Commercial Banks – Overview, Types, and Functions

Learn about commercial banks, their primary functions, types and why they are important to shape up the economic conditions of a country.

What is Commercial Bank?

A commercial bank is an entity whose economic activity is financial intermediation. In other words, it takes deposits from the public and directs those resources to grant credits to obtain a profit.

These banks can generate profits from the interest rate they charge for the financing granted. Thus, they recover the borrowed money and obtain additional income.

Commercial banks are usually involved in the opening and maintenance of savings accounts or current accounts. Through these products, customers make deposits to keep their money safe and achieve a small return.

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Importance of Commercial Banks

Commercial banks are vital to a nation’s economy. They offer essential banking services to end users and help create market capital and liquidity by taking consumers’ funds and lending them to others. 

Commercial banks play a role in credit creation, which increases production, employment, and consumer spending, thereby boosting the economy. These banks are heavily regulated by the central bank of that country, the RBI, in India. For example, central banks impose reserve requirements on commercial banks, which means that they would need to hold a certain percentage of their consumer deposits at the central bank in case of a rush to withdraw funds from the general public. These entities help markets thrive and, if their influence is used well, can foster development so that more people can access essential services and consumer goods.

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Types of Commercial Banks

Commercial banks are classified into two categories, i.e., scheduled commercial banks and non-scheduled commercial banks. Furthermore, scheduled commercial banks are classified into three types:

Private Banks

When individuals own more than 51% of the share capital, that banking company is private. However, these banks are companies on the stock market on a recognized stock exchange. Below are the private banks in India –

• Axis Bank
• Bandhan Bank
• City Union Bank
• DCB Bank
• Dhanlaxmi Bank
• Federal Bank
• HDFC Bank
• ICICI Bank
• IDBI Bank
• IDFC Bank
• IndusInd Bank
• Jammu and Kashmir Bank
• Karnataka Bank
• Karur Vysya Bank
• Kotak Mahindra Bank
• Lakshmi Vilas Bank
• Nainital Bank
• RBL Bank
• South Indian Bank
• Tamilnad Mercantile Bank
• YES Bank

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Public Banks

When the Government owns more than 51% of the share capital of a listed banking company, that bank is called a public sector bank. SBI is the largest public sector bank in India and is ranked among the top 50 banks in the world. Listed below are the public banks in India.

• Bank of Baroda
• Bank of India
• Bank of Maharashtra
• Canara Bank
• Central Bank of India
• Indian Bank
• Indian Overseas Bank
• Punjab & Sind Bank
• Punjab National Bank
• State Bank of India
• UCO Bank
• Union Bank of India

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Foreign Banks: Banks established in foreign countries and branches in the home country are called foreign banks. Some of the top foreign banks operating in India are –

• American Express Banking Corporation
• Bank of America
• Barclays Bank Plc.
• BNP Paribas
• Citibank
• DBS Bank India Limited
• Deutsche Bank
• HSBC Bank
• J.P. Morgan Chase Bank N.A
• Standard Chartered Bank
• The Royal Bank of Scotland
• United Overseas Bank Ltd

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Regional Rural Banks

Regional Rural Banks usually operate at regional levels in different states of India, and they provide credit to weaker sections of society like agricultural labourers, marginal farmers, and small enterprises.

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Functions of Commercial Banks

Among the roles played by commercial banks in modern economies are:

1. Mobilize savings for capital creation

Commercial banks help mobilize savings through a banking network. People in developing economies have low incomes, but banks can induce them to save by introducing a variety of deposit schemes to suit individual needs. Banks also mobilize the savings of the wealthy few. By mobilizing these people’s savings, banks can channel them to carry out productive and investment activities. Therefore, commercial banks are crucial to help capital formation in a developing country, creating jobs and markets, and boosting capitalism.

2. Finance the industry

Commercial banks finance the industrial sector in multiple ways. They provide short-term, medium-term, and long-term loans and three-year or even multi-year loans to help the industry, which is very rudimentary, particularly in the case of some developing nations, and help them grow and flourish. Commercial banks provide manufacturing activities and entrepreneurs with the confidence they need to grow their businesses on a large scale. In the same way, commercial banks can finance the actions and ventures of large companies that go public.

3. Finance trade

Commercial banks help in the financing of both internal and external trade. Banks provide loans to retailers and superstores to store the goods they trade. They also help the movement of goods from one place to another by providing all kinds of facilities such as discounts and accepting letters or promissory notes to provide resources. However, they finance exports and imports of developing countries by providing currency exchange facilities to exporters and importers of goods.

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4. Finance agriculture

Commercial banks help finance the agricultural sector in developing countries in multiple ways. They provide loans to traders in agricultural commodities. They also open a network of branches in rural areas by providing agricultural credit. Commercial banks provide direct financing to farmers for the commercialization of their products, modernization, and technification of their farms by providing irrigation technologies, resources for land development, etc.

These banks also provide financial assistance for industrial-scale animal husbandry, cattle raising, sheep farming, chicken farming, fish farming, and horticulture. Sometimes, small farmers are also reached by microcredit tools from commercial or microfinance institutions. Commercial banks, in theory, are prepared to provide financial assistance for all economic activities in rural areas.

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5. Financing of consumer goods

In developing countries, commercial banks help buyers to invest in durable consumer goods like home appliances, cars, etc. These banks can give consumers credit to buy movable and immovable goods. They also help people improve their living standards by providing the necessary resources.

6. Finance activities that generate employment

Commercial banks help finance employment-generating activities in developing and developed countries in multiple ways. They provide loans for young people to pursue higher education in engineering, medicine, and other high-skilled vocational pursuits. They also grant credits for young entrepreneurs, engineering and medical students, and others seeking technical training to establish their businesses. All commercial banks provide such credit facilities. Thus, help form human capital for start-ups and foreign companies that establish themselves in a country. Still, they also help finance entrepreneurial activities and new talents, brands, inventions, etc.

7. Help the government and central banks in monetary policy

Commercial banks help the economic development of a country by faithfully following the central bank’s monetary policy. Central banks depend on commercial banks to successfully implement monetary policy by following their dictates to drive the development of the economy.

These banks contribute so much to the growth of economies by granting loans for agriculture, for industry, helping the formation of physical and human capital, and by following the monetary policy of the monetary authorities of a country.

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