Difference between Commercial Banks and Development Banks (2024)

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A bank is a component of the financial system that issues demand deposits while also takingpublic deposits. Both direct and indirect lending activities can be carried out through capitalmarkets. Banks are heavily regulated in most nations due to their significance to financialstability.

What are Commercial Banks?

A financial institution that accepts deposits, provides checking account services, makesdifferent loans, and provides fundamental financial products like certificates of deposit (CDs)and savings accounts to individuals and small businesses is referred to as a "commercialbank." Most people conduct their financial business at commercial banks.

Commercial banks generate revenue through making loans, including mortgages, vehicleloans, business loans, and personal loans, and charging interest on those loans. Banks receivetheir funding for these loans from customer deposits.

Public and private sector banks are both incorporated in commercial banks. Commercialbanks' primary responsibility is to offer financial services to individuals and businesses,promoting stability in the political, social, and economic spheres while fostering long-termeconomic expansion.

What are Development Banks?

A development bank is a national or regional financial institution that offers medium- andlong-term finance for profitable investments in underdeveloped nations, frequently inconjunction with technical support.

Since the 1950s, the International Bank for Reconstruction and Development and its affiliates have fostered the growth of new development banks. The most critical role that commercial banks play in this regard is the production of credit.

They do not hand over cash to the borrower while authorizing a loan for a consumer. Theyinstead open a bank account in which the borrower can withdraw funds. In other words, theyestablish deposits automatically when they sanction a loan.

Difference between Commercial Banks and Development Banks

To understand the difference between the two, refer to the table below.

Categorization	Commercial Banks	Development Banks
Definition	A financial organization thataccepts deposits, redistributesvarious loans, offers checkingaccount services, and provides basicfinancial results like certificates ofdeposit (CDs) and savings accountsto people and small businesses isreferred to as a "commercial bank."	A financial entity is known as adevelopment financial institution(DFI), commonly referred to as adevelopment bank or adevelopment finance corporation(DFC), is one that offers riskcapital for economic developmentprojects on an unpaid basis.
Role	Commercial banks' primaryresponsibility is to offer financialservices to individuals andbusinesses in order to promotesocial and economic stability andlong-term economic growth.The most critical role ofcommercial banks in this regard iscredit creation. They do not give theborrower cash when they approve aloan for a consumer. Instead, theyestablish a deposit account that theborrower can use to withdrawfunds. In other words, theyautomatically establish depositswhen they sanction a loan.	DFIs can be extremely importantin financing commercial andpublic sector initiatives indeveloping nations.DFIs frequently lend money to theprivate sector to supportinitiatives that advancedevelopment and aid businesses inmaking investments, particularlyin nations with a variety of marketconstraints.Some development banksincorporate criteria for impactinvestment and socially consciousinvesting in their mandates.Governments frequently usedevelopment banks as acomponent of their programs forinternational aid or economicgrowth .
Purpose	Commercial banks' primary goal isto generate profit by collectinginterest from high-interest loans.	Development banks’ main aim isto pursue social profit throughimplementing developmentinitiatives.
Establishment	Commercial banks are establishedas businesses under the CompaniesAct.	Development banks areestablished under a special Actpassed by the government.
Clients	Commercial banks lend to bothindividuals and businesses.	Development banks lend to thegovernment.
Source ofIncome	Commercial banks generate andcollect interest from loans such asmortgages, business loans, vehicleloans, and personal loans in order togenerate revenue. Banks receive the funding to makethese loans from customer deposits.	Development banks raise moneyin both domestic and globalfinancial markets, andgovernments also provide theirpay in capital. Additionally, the private sectorfrequently contributes to thesebanks' loans, which is particularlybeneficial for governmentsdealing with tight budgets duringand after economic crises.
Location	Generally, commercial banks havebeen situated in structures whereclients come to do their everydaybanking using ATMs and tellerwindow services.	Community development banksdiffer significantly fromcommercial banks despite bothbeing private enterprises.They are always found ineconomically poor urban and ruralareas with little to no banks orbank branches.
Nature	Commercial banks are financialintermediaries.	Development banks serve avariety of purposes.
Fundraisingstrategy	Public deposits that are demandpayablehelp commercial banksraise money	On the other hand, developmentbanks obtain their funding fromthe sale of securities, borrowing,and grants.
Usage ofcheque	Commercial banks offer chequefacilities, allowing deposits andwithdrawals to be conducted usingchecks.	Development banks don't providecheck conveniences.

Conclusion

We have witnessed numerous developments in the business due to the ongoing growth ofbanking and banking services. Without these services, there is no economy that couldpossibly survive.

The modern economy cannot function without the banking industry. As the main source ofcredit, it provides funding for individuals to purchase homes and vehicles as well as forbusinesses to acquire equipment, grow their operations, and pay their employees.

Additionally, banks offer depositors a secure location to store their money. Banks are thebackbone of all industries and play a significant part in the daily lives of people.

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