Commercial Banks

Commercial banks are financial institutions that provide a wide range of financial services, primarily focusing on accepting deposits, providing loans, and facilitating various other banking services such as wealth management and payment processing. Unlike central banks, which regulate the money supply and financial systems of a country, commercial banks interact directly with the public and businesses.

Functions of Commercial Banks

1. Accepting Deposits:
   • Commercial banks offer a variety of deposit accounts where individuals, businesses, and government entities can park their funds securely. These accounts include:
     • Current Accounts: Mainly for businesses, allowing frequent transactions.
     • Savings Accounts: For individuals, offering interest on deposited funds.
     • Fixed Deposits: Accounts where funds are deposited for a fixed term at a predetermined interest rate.
2. Providing Loans and Advances:
   • Commercial banks lend money to individuals, businesses, and governments for various purposes. The types of loans offered include:
     • Personal Loans: For personal needs such as education, home buying, or medical expenses.
     • Business Loans: To fund business activities, expansion, or working capital.
     • Home Loans: For purchasing real estate.
     • Overdrafts: Short-term loans where the account holder is allowed to withdraw more than the balance in their account.
3. Facilitating Payment and Transfer Services:
   • Commercial banks provide essential services to facilitate transactions, including:
     • Cheque Services: Processing cheques for withdrawals and deposits.
     • Wire Transfers: Transferring funds domestically or internationally.
     • Electronic Fund Transfers (EFT): Transferring money through online banking or mobile banking applications.
4. Credit Creation:
   • By lending out the deposits they receive, commercial banks play a crucial role in the creation of money within an economy. When banks provide loans, they essentially create additional money in the form of deposits, which can lead to an increase in the overall money supply.
5. Foreign Exchange Services:
   • Commercial banks offer foreign exchange services, including the buying and selling of foreign currencies for international trade, investment, or travel. They also provide foreign currency accounts and related services to businesses.
6. Investment Services:
   • Some commercial banks offer investment products such as mutual funds, bonds, and stocks. They also provide financial advice and wealth management services to individuals and institutional investors.
7. Safekeeping Services:
   • Commercial banks provide safe deposit boxes and vault services for the safekeeping of valuables, documents, and important assets.

Types of Commercial Banks

1. Public Sector Banks:
   • These banks are owned and operated by the government. They are generally more focused on serving public interests, offering essential banking services to the masses. Examples include:
     • State Bank of India (SBI)
     • Bank of Baroda
     • Punjab National Bank (PNB)
2. Private Sector Banks:
   • These banks are privately owned and operate for profit. They often offer a wider range of services with an emphasis on efficiency and customer satisfaction. Examples include:
     • HDFC Bank
     • ICICI Bank
     • Axis Bank
3. Foreign Banks:
   • Foreign banks are branches of foreign financial institutions that operate in a host country. They cater primarily to international businesses and affluent individuals. Examples include:
     • Citibank
     • HSBC
     • Standard Chartered Bank
4. Cooperative Banks:
   • These are banks that are owned and operated by members of a cooperative society. Their focus is often on serving rural areas and providing loans to members at affordable rates.

Sources of Funds for Commercial Banks

1. Deposits:
   • The primary source of funds for commercial banks comes from customer deposits, including savings accounts, current accounts, and fixed deposits.
2. Borrowings from the Central Bank:
   • Commercial banks can borrow funds from the central bank, usually in the form of short-term loans or through the discount window, at a rate determined by the central bank.
3. Capital Raised by Issuing Shares:
   • Banks may raise capital by issuing equity or debt securities in the market. This allows them to increase their funds for lending and investment.
4. Retained Earnings:
   • Commercial banks also accumulate capital through retained earnings (profits that are not distributed as dividends).

Commercial Banks’ Role in the Economy

1. Financial Intermediation:
   • Commercial banks act as intermediaries between savers and borrowers. They channel funds from depositors (who are savers) to borrowers (such as individuals, businesses, or governments) who need financial resources for various activities. This function is crucial for economic development as it ensures the efficient allocation of capital.
2. Support Economic Growth:
   • By providing loans and credit to businesses and individuals, commercial banks play a central role in promoting economic activities like entrepreneurship, consumption, and investment, thereby fostering economic growth.
3. Money Supply Management:
   • Commercial banks, through their lending activities, influence the money supply. By granting loans, they effectively create money (credit creation), which contributes to changes in the money supply within the economy.
4. Promote Investment and Consumption:
   • Commercial banks encourage investment by offering loans to businesses for expansion, research, and development. Similarly, they promote consumption by providing personal loans to individuals for purchasing homes, cars, and other goods.