Commercial bank
Also written Commercial banks in India
A regulated deposit-taking institution supervised by the Reserve Bank of India, inspected and audited at intervals, offering savings, current, fixed and recurring deposit accounts.
In plain language
A commercial bank is where most people keep their money, and the booklet's reason for trusting one is simple: it is regulated.
Commercial banks deal with public money, so the Reserve Bank of India supervises them closely. They go through mandatory inspections and audits at various intervals, and the RBI itself audits them every year. That oversight is what makes a bank deposit a comparatively low-risk place to keep money, even though the returns are modest.
The booklet's opening comparison makes the point sharply: keeping cash at home is unsafe, earns nothing, and does not build any credit eligibility. Keeping money in a bank protects it, earns some interest, and lets you later borrow against it.
How it works
Commercial banks in India are regulated by the Reserve Bank of India and are "required to go through mandatory inspection and audits at various intervals" and are "also audited by the Reserve Bank of India every year."
A depositor can borrow against a fixed deposit held with a commercial bank: the booklet states loans against fixed deposits are available "up to 75 to 90% of the deposit amount."
Deposits carry a safety net beyond the bank's own soundness: the Central Government deposit insurance scheme insures all deposits with a bank up to Rs 5 lakhs per customer in that bank, so a depositor gets that much back even if the bank fails.
A commercial bank offers several account types — savings, current, fixed deposit, recurring deposit and special tax-saving term deposits — each covered separately elsewhere in the same chapter.
A worked example
Mohit keeps Rs 8,00,000 as a fixed deposit with a commercial bank at 7% a year.
When he needs Rs 6,00,000 urgently for a family medical expense, he does not break the FD. Instead he takes a loan against it. At 85% of the deposit amount — within the booklet's stated 75–90% range — the bank can lend him up to Rs 6,80,000 without breaking his FD or losing the interest it continues to earn.
Separately, if that same bank were to fail, the Central Government deposit insurance scheme would still return up to Rs 5,00,000 of Mohit's deposit to him — so on his Rs 8,00,000 FD, Rs 3,00,000 would sit outside the insured amount. That single fact — the Rs 5 lakh ceiling — is the reason the booklet advises spreading large deposits across more than one bank rather than concentrating them in one.
Why NISM asks about it
Chapter 4 (Savings Related Products), Section B (Banking), opens with the regulatory case for keeping money in a commercial bank rather than as cash. Expect a direct recall question on the regulator (RBI), the loan-against-FD range (75–90%), and the deposit insurance ceiling (Rs 5 lakh) which sits in the same section.
Common exam traps
- Loan against FD is 75 to 90% of the deposit, a range, not a fixed percentage — an exam option quoting a single number outside that band is wrong.
- Deposit insurance is Rs 5 lakh per customer, per bank — not per account and not per deposit, so multiple FDs in the same bank under the same customer are aggregated for the Rs 5 lakh limit.
- RBI regulates commercial banks; SEBI regulates the securities market — do not swap the regulator when a question moves from Chapter 4 to Chapter 5.
- Mandatory RBI audit is annual, on top of the inspections at various intervals — do not read the annual audit as the only oversight the bank receives.
Check yourself
1.A depositor places ₹14,00,000 at one bank across a savings account, two fixed deposits and a recurring deposit. How much is covered by deposit insurance?
- a)₹20,00,000, being ₹5 lakh for each of the four accounts
- b)₹5,00,000, because the cover is per customer in that particular bank regardless of the number of accounts
- c)₹14,00,000, because all bank deposits are fully guaranteed
- d)₹10,00,000, being ₹5 lakh for the savings account and ₹5 lakh for the deposits
Show the answer
Answer: (b) ₹5,00,000, because the cover is per customer in that particular bank regardless of the number of accounts
The cover is "up to a limit of ₹5 lakhs PER CUSTOMER IN THAT PARTICULAR BANK." All accounts held by the same customer at the same bank are added together, so four accounts share one ₹5,00,000 cover and ₹9,00,000 sits uninsured. Splitting the money into more accounts at the same bank changes nothing. The remedy is to change banks, not accounts: ₹5,00,000 + ₹5,00,000 + ₹4,00,000 across three banks brings every rupee inside the limit, with the same products at roughly the same rates. Two honest caveats. The cover matters only on the day a bank fails, which for a large scheduled commercial bank is a remote event — the rule exists for the tail. But chasing a rate materially above every other bank usually means moving towards smaller institutions, which is exactly when the limit stops being theoretical. As Chapter 3 puts it, "always check the potential risks and do proper due diligence when promised returns are unusually high."
2.For what purpose was SEBI established?
- a)To guarantee returns to investors in the securities market
- b)To protect the interests of investors and to regulate and develop the Indian securities market
- c)To supervise commercial banks and non-banking finance companies
- d)To manage the Government of India's borrowing programme
Show the answer
Answer: (b) To protect the interests of investors and to regulate and develop the Indian securities market
"SEBI is a statutory body set up by the Parliament of India in 1992 TO PROTECT THE INTERESTS OF INVESTORS AND TO REGULATE AND DEVELOP THE INDIAN SECURITIES MARKET." Two halves — protection, and regulation and development — which map onto the three key functions stated a sentence later. Option (a) is the standard upgrade trap, and it fails for the same reason it failed in Chapter 1: no regulator can promise returns, and Chapter 3 stated that "risk and investing go hand in hand." Options (c) and (d) describe the Reserve Bank of India, which Chapter 4 said conducts "consolidated supervision of the financial sector... commercial banks, financial institutions and non-banking finance companies" and is "the banker to the Government of India." Keeping the regulators apart is the single most useful discipline across Chapters 4, 6, 7, 13 and 14.
3.Which accounts does an investor need in order to invest in equity shares?
- a)Only a demat account with a depository
- b)A savings account with a commercial bank, a trading account with a SEBI registered stock broker, and a demat account with a SEBI recognized Depository Participant
- c)A trading account and a current account
- d)A demat account opened directly with NSDL or CDSL
Show the answer
Answer: (b) A savings account with a commercial bank, a trading account with a SEBI registered stock broker, and a demat account with a SEBI recognized Depository Participant
The chapter lists three: "Savings Account – Saving bank account with a commercial bank; Trading Account - Trading account with a SEBI REGISTERED STOCK BROKER of a recognized stock exchange to buy or sell securities on the Stock Exchange; Demat Account - Demat account with a SEBI RECOGNIZED DEPOSITORY PARTICIPANT (DP) of Depository for holding securities in dematerialized/electronic form." Think of the savings account as the purse, the trading account as the shop that transacts for you, and the demat account as the bag you carry the shares home in — a bag alone buys nothing. Option (d) confuses two layers: "NATIONAL SECURITIES DEPOSITORY LTD. (NSDL) and CENTRAL DEPOSITORY SERVICES (INDIA) LTD. (CDSL) are two SEBI registered DEPOSITORIES in India", but the account is opened with a depository participant of one of them, not with the depository itself.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- Basic Savings Bank Deposit AccountA zero-balance bank savings account, needing no opening deposit, introduced to bring everyone into the banking system. A holder cannot open any other savings account in the same bank.
- Deposit insuranceThe Central Government scheme that insures every bank deposit up to Rs 5 lakh per customer in a bank, so depositors get that much back even if the bank itself fails.
- Reserve Bank of IndiaIndia's central bank, set up on April 1, 1935 under the RBI Act. It runs monetary policy, regulates and supervises banks and NBFCs, is banker to the Government and lender of last resort.
- Small Finance BankA category of bank introduced by the RBI that takes small deposits and gives small loans, mainly to people and small businesses the banking system does not reach well.
- IMPS — Immediate Payment ServiceAn instant electronic fund transfer between two bank accounts, usable through internet banking with an IFSC code or through mobile banking with a 7-digit MMID.
- Indian Financial System CodeA unique code assigned to each bank branch in India, used together with the beneficiary's account number to route NEFT, RTGS and IMPS internet-banking transfers to the correct branch.
- Customer liability for unauthorised transactionsRBI's rule that a bank customer bears no loss from an unauthorised transaction caused by fraud, bank negligence or a system failure elsewhere — provided it is reported within three days of the alert.
- Lender of last resortThe workbook's description of RBI's role as the lender commercial banks can turn to when no one else will lend them money.