Difference between Commercial and Cooperative Banks

Commercial Banks and Cooperative banks are two types of financial institutions that offer a range of financial services to their customers. Commercial Banks works for profit motive whereas Cooperative banks are established based on the principles of cooperation.

What are Commercial Banks?

Commercial Banks are financial institutions that provide a range of banking services to individuals, businesses, and organisations. They are profit-oriented entities that operate on a commercial scale. Commercial banks play a crucial role in the economy by facilitating financial transactions, promoting economic growth, and channelling funds between savers and borrowers.

The primary functions of commercial banks include:

• Deposits
• Lending
• Payment Services
• Foreign Exchange Services
• Investment and Advisory Services
• Trade Finance

Commercial Banks are subject to regulatory oversight by central banks, financial regulatory authorities, and banking regulators. They are required to maintain adequate capital reserves; adhere to regulations regarding liquidity, risk management, and consumer protection; and follow anti-money laundering and counter-terrorism financing guidelines.

Commercial Banks serve as an intermediary between savers and borrowers, promote economic activity, facilitate financial transactions, and provide essential banking services to individuals and businesses.

What are Cooperative Banks?

Cooperative Banks, also known as Co-operative Credit Institutions or simply Co-ops, are financial institutions that are owned and operated by their customers, who are also referred to as members. These banks are established based on the principles of cooperation, mutual assistance, and democratic decision-making. The primary objective of cooperative banks is to meet the banking and financial needs of their members while promoting their economic and social well-being.

Some of the key characteristics and features of cooperative banks include:

• Ownership and Governance
• Focus on Members
• Member Deposits
• Member Loans and Credit
• Social Objectives
• Profit Distribution
• Local Focus
• Regulatory Framework

Cooperative Banks are an essential part of the cooperative movement and contribute to inclusive economic development, empowering individuals and communities through access to financial services and cooperative principles.

Difference between Commercial Banks and Cooperative Banks

Basis	Commercial Banks	Cooperative Banks
Meaning	The financial institutions that provide a range of banking services to individuals, businesses, and organisations are known as Commercial Banks.	The financial institutions that are owned and operated by their customers (also referred to as members) are known as Cooperative Banks.
Governing Act	Commercial Banks are governed by the Banking Regulation Act, 1949.	Cooperative Banks are governed by the Cooperative Societies Act, 1965.
Purpose	Commercial banks focus on providing a wide range of financial services like depositing, lending, investment services, foreign exchange, trade finance, etc.	Cooperative banks are established to meet the banking needs of a specific group or community and aim to promote the economic and social well-being of their members by providing them with affordable banking services.
Area of Operation	The area of operation of commercial banks is large.	The area of operation of cooperative banks is small.
Borrowers	The borrowers of commercial banks are its account holders.	The borrowers of cooperative banks are its member shareholders.
Ownership Structure	Commercial banks are typically owned by shareholders or private investors.	Cooperative banks are owned and controlled by their customers, who are also known as members.
Customer Base	Commercial banks serve a diverse customer base, including individuals, small and medium-sized enterprises (SMEs), large corporations, and institutional clients. They cater to a broader market and operate on a commercial scale.	Cooperative banks primarily serve their members who have a common bond, such as residents of a particular locality, employees of a specific organization, or members of a cooperative society. They have a more localised focus and tailor their services to the needs of their members.
Regulatory Framework	Commercial banks are subject to regulations and oversight by central banks, financial regulatory authorities, and banking regulators specific to the jurisdictions in which they operate.	Cooperative banks also operate within the regulatory framework set by relevant authorities. However, their regulatory environment may vary depending on the country and the specific legal framework governing cooperative institutions.
Governance	Commercial banks are governed by a board of directors appointed by the shareholders or investors. The board makes strategic decisions and appoints senior management to oversee day-to-day operations.	Cooperative banks have a democratic governance structure. Each member typically has voting rights, and decisions are made collectively through a general body or elected representatives.
Interest Rate on Deposits	The interest rate provided to the account holders for depositing money with commercial banks is less.	The interest rate provided to the member shareholders for depositing money with the cooperative banks is slightly high.
Profit Distribution	Profits are distributed to shareholders in the form of dividends and retained earnings for reinvestment.	Instead of distributing profits to external shareholders, these banks may allocate a portion of their surplus to dividends, reserve funds, community development projects, or provide lower interest rates on loans to members.
Profit Retention and Reserves	Commercial banks typically retain a significant portion of their profits for reinvestment and expansion purposes. They also maintain reserves to meet regulatory requirements and absorb potential losses.	Cooperative banks often allocate a portion of their surplus to reserves, which serve as a safeguard against future risks and ensure the stability of the institution.