The role of banks in an economy of India:

(i) Deposits - Banks accepts the deposits and also pay an amount as interest on the deposits. In this way people’s money is safe with the banks and it earns an amount as interest. People also have the provision to withdraw the money as and when they require. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

(ii) Loans - Banks keep only a small proportion of their deposits as cash with themselves. Banks use the major portion of the deposits to extend loans. There is a huge demand for loans for various economic activities. Banks make use of the deposits to meet the loan requirements of the people.

(iii) Credits - A large number of transaction in our day- to-day activities involve credits in some form or the other. Credit, loans refers to an agreement in which the lender supplies the borrower with money, good or services in return for the promise of future payment. Credit, therefore plays a vital and positive role.

The formal sector credit in India includes loans from banks and cooperatives. RBI supervises their functions of providing loans. These formal sector credits can be made beneficial for poor farmers and workers through the following way:

i. Formal sector credit needs to be expanded in India so as to save people and especially poor farmers and workers from exploitation of the informal sector credit.

ii. Provide credit at a reasonable rate of interest to fulfil various needs of the people by providing cheap and affordable credit.

iii. This credit can be distributed equally which helps in benefiting the poor. This can help in promoting agricultural activities and small-scale industries.

iv. The absence of collateral and documentation with rural borrowers would ease the formalities to obtain credit from the formal sector. Provide flexible loans in terms of
timelines, interest rates and procedural requirements to rural borrowers.

v. Awareness among rural borrowers against the exploitation of informal sector credit facilities. The need to keep them aware regarding the high rate of interest and debt traps of moneylenders.

Self help groups (SHG) have helped borrowers to borrow money without collateral in the following ways : 
(i.) Self help groups have organised rural poor more so women in collecting their money and in extending loans to its members. 
(ii.) SHG charge less rate of interest as compared with any other form of rural banking or even those charged by moneylenders. 
(iii.) These groups gradually can seek loans from the bank so as to create employment opportunities for its members. 
(iv.) Banks have been extending loans to these groups to meet their needs like buying fertilizers, seeds, raw materials etc. 
(v.) These SHG have emerged as building blocks for the rural poor as it is the group as a whole which is responsible for the repayment of the loan. In case, of non repayment it is taken up in a serious manner by the group members. 

The formal sector loans can be made beneficial for poor farmers and workers in the following ways:- 

• Formal sector credit includes loans from banks and cooperatives which are regulated by RBI.
• The rate of interest in formal sector is very low compared to informal sector. 
• Informal sector tries to exploit and cheat the poor people by charging high rate of interest and unreasonable terms of credit, but on the other hand, banks encourage the poor people to come together as Self Help Groups (SHGs) to inculcate into them the habit of savings and get easy loans from the banks. 
• The difficult terms and conditions underlying the loans should be relaxed so that the poor do not resort to private money lenders who often charge exorbitant rate of interest.

Four terms of credit are-

(i) Interest rate- Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal.

(ii) Collateral- It is an asset that the borrower owns such as land, building, vehicle, live stocks deposits with the banks and uses this as a guarantee to a lender until the loan is repaid.

(iii) Documentation-It is related to identification such as employment records and salary.

(iv) Mode of repayment- This refers to the manner in which loan would be repaid.