Definition of Commercial Bank

A commercial bank is a financial organisation that accepts deposits, provides checking account services, makes different loans, and provides basic financial products to people and small companies such as certificates of deposit (CDs) and savings accounts. Most individuals conduct their banking at a commercial bank.

Commercial banks generate money by making loans and charging interest on them, such as mortgages, vehicle loans, business loans, and personal loans. Customer deposits provide the capital for banks to make these loans.

Commercial bank functions

Primary Function

The bank accepts deposits in the form of savings, checking, and fixed deposits. Firms and people who have extra money in their accounts lend it out to meet short-term needs in business transactions.

Gives out loans and advances: One of the most important things this bank does is give out loans and advances to business owners and entrepreneurs and collect interest on them. It is the most important way for banks to make money. In this method, a bank keeps a small amount of deposits as a reserve and gives the rest of the money to borrowers in the form of demand loans, overdrafts, cash credits, short-term loans, and other similar loans.

Credit cash: When a customer gets a loan or line of credit, they do not get cash. First, a customer’s bank account is set up, and then the money is moved into the account. Through this process, the bank can make money.

Secondary Functions

Bills of exchange can be discounted. This is a written agreement that says how much money will be paid for goods at a certain time in the future. The amount can also be paid off before the time given by using a commercial bank’s discounting method.

Overdraft facility: A customer gets a loan by letting their checking account go overdrawn up to a certain limit.

Buying and selling securities: The bank gives you the option of buying and selling securities.

Customers can use lockers at a bank to store their valuables or important papers in a safe place. For this service, the banks charge at least one fee per year.

For paying and collecting the credit, different tools are used, such as a promissory note, a check, or a bill of exchange.

Commercial bank examples

Here are a few instances of commercial banks in India:

State Bank of India (SBI)

Housing Development Finance Corporation (HDFC) Bank.

Industrial Credit and Investment Corporation of India (ICICI) Bank.

Dena Bank.

Corporation Bank.

Many of the major financial institutions in the world, including commercial banks and banks with commercial banking activities, are based in the United States. For instance, JPMorgan Chase’s commercial banking division is called Chase Bank. Chase Bank, with its headquarters in New York City, reported assets of over $3.2 trillion as of June 2021. 4 With 66 million clients, including both individual consumers and small and mid-sized enterprises, Bank of America is the second-largest bank in the United States, with more than $2.35 trillion in assets.

Types of commercial bank

Commercial banks come in three main varieties.

Private banks are a subset of commercial banks where the majority of the share capital is owned by private persons and companies. All private banks are listed as limited liability firms. Examples of such banks are Industrial Credit and Investment Corporation of India (ICICI) Bank, Yes Bank, and Housing Development Finance Corporation (HDFC) Bank.

Public bank: This category of bank is nationalised, and the government owns a substantial portion of it. For instance, Bank of Baroda, Punjab National Bank, Dena Bank, Corporation Bank, and State Bank of India (SBI).

Foreign bank: These financial institutions were founded in other nations and have branches there. Examples of such banks are American Express Bank, Citibank, Standard & Chartered Bank, and Hong Kong and Shanghai Banking Corporation (HSBC).

Conclusion

The system of commercial banking that is used in India is completely unique and cannot be found anywhere else in the world. The most important sources of capital for a commercial bank are the deposits made by customers, the sale of certificates of deposit, and reserves generated from earnings that are kept on hand.