Firstly it is necessary to define liquidity and explain the reason that liquidity is so important for banks. Liquidity is essentially immediately spendable funds or the ability to convert assets into spendable funds, quickly and easily without a significant loss. Banks need liquidity because of demands for spendable funds. These demands mainly come from customers wishing to withdraw money from their accounts and from customers with credit requests, either in the form of new loans or drawings upon existing credit lines. However, banks will also have a demand for liquidity for other reasons including paying off liabilities that they have for example loans from other banks, or the central bank, payment of income taxes, and the paying of cash dividends to their shareholders. Sources of liquidity that banks have available to them fall into two categories; asset liquidity and borrowed liquidity, with most banks tending to use a mix between Continue reading
Bank Management Concepts
Operational Risks in Banks
“Operational Risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and system or from external events.” Generally, operational risk is defined as any risk, which is not categorized as market or credit risk, or the risk of loss arising from various types of human or technical error. It is also synonymous with settlement or payments risk and business interruption, administrative and legal risks. Operational risk has some form of link between credit and market risks. An operational problem with a business transaction could trigger a credit or market risk. Indeed, so significant has operational risk become that the Bank for International Settlement (BIS) has proposed that, as of 2006, banks should be made to carry a Capital cushion against losses from this risk. Managing operational risk is becoming an important feature of sound risk management practices in modern financial markets Continue reading
Variable Cash Reserve Ratio and Credit Control
Considering the limitations of the bank rate policy and the open market operations, the need to develop a very effective method of credit control was felt. Especially the need was to directly control the power of the commercial banks to create credit, Variable cash reserve ratio was suggested as one more method of quantitative credit control by Keynes. Further this method is considered necessary for promoting the overall liquidity and solvency of the banking system, apart from improving the public confidence on the banking system. The process of working of this method of credit control can be easily understood with an example. Suppose in an economy there is over expansion of credit which is possible with excessive cash reserves with the commercial banks. To check this, the central bank may raise the cash reserve ratio say from 20% to 25% Then this will bring down the availability of cash reserve Continue reading
Bank – Meaning, Characteristics and Functions
A bank is financial institution, which deals with money and credit. Bank accepts deposits from the public and mobilizes the fund to productive sectors. Bank also provides remittance facility to transfer money from one place to another. Generally, bank accepts deposits from business institutions and individuals, which is mobilized into productive sectors mainly business and consumer lending. So bank is also called a dealer of money. At present context, a bank may engaged in different types of functions such as remittance, exchange currency, joint venture, underwriting, bank guarantee, discounting bills etc. The modern bank refers to an institution having the following characteristics: Bank deals with money: it accepts deposits and advances loans. Bank also deals with credit: it has the ability to create credit by expanding its liabilities. Bank is commercial institution: it aims at earning profit. Banks are the principal source of credit for millions of individuals and families and Continue reading
Different Modes of Acceptance of Deposits by Commercial Banks
The most important activity of a commercial bank is to mobilize deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank. The following types of deposits are usually received by banks: Current Deposit: Also called ‘demand deposit’, current deposit can be withdrawn by the depositor at any time by cheques. Businessmen generally open current accounts with banks. Current accounts do not carry any interest as the amount deposited in these accounts is repayable on demand without any restriction. The Reserve bank of India prohibits payment of interest on current Continue reading
The Concept of Debt Recovery Management
Banks were never so serious in their efforts to ensure timely recovery and consequent reduction of Non-Performing Assets (NPAs) as they are today. It is important to remember that recovery management, be of fresh loans or old loans, is central to NPA management. This management process needs to start at the loan initiating stage itself. Effective management of recovery and Non-Performing Assets comprise two pronged strategy. First relates to arresting of the defaults and creation of NPA thereof and the second is to handling of loan delinquencies. The tenets of financial sector reforms were revolutionary which created a sense of urgency in the minds of staff of bank and gave them a message that either they perform or perish. The prudential norm has forced the bank to look into the asset quality. A debt from a loan, credit line or accounts receivable that is recovered either in whole or Continue reading