Answer:

A well designed financial system promotes growth through effective mobilisation of savings and their allocation to the most productive uses by either following a centralised approach or a decentralised approach or a combination of both. Typically, economies with underdeveloped capital markets adopt a centralised approach, whereby financial intermediaries such as banks mobilise resources from savers and allocate them to borrowers.

Historically, financial intermediation by banks has played a central role in India in supporting the growth process by mobilising savings, particularly after the nationalisation of the 14 major private banks in the late 1960s. Banks have been particularly instrumental in mobilising deposits from the household sector, the major surplus sector of the economy, which, in turn, has helped raise the financial savings of the household sector and hence the overall saving rate.

Notwithstanding the liberalisation of the financial sector and increased competition from various other saving instruments, banks continue to play a dominant role in the financial intermediation of the Indian economy. The deregulation of interest rates has opened up new avenues for banks to mobilise funds at competitive rates. Further owing to the robust growth performance, banks need to provide funding on a sustained scale which could be harnessed by unlocking a large part of domestic savings locked up in unproductive physical assets like gold, real estate etc.

The changing demographics and employment patterns also generate demand for a wide range of financial services such as insurance, housing and other financial products with innovative features. In order to reap the benefits of the changing demographics and employment patterns, banks can re-orient their role as financial intermediaries beyond the traditional confines of passive deposit mobilisation and lending by providing a package of financial services as demanded by the customers. The rural sector also throws up vast opportunities for banks to reap the benefits of low cost large deposit base, which may not be available to other financial intermediaries.

The mobilisation of savings from hitherto untapped areas and conversion of physical savings into financial savings would necessitate introduction of appropriate products to suit the demand of savers. Banks are indeed in an ideal position to do so because of certain inherent characteristics of deposits such as safety and liquidity.