Understanding the Principles of Commercial Banks: A Comprehensive Guide

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
Principles of Commercial Bank

Principles of Commercial Bank

  1. 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.
  2. Profitability Principles: Similar to other commercial enterprises, the primary goal of commercial banks is to generate profits.
  3. Solvency Principles: Commercial banks need to be financially sound and maintain the required capital to ensure the stability of their operations.
  4. Safety Principles: When investing funds, banks exercise caution, recognizing that the money they handle belongs to depositors.
  5. 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.
  6. 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.
  7. Economy Principles: Commercial banks strive to avoid unnecessary expenditures, focusing on maintaining functions economically to enhance annual profits.
  8. Service Provision Principles: Offering superior service enhances a bank’s reputation.
  9. Secrecy Principles: Commercial banks maintain client accounts confidentially, allowing only authorized individuals access to client account information.
  10. 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.
  11. Specialization Principles: Reflecting the age of specialization, commercial banks segment their functions and allocate human resources based on efficiency.
  12. Location Principles: Commercial banks strategically select locations with a large availability of customers.
  13. Relation Principles: Maintaining positive relationships with clients and potential customers is a priority for commercial banks.
  14. 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 FunctionsSecondary 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

What are the key principles of liquidity for commercial banks?

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.

How does profitability play a role in commercial banking?

Answer: Profitability is a driving force for commercial banks, similar to other commercial enterprises. The goal is to generate profits through various banking activities.

Why is solvency important for a commercial bank?

Answer: Commercial banks should be financially sound and maintain the required capital to ensure stability and successful business operations.

Sanjeet Kumar is a graduate of Journalism, Psychology, and English. Passionate about communication - with words spoken and unspoken, written and unwritten - he looks forward to learning and growing at every opportunity. Pursuing a Post-graduate Diploma in Translation Studies, he aims to do his part in saving the 'lost…

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