Commercial Banks: An Overview (2024)

Commercial banks are an important component of the country’s Financial Institutions System. Commercial banks are profit-seeking institutions that accept deposits from the general public and advance money to individuals such as households, entrepreneurs, businessmen, and so on, with the primary goal of earning profit in the form of interest, commission, and so on. All of these banks’ operations are governed by the Reserve Bank of India, India’s central bank and supreme financial authority.

A commercial bank’s main source of income is the difference between the two rates it charges borrowers and pays depositors. Commercial banks include the State Bank of India, ICICI Bank, Axis Bank, and HDFC Bank.

Commercial Banks- An Overview:

Commercial banks are simple corporate or commercial enterprises that offer a variety of financial services to consumers in exchange for payments such as interest, discounts, fees, commission, and so on. The primary goal of these banks is to make money. However, the extent to which they must balance the profit maximization principle with other values such as the principle of social welfare, social fairness, and the promotion of regional balance in development distinguishes these banks from other corporate concerns.

The banking system in India is made up of the Reserve Bank of India, commercial banks, and cooperative banks. Profitability, liquidity, safety, and social welfare are the primary principles that banks try to incorporate into their operations. Finally, commercial banks provide the economy with maturity intermediation services.

Features of commercial banks:

In contrast to other financial institutions, commercial banks have unique functions such as they are the primary conduits via which credit and monetary policies are communicated to businesses.

They deal in a wide range of assets and cater to a variety of borrowers. They make it easier for monetary policies to extend to non-bank lenders and other sectors of the economy.

Classification of commercial banks:

Commercial banks are governed by the Banking Regulation Act of 1949. Their principal duty is to receive deposits and make loans to individuals, businesses, and governments. Commercial banks are classified as follows:

1. Scheduled Banks: Scheduled banks are those that have been included in the Second Schedule of the Reserve Bank of India Act, 1934. There are three categories of scheduled commercial banks in India.

• Public Sector Banks- Government-owned and managed banks are known as public sector banks. The primary goal of these banks is to serve society rather than to create profits. SBI and its subsidiaries, as well as other nationalized banks, are examples of public sector banks.
• Private Sector Banks- These banks are the exact opposite of public sector banks as their main focus is to earn a maximum profit because private owners own a large portion of the stock of these institutions. Although, private sector banks will still be subject to all of the RBI’s banking laws and regulations.
• Foreign Banks- A foreign bank is one that has its headquarters outside of India yet operates as a private business in India. They must abide by the laws of their own nation as well as the laws of the country in which they are operating. Foreign banks include Bank of America and Standard Chartered Bank.

2. Non-Scheduled Banks: Non-scheduled banks are local area banks that are not listed in the Reserve Bank of India’s Second Schedule. Non-Scheduled Banks must also maintain the cash reserve requirement, although not with the RBI.

Functions of Commercial Banks:

1. Accepting Deposits: A commercial bank’s first and most important role is to accept deposits in the form of current, savings, and fixed deposits.
2. Advancing Loans: Its second most important purpose is to provide loans and advances, primarily to business people and entrepreneurs, in exchange for interest. In fact, this is the bank’s primary source of revenue.
3. As an agent: The functions of an agent are also essential in a commercial bank. The bank serves as an agent for its customers and receives a commission for doing so. For example, making payments for various items, giving letters of reference, etc.
4. Credit creation: One of the most significant functions of commercial banks is credit creation. They, like other financial institutions, want to make money. Commercial banks perform this job by accepting deposits and advancing loans while maintaining a small cash reserve for day-to-day transactions. When a bank advances a loan, it creates an account in the customer’s name and does not pay him in cash, instead of allowing him to draw money by cheque as needed. The bank provides credit or deposits by granting a loan.

Other secondary functions are as follows:

• Discounting Bills of exchange
• Financing Foreign Trade
• Overdraft Facility
• General Utility services

Conclusion:

To conclude, commercial banks, being the primary repository of people’s money, are a significant source of institutional credit. They are key institutions for aiding trade and commerce with short-term loans. Commercial banks, as deposit-taking institutions, have played an important role in attracting people’s savings, particularly after nationalization. As a result, they have made commendable attempts to pool their savings.