Difference between Commercial Banks and Cooperative Banks
Basis |
Commercial Banks |
Cooperative Banks |
---|---|---|
Meaning | The financial institutions that provide a range of banking services to individuals, businesses, and organisations are known as Commercial Banks. | The financial institutions that are owned and operated by their customers (also referred to as members) are known as Cooperative Banks. |
Governing Act | Commercial Banks are governed by the Banking Regulation Act, 1949. | Cooperative Banks are governed by the Cooperative Societies Act, 1965. |
Purpose | Commercial banks focus on providing a wide range of financial services like depositing, lending, investment services, foreign exchange, trade finance, etc. | Cooperative banks are established to meet the banking needs of a specific group or community and aim to promote the economic and social well-being of their members by providing them with affordable banking services. |
Area of Operation | The area of operation of commercial banks is large. | The area of operation of cooperative banks is small. |
Borrowers | The borrowers of commercial banks are its account holders. | The borrowers of cooperative banks are its member shareholders. |
Ownership Structure | Commercial banks are typically owned by shareholders or private investors. | Cooperative banks are owned and controlled by their customers, who are also known as members. |
Customer Base | Commercial banks serve a diverse customer base, including individuals, small and medium-sized enterprises (SMEs), large corporations, and institutional clients. They cater to a broader market and operate on a commercial scale. | Cooperative banks primarily serve their members who have a common bond, such as residents of a particular locality, employees of a specific organization, or members of a cooperative society. They have a more localised focus and tailor their services to the needs of their members. |
Regulatory Framework | Commercial banks are subject to regulations and oversight by central banks, financial regulatory authorities, and banking regulators specific to the jurisdictions in which they operate. | Cooperative banks also operate within the regulatory framework set by relevant authorities. However, their regulatory environment may vary depending on the country and the specific legal framework governing cooperative institutions. |
Governance | Commercial banks are governed by a board of directors appointed by the shareholders or investors. The board makes strategic decisions and appoints senior management to oversee day-to-day operations. | Cooperative banks have a democratic governance structure. Each member typically has voting rights, and decisions are made collectively through a general body or elected representatives. |
Interest Rate on Deposits | The interest rate provided to the account holders for depositing money with commercial banks is less. | The interest rate provided to the member shareholders for depositing money with the cooperative banks is slightly high. |
Profit Distribution | Profits are distributed to shareholders in the form of dividends and retained earnings for reinvestment. | Instead of distributing profits to external shareholders, these banks may allocate a portion of their surplus to dividends, reserve funds, community development projects, or provide lower interest rates on loans to members. |
Profit Retention and Reserves | Commercial banks typically retain a significant portion of their profits for reinvestment and expansion purposes. They also maintain reserves to meet regulatory requirements and absorb potential losses. | Cooperative banks often allocate a portion of their surplus to reserves, which serve as a safeguard against future risks and ensure the stability of the institution. |
Difference between Commercial and Cooperative Banks
Commercial Banks and Cooperative banks are two types of financial institutions that offer a range of financial services to their customers. Commercial Banks works for profit motive whereas Cooperative banks are established based on the principles of cooperation.
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