Q 3 a) Banking and financial institutions are credit and investment suppliers and considered as backbone of any economy

3.a) Depending upon the type of work performed by a bank they are generally divided into two major classes: Commercial banks and Investment banks. Whenever someone hears the word bank, what comes in mind of most of the common people is the commercial banks. Commercial banks are for the common public for normal transactions like lending and deposits to the clients. For the normal public, it is depositing salary in accounts and withdrawal when a necessity. Investment banking is for investors. Investment banking is used for raising capital. There are few banks that are a mix of commercial and investment banks. However in the past, when during 2008 there was a financial crisis, many banks merged. It is been observed that combined function banks failed drastically.

Key Differences Between Commercial Bank vs Investment Bank

• Commercial banks are set to be as a bridge between people who want to invest and people who want to lend but there is no direct relation between them as banks behave as the intermediary. It could be either public or private owner. It works under the banking regulation act of India,1949. All the core financial work is performed by investment banks. Financial banks is actually a direct relationship between lenders and investor. E.g.: the person wants to raise money by bonds and others want to invest in bonds hence creating a direct relation. Helping the government and corporations for providing advisory services or helping them for issuance of stocks and bonds. Helping large corporations or investors or government bodies to manage their money.
• The main work of any commercial bank is to lend and deposit money to the customers and corporations in a legal way. The services provided by a commercial bank are generic and not specific. Commercial services are provided day to day services. The work of the investment bank is generally based on the customers’ requirements. They act as a mediator between buying and selling of stocks and bonds. The primary service provided by an investment bank is raising capital. An investment banking facility is not a day to day service.
• Other services through which banks earn by charging fees are: For commercial banks – By providing credit and debit card services, collect and create cheques, interest warrant, overdrafts, foreign exchange transaction, merchant facility, locker facilities. For investment banks – By commissions or by profit on the trades or fees for specific services. Secondary services provided by Investment banks are a brokerage, IPO, Advisory, Mergers and Acquisitions, Asset Management, Restructuring, Leveraged finance, research, proprietary trading, risk management, etc.
• The profit earned by a commercial bank is by the difference in the interest rates. Commercial banks give a loan at an interest rate which is high to the common public or corporations or small businesses. When the public or the corporations deposit money in the commercial banks the rate is lower. The difference in the interest rates is the profit earned by the commercial banks. The profit earned by the investment banks is the fees charged in different services. The services provided by investment banks are IPO services, brokerage services, M&A, asset management, etc.
• The risk involved in commercial banks is very low. Commercial banks will always be in demand as the money needed for the public for different purposes will never stop. Be it for personal loans or car loans or home loans or industry loans, etc. The main aim of the commercial banks is of public interest. As the government involvement is more in commercial banks the risk tolerance is low. It is ruled by the Federal Deposit Insurance Corporation (FDIC). The risk involved in Investment banks is very high because it deals with investors and corporations. As risk is higher when it comes to equity and bond markets compared to commercial. The profit earned by the investment bank also depends on the profit of the investors. As investment bank helps to underwrites debt and equity. Investment banks are controlled by SEBI ( Securities Exchange Board of India). SEBI gives more freedom for companies to take decisions for maximizing one’s profit. Due to the less interference of any government regulations in the investment banks the tolerance level is very high. However strategic decisions can be made easily by Investment banks over commercial banks.
• The customer base of commercial banks is higher than the investment banks. As commercial banks are the bank to all the citizens of the country the client base of this bank is wide. Investment banks are only for investors, government bodies and corporations.
• Commercial bank’s main purpose is to lend money and deposit and conducting all the commercial transactions to all the individuals and corporates. As the credit demand in the market is fulfilled by providing loans to the public. As the interest rate charged by commercial banks directly links with the growth of the economy. The mobilization of the money in the economy is linked with the commercial banks. Investment banks are related to the performance of stocks. As investment banks mainly deal with the testing of bonds and equities.

Commercial Bank vs Investment Bank Comparison Table

Let’s discuss the top comparison between Commercial Bank vs Investment Bank

Conclusion

The main difference between these two banks is the function and the target audience. Commercial banks deal with deposits and lending money for business whereas investment banks deal with trading securities and bonds.

b)

Financial instruments offered by bank -

1)The term commercial bank refers to a financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. A commercial bank is where most people do their banking. Commercial banks make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the capital to make these loans.

2)Customers find commercial bank investments, such as savings accounts and CDs, attractive because they are insured by the Federal Deposit Insurance Corporation (FDIC), and money can be easily withdrawn. Customers have the option to withdraw money upon demand and the balances are fully insured up to $250,000, therefore, banks do not have to pay much for this money.1? Many banks pay no interest at all on checking account balances, or at least pay very little, and pay interest rates for savings accounts that are well below U.S. Treasury bond (T-bond) rates. However, these investments traditionally pay very low interest rates compared with mutual funds and other investment products. In some cases, commercial bank deposits, such as checking account deposits, pay no interest at all.

3)Consumer lending makes up the bulk of North American bank lending, and of this, residential mortgages make up by far the largest share. Mortgages are used to buy properties and the homes themselves are often the security that collateralizes the loan. Mortgages are typically written for 30 year repayment periods and interest rates may be fixed, adjustable, or variable. Although a variety of more exotic mortgage products were offered during the U.S. housing bubble of the 2000s, many of the riskier products, including pick-a-payment mortgages and negative amortization loans, are much less common now.

4)Automobile lending is another significant category of secured lending for many banks. Compared to mortgage lending, auto loans are typically for shorter terms and higher rates. Banks face extensive competition in auto lending from other financial institutions, like captive auto financing operations run by automobile manufacturers and dealers.

5)Credit cards are another significant lending type. Credit cards are, in essence, personal lines of credit that can be drawn down at any time. Visa and MasterCard run the proprietary networks through which money is moved around between the shopper's bank and the merchant's bank after a transaction. Not all banks engage in credit card lending and the rates of default are traditionally much higher than in mortgage lending or other types of secured lending. That said, credit card lending delivers lucrative fees for banks—interchange fees charged to merchants for accepting the card and entering into the transaction, late-payment fees, currency exchange, over-the-limit and other fees for the card user, as well as elevated rates on the balances that credit card users carry from one month to the next.

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