The main difference between a commercial bank and a development bank is that a commercial bank's principal goal is to provide financial services to companies and people, whereas a development bank's goal is to promote economic and infrastructural expansion.
The financial infrastructure of any nation is underpinned substantially by the activities of its banking sector. The efficiency of the financial system in an economy contributes to the growth and development of that economy. This is an important factor. Every sector of society uses various banking services, but their motivations for doing so are vastly diverse.
What is a Commercial Bank?
Commercial Bank is a for-profit financial institution established to take deposits from the general public, provide current account services, issue loans, and provide various financial products to people and commercial organizations.
The banks are an intermediary between the depositors and the borrowers. It does so by lending the money to borrowers at a high-interest rate, depending on the risk element involved, while simultaneously paying depositors a low-interest rate on the funds. The commercial bank can generate revenue using this method.
The interest rate offered to depositors is referred to as the borrowing rate, while the interest rate offered to borrowers is referred to as the lending rate. The term "spread," which refers to the difference in interest rates between lending and borrowing, is synonymous with "profit." Not only do the deposits received from the public give cash, but they also raise the institution's obligation to guarantee liquidity and safety, which limits the use that may be made of those funds.
What is a Development Bank?
Development Bank is a financial institution tasked with the main mission of "assisting in the development of infrastructure" in addition to "offering loans to the agricultural and industrial sector." They serve as multipurpose financial institutions, giving public and private sector loans, participating in term lending, and investing in security.
In their most basic form, development banks are financial organizations that lend money; nevertheless, they are differentiated from other lending institutions by focusing on larger aspects of development. As a result, one definition of a development bank is a financial organization whose purpose is to assist with and provide funding for the fundamental requirements of society.
They aim to foster growth by providing discounted loans and help to various businesses and sectors, such as agriculture and manufacturing, to further their goals. The maximization of profits is not the driving force behind the operations of development banks. There is a clear distinction between the types of loan arrangements provided by development banks and those provided by other banks. The provision of loans for extended periods of time is the primary focus of development banks.
Differences between Commercial Bank and Development Bank
Purpose
The primary objective of commercial banks is to generate profits via the collection of interest payments on loans made at relatively high-interest rates. On the other hand, the goal of development banks is to generate a social profit by implementing various development initiatives.
Process of Formation
Development banks are established as companies in accordance with the companies act, whereas commercial banks are established by a special act issued by the government.
Target Clients
Commercial banks provide loans to people and businesses, while development banks give loans to the government.
Raising Funds
Deposits from the general public, subject to immediate withdrawal, are the primary funding source for commercial banks. On the other hand, development banks raise money via the sale of securities, borrowing money, and receiving grants.
Sector Targets
Commercial banks cater to the general public since they have various goods available. On the other hand, development banks exclusively focus on the development industry.
The Making of Loans Available
Loans for medium and long terms are made available by development banks, in contrast to the short and medium-term loans offered by commercial banks.
Comparison Chart: Commercial Bank Vs Development Bank
| Basis | Commercial Bank | Development Bank |
| Nature | Reactive | Proactive |
| Set-up | As Banking Companies set up under the Companies Act | Set up under a specialized act |
| Source of Funds | Accepting public deposits | Borrowing, grants, and selling securities |
| Available Loans | Short and medium-term loans | Medium and long-term loans |
| Orientation | Profit-oriented | Development-oriented |
| Scope | To make a profit lending money at high-interest rates | Social profit is achieved by funding developmental projects |
| Clients | Individuals and business entities | Government |
FAQ
What is a Liquidity Principle of a Commercial Bank?
A liquidity principle can be considered a commercial bank's guiding principle. The ability to meet immediate withdrawal requests from consumers is an essential liquidity component. In the context of a commercial bank, "the liquidity principle" refers to the strategy of maintaining the required quantity of liquid assets to settle customer checks on demand whenever they are presented.
What is a Confidentiality Principle of a Commercial Bank?
The idea of maintaining client confidentiality requires that all possible human and technological precautions be taken to ensure that the customer's financial information is not accessed by any party other than the individual or organization that is the subject of the secrecy.
What is a Multilateral Development Bank?
The multilateral development banks offer member states loans and grants to finance initiatives encouraging social and economic development. These projects may include the construction of new roads or the provision of clean water to local people.
Conclusion
As a result of the ongoing expansion of banking and financial services, the sector as a whole has seen a great deal of change in recent years. Without a shadow of a doubt, there is not a single economy that would be able to endure in the absence of these services. Banks are essential to the functioning of many different types of businesses and play a significant part in the day-to-day lives of individuals.
Therefore, one might say that banks are the foundation upon which economic development is built. Both commercial banks and development banks fulfill this function, although in distinct ways; as a result, both types of banks are necessary components of any economy.
