what is commercial banks essay

Essay on Commercial Bank

Students are often asked to write an essay on Commercial Bank in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

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100 Words Essay on Commercial Bank

What is a commercial bank.

A commercial bank is a place where people keep their money safe. Banks also lend money to people and businesses. When someone needs money to buy a house or start a company, they can borrow it from a bank. In return, the bank charges interest, which is like a fee for using the bank’s money.

Services Offered

Role in the economy.

Commercial banks are important for the economy. They help money flow from people who save to those who want to invest in businesses. This helps new businesses start and existing ones grow, which can create jobs.

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250 Words Essay on Commercial Bank

What is a commercial bank, how do banks work.

When you put your money in a bank, the bank doesn’t just keep it in a vault. It uses the money to lend to others who need it. For example, someone might need a loan to buy a house or start a business. The bank charges them interest, which is like a small fee for using the money. This interest is how banks earn most of their money.

Banks offer many services. They let you save money in savings accounts, which can earn you a little extra money over time. They also have checking accounts so you can pay for things with checks or a bank card. Banks can also help you send money to people in different places, give you loans, and help you manage your money.

Why Are Banks Important?

Commercial banks are important because they keep money moving in the economy. By lending money to people and businesses, they help them grow and create new jobs. They also make it easier to buy and sell things, which is good for everyone. Banks are like the heart of the money world, keeping the flow of money healthy and strong.

500 Words Essay on Commercial Bank

A commercial bank is like a big money shop where people and companies can keep their money safe. They also help people borrow money when they need to buy something big like a house or to help their business grow. These banks are very important because they help the flow of money around the economy, making it easier for people to do business and spend money on things they need.

Services Offered by Commercial Banks

Banks also help people and businesses send money to each other, even if they are in different parts of the world. They offer credit cards, which let you buy things now and pay for them later. Plus, they have safe deposit boxes where you can keep important things like a birth certificate or a special piece of jewelry.

How Do Commercial Banks Make Money?

You might wonder how banks make money. They make money from the interest they charge people when they lend them money. They also charge fees for some of the services they offer. For example, if you use your credit card a lot or go over the limit of how much money you can take out of your account, the bank might charge you a fee.

The Role of Commercial Banks in the Economy

Banks also keep money safe. If everyone kept their money at home, it could get stolen or lost. But banks have strong safes and security systems to protect the money. They also use the money people deposit to give loans to others, which helps the economy grow.

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The Bottom Line

Personal Finance

How Do Commercial Banks Work, and Why Do They Matter?

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

What Is a Commercial Bank?

The term commercial bank refers to a financial institution that accepts deposits and offers different banking and financial products. Commercial banks provide these services to people and businesses. Commercial banks make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the capital to make these loans.

Key Takeaways

Commercial banks offer basic banking services, including deposit accounts and loans, to consumers and businesses.
These financial institutions make money from a variety of fees and by earning interest income from loans.
Commercial banks have traditionally been located in physical locations, but a growing number now operate exclusively online.
Commercial banks are important to the economy because they create capital, credit, and liquidity in the market.

Yurle Villegas / Investopedia

How Commercial Banks Work

Commercial banks provide basic banking services and products to the general public, both individual consumers and businesses. The following table highlights some of the key services commercial banks provide to their retail customers:


	Loans and
Debit card transactions	Lines of credit	Retirement account services
	Letters of Credit	Investment portfolio services

Business banking services also include bank accounts, investments, and lending products. Commercial banks also provide their business clients with merchant services, which allows companies to accept payments electronically from their customers.

These financial institutions have traditionally been located in buildings where customers come to use teller window services and automated teller machines (ATMs) to do their routine banking. With the rise in internet technology, most banks now allow their customers to do most of the same services online that they could do in person, including transfers , deposits, and bill payments .

The money that customers deposit at commercial banks is insured by the Federal Deposit Insurance Corporation (FDIC) , including cash in savings accounts and CDs. Customers have the option to withdraw money upon demand, and the balances are fully insured up to $250,000. Therefore, banks do not have to pay much for this money.

A growing number of commercial banks operate exclusively online, where all transactions with the commercial bank must be made electronically. Because these banks don’t have any brick-and-mortar locations, they can offer a wider range of products and services at a lower cost—or none at all—to their customers.

How Commercial Banks Make Money

Banks make money by imposing service charges on their customers. These fees vary based on the products, ranging from account fees (monthly maintenance charges, minimum balance fees, overdraft fees, and non-sufficient funds [NSF] charges), safe deposit box fees, and late fees . Many loan products also contain fees in addition to interest charges.

Banks also make money from the interest they earn when they lend money to their clients. The funds they lend come from customer deposits. However, the interest rate paid by banks on the money they borrow is less than the rate charged on the money they lend. For example, a bank may offer savings account customers an annual interest rate of 0.25%, while charging mortgage clients 4.75% in interest annually.

Many banks pay their customers no interest (or very little) at all on checking account balances and offer interest rates for savings accounts that are well below U.S. Treasury bond (T-bond) rates.

Commercial Banks and Lending

Consumer lending makes up the bulk of North American bank lending. Some of the most significant categories include residential mortgages, automobile lending, and credit cards.

Residential Mortgages

Mortgages make up by far the largest share. Mortgages are used to buy properties, and the homes themselves are often the security that collateralizes the loan. Mortgages are typically written for 30-year repayment periods, and interest rates may be fixed , adjustable , or variable .

Although a variety of more exotic mortgage products were offered during the U.S. housing bubble of the 2000s, many of the riskier products, including pick-a-payment mortgages and negative amortization loans , are much less common now.

Automobile lending is another significant category of secured lending for many banks. Compared to mortgage lending, auto loans are typically for shorter terms and higher rates. Banks face extensive competition in auto lending from other financial institutions, like captive auto financing operations run by automobile manufacturers and dealers.

Credit Cards

Credit cards are another significant type of financing. Credit cards are, in essence, personal lines of credit that can be drawn down at any time. Private card issuers offer them through commercial banks.

Visa and Mastercard run the networks through which money is moved around between the shopper’s bank and the merchant’s bank after a transaction. Not all banks engage in credit card lending, as the rates of default are traditionally much higher than in mortgage lending or other types of secured lending.

Credit card lending delivers lucrative fees for banks. For example, interchange fees are charged to merchants for accepting the card and entering into the transaction. Banks also charge customers late-payment fees, currency exchange, over-limit , and other fees, as well as elevated rates on the balances that credit card users carry from one month to the next.

The total number of commercial banks in the United States in 2023.

Importance of Commercial Banks

Commercial banks are an important part of the economy . They not only provide consumers with an essential service but also help create capital and liquidity in the market.

Commercial banks ensure liquidity by taking the funds that their customers deposit in their accounts and lending them out to others. Commercial banks play a role in the creation of credit , which leads to an increase in production, employment, and consumer spending, thereby boosting the economy .

As such, these banks are heavily regulated by a central bank in their country or region. For instance, central banks impose reserve requirements on commercial banks. This means that banks are required to hold a certain percentage of their consumer deposits at the central bank as a cushion if the public rushes to withdraw funds .

Commercial Banks vs. Investment Banks

Both commercial and investment banks provide important services and play key roles in the economy. For much of the 20th century, these two branches of the banking industry were generally kept separate from one another in the United States, thanks to the Glass-Steagall Act of 1933 , which was passed during the Great Depression . It was largely repealed by the Gramm-Leach-Bliley Act of 1999 , allowing for the creation of financial holding companies that could have both commercial and investment bank subsidiaries.

While commercial banks traditionally provide services to individuals and businesses, investment banks focus on offering banking services to large companies and institutional investors . They act as financial intermediaries, providing their clients with underwriting services, merger and acquisition (M&A) strategies, corporate reorganization services, and other types of brokerage services for institutional and high-net-worth individuals (HNWIs) .

While commercial banking clients include individual consumers and small businesses, investment banking clients include governments, hedge funds , other financial institutions, pension funds , and large companies.

The Gramm-Leach-Bliley Act tore down the wall between commercial and investment banks but maintained some safeguards. For instance, it forbids a bank and a nonbank subsidiary of the same holding company from marketing the products or services of the other entity—to prevent banks from promoting securities underwritten by other subsidiaries to their customers—and placed size limitations on subsidiaries.

Examples of Commercial Banks

Some of the world’s largest financial institutions are commercial banks or have commercial banking operations—many of which can be found in the U.S. For instance:

Chase Bank is the commercial banking unit of JPMorgan Chase ( JPM ). Headquartered in New York City, Chase Bank reported more than $3.39 trillion in assets as of December 2023.
Bank of America ( BAC ) is the second-largest U.S. bank, with more than $2.54 trillion in assets and 6 million customers, including both retail clients and small and midsize businesses.

As noted above, banking has had to change with the rise of financial technology (fintech) . Some of the major commercial banks have an increased online presence. Some banks operate exclusively online. For example, Ally Bank ( ALLY ) is one of the major online commercial banks in the United States. The bank is headquartered in Detroit and has $196 billion in assets as of December 2023.

Is My Bank a Commercial Bank?

Possibly! Commercial banks are what most people think of when they hear the term “bank.” Commercial banks are for-profit institutions that accept deposits , make loans, safeguard assets, and work with many different types of clients, including the general public and businesses. However, if your account is with a community bank or credit union , it probably would not be a commercial bank.

What Role Do Commercial Banks Play in the Economy?

Commercial banks are crucial to the fractional reserve banking system, currently found in most developed countries. This allows banks to extend new loans of up to (typically) 90% of the deposits they have on hand, theoretically growing the economy by freeing capital for lending.

Is My Money Safe at a Commercial Bank?

For the most part, yes. Commercial banks are heavily regulated, and most deposit accounts are covered up to $250,000 by the Federal Deposit Insurance Corporation. Moreover, commercial and investment banking funds cannot be co-mingled by law.

Commercial banks are a critical component of the U.S. economy by providing vital capital to businesses and individuals in the form of credit and loans. They provide a secure place where people save money, earn interest, and make payments through checks , debit cards , and credit cards.

Commercial banks are typically in brick-and-mortar locations in cities and towns, many with extensive branch networks . A growing number have no physical location, however—instead, they are accessible online and through mobile applications.

Federal Deposit Insurance Corp. “ Understanding Deposit Insurance .”

IBIS World. " Commercial Banking in the US - Number of Businesses ."

Federal Reserve History. “ Banking Act of 1933 (Glass-Steagall) .”

GovInfo. “ Public Law 106-102: Gramm-Leach-Bliley Act ,” 113 Stat. 1349 (Page 13 of PDF).

Federal Reserve System. “ Statistical Release: Large Commercial Banks .”

Bank of America, Newsroom. “ Company Overview .”

Ally. " Who We Are ."

GovInfo. “ Public Law 106-102: Gramm-Leach-Bliley Act ,” 113 Stat. 1399 (Page 62 of PDF).

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Commercial Banks, Definition, Functions, Types, Roles

Commercial banks are profit-based institutions that offer financial products to their customers. Know all about Commercial Banks Functions, Definition, Types & Roles in this article.

Table of Contents

Commercial Banks

Commercial banks are financial institutions that are primarily engaged in accepting deposits from individuals and businesses and providing loans and credit facilities to borrowers. They are for-profit organizations that operate with the primary objective of generating profit for their shareholders.

Commercial banks are also known as retail banks or universal banks as they provide a wide range of services to retail customers, including payment services, investment services, and foreign exchange services, in addition to their core functions of deposit-taking and lending. Commercial banks are regulated by the central bank of the country and are subject to various regulatory and supervisory requirements to ensure the safety and soundness of the banking system.

Read about: List of RBI Governors of India

Functions of Commercial Banks

Commercial Banks play a crucial role in the economy by providing various financial services and products to individuals, businesses, and governments. Functions of Commercial Banks are classified into Primary Functions and Secondary Functions.

Primary Functions of Commercial Banks

The primary functions of Commercial Banks revolve around the mobilization of funds from the public and the allocation of these funds to borrowers who require them for their various financial needs, thereby facilitating economic growth and development.

The primary functions of commercial banks include:

Accepting Deposits

Commercial banks accept deposits from individuals and businesses, including checking accounts, savings accounts, and time deposits such as certificates of deposit (CDs).

Providing Loans

Banks lend money to individuals and businesses for various purposes, such as buying a home, starting a business, or funding a project.

Issuing Checks

Banks provide customers with a chequebook, which they can use to write checks for payment.

Clearing Checks

Banks process checks written by their customers and those deposited by other banks.

Maintaining Accounts

Banks maintain account records for their customers, including transaction history, balances, and interest earned.

Providing Safekeeping Services

Banks offer safe deposit boxes for customers to store valuables and important documents.

Providing Currency Exchange

Banks provide currency exchange services for customers who need to convert one currency to another.

Providing Overdraft Facilities

Banks offer overdraft facilities to customers who need to borrow money temporarily to cover short-term expenses.

Read about: Finance Ministers of India List

Modern or Secondary Functions of Commercial Banks

The modern functions of commercial banks have evolved from the conventional functions of commercial banks in response to changing customer needs, technological advancements, and economic conditions. They can also be called as secondary functions of commercial banks. Here are some examples of how modern functions have evolved from conventional functions:

Facilitating Payments

With the advent of electronic payments, commercial banks have evolved their payment services to include online bill payment, mobile banking, and person-to-person payments.

Issuing Credit and Debit Cards

Credit and debit cards have become a ubiquitous part of modern banking, but they were not always available. In the past, banks primarily issued checks and travellers’ checks as a means of payment.

Managing Investments

Commercial banks have expanded their investment services to include a wider range of products, such as mutual funds, exchange-traded funds (ETFs), and online investment platforms.

Providing Foreign Exchange Services

While commercial banks have always offered foreign exchange services, the rise of global trade and travel has led to an increased demand for these services.

Offering Insurance Products

Banks have expanded their product offerings to include insurance products, such as life insurance and property insurance, to meet the changing needs of customers.

Providing Financial Advice

Banks have expanded their financial advice services to include retirement planning, investment advice, and debt management, as customers seek more guidance and support in managing their finances.

Read about: India’s GDP Growth Rate

Types of Commercial Banks

The types of commercial banks include:

Public Sector Banks

These banks are owned and controlled by the government, and they provide banking services to the public. Examples include State Bank of India, Punjab National Bank, and Bank of Baroda.

Private Sector Banks

These banks are owned and controlled by private entities, and they provide banking services to the public. Examples include HDFC Bank, ICICI Bank, and Axis Bank.

Foreign Banks

These banks are headquartered in foreign countries and have branches or subsidiaries in India. Examples include Citibank, Standard Chartered Bank, and HSBC Bank.

Regional Rural Banks

These banks are set up with the objective of providing banking services to rural areas. They are sponsored by a public sector bank, a private sector bank, or the government. Examples include Narmada Jhabua Gramin Bank, Pragathi Krishna Gramin Bank, and Baroda Uttar Pradesh Gramin Bank.

Co-operative Banks

These banks are owned and controlled by members who use the banking services provided by the bank. Examples include Urban Co-operative Banks and Rural Co-operative Banks.

Commercial Banks UPSC

The functions of commercial banks are an important topic for UPSC (Union Public Service Commission) aspirants as it is included in the UPSC Syllabus under the Economics section of the General Studies Paper III. Understanding the functions of commercial banks is crucial for candidates preparing for the UPSC Civil Services Exam as it is a part of the Indian Economy and banking sector, which is an important component of the Indian Financial System .

Moreover, the topic of commercial bank functions is often included in the StudyIQ UPSC Online Coaching and UPSC Mock Test , which are popular resources for UPSC aspirants. Through these resources, candidates can gain a deeper understanding of the traditional and modern functions of commercial banks and how they have evolved over time. This can help candidates to answer questions related to banking and financial services in the UPSC Prelims and Mains exams.

Additionally, a strong understanding of the functions of commercial banks can also help candidates in the Essay paper, where they may be asked to analyze the role of banking in the Indian economy or discuss the impact of digital banking on the traditional functions of commercial banks.

Read about: GDP of Indian States

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Commercial Banks FAQs

What are 5 functions of a commercial bank.

1. Accepting deposits from customers 2. Providing loans and credit to individuals and businesses 3. Facilitating payments through various means, such as checks and electronic transfers 4. Offering investment products and services 5. Providing foreign exchange services to customers

What are the functions of commercial bank?

The functions of commercial banks typically include accepting deposits, providing loans and advances, facilitating payments, offering overdraft facilities, and providing foreign exchange services.

What are the 3 types of commercial bank?

3 types of commercial banks include- Public Sector Banks, Private Sector Banks and Foreign Banks.

What is a commercial bank an example of?

A commercial bank is an example of a financial intermediary that accepts deposits from customers and provides loans and other financial services. Examples include State Bank of India, HDFC Bank, and Citibank.

What banks are commercial banks?

Commercial banks include Public Sector Banks, Private Sector Banks, Foreign Banks, Regional Rural Banks, and Co-operative Banks.

What is commercial bank and its types?

A commercial bank is a financial institution that accepts deposits from customers and provides loans and other financial services. Types of commercial banks include Public Sector Banks, Private Sector Banks, Foreign Banks, Regional Rural Banks, and Co-operative Banks.

Who introduced commercial bank?

The concept of commercial banking dates back to ancient times, but modern commercial banking can be traced back to the 17th century when the Bank of England was established in 1694 as the first commercial bank.

I, Sakshi Gupta, am a content writer to empower students aiming for UPSC, PSC, and other competitive exams. My objective is to provide clear, concise, and informative content that caters to your exam preparation needs. I strive to make my content not only informative but also engaging, keeping you motivated throughout your journey!

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What is a Commercial Bank?

Functions of commercial bank, 1. deposit acceptance, 2. credit creation.

3. Treasury and payments

4. Agency and advisory

More resources, commercial bank.

A financial intermediary that profits from providing banking and lending products and services to businesses

A commercial bank is a financial intermediary that serves businesses by providing essential liquidity functions within an economy via various products and services.

The institution accepts and manages deposits to earn fee income and as a low-cost source of funds. Funds can generate interest income via credit creation and offering credit facilities. Deposit acceptance and credit creation are two dominant revenue sources for commercial banks, with clients spanning a broad section of the economy.

Business banks and commercial banks jointly serve small and medium enterprises (SMEs). For example, clients may be segmented by “small business” under the business bank channel, with clients meeting middle market criteria served by the commercial bank. Regardless of the segmentation, banks cater to enterprises that rely partly or wholly on owners’ support. This reliance wanes as a business increases in size and complexity at or above the mid-market.

Typically, a commercial bank serves businesses with less complex needs than those supported by corporate banking and investment banking specialists.

Commercial Bank - Image of a bank's facade

Key Highlights

A commercial bank is a financial intermediary that provides liquidity by bridging sources of capital from depositors and creating credit that can be extended to borrowers.
Functions of a commercial bank include deposit acceptance, credit creation, treasury and payments, and other agency and advisory services.
Business banks and commercial banks jointly serve small and medium enterprises (SMEs). Clients may be segmented by size and complexity.

As a financial intermediary , a commercial bank provides financial services to organizations of varying sizes, bringing together users (borrowers) and providers (depositors) of funds. To do so, they offer a wide variety of business-centric products and services. They are critical to any economy that relies on business credit and its creation.

According to McKinsey & Company Global Banking Annual Review 2021 [1] , worldwide revenue under the commercial and corporate/investment banking sector was $2,140 billion USD, larger than revenue from retail banking at $1,934 billion USD. Payment services revenue was valued at $868 billion USD. The total addressable market fosters high competition, from universal banks to banks that specialize in corporate and investment banking.

Functions may be categorized as follows. For specific products and services, please see business banking for details.

Deposit-gathering is a necessary function of any commercial bank and is required to offer credit products and services at a lower cost than external financing. Gathering deposits is the key to generating an acceptable return on equity, tied to the growth of a commercial bank’s credit portfolio and interest income.

In the past, a bank was trusted to hold cash and valuables for safekeeping. Depositors paid for the custodial services. With fractional banking , a bank can lend a greater portion of its deposit to achieve higher margins and profitability. Cash and custodial fees are no longer the primary revenue source [1] . A commercial bank accepts deposits and pays interest to gather low-cost funds to grow its credit portfolio.

Regulators set the minimum cash reserve a commercial bank must hold to support its deposit liabilities. Excess deposits may be used to create credit to lend via commercial loans and other credit products or lend to other institutions at the overnight rate . Credit creation is a critical function of a commercial bank. Interest is the highest percentage of revenue at commercial banks [1] . Credit portfolio performance and health are widely monitored performance measures.

Many business credit products and services are available and match clients’ operational and strategic needs.

3. Treasury and payments

To increase economies of scope and scale, as well as the share of wallet , commercial banks offer invoicing, collection, and also merchant (point-of-sale) solutions to support current asset requirements for businesses. Expenses paid via cheque, charge and credit cards, and electronic payments are offerings that support current liability requirements.

Companies specializing in the payment segment have outperformed other business bank models over the past five years [1] and are an attractive area for high-tech due to the growth.

Commercial banks also offer many agencies and advisory functions due to their privileged position as financial intermediaries. Advisory services to manage risks from business-to-business activities, supporting trade credit with global entities participating in import and export, or documenting the performance of cross-border services, are some examples in this category.

Institutions are highly regulated and integrated with global systems (e.g., SWIFT ), which is a function that is a barrier to entry for firms that do not operate on the same scale.

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

Business Banking
Corporate Banking
Merchant Bank
Private Banking
Commercial Banking & Financial Planning Career Booster
See all commercial lending resources

Article Sources

Global Banking Annual Review 2021 – McKinsey & Company
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Commercial Bank

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What is a Commercial Bank?

Commercial Banks are profit-seeking financial institutions. They receive deposits from customers at a lower rate of interest and offer business loans at a higher interest rate. They serve individuals, small-scale businesses, and medium-sized businesses.

Commercial banks augment their profits by offering additional investment products and banking services—current account deposits, savings accounts, fixed deposits, cash credit, advances, overdrafts , locker facilities, and investments. Due to competition, they need to innovate continuously, adapting to automation, data analytics, digitization, artificial intelligence, faster transactions, and quicker responses to market changes.

How do commercial banks work, #1 – primary functions, #2 – secondary functions, role of commercial banks, types of commercial banks, commercial banking vs. retail banking, frequently asked questions (faqs), recommended articles, key takeaways.

Commercial banks are licensed financial institutions that provide banking solutions to their clients—individuals, small businesses, and medium-sized firms.
Commercial finance institutions serve both individuals and businesses. Retail banks on the other hand extend services only to individuals.
These institutions also execute various secondary functions for their client—overdraft facility, agency services, discounting bills of exchange, traveler’s check, investments, and locker facility.

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Commercial banks play a part in economic growth and liquidity by catering to a multitude of customers. Their clientele comprises individuals and small to mid-sized corporates. The customers obtain low rates of interest on bank deposits but the bank loans funds at a higher interest rate to earn a margin—also known as the spread . Recently, some of these banks introduced investment banking divisions —Citibank and JPMorgan Chase. But banks like Ally operate only on commercial aspects of the business.

These banks mainly offer loan facilities and accept deposits. But in addition to that, they provide saving accounts, merchant services, commercial loans, global trade services, treasury services, lending services, current or cash management services, corporate loans, and online banking services.

In the contemporary digital era, most commercial banks function online—customers carry out electronic banking transactions without visiting their bank’s branch office. As a result, operating profit margins for “virtual” banks have increased. The Internet has brought down operating expenses (OpEx) – banks do not have to maintain physical branches – ancillary charges on rent, property taxes, and utilities have gone down.

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Video Explanation about Commercial Bank

Functions of commercial banks.

Banks survive on loans. Commercial banks are no different. Given below are the various functions:

Accepting current, demand, fixed, and savings account deposits from customers;
Providing cash credit, auto loans, mortgage loans, short-term loans, and advances;
Creating credit by expanding deposits.

Other miscellaneous services are enlisted below:

Banks act as agents for funds transfer or collection—make payments on behalf of the clients;
They extend overdraft facility to the current account holders;
They discount the bills of exchange ;
Offer locker facility;
Issue traveler’s checks.

The banking industry as a whole runs the economy of a nation. The roles of a commercial bank are as follows:

They aid in the successful implementation of monetary policies .
They boost the industrial sector by offering short, medium, and long-term finance.
They accelerate trade by offering agency services, overdraft facilities, and other solutions to wholesale and retail businesses.
These financial institutions help lower and middle-class customers in procuring consumer products on loans—easy repayment options.
Banks also operate on rural and regional fronts.
The agricultural sector receives strong financial backing from commercial institutions facilitating crop cultivation, irrigation facilities, dairy farming, poultry farming, horticulture, and pisciculture.
They adopt innovative ways to facilitate easy banking—automation, digitalization, and artificial intelligence.
They ensure a superior level of data security for their clients.

According to a Federal Reserve Statistical Release report, JPMorgan Chase & Co is the largest commercial bank in the US. As of September 30, 2021, JPMorgan possesses consolidated assets worth $3,290,398 million. It is closely followed by Bank of Amer Corp and Wells Fargo & Co, with consolidated assets worth $2,400,819 million and $1,786,611 million, respectively.

JPMorgan Chase provides global financial solutions to its clients ranging from treasury payments, commercial real estate, international banking, credit, and financing. The bank also offers investment banking and asset management facilities.

They are further classified into the following categories:

Private Sector Banks : The majority stake is owned by private shareholders (individuals or corporates). They accept deposits and distribute loans to individual customers, small businesses, and medium-sized businesses.
Public Sector Banks : For public banks, majority equity lies in the hands of the government. Nationalized banks provide financial services to mass customers at affordable rates.
Foreign Banks : As the name suggests, these financial institutions operate in foreign countries but have head offices in the parent country. The bank’s foreign branches take deposits, extend loans, engage in securities trading, and facilitate foreign exchange functions.

Commercial and retail banks are both categorized as depository banks. Commercial finance institutions serve both individuals and businesses. Retail banks, on the other hand, extend services only to the general public. Commercial finance is a huge sector operating in small and medium scale industries, whereas retail banking is the front for the common people.

In addition to primary functions, commercial institutions offer services like trade finance, corporate loans, cash management, treasury management facility, agency services, and overdraft facility. In comparison, retail banks offer services like mortgage loans, savings and checking accounts, line of credit , debit cards, and credit cards.

Commercial finance institutions offer various loans and advances—personal, mortgage, business, and auto loans. The banks earn interest on these credit services, and it is always less than the interest rate offered to the depositors. This margin between the interest rates acts as their source of income.

Financial institutions are classified as central banks, agricultural banks, cooperative banks, investment banks, savings banks, retail banks, rural banks, small finance, industrial banks, exchanges, and specialized banks.

It is a licensed financial institution that provides various financial products and services—deposits, loans, credit, investments, locker facility, and overdraft facility. They provide banking facilities to individuals, small businesses, and medium-sized businesses. Banks make profits by charging interest on loans.

This has been a guide to Commercial Bank and its Meaning. Here we explain the functions of a commercial bank along with examples, types, and roles. You can learn more about accounting from the following articles –

Commercial Credit
Thrift Bank Examples
Types of Financial Institutions
Career in Commercial Banking
Commercial Banking vs. Merchant Banking

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Commercial Bank

Definition of commercial bank.

A commercial bank is a type of financial institution that provides various banking services to businesses and individuals. These services include accepting deposits, making business loans, and offering investment products. Essentially, commercial banks function by accepting deposits from the public and utilizing those funds to offer loans to businesses and individuals, thereby generating profit through the difference in interest rates charged on loans and paid on deposits.

Consider a scenario where a small business needs funding to expand its operations. The business owner approaches XYZ Commercial Bank to apply for a loan. The bank assesses the business’s financial health and decides to grant a loan on the basis of its creditworthiness. The interest rate the bank charges on this loan is higher than the interest rate it pays to its depositors. This difference in interest rates allows the bank to cover its costs and make a profit.

At the same time, individuals and other businesses deposit money into their accounts with XYZ Commercial Bank, earning interest on their balances. The bank uses these deposits to fund the loan to the small business, among other investments and loans, thus facilitating the flow of money within the economy.

Why Commercial Banks Matter

Commercial banks play a critical role in the financial system and the economy at large. They serve as intermediaries between savers and borrowers, thereby enabling the efficient allocation of resources and liquidity within the economy. By providing a safe place for individuals and businesses to deposit their money, they help to encourage saving. Through the loan products they offer, commercial banks enable businesses to grow and individuals to purchase homes and cars or to finance education, which in turn contributes to economic development and growth.

Moreover, commercial banks offer various other services, including financial advice, wealth management, and safe deposit boxes, adding value for their customers and aiding in the overall functioning of the economy. Their role in processing payments and facilitating international trade through letters of credit and foreign exchange services is also vital.

Frequently Asked Questions (FAQ)

How do commercial banks create money.

Commercial banks create money through the lending process. When a bank grants a loan, it does not give out existing money but creates a deposit in the borrower’s account, effectively creating new money. This process is subject to regulatory requirements like maintaining reserve ratios to ensure banks have enough liquidity to meet their obligations.

What is the difference between commercial banks and central banks?

Commercial banks are private entities whose main goals include profit-making, accepting deposits, and providing loans to the public and businesses. In contrast, central banks are government institutions that manage the country’s currency, money supply, and interest rates. Central banks also serve as a bank for commercial banks and the government, but they do not deal with the public directly.

How do commercial banks manage risks?

Commercial banks manage risks through various strategies, including diversifying their loan portfolios, setting aside provisions for bad debts, and meticulously assessing the creditworthiness of borrowers. They also use hedging and insurance to manage risks associated with changes in interest rates, foreign exchange rates, and other market variables. Additionally, banks are subject to regulatory oversight, which includes requirements for capital adequacy and liquidity, further ensuring their stability and the safety of the banking system.

What role do commercial banks play in monetary policy implementation?

Commercial banks play a crucial role in the implementation of monetary policy. Central banks use tools like reserve requirements, open market operations, and the discount rate to influence the amount of money that commercial banks can lend. Changes in these policy tools can affect the interest rates charged on loans and paid on deposits, influencing borrowing and spending in the economy. Through these mechanisms, commercial banks act as conduits through which monetary policy affects economic activity and inflation.

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Commercial Bank

What is a Commercial Bank?

A commercial bank is a financial institution that offers checking accounts, demand deposits, business and personal loans , savings vehicles and a variety of other related financial services.

How Does a Commercial Bank Work?

Commercial banks are owned by shareholders and are run for a profit , which is largely obtained by lending at rates higher than they pay their depositors. Commercial banking is different from investment banking , which primarily raises money for businesses, facilitates mergers or acquisitions, and works for institutional investors.

A commercial bank must have a charter to operate, which will be issued by the federal government or by the state in which it plans to do business. States regulate and inspect state chartered banks, and the federal government regulates and inspects federally chartered banks.

In order to apply for a charter, the bank's 'organizing group of founders' must provide a business plan, an overview of local zoning and business practice laws, and the names of directors and key executives. Each state has its own minimum capital requirements to issue a charter.

The organizing group is required to invest a minimum amount of its own money into the bank, making them primary shareholders. The remaining required funds will be raised by selling shares in the bank.

When a commercial bank receives a charter, it is a demonstration that the agency responsible for protecting the public from unsafe banking practices has done its job. Chartering requirements vary by the agency supplying the charter.

In some cases, a state-chartered bank is not required to be a member of the Federal Reserve System -- which allows them to borrow short-term funds from the Federal Reserve to meet reserve requirements .

If a bank requests a federal charter, however, it must become a member of the Federal Reserve System. All commercial banks must apply for deposit insurance with the FDIC , which protects depositors for up to $250,000 of losses if the bank fails.

Why Does a Commercial Bank Matter?

Commercial banks offer critical services that lubricate and facilitate economic activity throughout our entire financial system.

There are many alternatives to using commercial banks. Credit unions, savings and loans , and brokerage firms offer many of the services that commercial banks offer. Not all of these alternatives, however, have ATMs, accept certain checks, charge the same fees or offer competitive loans.

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Commercial Banks: It’s Functions and Types – Explained!

Commercial banks are the most important components of the whole banking system.

A commercial bank is a profit-based financial institution that grants loans, accepts deposits, and offers other financial services, such as overdraft facilities and electronic transfer of funds.

According to Culbertson,

“Commercial Banks are the institutions that make short make short term bans to business and in the process create money.”

In other words, commercial banks are financial institutions that accept demand deposits from the general public, transfer funds from the bank to another, and earn profit.

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Commercial banks play a significant role in fulfilling the short-term and medium- term financial requirements of industries. They do not provide, long-term credit, so that liquidity of assets should be maintained. The funds of commercial banks belong to the general public and are withdrawn at a short notice; therefore, commercial banks prefers to provide credit for a short period of time backed by tangible and easily marketable securities. Commercial banks, while providing loans to businesses, consider various factors, such as nature and size of business, financial status and profitability of the business, and its ability to repay loans.

Commercial banks are of three types, which are as follows:

(a) Public Sector Banks:

Refer to a type of commercial banks that are nationalized by the government of a country. In public sector banks, the major stake is held by the government. In India, public sector banks operate under the guidelines of Reserve Bank of India (RBI), which is the central bank. Some of the Indian public sector banks are State Bank of India (SBI), Corporation Bank, Bank of Baroda, Dena Bank, and Punjab National Bank.

(b) Private Sector Banks:

Refer to a kind of commercial banks in which major part of share capital is held by private businesses and individuals. These banks are registered as companies with limited liability. Some of the Indian private sector banks are Vysya Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank, and Housing Development Finance Corporation (HDFC) Bank.

Refer to commercial banks that are headquartered in a foreign country, but operate branches in different countries. Some of the foreign banks operating in India are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, and Grindlay’s Bank. In India, since financial reforms of 1991, there is a rapid increase in the number of foreign banks. Commercial banks mark significant importance in the economic development of a country as well as serving the financial requirements of the general public.

Functions of Commercial Banks :

Commercial banks are institutions that conduct business for profit motive by accepting public deposits for various investment purposes.

The functions of commercial banks are broadly classified into primary functions and secondary functions, which are shown in Figure-1:

The functions of commercial banks (as shown in Figure-1) are discussed as follows:

(a) Primary Functions:

Refer to the basic functions of commercial banks that include the following:

(i) Accepting Deposits:

Implies that commercial banks are mainly dependent on public deposits.

There are two types of deposits, which are discussed as follows:

(1) Demand Deposits:

Refer to kind of deposits that can be easily withdrawn by individuals without any prior notice to the bank. In other words, the owners of these deposits are allowed to withdraw money anytime by simply writing a check. These deposits are the part of money supply as they are used as a means for the payment of goods and services as well as debts. Receiving these deposits is the main function of commercial banks.

(2) Time Deposits:

Refer to deposits that are for certain period of time. Banks pay higher interest on rime deposits. These deposits can be withdrawn only after a specific time period is completed by providing a written notice to the bank.

(3) Advancing Loans:

Refers to one of the important functions of commercial banks. The public deposits are used by commercial banks for the purpose of granting loans to individuals and businesses. Commercial banks grant loans in the form of overdraft, cash credit, and discounting bills of exchange.

(b) Secondary Functions:

Refer to crucial functions of commercial banks. The secondary functions can be classified under three heads, namely, agency functions, general utility functions, and other functions.

These functions are explained as follows:

(1) Agency Functions:

Implies that commercial banks act as agents of customers by performing various functions, which are as follows:

(i) Collecting Checks:

Refer to one of the important functions of commercial banks. The banks collect checks and bills of exchange on the behalf of their customers through clearing house facilities provided by the central bank.

(ii) Collecting Income:

Constitute another major function of commercial banks. Commercial banks collect dividends, pension, salaries, rents, and interests on investments on behalf of their customers. A credit voucher is sent to customers for information when any income is collected by the bank.

(iii) Paying Expenses:

Implies that commercial banks make the payments of various obligations of customers, such as telephone bills, insurance premium, school fees, and rents. Similar to credit voucher, a debit voucher is sent to customers for information when expenses are paid by the bank.

(2) General Utility Functions:

Include the following functions:

(i) Providing Locke r Facilities:

Implies that commercial banks provide locker facilities to its customers for safe keeping of jewellery, shares, debentures, and other valuable items. This minimizes the risk of loss due to theft at homes.

(ii) Issuing Traveler’s Checks:

Implies that banks issue traveler’s checks to individuals for traveling outside the country. Traveler’s checks are the safe and easy way to protect money while traveling.

(iii) Dealing in Foreign Exchange:

Implies that commercial banks help in providing foreign exchange to businessmen dealing in exports and imports. However, commercial banks need to take the permission of the central bank for dealing in foreign exchange.

(iv) Transferring Funds:

Refers to transferring of funds from one bank to another. Funds are transferred by means of draft, telephonic transfer, and electronic transfer.

(3) Other Functions:

Include the following:

(i) Creating Money:

Refers to one of the important functions of commercial banks that help in increasing money supply. For instance, a bank lends Rs. 5 lakh to an individual and opens a demand deposit in the name of that individual.

Bank makes a credit entry of Rs. 5 lakh in that account. This leads to creation of demand deposits in that account. The point to be noted here is that there is no payment in cash. Thus, without printing additional money, the supply of money is increased.

(ii) Electronic Banking:

Include services, such as debit cards, credit cards, and Internet banking.

Types of Credit Offered by Commercial Banks :

A commercial bank offers short-term loans to individuals and organizations in the form of bank credit, which is a secured loan carrying a certain rate of interest.

There are various types of bank credit provided by a commercial bank, as shown in Figure-2:

Bank Loan :

Bank loan may be defined as the amount of money granted by the bank at a specified rate of interest for a fixed period of time. The commercial bank needs to follow certain guidelines to extend bank loans to a client. For example the bank requires the copy of identity and income proofs of the client and a guarantor to sanction bank loan. The banks grant loan to clients against the security of assets so that, in case of default, they can recover the loan amount. The securities used against the bank loan may be tangible or intangible, such as goodwill, assets, inventory, and documents of title of goods.

The advantages of the bank loan are as follows:

a. Grants loan at low rate of interest

b. Involves very simple process of loan granting

c. Requires minimum document and legal formalities to pass the loan

d. Involves good customer relationship management

e. Consumes less time because of modern techniques and computerization

f. Provides door-to-door facilities

In addition to advantages, the bank loan suffers from various imitations, which are as follows:

a. Imposes heavy penalty and legal action in case of default of loan

b. Charges high rate of interest, if the party fails to pay the loan amount in the allotted time

c. Adds extra burden on the borrower, who needs to incur cost in preparing legal documents for procuring loans

d. Affects the goodwill of the organization, in case of delay in payment

Cash Credit :

Cash credit can be defined as an arrangement made by the bank for the clients to withdraw cash exceeding their account limit. The cash credit facility is generally sanctioned for one year but it may extend up to three years in some cases. In case of special request by the client, the time limit can be further extended by the bank.

The extension of the allotted time depends on the consent of the bank and past performance of the client. The rate of interest charged by the bank on cash credit depends on the time duration for which the cash has been withdrawn and the amount of cash.

The advantages of the cash credit are as follows:

a. Involves very less time in the approval of credit

b. Involves flexibility as the cash credit can be extended for more time to fulfill the need of the customers.

c. Helps in fulfilling the current liabilities of the organization

d. Charges interest only on the amount withdrawn by the customer. The interest on cash credit is charged only on the amount of cash withdrawn from the bank, not on the total amount of credit sanctioned.

The cash credit is one of the most important instruments of short-term financing but it has some limitations.

These limitations are mentioned in the following points:

a. Requires more security for the approval of cash

b. Imposes very high rate of interest

c. Depends on the consent of the bank to extend the credit amount and the time limit

Bank Overdraft :

Bank overdraft is the quickest means of the short-term financing provided by the bank. It is a facility in which the bank allows the current account holders to overdraw their current accounts by a specified limit. The clients generally avail the bank overdraft facility to meet urgent and emergency requirements. Bank overdraft is the most popular form of borrowing and do not require any written formalities. The bank charges very low rate of interest on bank overdraft up to a certain time.

The advantages of the bank overdraft are as follows:

a. Involves no documentation for the extension of overdraft amount

b. Imposes nominal interest on the overdraft amount

c. Charges fee only on the amount exceeding the account limit

The disadvantages of the bank overdraft are as follows:

a. Incurs high cost for the clients, if they fail to pay the amount of overdraft for a longer period of time

b. Hampers the reputation of the organization, if it fails to pay the amount of overdraft on time

c. Allows the bank to deduct overdraft amount from the customers’ accounts without their permission

Discounting of Bill :

Discounting of bill is a process of settling the bill of exchange by the bank at a value less than the face value before maturity date. According to Sec. 126 of Negotiable Instruments, “a bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer.”

The facility of discounting of bill is used by the organizations to meet their immediate need of cash for settling down current liabilities.

Conditions laid down by the bank for discounting of bill are as follows:

a. Must be intended to specific purpose

b. Must be enclosed with the signature of the two persons (company, bank or reputed person)

c. Must be less than the face value

d. Must be produced before the maturity period.

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Commercial Banks and Financial Institutions

Banks are a very important part of our economy. They are the center of finance. People keep money in the banks because it is a safe and secure way to store the money . In the line with this, let’s learn further what are Commercial Banks and Financial Institutions.

Browse more Topics under Sources Of Business Finance

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Commercial Paper
Equity Shares and Preference Shares
Lease Finance and Public Deposits
International Financing and Choice of Source of Funds
Meaning, Nature and Significance of Business Finance
Retained Earning, Trade Credit and Factoring

Merits of Commercial Banks

Every coin has two sides, similarly raising a loan from a bank has a sunny side as follows:

Banks are flexible sources of finance as the amount to be received is decided by the borrowing party and can be increased and decreased according to business needs. Loans can be repaid in advance when funds are not required.
Banks keep the borrower’s information confidential and secure .
Banks provide assistance in time of need to businesses by providing funds.

Limitations of Commercial Banks

Certain limitations occur while raising funds from commercial banks. The limitations of raising funds from commercial banks are as follows:

Banks are notorious for making a detailed investigation of the company’s background and affairs, financial structure, plan etc., and also to ask for the security of assets and personal sureties. This makes the procedure of getting funds difficult;
Funds are generally available for short periods and renewal is uncertain and difficult;
Banks put forth difficult terms and conditions before providing a loan.

Financial Institutions

The economic development of any country depends on the growth of the business sector. The well developed financial system helps the business to achieve growth by making funds available to them. For which, the government has established financial institutions all over the country to provide finance to businesses.

These institutions aim at promoting the industrial development of a country and are called ‘development banks’. The main role of a financial institution is to transfer financial resources from those who save it to those who are in need of financial resources for economic activity.

Central and state governments set up Financial Institutions. They provide both owned capital and loan capital for long and medium-term and supplement the traditional financial agencies like commercial banks. Financial institutions give technical assistance and managerial services to organisations. These institutions give large funds for a longer duration.

Merits Of Financial Institutions

The merits of raising funds from financial institutions are as follows:

Here, finance is available even during periods of depression, when no other source of finance is available in the market.
Besides providing funds, many of these institutions provide financial, managerial and technical advice and consultancy to business firms.
For long-term business funds requirements, financial institutions are preferable as they provide long-term finance , which is not provided by commercial banks.

Limitations Of Financial Institutions

The limitations of raising funds from financial institutions are as follows:

Restriction on dividend payment imposed on the powers of the borrowing company by the financial institutions.
As these institutions come under government criteria, they follow rigid rules for granting loans. Too many formalities make the procedure time-consuming
Financial institutions may have their nominees on the Board of Directors of the borrowing company thereby restricting the powers of the company.

Special Financial Institutions

1. industrial finance corporation of india (ifci).

Commercial Banks & Financial Institutions:: IFCI

IFCI set up as a statutory organization under the Industrial Finance Corporation Act 1948. Its main objectives were to provide help towards supporting the local advancement and urging new business visionaries to go into the urgent and needful sectors of the economy.

2. State Financial Corporations (SFC)

The State Financial Corporations Act, 1951 made the State Governments build up State Financial Corporations in their particular areas for giving medium and short-term funds to businesses which are outside the extent of the IFCI.

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

This foundation formed in 1955 as a public organization under the Companies Act. ICICI helps the creation, development and modernisation of industrial endeavours solely in the private sector.

4. Industrial Development Bank of India (IDBI)

In 1964, it was set up under the Industrial Development Bank of India Act, 1964 with a target to facilitate the working of other financial institutions including commercial banks.

5. Industrial Investment Bank of India Ltd.

It was set up as an essential institution for the restoration of sick units and was known as Industrial Reconstruction Corporation of India. It was reconstituted and renamed as the Industrial Reconstruction Bank of India in 1985 and again in 1997, its name was changed to Industrial Investment Bank of India.

Solved Question for You

Q: The Life Insurance Company (LIC) is a commercial bank. True or False?

Ans: This statement is false. LIC is not a commercial bank it is a financial institution. The main function of LIC is to provide the public with insurance services. It was set up in 1956 by the Government of India to serve the public.

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What is the economic function of a bank?

July 1, 2001

Commercial banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. They provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient.

Imagine a World Without Banks

One way to answer your question is to imagine, for a moment, a world without banking institutions, and then to ask yourself a few questions. This is not just an academic exercise; many former eastern-block nations began facing this question when they began to create financial markets and develop market-oriented banks and other financial institutions.

If there were no banks…

Where would you go to borrow money?
What would you do with your savings?
Would you be able to borrow (save) as much as you need, when you need it, in a form that would be convenient for you?
What risks might you face as a saver (borrower)?

How Banks Work

Banks operate by borrowing funds-usually by accepting deposits or by borrowing in the money markets. Banks borrow from individuals, businesses, financial institutions, and governments with surplus funds (savings). They then use those deposits and borrowed funds (liabilities of the bank) to make loans or to purchase securities (assets of the bank). Banks make these loans to businesses, other financial institutions, individuals, and governments (that need the funds for investments or other purposes). Interest rates provide the price signals for borrowers, lenders, and banks.

Through the process of taking deposits, making loans, and responding to interest rate signals, the banking system helps channel funds from savers to borrowers in an efficient manner. Savers range from an individual with a $1,000 certificate of deposit to a corporation with millions of dollars in temporary savings. Banks also service a wide array of borrowers, from an individual who takes a loan of $100 on a credit card to a major corporation financing a billion-dollar corporate merger.

The table below provides a June 2001 snapshot of the balance sheet for the entire U.S. commercial banking industry. It shows that the bulk of banks’ sources of funds comes from deposits – checking, savings, money market deposit accounts, and time certificates. The most common uses of these funds are to make real estate and commercial and industrial loans. Individual banks’ asset and liability composition may vary widely from the industry figures, because some institutions provide specialized or limited banking services.

Banks Are Only One Type of Financial Intermediary

Finally, the U.S. financial services industry and financial markets are highly developed. In recent decades, many new products and services have been created, as well as new financial instruments and institutions. Today, in addition to banks, there are several other important types of financial intermediaries. These include savings institutions, credit unions, insurance companies, mutual funds, pension funds, finance companies, and real estate investment trusts (REITS).

Banks’ assets have grown in recent decades in absolute terms; however, banks have tended to lose market share to even faster growing intermediaries such as pension funds and mutual funds. Still, banks continue to account for a significant share-over 23 percent-of the assets of all financial intermediaries at the end of year 2000, as the chart below shows.

Let me also suggest some more advanced reading materials:

What’s Different about Banks–Still? Milton Marquis. Federal Reserve Bank of San Francisco. FRBSF Economic Letter. No. 2001-09. Apr. 6, 2001. (8-22-01) /publications/economics/letter/2001/el2001-09.html

Are Banks Special? A Revisitation. E. Gerald Corrigan. Federal Reserve Bank of Minneapolis. The Region. No. v. 14, no 1. Mar, 2000 , p. 14-17. (8-22-01) http://www.minneapolisfed.org/pubs/region/00-03/corrigan.cfm

Personal Financial Education , FederalReserveEducation.org, 2003

Accountancy
Business Studies
Organisational Behaviour
Human Resource Management
Entrepreneurship

Commercial Banks : Features, Advantages & Disadvantages

What are commercial banks.

A commercial bank is a financial institution that provides services like accepting deposits, granting loans, bank overdrafts, offering certificates of deposits, and savings accounts to individuals and businesses. Commercial banks are considered to be an important component of the banking system. These are the banks that perform banking services with the aim of earning profits. Commercial banks are generally famous because they provide funds for a different span of time: short-term & medium-term. Also, commercial banks are very active in accepting deposits. Usually, the rate of interest charged on the loans is more than the interest offered on the deposits. The disparity between both interest rates then becomes the primary source of income or profits for the banks. Common examples of commercial banks are the State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), Central Bank of India, Canara Bank, Bank of India, etc.

Table of Content

Characteristics of Commercial Banks

Advantages of commercial bank, disadvantages of commercial bank.

Commercial banks lend money to almost all sizes of businesses and firms.
The credibility and paying capacity of the firm is examined comprehensively before lending loan to any firm.
A commercial bank is an easy and flexible source of accepting and withdrawing money.
These are the economical source of funds as it manages deposits and withdrawals at a low cost and involves no hidden cost.
It generally provides the loan against some security.
Loans from commercial banks do not require much formality, but have to fulfil the terms and conditions laid by the banks.

The advantages of Commercial Banks are as follows:

1. Confidentiality of Information: The banks when lends funds or accept deposits do not share the information with anyone. Banks value the privacy of their customers by preserving the secrecy of personal information of customers. The personal details of the customers or the account holders are kept safe with the banks.

2. Economical: Commercial banks are widely regarded as the cheaper funding source. The reason for its being an economical source is that it does not involves any cost for issuing of a prospectus, underwriting fees or any other charges. Banking services under commercial banks are free from any sort of hidden charges.

3. Flexible: Commercial banks are considered to be a flexible source of funding because the borrower can easily borrow money from the banks whenever they are in urgent need of money or funds. The borrowers can easily increase or reduce the amount of borrowings as per their convenience and requirements. The banks make the funds available as and when needed by the borrowers. Also, borrowers can repay the money when they don’t feel the requirement.

4. Lesser Formalities: It’s easy for borrowers to raise funds from commercial banks because it requires no stringent formalities to follow up. As such no paperwork is involved in the whole borrowing process. It requires no formalities like looking for an underwriter or issuing of a prospectus. So, it makes the process hassle-free and smooth.

5. Encourage Savings: Commercial Banks through their operations encourage savings among the general public. With this facility, banks offer a safer way to collect money from individuals, which otherwise they could have consumed impulsively. The amount of savings is subject to some fixed rate of interest. So savings from individuals whether in small or big amount increases the capital accumulation with the banks, which then can be used to invest or lend to the general public.

6. Facilitates Digital Transactions: With the growth of digitisation, commercial banks have emerged as significant financial institution because it provides a technologically advanced platform for making digital payments. Apart from basic facilities, it makes online transfers easy, use of cheques, ATMs, bank drafts, etc. A very few and recent development of commercial banks is the facility of online wallet. Earlier individuals and businessmen had to handle a lot of money which was subjected to theft, but now they can keep their money safe in the wallets and can use to make digital payments.

The disadvantages of Commercial Banks are as follows:

1. Procedural Difficulty: While lending funds to borrowers, it’s important for commercial banks to check if the advances are being made to the right entity. The only way to check is to conduct a detailed investigation of the firm’s background and its financial affairs. It follows stringent rules, so it makes the procedure of borrowing very tricky and rigorous.

2. Difficulty in Renewal: Loans from Commercial Banks can be generally borrowed for a short period of time only. It’s almost difficult to renew or extend the borrowings. Also, extending the tenure of borrowed funds can be tough and only fresh loans can be borrowed.

3. Need for Security: Loans from commercial banks can’t be provided without any security. For any amount of loan or advances, there is a requirement of any asset or personal guarantees from the borrowers against which borrowings can be issued. Most of the time, the loan amount is lower than the security’s value. So it has become disadvantageous for the public and firms.

4. Stringent Terms and Conditions: Commercial banks sometimes put forward a few challenging conditions for borrowers before lending loans or funds. At times, terms and conditions are so difficult to fulfil that it hampers the complete borrowing process. So, this restricts the borrowing decision of firms that they even back out from this source of funds and shift to some other source of funds with some feasible terms and conditions.

5. Bankruptcy: Sometimes, the banks may not be capable to provide the amount requested by the borrowers even if that money belongs to the customers and they have only deposited those to their savings account. This happens when the management of the banks does not take proper care of depositors’ or investors’ finances and rather mismanages them. But sometimes, it could also happen due to weaker economic health, like in times of recession when customers do more withdrawal than borrowings.

6. Risk of Online Frauds: Growing digitisation has not only soothed operations but also has given rise to online frauds. Cyber attacks have become more common and often nowadays, ATM cards are more subjected to theft, hackers hack the accounts and passwords for digital payments, and steal money online. There’s an urgent need to strengthen the game of internet banking.

On the whole, it can be concluded that commercial banks are a very crucial component of the whole Banking system. Also, gradually with time, the outlook of commercial banks is expanding with regard to the economy. Commercial Banks offer a proper organised financial market in less developed countries by providing financial assistance and fulfilling the financial needs of individuals, firms and businesses.

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Functions Of Commercial Banks

Functions of Commercial Banks: Primary and Secondary Functions

What is commercial bank.

A commercial bank is a kind of financial institution that carries all the operations related to deposit and withdrawal of money for the general public, providing loans for investment, and other such activities. These banks are profit-making institutions and do business only to make a profit.

The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank offers to the depositors is known as the borrowing rate, while the rate at which a bank lends money is known as the lending rate.

Function of Commercial Bank:

The functions of commercial banks are classified into two main divisions.

(a) Primary functions

Accepts deposit : The bank takes deposits in the form of saving, current, and fixed deposits. The surplus balances collected from the firm and individuals are lent to the temporary requirements of the commercial transactions.

Provides loan and advances : Another critical function of this bank is to offer loans and advances to the entrepreneurs and business people , and collect interest. For every bank, it is the primary source of making profits. In this process, a bank retains a small number of deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand loans, overdraft, cash credit, short-run loans, and more such banks.

Credit cash: When a customer is provided with credit or loan, they are not provided with liquid cash. First, a bank account is opened for the customer and then the money is transferred to the account. This process allows the bank to create money.

(b) Secondary functions

Discounting bills of exchange: It is a written agreement acknowledging the amount of money to be paid against the goods purchased at a given point of time in the future. The amount can also be cleared before the quoted time through a discounting method of a commercial bank.

Overdraft facility: It is an advance given to a customer by keeping the current account to overdraw up to the given limit.

Purchasing and selling of the securities: The bank offers you with the facility of selling and buying the securities.

Locker facilities: A bank provides locker facilities to the customers to keep their valuables or documents safely. The banks charge a minimum of an annual fee for this service.

Paying and gathering the credit : It uses different instruments like a promissory note, cheques, and bill of exchange.

Types of Commercial Banks:

There are three different types of commercial banks.

Private bank –: It is a type of commercial banks where private individuals and businesses own a majority of the share capital. All private banks are recorded as companies with limited liability. Such as Housing Development Finance Corporation (HDFC) Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank, Yes Bank, and more such banks.

Public bank –: It is a type of bank that is nationalised, and the government holds a significant stake. For example, Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank, and Punjab National Bank.

Foreign bank –: These banks are established in foreign countries and have branches in other countries. For instance, American Express Bank, Hong Kong and Shanghai Banking Corporation (HSBC), Standard & Chartered Bank, Citibank, and more such banks.

You might also want to know: What are the 4Ps of Marketing ?

Examples of Commercial Banks

Few examples of commercial banks in India are as follows:

1. State Bank of India (SBI)

2. Housing Development Finance Corporation (HDFC) Bank

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

4. Dena Bank

5. Corporation Bank

This was all about the ‘Functions of Commercial Banks’ that is elucidated in detail for commerce students. To know about more such concepts, stay tuned to BYJU’S.

Frequently Asked Questions on Function of Commercial Banks

What is the most important function of a bank.

The most important function of a bank is to collect deposits from the public and lend those deposits for the development of business, agriculture, trade and commerce.

What is the first commercial bank of India?

Bank of Calcutta is the oldest commercial bank in India. It was established in the year 1806. It was later renamed the Bank of Bengal. Currently it is known as State Bank of India.

What is the main purpose of commercial banks?

The main purpose of commercial banks is to provide financial services to the general public and also provide loan facilities to the business which helps in ensuring economic stability and growth of the economy. Therefore, we can say that credit creation is the most important purpose of commercial banks.

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Commercial Banks (Financial Economics)

Last updated 20 Jul 2019

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Home — Essay Samples — Economics — Banking — Functions of modern commercial banks

Functions of Modern Commercial Banks

Categories: Banking

About this sample

Words: 729 |

Published: Jan 29, 2019

Words: 729 | Pages: 2 | 4 min read

Loans and advances, secondary / non-banking functions.

Primary or Banking functions
Secondary or Non-Banking functions.
Subsidiary Activities
Cash Credit
Discounting of Bills
Money At Call
Direct Loans
Collection: Commercial banks collect cheques, drafts, bills, promissory notes, dividends, subscriptions, rents and any other receipts which are to be received by the customer. For these services banks charge a nominal amount.
Payment: Banks also makes payments on behalf of their customers like paying insurance premium, rent, taxes, electricity and telephone bills etc for such services commission is charged.
Income — Tax Consultant: Commercial banks act as income tax consultants. They prepare and finalise the income tax returns of their clients.
Sale And Purchase Of Financial Assets: As per the customers instruction banks undertake sale and purchase of securities, shares and any other financial assets. Nominal charges are charged by a bank.
Trustee, Executor And Attorney: As a trustee, banks become the custodian and manager of customer funds. Bank also acts as executor of deceased customer’s will. As an Attorney the banks sign the documents on behalf of customer.
E- Banking: Through Electronic Banking, a customer can operate his bank account through internet. He can make payments of various bills. He can even transfer money from one place to another.

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US banks’ commercial deposits are back on a path to growth

US banks’ deposit operations have experienced a difficult few years, with total deposit balances declining 7 percent between the first quarter of 2022 and the third quarter of 2023. In 2022, the US Federal Reserve began pursuing quantitative tightening (QT), or reducing its balance sheet by not reinvesting all the proceeds of maturing securities. It also started rapidly raising interest rates. Consequently, banks’ funding costs have risen, ratcheting up pressure on margins.

The Fed last raised rates in July 2023 and has signaled that it expects one rate cut this year. QT is also expected to end: the central bank started to slow the pace of its balance sheet reductions in June. As a result, commercial deposits at US banks ticked up 2 percent between the third quarter of 2023 and the first quarter of 2024, and they are expected to continue expanding for the rest of this year, potentially showing annual growth of as much as 4 percent. Emerging trends point to a similar annual growth rate for the next three years—although changes in the Fed’s actions would alter this forecast.

Boosting and retaining deposits and improving margins are likely to be top of mind for bank executives. They will need to consider nuanced deposit strategies, as clients’ price sensitivity regarding deposits has varied significantly as rates have risen.

Bank executives need to consider nuanced deposit strategies, as clients’ price sensitivity regarding deposits has varied significantly as rates have risen.

For banks to thrive in this environment, it’s crucial that they develop and nurture deep relationships with customers, devise effective pricing strategies, and position themselves for long-term structural success by achieving the right balance in terms of markets and client segments.

The US deposits landscape

US bank deposits declined significantly in 2022 and for most of 2023 as the Fed pursued quantitative tightening, but they began to recover in late 2023. Commercial deposits stabilized despite the challenges posed by the early 2023 regional banking crisis.

Hit by quantitative tightening

Stabilizing commercial deposits, aftermath of the regional banking crisis, strategies for striking the right balance on deposits.

To thrive in this competitive environment, banks need to build deep relationships with clients, devise effective pricing strategies, and position themselves for long-term success by pursuing the right markets and client segments.

Deeper client relationships

Price sensitivity varies, industry differences.

The environment for commercial deposits for the remainder of this year is expected to provide opportunities for deposits-driven growth. Banks will need to use client-specific repricing strategies and account for clients’ price sensitivity to succeed for years to come.

Szilard Buksa is a partner in McKinsey’s Dallas office; Manthan Pakhawala is a research science analyst in the Atlanta office, where Ryan Cope is a senior asset leader; and Vanathi Ambigapathi is an asset leader in the Boston office.

The authors wish to thank Bolivar Rojas, Maikael Mora, Pavel Baltabaev, Peter Noteboom, and Victor Varela for their contributions to this article.

This article was edited by Jana Zabkova, a senior editor in the New York office.

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Winning in corporate deposits through transaction banking

Looking up at a hig-hrise residential tower

Five big shifts shaping a new world for corporate and investment banks

Extending upmarket in US commercial banking

Overall bank rating

Pros and cons, how commercial bank and trust company works.

Is Commercial Bank and Trust trustworthy?
The role of CDFIs

Commercial Bank and Trust Company vs. Simmons Bank

Commercial bank and trust company vs. southern bancorp, frequently asked questions, commercial bank and trust company review 2024.

Affiliate links for the products on this page are from partners that compensate us and terms apply to offers listed (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate banking products to write unbiased product reviews.

The bottom line: Commercial Bank and Trust Company could be a good choice if you live in Monticello, Arkansas, and want to open a savings account or a short-term CD at a local bank. You might consider other financial institutions if you don't have a lot of money for an opening deposit.

Feature	Insider rating (out of 5)
Savings	3.25
Checking	3
CD	3
Trustworthiness	3
Total	3

Pros	Cons

Commercial Bank and Trust Company Savings Account

no monthly service fee

Check mark icon A check mark. It indicates a confirmation of your intended interaction. No monthly service fee
con icon Two crossed lines that form an 'X'. $200 minimum opening deposit
con icon Two crossed lines that form an 'X'. Must keep at least $200 in account to earn interest
con icon Two crossed lines that form an 'X'. Limit of three transactions per quarter
5 branches in Monticello, Arkansas
To earn 0.15% APY you must maintain at least $200 in your account
Limit of 3 transactions per quarter; $1 excess transaction fee if you exceed the limit
Interest compounded and deposited quarterly
FDIC insured

The Commercial Bank and Trust Company Savings Account could be ideal if you're looking to avoid monthly service fees. You'll need at least $200 to open a savings account at the brick-and-mortar bank, though, which is high compared to other banks .

You'll also want to be mindful of transaction limits with the account. You'll be charged a $1 fee for each transaction that exceeds the limit of three transactions per quarter.

Commercial Bank and Trust Company 4-3-2 Account

up to $6 monthly service fee

Check mark icon A check mark. It indicates a confirmation of your intended interaction. Unlimited check writing
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Possible to waive monthly service fee
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Free overdraft protection available
Check mark icon A check mark. It indicates a confirmation of your intended interaction. No out-of-network ATM fees
con icon Two crossed lines that form an 'X'. Monthly service varies between $6 and $0 (depends on your account balance)
con icon Two crossed lines that form an 'X'. $30 overdraft fee
con icon Two crossed lines that form an 'X'. Doesn't reimburse if you're charged by an out-of-network ATM provider
Surcharge-free transactions at any Cirrus, Pulse, and Star ATMs
Monthly service fee depends on your account balance: No fee if you have an account balance over $500; $2 monthly service fee if you have a daily account balance between $400 and $500; $4 monthly service fee if you have a daily account balance between $300 and $400; $5 monthly service fee if you have a daily account balance between $200 and $300; $6 monthly service fee if you have a daily account balance under $200
Overdraft protection available: You may link your checking account to a savings account

The Commercial Bank and Trust Company 4-3-2 Account works best if you keep more than $500 in your account daily. Otherwise, you'll have to pay a monthly service fee that depends on how much money is in your account.

Commercial Bank and Trust Company CD

0.25% to 0.75%

Check mark icon A check mark. It indicates a confirmation of your intended interaction. Solid interest rate compared to other brick-and-mortar banks
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Standard CD early withdrawal penalties
con icon Two crossed lines that form an 'X'. Online banks may offer a higher interest rate
con icon Two crossed lines that form an 'X'. $1,000 minimum opening deposit
con icon Two crossed lines that form an 'X'. Limited CD term options
con icon Two crossed lines that form an 'X'. Interest compounded quarterly, not daily
Terms range from 6 months to 3 years
CD early withdrawal penalties: 3 months of interest for terms under 1 year; 6 months of interest for terms over 1 year

Commercial Bank and Trust might be worth exploring if you'd like to open a short-term CD with a brick-and-mortar bank. CD terms range from six months to three years, and you'll earn a solid interest rate, regardless of which term you choose.

Commercial Bank and Trust Company is a community development financial institution with five locations in Monticello, Arkansas. The brick-and-mortar institution is also part of Cirrus, Pulse, and STAR ATM networks, so customers have access to over 2 million ATMs throughout the US.

Customer support is available by phone from 8 a.m. to 4:30 p.m. CT Monday through Thursday and 8 a.m. to 5 p.m. CT on Friday.

The bank's mobile app is rated 4.8 out of 5 stars in the Apple store and 4.5 out of 5 stars in the Google Play store.

Commercial Bank and Trust Company is FDIC insured . Up to $250,000 is safe in an individual account, and $500,000 is secure in a joint bank account.

Commercial Bank and Trust trustworthiness and BBB rating

Commercial Bank and Trust Company hasn't been involved in any recent public controversies.

Usually, we also include ratings from the Better Business Bureau, but Commercial Bank and Trust Company hasn't been rated by the BBB yet.

BBB ratings aren't necessarily the be-all and end-all. You might want to read online customer reviews or chat with current customers to see if the bank is right for you.

The role of community development financial institutions

Community development financial institutions, or CDFIs , serve low-income and disadvantaged communities. Banks and credit unions have to undergo certification by the US Department of Treasury's Community Development Financial Institutions Fund and meet specific requirements to address the banking needs of local communities.

Commercial Bank and Trust Company hosts luncheons and community events for local schools and hospitals, like the Drew Memorial Health System, Drew Central Schools, and Monticello Schools. Representatives also participate in local fundraisers for nonprofit organizations and programs like the Special Olympics.

We compared Commercial Bank and Trust Company to another bank with branches in Arkansas: Simmons Bank .

Commercial Bank and Trust Company	Simmons Bank
0.15%	Varies by location and balance
Free savings account	Free checking account

Commercial Bank and Trust Company might be a good option if you plan to open a savings account and have a minimum of $200. The Commercial Bank and Trust Company Savings Account charges zero monthly service fees. Meanwhile, Simmons Bank charges a $5 monthly service fee on its lowest-tier savings account if you don't keep at least $100 in your account.

If your priority is opening a checking account, you may favor Simmons Bank. The Simmons Bank Coin Checking Account has zero monthly service fees and has a $0 minimum opening deposit. In comparison, Commercial Bank and Trust Company charges a monthly service fee if you don't keep at least $500 in your account and requires a $200 minimum opening deposit.

Southern Bancorp also has branches in Arkansas. See how the two banks compare below.

Commercial Bank and Trust Company	Southern Bancorp
0.15%	0.10%
Free savings account	CDs

You'll probably prefer Commercial Bank and Trust Company if you're looking to open a savings account and have at least $200 for an initial deposit.

Commercial Bank and Trust Company doesn't charge service fees on its savings account, while Southern Bancorp has a quarterly service fee if you don't keep at least $50 in your account daily. You'll also earn a high interest rate with the Commercial Bank and Trust Company savings account than with the Southern Bancorp savings account.

If you'd like to earn more interest on your money, online banks will likely be a better option for opening a savings account that a brick-and-mortar bank. For CDs, though, you might lean more toward Southern Bancorp. Southern Bancorp has solid CDs with higher interest rates than Commercial Bank and Trust Company, regardless of which term you choose.

Yes, Commercial Bank and Trust Company is FDIC insured. When a bank is federally insured, up to $250,000 is secure in an individual bank account, and $500,000 is safe in a joint bank account.

Commercial Bank and Trust Company serves communities in Monticello, Arkansas.

Bank accounts
Savings and CD rate trends
How banks operate

Editorial Note: Any opinions, analyses, reviews, or recommendations expressed in this article are the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any card issuer. Read our editorial standards .

Please note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed, or may no longer be available.

**Enrollment required.

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The Bottom Line

How Do Commercial Banks Work, and Why Do They Matter?

What Is a Commercial Bank?

Key Takeaways

How Commercial Banks Work

How Commercial Banks Make Money

Commercial Banks and Lending

Residential Mortgages

Credit Cards

Importance of Commercial Banks

Commercial Banks vs. Investment Banks

Examples of Commercial Banks

Is My Bank a Commercial Bank?

What Role Do Commercial Banks Play in the Economy?

Is My Money Safe at a Commercial Bank?

Commercial Banks, Definition, Functions, Types, Roles

Commercial Banks

Functions of Commercial Banks

Primary Functions of Commercial Banks

Accepting Deposits

Providing Loans

Issuing Checks

Clearing Checks

Maintaining Accounts

Providing Safekeeping Services

Providing Currency Exchange

Providing Overdraft Facilities

Modern or Secondary Functions of Commercial Banks

Facilitating Payments

Issuing Credit and Debit Cards

Managing Investments

Providing Foreign Exchange Services

Offering Insurance Products

Providing Financial Advice

Types of Commercial Banks

Public Sector Banks

Private Sector Banks

Foreign Banks

Regional Rural Banks

Co-operative Banks

Commercial Banks UPSC

Commercial Banks FAQs

What are the functions of commercial bank?

What are the 3 types of commercial bank?

What is a commercial bank an example of?

What banks are commercial banks?

What is commercial bank and its types?

Who introduced commercial bank?

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IMPORTANT EXAMS

What is a Commercial Bank?

4. Agency and advisory

Key Highlights

3. Treasury and payments

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Commercial Bank

What is a Commercial Bank?

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Commercial Bank

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