21 Advantages and Disadvantages of Commercial Banks

Commercial Banks are those banks which have been registered under the banking act of specified country. and they        making available short term credit facilities for industries and businesses.

advantages and disadvantages of commercial banks
advantages and disadvantages of commercial banks

There so many different benefits and limitations of taking loans from commercial banks.

Advantages of Commercial Banks

Following are the important advantages of financial assistance provided by commercial banks:

  1. The deposited amount with the banks is used for the overall development of the country through the financial assistance provided by the banks.
  2. Socialism was established in the country with the help of the banks and their nationalization.
  3. Banks help the unorganized and weaker sections. As a result, the loan requirements of small and marginal farmers, artisans, small entrepreneurs, and weaker sections have started getting fulfilled.
  4. The commercial banks have provided financial assistance to the unemployed persons in starting their venture.
  5. By the establishment of regional banks in the rural areas, farmers are coming out of the grip of moneylenders and rural indebtedness has started declining.
  6. The commercial banks are encouraging the development of small and cottage industrial also and loan facilities are being provided to the entrepreneurs.
  7. The economic position of the common man has been rapidly improving due to the significant role of commercial banks in the process of national development. As a result, their living standard is going high.
  8. The entrepreneurs can obtain the loan on easy terms, without many formalities.
  9. Banks maintain the secrecy of all information about their customers.
  10. The bank is a real friend at the time of need because the bank helps the entrepreneurs during the crisis through overdraft facilities and credit facilities.

Related: Trading On Equity: Objectives, Types, Importance, Limitations.

Disadvantages of Commercial Banks

The entrepreneurs and institutions may have the following disadvantages also, from the commercial banks:

  1. The efficiency of the banks is fast reducing.
  2. Customer services are also fast deteriorating. As a result, the customers are getting dissatisfaction also
  3. The branch managers have become weak and helpless due to fast expansion and the majority of local staff. All these adversely affect management and control.
    problems of commercial banks
    Disadvantages of Commercial Banks
  4. The profit earning capacity of banks is also reducing due to the decline in their efficiency.
  5. The significant share of loans provided by the banks is utilized only by the organized sectors of the economy, even today.
  6. No change has taken place in the organizational structure of the banks, even after their fast expansion and new challenges to them.
  7. Good progress has not been achieved in the sphere of recovery of loans by the banks. As a result, the efficient circulation of funds does not become possible.
  8. The cases of fraud and embezzlement of bank funds by the bank officers and staff are also alarmingly increasing.
  9. The deposits of the bank have not increased in the proposition of expansion of branches of the banks. Hence, significant assistance is not being provided to the entrepreneurs.
  10. The political influence in providing loans, especially the concessional loans have adversely affected the recovery of bank loans.

Related: 19 Factors Influencing Entrepreneurship Development.

Types of Financial Assistance by Commercial Banks

Commercial banks provide short term financial assistance, by way of:

  1. Providing, ordinary types of loans.
  2. Providing an overdraft facility.
  3. Giving cash credit.
  4. Making cash payment of bills of exchange.
  5. Purchase of shares and debentures.
  6. Providing a guarantee.
  7. Providing loans against mortgages, etc.

The commercial banks provide long term and short term finance also, in various forms, like:

  1. Making the investment of money in shares and debentures.
  2. By providing loans, against the security of fixed assets.
  3. By the frequent renewal of short term loans.
  4. By underwriting of securities of the companies.
  5. By making investments of money in specific financial institutions.
  6. The Providing loan, against the securities of the companies.

Difficulties of Commercial Banks

Following difficulties are experienced in taking financial assistance from the commercial banks:

  1. Banks provide loans only against the security of stocks and fixed property. For many business organizations, it becomes difficult to take loans, on the security of fixed assets.
  2. Banks do not provide loans against the security of fixed assets in some cases.
  3. Many formalities are to be completed for taking loans from banks, which causes unnecessary delays also.
  4. Delays in getting loans to occur also due to red-tapism in the banks.
  5. Banks keep a high margin in providing loans, due to which very low amount of loan is provided in comparison to the value of the property.
  6. Some bank loan bears very high-interest rates.
  7. In several cases, partiality and nepotism are observed in the sanctioning of loans by the banks.
  8. Whereas banks are very liberal in providing loan facilities to the reputed large business organizations, they do not easily provide loans to small and new units.

Top Commercial Banks in India.

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