What Is Commercial Banking?

Commercial Banking: Are you curious about how businesses manage their finances and secure loans? That’s where commercial banking comes in.

Commercial banking refers to financial institutions that provide essential services to businesses and individuals, such as deposit accounts, loans, and payment processing. These banks make money by charging interest on loans like mortgages, auto loans, and business loans, using customer deposits as the capital to fund them.

In this article, we’ll dive into what commercial banking is, its advantages, the various types of commercial banks, their functions, examples, and how they differ from retail banking, as well as insights into careers and salaries in the commercial banking sector.

Table of Contents

Commercial banking is a type of banking that provides essential services to businesses, government agencies, and institutions, helping them grow and thrive. These banks primarily make money by lending money to businesses and charging interest and fees on these loans.

For instance, they might provide loans to cover costs like supplies, real estate, or hiring employees. In India, some well-known commercial bank examples include the State Bank of India (SBI), HDFC Bank, ICICI Bank, Corporation Bank and more.

Importance of Commercial Banking

Commercial banking offers numerous advantages. Here are some key points highlighting the importance of commercial banking:

Provide Financial Support: Banks offer loans and credit to businesses and individuals to fuel growth and expansion.
Maintain Economic Liquidity: By lending customer deposits, banks ensure the smooth circulation of money in the economy.
Enable Quick Transactions: Banks facilitate fast and secure payment processing, supporting both local and international trade.
Encourage Savings: Commercial banks offer interest on savings, encouraging people to store their money securely.
Safeguard Deposits: They provide a safe environment for individuals and businesses to store and grow their funds.
Boost Economic Growth: By providing credit, commercial banks help increase production, employment, and overall economic activity.

Also Read: Bank for International Settlements – Everything You Need to Know

Functions of Commercial Banking

Commercial banks perform a range of essential functions to support both businesses and individuals. These can generally be divided into two main categories:

a) Primary Functions

Accepting Deposits: Commercial banks accept deposits from the public in different forms, such as savings, current, and fixed deposits. These deposits help accumulate funds, which are then used to meet the financial needs of others through loans.
Providing Loans and Advances: Banks lend money to entrepreneurs and businesses through loans, overdrafts, and credit lines. This is a significant source of profit, as banks earn interest on the money lent. They also maintain a reserve while lending the rest of the funds to borrowers.
Credit Creation: When banks offer credit or loans, they transfer the funds to a customer’s account instead of providing cash directly. This creates money within the banking system, supporting economic activity.

b) Secondary Functions

Discounting Bills of Exchange: Commercial banks offer businesses the ability to clear future payments early by discounting bills of exchange, providing instant access to funds at a discounted rate.
Overdraft Facility: Banks allow account holders to withdraw more than their account balance, up to a specific limit, to meet short-term cash needs.
Securities Trading: Commercial banks facilitate the purchase and sale of securities, enabling customers to invest their funds easily.
Locker Services: For a minimal fee, banks offer lockers to safely store valuable items and documents.
Payment Collection and Distribution: Using checks, promissory notes, and bills of exchange, banks manage payment processing for businesses, ensuring smooth transaction flows.
Foreign Exchange Services: Commercial banks help businesses exchange currencies to support international trade and operations.
Letter of Credit Services: Banks provide letters of credit that vouch for a business’s creditworthiness, ensuring reliable payments when trading with other companies.
Professional Services: Commercial banks offer additional services like collecting checks, paying interest or premiums, and handling bill payments, all for a commission.

These functions make commercial banking a vital part of the financial system. They help support economic growth and ensure that both businesses and individuals can manage their finances effectively and securely.

Also Read: What is Direct Benefit Transfer (DBT) & Its Benefits

10 Types of Commercial Bank

In the world of commercial banking, different types of banks serve various needs within the financial system. Here are 10 types of commercial banks:

Private Banks: Owned by private individuals or businesses, private banks operate intending to generate profit. For example, ICICI Bank & HDFC Bank.
Public Banks: These banks are government-owned and serve the public interest. Notable examples include the State Bank of India (SBI) and Bank of Baroda.
Retail Banks: Retail banks provide basic banking services to individual consumers, including savings and checking accounts, personal loans, and mortgages.
Corporate Banks: Catering to large businesses, corporate banks offer services like business loans, credit lines, and treasury management.
Investment Banks: While primarily focused on businesses, investment banks help with capital raising, underwriting securities, and providing advice on mergers and acquisitions.
Foreign Banks: Established in one country but operating branches in others, foreign banks like Citibank and HSBC offer services for international clients and transactions.
Credit Unions: These member-owned institutions provide similar services to retail banks but often offer better interest rates and lower fees for their members.
Microfinance Banks: Targeting low-income individuals and small businesses, microfinance banks provide small loans and savings options to those without access to traditional banking.
Regional Rural Banks (RRBs): These banks focus on serving rural and agricultural communities, offering tailored financial services to promote rural development.
Payments Banks: A newer type of commercial bank, payments banks focus on providing basic banking services, such as digital payments and money transfers, often without offering traditional loans.

Each type of commercial bank performs a crucial role in the economy, addressing the diverse needs of consumers and businesses while facilitating financial growth and stability.

Commercial Banking Vs Retail Banking

Commercial banking and retail banking serve different customer bases and offer distinct products and services. Here, check the key differences between commercial banking & retail banking:

Commercial Banking Vs Retail Banking: Key Differences
Feature	Commercial Banking	Retail Banking
Main Customers	Businesses, corporations, institutions, and governments	Individual consumers, families, and small businesses
Products and Services	Customized services such as business loans, lines of credit, foreign exchange, and cash management	Standard services including checking and savings accounts, personal loans, and credit cards
Transaction Size	Generally larger transactions	Typically smaller, everyday transactions
Customization	Offers customized financial solutions based on client needs	Provides standardized products for personal use
Account Management	Dedicated relationship managers for business clients	Self-service banking and personal banking advisors
Careers Available	Roles in portfolio management, relationship management, and corporate finance	Positions for personal bankers and financial advisors
Regulatory Oversight	Heavily regulated to ensure stability and risk management	Regulated to protect consumer interests

Also Check: Difference Between Government Bank Vs Private Bank

Commercial Banking Salary and Career Growth

A career in commercial banking offers various roles with competitive salaries and opportunities for advancement. Here’s what you need to know about the salary and potential career paths in this field.

Relationship Manager: Works closely with business clients to provide tailored banking solutions and maintain long-term relationships.
Credit Analyst: Evaluates a business’s creditworthiness and financial health to determine eligibility for loans or credit lines.
Loan Officer: Assesses and processes loan applications, ensuring they meet the bank’s criteria and guidelines.
Operations Manager: Oversees the daily operations of the bank, ensuring efficiency and compliance with policies.
Treasury Manager: Manages the bank’s liquidity and funding strategies, optimizing the bank’s cash flow.
Risk Manager: Identifies, assesses, and mitigates risks associated with lending and investments to protect the bank’s assets.
Commercial Banking Executive: Senior-level position focusing on strategy development and overall management of the bank’s commercial services.

Moreover, in India, the median salary for a commercial banker is approximately ₹7,25,000 per year. Below is a table summarizing the salary ranges offered by various banks for corporate banking positions:

Commercial Banking Salary
Bank Name	Salary Range (per annum)
ICICI Bank	₹10,00,000 – ₹23,00,000
Axis Bank	₹28,00,000 – ₹40,00,000
Larsen & Toubro	₹10,00,000 – ₹11,00,000
HSBC	₹9,00,000 – ₹10,00,000
Citi Bank	₹11,52,000 – ₹14,40,000
Yes Bank	₹8,00,000

A career in commercial banking offers not just competitive salaries but also diverse roles with significant growth potential. By pursuing continuous education and networking, professionals can elevate their careers in this dynamic field.

Also Check: How to Choose the Best Business Account for Your Banking Needs?

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Commercial Banking FAQs

What is commercial banking?

Commercial banking refers to a type of banking that offers services to businesses, government agencies, and institutions. These banks help their clients grow by providing loans and earning interest and fees on those loans.

What do commercial bankers do?

Commercial bankers provide banking solutions and advice on various products, including cash management, credit for working capital, treasury services, and financial planning. They use their expertise to help businesses manage their finances effectively.

How do commercial banks make money?

Commercial banks generate revenue mainly from loans and credit card interest. They earn profits through the interest charged on loans and various fees, such as those for opening lines of credit and overdrafts.

Is RBI a commercial bank?

No, the Reserve Bank of India (RBI) is not a commercial bank. It is the central bank of India, responsible for regulating the country's monetary policy, while commercial banks are private institutions providing banking services to individuals and businesses.

Is a career in commercial banking a good choice?

Yes, a career in commercial banking can be rewarding. It offers a good work-life balance, competitive pay, and various advancement opportunities, although the work may become repetitive over time.