Advantages and Disadvantages of Commercial Banks
Any financial institution or organization that deals in the transfer of money and also keep it safe for its customers is called a bank. The most well-known banking services include accepting deposits and offering loans. Alongside these two major roles, banks also offer the ability to withdraw funds and pay with cash drafts and cheques; credit creation; regulatory exchange rates; issuing new currency notes, money transfers, etc. Private sector banks, as well as Public sector banks, are among the most generally categorized banks. Banking is a system that in India has changed a lot over the years. The Banking system is accountable for ensuring the liquidity of the economy by mobilizing savings, regulating the rate of interest, driving innovation, and developing the economy. The banking system of every nation can help boost its economy and remove obstacles to enable the growth of the economy. Based on the purpose of banks can be of various types, such as Central Banks, Commercial Banks, Foreign Banks, Savings Banks, Industrial Banks, etc.
What are Commercial Banks?
Commercial banks play an essential part in the system of banking. They provide banking services for the purpose of making profits. Commercial banks are typically regarded as prestigious due to their ability to provide funds over an array of times, both medium and short-term. Commercial banks are also highly active in accepting deposits. The typical rate of interest on loans is higher than the interest rate offered on deposits. The difference between the two interest rates is then the primary source of revenue or profits for banks. Examples of commercial banks include the State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), Central Bank of India, Canara Bank, Bank of India, etc.
Commercial banks are a financial institution that provides services such as accepting deposits, providing loans as well as bank overdrafts. They also offer certificates of deposit and savings accounts for individuals as well as businesses.
Characteristics of commercial banks
The role of commercial banks in developing countries
A few of the most significant roles of commercial banks in an emerging economy are:
Apart from the typical commercial banking tasks, Banks in developing countries are able to contribute to their economic growth. A majority of the population in these countries is poorly employed or engaged in traditional farming.
There is a severe lack of capital. People are not able to think independently and have a sense of enterprise. Transport methods are not developed. Industries are in decline. Commercial banks assist in the removal of these barriers and encourage economic growth. The importance of a commercial banking institution in a developing nation is explained below in the following points-
1. Mobilizing Savings for Capital Formation
Commercial banks assist in the mobilization of savings by utilizing the branches that are a part of the bank. In developing countries, people are not wealthy, but banks help them save by introducing various deposit plans that meet the requirements of each depositor. They also draw in savings that are not being used by the wealthy. Through mobilizing savings, banks convert them into a profitable investment. This helps in the development of capital for a country.
2. Financing Industry
Commercial banks help the finance industry through a variety of methods. They offer short-term, medium-term, and long-term industrial loans. In India, they offer short-term loans. Latin American countries like Guatemala also provide loans with a medium-term up to 3 years. However, in Korea, commercial banks also provide long-term loans to industries.
In India, commercial banks are responsible for the financing of medium and short-term small-scale businesses and additionally provide hire-purchase finance. Additionally, they provide underwriting for the shares and debentures of large-scale companies. Therefore, they do not just provide financing to Industry but also assist in the growth of the capital market that isn't developed in these countries.
3. Financing Trade
Commercial banks assist in financing both international and domestic trade. The banks offer credit to wholesalers and retailers to purchase goods they trade. They also help in the transportation between one location to another through the provision of various kinds of services like discounting and accepting bills of exchange, offering overdraft services, and issuing drafts, among others. Additionally, they finance imports and exports of developing nations by offering foreign exchange services to exporters and importers of products.
4. Financing Agriculture
Commercial banks aid the huge agricultural sector in developing countries in a variety of ways. They lend to farmers who trade in agricultural commodities. They set up branches in rural areas to supply agricultural credit. They can provide financing directly to farmers for the sale of their products, for the modernization and automation of farms, offering irrigation facilities, expanding land, etc.
They also provide financial aid for dairy farming, animal husbandry as well as livestock breeding, sheep pisciculture, and horticulture. The marginal and small farmers, landless agricultural workers, artisans, shopkeepers, and petty traders in rural areas receive financial aid through the rural, regional banks in India. The regional rural banks function under the umbrella of commercial banks. Therefore, commercial banks satisfy the needs of credit for every type of rural individual.
5. Financing Consumer Activities
The people living in countries that are poor and earning low wages are not able to afford the funds to purchase durable consumer products. Commercial banks provide consumer loans for purchases of items like houses and vehicles, as well as washing machines, refrigerators, and other appliances. In this manner, they aid in improving the standard of living of those residing in countries that are developing by offering loans to consumers for their consumptive actions.
6. Financing Employment Generating Activities
Commercial banks fund employment-generating activities in developing nations. They offer loans to finance students attending medical, engineering, and other vocational institutions. They offer loans to entrepreneurs who are young, as well as engineering and medical graduates and technical people who are establishing their own businesses. The loan facility is offered by a variety of commercial bankers in India. Therefore, the banks do not just assist in the creation of human capital but also help in boosting business activities in developing countries.
7. Assistance in Monetary Policy
Commercial banks help in the economic development of a country by sticking to the monetary policy adopted by the central bank of that nation. In India, the Reserve Bank of India introduces the monetary policy. In reality, the central bank is dependent on commercial banks to ensure the success of its monetary policy, which is in line with the requirements of a rapidly growing economy.
Therefore, commercial banks play a significant role in the development of an economy through lending for trade, agriculture, and Industry. They also assist in the process of human and physical capital creation and following the economic policy of the country.
Advantages of Commercial Bank
The benefits of Commercial Banks are as follows:
The disadvantages of Commercial Bank
The negatives that come with Commercial Banks are as follows:
Overall, it is evident that commercial banks are an extremely vital part of the banking system. Additionally, with the passage of time, the prospects that commercial banks have is growing in relation to the economy. Commercial Banks provide a well-organized financial market in less developed nations by offering financial assistance and meeting the financial needs of people as well as businesses and firms.