By now, you have a good idea about the various functions of a commercial bank. In modern economics, these banks perform a wide range of functions and hence need some principles to guide them. Today, we will talk about the different principles of commercial banking which help these banks perform optimally.
Principles of Commercial Banking
Principles of Liquidity
A commercial bank offers two types of deposits
- Demand deposits which the bank has to repay on demand like a Savings Account and
- Time deposits which the bank has to repay after the expiry of a certain period
Further, on a daily basis, customers withdraw as well as deposit cash. therefore, all commercial banks have to keep a certain amount of cash in their custody to meet the cash demands of customers.
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Principles of Profitability
Any commercial enterprise primarily tries to generate profit. A commercial bank is a commercial enterprise as well. Hence, it tries to generate profits.
Browse more Topics under Banking
- History of Banking in India & World
- Structure of Banking in India
- Nationalisation of Banks
- Functions of Commercial Banks
- State Bank of India and its Associate Banks
- Functions of State Bank of India
- Important Banks in India
- Negotiable Instruments
- Types of Banking
- Banking Practice Questions
Principles of Solvency
Commercial banks must be financially sound. Further, they need to maintain a certain required capital for running the business.
Learn more about Types of Banking here in detail.
Principles of Safety
A commercial bank accepts deposits from its customers and then invests it. However, since it is investing the investor’s money it keeps the safety of the money first.
Principles of Collection of Savings
This is one of the most important principles in the current banking scenario. Commercial banks seek huge amounts of idle money from their clients. In fact, bank employees are given targets to collect more savings from people.
Principles of Loans and Investment Policy
A commercial bank primarily earns money through its lending and investing activities. It also ensures that the investor’s money is invested in viable projects. Therefore, banks need strong loans and investment policies to earn a good profit.
Principles of Economy
Principles of providing services
Commercial banks are usually service-focused banks. After all, good service ensures a better reputation and therefore, profits.
Principles of Secrecy
Commercial banks ensure that they keep the accounts of their clients secret. Also, access to the accounts is given only to legitimized persons.
Principles of Modernization
We live in an era of technology as well as modernization. Therefore, to cope with the advancements in the world, commercial banks adopt modern technical services like online banking, mobile banking, etc.
Principles of Specialization
Apart from modernization, we also live in the age of specialization as well as super-specialization. Therefore, commercial banks segment their entire functions into smaller units and place their employees according to their efficiencies.
Principles of Location
Usually, commercial banks choose a location where they think they can find many customers.
Principles of Relation
All commercial banks try to maintain good relations with their existing clients as well as potential customers.
Principles of Publicity
Any successful business needs good publicity. Therefore, most successful businesses advertise to get the attention of more customers. Hence, commercial banks follow the principles of publicity.
Q1. List the principles of commercial banking.
Answer: The principles of commercial banking are the principles of:
- Collection of Savings
- Loans and Investment Policy
- Providing services