Commercial Bank Definition, Types, and Functions (2024)

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.

These are:

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.

Foreign Banks

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.

Conclusion

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.