A commercial bank is a type of financial institution that provides services such as accepting deposits, making business loans, and offering basic investment products. Commercial bank can also refer to a bank, or a division of a large bank, which more specifically deals with deposit and loan services provided to corporations or large/middle-sized business - as opposed to individual members of the public/small business - retail banking, or merchant banks.
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Origin of the term
The name bank derives from the Italian word banco "desk/bench", used during the Renaissance era by Florentine bankers, who used to carry out their transactions on a desk covered by a green tablecloth. However, traces of banking activity can be found even in ancient times.
Commercial Banks Definition Video
Role
The general role of commercial banks is to provide financial services to general public and business, ensuring economic and social stability and sustainable growth of the economy.
In this respect, "credit creation" is the most significant function of commercial banks. While sanctioning a loan to a customer, they do not provide cash to the borrower. Instead, they open a deposit account from which the borrower can withdraw. In other words, while sanctioning a loan, they automatically create deposits, known as a "credit creation from commercial banks".
Primary functions
- Commercial banks accept various types of deposits from public especially from its clients, including saving account deposits, recurring account deposits, and fixed deposits. These deposits are returned whenever the customer demands it or after a certain time period
- Commercial banks provide loans and advances of various forms, including an overdraft facility, cash credit, bill discounting, money at call etc. They also give demand and term loans to all types of clients against proper security.
Regulations
In most countries central banks are responsible for the oversight of the commercial banking system of their respective countries. They will impose a number of conditions on the banks that they regulate such as keeping bank reserves and to maintain minimum capital requirements.
Bank reserves
Bank reserves or "central bank reserves" are banks' holdings of deposits in accounts with their central bank (for instance the European Central Bank or the Federal Reserve, in the latter case including federal funds), plus currency that is physically held in the bank's vault ("vault cash"). Some central banks set minimum reserve requirements, which require banks to hold deposits at the central bank equivalent to at least a specified percentage of their liabilities such as customer deposits. Even when there are no reserve requirements, banks often opt to hold some reserves --called desired reserves-- against unexpected events such as unusually large net withdrawals by customers or bank runs.
Services by product
Commercial banks generally provide a number of services to its clients, these can be split into core banking services such as deposits and loans and other services which are related to payment systems and other financial services.
Core products and services
- Accepting money on various types of Deposit accounts
- Lending money in the form of Cash: by overdraft, instalment loan etc.
- Lending money in Documentary form: Letters of Credit, Guarantees, Performance bonds, securities, underwriting commitments, issuing Bank drafts and Bank cheques, and other forms of off-balance sheet exposure.
- Inter- Financial Institutions relationship
- Cash management
- Treasury management
- Private Equity financing
- Processing payments via telegraphic transfer, EFTPOS, internet banking, or other payment methods.
Other functions
Along with core products and services, commercial banks perform several secondary functions. The secondary functions of commercial banks can be divided into agency functions and utility functions.
Agency functions include:
- To collect and clear cheques, dividends and interest warrant.
- To make payments of rent, insurance premium, etc.
- To deal in foreign exchange transactions.
- To purchase and sell securities.
- To act as trustee, attorney, correspondent and executor.
- To accept tax proceeds and tax returns.
Utility functions include:
- To provide safety locker facility to customers.
- To provide money transfer facility.
- To issue traveller's cheque.
- To act as referees.
- To accept various bills for payment: phone bills, gas bills, water bills, etc.
- To provide merchant banking facility.
- To provide various cards: credit cards, debit cards, smart cards, etc.
Loan types
All the loans in the Commercial banking, irrespective of the particular type of bank product, are subject to be "secured" or "unsecured".
Secured loans
A secured loan is a loan in which the borrower pledges some asset (e.g., a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral -- in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower, for example, foreclosed a portion of the bundle of rights to specified property. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the remaining amount. The opposite of secured debt/loan is unsecured debt, which is not connected to any specific piece of property and instead the creditor may only satisfy the debt against the borrower rather than the borrower's collateral and the borrower.
Unsecured loan
Unsecured loans are monetary loans that are not secured against the borrower's assets (no collateral is involved). There are small business unsecured loans such as credit cards and credit lines to large corporate credit line . These may be available from financial institutions under many different guises or marketing packages such as:
- Bank overdrafts
- Corporate bonds
- Credit card debt
- Credit facilities or lines of credit
Source of the article : Wikipedia
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