Banking was in existence in one form or another from ancient times onwards as an essential part of the society to manage the financial activities of individuals as well as businesses.
Clever banking ideas and facilities are the best way to grow one’s finance and organize funds to use for different purposes. The deposits of people should be managed effectively and provide them full safety and options to grow their savings by providing interests.
Usually, banks function based on the surplus capital they collect from the difference in the interest they pay to the customers for their deposits and the interest they collect from the customers for their loans.
Commercial Banks and Small Finance Banks are parts of the current banking sector instrumental in receiving deposits and providing loans.
Commercial Bank vs Small Finance Bank
The main difference between Commercial Bank and Small Finance Bank is that there is no limitation regarding the target customers of commercial banks whereas Small Finance Banks have target customers like small scale farmers, small businesses, unorganized workers as well as MSME.
Comparison Table Between Commercial Bank and Small Finance Bank (in Tabular Form)
| Parameter of Comparison | Commercial Bank | Small Finance Bank |
|---|---|---|
| Capital limit | No limit for the capital that can be incurred by a commercial bank | Minimum capital paid up should be a hundred thousand dollars |
| Loan services | Can offers loans to all customers of the Bank | It can offer loans to customers. But should extend 75% of loans to the priority sectors. |
| Revenue earning | An earn revenue employing lending services and transaction charges. | Can earn revenue utilizing lending services to the target customers. |
| Target customers | No restriction to any region. | Target customers are small farmers, small businesses, unorganized workers as well as MSME. |
| Branches | Can open branches anywhere within the country | For the first 3 years, 25% of branches should be in rural areas. |
What is Commercial Bank?
A commercial bank is a financial establishment that can accept deposits and offer the services of checking accounts.
A commercial bank is capable to make different loans and give basic financial products such as CDs (certificates of deposit) and provide savings accounts to small businesses as well as individuals.
A commercial bank is accessible to everyone to do their banking. Their main source of income is from the interest incurred by giving loans to individuals and small businesses along with providing auto loans, mortgages, and so on.
Commercial banks are collecting capital to give loans usually by checking accounts, deposits of customers, saving accounts, money markets, and so on.
The customers who deposit money in the banks are paid interest by the banks. The interests paid to the customers for their deposits are less than the interest they ought to pay for their loans.
The mode of money creation followed by a commercial bank will be similar to that of a central bank or according to the norms of the Reserve Bank.
At present, many commercial banks operate completely online, so all the transactions of such banks are only via electronic means.
The total sum of the money acquired by a commercial bank can be calculated by the spread between the interest it is paying to the depositors and the interest the bank acquired on the loans issued is known as net interest income.
The investments of the customers within the commercial banks in the form of savings and fixed deposits are insured by the Reserve Bank and the money can be withdrawn easily.
The functions of a commercial bank can be classified as primary functions and secondary functions. The primary functions of a commercial bank are deposit acceptance and giving loans to their clients.
The three types of deposits acceptable for a commercial bank are current account deposits, fixed deposits (Time deposits) and savings account deposits.
The deposits that can be withdrawn on demand by the depositors at any time are called demand deposits. Current account deposits are demand deposits. They are chequable deposits and are highly liquid.
Fixed deposits or time deposits are non-demand deposits and they are not chequable. The liquid rate of fixed deposits is comparatively less.
Usually, the three types of loans provided by a commercial bank are cash credit, demand loans, and short-term loans. Commercial banks invest the surplus earned in three kinds of securities like government securities, other approved securities as well as other securities.
What is Small Finance Bank?
The Small Finance Bank is a financial institution in the private sector by providing basic banking activities such as underserved and unserved sections. They may include small scale farmers, small and micro industries as well as unorganized sector entities.
The restrictions applicable to regional banks and local area banks are not usually applicable to small finance banks.
Small Finance Banks in India are working according to the guidelines issued by Reserve Bank on 2014th November 2014.
A Resident individual or a professional with a minimum of ten years of experience in the banking/finance sector is eligible to start a small finance bank.
Currently operating small finance companies such as Non-Banking Finance companies, microfinance establishments, local area banks are eligible to convert as a small finance bank.
The minimum capital mandatory for a small finance bank is 100 crore and its 40% can come from promoters. After 12 years of functioning, this should reduce to 26%.
Once the Small finance Bank attained the net worth of Rs. 500 crores, within three years the shares of it should list on a stock exchange.
The norms applicable to commercial banks are relevant to small finance banks also in the areas of maintaining a Cash Reserve Ratio as well as Statutory Liquidity Ratio.
Main Differences Between Commercial Bank and Small Finance Bank
- The main difference between Commercial Bank and Small Finance Bank is there is no limit for the capital acquired by a Commercial Bank whereas Small Finance Bank should pay up a minimum capital of hundred crores.
- A Commercial Bank can offer loans to all the customers whereas a Small Finance Bank should provide 75% of the loans to the priority sectors.
- A Commercial Bank can earn revenue by loans and transaction charges. The main source of income for Small Finance Banks is by lending services to the target customers.
- A Commercial Bank can lend its services to everyone interested but the services of a Small Finance Bank are for small farmers, small businesses, and unorganized workers and MSME (micro, small and medium enterprises).
- A Commercial Bank can open branches anywhere within the country whereas it should focus on the rural areas for the first three years of establishment.
Conclusion
Banking is essential in today’s world. People are dependent on them for their financial needs such as getting loans and mortgages, making deposits, etc. Commercial Banks and Small Finance Banks are two types of banks in India.
Financial banks can be termed as new generation banks as they came into existence only after 2014 for the benefit of small-scale farmers, businesses, especially in rural areas of India. If one can move forward following the schedules and guidelines, banks are most beneficial for people to earn financial stability and security.
References
- https://www.ajol.info/index.php/aref/article/view/86945
- https://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-2850