Difference Between Central Bank and Commercial Bank

Commercial and central banks are essential parts of the country’s economy. While commercial banks deal directly with the end users, central banks offer their products and services to the government and other commercial banks. There are several differences between commercial and central banks regarding the services and products offered, the clients they serve, their responsibilities, etc. This blog covers each type of bank and the difference between central bank and commercial bank.

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Central Banks

Central banks do not deal directly with customers. A single central bank in a country controls the entire banking industry. The country’s central bank holds deposits for the government. The government deposits funds to provide health insurance, social welfare, unemployment benefits, etc. Central banks offer short-term loans to commercial banks in the country. These loans are made to banks for overnight financing at interest rates lower than the fed funds rate. Central banks offer baking services such as clearing funds between member banks, issuing government bonds, paying various social security and Medicare programs, etc.

Central banks also play a crucial role in regulating the country's control policy. The central bank raises or lowers interest rates, raises or lowers reserve requirements, etc. The central bank formulates the banking rules and regulations and keeps a tab on whether the implemented banking regulations are complied with by conducting regulatory tests.

Functions of Central Bank (Reserve Bank of India - RBI)

• Issuance of Currency: RBI is the sole authority for printing and managing Indian currency notes.
• Monetary Policy Implementation: Controls money supply, interest rates, and inflation to ensure economic stability.
• Regulation of Banks: Supervises and controls the operations of commercial banks and financial institutions.
• Foreign Exchange Management: Manages India’s foreign exchange reserves and regulates exchange rates under the Foreign Exchange Management Act (FEMA).
• Lender of Last Resort: Provides emergency funding to banks facing financial crises.
• Government’s Banker: Manages government accounts, debt, and borrowing operations.
• Promoting Financial Inclusion: Introduces programs to expand banking facilities in rural and underdeveloped regions.

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Commercial Banks

Commercial banks are banks that serve customers directly. These banks offer individuals and businesses various banking products and services. The services offered are generally well-tailored to commercial banks’ specific customer segments.

They offer various options to individuals and businesses, such as current accounts, savings accounts, certificates of deposit, etc. A primary function of commercial banks is lending. Credit products include business loans, business financing, home and mortgage, auto, and personal loans. Commercial banks also offer several services to their customers, such as security deposit services, mobilizing savings for capital creation, financing the industry, agriculture, and businesses, financing activities that generate employment, etc.

Functions of Commercial Banks

• Accepting Deposits: Offer savings, fixed, and recurring deposit accounts for individuals and businesses.
• Providing Loans: Extend credit for personal, agricultural, and business needs, including housing and vehicle loans.
• Facilitating Payments and Transfers: Provide services like cheques, demand drafts, NEFT, RTGS, and UPI for smooth transactions.
• Credit Creation: Create money in the economy by lending more than the deposits they hold.
• Investment Services: Offer mutual funds, insurance, and fixed deposit options to customers.
• Safe Custody and Locker Facilities: Provide lockers and safekeeping of valuables.
• Advisory Services: Guide customers on investments, loans, and financial planning.
• Foreign Exchange Transactions: Facilitate currency exchange and international trade financing.

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Difference Between Central Bank and Commercial Bank

Conclusion

Commercial and central banks are crucial institutions in a nation's financial system, but with different functions. Central banks govern the economy, execute monetary policy, and regulate banks, whereas commercial banks offer financial services directly to businesses and individuals. Their roles are interdependent, as central banks depend on commercial banks to apply monetary policies, and commercial banks effectively rely on central banks for guidance and finances. All these help comprehend the structure and operation of a country's banking system.

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