PRINCIPLES OF BANKING | MODULE A
In this post, we will talk about the principles of banking, an important topic of IIBF DRA Exams 2022 from the prescribed DRA Syllabus 2022.
PRINCIPLE OF LIQUIDITY
A commercial bank generally offers 2 types of deposits, mentioned below:
- Demand deposits that the bank must repay on demand as a Savings Account a
- Time deposits, which the bank must repay after a certain period of time
Customers also withdraw and deposit cash daily. Therefore, all commercial banks must have a certain amount of cash in their custody to meet the cash requirements of customers.
PRINCIPLE OF PROFITABILITY
Any commercial corporation on the whole tries to generate income & because a commercial bank is a commercial enterprise, it also works to generate earnings.
This is the fundamental principle for any bank. Sufficient profit must be earned by the banks. Therefore, it should invest in products & securities that will assure a fair and stable return on its investment. Interest rates, basically, determine how much it can earn.
Other than earning interest on its loan products, it earns interest on government securities primarily belongs to the central, state, and local governments. This kind of security would be a better investment than shares of new companies that are also exempt from taxes. The reason for this is that shares in new companies are not safe investments.
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PRINCIPLE OF SOLVENCY
Solvency equals financial capability or sufficiency of the capital which is essential to stay in the competitive markets. If the finances are not sufficient, the bank cannot run its commercial business.
The main supply of money for the commercial banks is the cash deposited via the depositors through the different accounts.
PRINCIPLES OF SAFETY
Deposits from customers are accepted by commercial banks, which then invest them. Because it is investing an investor’s money, it is always concerned with the safety of that money.
Security of borrowed funds is another principle when it comes to banks. Security means that the borrower should be able to repay the loan and interest on time at regular intervals without delay. And the repayment of the loan depend different factors such as: the nature of the security, the character of the borrower, his ability to repay and his financial situation.
PRINCIPLES OF COLLECTION OF SAVINGS
This is another important principle of the current banking scenario. Commercial banks are looking for huge amounts of unused money from their clients and therefore, bank employees are always looking ways to extract more savings from people.
Commercial banks raise funds by creating savings facilities. Then commercial bank invests these savings for profit. So, more savings means more investment means more profit.
PRINCIPLES OF LOANS AND INVESTMENT POLICY
Commercial banks earn money primarily through lending and investment activities while ensuring that the investor’s money is being invested in viable projects. Banks, therefore, need strong credit and investment policies to make good profits.
PRINCIPLES OF ECONOMY
Commercial banks always try not to make unnecessary expenses. Hence, they try to manage their operations within the pre-decided budget and raise their profits.
PRINCIPLES OF PROVIDING SERVICES
Commercial banks are considered to be service oriented banks. And good service ensures a better reputation and thus – better profits which is their main aim of business.
PRINCIPLES OF SECRECY
Commercial banks always try to keep their clients’ accounts confidential. The access to accounts is only allowed to authorized persons as anyone would want to keep their valuables and money confidential.
So, banks have this principle established that they must keep their customers’ accounts secret. For, if they do not maintain the confidentiality of their customers, it will lead to customer dissatisfaction.
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PRINCIPLES OF MODERNIZATION
In the era of technology & modernization, to cope with the advancement of the today’s world, commercial banks are adopting modern technical services like online banking, mobile banking etc.
It is also because of the ever-present threat to traditional banking from companies like Google and Amazon, development of digital solutions while meeting compliance requirements presents a major challenge in creating a truly user-friendly environment. Therefore, banks have to change as the society gets advanced.
PRINCIPLES OF SPECIALIZATION
In addition to modernization, we also live in an age of specialization and specialization. Commercial banks therefore segment their entire functions into smaller units and place their employees according to their performance to deliver specialized services.
PRINCIPLES OF LOCATION
Commercial banks usually choose a place where they think they will find many customers. Commercial banks must have their branches in a commercial area where there are no. of customers. The place must also be safe for customers and there must be a simple communication system.
PRINCIPLES OF RELATION
All commercial banks also try to maintain good relation with their existing clients and potential customers so as to maintain the customer loyality & to increase the customer retention rate.
PRINCIPLES OF PUBLICITY
Every successful business also need to do some good advertising. Therefore, the most successful businesses advertise to gain the attention of more customers. More customers will mean more business for the Commercial banks & therefore, they follow the principles of publicity.
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FRESH DRA CLASSES | AVAILABLE SOON 2022
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