Principles of Commercial Banks (All you need to know about in detail)

Principles of Commercial Banks: A central bank is an apex institution of a country’s monetary and financial system. Since the monetary system (which includes commercial banks) is a dominant part of the financial system of a country; the central bank is the apex system to the country’s financial system also. As such it plays a leading role in organizing, running, supervising, regulating and developing the monetary financial system. Now check out Principles of Commercial Banks from below…

Principles of Commercial Banks

1. Principles of liquidity: Deposits are repayable on demand or after expiry of a certain period. Everyday depositors either deposit or withdraw cash. To meet the demand for cash, all commercial banks have to keep certain amount of cash in their custody.

2. Principles of profitability: The driving force of commercial enterprise it sot generate profit. So it is true in case of commercial bank also.

3. Principles of Solvency: Commercial bank should have financially sound and maintain a required capital for running the business.

4. Principles of safety: While investing the fund, banks are to be cautions because bank’s money is depositor’s money.

5. Principles of collection of savings: This is a very important principle for today’s banking business. Commercial banks always seek huge amount of idle money from the clients. Now a day’s banks fix up the target for their employees to generate more savings from the people.

6. Principles of loan and investment policy: The main earning sources of commercial banks are lending and investing money to the viable projects. So commercial banks always try to earn profit through sound investment.

7. Principles of economy: Commercial banks never go for any unnecessary expenditure. They always try to maintain their functions with economy that increase their yearly profit.

8. Principles of providing services: A better service brings great reputation for the bank.

9. Principles of secrecy: Commercial bank maintains and keeps the clients accounts secretly. Nobody except the legitimized person is allowed to see the accounts of the clients.

10. Principles of modernization: It is the age of science and technology. So to cope up with the advanced world the commercial bank has to adopt modern technical services like online banking, credit card etc.

11. Principles of specialization: It is an age of specialization. Here commercial banks segments their whole functions into various parts and place their human resources according to their efficiency.

12. Principles of location: Commercial banks choose a suitable site where the availability of customers is large.

13. Principles of relation: Commercial banks always try to maintain a good relation with their clients and potential customers.

14. Principles of publicity: It is an age of publicity. If you would like to earn more money, you have to give more advertisement through various media. In that case, commercial banks follow this kind of principles to increase their customers.

Thus the functions of commercial banks can be summarized as below:

Primary Functions Secondary Functions
Accepting Deposits

The commercial banks accepts deposits from public, businessmen and others in the form of

  • Saving Deposits
  • Time Deposits
  • Current Deposits
Agency Service

  • Collection of bills, draft, cheques, dividends, etc
  • Payments of insurance premium, loan installments, etc.
  • Acting as an executor, administrator or trustee
  • Other services such as preparation of income tax returns, claiming of 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

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