The main bank and also commercial financial institutions both form the basic of a country’s economy. However, they room incredibly various from one another. When the central bank is the supreme organization of the banking device of any country, the advertisement banks role under the rules, regulations, policies and guidelines that the central bank.

You are watching: Explain the distinction between a central bank and a commercial bank.


The far-reaching difference in between the 2 is that the main bank is the apex body to run the entirety banking system. Whereas, a commercial financial institution is simply a constituent unit that the banking device which operates come facilitate exchange and make profits.

Content: difference Between main Bank and Commercial Bank

Difference and also Comparison

BasisCentral BankCommercial Bank
MeaningThe apex human body which regulates the it is provided of money in the economy and also administers the banking device operations in a countryA financial institution which begin deposits, provide loans and also invest the public"s money to earn earnings
OwnershipPublicPublic or private
Banking SystemApex InstituteConstituent Unit
Bank ChiefGovernorChairman
Number of BanksSingleMany
CustomersOther banks and governmentGeneral public
Motive or ObjectiveControlling credit transaction systemProfit earning
Foreign currency FunctionGuardian of foreign currencyDealer of foreign currency
LoansLender that the last resort for advertisement banksLending commercial loans, an individual loans, real estate loans, profession finance, automobile loans and mortgage loans
Other FunctionsIssuing federal government bonds, formulates bank regulations and fund clearance amongst member banksSafe store service, international exchange provision and letter the credit
Note printing AuthorityYesNo
Monetary AuthorityYesNo
Monetary it is provided FunctionYesNo
MonopolyYesNo
Example with reference to IndiaReserve bank of India (RBI)State bank of India (SBI), main Bank the India (CBI), Canara Bank, etc.
Governing human body in IndiaReserve financial institution of India plot 1934Banking Regulation action 1949

What is a Central Bank?

The main bank is an apex human body which aims at controlling and also managing the banking system operations along with regulating the money supply because that the economic stability of a country.

Features of central Bank

To clearly understand what a central bank is, let united state go with its characteristics, provided below:

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Monopoly: The central bank is only one in every country, enjoy it the monopolistic rights and authorities.Apex Body: the is the can be fried body of the country’s banking device regulating the various other banks and supporting the entirety banking framework of the nation.Government-Owned: The main bank is strictly own by the government and thus belong to the public sector.Legal Entity: it is a legitimate entity created under the provisions the a details act that the government, holding a one-of-a-kind significance and also rights.Banker of various other Banks and also Government: The central bank provides the banking solutions such as deposits and withdrawals come the miscellaneous commercial banks and government.Monetary Authority: that keeps finish control end the flow of money within a country through the formulation of miscellaneous monetary policies, rules and regulations.Note print Authority: The central bank is the only financial institution of the country which has actually the authority of printing brand-new notes except coins and also Re. 1 note.Nation’s Gold and also Foreign Exchange Reserve: This bank is also considered to it is in the custodian that the country’s foreign exchange and also gold reserve keeping these heritage under its supervision.The backbone of banking System: gift an apex body, the central bank acts as the backbone of a country’s banking system, performing all the vital financial functions. Such together framing the banking rules and regulations, circulation of money in the market and also advising the government on financial issues.Clearing House: The main bank can be viewed as a clearinghouse due to the fact that it initiates the settlement of bills, cheques and also other gaue won instruments amongst the 2 or an ext banks come ensure smooth to work of the banking device in a country.

What is a Commercial Bank?

A commercial bank is a financial school which aims at making profits by initiating deposits native the public, giving loans to them and also investing your money in financially rewarding options.


Features of commercial Bank

Commercial financial institutions are the financial institutions to i beg your pardon you, I and also other general public visit from time come time to seek assorted financial services. Permit us now go with the following functions of the commercial banks for in-depth knowledge:

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Public or exclusive Ownership: These financial institutions can be classified right into public and private banks, i.e. The property of such banks is not just minimal to the government.Dealer of foreign Currency: Such banks accelerate foreign trade by facilitating the buying and also selling of the international exchange currency.Profit Motive: advertisement banks duty with the motive of earning a profit and also generating income by giving financial services to the public.Types of advertisement Banks

Commercial financial institutions can be extensively categorized right into four types on the communication of your ownership and establishment. This are explained one by one in information below:

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Public ar Banks: The banks which space owned by the general public sector, i.e. The central bank stop 50% shares, the state government has 15%. Whereas, the commercial financial institutions which sponsor such banks to own 35% the the holdings.Private ar Banks: Private banks are the ones where personal investors very own maximum shares.Foreign Banks: All banks which are created outside the nation are termed as foreign banks.Regional rural Banks: The financial institutions which are developed in the rural locations for giving financial aid in transferring out agriculture activities and other little scale commercial operations are well-known as countryside banks.

Functions of main Bank

The main bank holds countless responsibilities and also authorities which defines its services. These are as follows:

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The controller that Money Supply and Credit: The primary function of the central bank is to regulate the it is provided of money and the circulation of credit in the market. The is promoted through quantitative instruments (bank rates, cash to make reservation ratio, statutory liquidity ratio and also open sector operations) and also qualitative instruments, i.e. Fluctuating the rate of attention for loans.

Printing Currency: The main bank has actually the authority of print the notes of all denominations except for Re.1 notes and the coins.

Custodian of Cash Reserve: All the banks have accounts with the central bank where they can maintain some cash reserve because that future needs.

Custodian of foreign Exchange Reserve: This financial institution is responsible for managing, controlling and exchange that the foreign currency and also gold in a country, by maintaining the foreign exchange reserve to save the exchange rates stable.


Clearing House: The main bank acts as a mediator in between the two or much more commercial banks to resolve their accounts at the moment loss and also manage the transactions between the advertisement banks.

Lender of the critical Resort: among the necessary functions that the central bank is to administer loans to commercial financial institutions at the moment of emergency, loss and also insolvency.

Banking services to Banks and Government: This financial institution provides all the general banking services choose accepting deposits and also sanctioning loans to the other banks and also the government.

Issuing government Bonds: The main bank issues various federal government bonds to create funds, encourage public deposits and also investments in the country.

Formulates bank Rules and Regulations: This bank performs miscellaneous regulatory attributes like license banks, framing banking norms and also policies, preparing a judicial mechanism for debt recovery by banks, monitoring the banking operations, etc. The central bank also practices ethical suasion because that making the commercial financial institutions to abide through the plans so framed.

Financial Agent and Advisor to the Government: The main bank acts together a financial advisor to the government by offering an expert opinion at the time financial crisis, budget deficit, and advancing loan to other countries. In ~ the same time, it likewise acts together an certified dealer by representing the country and the federal government in international conferences and also meetings, along with issuing the government bonds and also securities on behalf of the government.

Functions of commercial Banks

The commercial banks have multiple jobs to perform. These room bifurcated into the following two heads, each including many activities:

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Primary Functions

The commercial financial institutions carry out different functions, the crucial ones others together follows:

Accepting Deposits: The financial institutions receive deposits native its customers by initiating them come open present accounts, savings accounts, addressed accounts, etc.Providing Loans and also Advances: They additionally offer long-term loans, demand loans, temporary loans and also many rather to fulfil the customer’s jae won needs.

Secondary Functions

Other 보다 the over mentioned basic operations of advertising banks, there room many an additional functions carry out by these financial institutions are classified right into the adhering to two categories:

Agency Functions: Commercial financial institutions work together agents to the general public or the customers, by giving various payment and also collection infrastructure on a weekly, monthly or yearly basis by charging some commission. It performs the following tasks in this context:The commercial banks act as an agent by paying various interests on instead of of your customers.They also pay the instalments ~ above the loans obtained by customers, such as residence loans, automobile loans and an individual loans ~ above a monthly, quarterly or yearly basis.They also facilitate the payment of taxes, mutual fund instalments and insurance premium because that the customers.The banks on instead of of your customers; collect cheques, interests, rents, dividends, etc.Utility Functions: various other than the firm functions, the financial institutions also administer other infrastructure to the public. Few of these are mentioned below:The advertisement banks carry out the facility of bank overdraft to attract money even in the zero balance situation of the holder’s account.These banks carry out money to customers by discounting their bills of exchange and promissory notes.The banks provide lockers come the client to save their jewellery and valuables in for sure custody through the banks.The advertisement banks likewise issue traveller’s cheques to carry during the trip by the client to prevent the loss or theft the cash.

Summary

To know an ext about the distinctions in detail, check out the provided explanation the the over comparison chart below:

The central bank is the apex institution administering and also controlling the entirety monetary and also banking device of the country. On the various other hand, a commercial financial institution is a financial institution i beg your pardon earns a profit by initiating deposits, progressing loans and also investing the public’s money in assorted opportunities.The main bank is generally a public sector organization own by the state in countless countries. Whereas, commercial financial institutions are held by both the public and also private sectors.The former is an apex college or the supreme human body of the bank system. However, a commercial financial institution is a financial college which functions under the regulations of the central bank.Central bank’s chef is the Governor that the main bank. Whereas, advertisement bank’s head is the Chairman that the corresponding commercial bank.When the former is the only bank the its type in the country, the latter has many institutions of different types.While main bank serves the various other banks together with the government, commercial financial institutions serve the general public, consisting of individuals and also business organizations.The major objective the the central bank is credit control and economic stability. ~ above the contrary, the commercial banks’ primary motive is to earn a profit.When the main bank is the guardian the the foreign currency regulating the foreign exchange operations, commercial banks are dealers of international currency facilitating together transactions because that its customers.The previous provides a loan come the advertising banks in instance of emergency, conversely, the latter offers loans to its customers consistently to create profits.The miscellaneous other attributes of central bank involve issuing of government bonds, formulate bank regulations and also clearance that funds amongst member banks. However, the features of commercial banks include safe store service, foreign exchange provision, and issuing a letter of credit.The main bank has the authority of printing brand-new currency other than for coins and also Re. 1 notes, whereas commercial banks do not have actually this authority.The previous holds assorted monetary authorities such as framing the fiscal policies and also regulating the bank operations in a country. Top top the contrary, the latter has actually no such rights.The main bank exercises control over the supply of money and credit terms and also conditions in the gaue won market. However, the commercial banks have come follow the accuse of the central bank regarding money supply and also credit terms.The former is the only bank of that is kind, enjoy it the monopoly in the banking sector. However the latter are multiple in number and function under the main bank.The central bank the India is the Reserve bank of India (RBI). Whereas, the various others prefer State financial institution of India (SBI), main Bank that India (CBI) and Canara Bank room all advertising banks.In India, the Reserve financial institution of India is administer under the Reserve bank of India action 1934. However, the commercial financial institutions are administer by the Banking Regulation action 1949.

No service can role properly without the solutions of the banks. Appropriate from taking loans to meet the financial requirement of the company to depositing the income and profits for additional needs, financial institutions play a an essential role.

Where the commercial banks carry out various such services to the public, in general, i.e. The individuals and also the organization entities, the main bank assists all the commercial banks and the government, to function correctly.

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To conclude, we deserve to say the both the main bank and also the commercial financial institutions are important to the country, the economy, the service entities and also the public; make everyone’s resides easier.