Principles of Commercial Banking Explained

Learning about the banking sector is one of the important pillars of financial management that one should. There are a lot of details in the banking sector and its process of lending functions. The students must know all the details to be more responsible citizens and become aware of the financial institutions. At the same time, Principles of Commercial Bank - Investment Policy and Principles of Lending is among those topics which are often asked in the business studies or economics exams by the examiner. Students must carefully read this topic and ensure that they go prepared with it in the examinations.

To assist students in their understanding and learning of the principles of the commercial banks, Vedantu has come up with the Principles of Commercial Bank - Investment Policy and Principles of Lending article. The Article is available on the website and could also be downloaded in PDF format. One can access the content from any geographical location of this plant and can read it on their phone, laptop, and tablets. All one needs is a decent internet connection. The PDF is free of cost and doesn’t require any pre-registration fee or sign-ups. 

There are certain principles of a commercial bank that are set to maintain the market competition in modern days. This article will be discussing the various investment policies and principles of a commercial bank. These forms of banks make their profit from lending. Now, if you are willing to know more about the process of lending and to whom the money is given, you should continue reading this article. Not only is this article going to give an understanding of the principles and investment policy of commercial banks but it will also help people with smart investment ideas.

What are the Principles of Lending?

There are certain principles associated with lending which must be adhered to by the bank workers when it comes to lending? Let’s have a look at the principles that must be considered. 

Stability - Commercial banks must invest only in securities and shares that can provide sufficient stability. This is one of the important principles that must be followed by the bank to avoid losses on the value of its securities.  

Liquidity - Bank grants advance loans on securities that can be easily converted and marketed into cash within short notice. This is what liquidity means and is an important principle of bank lending. A bank only puts those securities in the investment portfolio which can offer a sufficient amount of liquidity to the bank. This is one of the important principles because the cash helps the customers of the bank in emergencies. Without having to disturb the market prices, the bank should be able to sell securities on short notice.

Profitability - The amount that is being invested must generate sufficient profits and hence profitability is referred to as one of the cardinal principles of lending. The interest rate of the loan decides the earning capacity of shares and securities. It also depends upon the tax benefit and the dividend rate. Hence, the bank must invest in securities that are capable of providing stable returns keeping profitability in mind. 

Safety - Another important principle of lending is safety which refers to the important fact that the borrower should be able to repay the loan. Also, the repayment is based on the character of the borrower, his/ her capacity and the nature of the security associated with the loan. Hence, the lender from the bank must maintain the principle of safety and look into the financial stability of the person.

Diversity - Any commercial bank must follow the principles of diversity while lending. The bank must be careful that the investment of the surplus funds is diversified and not limited. Also, the bank tries to maximize diversity to minimize the risk concerning the investment portfolio.

The Investment Policy of the Commercial Bank

Investments in banks are meant for earning profits. They take the help of the reserves both primary and secondary to meet the liquidity requirements of the bank. This also helps in meeting the credit needs of society. These needs include short term loans that are provided by the bank. After providing the loan, the bank invests the remaining for a long period to grow and maximize the earning capacity. All banks have a certain investment policy that goes by the principles of a commercial bank. These investment policies include high returns of unloaded resources.

All of this activity is conducted keeping in mind the principles of lending where often the aim of earning profits clashes with principles of liquidity and safety. Thus, to avoid such risk, it is essential to implement policies that can create a balance between the two principles. Balance in such scenarios refers to maintaining the balance between liquidity and safety and maximizing them in a manner that can produce a generous amount of profit for the bank.

Why should a Bank follow the Principles of Sound Lending?

One of the primary functions of the bank is lending. The deposits that are collected by the bank from its customers are used as loans for the customers who require it. However, a bank cannot function if it provides a loan to the customer without any form of profit-earning objective or for that matter if it does not follow the basic principles of banking. Further, the bank also might face risks if they do not apply sound lending principles. The interest that the bank received from the customers while repaying the loan, is the most important source of income for the bank. Safety, liquidity, purpose, profitability are some of the principles that must be followed to mitigate risks like loss and fraudulency.

Why Choose Vedantu for studying Principles of Banking?

Vedantu is one of the trusted online tutorial sites. The solutions and the information shared on the site are the product of comprehensive research work conducted by veteran teachers. When you choose Vedantu, you choose advanced education. And what better way to learn about principles of banking than with Vedantu’s solutions! It is created as per NCERT guidelines. It is good for both concept building as well as exam preparation.

Ways of Growing Money

In this everyday growing world, economies across the world are moving at a highly dynamic pace. People grow their money in various ways and after the advent of globalization and digitalization, the opportunities have just expanded.

To grow money one can start from the basics which are saving. Saving money is the most fruitful practice which we are told since childhood. Since the beginning parents try to inculcate the practice of saving in their children.  The same practice is even valid when a person turns into a teenager or a young adult. One can save by setting personal monetary goals like saving 500 rupees a month or 1000 rupees a month. This practice will pay off in the future or in time of need.

The second best way to grow money is by investing. Today investment is in vogue. One can invest in mutual funds, the stock market, or the Forex trade. All these options act as great instruments of second income that enable one to grow oneself financially. There is a lot of free mentoring available on it online.

Cryptocurrency, which is also known as the new age money or blockchain money which is changing the way money was seen before.  Although the Indian government is sceptical about crypto, many people around the world are seeing it as a good means to grow their wealth.

However, one needs some prior knowledge and understanding of the way the banking sector works. For this, a student can download the Principles of Commercial Bank - Investment Policy and Principles of Lending PDF available online on Vedantu’s website or read the article online. This article is prepared by the teachers who are experts in their field and have great accountability for providing the students with reliable information.