Commercial Banking vs Investment Banking: Difference
Commercial Banking vs Investment Banking: Difference
Introduction
Banking institutions, both commercial and investment, had a significant role to play in helping nations achieve their financial goals. While commercial bankers perform a range of practices such as depositing money, moneylending, and providing other financial services, investment bankers concern themselves with underwriting bonds and stocks and helping companies raise capital through initial public offerings (IPOs) for business expansion.
Difference between commercial and investment banking in tabular form.
What is Commercial Banking?
Commercial banking refers to a branch of bankers who engages in accepting deposits, providing every type of loan for profit-earning motives, and facilitating premium financial services to corporations and governments. For instance, SBI, HDFC, and ICICI, all these banks are leading commercial banks in India. It does not matter whether they are partly or wholly owned by the government.
Types of Commercial Banks
Further, commercial banks are divided into four categories based on what role they play and who owns them:
Public sector banks
Private sector banks
Foreign sector banks
Regional rural banks
Public sector banks: Banks falling under this head are owned by the government. Public sector banks are synonymous with nationalized banks. There are a total of 12 nationalized banks in India. These banks are also public sector banks. Some common examples include Bank of Maharashtra, Bank of Baroda, Bank of India, etc.
Private sector banks: In these kinds of banks, the majority stake holding is in the hands of a single or more than a single individual. In other words, Private sector banks are privately owned banks. Hdfc, Axis, and Yes Bank are all examples of Private sector banks.
Foreign sector banks: As the name suggests, these banks are foreign banks that are operating in India. Most of the foreign banks in India have their main headquarters in their land. One such likely example is American Express Bank. The bank’s main headquarters is in New York, USA.
Regional rural banks: The main operating objective of these banks is to help lower-class people by aiding them with financial loans at less interest rates. Though they provide loans to micro industries as well. Banks such as capital small finance bank ltd, and Au small finance bank Ltd, are some examples of regional rural banks.
What is Investment Banking?
Investment banking refers to a branch of banking Institutions that specializes in financing IPOs, underwriting stocks, and bonds, and advising corporations on mergers & acquisitions. They assist companies in raising capital through Initial public offerings and guide them on whether to acquire a new business or not. They play a significant role in helping businesses expand.
Types of Investment Banks
Investment banking is broken down into three heads:
Bulge Bracket
Middle Market
Boutique market
Bulge bracket: Under this head are those investment banks (J.P Morgan and Goldman Sachs) that had a huge story building in the middle of a very popular city such as London or New York. These banks assist large corporations with their M&As, and they charge huge fees for rendering their services.
Middle Market: Investment banks falling in this head targets businesses that are not so big as Microsoft or Apple, rather they focus on corporations that are yet to be elite companies of their nations.
Boutique Market: Investment banks that specialize in one aspect of investment banking, usually corporate financing, fall under this category. For instance, Cantor Fitzgerald L.P is a boutique market investment bank that specializes mainly in corporate finance.
Main Difference
One of the key ways to distinguish between Investment banking and commercial banking is to look at the practices that are done in both industries, respectively, and the differences they had because of the business outlet. For instance, commercial banks take deposits, but investment banks say no to deposits. Commercial bank's primary source of earning profit is through charging interest on loans, while investment banks earn revenue from many sources. Commercial banking is in existence since the trade started while Investment banking is a recent invention to carry out business easily.
Conclusion
In the end, it is important to be noted that both commercial and investment banking play a critical role in shaping national economies. A country cannot prosper, and development becomes impossible if there are no commercial banks. Similarly, businesses cannot expand if investment banks will not assist them in listing their stock on a stock exchange. Therefore, both are important and should be encouraged.
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