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Principles of Commercial Bank

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.

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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.

principles of commercial banking                                                                                                                                               Source: Clipart Library

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

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

Commercial banks always try to avoid any unnecessary expenditure. Therefore, they try to manage their functions within a set budget and increase their profits.

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.

Solved Question

Q1. List the principles of commercial banking.

Answer: The principles of commercial banking are the principles of:

  • Liquidity
  • Profitability
  • Solvency
  • Safety
  • Collection of Savings
  • Loans and Investment Policy
  • Economy
  • Providing services
  • Secrecy
  • Modernization
  • Specialization
  • Location
  • Relations
  • Publicity
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