A significant concept in finance and commerce, this difference between commercial and development bank reflects their distinct roles in the economy. Commercial banks are financial intermediaries offering short-term loans and deposit facilities to individuals and business organizations. Development banks are concerned with long-term economic growth through financing large-scale industrial and infrastructure projects. This article goes deep into their nature, functions, and objectives.
Difference Between Commercial Bank and Development Bank
The objectives, services, and operations between a commercial bank and a development bank are what make the difference. Commercial banks are profit-driven institutions providing short-term financial services to both individuals and businesses. The primary focus of development banks, however, is economic growth and industrialization by taking higher risks, mainly through funding long-term developmental projects.
- Objective: Commercial banks aim to make profits through interest on loans and service fees, while development banks focus on socio-economic development.
- Customer Base: Commercial banks cater to individuals, businesses, and corporations. Development banks primarily assist industries, governments, and specific sectors like agriculture or small-scale enterprises.
- Loan Duration: Loans provided by commercial banks are generally short to medium-term, whereas development banks provide long-term loans for large-scale projects.
| Aspect | Commercial Bank | Development Bank |
|---|---|---|
| Primary Objective | Profit maximization | Long-term economic development |
| Customer Base | Government funds, bonds, and external borrowings | Governments, large industries, SMEs |
| Loan Tenure | Short to medium-term loans | Long-term loans |
| Funding Sources | Deposits, interbank loans | Government funds, bonds, external borrowings |
| Sectoral Focus | General banking services | Infrastructure, industry, agriculture |
| Risk Tolerance | Low-risk, short-term lending | High-risk, long-term projects |
| Examples | ICICI Bank, Bank of America, SBI | NABARD, IFC, Asian Development Bank |
Definition of Commercial Banks
A commercial bank is a financial institution that provides a wide range of financial services to the general public and businesses. They primarily focus on short-term needs, such as deposit acceptance, lending, and transaction facilitation. Their main goal is to generate profits through interest on loans and service charges.
Characteristics of Commercial Banks
- Deposit Mobilization: They attract deposits from customers through savings accounts, fixed deposits, and recurring deposits.
- Lending Operations: Loans are provided to individuals and businesses based on creditworthiness.
- Transaction Services: Facilitate domestic and international payments.
- Profit-Oriented Approach: Operate to maximize profits for stakeholders.
Example of Commercial Banks:
Some well-known commercial banks include State Bank of India (SBI), HDFC Bank, and JPMorgan Chase.
Nature of Commercial Banks
The nature of commercial banks lies in their intermediary role between savers and borrowers. These banks are essential for maintaining liquidity in the economy and ensuring smooth financial transactions.
Key Features
- Short-Term Focus: Provide financing for immediate needs like working capital, personal loans, or business expansion.
- Regulated Activities: Operate under the supervision of central banks and follow strict regulatory guidelines.
- Versatility in Services: Offer various financial products, such as loans, deposits, credit cards, and foreign exchange services.
- Mass Appeal: Serve a broad customer base, including individuals, small businesses, and large corporations.
Commercial banks rely heavily on deposits from the public and use these funds to provide loans. Their success depends on their ability to manage risks and maintain customer trust.
Functions of Commercial Banks
Commercial banks perform several vital functions that ensure the smooth functioning of the economy. These functions can be categorized as primary and secondary:
Primary Functions
- Accepting Deposits:
- Savings Deposits: Encourage individuals to save money.
- Current Deposits: Facilitate frequent transactions for businesses.
- Fixed Deposits: Offer higher interest rates for long-term savings.
- Providing Loans and Advances:
- Short-term loans for working capital.
- Consumer loans for personal needs, such as home loans or education loans.
- Overdraft facilities for businesses.
- Facilitating Transactions:
- Payment services like checks, online transfers (NEFT, RTGS), and international remittances.
Secondary Functions
- Investment Services: Help customers invest in stocks, bonds, and mutual funds.
- Locker Facilities: Safeguard customers’ valuable items.
- Foreign Exchange Services: Assist in currency exchange and international trade transactions.
Definition of Development Banks
Development banks are financial institutions designed to support the economic development of a country. They focus on financing long-term projects that are vital for industrial growth and infrastructure development.
Characteristics of Development Banks
- Sectoral Support: Concentrate on priority sectors like agriculture, small-scale industries, and infrastructure.
- Non-Depository Institutions: Unlike commercial banks, they do not accept public deposits.
- Government Backing: Operate with significant support from government agencies and international organizations.
Example of Development Banks:
Prominent development banks include the National Bank for Agriculture and Rural Development (NABARD) and the Industrial Finance Corporation of India (IFCI).
Nature of Development Banks
Development banks are catalysts for economic growth. They play a strategic role in bridging the financial gaps in underdeveloped sectors and regions.
Key Features:
- Long-Term Vision: Focus on projects that yield benefits over an extended period.
- High Risk Appetite: Undertake high-risk investments in infrastructure and industrial projects.
- Promotional Role: Encourage entrepreneurship and innovation by providing technical and financial support.
- Non-Competitive: Do not compete with commercial banks but complement them by funding large-scale projects.
Development banks aim to reduce economic disparities and enhance the standard of living by investing in areas that are often neglected by commercial institutions.
Functions of Development Banks
Development banks play a crucial role in promoting economic development by performing various specialized functions:
Primary Functions
- Project Financing:
- Provide long-term loans for industrial, agricultural, and infrastructure projects.
- Support startups and small businesses.
- Entrepreneurship Promotion:
- Offer financial and technical assistance to entrepreneurs.
- Provide training and resources for small-scale industries.
- Infrastructure Development:
- Invest in public utilities like roads, bridges, railways, and power plants.
- Support urban and rural development projects.
Secondary Functions
- Providing Guarantees: Act as guarantors for loans extended by other financial institutions.
- Facilitating Export Trade: Offer financial assistance to exporters to boost international trade.
- Research and Development: Conduct studies and surveys to identify growth opportunities in various sectors.
Development banks often collaborate with governments, international organizations, and private investors to achieve their objectives.
Commercial Bank vs Development Bank FAQs
What is the primary difference between commercial bank and development bank?
The primary difference is their focus: commercial banks provide short-term loans for profit, while development banks fund long-term projects to promote economic growth.
Can development banks offer regular banking services like deposits and withdrawals?
No, development banks do not offer regular banking services. They focus solely on financing and supporting development projects.
Which sectors do development banks target?
Development banks prioritize infrastructure, agriculture, and small-scale industries to foster national development.
Are development banks riskier than commercial banks?
Yes, development banks take higher risks by funding large-scale projects in underdeveloped regions, unlike commercial banks that prioritize short-term, low-risk lending.
How do commercial banks differ from development banks in funding sources?
Commercial banks rely on customer deposits, while development banks use government funds, bonds, and external borrowings.
