Commercial Banks

Commercial banks are an essential part of the banking system, playing a crucial role in the economy by providing various financial services to individuals, businesses, and government entities. These banks primarily focus on generating profit through their operations.

Functions of Commercial Banks:

1. Accepting Deposits: One of the primary functions of commercial banks is to accept deposits from individuals and businesses. They provide various types of deposit accounts such as current accounts, savings accounts, fixed deposits, and recurring deposits. Customers can earn interest on their deposited funds depending on the type and duration of the account.

2. Issuing Loans: Commercial banks lend money to borrowers, including individuals, businesses, and other organizations for various purposes such as purchasing homes or vehicles, expanding business operations, or meeting personal financial requirements. The bank earns interest on these loans according to predetermined rates.

3. Facilitating Payments: Commercial banks play a vital role in facilitating domestic and international payments by providing services like issuing checks; offering debit cards and credit cards; processing electronic fund transfers (EFT); enabling online transactions; and maintaining automated teller machines (ATMs).

4. Foreign Exchange Services: Many commercial banks offer foreign exchange services that allow customers to convert one currency into another for travel or business purposes. They engage in currency trading activities both for their clients' benefit as well as their own profitability.

5. Investment Advisory Services: Some commercial banks provide investment advisory services to help individual customers make informed decisions about investing in stocks, bonds, mutual funds or other financial instruments.

6. Trade Finance Services: Commercial banks support trade finance activities such as issuing letters of credit (LCs), bank guarantees (BGs), export financing schemes like pre-shipment credit facilities and post-shipment export finance.

Characteristics:

Commercial banks exhibit certain key characteristics:

1. Registered Legal Entities: A commercial bank is registered under relevant banking regulations and holds a banking license issued by the central bank or financial regulatory authority of the country it operates in.

2. Profit-Oriented: Commercial banks primarily aim to generate profit for their shareholders by utilizing customer deposits efficiently, attracting borrowers, and charging interest on loans.

3. Risk Management: Banks manage various risks associated with their operations, such as credit risk (the risk of borrowers defaulting on their loan repayments), liquidity risk (the ability to meet short-term financial obligations), and operational risk (risks arising from internal processes, systems, or external events).

4. Network of Branches: Commercial banks typically have a network of branches to provide convenient access to customers for depositing money, making payments, availing services, and seeking guidance. This allows them to serve customers across different geographic locations.

5. Regulatory Supervision: They operate under the oversight of regulatory authorities who monitor compliance with rules related to capital adequacy requirements, disclosures, compliance guidelines against money laundering & terrorism financing activities.

6. Technology Integration: Commercial banks have been actively embracing technology in recent years to enhance customer experience through online banking platforms, mobile apps for transactions & account management; improving security measures; implementing artificial intelligence for fraud detection and customer service.

Examples:

Some well-known examples of commercial banks around the world include JPMorgan Chase & Co., Bank of America Corporation., HSBC Holdings plc., Deutsche Bank AG., Barclays PLC., Citigroup Inc., Wells Fargo & Company etc.