What is the main difference between commercial bank and development bank? Commercial bank offers public utility banking services while development bank is a multi-purpose financial institution that provide financial aid to industrial and agricultural sectors.
Banks are vital financial institutions in a country’s economic system. They add economic development and growth of the country. Every society segment uses different banking services for different purposes.
Cooperative banks, commercial banks, and development banks are the categories of banks. We wrote this article to highlight the differences between development bank and commercial bank with their similarities.
Difference between Commercial Bank and Development Bank with Table
|Basic Terms||Commercial Bank||Development Bank|
|Primary Function||Provide financial services to the general public and businesses, including accepting deposits, lending, and payment services.||Focus on providing long-term financial assistance for economic development and growth.|
|Client Base||Serve a wide range of clients, including individuals, businesses, and government entities.||Primarily work with government agencies, businesses, and projects with a developmental focus.|
|Profit Orientation||Profit-driven institutions that aim to maximize shareholder returns.||Typically not-for-profit or less profit-oriented, with a focus on socio-economic development.|
|Risk Tolerance||Tend to have a lower risk tolerance, focusing on traditional banking activities with lower risk profiles.||May have a higher risk tolerance, as they engage in riskier projects to stimulate economic growth.|
|Source of Funds||Primary source of funds is deposits from the public and borrowing from the central bank and interbank market.||Funded by government capital injections, international organizations, and long-term loans and grants.|
|Loan Purpose||Loans provided for various purposes, including personal, business, and consumer needs.||Loans directed toward projects and initiatives that contribute to economic development and infrastructure.|
|Regulation||Regulated by central banks and financial regulatory authorities with a focus on prudential and monetary policies.||Subject to regulatory oversight but often have a specific development-oriented mandate from government authorities.|
|Profit Distribution||Distribute profits among shareholders and may pay dividends.||Profits, if any, are reinvested in developmental projects or used to support socio-economic goals.|
|Geographic Focus||Serve clients across regions, both urban and rural, based on market demand.||Often have a regional or sectoral focus, targeting specific areas or industries needing development.|
|Key Initiatives||Primarily involved in traditional banking services like savings, loans, and investment products.||Engage in financing infrastructure projects, small and medium-sized enterprises (SMEs), and poverty alleviation programs.|
What Is Commercial Bank?
A Commercial Bank is a financial institution that provides a wide range of banking services to the general public, businesses, and government entities. Its primary functions include accepting deposits from customers, offering loans and credit, and providing various financial products.
Commercial banks play a pivotal role in the economy by channeling funds from depositors to borrowers, thus facilitating economic activities. They earn revenue through the interest charged on loans and may also provide fee-based services like wealth management and financial advisory.
These banks are profit-oriented institutions with aim to generate income for their shareholders by efficiently managing deposits and loans while adhering to regulatory guidelines and ensuring the safety and security of customer funds.
Commercial banks operate within a regulated framework and are supervised by central banks and financial regulatory authorities to maintain stability in the financial system.
What Is Development Bank?
A Development Bank is a specialized financial institution primarily established to promote economic development and growth within a country or region. Development banks prioritize financing projects and initiatives that contribute to the socio-economic well-being of a nation.
Development banks typically obtain funds from sources like government capital injections, international organizations, and long-term loans and grants.
They then channel these funds into areas such as infrastructure development, poverty alleviation programs, small and medium-sized enterprises and other projects with developmental objectives.
These banks often have a higher risk tolerance and may engage in riskier ventures to stimulate economic progress. Their primary goal is to enhance infrastructure, create jobs, reduce poverty, and promote overall economic advancement.
Development banks are subject to regulatory oversight but typically have a specific developmental mandate from government authorities or international organizations.
Main Difference between Commercial Bank and Development Bank
- Commercial banks offer basic banking services to the public, while development banks fund projects for economic growth.
- In India, commercial banks are formed as joint-stock companies, while development banks are created through specialized acts passed by the parliament.
- Development banks are proactive in promoting projects, while commercial banks react to business opportunities.
- Commercial banks gather funds through public deposits, while development banks secure funds from borrowing, government grants, and securities.
- Commercial banks provide short and medium-term loans, whereas development banks offer medium and long-term loans.
- Commercial banks seek profit, often through high-interest lending, whereas development banks aim for social profit by funding capital-intensive projects.
- Commercial banks offer services like legal advice for a fee, while development banks provide counseling and advisory services to foster enterprise development.
- Commercial banks serve the general public and businesses, while development banks primarily work with the government.
Similarities between Commercial Bank and Development Bank
- Both are financial institutions.
- They offer various financial services.
- Both are regulated by financial authorities.
- They play a role in the country’s economic development.
- Both may provide loans to clients.
- They handle funds and deposits.
- Both operate under specific legal frameworks.
- They contribute to the stability of the financial system.
- Both have a role in channeling funds to borrowers.
- They have a presence in the banking industry.
Final Thoughts from Experts
Commercial Banks and Development Banks serve distinct roles in the financial landscape. Commercial banks are profit-driven institutions that offer basic banking services to the general public and businesses. They operate reactively, focusing on bankability and profit-seeking.
Development Banks are specialized institutions established to promote economic, agricultural, and industrial growth. They have a proactive role in fostering projects and businesses aligned with developmental objectives. These banks secure funds through borrowing, government grants, and securities and offer medium to long-term loans.
Both types of banks play vital roles in their respective domains and contribute to the overall financial stability and economic development of a country. Understanding these differences helps individuals and governments make informed decisions about financial institutions’ roles.
People Who Read This Also Read:
- Difference between Article and Journal
- Difference between ATL and BTL Marketing
- Difference between Asset Management and Wealth Management