What is a Commercial Bank?
A commercial bank is a type of financial organization that handles all public deposit and withdrawal activities, as well as lending for investments and other similar purposes. These banks are for-profit companies that operate solely to earn a profit.
Function of Commercial Bank:
Primary Functions
1. Accepts deposits: Savings, current, and fixed deposits are all accepted forms of deposits at this bank. The excess balances gathered from both the company and the people are loaned to meet the short-term needs of the business dealings.
2. Loan and advance provision: This bank's ability to lend money to business owners and entrepreneurs, as well as to collect interest, is one of its most important functions. Profitability is the main source of income for any bank. In this procedure, a bank holds onto a tiny portion of its deposits as a reserve and makes the remaining amount available to borrowers through demand loans, overdrafts, cash credit, short-term loans, and other similar products.
3. Credit cash: A consumer does not receive cash on credit when they are given a loan or credit. Before the money is sent to the account, the customer's bank account must first be opened. The bank can generate money through this procedure.
Secondary Functions
1. Bills of exchange that have been discounted: A written agreement that specifies the sum of money that must be paid for the products that will be acquired at a specific later date. Using a commercial bank's discounting technique, the money can also be paid off before the specified period.
2. Overdraft facility: A customer who has their current account kept open to overdraw up to a certain amount is granted an overdraft facility.
3. Buying and selling of securities: You are provided with the ability to purchase and sell securities by the bank.
4. Locker facilities: Customers of a bank can store their documents or valuables in safe lockers. For this service, the banks require a minimum yearly payment.
Credit is paid for and gathered using a variety of documents, including bills of exchange, promissory notes, and checks.
Types of Commercial Banks:
A private bank: is a kind of commercial bank in which the majority of the share capital is owned by private citizens and companies. Private banks are all registered as limited liability corporations. A few examples of these banks are Yes Bank, Housing Development Finance Corporation (HDFC) Bank, and Industrial Credit and Investment Corporation of India (ICICI) Bank.
A public bank: is a nationalized bank in which the government owns a sizable portion. Bank of Baroda, Punjab National Bank, Corporation Bank, Dena Bank, and State Bank of India (SBI) are a few examples.
Foreign banks: These banks were founded abroad and have branches there as well. American Express, Standard & Chartered, Citibank, Hong Kong and Shanghai Banking Corporation (HSBC), and other banks of a similar nature are a few examples.
How Commercial Banks Make Money?
Service fees are how banks generate revenue from their clientele. These fees range from account fees (monthly maintenance, minimum balance, overdraft, and non-sufficient funds [NSF] penalties) to safe deposit box fees and late fees, depending on the products. A lot of loan products have additional costs on top of interest.
The interest that banks receive on loans to their customers is another source of income for them. They lend money based on deposits made by customers. Nonetheless, banks pay a lower interest rate on the money they borrow than the interest rate on the money they lend. A bank might, for instance, charge 4.75% yearly interest to mortgage clients yet give savings account customers an annual interest rate of 0.25%.
Lending and Commercial Banks
The majority of bank lending in North America is to consumers. Credit cards, vehicle loans, and home mortgages are a few of the most important categories.
Home Loans
By far the largest portion is made up of mortgages. Properties are purchased using mortgages, and the houses themselves frequently serve as the collateral for the loan. Mortgages usually have 30-year payback terms, and interest rates can be variable, adjustable, or fixed.
While several riskier mortgage products, such as pick-a-payment mortgages and negative amortization loans, were available during the U.S. housing bubble of the 2000s, they are considerably less frequent today.
Vehicle Loans
For many banks, auto loans represent another important type of secured lending. Auto loans usually have higher interest rates and shorter durations than mortgage lending. Banks compete fiercely with other financial institutions in the vehicle loan market, including captive auto financing businesses owned by automakers and dealers.
Credit-Based Cards
Credit cards represent a noteworthy category of funding. Essentially, credit cards are individual credit lines that are available for use whenever needed. They are provided by private card issuers via commercial banks.
The networks that facilitate money transfers following a transaction between the merchant's bank accounts and the customer's are managed by Visa and Mastercard.
What Type of Bank Is My Bank?
Maybe! When most people hear the word "bank," they think of commercial banks. Commercial banks are for-profit organizations that deal with a wide range of customers, including the general public and businesses, and that take deposits, provide loans, and protect assets. It most likely wouldn't be a commercial bank, though, if your account is with a community bank or credit union.
What part of the economy do commercial banks play?
The majority of developed countries today use a fractional reserve banking system, which depends heavily on commercial banks. Freeing up capital for lending enables banks to offer new loans of up to (usually) 90% of the deposits they already hold, which could expand the economy.
The Final Word
Due to their ability to give credit and loans to both individuals and corporations, commercial banks play a crucial role in the US economy. They offer a haven where customers can keep money, accrue interest, and use credit cards, debit cards, and cheques to make payments.
Most commercial banks have a physical presence in cities and towns, and many of them have vast branch networks. Yet an increasing percentage can only be reached online and via mobile apps; they don't have a physical site.
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