Capital formation is one of the essential parts of economic development. There is the lack of capital formation in most of the developing countries like Nepal. So, bank collects ideal money from the people and invest that shaving on the productive sector. That causes capital formation as well as development of the nation.
Banking system encourages entrepreneurial innovation because due to development of banking system bank can provide requested amount of loan to the entrepreneur at the reasonable rate of interest in which there is the increment of participation of private sector.
Monetization of money:
Establishment of bank and their branches in remote and rural area helps to increase banking habit of people. People keep their excess income in bank and withdraw the money at the time of need. It helps government to implement the fiscal and monetary policies.
Monetization – use of money
Fiscal policy – budgetary, tax, expenditure policy
Monetary – rate of interest
Influence the economic activity:
Bank can influence economic activities by changing the rate of interest. If bank charges low rate on loan then there is more demand of fund for investment. As a result, economic activities increases and vice-versa.
Facilities of monetary and fiscal policy:
Effective banking system is necessary for effective implementation of fiscal and monetary policy of nation. The instruments of fiscal and monetary policy such as regulation of credit, interest rate, tax, etc are properly used only if banking system of the country is sound.
Raising deposits and financing loans:
Bank by offering attractive rate of interest can increase the saving and deposits then after collected money can be provided to the investors at the reasonable rate of interest.
Remittance of money:
The bank remits the money to its customers from one place to the other place without any risk. It helps to promote the economic activities inside the country.