Banks are important parts of an individual’s life. They play an important role in the financial sector of the state by mobilizing the savings of general people and entities. The central bank and commercial bank are the two types of banking that are available in every country. So, in this article, we will have a look at different concepts like, what is a central bank, its functions, what is a commercial bank and its functions, key differences, and a table comparing both central vs commercial bank in a side-by-side manner.
Central Bank Vs Commercial Bank (Comparison Table)
| Central Bank | Commercial Bank |
|---|---|
| A central bank is a financial institution that is responsible for regulating the monetary policy of a country or group of countries. It also controls, manages, and looks after the nation’s banking system. | A commercial bank, on the other hand, is a financial institution that provides short-term financial facilities and banking services to the general public and businesses |
| It is concerned with public welfare and economic development | It works and seeks profits and earnings. |
| It acts as a banker, agent, or financial advisor for the government and financial institutions. | It acts as a banker to the general public or citizens. |
| Central banks have the authority to frame monetary and credit policy. | Commercial banks do not have the authority to frame any kind of monetary and credit policy. |
| A nation can have only one central bank. | There could be as many commercial banks as possible in a country. |
| They grant loans to commercial banks and the government | They grant loans to the general public or businesses. |
| Central banks have public ownership, i.e. they are owned by the nation’s government or ministry of finance. | Commercial banks can either have public or private ownership |
| The clients of the commercial banks are government and financial institutions. | Commercial Bank’s clients include public, firms, institutions, and organizations. |
What is a Central Bank?
A central bank or reserve bank is an apex(supreme) body and institution that manages the state’s currency, money, supply, and interest rates. The central banks usually also monitor and oversee the commercial banking system of their respective countries. It operates to control the economy, supply of money, and credit system of the country. These banks(central banks) have no connections with the people and have no political control over them.
Functions Of Central Bank
Following are some of the main functions of the central bank.
- Issuing Of Notes- It is the central bank of the country so it has the monopoly right of issuing currency notes except coins and notes of small immensity.
- Banker to the government- Central bank works as the banker, agent, or financial advisor for the government.
- Banker to the Banks- It acts as a banker to the various commercial banks and maintains the balance of the other banks in the form of cash reserves.
- Custodians Of the Nation’s Reserves- It acts as a custodian and maintains the proper balance and reserves of foreign exchange.
- Collection Of Data- In order to check the economic growth in an economy, the Central Bank time to time collects and publishes the required data relating to the banking and financial sector of the country.
- Control of Credit- It control and oversee the credit and monetary policy of the state or nation.
What is a Commercial Bank?
A commercial bank offers services to the general public and to companies. 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.
Functions Of Commercial Bank
Some of the major functions of a commercial bank are as follows.
- A commercial bank accepts deposits from the general public, companies, and institutions.
- They provide advance loans in the form of cash credits, overdraft facilities, short-term loans, etc.
- It also performs agency functions like collections and payment of cheques, rents, insurance, policies, etc.
- Also, they collect, transfer, and make payments of funds on behalf of the customer.
- Commercial banks issue letters of reference to provide knowledge about the creditworthiness of the customer.
Key Differences Between Central Bank And Commercial Bank
While comparing central bank vs commercial bank, we have included some of the key differences between them as well. These are as follows:
- Meaning – A central bank or reserve bank is an apex(supreme) body and institution that manages the state’s currency, money, supply, and interest rates. On the other hand, 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 and electronic transfer of funds.
- Objective – The central bank is the banking institution that is concerned with public welfare and does not seek profits. On the other hand, the commercial bank works and seeks profits and earnings.
The following table shows an in-depth comparison between a central bank vs a commercial bank.
Conclusion
With the above explanations and discussions, we can simply conclude that there could only be one central or reserve bank in a state and could be a number of commercial banks in a country. A central bank or reserve bank is an apex(supreme) body and institution that manages the state’s currency, money, supply, and interest rates. On the other hand, 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 and electronic transfer of funds.
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