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Difference between Commercial Banks and Development Banks
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. . |
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.
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