Role of Financial Intermediaries in Economic Development

Banks directly play an important role in the economic development of the country. Here, we can see certain specific role of banks as financial intermediary.

Role of Financial Intermediaries role in Economic Development

1. Self-employment programme

Employment growth is a sign of economic development. Financial Intermediaries, by providing finance for starting self-employment programmes are generating more production and income in the country. In India, after the nationalization of commercial banks, a number of programmes have been initiated by banks for self-employment schemes.

2. Entrepreneurial Development Programmes (EDPs):

Entrepreneurial Development programmes have been successfully launched by various banks. Initially through Lead Bank Scheme, banks were developing employment opportunities at the district level. Later on, Service Area Approach was adopted in 1978 by which certain specific areas were allotted to the banks for launching different economic programmes for the development of such areas.

3. Integrated Rural development scheme

Under this scheme, financial intermediaries were financing socially and economically depressed people by providing loans to them for various economic activities. One third of the loan will be a subsidy and the remaining two-thirds of the loan will carry a lower rate of interest under the interest subsidy scheme of RBI. In this way, various economic programmes aimed at improving rural economic conditions were undertaken.

4. Housing Finance

As a part of improving dwelling houses, financial intermediaries are providing housing loans. They are also providing refinancing facility to agencies such as HUDCO (Housing and Urban Development Corporation). This has enabled many fixed income group people to avail the housing loan. Normally, to a borrower under this facility, a bank provides 3-year aggregate net income as a maximum amount or the cost of the house, whichever is less.

5. Priority Sector

As per RBI guidelines, commercial banks have to provide certain percentage of their lending to priority sector which consists of agriculture and its allied activities, such as poultry, dairy, etc, cottage industries, small scale industries, small industry and business.

6. Backward area Development

In order to prevent regional disparities, financial intermediaries have been advancing loans to industries which are started in backward areas. Government has given certain concessions in the form of tax benefits to such industries and banks provide cheap loans so that the backward areas could attract more industries.

7. Introduction of Electronic system

Computers are being used by financial intermediaries for most of their activities now and they are able to link their branches through a network. This has resulted in quicker transfer of funds between centres and this has helped customers in realizing their cheques in a speedy manner. It is for this purpose, that Magnetic Ink Character Recognition (MICR) cheques have been introduced.

The customer can also make use of Home banking facility by linking their computer system with the bank and instructions can be provided for transfer of funds. This facility, if developed throughout the country, will not only help in the movement of funds but also reduce the disparity in the interest rate.