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Commercial Banks : Features, Advantages & Disadvantages

Last Updated : 09 Jan, 2024
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What are Commercial Banks?

A commercial bank is a financial institution that provides services like accepting deposits, granting loans, bank overdrafts, offering certificates of deposits, and savings accounts to individuals and businesses. Commercial banks are considered to be an important component of the banking system. These are the banks that perform banking services with the aim of earning profits. Commercial banks are generally famous because they provide funds for a different span of time: short-term & medium-term. Also, commercial banks are very active in accepting deposits. Usually, the rate of interest charged on the loans is more than the interest offered on the deposits. The disparity between both interest rates then becomes the primary source of income or profits for the banks. Common examples of commercial banks are the State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), Central Bank of India, Canara Bank, Bank of India, etc.

Characteristics of Commercial Banks

  1. Commercial banks lend money to almost all sizes of businesses and firms.
  2. The credibility and paying capacity of the firm is examined comprehensively before lending loan to any firm. 
  3. A commercial bank is an easy and flexible source of accepting and withdrawing money.
  4. These are the economical source of funds as it manages deposits and withdrawals at a low cost and involves no hidden cost.
  5. It generally provides the loan against some security.
  6. Loans from commercial banks do not require much formality, but have to fulfil the terms and conditions laid by the banks.

Advantages of Commercial Bank

The advantages of Commercial Banks are as follows:

1. Confidentiality of Information: The banks when lends funds or accept deposits do not share the information with anyone. Banks value the privacy of their customers by preserving the secrecy of personal information of customers. The personal details of the customers or the account holders are kept safe with the banks.

2. Economical: Commercial banks are widely regarded as the cheaper funding source. The reason for its being an economical source is that it does not involves any cost for issuing of a prospectus, underwriting fees or any other charges. Banking services under commercial banks are free from any sort of hidden charges.

3. Flexible: Commercial banks are considered to be a flexible source of funding because the borrower can easily borrow money from the banks whenever they are in urgent need of money or funds. The borrowers can easily increase or reduce the amount of borrowings as per their convenience and requirements. The banks make the funds available as and when needed by the borrowers. Also, borrowers can repay the money when they don’t feel the requirement.

4. Lesser Formalities: It’s easy for borrowers to raise funds from commercial banks because it requires no stringent formalities to follow up. As such no paperwork is involved in the whole borrowing process. It requires no formalities like looking for an underwriter or issuing of a prospectus. So, it makes the process hassle-free and smooth.

5. Encourage Savings: Commercial Banks through their operations encourage savings among the general public. With this facility, banks offer a safer way to collect money from individuals, which otherwise they could have consumed impulsively. The amount of savings is subject to some fixed rate of interest. So savings from individuals whether in small or big amount increases the capital accumulation with the banks, which then can be used to invest or lend to the general public.

6. Facilitates Digital Transactions: With the growth of digitisation, commercial banks have emerged as significant financial institution because it provides a technologically advanced platform for making digital payments. Apart from basic facilities, it makes online transfers easy, use of cheques, ATMs, bank drafts, etc. A very few and recent development of commercial banks is the facility of online wallet. Earlier individuals and businessmen had to handle a lot of money which was subjected to theft, but now they can keep their money safe in the wallets and can use to make digital payments. 

Disadvantages of Commercial Bank

Disadvantages of Commercial Bank

The disadvantages of Commercial Banks are as follows:

1.  Procedural Difficulty: While lending funds to borrowers, it’s important for commercial banks to check if the advances are being made to the right entity. The only way to check is to conduct a detailed investigation of the firm’s background and its financial affairs. It follows stringent rules, so it makes the procedure of borrowing very tricky and rigorous.

2. Difficulty in Renewal: Loans from Commercial Banks can be generally borrowed for a short period of time only. It’s almost difficult to renew or extend the borrowings. Also, extending the tenure of borrowed funds can be tough and only fresh loans can be borrowed.

3. Need for Security: Loans from commercial banks can’t be provided without any security. For any amount of loan or advances, there is a requirement of any asset or personal guarantees from the borrowers against which borrowings can be issued. Most of the time, the loan amount is lower than the security’s value. So it has become disadvantageous for the public and firms.

4. Stringent Terms and Conditions: Commercial banks sometimes put forward a few challenging conditions for borrowers before lending loans or funds. At times, terms and conditions are so difficult to fulfil that it hampers the complete borrowing process. So, this restricts the borrowing decision of firms that they even back out from this source of funds and shift to some other source of funds with some feasible terms and conditions.

5. Bankruptcy: Sometimes, the banks may not be capable to provide the amount requested by the borrowers even if that money belongs to the customers and they have only deposited those to their savings account. This happens when the management of the banks does not take proper care of depositors’ or investors’ finances and rather mismanages them. But sometimes, it could also happen due to weaker economic health, like in times of recession when customers do more withdrawal than borrowings.

6. Risk of Online Frauds: Growing digitisation has not only soothed operations but also has given rise to online frauds. Cyber attacks have become more common and often nowadays, ATM cards are more subjected to theft, hackers hack the accounts and passwords for digital payments, and steal money online. There’s an urgent need to strengthen the game of internet banking. 

On the whole, it can be concluded that commercial banks are a very crucial component of the whole Banking system. Also, gradually with time, the outlook of commercial banks is expanding with regard to the economy. Commercial Banks offer a proper organised financial market in less developed countries by providing financial assistance and fulfilling the financial needs of individuals, firms and businesses.

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