- Commercial banks work on the principle of profit making. They accept deposits from the public and provide loans to households and businesses.
- The primary objective of commercial banks is to earn profit through interest received from lending activities, and through other legal means.
- They are regulated by the Reserve Bank of India under the Banking Regulation Act of 1959.
Major Functions of Commercial Banks
- Commercial banks accept deposits in the form of current, savings, and fixed deposits and give loans and advances.
- They provide overdraft facilities. An overdraft is a loan that allows a customer with a current account to overdraw his account up to a predetermined limit. In this function of a commercial bank, the bank allows a depositor to withdraw an amount greater than the balance in his account.
- The bank acts as a customer’s agent and receives a commission for performing agency functions, such as: collection and transfer of funds, payments of various items, purchase and sale of shares and securities, collection of dividends and interest, etc. These are all the agency functions of commercial banks.
Classification of Commercial Banks
Public Sector Banks (PSBs)
- These banks have the government as the majority shareholder with government ownership of more than 51%.
- The shares of these banks are listed on stock exchanges.
- Public sector banks include State Bank of India, Punjab National Banks, etc.
- Public sector banks hold the majority of the banking business in India.
Private Sector Banks
- There are two types of private sector banks – Old Private Sector Banks and New Private Sector Banks. Old Private Sector Banks are those private sector banks that existed at the time of nationalization. No new banks could be established in India prior to 1993.
- The Reserve Bank of India issued guidelines for the establishment of new private sector banks in India in 1993.
- The majority of a bank’s share capital is held by private individuals. These banks are set up as limited-liability corporations.
- Private sector banks include ICICI Bank, Axis Bank, HDFC, and others.
Scheduled and Non-Scheduled Commercial Banks
- Scheduled commercial banks are those banks, listed in the 2nd Schedule of the Reserve Bank of India Act, 1934. Non-Scheduled commercial banks are those banks which are not listed in the 2nd Schedule of the RBI, 1934.
- To Qualify as a scheduled bank, the paid-up capital and collected funds of the bank must not be less than Rs. 5 Lakh. Whereas, banks with a reserve capital of less than Rs. 5 Lakh qualify as non-scheduled commercial banks.
- Scheduled commercial banks can borrow from the RBI and are given membership to clearing houses. whereas, the non-scheduled banks are not entitled to borrow from the RBI in emergencies.