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Commercial banks offer a wide range of corporate financial services that address the specific needs of private enterprise. They provide deposit, loan and trading facilities but will not service investment activities in financial markets.
Commercial banks can be described as a type of financial intermediary. In the US, the term is used to refer to any banking organization or division that deals with the deposits and loans of business organizations.
The term commercial bank is used to differentiate these banks from investment banks, which are primarily engaged in the financial markets. Commercial banks are also differentiated from retail banks that cater to individual clients only. In non English-speaking countries the term commercial bank is used interchangeably with the term trading bank.
Commercial banks play a number of roles in the financial stability and cash flow of a countries private sector. They process payments through a variety of means including telegraphic transfer, internet banking and electronic funds transfers. Commercial banks issue bank checks and drafts, as well as accept money on term deposits.
Commercial banks also act as moneylenders, by way of installment loans and overdrafts. Loan options include secured loans, unsecured loans, and mortgage loans. A secured loan is one where the borrower provides a certain property or asset as collateral against the loan. The main condition of these loans is that if the loan remains unpaid, the bank has the right to use the property in any way they like to realize the outstanding amount. Unsecured loans have no collateral and therefore command higher interest rates. There are a variety of unsecured loans available today and these include credit cars, credit facilities such as a lines of credit, corporate bonds, and bank overdrafts.
Mortgage loans that are provided by commercial banks are similar to secured loans but are used specifically to buy real estate property for commercial purposes. In most of these cases, the banks hold a lien on the title to the particular property purchased with the loan. If the borrower is unable to pay the loan back, the bank leverages this item against the loan to generate funds or recover the principal.
Commercial banks provide a number of import financial and trading documents such as letters of credit, performance bonds, standby letters of credit, security underwriting commitments and various other types of balance sheet guarantees. They also take responsibility for safeguarding such documents and other valuables by providing safe deposit boxes.
Currency exchange functions and the provision of unit trusts and commercial insurance are typically provided by the relevant departments in larger commercial banks.
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