Commercial Bank is the bank organized to perform public utility banking services, such as accepting deposits, lending money, etc. On the other hand, development bank refers to a multi-purpose financial undertaking set up to provide financial aid to the industrial and agricultural sector, to encourage development.
Banks play a very important role in the financial system of every country. If the banking system in the economy is effective, it adds to the economic development of the country. Every segment of society uses different services provided by the banks for different purposes.
Banks are divided into three categories – Cooperative Banks, Commercial Banks and Development Banks. Let us now discuss the difference between Commercial bank and Development Bank.
Content: Commercial Bank Vs Development Bank
|Basis for Comparison
|Commercial Banks are the banks that provide basic banking and financial services to individuals and corporates.
|Development Banks are the banks which are set up to provide finance for infrastructural and economic development.
|Set up under the Companies Act, as Banking Companies.
|Set up under specialized act.
|Source of funds
|Raise funds from accepting public deposits.
|Borrowing, grants and selling of securities.
|Short and Medium-term loans
|Medium and Long term loans
|To make a profit by lending money at a high rate of interest.
|To achieve social profit, by providing funds for developmental projects.
|Legal, Business advice and Credit Investigation service are provided for a definite fee.
|Counselling and Advisory service are provided for the development and promotion of the enterprise.
|Individuals, and Business Entities
Definition of Commercial Bank
Commercial Bank, as the name suggests is a profit-oriented financial institution established for accepting deposits from the public, providing current account services, granting loans and offering a range of financial products to individuals and business entities.
The banks act as an intermediary between the depositors and borrowers. It pays interest to the depositors on the funds deposited at a low rate and lends them to the borrowers at a high rate of interest, depending on the risk factor involved. In this way the commercial bank makes money.
The rate at which interest is provided to the depositors is called borrowing rate, whereas the rate at which the bank gives loans, is called the lending rate. The difference between lending and borrowing rate is called ‘spread‘, which amounts to profit.
The deposits received from the public not only provide funds but also increases their responsibility for providing liquidity and safety, which confines their use.
Commercial Banks are mainly divided into Scheduled Banks and Non-scheduled banks. Further, the scheduled banks cover Nationalised banks, State Bank of India and its subsidiaries, Private sector banks and foreign banks.
The functions performed by Commercial Banks are divided into two categories – Primary Functions and Secondary Function. These functions are described as under:
- Acceptance of Deposits
- Time Deposit
- Fixed Deposit
- Recurring Deposit
- Cash Certificates
- Demand Deposits
- Savings Bank Account Deposits
- Current Account Deposits
- Time Deposit
- Advancing of Loans
- Cash Credit
- Discounting of Bills
- Loans and Advances
- Housing Finance
- Loan against Shares/Securities
- Loan Against Savings Certificate
- Consumer Loans and Advances
- Securitization of Loans
- Agency Services
- Dealing in Foreign Exchange
- Collections of cheques, interest and dividend.
- Purchase and sale of securities
- Preparation of Income tax returns
- Payment of Rent, Electricity Bill, Insurance Premium, etc.
- Acting as executors of Will.
- General Utility Services
- Safety locker facility
- Gift Cheques
- ATM facility
- Supplying trade information and statistics
- Payment Mechanism, i.e. money transfer
- Traveller’s cheques
- Letter of Credit
- Credit Cards
- Underwriting of securities
- Advisory Services
- Accepting bills
- Merchant banking
- Investment Functions
- Credit Creation
Definition of Development Bank
Development Bank refers to a specialised financial entity, which is being established to offer infrastructure facilities, for encouraging industrial and agricultural sector development, by providing medium and long term loans.
It also provides other services like underwriting of shares, investment and guarantee operations and promotional activities to the business entities. The primary function of development banks is to provide credit for capital intensive investment project, usually for the long term, having a low rate of return.
Objectives of Development Bank
- To encourage industrial growth.
- To create employment opportunities.
- To revive sick units.
- To encourage self-employment projects.
- To remove regional imbalance.
- To develop backward areas.
- To develop the housing sector.
- To promote and provide finance to small scale industries.
- To facilitate the expansion and development of large scale industries.
Key Differences Between Commercial and Development Bank
The difference between commercial and development bank can be drawn clearly on the following grounds:
- Commercial Banks are the banks which are established to undertake basic banking services, for the general public. On the other hand, Development Banks are the financial institutions, set up to provide funds to new and budding companies and projects related to economic, agricultural and industrial development.
- In India, the commercial bank is established as a joint-stock company, called a banking company. On the flip side, Development Banks are set up under specialised act, passed by the parliament.
- A development bank is proactive in nature, as it plays an active role in promoting projects and to develop budding companies. As against, commercial banks are reactive in terms of business opportunities, because it requires bankability, after the entrepreneur’s decision is taken, thereafter the idea is taken into consideration.
- Commercial banks raise funds by accepting public deposits. Conversely, Development Banks raise funds from borrowing, government grants and selling of securities.
- Commercial Banks offers loan for short and medium-term, whereas medium and long term loans are offered by development banks.
- Commercial Banks are profit-seeking business entities. In contrast, Development Banks are established to encourage development.
- Commercial Banks aims at making a profit by lending money at a high rate of interest. As against, development banks aim to achieve social profit, by providing funds for capital intensive projects.
- Commercial Banks provide legal, business advice and credit Investigation service are provided for a definite fee. Contrarily, counselling and advisory service are provided for the development and promotion of the enterprise, by a development bank.
- Commercial banks deal with the general public and business entities, while the development banks deal with the government.
Banks have the power to issue promissory notes, so as to circulate money in the form of banknotes, as well as to deposit money received from the public and advances the same as loans to those who apply for it.