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Patel Harsh Nareshbhai, student of the International Medical Institute, Kursk State Medical University, Kursk, Russia.
Email: [email protected]
THE ROLE OF COMMERCIAL BANKS IN THE INDIAN MONETARY SYSTEM
Abstract: one of the main tasks of the banking system since its inception is the regulation and redistribution of cash flows in the business environment. A key element of this system are commercial banks, which are the basis of the banking system. Being a commercial organization, the bank is primarily interested in maximizing profits, but at the same time, it is the process of maximizing profits that triggers the regulation and redistribution of cash flows in the business environment. The attraction and accumulation of liabilities, as well as the issuance of loans and credits, is carried out by commercial banks solely within the framework of the expediency of their activities, and this very activity helps to stimulate the redistribution of cash flows in the business environment.
Keywords: commercial banks, money creation, monetary policy
Патель Харш Нарешбхай, студент Международного медицинского института Курского государственного медицинского университета, Курск, Россия.
Электронная почта: [email protected]
РОЛЬ КОММЕРЧЕСКИХ БАНКОВ В ИНДИЙСКОЙ ДЕНЕЖНО-КРЕДИТНОЙ СИСТЕМЕ
Аннотация: одной из основных задач банковской системы с момента ее создания является регулирование и перераспределение денежных потоков в бизнес-среде. Ключевым элементом этой системы являются коммерческие банки, которые являются основой банковской системы. Являясь коммерческой организацией, банк, в первую очередь, заинтересован в максимизации прибыли, но в то же время именно процесс максимизации прибыли запускает механизм регулирования и перераспределения денежных потоков в бизнес-среде. Привлечение и накопление обязательств, а также выдача займов и кредитов осуществляется коммерческими банками исключительно в рамках целесообразности своей деятельности, и именно эта деятельность способствует стимулированию перераспределения денежных потоков в бизнес-среде.
Ключевые слова: коммерческие банки, создание денег, денежно-кредитная политика.
Commercial banks are a fundamental element of the monetary system in India, playing a crucial role in money creation, monetary policy implementation, payment system facilitation, financial intermediation, and regulatory compliance.
Commercial banks in India have the authority to create money through the process of lending. When they provide loans to businesses and individuals, they effectively expand the money supply, impacting the overall monetary system.
The Reserve Bank of India (RBI) relies on commercial banks to implement monetary policy. Through mechanisms such as reserve requirements and open market operations, the RBI influences the lending and deposit activities of commercial banks to regulate the money supply and economic conditions. The table below outlines the key tools used by the RBI for monetary policy implementation and the corresponding impact on commercial banks [1].
Monetary policy is enacted by a central bank to sustain a level economy and keep unemployment low, protect the value of the currency, and maintain economic
growth. By manipulating interest rates or reserve requirements, or through open market operations, a central bank affects borrowing, spending, and savings rates [2].
Commercial banks in India provide essential services for the smooth functioning of the payment system, including check clearing, electronic fund transfers, and credit card processing. The following illustration highlights the role of commercial banks in facilitating various payment transactions:
Indian commercial banks collect deposits from savers and channel them into loans and investments, contributing to the allocation of capital for productive uses and supporting economic growth. The table below presents the key financial intermediation activities performed by commercial banks and their impact on the economy [3].
A loan portfolio is the totality of all loans issued by a bank or other financial institution to its customers. The portfolio can consist of both safe and risky loans. A diversified loan portfolio should contain a mix of different borrowers and industries to minimise the risk of losses [5].
Since the mid-2010s, the Indian banking system has experienced NPL ratios far higher than other Asian banking systems, and Indian banks have had far lower levels of capital. This has weighed on banks' ability to extend credit because NPLs have reduced banks' profitability and risk depleting already low capital buffers. Low capital levels have also contributed to low Basel III leverage ratios, which have further limited banks' capacity to extend credit [1]. While Indian authorities had previously introduced measures to help banks address their weak balance sheets, the COVID-19 pandemic has hindered progress and in some cases exacerbated existing issues [3].
Commercial banks in India are subject to regulations and oversight by the RBI and other regulatory bodies. These regulations cover areas such as capital adequacy, liquidity, and risk management to ensure the stability and integrity of the monetary system [6].
In conclusion, commercial banks are integral to the functioning of the Indian monetary system, serving as key players in money creation, monetary policy implementation, payment system facilitation, financial intermediation, and regulatory
compliance. Their activities have a significant impact on the overall stability and efficiency of the monetary system, making them essential components of India's financial landscape.
References
1. Acharya VV (2018), 'Prompt Corrective Action: An Essential Element of Financial Stability Framework', Speech delivered at the Indian Institute of Technology, Bombay -https: //www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id= 17879.
2. Anand N and A Ahmed (2021), 'India Plans to Ask State-run Banks to Expand Lending to Boost Demand', Reuters, 26 August.
3. Creehan S (2014), 'Priority Sector Lending in Asia', Federal Reserve Bank of San Francisco Asia Focus.
4. Fairweather Z and M Sutton (2020), 'Economic Developments in India' (https://www.rba.gov.au/publications/bulletin/2020/dec/economic-developments-in-india.html), RBA Bulletin, December.
5. Ganguly S (2019), 'India's Corporate Bond Market: Issues in Market Microstructure', RBI Bulletin, January.
6. Hudson C, B Watson, A Baker and I Arsov (2021), 'The Global Fiscal Response to COVID-19' RBA Bulletin -https://www.rba.gov.au/publications/bulletin/2021/jun/the-global-fiscal-response-to-covid-19.html.
