Fundamental Principles of Banking operations Dr Manish Dadhich

Fundamental Principles of Banking operations Dr. Manish Dadhich

Basic Principles that Commercial Banks Follow • Commercial banks follows certain principles • to serve the maintain some principles which are very important for banks to remain in the competition in modem days. • The bank which deals with money and money a worth with a view to earning prom is known as the commercial bank. • Commercial banks must maintain some principles which are very important for banks to remain in the competition in modem days.

1. Principle of Liquidity • The principle of liquidity is very important for the commercial bank. Liquidity refers to the ability of an asset to convert into cash without loss within the short time. • Paying the deposited money on demand of’ customers is called liquidity in sense of banking.

2. Principle of Solvency • Solvency means the financial capability or sufficiency in capital. To stay in these competitive market commercial banks must have sufficient capital. If the funds are not sufficient the bank cannot run his business. • The main source of fund of the commercial bank is the deposited money by the depositors’ through the different type of account. • Depositors keep cash in the bank, especially for safety. So commercial bank must ensure the safety of deposited fund.

3. Principle of Profitability • The main objective of the commercial bank is to earn a profit. For earning profit commercial bank have to make the investment by providing short term loan, before providing loan commercial bank have to compensate a certain amount of money as liquidity.

4. Principle of Loan and Investment • The main source of profit of bank is granting loans to any individual or organization. Investment is the profitable and source of income. Commercial banks invest in business and investment sector.

5. Principle of Savings • Commercial banks collect fund by creating savings facilities. Commercial banks try to collect savings from society surplus. • The commercial bank makes the investment from this savings to generate profit. So, more savings, more investment, and more profit.

6. Principle of Services • Commercial bank ensures best services to their customers. The success of a bank depends on the services provided by the bank. Customer chooses those banks that provide improved services.

7. Principle of Secrecy • Customers want to keep secret about their valuable assets and money. So banks must have to keep secret about their customer’s account. If a commercial bank does not maintain secrecy the customer will be dissatisfied.

8. Principle of Efficiency • The commercial bank should operate their business efficiently. So that they can succeed at the objective. • In this competitive market, there is no alternative way without efficiency in management. So commercial bank must train their employees to increase the efficiency in management.

9. Principle of Location • Commercial banks must have to locate their branches in the commercial area where many customers are available. The location must be safe for the customers and easy communication system must exist. • Other principles; • The principle of goodwill. • The principle of the economy. • The principle of technology. • The principle of publicity.

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