Commercial Bank
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Commercial Banks
Commercial banks are institutions that perform the function of accepting deposits and giving loans to the members of the public for investment purposes. Commercial banks are banks that are accessible to the members of the public. They offer services to the general members of the public and other companies. There are different types of commercial banks based on the function the bank performs, type of the bank, and other functions such as the kind of services that commercial banks perform and banking channels these banks use.
Different types of commercial banks
There are three major categories of commercial banks.
- Public Sector Banks
Public sector banks refer to banks that have been nationalized by respective governments to allow deposits and advance loans to members of the public. These banks are opened to members of the public, and they are free to buy the shares of the bank to become a shareholder of the bank. In most countries, the government holds the largest stake of public banks (Rampini, Viswanathan, & Vuillemey, 2019). Activities of public, commercial banks are influenced by the government through the central bank. The government will always intervene to ensure the interest rates are kept low to protect the interest of the citizens.
- Private Sector Banks
Private sector banks operate almost in the same manner as public, commercial banks, but the only difference between the two is that private businesses and individuals are the largest shareholders of the private banks. Private sector banks are registered as banks with limited liability. The bank rates of private sector banks are relatively high as compared to public sector commercial banks.
- Foreign Banks
Foreign banks are banks with their headquarters in foreign countries. Most foreign banks have their branches across different countries in the world. Most of the major decisions of foreign banks are made at the banks’ headquarter. Due to increased globalization, the number of registered foreign banks has gone up, with most of them operating in different parts of the world to facilitate international trade (Rampini, Viswanathan, & Vuillemey, 2019). A good example of a foreign commercial bank is Bank of Baroda, which has headquartered based in India but has several branches across the world.
The Services that Public, Private and Foreign Commercial Banks Offer
The three categories of banks perform almost similar functions with just a few exceptions in terms of services offered by each bank. The bank charges are also likely to vary with the category of the bank. The main functions of the banks are illustrated as follows:
Primary Functions
- Accepting deposits
There are two types of deposits that these banks offer (demand and time deposits). Demand deposits describe deposits that account owners can withdraw their money at any time without necessarily giving prior notice to the bank (Kidwell et al., 2016). Time deposits are deposits put in a fixed deposit account until the stated period expires. The owner of the account can request for the withdrawal but after a specific period of time or upon giving the bank notice of the request to withdraw money from the account.
- Advance Loans
Both public, private and foreign banks often advance loans to citizens and other commercial banks. The major distinction among the three banks is the amount they charge as interest rates to the members of the public. Most private banks serve higher interest rates on borrowers.
Secondary Functions of Commercial Banks
Secondary functions are classified into three major categories. These include agency functions, general utility functions, and other functions that do not fall within the two categories.
Agency Functions
Collect checks and bills of exchange on behalf of their clients through clearing house facilities. The clearinghouse facilities are provided by central banks (Kidwell et al., 2016).
Collecting incomes
Commercial banks collect dividends, interests, pensions, and interest on investment on behalf of the customer
Paying expenses
Pay various obligations such as telephone bills, school fees, rents, and insurance premiums on behalf of the customer.
General Functions
- Provide locker facilities
- Issue travelers’ checks
- Deal with foreign exchange
- Transfer funds
Balance Sheet Structure of Commercial Banks
Public, commercial banks are regulated by the government, and members of the public are obligated to access the balance sheet of public, commercial banks because the banks are opened to members of the public (Kidwell et al., 2016). Public, commercial banks are also expected to publish their financial statements regularly and ensure the information is accessible to members of the public.
The private sector, on the other hand, do not share their financial statement with the members of the public but only among the shareholders of the firms. Bank statements of foreign banks are made at the headquarter of the bank and may not be accessible for locals or other employees who work in remote branches across the world.
References
Rampini, A. A., Viswanathan, S., & Vuillemey, G. (2019). Risk management in financial institutions. The Journal of Finance.
Kidwell, D. S., Blackwell, D. W., Sias, R. W., & Whidbee, D. A. (2016). Financial institutions, markets, and money. John Wiley & Sons.