Difference Between Commercial Bank and Cooperative Bank

Introduction

A bank is a sort of financial institution that accepts public deposits, creates demand deposits, and lends money. Banks can be classified as Central Banks, Cooperative Banks, Commercial Banks, Regional Rural Banks (RRB), Local Area Banks (LAB), Specialized Banks, Small Finance Banks, and Payments Banks. Banks are vital to the economy because they provide key services to both consumers and businesses. Individuals and businesses can get credit from banks. In this article, we shall understand two major types of banks that are Commercial banks and Cooperative banks.

Commercial Banks vs. Cooperative Banks

A commercial bank is one that was established for commercial purposes, with the primary goal of profiting from its banking operations. Cooperative banks, on the other hand, are owned and run by their members with a shared goal: to offer financial services to farmers and small business owners. It is based on cooperative ideals such as open membership, democratic decision-making, and mutual assistance.

The fundamental duty of a commercial bank is to take public deposits and provide loans to people and companies. A cooperative bank, on the other hand, accepts deposits from members and the general public and makes loans to farmers and small business owners.

Difference Between Commercial Banks and Cooperative Banks in Tabular Form

Parameters	Commercial Bank	Cooperative Bank
Customers	General public and businessmen, traders, importers, and exporters.	People engaged in Agriculture and rural small businesses.
Entity	Could be both public and private.	Cooperative banks can only be private entities.
Motive	Commercial banks are engaged in the financial activities that drive profits.	Cooperative banks operate on a smaller scale and their motive is to help small businesses and not to earn profits. (service motive)
Rate of interest	Lower rate of interest on the deposits.	Higher rates of interest are provided.
Area of operation	Commercial banks operate in comparatively larger areas.	Cooperative banks cover a limited area.
Incorporation	Banking Regulation Act, 1949	Cooperative Societies Act, 1965.
Voting power	Account-holders borrow from these banks and have no voting power.	Members have the voting power and they can influence the credit policy.
Services and products	Commercial banks offer more services and products to increase profits.	Cooperative banks offer comparatively lesser services and products.
Governed By	Reserve Bank Of India	RBI and registrar of Cooperative society
Functions	Accepting deposits and granting loans to any eligible customer.	Accept deposits from members and grant loans to farmers and small businesses.

What is Commercial Bank?

A commercial bank is a financial organization that takes public deposits and provides loans for consumption and profit-making investment. Commercial banks' main function is to offer financial services to the general public and businesses, maintaining economic and social stability as well as long-term economic progress.

India's oldest commercial bank is the Bank of Calcutta. In the year 1806, it was founded. The Bank of Bengal was afterward renamed. It is currently known as the State Bank of India.

Categories of Commercial Banks

Public sector banks, private sector banks, and foreign banks are the three primary types of commercial banks.

1. Public sector banks:

Public Sector Banks (PSBs) is a prominent category of government-owned banks in India, with the Ministry of Finance of the Government of India or the State Ministries of Finance of several Indian states owning a majority interest (i.e. more than 50%). At the moment, there are 12 public sector banks operational in India. State Bank of India, Bank of Baroda, Canara Bank, Punjab National Bank, and Bank of India are some examples of public sector banks in India

2. Private sector banks:

Commercial banks in the private sector are financial institutions predominantly owned and run by high-net-worth individuals and businesses. Public Sector Banks, on the other hand, are owned and operated by the government. In India, there are now 22 private banks. HDFC Bank, ICICI Bank, Federal Bank, IDBI Bank, and Kotak Mahindra Bank are the private banks that are operational in India at the moment.

3. Foreign bank:

A foreign bank is an international bank having branches in India that has its headquarters in a separate country. The regulations of both the home and host nations must be followed by a foreign bank. Around 46 foreign banks are operating in India. HSBC bank, Dohra bank, Bank of America, and Citi Bank are the foreign banks currently operating branches in India.

Functions of commercial bank:

Usually, banks perform their primary functions like accepting deposits, lending loans and credits, providing money transfer facilities, and other miscellaneous functions. Let us see some functions of commercial banks-

Primary functions:

1. Accepting Deposits

Commercial banks' primary responsibility is to accept public deposits. Current, savings and fixed deposit accounts are all accepted by banks.

• Current deposits-

Account-holders of these accounts are mostly traders or businessmen since their need of depositing and withdrawing money frequently is fulfilled in this account. Bank has to keep the cash ready all the time to be withdrawn in this account and hence provides no interest or very lesser interest. Money can be deposited and withdrawn at any point in time and there’s no restriction on the frequency.

• Savings deposits-

These account holders can deposit a certain amount according to the limit set by the bank. There are restrictions on withdrawal such as how many times money should be withdrawn, in how much time, and how much to be withdrawn. This helps encourage the saving habit in people and hence preferred by general people.

• Fixed deposits-

These are deposits that are made for a specific length of time. Long-term deposits are defined as those that are held for at least one year. Because banks may utilize these deposits for an extended time without worry of their being removed, they usually pay a higher rate of interest.

2. Loans and credits:

Extending loans to businesses and individuals and profiting from the interest gained Banks construct a line of credit and transmit the loan to a firm or commercial entity all at once, rather than delivering liquid cash.

3. Overdraft

If there are no deposits in the current account, banks extend loans to their customers up to a specific amount through overdrafts. For this reason, banks require security from clients and charge exorbitant interest rates.

Secondary functions:

• Locker facilities:

Customers can use a bank's locker room to store their valuables or important papers. Banks charge its customers for this service annually. Banks put up lockers for their clients' precious possessions, such as gold, silver, and legal papers, to be kept safe. Locker facilities reduce the threat of theft or loss that exists when belongings are kept at home.

• Bill of exchange discounting:

This is the most common and important means of providing traders with short-term financing. It is a written agreement that specifies the amount of money to be paid in exchange for products purchased at a future date. To clear the due payment before the deadline, commercial bank’s discounting strategy can be used. Businesspeople can acquire loans based on their bills of exchange before they mature in this way.

• Foreign exchange and exchange of securities:

Importers and exporters need foreign exchange and that is provided by commercial banks. However, only specific banks with a foreign exchange trading license are permitted to conduct such transactions. The bank provides you with the option to sell and acquire securities. Commercial banks trade in bonds, securities, etc., and customers can buy or sell units directly from the bank.

What is a co-operative bank?

Co-operative banks are owned by its cooperative society members and operated by them. These members have the power to influence credit policy. This means that a co-operative bank's customers are also its proprietors. These financial organisations provide a full diverse array banking and financial services. The cooperative banking system was established to encourage individuals to save and invest, particularly in rural areas of the country. In India, cooperative banks are governed by the States Cooperative Societies Act. They are also regulated by the Reserve Bank of India (RBI) under two laws, posing the challenge of dual regulation.

Types of Cooperative Banks-

Cooperative banks are mainly categorized into four parts. They are as follows:

1. Central Cooperative Bank

These banks are operated at the district level. These could be divided further into two categories- Co-operative Banking Union and Mixed control Co-operative Bank. The associated primary societies are mostly financed by the central co-operative banks, with average loan terms ranging from one to three years. In Co-operative Banking Union, only the members of cooperative society become the members of the bank. In Mixed control Cooperative banks, both the members of the cooperative society and other individuals can become members of the bank.

A District Co-operative Central Bank (DCCB) is an Indian cooperative bank that operates at the district level.

2. State Co-operative Banks:

The state cooperative bank is a federation of the central cooperative bank that serves as the state's custodian of the cooperative banking system. Its funds come from the Reserve Bank of India's social capital, deposits, loans, and overdrafts.  Saraswat Co-operative Bank, Cosmos Co-operative Bank, TJSB Bank, Abhyudaya Bank are some examples of state cooperative banks in India.

3. Primary C-operative Banks:

Primary cooperative banks, also known as Urban Cooperative Banks (UCBs), are registered as cooperative societies under either the State Cooperative Societies Act of the state in question or the Multi State Cooperative Societies Act of 2002.

4. Land Development Banks

A land development bank, abbreviated LDB, is a quasi-commercial bank in India that offers services such as receiving deposits, arranging business loans, and offering basic investment products. The land development bank's principal goal is to encourage agricultural development and boost agricultural production. The Land Development Bank is divided into two parts: the Central Land Development Bank at the state level and the Primary Land Development Bank at the district or Taluka level.

Examples of Land Development Banks in India-

• Gujarat State Cooperative Agriculture and Rural Development Bank,
• National Co-operative Agriculture & Rural Development Banks Federation Limited.
• Progoti Co-operative Land Development Bank Limited.

Main Differences Between Commercial Bank and Cooperative Bank in Points

• Commercial banks are run for commercial benefits that are to earn profits. On the other hand, cooperative banks are run for helping small businesses and people who are engaged in agricultural activities.
• All commercial banks are strictly governed by the Reserve Bank of India whereas, Cooperative banks are governed by their cooperative society and Reserve Bank of India.
• Commercial banks offer a variety of services and products to their customers such as foreign exchange, overdraft facilities, types of credits, exchange o securities, etc. Cooperative banks do not offer profit-driven services.
• Commercial banks are engaged in bonds and trading; customers can directly sell or buy those securities from the bank. Cooperative banks don’t operate in bonds and trading. Commercial banks were incorporated in 1949 under Banking Regulation Act, 1949. Cooperative banks are incorporated in 1965 under Cooperative Societies Act, 1965.
• Commercial banks offer a lesser rate of interest on deposits as compared to cooperative banks.
• Commercial banks accept deposits from the general public and businesses and grant loans and credits to them according to their eligibility. Cooperative banks accept deposits from their members and grant loans to agriculturists and small businesses.
• Members of the cooperative society of the cooperative bank have the voting power and they can amend the credit policy. Customers of commercial banks don’t have this right.
• Commercial banks can be both public and private. But, an entity of cooperative banks is always private.

Conclusion

The article has stated how commercial banks are different from cooperative banks. The main motive of commercial banks is to earn profits from services and products offered to the customers. On the other hand, cooperative banks are service-based. They help small businesses by granting loans from the funds generated. They both work on the principle of serving their consumers, which may be limited to a specific location or divided into other locations, but the only goal of business is either making money or serving people. Customers of commercial banks do not have the power to vote on credit restrictions, but customers of cooperative banks do.