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Commercial BAnks
Commercial BAnks
1. A commercial bankis a financial intermediary which collects credit from lenders in the form of
deposits and lends in the form of loans. A commercial bank holds deposits for individuals
and businesses in the form of checking and savings accounts and certificates of deposit of
varying maturities while a commercial bank issues loans in the form of personal and business
loans as well as mortgages. The term commercial bank came about as a way to distinguish it
from an "investment bank.
Difference b/w commercial banks and investment banks
"The primary difference between a commercial bank and its counterpart is that a
commercial bank earns revenue by issuing primary loans from its pool of deposits while an
investment bank brings debt and equity offerings to market for a fee. Among its assets,
including loans, a commercial bank holds a portfolio of other securities to generate proprietary
income
Bank that makes loans to businesses, consumers, and no business institutions. Early commercial
banks were limited to accepting deposits of money or valuables for safekeeping and verifying
coinage or exchanging one jurisdiction's coins for another's. By the 17th century most of the
essentials of modern banking, including foreign exchange, the payment of interest, and the
granting of loans, were in place. It became common for individuals and firms to exchange funds
through bankers with a written draft, the precursor to the modern check. Because a commercial
bank is required to hold only a fraction of its deposits as cash reserves, it can use some of the
money deposited by its customers to extend loans. Commercial banks also offer a range of other
services, including savings accounts, safe-deposit boxes, and trust services.
Banking
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A commercial bank is a type of financial intermediary and a type of bank. Commercial banking
is also known as business banking. It is a bank that provides checking accounts, savings
accounts, and money market accounts and that accepts time deposits.[1] After the Great
Depression, the U.S. Congress required that banks engage only in banking activities, whereas
investment banks were limited to capital market activities. As the two no longer have to be under
separate ownership under U.S. law, some use the term "commercial bank" to refer to a bank or a
division of a bank primarily dealing with deposits and loans from corporations or large
businesses. In some other jurisdictions, the strict separation of investment and commercial
banking never applied. Commercial banking may also be seen as distinct from retail banking,
which involves the provision of financial services direct to consumers. Many banks offer both
commercial and retail banking services.
Contents
• 1 Possible meanings
• 2 Origin of the word
• 3 The role of commercial banks
• 4 Types of loans granted by commercial banks
○ 4.1 Secured loan
• 5 References
• 6 See also
• 7 Further reading
• 8 External links
Possible meaning
This is what people normally call a "bank". The term "commercial" was used to distinguish it
from an investment bank. Since the two types of banks no longer have to be separate companies,
some have used the term "commercial bank" to refer to banks that focus mainly on companies. In
some English-speaking countries outside North America, the term "trading bank" was and is used
to denote a commercial bank. During the great depression and after the stock market crash of
1929, the U.S. Congress passed the Glass-Seagull Act 1933-35 (Khambata 1996) requiring that
commercial banks engage only in banking activities (accepting deposits and making loans, as
well as other fee based services), whereas investment banks were limited to capital markets
activities. This separation is no longer mandatory.
It raises funds by collecting deposits from businesses and consumers via checkable deposits,
savings deposits, and time (or term) deposits. It makes loans to businesses and consumers. It also
buys corporate bonds and government bonds. Its primary liabilities are deposits and primary
assets are loans and bonds.
• Commercial banking can also refer to a bank or a division of a bank that mostly deals
with deposits and loans from corporations or large businesses, as opposed to normal
individual members of the public (retail banking).
Origin of the word
The name bank derives from the Italian word banc "desk/bench", used during the Renaissance by
Florentine bankers, who used to make their transactions above a desk covered by a green
tablecloth. However, traces of banking activity can found even in ancient times.
In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders
would set up their stalls in the middle of enclosed courtyards called macula on a long bench
called a banc, from which the words banc and bank are derived. As a moneychanger, the
merchant at the banc did not so much invest money as merely convert the foreign currency into
the only legal tender in Rome- that of the Imperial Mint.
The role of commercial banks
Commercial banks engages in the following activities:
• processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or
other means
• issuing bank drafts and bank cheques
• accepting money on term deposit
• lending money by overdraft, installment loan, or other means
• providing documentary and standby letter of credit, guarantees, performance bonds,
securities underwriting commitments and other forms of off balance sheet exposures
• safekeeping of documents and other items in safe deposit boxes
• sale, distribution or brokerage, with or without advice, of insurance, unit trusts and
similar financial products as a “financial supermarket”
• Traditionally, large commercial banks also underwrite bonds, and make markets in
currency, interest rates, and credit-related securities, but today large commercial banks
usually have an investment bank arm that is involved in the mentioned activities.
Types of loans granted by commercial banks
Secured loan
A secured loan is a loan in which the borrower pledges some asset (e.g., a car or property) as
collateral (i.e., security) for the loan.
Mortgage loan
A mortgage loan is a very common type of debt instrument, used to purchase real estate. Under
this arrangement, the money is used to purchase the property. Commercial banks, however, are
given security - a lien on the title to the house - until the mortgage is paid off in full. If the
borrower defaults on the loan, the bank would have the legal right to repossess the house and sell
it, to recover sums owing to it.
In the past, commercial banks have not been greatly interested in real estate loans and have
placed only a relatively small percentage of their assets in mortgages. As their name implies,
such financial institutions secured their earning primarily from commercial and consumer loans
and left the major task of home financing to others. However, due to changes in banking laws
and policies, commercial banks are increasingly active in home financing.
Changes in banking laws now allow commercial banks to make home mortgage loans on a more
liberal basis than ever before. In acquiring mortgages on real estate, these institutions follow two
main practices. First, some of the banks maintain active and well-organized departments whose
primary function is to compete actively for real estate loans. In areas lacking specialized real
estate financial institutions, these banks become the source for residential and farm mortgage
loans. Second, the banks acquire mortgages by simply purchasing them from mortgage bankers
or dealers.
In addition, dealer service companies, which were originally used to obtain car loans for
permanent lenders such as commercial banks, wanted to broaden their activity beyond their local
area. In recent years, however, such companies have concentrated on acquiring mobile home
loans in volume for both commercial banks and savings and loan associations. Service
companies obtain these loans from retail dealers, usually on a nonrecourse basis. Almost all
bank/service company agreements contain a credit insurance policy that protects the lender if the
consumer defaults.
Unsecured loan
Unsecured loans are monetary loans that are not secured against the borrowers assets (i.e., no
collateral is involved). These may be available from financial institutions under many different
guises or marketing packages:
• bank overdrafts
• corporate bonds
• credit card debt
• credit facilities or lines of credit
2. Advancing Loans:
This is the important function of the commercial bank. Credit is given to the people in
different ways.
(a.): Making Loans:
There are three types of loans given to borrowers.
i. Short Term Loans:
These loans are advanced for the period of six months to one year. High Interest rate
Is charged on this type of accounts.
ii. Medium Term Loans:
Loans from one to five years are called medium term loans.
iii: Long Term Loans:
Loans which are advanced for the period, more than ten years are long term loans.
(b.): Bank Overdraft:
Banks allows their trustful customers to draw more than the deposit they have in the
Bank. Bank charges interest on overdraft.
(c.): Cash Credit:
Bank also gives credit against immovable property and interest is charged by the
bank.
(d.): Discounting of Bills:
This is income source of bank to discount bills of exchange. They charge nominal
Interest and discount only reputed and clear bills of exchange.
• Commercial Bank 1. Receiving Deposits:
This is the main function of commercial banks to collect savings of individuals and firms.
They offer different types of deposits for the facility of the customers.
2. Advancing Loans:
This is the important function of the commercial bank. Credit is given to the people in
different ways.
(a.): Making Loans: