Commercial banks are the mainstays of a nation’s economy. Commercial banks are the financial intermediaries, mobilising the lenders’ money for the borrowers. The functions of commercial banks range from accepting deposits to lending, and they are directly involved in subsidising economic activity either on an individual basis or on an industrial level.
Like everything else, however, commercial banks have their merits and demerits. Individuals, companies, and policymakers using banking systems repeatedly must be aware of both the merits and demerits.
Commercial bank’s meaning
Commercial banks are the ones that are managed on a scale of finances and take deposits, provide facilities in the form of checking accounts, give loans, and change plain money instruments such as savings accounts and certificates of deposit. The major revenue sources for them come in the form of interest against loans and service charges against many services.
Broadly, two types of commercial banks exist:
- Public Sector Banks – government-owned and state-controlled
- Private Sector Banks – controlled by private institutions and owned by private institutions
Strengths of Commercial Banks
1. Financial intermediation
One of the strongest arguments in favor of commercial banks is that they are financial intermediaries. They purchase public savings and invest them in productive pursuits by lending money to business houses, governments, and individuals.
2. Convenient and safe deposits
Commercial banks offer a haven for people to store their money. Current accounts, savings accounts, and fixed deposit accounts give people the security of money in the knowledge that it is safe and will be earning interest in the long run.
3. Loan and credit facilities
Commercial banks provide various credit facilities—business loans, personal loans, house loans, education loans, and credit cards. Commercial banks facilitate individuals to purchase housing, education, or attend to emergencies, whereas firms can undertake businesses and expand their operations.
4. Encouraging saving and investment
Commercial banks encourage individuals to save in the form of interest paid for fixed deposits and savings. Commercial banks invest these savings in other financial assets, and the overall economy will grow.
5. Promoting trade and industry
Banks provide financial accommodation in the shape of letters of credit, bank guarantees, and bill discounting, which facilitate foreign and domestic trade. Banks provide industrial and commercial houses with working capital finance, term loans, and overdraft facilities.
6. Payment facilitation
Commercial banks transformed the payment system. With checks, debit/credit cards, mobile banking, internet banking, and UPI, they facilitate payment quickly, traceably, and securely.
7. Employment generation
With their hundreds of thousands of offices and cyber networks, commercial banks are mammoth employers in any nation. They provide jobs of all types, from clerks to managers, loan officers, marketing individuals, and computer professionals.
8. Operation of monetary policy
Commercial banks have a very significant part in a country’s monetary policy achievement. By lending and deposit interest rates, cash reserve requirements, and credit control, they enable the central banks to keep watch over inflation and gain financial stability.
9. Credit creation
Commercial banks create credit in the economy by extending more than their deposits held with them (under the fractional reserve system). It boosts purchasing power and facilitates growth.
10. Financial inclusion
Over the last few years, rural and under-banked groups have been tapped by commercial banks, and banking operations have been introduced to the unbanked client. It is a guarantee for poverty alleviation and inclusive growth.
Commercial bank limitations
1. Profit motive
Since they are mainly business-focused, commercial banks sometimes get involved in high-return activities rather than socially rewarding but low-return activities. It may lead to the avoidance of activities like farming, small and medium enterprises, or poverty reduction schemes.
2. Limited risk appetite
Commercial banks do not take risks. Banks may refuse to lend to new entrepreneurs or small-size entrepreneurs without any credit history, although refusal has far-reaching effects in terms of employment and innovation.
3. Excessive service charges
Banks typically impose account maintenance, overdraft, late payment, ATM withdrawal, and other charges. These are typically excessive charges, particularly to bad account holders.
4. Excessive dependence on collateral
Commercial banks can ask for high collateral such that they can lend. This is the main concern of entrepreneurs and individuals who possess no or very few assets but need funds such that they can develop or even survive in business.
5. Lending risk and Non-performing assets
Banks are susceptible to bad loans during a period of economic downturn. Inadequate credit analysis and unethical borrowers have the potential to create huge amounts of NPAS, thereby affecting the liquidity and profitability of the bank.
6. Lack of personalisation
Commercial banks will use a traditional product and service approach. Compared to specialist or private banking institutions, they lack the resources to be as flexible as they would like to be in trying to target financial products that are tailored to meet customer requirements or markets.
7. Bureaucratic inefficiency
Particularly in government sector banks, the clients will be offered slow processing, over-documentation, and low personalised service. Such inefficiency can become time-consuming and exhausting.
8. Cyber and security risks
Commercial banks, and thereby all the banking institutions, also experience real cyber risks with more digitalisation. Hacking, phishing, and data breach attempts breach the financial security and customer data.
9. Financial illiteracy
Commercial banks only give financial products and do not guide their consumers to practice the norms of right borrowing, saving, and investment steps. A debt trap or incorrect usage of financial facilities results from this.
10. Changing interest rates: influence
Shifting interest rates immediately affect savings as well as loan-taking activity. Borrowing tends to fall out of favour at high rates, and reducing rates discourages one from saving. Swings may undermine business as well as single-unit planning.
Conclusion
The modern economy depends heavily on commercial banks as its foundational element. Through their financing capabilities for businesses and investment encouragement and monetary policy development, and financial service delivery, banks emerge as essential components that drive economic advancement. Commercial banks operate through a broad network that extends from individual clients to major corporate entities for their financial activities.
Auction Dunia understands the primary importance of commercial banks because they enable economic operations and build responsible financial environments. The economic institutions face multiple difficulties, including inflexible credit criteria and costly service fees, together with heavy reliance on collateral and escalating cyber risks, which demand strategic changes along with technological improvements and widespread financial knowledge. The primary function of commercial banks is to maintain a balance between making money and fulfilling their social duties.
The banking system, together with financial platforms such as Auction Dunia, needs regulatory enhancements and digital transformations as well as improved transparency to create a more inclusive economic system.
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