Principles of Commercial Bank

Principles of Commercial Bank

The bank which deals with money and money’s worth with a view to earning a profit is known as a commercial bank. Commercial banks must maintain some principles which are very important for banks to remain in the competition in modern days.

A commercial bank is a dealer in capital or more properly a dealer in money. This bank gives minimum interest to depositors and demand maximum interest from the borrower. By these processes, commercial banks earn a profit and continue their business.

Some principles are discussed below:

The principle of liquidity: Principle of liquidity is very important for a commercial bank. Liquidity refers to the ability of an asset to convert into cash without loss within a short time. Paying the deposited money on demand of customers is called liquidity in sense of banking.

The principle of solvency: Solvency means the financial capability or sufficiency in the capital. To stray in these competitive market commercial banks must have sufficient capital. If the funds are not sufficient the bank cannot run his business.

The principle of safety: The main source of fund of the commercial bank is the deposited money by the depositors’ through a different type of account. Depositors keep cash in the bank, especially for safety. So commercial bank must ensure the safety against a deposited fund.

The principle of profitability: The main objective of a commercial bank is to earn a profit. For earning profit commercial bank have to make an investment by providing short term loan, before providing loan commercial bank have to compensate a certain amount of money as liquidity.

The principle of loan and investment: The main source of profit of bank is granting loans to any individual or organization. Investment is a profitable and sound source of income. Commercial banks invest in business and investment sector.

The principle of savings: Commercial banks collect fund by creating savings facilities. These banks try to collect savings from society surplus. A commercial bank makes an investment from this savings to generate profit. So, more savings, more investment, and more profit.

The principle of services: Commercial ‘bank ensures the best services to their customers. The success of a bank depends on the services provided by a bank. Customer chooses those banks that provide improved services.

The principle of secrecy: Customers want to keep secret about their valuable assets and money. So banks must have to keep secret about their customer’s account. If a commercial bank does not maintain secrecy the customer will be dissatisfied.

The principle of efficiency: Commercial bank should operate their business efficiently. So that they can succeed at the objective. In this competitive market, there is in an alternative way without efficiency in management. So commercial bank must train their, employees to increase the efficiency in management.

The principle of location: Commercial banks must have to locate their branches in the commercial area where many customers are available. The location must be safe for the customers and easy communication system must exist.

These are the basic principles of a commercial bank. These banks must follow these principles.