Abstract: Banks play an important role in development of Indian economy.

After liberalization, thebanking industry under went major changes. The economic reforms totally have changed thebanking sector. RBI permitted new banks to be started in the private sector as per therecommendation of Narasimham committee. The Indian banking industry was dominated bypublic sector banks. But now the situations have changed. New generation banks with used of technology and professional management has gained a reasonable position in the bankingindustry. In this paper we look at the type of banks , their role and functioning , Establishmentand Role of Indias Central Bank RBI and the recent banking reforms . We perform a comparative data analysis between GDP and total advances & deposits .We also check whether the Credit Deposit Ratio has any relationship with the GDP . We thenperform a regression analysis to check whether there is any relationship between GDP and Bank lending interest rates. We also compare the Flow of credit to Agricultural Sector with the Growthof Agriculture Sector. We conclude the analysis by an overview and analysis of the sectorialdeployment of gross bank credit over the last two financial years Introduction Banks over the years, have become a significant aspect of an economy. With the ongoingfinancial depression, the position of banks have become all the more important in the course of working of the money market and hence the economy of a nation. The banking sector forming aportion of the financial sector primarily works as a financial intermediary generating moneysupply. From the different macro economic models , banks have been found to be a part of thesupply side of the economy . However, over time banks have transformed from merely moneygenerating organizations to a multi tasking entity. In this paper, we shall deal with the role of banks in the context of the world economy as well as the Indian economy . The first section willillustrate the functions of a bank along with its classification. In the second section, we shalldiscuss the role of a banks as a major component of the service sector rendering to the

economyas a whole. In the third section, we would like to empirically validate our hypothesis with acomprehensive data analysis. The recession in the US market and the global meltdown termed as Global recession haveengulfed complete world economy with a varying degree of recessional impact. World over theimpact has diversified and its impact can be observed from the very fact of falling Stock market,recession in jobs availability and companies following downsizing in the existing available staff and cutting down of the perks and salary corrections. Various steps taken by RBI to curb the present recession in the economy and counter act theprevailing situation. The sudden dryingup of capital inflows from the FDI which were investedin Indian stock markets for greater returns visualizing the Potential Higher Returns flying back iscontinuing to challenge liquidity management. At the heart of the current liquidity tightening isthe balance of payments deficit, and this NRI deposit move should help in some small way. To curb the liquidity crises the RBI will continue to initiate liquidity measures as long as thecurrent unusually tight domestic liquidity environment prevails. The current step to curb thesebeing lowering of interest rates and reduction of PLR . The BOP- Balance of Payment deficit at a time when domestic credit demand is very high is resulting in a vicious loop of reducedaccess to liquidity, slowing growth, and increased risk-aversion in the financial system. In present situation down fall in one sector one day leads to a negative impact on the other sectorthus all together everyone feel the impact of the Financial crises with the result of the currentrecession which started in US and slowly and gradually due to linked global world haveimpacted everyone. Solution for the problem still remain at the top of the mind of every one, still everyone facing theimpact of recession but how long is the major question which is of great importance. HYPOTHESIS

In this research paper , I am trying to give an overview of the whole banking sector in India andthe kind of financial functions they perform which help in the growth of the economic growthand progress of the country . I have tried to look for relationship if any between GDP and thefollowing : Total advances/Total deposits , Credit Deposit Ratio , Lending interest rates , and thesectors in India which got more advances from the banks over the last 3 years . WHAT IS A BANK While the question may seem elementary, the answer can be quite complex. Understanding whatbanking is all about will help the paper to illustrate the role of banks better. A bank is a financial institution where an individual can deposit money. Banks provide a systemfor easily transferring money from one person or business to another. Using banks and the manyservices they offer saves an incredible amount of time, and ensures that the funds of micro aswell as macroeconomic agents "pass hands" in a legal and structured manner. There are alsoother types of financial institutions that operate just like banks FUNCTIONS OF BANK Functioning of a Bank is among the more complicated of corporate operations. SinceBanking involves dealing directly with money, governments in most countries regulatethis sector rather stringently. In India, the regulation traditionally has been very strict andin the opinion of certain quarters, responsible for the present condition of banks, whereNPAs are of a very high order. The process of financial reforms, which started in 1991 hascleared the cobwebs somewhat but a lot remains to be done. The multiplicity of policy andregulations that a Bank has to work with, makes its operations even more complicated,sometimes bordering on illogical. This section attempts to give an overview of thefunctions in as simple manner as possible Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from

the public, repayable on demand orotherwise and withdraw able by cheques, draft, order or otherwise". Deriving from thisdefinition and viewed solely from the point of view of the customers, Banks essentiallyperform the following functions : 1.Accepting Deposits from public/others (Deposits) 2.Lending money to public (Loans) 3.Transferring money from one place to another (Remittances) 4.Credit Creation 5.Acting as trustees 6.Keeping valuables in safe custody 7.Investment Decisions and analysis 8.Government business 9.Other types of lending and transactions In addition to providing a safe custodian of money, banks also loan money to businesses andconsumers. A large portion of a bank's business is lending. How do banks get the money theyloan? The money comes from depositors who intend to save a portion of their wealth. Banksacting as intermediaries, use these deposits as loans to prospective borrowers.
The objective of commercial banks like any other organization is profit maximisation. This profitgenerally originates from the interest differential between borrowers and lenders. In the presentday, however, the banking operation has extended much beyond simple lending exercise. Sothere are other different channels of profit ensuing from other investment programmes as well.However, it should be mentioned in this context that the entire deposit held by a bank cannot begiven as loans as the Central Bank retains a portion of this money in the form of cash-reserve forunforeseen circumstances.

Banks create money in the economy by making loans. The amount of money that banks canlend is directly affected by the reserve requirement set by the Federal Reserve. The reserverequirement is currently 3 percent to 10 percent of a bank's total deposits. This amount can beheld either in cash on hand or in the bank's reserve account with the Fed. To see how this affectsthe economy, think about it like this. When a bank gets a deposit of $100, assuming a reserverequirement of 10 percent, the bank can then lend out $90. That $90 goes back into the economy,purchasing goods or services,

and usually ends up deposited in another bank. That bank can thenlend out $81 of that $90 deposit, and that $81 goes into the economy to purchase goods orservices and ultimately is deposited into another bank that proceeds to lend out a percentage of it
In this way, money grows and flows throughout the community in a much greater amount thanphysically exists. That $100 makes a much larger ripple in the economy than you may realize!

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