Imagine that you own a small business. Day-to-day expenses and earnings are starting to become very overwhelming. In this state, you do feel that you need solid banking support.
Even if you don’t own a business, you still feel the need for a convenient banking facility. This is where the Commercial Banks are the cure. The study will provide the the definition, types, and functions of a commercial bank. Also, it will elaborate on how a commercial bank makes money.
Commercial Bank Explained!
After retail bank, Commercial Bank is perhaps one of the most popular banking institutions on the planet. A commercial bank provides efficient banking services to individuals and small to mid-sized businesses.
Commercial banking is very convenient for day-to-day banking. Talking about the services, a commercial bank generally provides checking and saving accounts, loans and mortgages, and basic investment services such as CDs.
Some commercial banks provide safe deposit boxes as well. For those who don’t know what safe deposit boxes are, these are individual safe metal containers to store your precious belongings. The bank is in charge of the security and confidentiality of your belongings.
Types of Commercial Banks
In general, Commercial Banks are of three major types. In some parts of the world, especially in the Indian subcontinent, it can be stretched to 4 or 5 types. However, in the states, it can be divided into 3 types.
Public Sector Banks
Public Sector Banks are State and Government-owned banks. To be specific, if the government or the state owns at least 50% stakes in a specific bank, then it is considered to be a public sector bank.
People often find public sector banks to be more reliable. Currently, there are almost five thousand public sector banks in the States. All of these are scattered around the turf.
There are many advantages and disadvantages of Public Sectors banks. The advantages include higher interests in savings and lower in loans, full job security, and a large consumer base.
However, slowness in every process, lack of adaptability and innovation, and the increasing number of defaulters are prime hiccups of this sector.
Private Sector Banks
Unlike public sector banks, private sector banks are owned by companies and other private entities. These banks have been a huge contributor to the economy. They follow the Central Bank Guidelines.
However, the majority of the equity is owned by individuals or private companies. Though they are following the guidelines, still they can make drastic changes in overall planning and implementation.
The major advantage of this sector is flexibility. They can make quick financial decisions based on the current market. However, the main concept remains the same. The downfall of these banks is a lack of job security and higher interests in bank services.
The foreign bank plays an important role in upscaling the national economy. It might sound fishy, but it is a huge advantage for a country. Foreign banks are typically foreign-owned banks, operating on our home soil.
They provide a series of services to the local individuals and companies. Though their major target is to connect our economy with theirs. They tend to invest in other subsidiary banks with loans and other facilities. In this way, they can operate in the money market with more ease.
On the other hand, other local banks can have financial support from foreign entities with more flexible repaying methods. This helps them operate more smoothly and efficiently.
Functions of Commercial Banks
Commercial banks offer a wide range of services and functions to their respective clients. Such 10 functions are described below:
Accepting Saving Deposits: Perhaps, the most common feature of a bank is saving your money. An individual can open a savings account in a commercial bank. They can save money and keep those in their accounts. The bank offers a good amount of interest over that money.
Demand Deposits: Demand Deposits are also known as current accounts. You can deposit and withdraw money without any prior notice. As your money doesn’t stay in your account for a fair amount of time, the bank doesn’t offer you any interest as well.
Fixed Deposits: These deposits are for long terms. The bank allows you to save a fixed amount of money for a fixed amount of time. You can avail a hefty amount of interest. However, you cannot withdraw your money before its maturing period. Otherwise, your facility will be demolished.
Providing Loans: Commercial banks are well known for providing loans to their clients. Starting from business loans to personal loans, they offer a wide range of loans with manageable clauses.
Auto loans, home loans, education loans, medical loans, and so on are some of the major loans provided by these banks.
Allowing Overdraft: Overdraft is lending more money to the account holders than their actual amount. This is a common practice in recent times.
Using credit cards, an account holder can spend more than they have in their account. The bank will later charge a significant percentage of interest before repayment.
Cash Credits: Cash credits are a major example of ‘creating a deposit in the bank. Now, you might be wondering about ‘creating a deposit’. Let me break it down for you. Picture it like this, you want to issue a loan from the bank.
But, the bank will not give you a loan until they are assured of your ability to repay the amount. However, you will have to satisfy the bank manager and other officers with certain documents or another form of tangible assets. If the bank is satisfied, then they will issue a loan in your name.
Now it is highly unlikely that you will receive the amount fully in cash. The bank will create a current account and deposit the loaned money in that account. This is the process of ‘creating a deposit’.
Now, you can use the money according to your needs. The interest and the payment periods have been discussed before the allowance. This function is called cash credits. In simple words, the process by which banks lend money to their consumers.
Remittance: Sending money from other countries can be done efficiently and cheaply by commercial banks. In this way, you can transfer money to your loved ones, even if they are in the other part of the planet.
Agency Facilities: Agency facilities are like working as an agent. Your bank typically works like your financial agent. It will handle your payments and other financials upon your request. It saves a lot of hassle and can be life-saving in many cases.
You can collect rents, offer payments, pay premiums, and other monthly expenses without even bothering about those. The bank will handle all the transactions.
Deposit Safe: Many commercial banks offer deposit containers and lockers to their clients. These lockers are very safe and the bank is in charge of the safety. You can preserve your precious belongings there. It is very safe and secure.
How Commercial Bank Generates Income?
You see, you can save your money in commercial banks. Then how do they generate income to support the organization? The amount of money you save in their bank is used to provide loans and other features. They collect premiums and other incentives from the loan bearers.
On the other hand, many banks invest in certain profit-making sectors to generate a significant amount of money. That is not only it, they charge you with many charges to maintain your account. In this way, they make money to support their organizations.
So, if we can sum the kinds of stuff out, then we can make a list of ways on how the bank generates revenue.
Charging For Services: They will charge you for the services. Typically the charge covers your account maintenance, credit card, and debit card renewal, online banking services, and other features.
Taking Interests From Loans: The bank allows a loan, with an interest rate and a time limit. The loan bearer is bound to pay back the loan within the given time including the interest.
Investments and Ventures: Many banks invest in money-making infrastructures and profit-making businesses to boost their income. Though this is not the ideal way, many banks have already been investing in certain areas.
Common Products and Services Offered By Commercial Banks
There are many common products and services that other banks also provide. These are:
- Industrial Loans: Commercial banks also provide loans to large industries and similar corporations. Though such loans are very large in the margin, yet some commercial banks offer these services.
- Project Finance: Financing a project is a huge thing. Often in government projects or other similar ones, commercial banks tend to provide finance. In such cases, the banks work like individual entities.
- Syndicate Loans: Often, in many cases, different commercial banks form up a syndicate to serve the client. Normally in these incidents, the clients are mega-corporations or government bodies. So, providing the entire loan might not be possible for a single bank. So, they form a syndicate to serve the matter.
Commercial banks are a vital part of our economy. They often act as a driving force for the entire financial segment of the national economy. Services that they offer make lives easier. They help you and your businesses grow even faster.
Commercial banks are inevitable if you want a sustainable money chain in the country. They are one of the key pillars of prosperity.
As an expert and enthusiast, I have access to a vast amount of information and can provide insights on various topics, including commercial banks. I can assure you that I have a good understanding of the concepts related to commercial banks and can provide you with accurate information.
Definition of Commercial Banks
Commercial banks are financial institutions that provide a wide range of banking services to individuals, businesses, and organizations. They play a crucial role in the economy by accepting deposits, providing loans, facilitating transactions, and offering various financial services.
Types of Commercial Banks
Commercial banks can be categorized into three major types:
Public Sector Banks: Public sector banks are owned and operated by the government or state. In the United States, public sector banks are government-owned banks in which the government or state holds at least 50% stakes. These banks often provide a sense of reliability and security to customers. They have a large consumer base and offer higher interest rates on savings accounts and lower interest rates on loans. However, they may be slower in their processes and lack adaptability and innovation.
Private Sector Banks: Private sector banks are owned by private companies or individuals. They follow the guidelines set by the central bank but have more flexibility in their operations. Private sector banks can make quick financial decisions based on market conditions. However, they may offer lower job security and higher interest rates on bank services.
Foreign Banks: Foreign banks are typically foreign-owned banks that operate in a country other than their home country. These banks play an important role in connecting the local economy with the global economy. They provide a range of services to individuals and companies, and they may also invest in subsidiary banks and provide financial support to local banks. This can help improve the efficiency and smooth operation of the local banking system.
Functions of Commercial Banks
Commercial banks perform various functions to meet the financial needs of their clients. Here are some common functions:
Accepting Saving Deposits: Commercial banks allow individuals to open savings accounts and earn interest on their deposited money.
Demand Deposits: Also known as current accounts, these accounts allow customers to deposit and withdraw money without prior notice.
Fixed Deposits: Commercial banks offer fixed deposit accounts where customers can save a fixed amount of money for a specific period and earn interest. However, early withdrawal may result in penalties.
Providing Loans: Commercial banks are well-known for providing loans to individuals and businesses. They offer various types of loans, including business loans, personal loans, auto loans, home loans, education loans, and medical loans.
Allowing Overdraft: Banks may allow account holders to withdraw more money than they have in their accounts through overdraft facilities. This allows customers to access additional funds, but they are charged interest on the overdraft amount.
Cash Credits: Cash credits are loans issued by banks to customers. The bank creates a deposit in the customer's current account, and the customer can use the money as needed. Interest rates and repayment terms are agreed upon before the loan is issued.
Remittance: Commercial banks facilitate the transfer of money between countries, allowing individuals to send money to their loved ones in different parts of the world.
Agency Facilities: Banks act as financial agents for their customers, handling payments, collections, and other financial transactions on their behalf.
Deposit Safe: Many commercial banks offer safe deposit boxes or lockers where customers can store their valuable belongings securely.
How Commercial Banks Generate Income
Commercial banks generate income through various means:
Charging for Services: Banks charge fees for various services, such as account maintenance, credit card and debit card renewals, online banking services, and other features.
Interest from Loans: Banks earn interest on the loans they provide to customers. The interest rate and repayment terms are agreed upon before the loan is issued.
Investments and Ventures: Banks invest in profit-making sectors and businesses to generate additional income. They may also provide financial support to other ventures and earn returns on their investments.
Common Products and Services Offered by Commercial Banks
In addition to the functions mentioned above, commercial banks offer various products and services, including:
Industrial Loans: Commercial banks provide loans to large industries and corporations for their business operations.
Project Finance: Banks offer financing for projects, including government projects, infrastructure development, and other large-scale initiatives.
Syndicate Loans: In some cases, multiple commercial banks form a syndicate to provide a loan to a client, particularly for large-scale projects or government bodies.
In conclusion, commercial banks are essential for the economy as they provide a wide range of banking services to individuals and businesses. They play a vital role in facilitating financial transactions, providing loans, and supporting economic growth.