direct credit to the Government
and various Government agencies and through subscribing public debt and
investing money in various Government Securities. This process of credit
supply enables the Government to implement various schemes of development.
The banks also help the Planning Commission to achieve targets through their
working in co-ordination with the commission. By providing credit to the needy
in the countryside, they help the balancing of the economic development and
thereby, decentralizing it. Their working also indirectly helps the Government
to solve many problems in development like shortage of savings, rising prices,
unemployment, unbalanced development, lack of entrepreneurship, etc. Besides,
by encouraging the banking habit and popularising the use of credit instruments,
they also help the Government in reducing the social cost of supplying currency
to the public. Thus, the banking industry has been playing different roles in the
transformation of the development process of the economy, viz., branch
expansion, deposit mobilization, priority sector lending, etc.

References:

1. https://www.economicsdiscussion.net/banking/role-of-banks-in-the-

economic-development-of-a-country/26094

2. https://accountlearning.com/role-of-commercial-banks-in-economic-

development-of-country/

3. http://www.eduhelpnet.com/role-of-banking-in-economic-development/

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 4. https://www.academia.edu/11682682/_Role_of_Banks_as_in_Economic_

Development_

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 Part – B

Banks
After the independence, banking industry in Bangladesh started its journey with
6 Nationalized commercialized banks, 3 State owned Specialized banks and 9
Foreign Banks. In the 1980's banking industry achieved significant expansion
with the entrance of private banks. Now, banks in Bangladesh are primarily of
two types:

 Scheduled Banks: The banks that remain in the list of banks maintained
under the Bangladesh Bank Order, 1972.
 Non-Scheduled Banks: The banks which are established for special and
definite objective and operate under any act act but are not Scheduled
Banks. These banks cannot perform all functions of scheduled banks.

There are 60 scheduled banks in Bangladesh who operate under full control and
supervision of Bangladesh Bank which is empowered to do so through
Bangladesh Bank Order, 1972 and Bank Company Act, 1991. Scheduled Banks
are classified into following types:

 State Owned Commercial Banks (SOCBs): There are 6 SOCBs which are

fully or majorly owned by the Government of Bangladesh.
 Specialized Banks (SDBs): 3 specialized banks are now operating which
were established for specific objectives like agricultural or industrial
development. These banks are also fully or majorly owned by the
Government of Bangladesh.
 Private Commercial Banks (PCBs): There are 42 private commercial
banks which are majorly owned by individuals/the private entities. PCBs
can be categorized into two groups:

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  Conventional PCBs: 34 conventional PCBs are now operating in the
industry. They perform the banking functions in conventional fashion i.e
interest based operations.
 Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in
Bangladesh and they execute banking activities according to Islami
Shariah based principles i.e. Profit-Loss Sharing (PLS) mode.
 Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh
as the branches of the banks which are incorporated in abroad.

There are now 5 non-scheduled banks in Bangladesh which are:

 Ansar VDP Unnayan Bank,

 Karmashangosthan Bank,
 Grameen Bank,
 Jubilee Bank,
 Palli Sanchay Bank

FIs
Non Bank Financial Institutions (FIs) are those types of financial institutions
which are regulated under Financial Institution Act, 1993 and controlled by
Bangladesh Bank. Now, 34 FIs are operating in Bangladesh while the maiden
one was established in 1981. Out of the total, 2 is fully government owned, 1 is
the subsidiary of a SOCB, 15 were initiated by private domestic initiative and
15 were initiated by joint venture initiative. Major sources of funds of FIs are
Term Deposit (at least three months tenure), Credit Facility from Banks and
other FIs, Call Money as well as Bond and Securitization.

The major difference between banks and FIs are as follows:

 FIs cannot issue cheques, pay-orders or demand drafts.

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  FIs cannot receive demand deposits,
 FIs cannot be involved in foreign exchange financing,
 FIs can conduct their business operations with diversified financing
modes like syndicated financing, bridge financing, lease financing,
securitization instruments, private placement of equity etc.

KYC:

KYC means “Know Your Customer”. It is a process by which banks obtain

information about the identity and address of the customers. This process helps
to ensure that banks’ services are not misused. The KYC procedure is to be
completed by the banks while opening accounts and also periodically update the
same. To open a bank account, one needs to submit a Aadhaar/enrolment
number and PAN as ‘proof of identity and proof of address’ together with a
recent photograph. If you do not provide the required documents for KYC, the
bank may not be able to open your account. if you have opened an account with
a bank, which is KYC compliant, then for opening another account with the
same bank, furnishing of documents is not necessary. Full KYC exercise is
necessary for Credit/Debit/Smart/for purchaser of Gift Cards and also in respect
of add-on/ supplementary cards. KYC exercise needs to be done for all those
who want to make domestic remittances of Rs. 50,000 and above and all foreign
remittances. Demand Draft/Payment Order/Travellers Cheques for Rs.50,000/-
and above can be issued only by way of debiting the customer's account or
against cheques. all customers who do not have accounts with the banks (known
as walk-in customers) have to produce proof of identity and address while
purchasing third party products from banks if the transaction is for Rs.50,000
and above. KYC exercise may not be necessary for bank’s own customers for
purchasing third party products. However, instructions to make payment by
debit to customers’ accounts or against cheques for remittance of funds/issue of
travellers’ cheques, sale of gold/silver/platinum and the requirement of quoting
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PAN number for transactions of Rs.50,000 and above would be applicable to
purchase of third party products from banks by bank’s customers as also to
walk-in customers.

Technologies use In Banking

Digital account opening. Not only was digital account opening the most-
frequently cited technology for addition or replacement, it was at the top of the
list of technologies that banks plan to pursue fintech partnerships for. Some
institutions may not get what they're looking for, however

Person-to-person (P2P) payments. Venmo and Square may get a lot of press

regarding P2P payments, but banks (and credit unions) are the real leaders in the
P2P payments race. Consumers moved a little more than $300 billion in funds
to other people through their banks and credit unions in 2018, with Zelle
accounting for about 40% of that. With nearly 230 institutions signed up--but
only 60 currently offering the service--Zelle is poised to cannibalize the bank
volume and overtake PayPal.

Customer relationship management (CRM). Hardly a new technology, there

has been a resurgence in investments in CRM among banks and credit unions
over the past two years. This resurgence reflects a pendulum shift from
"distributed CRM," (i.e, CRM embedded in point solutions like digital banking,
loan origination and account opening systems) back to the enterprise-wide
deployments that were prevalent 10 to 15 years ago.

 New account/teller systems. According to digital futurist Brett King, author

of Bank 4.0: A lot of bankers disagree. The percentage of FIs planning to add or
replace new account/teller systems doubled between 2018 and 2019.

While the level of investment in new account/teller systems does reflect banks'
continued commitment to the branch channel, it's also driven by two other
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factors: 1) improving the in-branch account opening experience, and 2)
integrating (or at least coordinating) the digital and branch account opening
processes.

Commercial loan origination systems (LOS). Many community banks are

looking to grow their commercial (vs. consumer) lending business by expanding
beyond real estate into commercial and industrial (C&I) loans. To do so, they're
increasingly making investments in commercial LOS to improve their speed to
market. They'll need to--according to Cornerstone's research, nearly seven in 10
financial institution executives think their commercial lending capabilities aren't
"future ready."

Functions of clearing and forwarding agents:

 Warehousing before transportation.

 Local transportation.
 Container arrangement.
 Reservation of shipping space.
 Selection of mode of transportation.
 Packaging, marking and labelling.
 Completing customs and port facilities.
 Cargo insurance.
 Advising exporters on trade laws.
 Educating exporters.
 Processing documents.
 Other services.

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