Principles of Commercial Banks: Understanding the Core Tenets A central bank serves as the pinnacle institution in a nation’s monetary and financial framework. Given that the monetary system, encompassing commercial banks, is a predominant component of a country’s financial structure, the central bank assumes a paramount position in organizing, operating, supervising, regulating, and advancing the monetary financial system. Explore the fundamental principles of commercial banks outlined below…
Principles of Commercial Bank
- Liquidity Principles: Deposits are repayable either on demand or after a specified period. Daily transactions involve deposits and withdrawals, requiring commercial banks to maintain a certain amount of cash to meet the demand for withdrawals.
- Profitability Principles: Similar to other commercial enterprises, the primary goal of commercial banks is to generate profits.
- Solvency Principles: Commercial banks need to be financially sound and maintain the required capital to ensure the stability of their operations.
- Safety Principles: When investing funds, banks exercise caution, recognizing that the money they handle belongs to depositors.
- Savings Collection Principles: Vital for contemporary banking, commercial banks actively seek significant amounts of idle money from clients. Banks often set targets for employees to encourage savings.
- Loan and Investment Policy Principles: Commercial banks rely on lending and investing in viable projects as their main sources of earnings, aiming to generate profits through sound investment.
- Economy Principles: Commercial banks strive to avoid unnecessary expenditures, focusing on maintaining functions economically to enhance annual profits.
- Service Provision Principles: Offering superior service enhances a bank’s reputation.
- Secrecy Principles: Commercial banks maintain client accounts confidentially, allowing only authorized individuals access to client account information.
- Modernization Principles: In the era of science and technology, commercial banks must adopt modern technical services such as online banking and credit cards to keep pace with the advanced world.
- Specialization Principles: Reflecting the age of specialization, commercial banks segment their functions and allocate human resources based on efficiency.
- Location Principles: Commercial banks strategically select locations with a large availability of customers.
- Relation Principles: Maintaining positive relationships with clients and potential customers is a priority for commercial banks.
- Publicity Principles: In the age of publicity, commercial banks leverage advertising through various media to increase customer engagement and attract new clients.
Thus the functions of commercial banks can be summarized as below:
| Primary Functions | Secondary Functions |
|---|---|
| Accepting Deposits | 🏦 Saving Deposits |
| 🏦 Time Deposits | |
| 🏦 Current Deposits | |
| Agency Service | 🤝 Collection of bills, drafts, cheques, dividends, etc. |
| 🏦 Payments of insurance premiums, loan installments, etc. | |
| 🧾 Acting as an executor, administrator, or trustee | |
| 🌐 Other services such as preparing income tax returns, claiming tax refunds, etc. | |
| Lending Funds | 💵 Loans and Advances |
| 💳 Cash Credit | |
| 🔄 Overdraft | |
| 📜 Discounting of Bills | |
| General Utility Services | 🌍 Issuing travelers cheques |
| 🔒 Locker facilities for keeping valuables in safe custody | |
| 💳 Issue of debit and credit cards |
Principles of Commercial Bank FAQ
Answer: Commercial banks need to ensure that deposits are repayable on demand or after a specified period. They must maintain a certain amount of cash to meet daily withdrawal demands.
Answer: Profitability is a driving force for commercial banks, similar to other commercial enterprises. The goal is to generate profits through various banking activities.
Answer: Commercial banks should be financially sound and maintain the required capital to ensure stability and successful business operations.
