How do banks play an important role in the economy of India? Explain.

The role of banks in an economy of India:

(i) Deposits - Banks accepts the deposits and also pay an amount as interest on the deposits. In this way people’s money is safe with the banks and it earns an amount as interest. People also have the provision to withdraw the money as and when they require. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

(ii) Loans - Banks keep only a small proportion of their deposits as cash with themselves. Banks use the major portion of the deposits to extend loans. There is a huge demand for loans for various economic activities. Banks make use of the deposits to meet the loan requirements of the people.

(iii) Credits - A large number of transaction in our day- to-day activities involve credits in some form or the other. Credit, loans refers to an agreement in which the lender supplies the borrower with money, good or services in return for the promise of future payment. Credit, therefore plays a vital and positive role.