Banks are at the heart of every country’s economy and play a vital role in the country’s economic growth and development of financial activities. In India, all major banks are considered commercial under the basic structure of the Reserve Bank of India Act of 1934. However, there are other categories of banks under the planned banking category, such as microfinance banks, payment banks, and cooperative banks.
Commercial banks can be further categorised into public sector banks, private sector banks, foreign banks, local banks, and regional banks. They are regulated by the Banking Regulation Act 1949, which allows them to conduct business, hold deposits and provide credit to the public, businesses, and the government itself.
Commercial banks are financial institutions that provide customers with services such as loans, certificates of deposit, savings bank accounts, and overdraft facilities. These institutions make money by lending to individuals and earning interest on the loans. The different types of loans offered by commercial banks include business loans, car loans, home loans, personal loans, and education loans.
They issue these loans from the money deposited by their customers in various types of accounts. They use deposits as capital to provide credit. Commercial banks are vital to the country’s economy as they help create market capital, credit, and liquidity. These banks are generally physically located in cities, but you can access most of their services these days.
History of commercial banks in India
Some commercial banks in India are even a century old. Their branches are all over the country and expanding into the provinces. Since India’s independence, commercial banks have gone through three different stages.
Between 1955 and 1970, a public sector emerged in Indian banking. It began with the establishment of the National Bank of India in 1955 and ended with the nationalisation of fourteen significant banks in 1969.
Twenty years after the nationalisation of Banks, the 1970s and 1980s saw a shift from class banking to mass banking. A major branch expansion took place during this period, followed by the employment of many bank employees and increased funding for priority sectors, especially for the poor and underserved sectors.
The post-nationalization era was not without complications. Inadequate training has reduced staff efficiency and productivity, exacerbated the problem of non-collection of loans, and increased funding expectations to meet regulatory requirements, resulting in lower bank profitability. This was the case in 1991 when the government announced a new economic policy.
A Financial Sector Committee chaired by Sri M. Narasimham was established to propose a wide range of measures to improve the efficiency, productivity, and profitability of banks.
Types of commercial banks
There are three types of commercial banks namely:
Private bank: In this type, individuals and business houses hold majority share capital. For eg. HDFC Bank, ICICI, Yes Bank.
Public bank: In this type, the government holds majority stake . For eg. State Bank of India (SBI), Bank of Baroda (BoB), Punjab National Bank (PNB).
Foreign bank: In this type, the banks are established in foreign countries and have branches in India. For eg. American Express Bank, Hong Kong and Shanghai Banking Corporation (HSBC), Citibank.
Functions of commercial banks
Functions of commercial banks are divided into primary and secondary. While the primary function includes accepting deposit and providing loan, the secondary function includes providing overdraft facility, locker facility etc.
Commercial banks provide basic banking services to the general public, including individual customers and small businesses. Banks make their money by charging for services and fees. Fees vary depending on the products offered, such as overdraft fees, locker fees, and reminder fees. Various loans have other fees in addition to the interest on the loan.
Banks make money from lending and use funds from customer deposits. They charge higher interest rates on loans and offer relatively lower rates on amounts they receive as deposits from their customers. For example, a bank may give a customer 2% interest on a savings account but charge 4.8% annual interest on a mortgage.
Commercial banks are usually located in places where customers can easily come to use their services, ATMs and other teller facilities. Internet technology has improved in recent years, so most banks allow their customers to conduct most of their services online. People can now send money, deposit money, and pay bills online.
Importance of commercial banks in India
Commercial banks are vital to the economy as they provide basic services to their customers, create market liquidity, and generate capital. Banks ensure market liquidity by lending out of customers’ deposits. Commercial banks stimulate the economy by playing a role in credit creation that leads to increased production, employment, and consumer spending.
Commercial banks are, therefore, heavily regulated by the central bank of their country or region. For example, the central bank imposes reserve requirements on commercial banks. This means banks need to keep a certain percentage of consumer deposits at the central bank as a buffer when the general public wants to withdraw money.
Commercial banks in India and their home loan rates
The RBI has raised repo rates by 190 basis points for the fourth consecutive time since May 2022, but Indian mortgages soared in the second half of the year. Almost all banks have implemented this rate hike in home savings rates, but as of October 5, 2022, the following banks are offering the cheapest home savings rates:
| Bank | Home loan interest rate* |
| Central Bank of India | 7.50% |
| Union Bank of India | 7.75% |
| Canara Bank | 7.80% |
| Punjab National Bank | 7.90% |
| Bank of Baroda | 7.95% |
| Axis Bank | 8.10% |
| State Bank of India | 8.15% |
| Kotak Mahindra Bank | 8.49% |
| HDFC | 8.60% |
| ICICI Bank | 9.25% |
Top 5 commercial banks in India loan analysis
Union Bank of India
Mumbai-based Union Bank of India made news in 2020 when the government merged Andhra Bank with Corporation Bank. Today, the bank has over 9,300 branches and 11,800 ATMs.
- Maximum Term: 30 Years
- Processing Fee: 0.50% of Loan Amount up to Rs 15,000 + GST
- Affordable Scale: High
- Advantages: Union Bank has no maximum mortgage amount
- Cons: Union Bank has a limited number of branches compared to some public lenders.
| Bank name | Interest rates |
| Union Bank of India Home Loan | 8.50% |
| Union Bank of India Personal Loan | 10.4% |
Kotak Mahindra Bank
Led by Uday Kotak, a fast-growing private financial institution, the bank has offices in over 100 cities in India. Kotak Mahindra currently offers the best mortgage rates on the market.
| Bank name | Interest rates |
| Kotak Mahindra Bank Personal Loan | 10.8 – 12% |
| Kotak Mahindra Bank Business Loan | 15 – 16% |
| Kotak Mahindra Bank Loan Against Property | 8.75 – 9.45% |
| Kotak Mahindra Bank Home Loan | 6.95 – 7.75% |
- Longest Service: 30 Years
- Fees: Currently None. Typically 0.5-1% of the loan amount.
- Affordable Scale: High
- Benefits: Get instant mortgage approval through the Kotak Digi Home Loan Facility. Borrowers can expect expanded benefits as the bank maintains the lowest interest rates across the market over the past year and plans to keep the housing finance segment as its main focus.
- Cons: Compared to some official lenders, Kotak Mahindra has low market penetration in India. Mortgages require you to physically visit a branch for a variety of reasons.
Bank of Baroda
Vadodara-based Bank of Baroda became India’s third largest bank after merging with Dena Bank and Vijaya Bank in April 2019. The Maharajah of Baroda founded the bank in 1908, along with thirteen other significant commercial banks in India. It was nationalised by the government on 19th July 1969 and now operates over 10,000 branches in India and abroad.
| Bank name | Interest rates |
| Bank of Baroda Personal Loan | 9.76 – 11% |
| Bank of Baroda Business Loan | 13.9 – 15% |
| Bank of Baroda Loan Against Property | 8.2 – 9.5% |
| Bank of Baroda Home Loan | 6.9 – 7.8% |
- Maximum Duration:30 Years
- Processing Fee: Currently None
- Affordable: High
- Pros: The loan process on our online platform is very easy.
- Disadvantages: Those with poor credit should concentrate on loans from HFCs or NBFCs due to higher borrowing costs. As previously mentioned, public lenders are very slow to share important information with borrowers.
Punjab National Bank
PNB, India’s second-largest public sector bank, also offers affordable home loan rates. The New Delhi-based bank was founded in 1894 and has over 8 crore customers in 764 cities and 6,937 branches.
| Bank Name | Interest Rates |
| PNB Home Loan | 4 – 8.9% |
| PNB Personal Loan | 8.75 – 9% |
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- Maximum holding period: 30 years
- Fees: None at this time. It is normally 0.35% of the loan amount, with lower and upper limits limited to Rs 2,500 and Rs 15,000 respectively.
- Affordable Scale: High
- Benefits: Temporary waiver of processing fees reduces the overall burden for borrowers. The bank will reward even people with good credit without exception.
- Cons: Bank’s image has been hit hard recently by a dramatic increase in toxic lending and alleged involvement in fraud cases. Borrowers may also find the service far less customer-friendly than most private lenders.
State Bank of India (SBI)
The state-owned State Bank of India (SBI), India’s largest mortgage lender, has helped more than 30,000 home buyers to date. Founded in 1955, this lender also has more than 24,000 branches in India and abroad. Note that the State Bank of India is the largest player in the mortgage segment, with a book size of Rs 5.5 trillion.
| Bank Name | Interest Rates |
| SBI Personal Loan | 9.5 – 10.9% |
| SBI Home Loan | 7 – 8.5% |
| SBI Loan Against Property | 9.45 – 10.5% |
| SBI Business Loan | 11.05 – 12% |
- Maximum Term: 30 Years
- Service Fee: GST of 0.40% of the loan amount, minimum Rs 10,000, maximum Rs 30,000 applies. For projects where the bank is linked to the developer, the rate is 0.40% with a maximum of Rs 10,000 + tax.
- Affordable Scale: High
- Pros: State Bank is always the first to cut rates when the RBI cuts its repo rate. It also makes sense to turn to one of India’s most experienced banks to meet your borrowing needs. The bank’s sound financial position also gives the borrower a reason to continue using his SBI. SBI recently abolished interest penalties on occupations and now charges employees and the self-employed the same interest rate.
- Cons: Considering that banks use rigorous due diligence to verify the creditworthiness of borrowers, there are more documents to submit. Borrowers with a credit score of 750 and above are also offered the highest interest rates.
FAQs
What is the repo rate?
The repo rate is the rate charged by the RBI, India's top bank, to fund regular banks in the country. Banks also raise or lower the public interest rate whenever the repo rate is adjusted.
What is the meaning of liquidity?
Liquidity is a company's ability to convert its assets into cash or get the required funds through loans or bank deposits to meet its short-term obligations and liabilities.
What is a credit score?
It is a three-digit number that summarises your credit history. Scores are derived using CIBIL report credit history.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
