Commercial Banks

A commercial bank is a financial entity that offers a range of services such as loans, certificates of deposits, savings accounts, and bank overdrafts to its clients. These establishments generate income by lending funds to individuals and accruing interest on these loans. Commercial banks extend various types of loans, including business loans, car loans, home loans, personal loans, and educational loans.

The funds for these loans are sourced from the deposits made by customers into different types of accounts. The deposits serve as the capital base for providing loans. Commercial banks play a crucial role in a country’s economy as they contribute to the generation of capital, credit, and liquidity in the market. While these banks traditionally have physical branches in cities, the increasing prevalence of online banking has seen a rise in the number of virtual banks.

How does a Commercial works?

Commercial banks extend fundamental banking services to the public, catering to both individual customers and small to medium-sized businesses. Their revenue is generated through service charges and fees, which vary depending on the offered products, such as overdraft fees, charges for safe deposit boxes, late fees, and others. In addition to interest on loans, various fees are associated with different types of loans.

Banks earn income by providing loans, utilizing funds sourced from customer deposits. They apply higher interest rates on loans compared to the relatively lower interest rates offered on customer deposits. For instance, a bank might offer a 0.30 percent interest rate on savings accounts while imposing a 4.8 percent annual interest rate on home loans.

Commercial banks are typically housed in physical buildings where customers can access services through ATM machines and banker window facilities. With the increasing prominence of internet technology, many banks now facilitate online services, allowing customers to perform various transactions such as money transfers, deposits, and bill payments remotely.

Functions of Commercial Bank

Accepting Deposits:

• Commercial banks provide a safe place for individuals, businesses, and other entities to deposit their money. They offer various types of accounts, including savings accounts, current accounts, and fixed deposits.

Importance of commercial banks

Commercial banks play a crucial role in the economy, and their importance stems from various functions and contributions that impact individuals, businesses, and the overall financial system.

Here are some key reasons highlighting the importance of commercial banks:

• Commercial banks act as intermediaries between those who have excess funds (depositors) and those who need funds (borrowers). This financial intermediation facilitates the flow of money and credit in the economy
• Commercial banks mobilize savings from individuals and businesses by accepting various types of deposits. This pool of funds is then utilized for lending and investment purposes
• One of the most significant functions of commercial banks is the creation of credit. Through the process of lending, banks contribute to the expansion of economic activities by providing individuals and businesses with the financial resources they need
• Commercial banks play a vital role in fostering economic development by financing projects and initiatives that contribute to growth. This can include funding for businesses, infrastructure development, and other investment opportunities
• Banks provide a range of services that facilitate transactions, including checking accounts, electronic funds transfers, and payment services. These services contribute to the efficiency and liquidity of the financial system
• Commercial banks engage in risk management by assessing the creditworthiness of borrowers and implementing various risk mitigation measures. This helps maintain the stability of the banking system and protects depositors’ interests
• Central banks often use commercial banks as instruments to implement monetary policy. Through reserve requirements, interest rate policies, and open market operations, central banks influence the money supply and control inflation
• Commercial banks facilitate international trade and finance by providing services such as foreign exchange transactions. They assist businesses and individuals in dealing with different currencies, thereby supporting global economic activities.
• Commercial banks offer a range of services that enhance consumer convenience, including online banking, mobile banking, and ATMs. These technologies provide customers with easy access to their accounts and the ability to conduct transactions from anywhere