Difference Between Commercial Bank and Cooperative Bank
Commercial banks are profit-driven institutions owned by shareholders, offering a wide range of financial services like savings accounts, loans, and credit cards, with the primary goal of maximizing shareholder wealth.
In contrast, cooperative banks are owned and operated by their members, typically focusing on community welfare rather than profit. They offer similar banking services but at more favorable terms, as they prioritize member benefits over profits.
While commercial banks cater to a broader customer base, cooperative banks usually serve specific communities or sectors.
What is Commercial Bank?
A commercial bank is a financial institution that offers a variety of services to individuals, businesses, and governments. These banks play a crucial role in the economy by facilitating the flow of money and providing essential financial services.
The primary functions of commercial banks include accepting deposits, providing loans, and offering payment services.
Key Functions of Commercial Banks
Commercial banks are integral to the financial system, performing several key functions that help maintain economic stability.
1. Accepting Deposits
One of the most fundamental roles of a commercial bank is to accept deposits from customers. These deposits can be in the form of savings accounts, checking accounts, or fixed deposits. By keeping their money in a bank, customers can ensure its safety while earning interest on their savings.
2. Providing Loans
Commercial banks are major providers of loans to individuals, businesses, and governments. They offer various types of loans, such as personal loans, home loans, and business loans. By lending money, banks help stimulate economic activity by enabling consumers to make purchases and businesses to expand.
3. Payment and Transfer Services
Commercial banks facilitate payments and money transfers, making it easier for individuals and businesses to conduct transactions. Services such as Electronic Funds Transfer (EFT), online banking, and credit/debit cards are some of the ways banks help in the smooth transfer of money.
Types of Accounts in Commercial Banks
Commercial banks offer different types of accounts to cater to the diverse needs of their customers.
1. Savings Account
A savings account is designed for individuals who want to save money while earning interest. It is a secure place to store money, and customers can access their funds when needed.
2. Checking Account
A checking account is primarily used for everyday transactions. Customers can write checks, use debit cards, or make online payments directly from this account. While it typically offers lower interest rates compared to a savings account, it provides greater flexibility.
3. Fixed Deposit
A fixed deposit account allows customers to deposit a lump sum of money for a fixed period at a higher interest rate. The money cannot be withdrawn before the maturity date without incurring penalties, making it a suitable option for long-term savings.
What is Cooperative Bank?
A cooperative bank is a type of financial institution that operates on the principles of cooperation, self-help, and mutual assistance. Unlike traditional commercial banks, cooperative banks are owned and controlled by their members, who are also the bank’s customers.
These banks are designed to meet the financial needs of their members, often focusing on providing credit to rural and agricultural sectors, as well as small businesses and individuals.
Key Features of Cooperative Banks
Cooperative banks have several distinct characteristics that set them apart from other financial institutions:
Member Ownership:
Cooperative banks are owned by their members, who have a say in how the bank is run. Each member typically has one vote, regardless of the amount of money they have deposited in the bank. This democratic structure ensures that the bank operates in the best interest of its members.
Profit Distribution:
Any profits made by a cooperative bank are usually distributed among its members in the form of dividends. The primary goal of these banks is not to maximize profits, but to serve their members’ financial needs.
Focus on Community Development:
Cooperative banks often prioritize lending to small businesses, farmers, and local communities. Their aim is to promote economic growth and development within the community, rather than just generating profits.
Services Offered by Cooperative Banks
Cooperative banks offer a wide range of financial services, similar to those provided by commercial banks:
Savings Accounts:
Members can open savings accounts to deposit their money, earn interest, and manage their finances.
Loans and Credit:
Cooperative banks provide various types of loans, including personal loans, business loans, and agricultural loans. These loans often come with lower interest rates compared to those offered by commercial banks.
Electronic Funds Transfer (EFT):
Many cooperative banks offer EFT services, enabling members to transfer funds electronically between accounts or to other banks.
Other Financial Services:
Cooperative banks may also provide services such as insurance, investment options, and payment processing.
Comparison Between Commercial Bank and Cooperative Bank
| Parameter of Comparison | Commercial Banks | Cooperative Banks |
|---|---|---|
| Ownership | Owned by shareholders or the government | Owned and operated by its members |
| Objective | Profit maximization | Service to members, not profit-oriented |
| Management | Managed by professionals appointed by the board | Managed by a board of directors elected by members |
| Capital Structure | Large capital base, financed by shareholders and depositors | Limited capital, primarily funded by member contributions |
| Regulation | Regulated by the Central Bank (e.g., RBI in India, Fed in the USA) | Regulated by Cooperative Societies Act and Central Bank regulations |
| Services Offered | Wide range of services including loans, deposits, credit cards | Primarily focused on lending and deposit services for members |
| Target Customers | General public, businesses, and corporations | Members of the cooperative, often from specific communities or professions |
| Profit Distribution | Profits distributed as dividends to shareholders | Profits are shared among members as dividends or reinvested for member benefits |
| Interest Rates | Competitive rates based on market conditions | Generally offers higher interest rates on deposits and lower on loans for members |
| Loan Accessibility | Strict eligibility criteria, credit score-based | More flexible, focuses on the relationship with members |
| Branch Network | Extensive network with branches nationwide and globally | Limited to specific regions, often rural or community-based |
| Customer Service | Focus on efficiency and profitability | Focus on member satisfaction and personalized service |
| Risk Management | Advanced risk management practices | Risk management is less sophisticated, often supported by government in case of failure |
| Technology Adoption | High, with online banking, mobile apps, ATMs | Moderate to low, depending on the size and resources of the cooperative |
| Regulatory Support | Strong support from government and regulatory bodies | Limited support, often depends on government subsidies or support in crisis situations |