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Difference between Central Bank and Commercial Bank

Banks are the most essential aspects of an individual's life. All the life savings of an individual, including salary, funds, investments, etc., are kept in the bank accounts. It depends upon us as to which bank we want to deposit our money in. Banks are the monetary authorities of the nation. The state bank and reserve bank are the two most important banks in India. Banks are required for stabilizing the economy. So, today we will be discussing about the commercial bank and central bank. There are several differences between the commercial bank and central bank, which we will discuss later. Let us begin by understanding the primary meaning of these terms.

Central Bank

The bank which takes care of the monetary policy of the state is called as the Central Bank. Central Bank has the monetary authority of the nation. It is also called as the Reserve Bank. The policies formed by the Central Bank have to be followed by the other small banks. The main objective of the Central Bank is to stabilize the economy, reduce unemployment, keep an eye on the monetary matters of the country, and prevent inflation. Examples of Central Bank include the European Central Bank, the Federal Reserve Bank, Bank of Japan, etc. The government owns the Central Bank under the Ministry of Finance department. Commercial bank is the biggest bank in the nation. The rules and policies are made by this bank. The Central Bank of India is located in Mumbai, also known as the financial capital of India. Central Bank performs many functions. For instance, they serve as the agent and advisor to the government, controller of credit, clearing house, etc. The first central bank was Riksbank, which was established in the year 1668 by Johan Palmstruch.

Commercial Bank

A commercial bank is an institution that receives the deposits of the people and then provides loans for investment and profit earning. These banks provide basic financial facilities and products like the certificate of deposit (CD), saving accounts, etc. Examples of Commercial Bank includes Dena Bank, Corporation Bank, State Bank of India, Punjab National Bank, etc. A Commercial Bank has various functions like accepting deposits, utility functions, granting loans, etc. Commercial Banks are the banks whose main purpose is to yield profits. These banks do banking business in order to earn profits. Commercial Banks are also known as the Depository Financial Institution. The largest commercial bank in India is the State Bank of India. It is a public sector bank.

State Bank is also one of the richest banks in India. The first bank established in India under the SBI was the Bank of Calcutta in the year 1806. Now, let us discuss the contrasting points between the Commercial Bank and Central Bank.

1. A Central Bank is defined as a financial institution that looks after the country's economic and financial stability. On the other hand, a Commercial Bank is a financial institution that receives people's deposits in order to earn profits.
2. A Central Bank is of the highest authority in the country. A Commercial Bank is the richest bank in the nation.
3. A Central Bank devises new policies and rules which have to be followed by the other banks. A Commercial Bank has no such authority of making policies or rules.
4. The Central Bank acts as a banker to several other banks and the government. A Commercial Bank serves as a dealer to the citizens of the nation.
5. The Central Bank came into being under the Reserve Bank Act of India, 1934. The Commercial Bank came into being in the year 1949 under the Banking Regulation Act.
6. A Central Bank is owned by the public sector/ government. A Commercial Bank is owned by both the public and private sectors.
7. A Central Bank does not make profits out of the deposits. Commercial Banks are solely made for earning profits through people's deposits.
8. A Central Bank is the highest Monetary authority. This bank has many powers to exercise. A Commercial Bank has no authority like this.
9. The main purpose of the Central Bank is the welfare of the citizens and bringing economic stability in the country. The primary objective of the Commercial Bank is to earn profits.
10. Central Banks are the ultimate money supply sources in the nation. Commercial Banks do not perform such monetary functions.
11. The right to print currency notes and issue them lies with the Central Bank. Commercial Banks have no such right.
12. Central Bank deals with the government and several other banks. Commercial Banks deal with the general public.
13. There is only one Central Bank in every nation. There are many Commercial Banks in the country.
14. Examples:
  • Federal Reserve Bank
  • Bank of Japan
  • European Central Bank
  • Dena Bank
  • Punjab National Bank
  • State Bank of India

So, these are some of the significant points of contrast between the Central Bank and the Commercial Bank. Well, both of these banks perform several functions for maintaining economic stability in the nation. So, let us discuss some functions of these banks.

Functions of Central Bank

  1. The Central Bank has the authority to issue the currency.
  2. Central Bank exercises the power of control and directs the Commercial Banks.
  3. Credit operations of Commercial Banks are controlled by the Central Bank.
  4. The Central Banks serves as an advisor to the government.
  5. The Central Bank is the manager of the Foreign Exchange Reserves.
  6. The information related to the banking and financial sector is recorded by the Central Bank.

Functions of Commercial Bank

  1. The Commercial Banks accept deposits from people and then use them to provide loans to others. Interest is paid on such deposits by the bank.
  2. The sole motive of these banks is to earn profit.
  3. Functions like collecting bills of exchange, trading debentures, and shares are taken care of by the Commercial Banks.
  4. Valuable like documents, jewelry, etc., are kept safely in the Commercial Banks.
  5. Commercial Banks also provide several facilities like ATM cards, cheques, debit cards, credit cards, etc.

So, these are some of the functions of the Commercial Bank and Central Bank. Both of these banks are essential for maintaining economic stability in the country. Central Bank is owned by the government, while both public and private sectors own the Commercial Bank. Thus, both Commercial Bank and Central Bank are necessary parts of the nation.

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