Difference Between Commercial Bank and RBI (With Table)

The history of banking dates back to the times of Mesopotamian civilization where grain loans were provided to traders and farmers supplying goods and services to the people of Babylonia and Mesopotamia.

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However, the modern banking system developed in Italy under the name Banco. In India, it was the colonial rule that introduced the concept of institutional banking.

Since then India has developed a gigantic banking system for itself which not only acts as a mediator between the depositors and the borrowers but also tries to address the various financial needs of agriculture, trade, and industry, thereby giving a boost to the national economy.

This enormous banking system of India is regulated by the Reserve Bank of India (RBI) and Commercial Banks work under the direction of the RBI.

Commercial Bank vs RBI

The main difference between Commercial Bank and RBI is that Commercial Bank is a financial institution that offers loans and other related services and accepts deposits from individuals and firms while the RBI regulates the structure and function of the former being “the supreme monetary and banking authority”.

 

Comparison Table Between Commercial Bank and RBI (in Tabular Form)

Parameter of Comparison

Commercial Bank

RBI
Ownership

Commercial Banks are either owned by the government (Public Sector Bank) or by private players like individuals or corporations (Private Sector Banks)

It is fully owned by the Government of India.

Objective

They are established with the ultimate motive of serving the interests of their owners that is earning profit.

The RBI was established to prevent the government from taking control of currency and credit and to extend banking facilities all over the country.

Governing Act

Commercial Banks in India are governed by the Banking Regulation Act, (BR Act), 1949

The Reserve Bank of India was established under the Reserve Bank of India Act, 1934

Lending facilities

It extends lending facilities and other related offers to the general public and enterprises and accepts deposits from them

It is described as “the banker of the government” and extends loans to other banks as the “lender of last resort”

Currency Issuance

Performs no such role.

As the Central Bank of India, it has the authority to issue and print currency.
 

What is Commercial Bank?

It is a financial institution that accepts diverse forms of deposits from individuals and associations. These deposits are then advanced to the prospective borrowers at a high rate of interest. The depositors are also allowed to withdraw money from their accounts by using a cheque or a card. In this way, it serves as an intermediary between the depositors and the borrowers and helps in running the lifecycle of the national economy.

Post-independence, to regulate the Commercial Banks and other banks (Regional Rural Banks and Co-operative Banks) of India, the Banking Regulation Act, 1949 was passed. Besides, certain rules, regulations, and guidelines related to banking and other financial services are issued by the Reserve Bank of India under the RBI Act, 1934.

Furthermore, the Department of Financial Services operating under the Ministry of Finance supervises and legislates on the functioning of banks and other financial institutions.

Following are some of the important functions performed by a Commercial bank:

  1. Accepting deposits: The bank accepts three forms of deposits viz savings, current and fixed. The excess balance obtained from these deposits is lent to the prospective borrowers.
  2. Lending: After collecting the deposits, the banks keep a small amount of those deposits as reserves which then extended to the prospective borrowers in the form of a loan, cash credit, overdraft, etc. for higher interests. Lending constitutes a primary source of profit for the banks.
  3. Investment: Investment of surplus fund also constitutes an important source f income for the Commercial Banks. There are mainly three types of securities in which Commercial Banks invest viz government securities, other approved securities, and other securities.
  4.  To make banking simpler for the account holders, the Commercial Banks provide facilities of ATMs, Credit Card, Debit Card, Prepaid Card, and Internet Banking, and so on.
  5. Agency function of the bank: The bank also acts as a trustee of its account holders and gets a share of their income for performing agency functions like transfer and collection of funds, payment of taxes, bills, insurance premiums, etc., buying and selling of shares and securities, letters of references, etc.
  6. General Utility Services: The banks also offer certain general utility services like Traveller’s cheques, locker facilities and buying and selling of foreign exchange, and so on.

There are mainly four types of Commercial Banks in India, namely Private Sector Banks, Public Sector Banks, Regional Rural Banks, and Foreign Sector Banks.

 

What is RBI?

The Reserve Bank of India is the apex authority of all financial institutions in India. Established under the Reserve Bank of India Act, 1934 on 1st April 1935, it was originally owned by private shareholders. After nationalization in 1949, it is now solely owned by the government of India.

 The union government appoints a Central Board of Directors for four years which is responsible for its governance.

It was originally formed to serve two purposes:

  1. To detach the government from the control of currencies and credits
  2. To extend banking facilities all over the country.

However, over time, the RBI assumed more extensive functions, some of which are as mentioned below:

  1. Supreme Monetary Authority: As the sovereign monetary authority of the country, the RBI is responsible for formulating, implementing, and monitoring monetary policies so that prices remain stable and the productive sectors receive an adequate flow of credit.
  2. Opening and Licensing of Functions: As the regulator and supervisor of the financial system, the RBI sets the norms and parameters for opening up and licensing of banks and regulates their operations so that people’s trust in the system remains intact, their deposit’s interest is protected and cost-effective banking services are provided to them.
  3. It regulates foreign exchange, government security markets, and financial derivatives so that external trade and transactions are facilitated and the foreign exchange market of India is developed and maintained.
  4. Currency Issuance: It issues, prints, and exchanges currency and coins. It can also destroy them if they are no longer fit for circulation.
  5. It performs a wide range of developmental functions to promote national objectives like extending institutional banking facilities to every nook and corner of the country.
  6. It is described as “the banker of the government” for its performance of merchant banking functions for the union and state governments.
  7. It provides loans to all Scheduled Banks and maintains their banking accounts.

In this way, it regulates and controls the financial and banking system of the country.

Main Differences Between Commercial Bank and RBI

  1. The main difference between the RBI and a Commercial Bank is that the former acts as the banker of the government and bank of the banks while the latter acts as the banker of the businesses and individual citizens of the nation.
  2. The Reserve Bank of India acts as the highest monetary and financial authority of India. But no such authority has been vested on the Commercial Banks.
  3. The Government of India is the sole owner of the RBI. While a Commercial Bank may be owned by the government or by a private institution.
  4. The RBI has been established under the Reserve Bank of India Act, (RBI Act), 1934, and its operations are governed by the Act. In contrast to that, Commercial Banks are governed by the Banking Regulations Act, 1949.
  5. Being the Central Bank of India, the RBI performs a wide range of functions like issuing and distributing currency and coins, providing loans to the government and banks, stabilizing inflation rates and the exchange rate of rupees, and performing a variety of developmental functions. While providing lending and deposit facilities and other related offers to the citizens and firms are the only functions performed by the Commercial Banks.

 

Conclusion

The RBI acts as the supreme financial institution of India and is described as the “lender of last resort” as it is this body that provides loans to the banks including the Commercial Banks when the latter is on the verge of collapsing as well as to the government.

Commercial Banks, on the other hand, provide lending and deposit facilities to the general public and firms, and thus, along with the RBI, it caters to the financial needs of the people of India.

References

  1. https://books.google.com/books?hl=en&lr=&id=jYf0AQAAQBAJ&oi=fnd&pg=PR1&dq=Commercial+Bank+and+RBI&ots=aQFl76S6Pd&sig=LXm-TK1KvZlJwm1B4LSwMoZ4V04
  2. https://journals.sagepub.com/doi/pdf/10.1177/0019466220060109
  3. https://www.nber.org/chapters/c7458.pdf

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