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Difference Between Central Bank and Commercial Bank

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What is the Necessity of a Bank?

For a financial system to be well is functional in the modern economy, banks are the utmost. Banks perform important functions for society. These banks should be able to lend their money to the consumers and the business houses. In addition to this, the payments for goods and services are to be processed swiftly, safely, and at a lower cost.

Students studying commerce must know these banks and they also should have good knowledge about the difference between these two. In this section, we will priorly talk about the difference between Central Bank and Commercial Bank. 


Central and Commercial Bank

Banks are mainly divided into – Commercial Banks and Central Banks. The Central and Commercial Bank plays an important role in the functioning of the economy. We need to clearly understand the meaning of these banks before we proceed to distinguish between the Central Bank and Commercial Bank. 


What are Banks?

Banks are an integral part of the economy in a nation. They are the most important institutions which help to regulate the overall development of the economy. 


Mobilisation of Money

Banks help in mobilizing the money in a nation. The banks act as a connecting pin between the government and the general population. The banks act as the facilitators of credit in the economy, they are an important component that drives growth in the stabilized economy.


The Two Types of Banks

There are two types of banks that are based on the system of authority, these are - central banks and commercial banks. The central bank can be called the apex banking system, they are responsible for formulating the monetary policy in an economy.

While, Commercial banks, on the other hand, are those banks that help in the flow of money in an economy by providing the facility of deposit and credit. Commercial banks provide financial services to individuals and businesses.


Definition of Central Bank

Central Bank is being the supreme financial institution that regulates the banking and the monetary system in the nation. This bank is formed for the purpose of monetary stability, issuing of notes, maintaining the value of a country’s currency in the international stock and commodity market. The Central Bank administers the currency and the credit system of the nation. The central bank which is RBI (Reserve Bank of India) plays the role of a centralized bank, which came into the existence, after passing the act in parliament in the year 1934. The bank is headquartered in Mumbai. These are the following functions which are fundamentally done by the Central Bank/RBI:

  • The RBI is authorized to issue the currency notes except for the coins and notes of a smaller magnitude amount.

  • RBI has the power to control, supervise and direct the commercial banks. RBI also helps these banks at the time of need or crisis.

  • The central bank employs various measures to control the credit operations of these commercial banks.

  • RBI is the banker and advisor to the government of India.

  • The RBI acts as the manager of the foreign exchange reserves.

  • RBI collects and publishes the information which relates to banking and the financial sector.

  • RBI oversees the credit and monetary policy of this nation.


Definition of Commercial Bank

The entities or the financial institutions that provide banking and financial services to a large number of people are known as the Commercial Banks. Commercial banks act as the mediator between the borrowers and the savers. The Commercial Banks receive the deposits from the general public and it lends it further to the general public or organizations of high interest. In this way, they facilitate the mobilization of savings that take place in the economy, thereby ensuring the economic cycle to go on smoothly.


Central Bank Vs Commercial Bank


Point of Difference

Central Bank

Commercial Bank

Definition 

This is the central bank which is the apex financial institute that is concerned with the formation of monetary policies and regulation of money. 

This is a type of financial institution which is concerned with providing the banking service to the general public and the business by facilitating the deposits and offering loan facilities. 

Ownership 

Central Bank has public ownership.

Commercial Banks can be either public or private in nature

No. of Banks under them 

Only one centralized bank that is the RBI

Many commercial banks in the country.

Profit Motive 

Does not operate for the purpose of making a profit.

Operate with the sole purpose of making a profit. 

Clients

Commercial Banks and Government only

General Public and Business Organizations. 

Policy 

The RBI or the Central Bank creates a Monetary Policy to regulate the interest rate in the country. 

Commercial banks play no role in creating any policy for the functioning of the economy.

The money supply

They are the source of money supply in the economy.

The money source is merely the deposits kept by the individuals. 


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Difference Between RBI and Commercial Bank


Reserve Bank of India

Commercial Bank

They have the sole monopoly right to issue currency notes.  

Issuing currency notes are not done by commercial banks.

Apex Bank of the money market

This is a banking unit in the country

RBI does not deal with the general public.

Deals with the general public

Acts as the banker to the government

No such responsibility. 

FAQs on Difference Between Central Bank and Commercial Bank

1. What is the Relation Between RBI and Central Government?

Ans. RBI-commercial bank relationship is a key factor in the economy. The RBI is the regulator and acts as the supervisor of the commercial banking system. RBI's monetary policy approach with the objective called the financial stability, this is to ensure that the bank should be healthy and capable of withstanding all such crisis.

2. What are the Important Functions of RBI?

Ans. Important functions of RBI are as follows:

  • Issuing of the Bank Notes.

  • RBI is the banker to the Government.

  • RBI is the custodian of the Cash Reserves of the Commercial Banks.

  • The institution is the custodian of the country's forex reserves.

  • RBI is the Lender of last resort.

  • The institution is the Controller of credit.

3. Which is the First Commercial Bank of India?

Ans. Bank of Calcutta is the oldest and first commercial bank of India. This bank was established in the year 1806. Later, it got renamed to Bank of Bengal. Now, it is known as the State Bank of India.