The primary function of a bank is to support the economic system by acting as a mediator between depositors and loan seekers. Banking services are essential for developing a country, functioning as the backbone of economies.
Three categories of Banks are Commercial Bank, Co-operative Banks and Developmental Banks. These can be differentiated based on their purpose in an economic system.
Key Takeaways
- Commercial banks are profit-driven financial institutions that provide various banking services to individuals and businesses. In contrast, government-supported development banks promote economic growth and development in specific sectors or regions.
- Development banks offer financing, technical assistance, and advisory services to support projects in infrastructure, agriculture, and small and medium-sized enterprises. In contrast, commercial banks primarily provide loans, deposits, and other financial services.
- The main difference between commercial and development banks lies in their objectives: commercial banks aim to maximize profit, while development banks promote economic and social development in line with government policies and priorities.
Commercial Bank vs Development Bank
Commercial banks provide various financial services to individuals and businesses, focusing on short-term loans and deposits. Development banks, however, aim to promote economic growth by financing long-term projects in sectors like agriculture, infrastructure, and small-scale industries, often at concessional interest rates.
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Comparison Table
| Parameter of Comparison | Commercial Bank | Development Bank |
|---|---|---|
| Definition | Banks that provide services to individuals and industries. | Banks that function as multi-purpose financial institutes with a broad development agenda. |
| Ownership | Set up under the ‘Companies Act’ | Set up under a Special Act |
| Nature | Profit Oriented | Development oriented |
| Funds | Funds are raised through investments and deposits made by Depositors | Funds are borrowed and acquired by selling securities. |
| Purpose | To gain profit by lending money at high-interest rates | To attain social welfare through financial aid |
| Clients and Customers | Individuals. Business industries | Government and Corporates |
What is Commercial Bank?
A commercial bank is an institution where most people seek financial services. As a financial institution, it offers accounting services, deposits, loans and other banking products like deposit certificates.
These banks offer safe deposits to companies and individuals at a lower interest rate, offering loans to borrowing parties at higher interest rates. The interest rate offered to depositors is called the borrowing rate, and the interest charged to loan seekers is called the lending rate.
Loans issued by Commercial Banks can vary highly depending on various factors. These may involve mortgages, personal loans, automobile loans etc.
Commercial Banks can be characterized as Scheduled and Non-Scheduled Banks, covering National, State, Foreign, and Private Banks.
A Scheduled Bank is a part of the Second Schedule of the Reserve Bank of India. Such banks must have a minimum reserve of 5 Lakhs and paid capital.
A Non-Scheduled Bank is any bank not included in the Second Schedule of the Reserve Bank of India. Such Banks are smaller banks with limited operations.
The functions of a Commercial Bank can be divided into Primary Functions and Secondary Functions.
The Primary functions of a Bank include accepting deposits in the form of recurring accounts, fixed deposits, saving accounts and current accounts and Advancing loans such as home loans, personal loans, loans against mortgages, shares and securities.
The Secondary functions of commercial banks are the general utility services and banking services offered by the banks. Other parts include investment and agency functions such as foreign transfer, income tax arrangements, sales, securities etc.
What is Development Bank?
Development Banks are financial structures with a primary agenda of aiding infrastructural Development and providing loans to the agricultural and industrial sectors. They function as multipurpose financial institutions providing loans to private and public industries and engaging in term lending and security investment.
Development Banks are essentially lending institutions that their broader development orientation can distinguish.
Hence one can define a Development bank as a financial institution whose motive is to aid and finance the basic needs of society. They achieve the agenda of promoting development by offering loans and aid to sectors such as agriculture and industries at a subsidized rate.
Development Banks do not function with the primary goal of profit-making. The loan structures offered by development banks are different from other banks.
Development Banks can be categorized into the following types;
- Industrial Development Banks- These are the banks that specialize in providing loan structures to Industries. Examples- Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), and Small Industries Development Bank of India (SIDBI).
- Agricultural Development Banks: Banks that devise and provide specialised schemes for farmers and other primary sectorial needs., for example, the National Bank for Agriculture & Rural Development (NABARD).
- Export-Import Development Banks: Banks that function as overseas financial institutions assisting cross-border trade and investment in trade capital. For example, the Export-Import Bank of India (EXIM Bank).
- Housing Development Banks: Entities that promote housing finance at local and regional levels established under the housing act. For example, the National Housing Bank (NHB).
Main Differences Between Commercial Bank and Development Bank
- A commercial bank is a financial institution that engages in the dual-natured agenda of depositing money and loan and providing it to individuals and cooperates. In contrast, Development Banks engage in financial activities to aid infrastructural and economic development.
- The primary aim of a commercial bank is to derive profit through interest on loans, while Development Banks are not profit-centric.
- Commercial Banks specialise in providing short-term loans and saving plans for individuals and corporates, while Development Banks focus on deriving long-term loan structures for the government and social sector.
- The primary source of funds for Commercial Banks is the money people deposit, while a development bank gathers its funding by borrowing from the government or selling securities.
- Commercial Banks are reactive in that they respond to business opportunities based on the bankability of an idea. At the same time, Development Banks are proactive as they promote projects and build companies.
- The clientele of commercial banks includes the general public and business people, while a development bank caters to the need of the Government and the Development Sector.
- https://www.scirp.org/html/14-1040071_17838.htm
- https://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-6146
- https://www.adb.org/sites/default/files/publication/189130/adbi-wp583.pdf
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
