Difference between Commercial Banks and Development Banks

Banking & Finance Differences Governments & Policies

A bank is a component of the financial system that issues demand deposits while also taking public deposits. Both direct and indirect lending activities can be carried out through capital markets. Banks are heavily regulated in most nations due to their significance to financial stability.

While they enable consumers to borrow money, invest, save for the future, and manage smaller chores (such as making deposits and paying bills), banks and the financial services sector are crucial to the economy.

Depending on the inclination and financial condition, there are numerous distinct types of banks.

What are Commercial Banks?

A financial institution that accepts deposits, provides checking account services, makes different loans, and provides fundamental financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses is referred to as a "commercial bank." Most people conduct their financial business at commercial banks.

Commercial banks generate revenue through making loans, including mortgages, vehicle loans, business loans, and personal loans, and charging interest on those loans. Banks receive their funding for these loans from customer deposits.

Public and private sector banks are both incorporated in commercial banks. Commercial banks' primary responsibility is to offer financial services to individuals and businesses, promoting stability in the political, social, and economic spheres while fostering long-term economic expansion.

What are Development Banks?

A development bank is a national or regional financial institution that offers medium- and long-term finance for profitable investments in underdeveloped nations, frequently in conjunction with technical support.

Since the 1950s, the International Bank for Reconstruction and Development and its affiliates have fostered the growth of new development banks. The most critical role that commercial banks play in this regard is the production of credit.

They do not hand over cash to the borrower while authorizing a loan for a consumer. They instead open a bank account in which the borrower can withdraw funds. In other words, they establish deposits automatically when they sanction a loan.

Difference between Commercial Banks and Development Banks

To understand the difference between the two, refer to the table below.

Categorization	Commercial Banks	Development Banks
Definition	A financial organization that accepts deposits, redistributes various loans, offers checking account services, and provides basic financial results like certificates of deposit (CDs) and savings accounts to people and small businesses is referred to as a "commercial bank."	A financial entity is known as a development financial institution (DFI), commonly referred to as a development bank or a development finance corporation (DFC), is one that offers risk capital for economic development projects on an unpaid basis.
Role	Commercial banks' primary responsibility is to offer financial services to individuals and businesses in order to promote social and economic stability and long-term economic growth. The most critical role of commercial banks in this regard is credit creation. They do not give the borrower cash when they approve a loan for a consumer. Instead, they establish a deposit account that the borrower can use to withdraw funds. In other words, they automatically establish deposits when they sanction a loan.	DFIs can be extremely important in financing commercial and public sector initiatives in developing nations. DFIs frequently lend money to the private sector to support initiatives that advance development and aid businesses in making investments, particularly in nations with a variety of market constraints. Some development banks incorporate criteria for impact investment and socially conscious investing in their mandates. Governments frequently use development banks as a component of their programs for international aid or economic growth .
Purpose	Commercial banks' primary goal is to generate profit by collecting interest from high-interest loans.	Development banks’ main aim is to pursue social profit through implementing development initiatives.
Establishment	Commercial banks are established as businesses under the Companies Act.	Development banks are established under a special Act passed by the government.
Clients	Commercial banks lend to both individuals and businesses.	Development banks lend to the government.
Source of Income	Commercial banks generate and collect interest from loans such as mortgages, business loans, vehicle loans, and personal loans in order to generate revenue. Banks receive the funding to make these loans from customer deposits.	Development banks raise money in both domestic and global financial markets, and governments also provide their pay in capital. Additionally, the private sector frequently contributes to these banks' loans, which is particularly beneficial for governments dealing with tight budgets during and after economic crises.
Location	Generally, commercial banks have been situated in structures where clients come to do their everyday banking using ATMs and teller window services.	Community development banks differ significantly from commercial banks despite both being private enterprises. They are always found in economically poor urban and rural areas with little to no banks or bank branches.
Nature	Commercial banks are financial intermediaries.	Development banks serve a variety of purposes.
Fundraising strategy	Public deposits that are demandpayable help commercial banks raise money	On the other hand, development banks obtain their funding from the sale of securities, borrowing, and grants.
Usage of cheque	Commercial banks offer cheque facilities, allowing deposits and withdrawals to be conducted using checks.	Development banks don't provide check conveniences.

Conclusion

We have witnessed numerous developments in the business due to the ongoing growth of banking and banking services. Without these services, there is no economy that could possibly survive.

The modern economy cannot function without the banking industry. As the main source of credit, it provides funding for individuals to purchase homes and vehicles as well as for businesses to acquire equipment, grow their operations, and pay their employees.

Additionally, banks offer depositors a secure location to store their money. Banks are the backbone of all industries and play a significant part in the daily lives of people.

Thus, banks can be considered the foundation of economic development. Although they provide this function in distinct ways, commercial and development banks are both crucial for any economy.