Advantages and Disadvantages of Commercial Banks

Introduction

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

1. Commercial banks loan money to all kinds of firms and businesses.
2. The company's credibility and the ability to pay are assessed in depth prior to lending money to any business.
3. Commercial banks are an easy-to-use and flexible way of cash withdrawal and acceptance.
4. They are the most economical sources of funds since it handles withdrawals and deposits at a minimal cost and has no hidden fees.
5. It usually provides a loan against a security.
6. Commercial banks' loans don't require a lot of formality. However, they must comply with the terms and conditions set by the 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:

1. Privacy of Information: Banks that lend money or take deposits do not disclose the data to anyone. The banks respect their customers' privacy by safeguarding the privacy of their personal details of their customers. The personal information of customers or account holders is secure with banks.
2. Economical: Commercial banks are generally thought of as the most economical source of funding. The reason why it is an economical option is that it doesn't have any charges for the issue of prospectuses, underwriting fees, or other fees. Commercial banks' banking services are completely free of hidden fees.
3. Flexible: Commercial banks are believed to be a source of finance since the borrower is able to take money from banks when they're in need of funds or money. The borrower can quickly increase or decrease the amount they borrow according to their needs and necessities. The banks will make the funds available at any time to the borrower. In addition, the borrower can pay back the loan if they don't think they are required to.
4. Simpler Formalities: It's simple for borrowers to obtain money from commercial banks since it doesn't require any formalities to be followed up. There is no paperwork required in the entire borrowing process. There are no formalities, such as seeking an underwriter or the issuance of a prospectus. Therefore, it is easy and smooth.
5. Encourage savings: Commercial Banks, through their activities, encourage savings among the general population. Through this service, banks provide a safe option to take cash from people, which, otherwise, they might have used in a hurry. The amount of savings is dependent on a fixed amount of interest. Therefore, savings from individuals in big or small amounts will increase the amount of capital that is accumulated by the banks. The capital can be utilized for investing or lending to the general population.
6. Facilitates Digital Transactions: With the rapid growth of digitalization, commercial banks have emerged as important financial institutions because they offer a highly technological platform for digital transactions. In addition to basic services, it also makes online transactions simple and enables using ATMs, cheques, bank drafts, etc. A recent and very limited improvement in commercial banks includes the availability of online wallets. In the past, businessmen and individuals were required to manage a large amount of cash that was susceptible to theft. However, today they are able to keep their cash secure in their wallets and pay digitally.

The disadvantages of Commercial Bank

The negatives that come with Commercial Banks are as follows:

1. Procedural Difficulty: When providing loans to borrowers, commercial banks need to verify that the loans are going to the correct entity. The only method to confirm this is to conduct an in-depth review of the background of the company/individual and financial records. The company adheres to strict rules, which makes the process of borrowing extremely difficult and thorough.
2. The difficulty of renewing loans: Loans taken from Commercial Banks can be generally borrowed for a brief period of time only. It is almost impossible to extend or renew the loans. In addition, extending the duration of the borrowed funds is difficult, and only fresh loans are able to be borrowed.
3. Need for security: The need for security is a requirement when loans from commercial banks cannot be made without security. In the case of any loan or advances, there's the requirement of any personal guarantee or asset from the borrower against which loans can be made. The majority of the time, the loan amount is smaller than the value of the security. This has resulted in a negative impact on both firms and the public.
4. Stringent Terms and conditions: Commercial banks often offer a number of challenging conditions for their borrowers prior to granting loans or funds. In some cases, conditions and terms are difficult to fulfill, and they interfere with the whole borrowing process. Therefore, it limits the decision to borrow in the case of companies and even forces them to shift from this particular source of funding and switch to another source of funding with reasonable requirements and terms.
5. Bankruptcy: Sometimes, banks might not be able to give the amount requested by the borrower, even though the funds belong to customers and they've transferred it to their savings accounts. This is because the bank's management is not taking proper care of investors' or depositors' finances and instead attempting to mismanage the funds. Sometimes, this can occur due to poorer economic health, for instance, during times of recession, when people withdraw more than they borrow.
6. Risk of online frauds: The increasing digitization of the internet has not just slowed down operations but also led to a rise in online fraud. Cyberattacks have become more frequent, and often, ATM cards are more vulnerable to theft. In addition, hackers steal passwords and accounts to make digital transactions and also steal funds online. There is a need to enhance the security of online banking.

Conclusion

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.