How Commercial Banks Distinguish Themselves from Other Financial Institutions
Banks are not only vital pillars of the financial system but also potent catalysts for economic development. They possess the unique ability to generate money through the creation and management of loans and deposits. This article sheds light on the distinctive roles and characteristics of commercial banks, setting them apart from other financial institutions such as development banks and cooperative banks.
The Power of Banks: A Facilitator of Economic Growth
One of the most crucial functions of banks is their ability to create and manage money. By making loans and depositing the proceeds into a depository checking account, banks generate expendable funds in the debtor's account. This process distinguishes banks from entities such as insurance companies or mutual funds, which lack this power to create money.
Banks play a vital role in ensuring a robust and effective financial system, which is essential for economic growth. A vibrant banking system supports various sectors of the economy, benefiting both individuals and businesses.
Bank Classification: Understanding the Differences
Financial institutions are broadly classified into three main categories: cooperative banks, commercial banks, and development banks. Each type serves a unique purpose within the financial landscape.
Development Banks are primarily focused on providing financial assistance for infrastructure and economic development, particularly in the industrial and agricultural sectors. These banks are not involved in commercial banking, focusing instead on long-term projects that contribute to national and regional growth.
Commercial Banks, on the other hand, offer basic banking and financial services to individuals and corporations. They play a significant role in providing working capital, short and medium-term loans, and now increasingly, long-term loans that extend up to 25 years. Commercial banks can offer a wide range of services, including checks, money transfers, and selling various financial products such as insurance and health insurance.
Development Banks extend medium and long-term loans, mainly for industrial, agricultural, and infrastructure projects. Their primary goal is social profit, aimed at fostering economic development rather than generating a profit. These banks also engage in activities such as promoting industrial growth, creating employment, encouraging self-employment, and developing housing projects.
Incorporation and Regulation of Banking Entities
Banking companies come into existence according to the Companies Act, while development banks are governed by specialized acts. Commercial banks primarily rely on deposits mobilized from the public, whereas development banks depend on government borrowings, grants, and sometimes sell securities to raise funds.
Regulatory bodies like the Reserve Bank of India (RBI) oversee and control banks, with the exception of non-scheduled banks. These non-scheduled banks, which do not meet the defined criteria, cannot become members of clearing houses, limiting their transactional capabilities with other banks. Despite their exclusion, non-scheduled banks still must maintain reserve requirements and comply with RBI demands.
Classifications of Scheduled Banks
Scheduled Commercial Public Sector Banks include institutions such as State Bank of India, while Scheduled Commercial Private Sector Banks encompass both old and new private sector banks. Additionally, scheduled foreign banks operating in India and cooperative banks, such as Regional Rural Banks, are part of this category. These banks are named based on their ownership pattern and area of concentration.
The Reserve Bank of India compels all scheduled banks to submit periodic returns as required. Cooperative banks are monitored for statutory reserves, and the central bank exerts more control to address failures, particularly those stemming from reckless lending practices.
Conclusion
Understanding the distinctions between different types of banks is essential for both individuals and enterprises. Commercial banks stand out for their diverse offerings, responsiveness to customer needs, and commercial focus. These institutions play a pivotal role in the economy by providing the necessary financial services and support to various sectors.