Q.What do you mean by a commercial bank? State its essential characteristics.

A commercial bank is a business that accepts deposits from the public and lends that money to earn a profit, standing as an intermediary between savers and borrowers.

Its essential marks are that it deals in money, accepts deposits repayable on demand, lends and invests those deposits, works for a profit, provides the payment machinery of the community, and acts as an intermediary between those with surplus funds and those who need funds.

Meaning. A commercial bank is a financial institution that accepts deposits of money from the public — repayable on demand or after a fixed period and withdrawable by cheque, draft or order — and uses those deposits to grant loans and advances and to make investments, with the object of earning a profit. It is essentially a dealer in money and credit: it borrows from depositors by paying them interest and lends to borrowers by charging a higher rate, the difference being its main source of profit. Standing between savers and investors, it channels the community's idle savings into productive use.

Essential characteristics.

1. Dealing in money — money is both its raw material and its stock-in-trade.
2. Acceptance of deposits repayable on demand — at least some deposits are withdrawable on demand by cheque; this is the key test of banking.
3. Lending and investment — deposits are not kept idle but lent out and invested to earn income.
4. Profit motive — it is a business run to earn a profit for its owners.
5. Payment and settlement — it supplies the cheques, drafts and electronic transfers by which the community makes and receives payments.
6. Financial intermediary — it links savers and investors, mobilising idle savings for productive use.

Students often describe a bank merely as 'a place to keep money' and omit lending — but it is the combination of accepting deposits AND lending them out that defines a bank; a pure safe-custody service is not banking. Do not confuse a commercial bank with the central bank (which does not deal with the general public or work for profit).