Commercial Banks
A commercial bank is a financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses.
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Commercial banks make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the capital to make these loans.
Definitions of Commercial Bank by Authors
Professor Roger: “The bank which deals with money and money’s worth with a view to earning profit is known as commercial bank.”
Professor Ashutosh Nath: “Commercial bank is and intermediary profit making institution.”
Cairn Cross: “Bank is a financial intermediary institution which deals in loans and advances”
R.S. Kent: “Bank provides service to its clients and in turn receives perquisites in different forms.”
P.A. Samuelson: “Bank is such an institution which creates money by money only.”
Functions of a Commercial Bank
The main functions of a commercial bank include accepting deposits and advancing loans. In addition to these primary functions, commercial institutions offer services like trade finance, corporate loans, cash management, treasury management facility, agency services, and overdraft facility.
Retail banks offer services like mortgage loans, savings and checking accounts, line of credit, debit cards, and credit cards.
Commercial banks provide retail banking services to household and business customers. They are licensed deposit-takers, providing a range of savings accounts for households and businesses. They are licensed to lend money (and thereby “create” money e.g. in the form of loans, overdrafts, and mortgages).
Commercial banks make profits from providing other services such as deposit security, currency trading, business advice, cheque and credit-card processing.
Commercial banks have traditionally been located in physical locations, but a growing number now operate exclusively online. Commercial banks are important to the economy because they create capital, credit, and liquidity in the market.
Types of Commercial Banks
There are two types of commercial banks:
- Private sector banks
- Public sector banks.
Private sector banks are owned by private individuals, while public sector banks are owned by the government.
Public sector banks and private sector banks are two major types of banks in India. They differ in their ownership structure, objectives, and customer base.
Public Sector Banks
Public sector banks in India are government-owned banks, where the majority stake (i.e., more than 50%) is held by the Ministry of Finance (India) or State Ministry of Finance of various State Governments of India.
They are established since long and dominate the Indian banking system with a total market share of 72.9%. Examples of public sector banks include Punjab National Bank, State Bank of India, and Central Bank of India.
These banks have a larger customer base than private sector banks. They also have more transparency in terms of interest rate policies compared to private banks, and their interest rates on deposits are generally higher than those offered by private banks.
Private Sector Banks
Private sector banks are banks in which the majority stake of shares or equity is maintained and owned by private individuals. They emerged in India a few decades ago and have grown significantly. Examples of private sector banks include HDFC Bank, ICICI Bank, and AXIS Bank.
Private sector banks generally provide better customer service and have a smaller customer base than public sector banks. They are known for their use of the latest technology, new monetary tools, and contemporary innovations.
Comparison
- Ownership: Public sector banks are majority-owned by the government, while private sector banks are majority-owned by private individuals.
- Customer Base: Public sector banks have a larger customer base than private sector banks.
- Interest Rates: Public sector banks generally offer higher interest rates on deposits than private sector banks.
- Transparency: Public sector banks have more transparency in terms of interest rate policies compared to private banks.
- Service Quality: Private sector banks are known for better customer service than public sector banks.
Examples of commercial banks include JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, and Goldman Sachs. In India, examples include State Bank of India, ICICI Bank, HDFC Bank, and Axis Bank.
Commercial banks make money from a variety of fees and by earning interest income from loans. The spread on their assets and liabilities is used to pay the operating expenses of a bank and also to make a profit.
Banking Services
Commercial banks offer a range of services to their customers, including:
- Deposits
- Loans
- Credit cards
- Debit cards
- Online banking
- Mobile banking
- Transfer of funds
- Credit Creation
- Deposits: Commercial banks accept various types of deposits from the public, including saving account deposits and fixed deposits. These deposits are returned whenever the customer demands it or after a certain time period.
- Loans: Commercial banks provide loans and advances of various forms, such as overdraft facility, cash credit, bill discounting, money at call, etc. They also give demand and term loans to all types of clients against proper security.
- Credit cards: Commercial banks provide credit cards to their customers for making purchases on credit. Customers are charged interest on the amount borrowed.
- Debit cards: Commercial banks provide debit cards to their customers for making purchases using their own funds.
- Online banking: Commercial banks offer online banking services to their customers, allowing them to access their accounts, make transactions, and perform other banking tasks through the internet.
- Mobile banking: Commercial banks offer mobile banking services to their customers, allowing them to perform banking tasks using their mobile devices.
Along with core products and services, commercial banks perform several secondary functions.
The secondary functions of commercial banks can be divided into agency functions and utility functions. Some examples include:
- To collect and clear cheques, dividends, and interest warrant
- To accept various bills for payment: phone bills, gas bills, water bills
- To provide various cards such as credit cards and debit cards
- Safekeeping of valuables, documents etc, in locker or vault.
- Sale of application forms of competitive exams.
- Transfer of funds: Banks assist in the transfer of funds from one person to another or from one place to another through its credit instruments.
- Credit Creation: The commercial banks are authorized to create credit, by granting more loans than the amounts deposited by the customers.
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