Commercial banks earn money through different businesses, which are detailed
below:
1) Interest on Loans: Commercial banks lend money to industrialists, traders, or consumers, and charge interest on the loans. This
is the main source of their income.
2) Investment: Commercial banks earn profit by investing in profitable
sectors like shares, issuing letters of credit, government security, etc.
3) Bill Discount: Commercial banks also earn money by making discounted
payments of bills of exchange in advance.
4) Commission Received from Bank draft, Traveller’s cheque, etc: Commercial banks earn a large amount of money by charging commissions on Bank
drafts, traveler’s cheques, etc.
5) Correspondence: Commercial banks also earn money through charges
received by offering various correspondence services for the clients at their
request.
6) Rent of Lockers: People can use lockers of commercial banks for the safekeeping of their valuable documents, ornaments, etc. by paying certain
charges, which is also a source of income for the commercial banks.
7) Agency Service: Commercial banks perform numerous agency services on
behalf of their clients, such as collection and payment of cheques or bills, etc. Commercial banks charge commissions for such services which earn income
for them.
8) Brokerage in Purchase or Trade of Shares: Banks also earn through
brokerage in purchasing or trading shares.
9) Foreign Exchange: Commercial banks earn profit by buying and selling
foreign exchange.
10) Import-Export: Commercial banks earn income through commission or
service charges for the role it plays in international trade and transactions.
11) Letter of Credit: Banks charge commissions for issuing letters of
credit on behalf of importers.
12) Trustee: Banks also charge commissions for performing services as
trustee.
Frequently Asked Questions
1. What is the primary source of income for commercial banks?
The primary source of income for commercial banks is net interest income,
which is the difference between the interest they charge on loans and the
interest they pay on deposits. In 2021, net interest income accounted for 55%
of total revenue for commercial banks in the United States.
2. How do commercial banks earn income from loans?
Commercial banks earn income from loans by charging interest on the principal
amount of the loan. The interest rate is a percentage of the principal that is
charged to the borrower over the life of the loan. The higher the interest
rate, the more money the bank will earn from the loan.
3. How do commercial banks earn income from deposits?
Commercial banks earn income from deposits by investing the money that is
deposited with them. Banks can invest in a variety of assets, such as
government bonds, corporate bonds, and stocks. The return on these investments
is the primary source of income for banks from deposits.
4. What are some other sources of income for commercial banks?
In addition to net interest income, commercial banks also earn income from a
variety of other sources, such as:
-
Fees: Commercial banks charge fees for a variety of services, such as
overdraft protection, ATM usage, and wire transfers.
-
Commissions: Commercial banks earn commissions by underwriting
securities, providing investment advice, and executing trades for customers.
-
Other income: Commercial banks also earn income from other sources,
such as the sale of insurance products and the rental of property.
5. How has the mix of income sources for commercial banks changed over
time?
The mix of income sources for commercial banks has changed significantly over
time. In recent years, there has been a decline in the share of income from
net interest income and an increase in the share of income from other sources,
such as fees and commissions. This is due in part to a number of factors, such
as increased competition, changes in regulations, and technological
advancements.
