The central bank and Commercial bank are the important financial institutions of a country. The central bank is an institution that is responsible for the monetary policies of the country while the commercial bank provides banking and other financial services to the general public.
Central Banks
The central bank is one of the most important institutions of any particular country because it plays an important role in managing a country’s monetary policies. It helps to maintain economic growth and stability in that particular country. The Central Bank also acts as a banker to commercial banks and it holds a fractional reserve banking system under its control. If we talk about India then the Reserve Bank of India (RBI) is considered the central bank of our country.
Features of Central Banks
Every central bank has a certain set of features, which makes it different from the others. The features are as follows:
First and foremost, the central bank must have a strong and stable economic policy. It must be able to keep track of the economic growth of that particular country at all times.
Secondly, a central bank must provide inflation-free money and should maintain a low inflation rate at all times. Also, this institution should improve the pay structure of its employees.
Lastly, a central bank should be in contact with the international banking community and it should take part in making policies through Treasury securities auctions as well as bond sales.
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Role of Central Banks in the Economy
Along with monetary and banking policies, the central bank of any country also plays an important role in the economic growth and development of that particular country. Here are some important roles of a central bank in the economy:
First and foremost, it must play an important role in providing money supply to the economy at all times.
Secondly, it must keep track of economic indicators like exchange rate, gross domestic product (GDP), etc on a regular basis so that it can take necessary actions to improve these measures.
Thirdly, a central bank must always maintain an optimum level of liquidity so that banks can provide credit facilities to their customers at all times.
Commercial Banks
The main objective of a commercial bank is to provide financial services to the general public. The main clients of commercial banks are small and medium industries, agriculture, households, and business. Commercial banks also play an important role in the safe custody of bank deposits. Features of Commercial banks:
Special Features of Commercial Banks
First, commercial banks must maintain a low rate of inflation at all times. Also, it should be capable of following prudent economic policies and maintaining an adequate level of reserves in its vault.
Secondly, a commercial bank should always look to improve the rate structure of its employees. Last but not least, a commercial bank should be capable of investing in the fund which is available in its vault at better rates.
Lastly, a commercial bank should maintain steady contact with other central banks of other countries in order to improve its monetary policies.
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Role of Commercial Banks in the Economy
It is very important to note that the commercial bank plays a great role in the economy of a particular country. These banks provide financial services to their customers in all fields and they should not waste the financial messages which come from their bank.
1) Financial services: It provides necessary financial services with proper regulation as well as management. It helps to provide cash for lending and other business activities, which are being performed by the general public.
2) Safe custody: Commercial banks are known for depositing and safekeeping of cash and deposit money. This institution must be able to properly keep and store all the money deposited by the general public in its vault.
3) Other Financial Services: Commercial banks offer many other financial services such as payment of salaries, business loans, etc. This bank plays an important role in the economic growth of a particular country.
4) Keep track of their Clients: Commercial banks are known for developing their own database and database management system. Banks take strict concern about the development of database systems and hiring trained staff for this purpose.
Differences between Central Banks and Commercial Banks
1) The Central Bank is the main banker to commercial banks while commercial banks serve the general public.
2) The Central Bank has the responsibility of controlling inflation all the time while Commercial banks don’t have any such responsibility.
3) A central bank has much larger authority and its responsibilities are much higher than those of a commercial bank.
4) Both the institutions play an important role in the economic development of a particular country providing various financial services to the people of that country.
5) The Central bank provides money supply to the overall economy and the commercial bank plays a significant role in the safe custody of deposits deposited by the common public into its own vaults.
6) On the other hand, the commercial bank has much smaller authority and responsibility.
7) A central bank always has its own main goal of maintaining economic growth and providing monetary stability to the country’s economy.
8) Commercial banks are more focused on providing financial services to the general public.
9) Also, a commercial bank cannot play an important role in the economic growth, stability, and development of a particular country in the same way a central bank plays its role.
10) Central banks have a crucial role to play in all monetary policies. On the other hand, commercial banks don’t provide any such services. They are not supposed to take part in making policies for the development of different countries. That’s why the roles of both institutions are different from each other.
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Conclusion
This article has highlighted the differences between central banks and commercial banks. The Central Bank is the most important financial institution while commercial banks provide financial services to the general public. Central banks are also considered the lender of last resort due to some special features which commercial banks don’t have. Anyway, this article has tried to highlight these features in detail. So, you can choose either a central bank or commercial bank as your choice for better purchase/service on your future needs.
