The history of banking dates back to the times of Mesopotamian civilization, where grain loans were provided to traders and farmers supplying goods and services to the people of Babylonia and Mesopotamia.
However, the modern banking system developed in Italy under the name Banco. In India, a colonial rule introduced the concept of institutional banking.
Since then, India has developed a gigantic banking system that not only acts as a mediator between the depositors and the borrowers but also tries to address the various financial needs of agriculture, trade, and industry, thereby boosting the national economy.
This enormous banking system of India is regulated by the Reserve Bank of India (RBI), and Commercial Banks work under the direction of the RBI.
- Commercial banks are financial institutions offering various banking services to customers; the Reserve Bank of India (RBI) is the central bank responsible for monetary policy, financial stability, and currency management in India.
- Commercial banks operate to earn profit and serve clients; the RBI’s primary goal is to maintain financial stability and regulate the banking sector.
- Commercial banks must follow the regulations and guidelines set by the RBI, which acts as the supervisory authority for the Indian banking system.
Commercial Bank vs RBI
Commercial banks are financial institutions that provide banking services to the public, such as accepting deposits and offering loans. The Reserve Bank of India (RBI) serves as the country’s central bank, responsible for formulating and implementing monetary policy, regulating financial institutions, and ensuring financial stability.
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|Parameter of Comparison||Commercial Bank||RBI|
|Ownership||Commercial Banks are either owned by the government (Public Sector Banks) or by private players like individuals or corporations (Private Sector Banks)||The Government of India wholly owns it.|
|Objective||They are established with the ultimate motive of serving the interests of their owners, that is, earning profit.||The RBI was established to prevent the government from taking control of currency and credit and to extend banking facilities all over the country.|
|Governing Act||Commercial Banks in India are governed by the Banking Regulation Act (BR Act), 1949||The Reserve Bank of India was established under the Reserve Bank of India Act, 1934|
|Lending facilities||It extends lending facilities and other related offers to the general public and enterprises and accepts deposits from them.||It is described as “the banker of the government” and extends loans to other banks as the “lender of last resort.”|
|Currency Issuance||Performs no such role.||As the Central Bank of India, it has the authority to issue and print currency.|
What is Commercial Bank?
It is a financial institution that accepts diverse deposits from individuals and associations. These deposits are then advanced to prospective borrowers at a high-interest rate.
The depositors are also allowed to withdraw money from their accounts by using a cheque or a card. In this way, it serves as an intermediary between the depositors and the borrowers and helps run the national economy’s lifecycle.
Post-independence, to regulate the Commercial Banks and other banks (Regional Rural Banks and Co-operative Banks) of India, the Banking Regulation Act 1949 was passed.
Besides, the Reserve Bank of India issued specific rules, regulations, and guidelines related to banking and other financial services under the RBI Act of 1934.
Furthermore, the Department of Financial Services, operating under the Ministry of Finance, supervises and legislates on the functioning of banks and other financial institutions.
Following are some of the essential functions performed by a Commercial bank:
- Accepting deposits: The bank accepts three deposits: savings, current and fixed. The excess balance obtained from these deposits is lent to the prospective borrowers.
- Lending: After collecting the deposits, the banks keep a small amount of those deposits as reserves which are then extended to the prospective borrowers in the form of a loan, cash credit, overdraft, etc., for higher interest. Lending constitutes a primary source of profit for the banks.
- Investment: The surplus funds also constitute a significant source f income for Commercial Banks. There are mainly three types of securities in which Commercial Banks invest, viz government securities, other approved securities, and other securities.
- To simplify banking for account holders, Commercial Banks provide facilities for ATMs, Credit cards, Debit cards, Prepaid cards, Internet Banking, and so on.
- Agency function of the bank: The bank also acts as a trustee of its account holders and gets a share of their income for performing agency functions like transfer and collection of funds, payment of taxes, bills, insurance premiums, etc., buying and selling of shares and securities, letters of references, etc.
- General Utility Services: The banks also offer general utility services like Traveller’s cheques, locker facilities, buying and selling of foreign exchange, etc.
There are four main types of Commercial Banks in India: Private Sector Banks, Public Sector Banks, Regional Rural Banks, and Foreign Sector Banks.
What is RBI?
The Reserve Bank of India is the apex authority of all financial institutions in India. Established under the Reserve Bank of India Act, 1934, on 1st April 1935, private shareholders originally owned it. After nationalization in 1949, it is now solely owned by the government of India.
The union government appoints a Central Board of Directors for four years for its governance.
It was initially formed to serve two purposes:
- To detach the government from the control of currencies and credits
- To extend banking facilities all over the country.
However, over time, the RBI assumed more extensive functions, some of which are as mentioned below:
- Supreme Monetary Authority: As the sovereign monetary authority of the country, the RBI is responsible for formulating, implementing, and monitoring economic policies so that prices remain stable and the productive sectors receive an adequate flow of credit.
- Opening and Licensing of Functions: As the regulator and supervisor of the financial system, the RBI sets the norms and parameters for opening up and licensing of banks and regulates their operations so that people’s trust in the system remains intact, their deposit’s interest is protected, and cost-effective banking services are provided to them.
- It regulates foreign exchange, government security markets, and financial derivatives so that external trade and transactions are facilitated and the foreign exchange market of India is developed and maintained.
- Currency Issuance: It issues, prints, and exchanges currency and coins. It can also destroy them if they are no longer fit for circulation.
- It performs various developmental functions to promote national objectives, like extending institutional banking facilities to every nook and corner of the country.
- It is described as “the banker of the government” for its performance of merchant banking functions for the union and state governments.
- It provides loans to all Scheduled Banks and maintains their banking accounts.
In this way, it regulates and controls the financial and banking system of the country.
Main Differences Between Commercial Bank and RBI
- The main difference between the RBI and a Commercial Bank is that the former acts as the banker of the government and bank of the banks while the latter acts as the banker of the businesses and individual citizens of the nation.
- The Reserve Bank of India is India’s highest monetary and financial authority. But no such authority has been vested in the Commercial Banks.
- The Government of India is the sole owner of the RBI. At the same time, the government or a private institution may own a Commercial Bank.
- The RBI was established under the Reserve Bank of India Act (RBI Act), 1934, and the Act governs its operations. In contrast, Commercial Banks are governed by the Banking Regulations Act of 1949.
- Being the Central Bank of India, the RBI performs various functions like issuing and distributing currency and coins, providing loans to the government and banks, stabilizing inflation rates and the exchange rate of rupees, and performing various developmental functions. While providing lending and deposit facilities and other related offers to citizens and firms are the only functions performed by Commercial Banks.
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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.