In banking, what is a commercial bank?

Introduction / Context:
The term commercial bank appears frequently in banking awareness, finance interviews, and competitive exams. Understanding what distinguishes commercial banks from other institutions, such as central banks or investment banks, is fundamental. This question asks you to select the statement that correctly defines a commercial bank in simple terms.

Given Data / Assumptions:

• Commercial banks operate under the supervision of the central bank and banking regulators.
• They deal with the general public and businesses, accepting deposits and granting loans.
• They offer a range of services like savings accounts, current accounts, loans, and payment facilities.
• They normally operate with a profit motive.

Concept / Approach:
A commercial bank is a financial institution, often organised as a company, that accepts deposits from individuals and businesses and uses those funds to provide credit and other banking services. Its main activities include accepting deposits, lending, facilitating payments, issuing cards, and providing other financial products. Unlike central banks, which manage monetary policy, or not for profit entities, commercial banks are profit oriented and compete in the market under regulatory oversight.

Step-by-Step Solution:
Step 1: Identify the core banking functions: accepting deposits, granting loans, and offering payment services. Step 2: Recognise that commercial banks are open to the general public, including individuals, small businesses, and corporations. Step 3: Note that commercial banks charge interest on loans and earn income from fees, operating with a profit motive. Step 4: Match these characteristics to the answer option that describes a financial institution accepting deposits, providing loans, and operating for profit. Step 5: Exclude options that describe tax departments, charities, or manufacturing companies, which are not banks.

Verification / Alternative check:
Think of well known banks in your country that offer savings accounts, fixed deposits, home loans, and business loans. These are typical commercial banks. Central banks, such as the Reserve Bank, do not provide such services to the public; instead, they regulate the banking system. Likewise, charities and vehicle manufacturers do not accept deposits and give loans as part of their main business. This comparison confirms the features of commercial banks described in the correct option.

Why Other Options Are Wrong:
A government department that collects taxes is part of the revenue administration, not a bank. A non profit charity distributing free money does not operate as a regulated bank and is not engaged in deposit taking and lending. A company that manufactures commercial vehicles is an industrial or manufacturing business, not a financial institution.

Common Pitfalls:
Learners might confuse commercial banks with central banks or development banks if they focus only on the word bank. It is important to remember that commercial banks primarily serve the financial needs of the general public and businesses, while other specialised banks or financial institutions have different mandates. Always look for the combination of deposit taking, lending, and profit motive when identifying commercial banks.

Final Answer:
A commercial bank is a financial institution that accepts deposits from the public, provides loans and other banking services, and operates for profit under banking regulation.