CHAPTER - 1 : COMMERCIAL BANKING IN INDIA

CHAPTER - 1 : COMMERCIAL BANKING IN INDIA

Q.1: Define Bank / Commercial Bank and Discuss the functions of Commercial Banks.

Ans. A) MEANING AND DEFINATION OF COMMERCIAL BANK :
In modern economy commercial Banks Play an important role in the financial sector. A
Bank is an institution dealing in money and credit. Credit money is the major component of
money supply in a modern economy. Commercial banks are the creators of credit. The strength
of economy of any country basically depends on a sound and solvent banking system.
A Commercial bank is a profit seeking business firms dealing in money or rather claims to
money. It safeguards the savings of the public and give loans and advances.
The Banking Companies Act of 1949, defines banking company as accepting for the
purpose of lending or investment of deposit money from the public, repayable on demand or
otherwise and withdrawable by cheque, drafts, order or otherwise.

B) FUNCTIONS OF COMMERCIAL BANKS :-
Modern commercial banks perform a variety of functions. They keep the wheels of
commerce, trade and industry always revolving. Major functions of a commercial bank are: -
Primary or Banking functions and Secondary or Non-Banking functions.

FUNCTIONS OF COMMERCIAL BANKS



Primary Secondary Subsidiary
Activities


Deposits Loans Agency Utility
& Services Services
Advances

I. Primary / Banking Functions :-
Commercial banks have two important banking functions. One is accepting deposits and
other is advancing loans.
1) Deposits :-
One of the main function of a bank is to accept deposits from the public. Deposits are
accepted by the banks in various forms.
a) Current Account Deposits :-
Current Accounts are usually opened by businessmen who have a number of regular
transactions with the bank, both deposits and withdrawls. There is no restriction on number and
amount of deposits. There is also no restriction on withdrawls. No interest is paid on current
deposits. Banks may even charge interest for providing this facility. These accounts are also
known as demand deposits as amount can be withdrawn on demand.
b) Saving Account Deposits :-
Saving Accounts are opened by salaried and other less income people. There is no
restriction on number and amount of deposits. withdrawls are subject to certain restrictions. It
earns Interest but less than fixed deposits. It encourages saving habit among salary earners
and others. Saving deposits are an important source of funds for banks.
c) Fixed Account Deposits :-
Deposits in fixed account are time deposits. Money under this account is deposited for a
certain fixed period of time varying from 15 days to several years. A high rate of interest is paid.
If money is withdrawn before expiry date, the depositor receives lower rate of interest. Deposits
can be renewed for further period. Many banks sanction loans against security of fixed deposits.
d) Recurring Account Deposits :-
In Recurring deposit, a specified amount is regularly deposited by account holder, at an
internal of usually a month. This is to form the habit of small savings among the people. At the
end of maturity period, the account holder gets a substantial amount. Interest on this type of
deposit is almost equal to fixed deposits.
Thus by creating variety of deposits, banks motivate people in a variety of ways and
encourage savings in the economy.
2) Loans And Advances :-
Banks not only mobilize money but also lend to its credit worthy customers for maximizing
profits. Loans and Advances are granted To :-
a) Business And Trade :-
Commercial banks grant short-term loans to business and trade activities in following forms:-

i) Overdraft :-
Commercial banks grant overdraft facility to current account holders Under this system a
borrower is allowed to draw more than what is deposited in his account. The borrower is granted
to a fixed additional amount against collateral security. Interest is charged for actual amount
drawn.
ii) Cash Credit :-
Cash credit is given by the bank to any businessman to meet regular working capital needs,
against the security of goods or personal security. Interest is charged on actual amount drawn
by the customer.
iii) Discounting Of Bills :-
When the holder of the bill is not in a position to wait till the maturity of the bill and requires
cash urgently, he sells the bill of exchange to bank. Bank advance credit by discounting bills of
exchange, government securities or any other approved financial instruments. The bank
purchases the instruments at a discount.

iv) Money At Call :-
Banks also grant loans for a very short period, generally not exceeding 7 days. Such
advances are repayable immediately at a short notice hence they are called as Money at Call or
Call money. These loans are given to dealers or brokers in stock market against Collateral
Securities.
v) Direct Loans :-
Loans are given to customers against the security of moveable properties. Their maturity
varies from 1 to 10 years. Interest has to be paid on entire loan amount sanctioned. Loans are
of many types like :- personal loans, term loans, call loans, participative loans, collateral loans
etc.
b) Loans to Agriculture :-
Banks grant short-term credit to agriculture at a lower rate of interest. Loans are granted for
irrigation, purchase of equipments, inputs, cattle etc.
c) Loans To Industries :-
Banks grant secured loans to small and medium scale industries to meet their working
capital needs. The time period may be from one to five years. It may be in the form of Overdraft,
cash credit or direct loan.
d) Loans To Foreign Trade :-
Loans are granted to export and import in the form of direct loans, discounting of bills,
guarantee for deferred payments etc. Here the rate of interest is low.
e) Consumer Credit / Personal loans :-
Banks also grant credit to household in a limited amount to buy some durable consumer
goods like television sets, refrigerators, washing machine etc. Such consumer credit is
repayable in installments. Under 20-point programme, the scope of consumer credit has been
extended to cover expenses on marriage, funeral etc., as well.


f) Miscellaneous Advances :-
Banks also gives advances like packing credits to exporters, export bill purchased or
discounted, import finance, finance to self-employed, credit to weaker sections of society at
concessional rates etc.
II. Secondary / Non-banking Functions :-
Banks gives various forms of services to public. Such services are termed as non- banking or
secondary functions :-

1. Agency Services:-
Banks perform certain functions on behalf of their customers. While performing these
services, banks act as agents to their customers, hence these are called as agency services.
Important agency functions are :-
a) Collection :-
Commercial banks collect cheques, drafts, bills, promissory notes, dividends,
subscriptions, rents and any other receipts which are to be received by the customer. For these
services banks charge a nominal amount.
b) payment :-
Banks also makes payments on behalf of their customers like paying insurance
premium, rent, taxes, electricity and telephone bills etc for such services commission is
charged.
c) Income Tax Consultant :-
Commercial banks acts as income-tax consultants. They prepare and finalise the
income tax returns of their clients.
d) Sale And Purchase Of Financial Assets :-
As per the customers instruction banks undertake sale and purchase of securities,
shares and any other financial assets. Nominal charges are charged by a bank.
e) Trustee, Executor And Attorney :-
As a trustee, banks becomes the custodian and manager of customer funds. Bank
also acts as executor of deceased customers will. As an Attorney the banks sign the
documents on behalf of customer.
f) E- Banking :-
Through Electronic Banking, a customer can operate his bank account through
internet. He can make payments of various bills. He can even transfer money from one place to
another.
2. Utility Services :-
Modern Commercial banks also performs certain general utility services for the community,
such as :-
a) Letter Of Credit :-
Banks also deal in foreign trade. They issue letter of credit and provide guarantee to
foreign traders for the soundness of their customers.
b) Transfer Of Funds :-
Banks arrange transfer of funds cheaply and safely from one place to another. Transfer
can be in the form of Demand draft, Mail transfer Travellers cheques etc.
c) Guarantor :-
Banks offer a guarantee of payment on behalf of importer to facilitate imports with
deferred payments.
d) Underwriting :-
This facility is provided to Joint Stock Companies and to government to enable them to
raise funds. Banks guarantee the purchase of certain proportion of shares, if not sold in the
market.
e) Locker Facility :-
Safe Lockers are provided to the customers. So that they can deposit their valuables
like Jewellary, Securities, Shares and otherdocuments.
f) Referee :-
Banks may act as referee with respect to financial standing, business reputation and
respectability of customers.
g) Credit Cards :-
Credit card facility have been introduced by commercial banks. It enables the holder
to minimize the use of hard cash. Credit card is a convenient medium of exchange which
enables its holder to buy goods and services from member establishment without using
money.
III. Subsidiary Activities :-
Many commercial banks also undertakes subsidiary activities such as :-

1) Housing Finance :-
Housing finance is provided against the security of immoveable property of land and
buildings. Many banks such as SBI, Bank of India etc. have set up housing finance subsidiaries.
2) Mutual Funds :-
A Mutual fund is a financial intermediary that pools the savings of investors for collective
investment in diversified portfolio securities Many banks like SBI, Indian Bank etc. have set up
mutual fund subsidiaries.
3) Merchant Banking :-
A variety of services are offered by merchant banking like :-
Management, Marketing and Underwriting of new issues, project promotion, corporate advisory
services, investment advisory services etc.
4) Venture Capital Fund :-
Venture capital fund provides start-up share capital to new ventures of little known,
unregistered, risky, young and small private business, especially in technology oriented and
knowledge intensive business. Many commercial banks like SBI, Canara Bank etc. have set up
venture Capital Fund Subsidiaries.
5) Factoring :-
Factoring is a continuing arrangement between a financial intermediary (factor) and a
business concern (client) where by the factor purchases the clients accounts recieveable. Banks
like SBI and Canara Bank have established subsidiaries to provide factoring services.
Thus various services are provided by commercial Banks.

Q.2: Explain the process of multiple credit creation of commercial banks.
OR
Write note on multiple credit creation by commercial banks. Every loan creates a
Deposit. Discuss.

Ans. A) MULTIPLE CREDIT CREATION BY COMMERCIAL BANKS:-
Creation of credit is an important function of a commercial bank. Prof. Sayers said
Banks are not merely purveyors of money but, also in an important sense manufacturers of
money. In a modern economy Banks deposits form a major proportion of total money supply.
A banks demand deposits arise mainly from :- Cash deposits by customers and Bank
Loans and Investments.

1. Cash Deposits By Customers :-
These are termed as primary deposits as they arise from the actual deposits of cash
in a bank made by its customers. In receiving such deposits, the bank plays a passive role. The
creation of primary deposits, however is nothing but transforming the currency money in to
deposit money.
2. Bank Loans And Investments :-
These are termed as derivative or active deposits. The derivative deposits are lent in
the form of loans or advances, discounting of bills or used for purchasing securities or other
assets.
Deposit account in the name of the customer or seller, credits him with the amount of
loan granted or value of security purchased, subject to withdrawl by cheque, as required. Hence
loans advanced or purchases of securities creates deposits.
Thus every loan creates a deposit. They increase the quantity of bank money. The
size of derivative demand deposits is determined by the banks lending and investment activities.
There will be a constant inflow and outflow of cash with the banks. For the sake of liquidity and
safety some proportion of total deposit must be maintained in cash, for e.g. :- 10% to 20% to
meet the demand for cash at the counter. This is known as Cash Reserve Ratio.
Primary deposits serve as a basis for creating derivative deposits, that is credit
creation, and for increasing money supply. Commercial banks are profit seeking institutions and
when they find that large volume of cash received lies Idle, they use these resources for
advancing loans or for making investment in securities, shares etc. there by earning high rate of
interest. The creation of credit also depends on excess cash reserves or cash reserve ratio. The
derivative deposits are used as working capital.
When the borrower withdraws money from his loan account by cheque it is
deposited by the payee in some other bank. Those banks again create deposit on the basis of
fresh deposits received after keeping required reserves. Ultimately, the total volume of credit or
derivative deposits or bank money created by all banks would be a multiple of the original
amount of new cash reserves in the system. Thus multiple expansion of credit takes place.

Example :-
Suppose the Cash Reserve Ratio is 20% and a person deposits Rs. 10,000/- with
Bank of India. This is primary deposit. The bank keeps Rs. 2000 as CRR and balance of Rs.
8000 is used for granting credit.
Now suppose Bank of India lends Rs. 8000 to Mr. A and Mr. A pays a cheque of
Rs. 8000 to Mr. B, who has an account in Bank Of baroda. Then Bank Of Baroda receives Rs.
8000 as primary deposit. It keeps Rs. 1,600 (20%) as CRR and excess amount of Rs. 6,400 is
used for giving credit. Now if, Mr. C is granted this loan and Mr.C gives a cheque of Rs. 6,400 to
another person who may deposit it in Bank of Maharashtra. Bank of Maharashtra will keep Rs.
1,280 as CRR and issue a loan of Rs. 5,120. This process continues until the original excess
reserves of Rs. 8000 with the first Bank of India, have been parceled out among various banks
and have been required resources. As a result, the aggregate of derivative deposits in the entire
banking system, approximates 5 times the initial derivative deposit over a period of time.

Let us explain with the help of table:-
The Multiple expansion of credit is the inverse of CRR maintained by banks. Higher the CRR,
Lower the expansion of credit and vice versa.

C) ASSUMPTIONS :-
The bank deposit multipler, discussed above, is based on the following assumptions:-
1) There is no leakage from the banking system. All the money should remain with banking system.
2) The banks must receive new deposits.
3) They must be willing to make loans or buy securities.
4) The CRR remains constant through all the stages.
5) People must be willing to borrow.
6) The business conditions are normal.
7) There is no credit control policy of central bank.
8) There should be popular banking habit in the country and a well developed banking system.

Q.3: What are the limits to the power of banks to create credit ?
OR
Write notes on limitations of credit creation.
Ans. A) LIMITATIONS OF CREDIT CREATION :-
Commercial banks do not have unlimited powers of deposit or credit creation, because
their activities in this direction are subject to a number of restrictions, such as :-
1) Amount Of Cash :-
The larger the amount of cash with banking system, the greater will be the excess funds,
and that larger will be the credit creation power of the bank. The banks power of creating money
or credit is thus limited by cash it can get in its hands on, primarily through primary deposits.
2) Cash Reserve Ratio :-
Higher the cash reserve ratio, smaller the volume of credit creation and vice versa. If CRR
falls to a certain minimum, then power of the banks to create credit is limited.
3) External Drain:-
External drain refers to the withdrawl of cash from the banking system by public. Every
rupee in cash that is withdrawn from the banking system, lowers the reserves of the banks and
thus checks further deposit expansion.
4) Willingness To Borrow:-
Credit creation will be larger during a period of business prosperity and smaller during a
depression. Bankers cannot create credit at will.The amount of credit is conditioned by the
needs and will of the borrowers.
5) Supply Of Collateral Securities:-
The availability of good securities places one more limitation on the power of banks to
create money. If approved securities are not available, the bank cannot create credit without
inviting trouble. The bank does not create money out of thin air, it transmutes other forms of
wealth in to money.
6) Banking Habits And Banking System:-
In the absence of banking habits and banking system, credit creation will be impossible.
The banking habit will become popular only if there is a sound, developed banking system.
7) Monetary Policy Of Control Bank:-
The Central bank has the power to influence the volume of money in the country and from
time to time, use various methods of credit control and thus its influences the banks to expand
or contract credit.


Q.4: Explain in details the Items included in Asset Side of Commercial
Bank Balance Sheet. OR
Explain the Assets and Liabilities of Commercial Banks. OR
Write notes on: - Assets and Liabilities of Commercial Banks. OR
Explain the Balance Sheet of Commercial Banks.

Ans. A) BALANCE SHEET OF COMMERCIAL BANKS :-
Banks are the most important financial intermediary in an economy. Banks performance
can be analysed by its balance sheet and profit and loss account. Bank publish balance sheet in
their annual accounts. The balance sheet of a commercial Bank is a statement of its liabilities
and Assets at a particular time. Liabilities show the sources of funds through which bank raises
funds for its business. Assets represents uses of funds to generate income for bank.
Thus, the balance sheet indicates the manner in which bank has raised funds and
invested them in various types of assets.
It is customary to state liabilities on left and assets on right side. A model of balance
sheet of a bank is given below:-

BALANCE SHEET OF A COMMERCIAL BANK

LIABILITIES ASSETS
1) Share Capital (paid up) 1) Cash Balances
a) With Central Bank
b) With other Banks
2) Reserves and surplus 2) Money at call and short notice.
3) Deposits :-
a) Time deposits.
b) Demand Deposits
c) Saving Deposits

3) Bills discounted, including treasury bills.
4) Borrowings 4) Investments
5) Other Liabilities 5) Loans and Advances

6) Other Assets.

B. LIABILITIES OF A COMMERCIAL BANK (LIABILITIES PORTFOLIO) :-
The liabilities of a commercial bank shos how the bank raises funds for its business.
1) Share Capital (Paid-up) :-
It is the contribution made by the shareholders of the bank. This indicates the banks
liabilities to its shareholders.
2) Reserves And Surplus :-
It is the amount accumulated over the years out of undistributed profits to meet
contingencies. Reserves and surplus are liabilities of the bank, as they belong to its
shareholders.
3) Deposits :-
Deposits from the public constitute the biggest proportion of banks working funds. The
deposits accepted by bank in current, fixed and savings account are liabilities of bank to t5heir
customers. They are categorized as demand, time and saving deposits. These funds are
liabilities of bank to their customers, which have to be returned to them. But at the same time,
these funds are also assets to bank since the banker can make use of them to get certain
interest yielding assets.
4) Borrowings :-
When a bank borrows from other banks liability is created. It consist of borrowing /
refinance obtained from RBI, commercial banks and other financial institutions. It also includes
overseas borrowings.
5) Other Liabilities :-
In course of its business, miscellaneous liabilities are incurred by bank. They include bills
payable like drafts, travelers cheques, pay slips etc. It also includes income tax provision.

C. ASSETS OF A COMMERCIAL BANK (ASSETS PORTFOLIO):-
The assets portfolio shows how the bank uses the funds entrusted to it:-
1) Cash Balances :-
A bank holds cash to meet the day-today withdrawls of deposits by its customer. This is
known as cash reserve. Bank hold cash balances with itself, with other banks and with RBI. In
India, Commercial Banks are obliged to keep a certain proportion of total deposits in the form of
cash reserve requirement with RBI. Cash has perfect liquidity, but yields no profit.
2) MONEY AT CALL AND SHORT NOTICE :-
It refers to short term loans made in money market. Such loans are borrowed by
speculators in stock exchange market. Their maturity vary between one day to 15 days. These
loans are repayable on demand and at the option of either lender or borrower. Thus, these
forms of assets are highly liquid and are interest earning too, though at a comparatively low
rate.
3) Bills Discounted :-
Banks funds are invested in commercial bills which are short-dated, usually three
months. Banks also invest in treasury bills. These assets are self-liquidating in nature.
4) Investments :-
Investment in various kinds of securities is a major part of assets of a bank. Mainly
commercial banks invest in government securities, shares etc. Securities and bonds are known
as banks secondary reserves because they are shiftable and Interest yielding. Usually banks
prefer medium and short term securities. This secondary reserve fails to convert securities in to
cash at the same time.
5) Loans And Advances :-
The most important asset item in the Balance sheet of a bank is loans advances. The
profitability of a bank depends upon the extent to which it grants loans advances to customers.
The various types of loans advances provided by banks are :- Cash Credit, Overdraft, Loans,
Installments, purchase and discounting of Bills. Banks mostly grant short term working capital
loans only so that they can have fair liquidity with high profitability.
6) Other Assets :-
It includes fixed assets, furniture and fixtures etc. It will also include the net position of
inter-office account.
From above assets and liabilities, banks will have to balance their revenues against
expenses in such a way to generate income to sustain profitability from business.

Q.5:Explain the trade off between banks objectives of liquidity and profitability. OR
Write note on trade off between liquidity and profitability objectives of bank. OR
Explain commercial banks objectives of liquidity and profitability. How do the
banks reconcile these two conflicting objectives?

Ans. A) OBJECTIVES OF PORTFOLIO MANAGEMENT (TRADE-OFF BETWEEN LIQUIDITY
AND PROFITABILITY) :-
A commercial bank has to manage its assets and liabilities with three objectives in mind,
namely :- Liquidity, profitability and solvency.
Liquidity means the capacity of the bank to give cash on demand in exchange for
deposits. But a commercial bank is a profit seeking institution. It has to arrange its assets in
such a way that it makes maximum profits. The bank should also maintain the confidence of
public by making cash available on demand. Liquidity and profitability are, therefore, conflicting
considerations for bankers.
Cash has perfect liquidity but yields no return at all, while other income-yielding assets
such as loans are profitable but have no liquidity. The bank should strike a balance between
liquidity and profitability.
Another consideration of the bank is its own solvency and security. This refers to liquidity
and shiftability. Liquidity is the capacity to produce cash on demand. Shiftability means the
assets acquired by bank should be easily shiftable to other banks or central bank. Those
securities would be preferred by a bank which can be shifted easily without any loss to the bank
than the risky and more profitable ones.
A bank which is solvent may not be liquid. Its assets may exceed its liabilities, but the
assets may not be in such a form that they are readily convertible in to cash. Thus, the two
motives of a banks liquidity and profitability are contradictory, but have to be reconciled. A good
banker is one who follows a wise investment policy and distributes the assets in such a way that
both the requirements of liquidity and profitability are satisfied. The assets should bring in
maximum profits and should provide maximum security to the depositors. The secret of success
of a bank lies in striking a sound balance between liquidity and profitability.
The liquidity profitability trade off is shown in following figure:-



























B. RECONCILING TWIN OBJECTIVES :-
A good banker is one who follows a wise investment policy and distributes the assets in
such a way that both the requirements of liquidity and profitability are satisfied. The secret of
success of a bank lies in striking a balance between liquidity and profitability. The commercial
bank arranges its assets in an ascending order of profitability and descending order of liquidity.
As we move down the balance sheet the assets become less and less liquid and more and
more profitable. The more liquid the assets, the less profitable it is. Let us Explain :-
1) Cash :-
Cash balance have perfect liquidity, but no profitability. Cash is held to meet the
withdrawl needs of depositors.
2) Money At Call :-
Surplus cash of commercial banks is lend to each other. This earns some interest and is
also very liquid.
3) Investment In Securities :-
Statutorily banks have to invest a part of their assets in government securities. These
securities have low rate of interest but banks can borrow from RBI against these securities.
Thus investment in securities provide returns as well as liquidity to bank.
4) Loans And Advances :-
Here liquidity is low but profitability is high.

Thus banks hold various assets in such a way that the requirements of liquidity and profitability
are balanced.


Q.6: Explain / what are the factors affecting Liquidity and profitability of Banks?
OR
Write note on factors determining Liquidity and profitability of a bank.

Ans. A. FACTORS AFFECTING LIQUIDITY OF BANKS :-
The amount of liquid assets held by bank, depends upon the following factors :-
1) Statutory Requirements :-
Every commercial bank has to keep a minimum cash balance by law. The extent of reserves
held by bank depends upon the statutory requirements like CRR and SLR. These limits are
fixed by central bank. Commercial banks also have to maintain liquid assets in the form of gold
and approved securities.
2) Nature Of Money Market :-
It will be easy for banks to buy and sell securities if the money marketis fully developed. In
such case need for cash will be less.
3) Banking Habits :-
Banking habits of customers have a direct bearing on banks cash balance and liquidity
position. In developed countries for making payments cheques are used hence, the use of cash
is less. On other hand, in developing countries banking habits are not fully developed, so banks
have to maintain large cash reserves.
4) Structure Of Banks :-
Under unit banking, every bank is an independent unit and they have to keep a high degree
of liquidity. Under branch banking, the cash reserves can be centralized in head office and
branches can have smaller liquid reserves.
5) Business Conditions :-
In Industrialised countries, business in brisk and speculative activities are undertaken so,
the demand for money is large. In agricultural countries, during off season, demand is less so,
the banks can manage with small cash balances.
6) Monetary Transactions :-
During busy season such as festival times, harvest season, beginning of month etc. banks
will have to keep large percentage of cash. Thus, the size of liquid reserves also depend on the
number and magnitude of monetary transactions.
7) Number And Size Of Deposits :-
When the number and size of deposits rise, banks have to keep more liquidity and
vice versa.
8) Nature Of Deposits :-
The nature of deposits also determines the liquidity requirements of a bank. Deposits are
various types such as time deposits, demand deposits etc. Larger the demand and short term
deposits, larger will be liquidity.
9) Clearing House Facility :-
When clearing house facilities are available, then large transactions can be made through
book adjustments. This will reduce cash requirements of commercial banks.
10) Liquidity Policy Of Other Banks :-
A Bank which decides to hold large cash balances will have more customers due to
goodwill. Hence other bank will also try to improve their liquidity position to attract customers.
Thus, the liquidity position of one bank depends on the liquidity policy of other banks.
On the whole, we can say by looking in to past experience, each bank has to take its own
decision on liquidity requirement.

B) FACTORS AFFECTING PROFITABILITY OF BANKS :-
1) Cost Of Funds :-
Share capital, reserves, deposits, borrowing and other liabilities are the sources of funds for
bank. The cost of funds refers to interest expenses.
2) Yield On Funds :-
Banks fund are used for different sources like CRR, SLR requirement, loans and Advances
etc. Many of these give rise to yields mainly in terms of interest income. This depends on the
portfolio management of banks.


3) Spread :-
The difference between interest income and interest expenses in defined as spread. High
interest spreads shows the level of efficiency and a relatively less competitive market.
4) Non-Interest Income :-
Non-Interest income is income derived from non-financial asset and services and includes
commission and brokerage on remittance facilities, guarantees underwriting, contracts etc,
locker rentals and other service charges.
5) Amount Of Working Capital :-
Profitability is directly related to the amount of working funds deployed by banks. Working
funds are funds deployed by a bank in its business.
6) Non performing Assets :-
Profitability also depends on NPAs. Larger the NPAs lower will be the profitability and vice
versa.
7) Competition :-
When the level of Competition increases, there is fall in margins and hence it results in lower
profitability.
8) Operating cost :-
If operating cost are higher, profitability of banks will be lower and vice versa. Operating cost
includes :- Salaries, bonus, gratuity, expenses on stationery, printing, rent, depreciation etc.
9) Risk Cost :-
Risk cost is the cost which is likely to be incurred on annual loss on assets. For e.g.:-
provisions for bad and doubtful debts is included under this head. Thus risk cost also affects the
profitability of banks.
10) Burden :-
The total non-interest expenses representing the transaction cost will generally be more
than miscellaneous income. The difference between the two is known as Burden. Higher the
burden, lesser will be the profitability of banks.
Thus from above we can say that the objectives of liquidity and profitability have to be
reconciled. A successful banker will adopt a prudent investment policy keeping the requirements
of liquidity and profitability.
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CHAPTER-18 - FOREIGN EXCHANGE MARKET
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CHAPTER-13. GAINS FROM INTERNATIONAL TRADE
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CHAPTER 8 - FORWARD, FUTURE AND COMMODITY MARKET
CHAPTER 7 MUTUAL FUNDS AND EQUITY MARKET
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CHAPTER 5 - INDIAN MONEY MARKET
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CHAPTER-2 : BANKING SECTOR REFORMS
CHAPTER - 1 : COMMERCIAL BANKING IN INDIA
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