Meaning of a Commercial Bank

A commercial bank is a financial institution that accepts deposits of money from the public, which are repayable on demand or after a fixed period, and lends that money to individuals, traders, farmers and businesses with the object of earning a profit. The single feature that makes an institution a bank — rather than a moneylender or a savings club — is that it accepts deposits withdrawable by cheque and uses those deposits to grant loans and advances. Under Indian banking law a banking company is defined as one that transacts the business of accepting, for the purpose of lending or investment, deposits of money from the public that are repayable on demand or otherwise and withdrawable by cheque, draft or order.

The word commercial signals the bank's dominant character: it deals mainly in short-term and medium-term credit connected with trade, commerce and industry, as distinct from a purely long-term lender such as a development or land-mortgage bank. A commercial bank is essentially a dealer in money and credit — it borrows from those who have surplus funds (depositors) by paying them interest, and lends to those who need funds (borrowers) by charging them a higher rate of interest. The difference between the interest it earns on loans and the interest it pays on deposits, together with fees and commissions on the services it provides, is the source of its profit.

Essential characteristics of a commercial bank:

• Dealing in money. It accepts deposits and grants loans; money is both its raw material and its stock-in-trade.
• Acceptance of deposits repayable on demand. A key test of banking is that at least some deposits are withdrawable on demand by cheque.
• Lending and investment. The deposits collected are not kept idle; they are lent out and invested to earn income.
• Profit motive. A commercial bank is a business run to earn a profit for its owners.
• Payment and settlement. It provides the means — cheques, drafts, electronic transfers — by which the community makes and receives payments.
• An intermediary. It stands between savers and investors, channelling idle savings into productive use.

Commercial banking is studied at the start of the CHSE Odisha +2 Banking and Insurance course because the commercial bank is the institution a student, a household or a small trader deals with most often, and every later topic — the central bank, insurance, the payment system — is easier to understand once the working of an ordinary commercial bank is clear. The principles below are the same principles of banking studied across Indian commerce curricula; only the illustrations are drawn from the Indian banking system a student can actually see around them.