Difference between merchant bank and commercial bank in tabular form
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Commercial banks are the most important components of the whole banking system.
A commercial bank is a profit-based financial institution that grants loans, accepts deposits, and offers other financial services, such as overdraft facilities and electronic transfer of funds
Commercial banks are of three types
(a) Public Sector Banks:
Refer to a type of commercial banks that are nationalized by the government of a country. In public sector banks, the major stake is held by the government.
(b) Private Sector Banks:
Refer to a kind of commercial banks in which major part of share capital is held by private businesses and individuals.
(c) Foreign Banks:
Refer to commercial banks that are headquartered in a foreign country, but operate branches in different countries. Some of the foreign banks operating in India are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, and Grindlay’s Bank.
(1) Demand Deposits:
Refer to kind of deposits that can be easily withdrawn by individuals without any prior notice to the bank.
(2) Time Deposits:
Refer to deposits that are for certain period of time. Banks pay higher interest on rime deposits.
(3) Advancing Loans:
Refers to one of the important functions of commercial banks.
(b) Secondary Functions:
Refer to crucial functions of commercial banks. The secondary functions can be classified under three heads, namely, agency functions, general utility functions, and other functions.
These functions are explained as follows:
(1) Agency Function
(i) Collecting Checks:
Refer to one of the important functions of commercial banks. The banks collect checks and bills of exchange on the behalf of their customers through clearing house facilities provided by the central bank.
(ii) Collecting Income:
Constitute another major function of commercial banks.
(iii) Paying Expenses:
Implies that commercial banks make the payments of various obligations of customers, such as telephone bills, insurance premium, school fees, and rents.
(2) General Utility Functions:
(i) Providing Locker Facilities:
Implies that commercial banks provide locker facilities to its customers for safe keeping of jewellery, shares, debentures, and other valuable items.
(ii) Issuing Traveler’s Checks:
Implies that banks issue traveler’s checks to individuals for traveling outside the country. Traveler’s checks are the safe and easy way to protect money while traveling.
(iii) Dealing in Foreign Exchange:
Implies that commercial banks help in providing foreign exchange to businessmen dealing in exports and imports.
(iv) Transferring Funds:
Refers to transferring of funds from one bank to another. Funds are transferred by means of draft, telephonic transfer, and electronic transfer.
(3) Other Functions:
Include the following:
(i) Creating Money:
Refers to one of the important functions of commercial banks that help in increasing money supply. For instance, a bank lends Rs. 5 lakh to an individual and opens a demand deposit in the name of that individual.
(ii) Electronic Banking:
Include services, such as debit cards, credit cards, and Internet banking.
Types of Credit Offered by Commercial Banks:
A commercial bank offers short-term loans to individuals and organizations in the form of bank credit, which is a secured loan carrying a certain rate of interest.
The advantages of the bank loan are as follows:
a. Grants loan at low rate of interest
b. Involves very simple process of loan granting
In addition to advantages, the bank loan suffers from various imitations, which are as follows:
a. Imposes heavy penalty and legal action in case of default of loan
b. Charges high rate of interest, if the party fails to pay the loan amount in the allotted time
Cash Credit:
Cash credit can be defined as an arrangement made by the bank for the clients to withdraw cash exceeding their account limit. The cash credit facility is generally sanctioned for one year but it may extend up to three years in some cases.
The advantages of the cash credit are as follows:
a. Involves very less time in the approval of credit
b. Involves flexibility as the cash credit can be extended for more time to fulfill the need of the customer
Bank Overdraft:
Bank overdraft is the quickest means of the short-term financing provided by the bank. It is a facility in which the bank allows the current account holders to overdraw their current accounts by a specified limit.
The advantages of the bank overdraft are as follows:
a. Involves no documentation for the extension of overdraft amount
b. Imposes nominal interest on the overdraft amount
The disadvantages of the bank overdraft are as follows:
a. Incurs high cost for the clients.
Discounting of Bill:
Discounting of bill is a process of settling the bill of exchange by the bank at a value less than the face value before maturity date.
A commercial bank is a profit-based financial institution that grants loans, accepts deposits, and offers other financial services, such as overdraft facilities and electronic transfer of funds
Commercial banks are of three types
(a) Public Sector Banks:
Refer to a type of commercial banks that are nationalized by the government of a country. In public sector banks, the major stake is held by the government.
(b) Private Sector Banks:
Refer to a kind of commercial banks in which major part of share capital is held by private businesses and individuals.
(c) Foreign Banks:
Refer to commercial banks that are headquartered in a foreign country, but operate branches in different countries. Some of the foreign banks operating in India are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, and Grindlay’s Bank.
(1) Demand Deposits:
Refer to kind of deposits that can be easily withdrawn by individuals without any prior notice to the bank.
(2) Time Deposits:
Refer to deposits that are for certain period of time. Banks pay higher interest on rime deposits.
(3) Advancing Loans:
Refers to one of the important functions of commercial banks.
(b) Secondary Functions:
Refer to crucial functions of commercial banks. The secondary functions can be classified under three heads, namely, agency functions, general utility functions, and other functions.
These functions are explained as follows:
(1) Agency Function
(i) Collecting Checks:
Refer to one of the important functions of commercial banks. The banks collect checks and bills of exchange on the behalf of their customers through clearing house facilities provided by the central bank.
(ii) Collecting Income:
Constitute another major function of commercial banks.
(iii) Paying Expenses:
Implies that commercial banks make the payments of various obligations of customers, such as telephone bills, insurance premium, school fees, and rents.
(2) General Utility Functions:
(i) Providing Locker Facilities:
Implies that commercial banks provide locker facilities to its customers for safe keeping of jewellery, shares, debentures, and other valuable items.
(ii) Issuing Traveler’s Checks:
Implies that banks issue traveler’s checks to individuals for traveling outside the country. Traveler’s checks are the safe and easy way to protect money while traveling.
(iii) Dealing in Foreign Exchange:
Implies that commercial banks help in providing foreign exchange to businessmen dealing in exports and imports.
(iv) Transferring Funds:
Refers to transferring of funds from one bank to another. Funds are transferred by means of draft, telephonic transfer, and electronic transfer.
(3) Other Functions:
Include the following:
(i) Creating Money:
Refers to one of the important functions of commercial banks that help in increasing money supply. For instance, a bank lends Rs. 5 lakh to an individual and opens a demand deposit in the name of that individual.
(ii) Electronic Banking:
Include services, such as debit cards, credit cards, and Internet banking.
Types of Credit Offered by Commercial Banks:
A commercial bank offers short-term loans to individuals and organizations in the form of bank credit, which is a secured loan carrying a certain rate of interest.
The advantages of the bank loan are as follows:
a. Grants loan at low rate of interest
b. Involves very simple process of loan granting
In addition to advantages, the bank loan suffers from various imitations, which are as follows:
a. Imposes heavy penalty and legal action in case of default of loan
b. Charges high rate of interest, if the party fails to pay the loan amount in the allotted time
Cash Credit:
Cash credit can be defined as an arrangement made by the bank for the clients to withdraw cash exceeding their account limit. The cash credit facility is generally sanctioned for one year but it may extend up to three years in some cases.
The advantages of the cash credit are as follows:
a. Involves very less time in the approval of credit
b. Involves flexibility as the cash credit can be extended for more time to fulfill the need of the customer
Bank Overdraft:
Bank overdraft is the quickest means of the short-term financing provided by the bank. It is a facility in which the bank allows the current account holders to overdraw their current accounts by a specified limit.
The advantages of the bank overdraft are as follows:
a. Involves no documentation for the extension of overdraft amount
b. Imposes nominal interest on the overdraft amount
The disadvantages of the bank overdraft are as follows:
a. Incurs high cost for the clients.
Discounting of Bill:
Discounting of bill is a process of settling the bill of exchange by the bank at a value less than the face value before maturity date.
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