From ancient times onward, banking has existed in some form or another as a necessary component of society to manage both private and public financial activity. The banking industry is essential to India's economic development. These financial institutions have the right to lend money, accept deposits, and offer other services to private citizens and commercial enterprises. Commercial banks, small finance banks, payments banks, and cooperative banks are among the several categories of banks in India. Public sector banks, private sector banks, foreign banks, and regional rural banks are further divisions of commercial banks (RRB). Let's examine how Commercial Banks vary from Small Finance Banks in this post.
The most excellent technique to manage money for various reasons and develop one's finances is through clever banking concepts and facilities. People's deposits should be efficiently handled, giving them complete protection and alternatives to increase their funds by paying interest. Typically, banks run on the excess capital they generate from the difference between the interest they pay on customer deposits as well as the interest they charge for loans. Commercial and small finance banks are a crucial component of the modern banking system for accepting deposits and disbursing loans.
Commercial Bank Vs. Small Finance Bank
The primary distinction between commercial and small finance banks is that the former have no restrictions on their target clients, while the latter have MSME, small-scale farmers, small companies, and unorganized labor among their clientele. Small Finance Bank is categorically distinct from Commercial Bank and was recently launched. Differentiated Bank, a small financial institution, introduced its concept in 2007. In September 2015, the RBI gave ten Small Finance Banks (SFB) in-principle licenses following a study on the idea. The primary goal behind the creation of such banks by the RBI is to target a particular market and modify these banks' operations following the preferences of this target market.
Difference Between Commercial Bank And Small Finance Bank in Tabular Form
|Parameters Of Comparison||Commercial Bank||Small Finance Bank|
|Maximum capital||There is no ceiling on how much capital a commercial bank can borrow.||One hundred thousand dollars should be the minimum capital paid up.|
|Requirement of Regulation||Controlled by the RBI||Controlled by the RBI|
|Loan||Provides all loan kinds||and offers essential lending services, including auto, gold, MSME, and personal loans.|
|Target Clients||Not limited to any person or thing||Small-dollar loans, unorganized labor, and MSMEs|
|Transfer Services||Can offer remittance services||Can offer remittance services|
|Solutions for Online Banking||can provide online banking services||can provide online banking services|
|Maximum Capital||Requires a significant investment in money||Up to 100 crores should be the minimum capital.|
|Loan products||May provide loans to all bank clients. Customers may be offered loans by it. However, loans should be extended to the priority industries at 75%.||
Using transaction fees and loan services, one can generate income.
May generate income by providing loan services to the intended clients.
There is no regional limitation.
The company's target clients are small enterprises, unorganized labor, small farmers, and MSMEs.
Branches may establish themselves anywhere throughout the nation.
25% of the branches should be in rural regions for the first three years.
What Is Commercial Bank?
A "commercial bank" is a type and kind of financial institution that accepts deposits, gives checking account services, makes various loans, and sells financial products including certificates of deposit (CDs) and savings accounts to individuals and small businesses." Most individuals do their financial business at commercial banks. Commercial banks generate revenue by making loans, including mortgages, vehicles, business, and personal loans, and charging interest on those loans. Customer deposits provide the money needed to fund these loans to banks. In addition, a commercial bank can offer essential financial services, including certificates of deposit (CDs) and savings accounts, to individuals and small companies.
Everyone can do their banking at a commercial bank. Their primary source of income is the interest they accrue by offering loans to people and small businesses as well as vehicle loans, mortgages, and other financial products. Commercial banks often use checking accounts, client deposits, savings accounts, money markets, and other means of capital collection to fund loans.
Purpose Of Commercial Bank
Commercial banks provide essential banking services to individuals and small to medium-sized enterprises, such as deposit accounts and loans. Commercial banks profit from fees and the interest they get on loans. Commercial banks have historically had physical facilities, but an increasing number of them now run entirely online. Because they generate capital, credit, and market liquidity, commercial banks are crucial to the economy.
Essential Roles of Commercial Banks
Commercial banks have a significant role in the economy. They offer customers an essential service, support the influx of money, and increase market liquidity. They maintain liquidity by taking the money that their clients put in their accounts and lending it to other people. As a result, commercial banks contribute to credit issuance, increasing output, employment, and consumer spending while stimulating the economy. As a result, each nation or area's central bank has strict regulations for commercial banks. For example, commercial banks are subject to reserve requirements set by central banks. To protect themselves against a sudden surge in public withdrawals of money, banks are therefore compelled to keep a fixed portion of consumer deposits at the central bank. In the absence of commercial banks, people would hoard money in their residences. Before banks were invented, people would store their money in jars, under their mattresses and beds, in the ground, in grain stocks, etc. Records of instances of money being taken and consumed by termites and rodents exist. In the present day, keeping money at home will result in a high rate of theft and robbery.
Characteristics of Commercial Bank
- Commercial banks have no constraints on offering consumers goods, functions, and services.
- Without any limitations, commercial banks in India can provide lending services, including personal loans, housing loans, etc.
- No limit on the number of customer deposits it will take
- Able to issue both debit and credit cards
- Commercial banks can put the funds they receive as deposits into the open market.
- Commercial banks can offer foreign exchange services. However, the fees charged by various banks vary.
What Is Small Finance Bank?
Small financing banks are a particular kind of bank that assists groups that do not receive assistance from larger banks. Small financing banks give society's economically underserved sectors access to essential banking services. It aids in providing financial assistance to small businesses, marginal farmers, microbusinesses, and small enterprises. Small enterprises, the unorganized sector, low-income households, farmers, etc., are all included.
Under the Corporations Act of 2013, small financing banks were registered as public limited companies. It is licensed under Section 22 of the Banking Regulation Act of 1949, which grants it a license. It is controlled by the terms of the Reserve Bank of India Act of 1934 and the Banking Regulation Act of 1949. The Reserve Bank of India intends to support rural and semi-urban areas, which are among the weakest sectors of the economy.
Depositors of small financial institutions can invest in current and savings accounts, fixed deposits, commercial papers, refinancing, etc. They provide interest rates of 6-7 percent on savings accounts. They provide a 9 percent interest rate on fixed accounts and so on. Small financing institutions offer both individual and group loans. Group loans are available on a shared responsibility basis. The entire group is responsible for the debt if one member fails to make the payment.
One of the Small Finance Banks functioning in India is AU Bank. We began our operations as a private finance firm in 1996 under the name AU Financiers to assist low- and middle-income people with their funding needs. Due to our established presence and successful track record, we were one of the ten companies to obtain the license to run a small finance bank in India in 2015. We are now regarded as one of India's top scheduled commercial banks. We give every one of our customers a tranquil banking experience; we are also recognized as a Fortune India 500 firm.
The Goal of Small Finance Bank
- Its principal objective is to offer a formal system for encouraging saving among the rural and semi-urban segments of society.
- It aids in providing loans to micro and small businesses, marginal farmers, unorganized industries, and other unorganized sectors.
Regulating Small Finance Banks
- Small financial institutions will perform fundamental banking tasks, including receiving deposits and lending money to underserved groups.
- It will offer financial services to encourage rural residents' saving behaviors.
- These microfinance institutions were founded as public limited companies. They may be sponsored by corporations, organizations, trusts, or society.
- These are controlled by the terms of the Banking Regulation Act of 1949 and the Reserve Bank of India Act of 1934.
- Contrary to other specified prohibitions, Small Finance Banks are not permitted to borrow money from the Reserve Bank of India.
Major Issues Faced by Small Finance Bank
- It is challenging to maintain a perfect technological platform that will help the bank save money while facilitating consumer transactions.
- Small Finance Banks did not previously handle deposits; instead, they operated as MFIs (Microfinance Institutions).
- They must invest in the necessary infrastructure to interact with banks and permit deposits through the network of ATMs.
- Management's capital adequacy ratio, the cash reserve ratio (CRR), and the statutory liquidity ratio (SLR). Consequently, earnings will be lower until SFBs build a sizable depositor base to manage them.
Qualification Standards for Banks
- Minimum Paid-Up Capital: 100 billion rupees
- Promoters' first minimum investment is greater than 40% (to be bought to 26 percent within 12 years of commencement)
- Foreign ownership following the FDI policy for private banks
- Obligated to follow all prudential standards and guidelines for commercial banks
- Seventy-five percent of ANBC should be extended to PSL sectors.
- At least 50% of the lending portfolio should be made up of loans and advances under Rs. 25 lakh.
Main Difference Between Commercial Bank And Small Finance Bank in Points
- While a Small Finance Bank should allocate 75% of its loans to priority industries, a Commercial Bank may make loans to any consumer.
- A commercial bank can generate income via transactions and loans. Small Finance Banks' primary source of revenue comes from the loan services they provide to their target clients.
- A commercial bank can lend to anybody interested. In contrast, a small finance bank only provides services to unorganized labor, MSMEs, small firms, and farmers (micro, small and medium enterprises).
- A commercial bank may operate branches anywhere in the nation, but it should concentrate on rural regions for the first three years after opening.
- The fundamental distinction between a Commercial Bank and a Small Finance Bank is that a Commercial Bank may acquire capital without restriction. Still, a Small Finance Bank is required to contribute a minimum of Rs. 100 crore.
- Small Finance Banks Those in the financial industry with at least ten years of experience, including NBFCs, microfinance institutions, neighborhood banks, etc. Commercial Banks, according to RBI-issued norms.
- Small Finance Banks should start out being entirely technology-driven. Commercial Banks progressively incorporate cutting-edge technologies, such as internet shopping, mobile banking, etc.
- While MSME, small farmers, small business owners, unorganized workers, etc., are among the target clients of small finance banks, commercial banks' target clients are commercial banks. Not limited to any one location
Nowadays, banking is necessary. They are relied upon by people to meet their financial demands, including those related to obtaining loans and mortgages, making deposits, etc. In India, there are two different sorts of banks: commercial banks and small finance banks. Financial institutions, particularly those in rural parts of India, might be referred to as new generation banks because they just began to exist after 2014. Banks are the best way for people to achieve financial security and stability if they can proceed while adhering to deadlines and instructions. Payments Banks and Small Finance Banks are two categories of specialized banks to which the Reserve Bank of India has previously granted licenses. Currently, the RBI is looking into the potential for licensing more specialized banks, such as custodian banks and banks that focus on wholesale and long-term financing.