Question

Below is a paragraph written by a new intern at your bank highlighting the various aspects of a bank’s role in the economy as well as the products and services it offers to enhance the economy.

In direct financing, savers and borrowers would definitely need banks to channel their funds. Borrowers look for safety and liquidity as they borrow and which occurs when their total receipts exceed its total expenditures. Maturity transformation is generally when, savers/depositors are willing to lend smaller amounts of money than the amounts required by borrowers. Borrowers perform risk transformation by specializing in a specific type of loans and market. Direct debits are used to pay a fixed amount at regular intervals into the account of another individual or company. Debit transfers are payments where the customer instructs the bank to transfer funds directly to the beneficiary’s bank account. Disintermediation was one of the results of the issues that the banking sector faced over the past decade. Overdraft facilities and credit lines are examples of guarantees given by bank to their corporate clients. Reregulation is the process of implementing new rules, removing restrictions and controls. Banks are said to mismatch their assets and liabilities under size transformation when borrowing long and lending long. Banks are said to mismatch their assets and liabilities under size transformation when borrowing long and lending long.

Required:

Since you find that the above paragraph does not accurately reflect the role of banks, rewrite the paragraph reflecting on your knowledge a bank’s role in the economy as well as the products and services it offers to enhance the economy.

Answer 1

Ans: Banks play a vital role in the growth of a economy and individual growth as it creates a cycle of savings by accepting the money from the normal public and giving a return over the same in the form of interest on fixed deposits, recurring deposit accounts etc creating a savings in the economy which can further be used for investment and production of goods and services and on the other hand they provide different type of secured and unsecured loans like home mortgage , Car Loan, Personal loan, credit cards etc   helping in increasing the consumption and creation of capital and current assets for a company they act as a linking pin where they act as a guarantor as well as provide liquidity for the money of investor and depositors and helps in creation of investment and consumption by providing the credit facilities to the individuals and corporate for their financial needs.

             They helps in matching the flow of funds in a economy by providing long term sources of fund to the corporate and Home mortgage in turn creates employemt,investment in the economy and they provide various type of credit facilities like

• Overdraft Facililities : It helps a organisation and individuals to meet their short term finance requirement of their day to day business and needs over which the bank use to charge a interest over the same.
• Credit Cards : For the individual customer a credit card is provided which helps them to consume more than their current income is and help them meet their short term liability.
• Car Loan : A car loan is provided to finance the cars which the individuals are interested to buy and make them pay in a low monthly emi .It use to be medium term of finance
• Mortgage Loan : It is provided on the home as it use for a long term finance for a tenure of 15 to 25 years.

And there are certain savings instruments like

• Fixed Deposits
• Recurring Deposits
• Bonds etc

Apart from it banks have a specialise team which help them to create a match in their assets and liabilities be it borrowing short or long and lending for a short and long they are able to manage it very well with the specialization with them.

                                                                    As the banks have adopted to the technological change , which has lead to virtual banking where a individual can full fill all his transaction as well as product needs from a common platform of internet banking reducing the burden of retail branches to focus more on their business and increasing the coverage of banking in the economy as a whole acting as a backbone for a growth of a growth of any country.