The primary function of a bank is to support the economic system by acting as a mediator between depositors and loan seekers. Banking services are essential for the development of a country, functioning as the back-bone to economies.
There are three categories of Banks, namely Commercial Bank, Co-operative Banks and Developmental Banks. These can be differentiated on the basis of the purpose they serve in an economic system.
Commercial Bank vs Development Bank
The main difference between a Commercial Bank and a Development Bank is that a Commercial Bank functions to provide financial services to industries and individuals, whereas a Development Bank is set up to provide funds for infrastructural and economic development.
Comparison Table Between Commercial Bank and Development Bank (in Tabular Form)
| Parameter of Comparison | Commercial Bank | Development Bank |
|---|---|---|
| Definition | Banks that provide services to individuals and industries. | Banks that function as multi-purpose financial institutes, with a broad development agenda. |
| Ownership | Set up under the ‘Companies Act’ | Set up under a Special Act |
| Nature | Profit Oriented | Development oriented |
| Funds | Funds are raised through investments and deposits made by Depositors | Funds are borrowed and acquired by selling securities. |
| Purpose | To gain profit by lending money at high-interest rates | To attain social welfare through financial aid |
| Clients and Customers | Individuals. Business industries | Government and Corporates |
What is Commercial Bank?
A commercial bank is an institution where most people seek financial services. As a financial institution, it offers accounting services, deposits, loans and other banking products like certificates for deposits. The functioning of a commercial bank is primarily profit-driven. The main source of profit for commercial banks is loan interest.
These banks offer safe deposits to companies and individuals at a lower interest rate, offering loans to borrowing parties at higher interest rates. The interest rate offered to depositors is called the borrowing rate and the interest charged to loan seekers is called the lending rate. the difference between the borrowing rate and the lending rate accounts to the bank’s profit also called Spread.
Loans issued by Commercial Banks can vary highly depending on various factors. These may involve mortgages, personal loans, automobile loans etc. Certain banks specialise in a specific category of loans, such as gold or home loans. Since Commercial Banks borrow to lend, Loans remain a distinctive characteristic of Commercial Banks.
Commercial Banks can be characterized as Scheduled and Non-Scheduled Banks, covering National Banks, State Banks, Foreign Banks and Private Banks.
A Scheduled Bank is the one that is a part of the Second Schedule of Reserve Bank of India. Such banks must have a reserve of a minimum of 5 Lakhs and a paid capital. Schedule Banks can reap certain benefits including borrowing credit from the Reserve Bank of India.
A Non-Scheduled Bank is any bank that has not been included in the Second Schedule of Reserve Bank of India. Such Banks are smaller banks with limited operations.
The functions of a Commercial Bank can be divided into Primary Functions and Secondary Functions.
The Primary functions of a Bank include accepting deposits in the form of recurring accounts, fixed deposits, saving accounts and current accounts and Advancing loans such as homes loans, personal loans, loans against mortgage, shares and securities.
the Secondary functions of commercial banks are the general utility services and banking services offered by the banks. Other functions include investment and agency functions such as foreign transfer, income tax arrangements, sales, securities etc.
What is Development Bank?
Development Banks are financial structures that have a primary agenda of aiding infrastructural Development and providing loans to the agricultural and industrial sector. They function as multipurpose financial institutions providing loans to both private and public sector and engaging in term lending and security investment.
Development Banks are essentially lending institutions that can be distinguished by their broader development orientation.
Hence one can define a Development bank as a financial institution whose motive is to aid and finance the basic needs of the society. They achieve the agenda of promoting development by offering loans and aids to sectors such as agriculture and industries at a subsidized rate.
Development Banks do not function with the primary goal of profit-making. the loan structures offered by development banks are evidently different from other banks. Development banks specialise in offering long term loans.
Development Banks can be categorized into the following types;
- Industrial Development Banks- These are the banks that specialize in providing loan structures to Industries. Example- Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), and Small Industries Development Bank of India (SIDBI).
- Agricultural Development Banks: Bank that devise and provide specialised schemes for farmers and other primary sectorial needs., for example, the National Bank for Agriculture & Rural Development (NABARD).
- Export-Import Development Banks: Banks that function as overseas financial institutions assisting cross border trade and investment in trade capital. for example, Export-Import Bank of India (EXIM Bank).
- Housing Development Banks: Entities that function to promote housing finance at local and regional levels established under the housing act. for example, the National Housing Bank (NHB).
Main Differences Between Commercial Bank and Development Bank
- A commercial bank is a financial institution that engages in the dual-natured agenda of depositing money and loan providing to individuals and cooperates, whereas Development Banks engage in financial activities to aid infrastructural and economic development.
- The primary aim of a commercial bank is to derive profit through interest on loans, while Development Banks are not profit-centric.
- Commercial Banks specialise in providing short term loans and saving plans for individuals and corporates while Development Banks focus on deriving long term loan structures for government and social sector.
- The primary source of funds for Commercial Banks is the money deposited by people, while a development bank gathers it’s funded by borrowing from the government or selling securities.
- Commercial Banks are reactive in nature, in the sense that they respond to business opportunities based on the bankability of an idea, while Development Banks are proactive as they engage in promoting projects and building companies.
- The clientele of commercial banks includes general public and businessmen, while a development bank caters to the need of Government and Development Sector.
Conclusion
Banks function as the support system to any economy. Commercial Banks and Development Banks are two broad categories of financial institutions with distinct roles and responsibilities. A commercial bank perform the role of a bank for the general public, offering deposition services and lending loans. A development bank, on the other hand, is a specialised structure that is devised to aid and support the economic and infrastructural development of the region.
The characteristic difference between a Commercial Bank and development bank is the profit-driven nature of the former and the Growth-oriented focus of the later.
References
- https://www.scirp.org/html/14-1040071_17838.htm
- https://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-6146
- https://www.adb.org/sites/default/files/publication/189130/adbi-wp583.pdf