You are on page 1of 8

Commercial bank

Introduction
A commercial bank is a type of bank that provides services such as accepting deposits, making
business loans, and offering basic investment products.
Commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits
and loans from corporations or large businesses, as opposed to individual members of the public
(retail banking).
In the US the term commercial bank was often used to distinguish it from an investment
bank due to differences in bank regulation. After the great depression, through theGlassSteagall
Act, the U.S. Congress required that commercial banks only engage in banking activities,
whereas investment banks were limited to capital markets activities. This separation was mostly
repealed in the 1990s.
DEFINITION OF 'COMMERCIAL BANK'
A financial institution that provides services, such as accepting deposits,
giving business loans and auto loans, mortgage lending, and basic investment
products like savings accounts and certificates of deposit. The traditional
commercial bank is a brick and mortar institution with tellers, safe deposit
boxes, vaults and ATMs. However, some commercial banks do not have any
physical branches and require consumers to complete all transactions by
phone or Internet. In exchange, they generally pay higher interest rates on
investments and deposits, and charge lower fees.
Meaning
Commercial banking activities are different than those of investment banking,
which include underwriting, acting as an intermediary between an issuer of
securities and the investing public, facilitating mergers and other corporate
reorganizations, and also acting as a broker for institutional clients. Some
commercial banks, such as Citibank and JPMorgan Chase, also have
investment banking divisions, while others, such as Ally, operate strictly on the
commercial side of the business.
Importance of Commercial Bank
Commercial banks play a key role in the economy both at a national and global level. The
importance of commercial banks include the fact that they serve as a trusted and safe place
where the funds of people and businesses can be kept on their behalf, reducing the necessity to
keep large sums of money on the private or business premises. On the international level,
commercial banks serve as a source for transferring money from one country to another,
eliminating the need to travel with money. The money paid by depositors into their savings
accounts are also used by the banks to foster economic growth through the lending of such
money to various businesses and individuals.
An importance of commercial banks is the role they play in the development of the economy.
They help various consumers, both individuals and businesses, purchase items that they would
not have been able to purchase without financial assistance from the banks. This includes the
purchase of cars, houses and more capital intensive items like machinery or manufacturing
plants. They also make it easier for their customers to repay the money through the arrangement
of long-term financial plans where the money will be spread over a determined length of time.
The advantage is that this makes it easier for the borrowers to repay the money, even if they
have to pay interest on the loan as a sort of service charge.
Another importance of commercial banks is the fact that they keep both people and their money
safe through the services they provide. Since the banks make it unnecessary to keep large sums
of money in the home or office by providing a safe alternative, people can rest easier knowing
that their money is safe. They can also feel safer knowing that the absence of money in their
homes or places of business makes these places less attractive to thieves.
Something else that contributes to the importance of commercial banks is the fact that the money
held on behalf of customers in the form of savings deposits cannot be categorized as idle money.
This is because that money also earns something for the depositor in the form of interest. On the
other hand, if the money is put away in the home or in a safe, it would not earn anything and
would be classified as idle money.
There is acute shortage of capital. People lack initiative and
enterprise. Means of transport are undeveloped. Industry is
depressed. The commercial banks help in overcoming these
obstacles and promoting economic development. The role of a
commercial bank in a developing country is discussed as under.
1. Mobilising Saving for Capital Formation:
The commercial banks help in mobilising savings through network
of branch banking. People in developing countries have low
incomes but the banks induce them to save by introducing variety of
deposit schemes to suit the needs of individual depositors. They also
mobilise idle savings of the few rich. By mobilising savings, the
banks channelise them into productive investments. Thus they help
in the capital formation of a developing country.
2. Financing Industry:
The commercial banks finance the industrial sector in a number of
ways. They provide short-term, medium-term and long-term loans
to industry. In India they provide short-term loans. Income of the
Latin American countries like Guatemala, they advance medium-
term loans for one to three years. But in Korea, the commercial
banks also advance long-term loans to industry.
In India, the commercial banks undertake short-term and medium-
term financing of small scale industries, and also provide hire-
purchase finance. Besides, they underwrite the shares and
debentures of large scale industries. Thus they not only provide
finance for industry but also help in developing the capital market
which is undeveloped in such countries.
3. Financing Trade:
The commercial banks help in financing both internal and external
trade. The banks provide loans to retailers and wholesalers to stock
goods in which they deal. They also help in the movement of goods
from one place to another by providing all types of facilities such as
discounting and accepting bills of exchange, providing overdraft
facilities, issuing drafts, etc. Moreover, they finance both exports
and imports of developing countries by providing foreign exchange
facilities to importers and exporters of goods.
4. Financing Agriculture:
The commercial banks help the large agricultural sector in
developing countries in a number of ways. They provide loans to
traders in agricultural commodities. They open a network of
branches in rural areas to provide agricultural credit. They provide
finance directly to agriculturists for the marketing of their produce,
for the modernisation and mechanisation of their farms, for
providing irrigation facilities, for developing land, etc.
They also provide financial assistance for animal husbandry, dairy
farming, sheep breeding, poultry farming, pisciculture and
horticulture. The small and marginal farmers and landless
agricultural workers, artisans and petty shopkeepers in rural areas
are provided financial assistance through the regional rural banks in
India. These regional rural banks operate under a commercial bank.
Thus the commercial banks meet the credit requirements of all
types of rural people.
5. Financing Consumer Activities:
People in underdeveloped countries being poor and having low
incomes do not possess sufficient financial resources to buy durable
consumer goods. The commercial banks advance loans to
consumers for the purchase of such items as houses, scooters, fans,
refrigerators, etc. In this way, they also help in raising the standard
of living of the people in developing countries by providing loans for
consumptive activities.
6. Financing Employment Generating Activities:
The commercial banks finance employment generating activities in
developing countries. They provide loans for the education of young
persons studying in engineering, medical and other vocational
institutes of higher learning. They advance loans to young
entrepreneurs, medical and engineering graduates, and other
technically trained persons in establishing their own business. Such
loan facilities are being provided by a number of commercial banks
in India. Thus the banks not only help inhuman capital formation
but also in increasing entrepreneurial activities in developing
countries.
7. Help in Monetary Policy:
The commercial banks help the economic development of a country
by faithfully following the monetary policy of the central bank. In
fact, the central bank depends upon the commercial banks for the
success of its policy of monetary management in keeping with
requirements of a developing economy.
Thus the commercial banks contribute much to the growth of a
developing economy by granting loans to agriculture, trade and
industry, by helping in physical and human capital formation and
by following the monetary policy of the country.
Advantages & Disadvantages of Commercial Banking
Commercial Banking
Commercial banking involves a division within a bank that focuses on business accounts and working with
business owners. Some banks may refer to these services under the term "business banking" instead of
commercial banking. The bank may offer services such as payroll processing, a way to pay your quarterly taxes,
and financial planning services. The financial planning may also include the management of retirement accounts
in addition to financial planning for the business. Many commercial banking divisions focus on lending money
to help businesses stay afloat.
Advantages
Commercial banking can help a small business by making it easier to manage day-to-day financial tasks. An
established commercial account with a bank will make it easier to borrow money when you grow your business.
Often a business is assigned a representative who works directly with the company to find the best services and
solutions for the issues the business is facing. For example, the company may save money by outsourcing
payroll processing. Banks also offer invoicing services, with personalized invoices, and can set up transfers to
other banks which will simplify accounting procedures. Some banks offer retirement account management for
your employees as well as other employee benefits. This can save you money, and make it easier to manage all
of the services you offer employees. Some banks allow you to make deposits online by scanning checks. Your
bank may offer you discounts on your merchant services fees. Commercial banking allows you to set up direct
deposits for your employees as well as for any invoices you need to pay to others, which will save you time.
Related Reading: Advantages and Disadvantages of a Computerized Accounting System for Small Businesses
Disadvantages
Commercial banking or business accounts are often more expensive than traditional bank accounts. Banks may
charge fees for night deposits, for processing a certain number of checks and for the payroll services. Depending
on the size of your business, some of the services offered may not be needed, and you may still be charged for
the services even if you're not fully using them. Different banks may offer different services and charge different
fees, and it can be difficult to compare the services. Signing up for a commercial account before your business is
ready for one will cost you and may slow the growth of the business. If you choose the wrong bank, you may
have a difficult time opening a new account and transferring all of the services to another bank. This can cost
you both time and money.
Making the Choice for Your Business
As your business grows you may reach a point where you need commercial banking services. Visit several
different banks to find out which services they offer, and the fees they charge. Look for a bank that features
good customer service. Carefully examine any fees that it charges and see if the changes will be more beneficial
or detrimental to your bottom line.
Types
Branch Banking:
This refers to a system under which two or more banks are opened
under a single ownership. Examples are State Bank of India, Punjab
National Bank, Indian Bank etc. which have several branches
spread all-over India.
Unit Banking:
This refers to that system of banking in which banking operations
are carried on through a single organisation, without any branches.
This system used to be popular in America.
One great advantage of branch banking is that the same bank can
cater to several parts of a large country (through its branches
situated in those parts) which a unit bank would find difficult to do.
As against this, a unit bank has the advantage that its efforts are
concentrated in one area so that it can serve that area well.
Group Banking:
This is a system under which two or more banks, separately
incorporated, are connected by being controlled by a single holding
company as trust.
Chain Banking:
This is similar to Group Banking. Here two or more banks are
controlled by a single group through the ownership of shares or
otherwise.
Deposit Banking:
In this category, the banks act as custodian or trustees of the
depositors.
Investment Banking:
This refers to banks whose main function is to provide finance for
investment to industrial concerns. They provide this by purchasing
shares and debentures of newly floated companies.
Mixed Banking:
Most banks in India play both roles. Deposit Banking and
Investment Banking. Such type of banking is called mixed banking.
FUTURE
The HT-MaRS Bank and Credit Card Satisfaction Survey 2012 ranked banks according to
customers' satisfaction across various categories. According to the results, India's second-largest
private bank, HDFC, emerged as the winner, dethroning 2010's champion, Axis Bank (which
slipped to third place). ICICI Bank moved up one place from the previous survey to the second
position. Though private sector banks may have got the top spots, ahead of public sector ones,
when it comes to satisfying consumers, the top 10 list features more state-owned banks. Bank of
Baroda bested the mammoth State Bank of India, improving drastically from its 12th position in
2010 by landing the fourth position over-all, becoming the best government-run bank.
The survey ranked banks across five parameters, namely account opening, bank staff, branch
facilities, turnaround time and account-related services. Each parameter had various attributes
on which customers were asked to score their banks.
Compared to 2010, there has been a marked increase in over-all satisfaction scores. Indian
Bank, Indian Overseas Bank and Canara Bank fell out of the top ten while relative newbies such
as Kotak Mahindra Bank and Yes Bank, which featured nowhere in the 2010 list have inched into
the results. Results vary from town to town, but residents of Chandigarh seem the most satisfied
with their banks, stamping their approval with a high score of 829 points.
Changes ahead
The contours of the banking industry in India is set to change in the coming years with
Parliament passing the much awaited Banking Laws Amendment Bill last week. The passage of
the bill paves the way for the Reserve Bank of India to come out with final guidelines on issuing
new bank licenses. This not only means more banks, but the style of operation is also expected
to be different, with the upgradation of technology.
At present, over 70% of the market lies with the public sector banks but the government is now
geared up to open the sector to more foreign players while setting up new private banks in the
country which would help in bringing more people under the banking net. Several business
houses including Aditya Birla Group, the Tatas and Reliance have evinced interest in entering
the Indian banking space. Besides the corporate houses, even non-banking financial
corporations can now convert themselves into full-fledged banks.
While allowing more banks to be set up, to encourage healthy competition in the market, the
government could also look at consolidating the public sector banks with a view to creating
mega-banking entities which could face up to stiff competition from others.
Evolution
The government under late prime minister Indira Gandhi nationalised 14 commercial banks in
1969. The second dose of nationalisation happened in 1980 when 6 more commercial banks
were nationalised. The move, according to the government then, was to provide more control of
credit delivery. In 1993, the government merged New Bank of India with Punjab National Bank.
The Narasimha Rao government in the 1990s embarked on a policy of liberalisation, providing
licenses to several private banks, which came to be known as the new generation banks.
With liberalisation and changing economic dynamics in the country, the UPA government is now
keen to open up the sector to more private and foreign players.

You might also like