A bank’s main job is to keep the economy running by acting as a middleman between depositors and borrowers. Banking services are critical for a country’s development, serving as the backbone of economies.
Commercial banks, co-operative banks, and development banks are the three types of banks. These can be distinguished based on the function they play in an economic system.
Commercial Bank Vs. Development Bank
A Commercial Bank provides financial services to businesses and individuals, whereas a Development Bank was established to offer money for infrastructure and economic development.
What is a Commercial Bank?
A commercial bank is a financial organisation where the majority of people go to get their money. It provides accounting services, deposits, loans, and other banking goods such as certificates for deposits as a financial institution. A commercial bank’s primary motivation is to make money. Loan interest is the primary source of profit for commercial banks.
These banks offer low-interest secure deposits to businesses and people while charging higher interest rates on loans to borrowers. The borrowing rate is the interest offered to depositors, whereas the lending rate is the interest charged to loan seekers. The spread is the difference between the borrowing and lending rates, which accounts for the bank’s profit.
Commercial bank loans can vary greatly depending on a variety of criteria. Mortgages, personal loans, and automotive loans are examples of these types of loans. Some banks specialize in a particular type of loan, such as gold or housing loans. Loans remain a distinguishing feature of Commercial Banks since they borrow to lend.
National Banks, State Banks, Foreign Banks, and Private Banks are all classified as Scheduled or Non-Scheduled Commercial Banks.
A Scheduled Bank is one that is listed in the Reserve Bank of India’s Second Schedule. These banks must have a minimum reserve of 5 lakhs and a paid capital. Certain advantages are available to Schedule Banks, including borrowing credit from the Reserve Bank of India.
A non-scheduled bank is one that is not listed in the Reserve Bank of India’s Second Schedule. Smaller banks with less operations fall under this category.
A Commercial Bank’s functions can be split into two categories: Primary Functions and Secondary Functions.
Accepting deposits in the form of recurring accounts, fixed deposits, saving accounts, and current accounts, as well as advancing loans such as home loans, personal loans, loans against mortgages, shares, and securities, are among a bank’s primary duties.
The general utility services and banking services provided by commercial banks are secondary roles. Investment and agency functions, such as foreign transfers, income tax arrangements, sales, and securities, are among the other functions.
What is a Development Bank?
Development banks are financial institutions that focus on assisting infrastructural development and lending to the agricultural and industrial sectors. They are multipurpose financial institutions that lend to both the commercial and public sectors, as well as engage in term lending and security investing.
Development Banks are essentially lending banks with a broader development focus.
As a result, a development bank might be defined as a financial entity whose mission is to assist and finance society’s basic necessities. They achieve their goal of fostering growth by providing subsidized loans and subsidies to areas like agriculture and industry.
The primary purpose of a development bank is not to make a profit. Development banks offer credit structures that are clearly distinct from those offered by other banks. Long-term loans are the specialty of development banks.
The following are the several types of development banks:
- Industrial Development Banks (IDBs): These are banks that specialize in lending to businesses. Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), and Small Industries Development Bank of India are examples of such institutions (SIDBI).
- Agricultural Development Banks: Institutions that design and implement specialized programmes for farmers and other primary sector requirements, such as the National Bank for Agriculture and Rural Development (NABARD).
- Export-Import Development Banks: Banks that act as foreign financial institutions, facilitating cross-border trade and trade capital investment. The Export-Import Bank of India, for example (EXIM Bank).
- Housing Development Banks: Under the Housing Act, entities that promote housing finance at the local and regional levels are established. The National Housing Bank, for example (NHB).
Difference Between Commercial Bank and Development Bank
- A commercial bank is a financial institution that has a dual-natured mission of depositing money and lending money to individuals and businesses, whereas Development Banks are involved in financial activities that help with infrastructure and economic development.
- A commercial bank’s principal goal is to make money by charging interest on loans, whereas Development Banks are not profit-driven.
- Commercial banks specialize on short-term loans and savings plans for individuals and businesses, whereas Development banks focus on long-term lending structures for the government and the social sector.
- People’s money is the principal source of finances for commercial banks, whereas a development bank is funded by borrowing from the government or selling securities.
- Commercial banks are reactive in character, responding to business prospects based on the bankability of an idea, whereas Development Banks are proactive in their promotion of initiatives and the establishment of businesses.
- Commercial banks serve the general public and businesspeople, whilst development banks serve the needs of the government and development sector.
Any economy’s support structure is comprised of banks. Commercial banks and development banks are two types of financial institutions, each with its own set of functions and obligations. A commercial bank acts as a bank for the general public, providing deposit services and loan financing. A development bank, on the other hand, is a specialized organisation created to assist and support the region’s economic and infrastructure development.
The distinction between a commercial bank and a development bank is the former’s profit-driven orientation against the latter’s growth-oriented focus.