According to the dictionary, “Environment” means the surrounding conditions of any person, institution, or object. These surroundings may influence those persons, institutions, or objects differently, such as economic, social, political, cultural, technological, etc.
Finding the relationship between business and environment, famous economist “Kotler” says, “Business environment means a surrounding situation or influencing power that influences an organization’s activities, operations, and decisions.
From this definition of Kotler, it is clear that the environment influences the whole social and economic activities, and there is nothing beyond the control of the environment. In this way, the success or failure of a business is largely influenced by the environment. The bank is a special type of business organization.
Bank collects money from a group of people as deposits and lends those to another group of people for profit. A shortage of deposits and investments is felt when the environment is unfavorable.
Though the environment influences the performance or activities of all businesses, for banks, environmental changes are very sensitive. So the banker needs to be always careful to look at the environmental changes (positive or negative) to undertake the right course of action.
Why Study of Environment of Banking?
The environment indeed controls whole socio-economic activities. It is impossible to achieve success from any initiative by ignoring the influence of the environment.
An interested reader of the subject of banking and new entrepreneurial clients of a bank, directors, and bankers must have sufficient knowledge regarding the environment of a bank and its elements with greater importance. It is essential to remain careful to peruse environmental changes to cope with challenges in managing banks.
Bankers need to study changes in the environment of banking closely to handle many problems, some of which are;
- Variations in Demand for Money.
- Variations in Credit Demand.
- Variations in funds supply.
- Variations in Interest Rates.
- Variations in Credit Condition.
1. Variation in demand for money
As the banks collect deposits from the surplus unit and give loans to the deficit unit, they need to know. They should have the ability to predict how much volume of money the depositors are expected to withdraw from the accounts within a specific limit of time.
On the other hand, if the demand for money suddenly rises, it may not be possible for the bank to supply a tremendous amount of money. So it requires extensive ideas regarding the environment of monetary demand in the market.
2. Variation in credit demand
The demand for credit varies over varied periods of time. Suppose: Short-term credit is needed for working capital, whereas to meet the capital expenditure of a large amount, it requires fixed and long-term credit. So bankers need to have an idea about how much to allocate for short-term credit and how much to allocate for long-term credit.
3. Variation in funds supply
The main supply of funds is the deposit money from the surplus savers. So when and for what reason will the depositors and the central bank increase or decrease the supply of funds; the bankers need to have ideas about those.
4. Variation in interest rate
The rise and fall of interest rates on both depositors’ money and disbursed loans to the borrowers affect the banking job. If interest on the deposit falls, the bank fund will be declined, and if the rate increases, the fund will increase.
Again, increasing interest rates on the loanable fund will lead the borrowers to take less money. A study of the environment will help bankers tackle such situations.
5. Variation in credit condition
The environment influences the terms and conditions of the credit, So when the environment changes, it requires a change in the terms and conditions of credit policies.
General Banking Environment
The general banking environment consists of;
- Competitor Banks,
- Banking Regulations, and
- International Banking Trends.
Competitor Banks
Many firms offer the same financial products and services. Commercial banks must compete with savings and loans, credit unions, finance companies, money market mutual funds, insurance companies, and investment banks for business.
Distinctions between firms are quickly fading as regulation changes to allow all firms to offer similar products anywhere in the country. Many banking organizations are trying to enter the city market because of its population base, international importance, and business potential.
Regulation
Bank regulation constantly changes to address changes in the banking environment. Two trends are evident:
- Regulators have removed most restrictions on what interest rates banks can charge on loans and pay on customer deposits.
- Regulators still limit the range of products and services banks can offer, but the list of new products and services is expanding rapidly. The big bank could eventually offer new insurance, credit card, and real estate products through bank subsidiaries. It could also underwrite securities, offer discount brokerage services, operates a travel agency, and form a mergers and acquisitions group.
International Banking Trends
Banks and other financial institutions are becoming increasingly international in scope. Geographic boundaries no longer constrain market activity as growing firms compete directly with foreign and domestic firms. Banks make loans to and accept deposits from foreign and domestic customers.
Bankers or people involved in the banking business have to take the right steps at the right time after proper observation, realization, and explanation of the business environment to sense the reasons for the success or failure of a bank.
It should be remembered that as the environment influences a bank’s activities, it can also partially affect the environment through its activities. At last, it can be said that the study and observation of the environment are essential and profitable for the bank.
Factors of Bank Environment
Factors of bank environment broadly can be divided into two parts; internal and external. And there are a lot of environmental factors in these two broad categories.
All the factors of the bank environment are;
- Internal Factors of Environment of Banking
- Internal Factors Relating to Organization.
- Location of the bank.
- Lay Out-Designing of Bank.
- Defined Goals and Politics.
- Clear Cut Responsibility & Duty.
- Adequate Piute & Logistics for work.
- Trade Union.
- Promotion and transfer based on efficiency.
- Efficient Deposit & Credit Operations.
- Efficient Management.
- Financial Solvency.
- Financial Discipline.
- Service Rendered.
- Method of Work.
- Use of Modem Technology.
- Bureaucratic Complexity.
- Relating to employees or employers.
- Internal Factors Relation of Bank with Customers.
- Number of Employees.
- Efficient Employee.
- Service-Oriented Altitude.
- Loyally to the Bank.
- Internal Factors Relating to Organization.
- External Factors of Environment of Banking
- Economic Factors.
- State of Development of Financial System.
- Adequacy of funds.
- Communication System.
- Free market economy.
- Monetary and Fiscal Policy.
- Industrial Policy.
- Investment Opportunity.
- Healthy Competition.
- Pricing Policy.
- Import-Export Policy.
- General Income Level.
- Savings Propensity.
- Easy access to Money Market.
- Role of Govt.
- Role of Central Bank.
- Reserve Ratio.
- Clearing House.
- Refinancing.
- Loan Facility.
- Supervision & Advising.
- Political Factors.
- The ideology of the state.
- The attitude of the Govt.
- Development Work.
- Support to the Businessmen.
- Socio-Cultural Factors.
- Values.
- Security.
- Social Status of the Businessman.
- Education.
- Cultural Consciousness.
- Banking Habits.
- Legal Factors.
- Business Control Laws
- Tax Laws
- Import & Export Laws
- Fiscal Laws
- Technological Factors.
- Economic Factors.
In this post, we are going to look at each factor of the banking environment.
Internal Factors Banking Environment
Like other business organizations, the bank also operates its business in any environment. The elements of this environment influence the banking business resulting in success or failure in many ways.
The elements, which influence bank business, are mainly divided into two parts;
- Internal Factors Banking Environment – Relating to Organization.
- Location of the bank.
- Lay Out-Designing of Bank.
- Defined Goals and Politics.
- Clear Cut Responsibility & Duty.
- Adequate Piute & Logistics for work.
- Trade Union.
- Promotion and transfer based on efficiency.
- Efficient Deposit & Credit Operations.
- Efficient Management.
- Financial Solvency.
- Financial Discipline.
- Service Rendered.
- Method of Work.
- Use of Modem Technology.
- Bureaucratic Complexity.
- Internal Factors Banking Environment – Relating to Bank Employees.
- Number of Employees.
- Efficient Employee.
- Service-Oriented Altitude.
- Loyally to the Bank.
A. Internal Factors Banking Environment – Relating to Organization
A bank is a complex financial institution, and running the organization requires many internal elements and factors. These internal factors impact the Banks’ environment.
15 internal factors banking environment relating to the organization are;
- Location of the bank.
- Lay Out-Designing of Bank.
- Defined Goals and Politics.
- Clear Cut Responsibility & Duty.
- Adequate Piute & Logistics for work.
- Trade Union.
- Promotion and transfer based on efficiency.
- Efficient Deposit & Credit Operations.
- Efficient Management.
- Financial Solvency.
- Financial Discipline.
- Service Rendered.
- Method of Work.
- Use of Modem Technology.
- Bureaucratic Complexity.
Let’s try to understand how these impact banks’ environment.
Location of Bank
The bank and its branches in an urban area can easily progress because people of a metropolitan area are mostly educated and habituated to banking activities. The economic activities are wider in the urban area. For this reason, these banks can easily reach their goal.
But in a rural areas, the literacy rate is very low, and they are not habituated that much in banking transactions. Their economic activities are limited to particular seasons.
So, banking activities are also limited to those seasons. In some areas, trade volume is attractive due to good law and order conditions.
In those areas, bank business may be relatively more profitable. On the other hand, the bank business faces a problem in an undeveloped and unhealthy environment.
Layout-Designing of bank
A bank with sufficient sitting & movement arrangements and other advantages for its employees and customers can prosper easily through its daily business activities. Employees can work satisfactorily, and clients like to be with that bank. If the employees get enough air, light and space to walk easily, they get interested in working for the bank attentively.
Defined Goals and policies
To be successful, every bank must have its own target and defined policies. But if this goal and policy are not defined specifically, the bank may fail to achieve its goal. If the goal and policy are defined in clear terms & words, there remains no scope for confusion and misunderstanding.
Clear-Cut Responsibility & Duty
If the responsibilities and duties of the bankers are not defined clearly, bank employees can’t do their jobs properly, and consequently, the bank cannot achieve its goal and success.
Adequate Place & Logistics for Work
For the lack of adequate places, furniture, and other essential logistics. Bank activities are most likely to be disturbed, and the efficiency of workers decreases. So. to operate the daily activities of the bank smoothly, there must be a sufficient arrangement for the needed space and logistics.
Trade Union
The concept of trade unions grew basically to preserve the interest of the employees and workers. But practically, trade union often creates obstacles to the bank’s activities without any reason.
For over-unionism, the movement of success of the bank is getting slow. But helpful and constructive union activities are favorable for the smooth operation of banks.
Promotion and transfer based on efficiency
Nepotism creates employee dissatisfaction if there is no tradition for promotion and transfer based on efficiency. This ultimately decreases employees’ morale and work efficiency.
Efficient Deposit and Credit Operations
The success of the banking business is vastly dependent on the efficient management of deposits and credit. An efficient deposit manager can decrease costs and increase profit with a proper Deposit Mix. Again an efficient loan manager can fulfill the demand of many borrowers through his experiences, even when funds are not adequate.
Efficient Management
If the management of any bank is efficient and experienced, it can reach the bank at the peak of success by making and implementing proper rules for the bank. On the other hand, inefficient management, defective rules, and regulations can invite many other problems for the bank.
Financial Solvency
Financial solvency creates confidence in clients in their banks on which the success of the bank is most dependable. On the other hand, financial insolvency spoils dead clients’ faith, which invites a banking business tragedy.
Financial Discipline
Financial discipline is one of the most important factors for a bank. Banks cannot absorb their true financial picture of the lack of financial discipline, which creates different problems for banks. On the other hand, if financial discipline is strictly adhered to, banks can make the right decisions based on the true picture of the financial situation.
Services Rendered
A bank provides different types of services to its clients. A bank can succeed in its business by achieving popularity in providing service.
Method of work
A bank can complete its tasks within a short time at lower labor costs if its method of doing work is constructive & done with modern technology. For these, clients remain benefited and satisfied.
Use of Modern Technology
Suppose a bank operates its business with modem technology such as Zoom, Cloud-computing, etc., then the employees’ efficiency will increase, and the clients will be more attracted.
Relation of Bank with Customers
If the bank’s employee keeps good relations with the bank’s clients and behaves well with them, that bank or the banking business can achieve success by raising goodwill.
Bureaucratic Complexity
The bureaucratic complexity always hampers organizational activities and leads to unexpected delays. For this style of issue management, no decision can be taken at the right time.
B. Internal Factors Banking Environment – Relating to Bank Employees
Some internal factors are directly or indirectly connected to the bank’s employees. 4 internal factors banking environment relating to the bank employees are;
- Number of Employees.
- Efficient Employee.
- Service-Oriented Altitude.
- Loyally to the Bank.
These are discussed below:
Number of Employees
Many employees create chaos in the bank’s activities; a shortage also hampers the bank’s performance. So, there should be an optimum number of employees.
Efficient Employee
A small number of skilled and efficient employees can do its task efficiently than many unskilled and inefficient employees. So. banks need expert personnel to create a favorable environment in their business organization. And to develop efficiency, the bank should arrange a proper training program.
Service-oriented attitude
Basically, the bank is a service-selling industry. So. employees of the bank must have a service-oriented attitude. An employee can create profitable clients for the organization by providing good service.
Loyalty to the Bank
Loyal employees are always prepared to sacrifice their interests to uphold the bank’s interest. Such loyal employees also show a service-oriented attitude to their clients. So, they are valuable assets for the bank. Most importantly, loyal employees make the internal environment favorable.
External Factors of the Banking Environment
There are a large number of external factors affecting a bank’s business.
According to the nature of the factors, they are divided into 5 groups:
- Economic Factors
- Political Factors
- Social Factors
- Legal Factors
- Technological Factors.
1. Economics Factors of Bank Environment
The overall health condition is the reflection of various influential economic factors.
15 economic factors affecting the banking environment are;
- State of Development of Financial System.
- Adequacy of funds.
- Communication System.
- Free market economy.
- Monetary and Fiscal Policy.
- Industrial Policy.
- Investment Opportunity.
- Healthy Competition.
- Pricing Policy.
- Import-Export Policy.
- General Income Level.
- Savings Propensity.
- Easy access to Money Market.
- Role of Govt.
- Role of Central Bank.
These are mentioned below:
State of Development of Financial System
The development of the banking sector largely depends on that country’s economic conditions and financial system. If the country’s financial condition is developed and organized, the banking activities can be better discharged for the business sectors and vice-versa.
Adequacy of Fund
A bank requires a huge amount of funds to establish and operate the business. An economy with a greater possibility of collecting funds from different financing sources favors the banking business.
On the other hand, a lack of sufficient funds is unfavorable to the bank.
Communication System
The developed communication system is necessary for providing developed and efficient industrial & commercial operations. In such a situation, the banking business flourishes. So, it can be said that a developed communication system creates favorable conditions for the banking business.
Free market Economy
Suppose a country’s economy is free from the direct control of the government. If the factors of the market system can work independently, then such an economy is called a free market economy. In this economy, capital and labor mean all the ingredients are free of control, and because of their mobility, these elements are easily available.
All sectors, including trade and commerce, better flourished in this economy and can succeed. Banks can extend their business by helping them to meet their financial demands.
Monetary and Fiscal Policy
Monetary and fiscal policy can create favorable and unfavorable banking business environments.
For example, a huge money supply in the market makes easy mobilization of the fund or capital favorable to the bank.
On the other hand, a decrease in the money supply is unfavorable to the bank. The latter situation decreases the bank fund and its loan-giving capability. Moreover, the fiscal policy’s imposition of huge tax liabilities hampers the banking business.
For example, when savings are taxable, it may de-motivate the possible savers. On the other hand, the flexible monetary and fiscal policy creates a favorable environment for the bank.
Industrial Policy
The success or failure is of a bank mostly dependent on industrial policy. The liberal industrial policy promotes the private or non-government sectors, which ultimately creates different opportunities for investors. Then, the demand for a bank loan will increase, and the bank’s overall profit will be high.
On the other hand, conservative industrial policies de-motivate private industrial institutions that, create an adverse situation for the bank.
Investment Opportunity
High investment opportunities can create a favorable environment for the bank if the investment opportunities are limited, creating an adverse bank environment. If the investment opportunity is sufficient, the investors’ demand for loans increases, enhancing business opportunities for the bank.
Healthy Competition
The monopoly business situation is not favorable for the banking business anyway. It causes unhealthy conditions for new banks. Healthy competition is necessary for the efficient banking business by giving developed services to reach the bank’s goal.
Pricing policy
Under the scope of pricing policy, the government can control the price of goods and services. If the price is not stable or unacceptable, producers will be disheartened.
Producers’ loan demand will decrease, and banks’ transactions will also decrease. So, the government’s realistic and goal-oriented pricing policy can be considered a favorable environmental element.
Import/Export Policy
Import/Export policy influences the banking business in many ways. If the export/ import policy is liberal, dial means they will be encouraged for further business if it is attractive for the exporter/ importer. With the help of foreign trade, a bank can earn more profit.
General Income Level
If the income level of the people goes down, the savings will decrease. Banks cannot collect deposits in this situation, creating a fund shortage.
Savings Propensity
Despite having a handsome income level, people may not be interested in keeping their money with the bank, creating a shortage of funds for the bank. So savings propensity is a favorable environmental factor for the bank.
Easy Access to Money Market
The power of easy access to the money market is the collection possibility of money from the money market at any time. If the situation is not stable, the bank can’t operate its business smoothly. In a mature money market, lending, and borrowing become easy for banks.
Role of Government
Government plays an important role in creating a favorable situation for the banking business. If the government encourages the bank or trade and commerce, this will create a favorable environment for the bank. The banking business will fall if the government wants to control different industries strictly.
Government can create a favorable environment for the early entrants and existing banks by making laws, regulations, and dividend distribution policies easy and flexible. Besides, the more the government’s development activities, the more the supply of deposits and demand for loans will be better will be the banking business.
Role of Central Bank
Central Bank is the guardian of all banks of the country. Moreover, as the guardian of all country banks, it is the government’s financial agent. The constructive role of the central bank can create a favorable environment for the bank. Again, it may encourage /discourage any sector of economic activity for the banking business.
So. the central bank has a much greater position as an important element of the bank environment.
- Reserve Ratio.
- Clearing House.
- Refinancing.
- Loan Facility.
- Supervision & Advising.
This can be proved by the following:
Reserve Ratio
If the central bank increases the reserve ratio, the bank’s funds will decrease, which is an unfavorable environment for the bank. Again if the reserve ratio decreases, banks will get an increased capacity to give loans.
Clearing House
Clearinghouse helps transfer clients’ funds from one bank to another. Pic efficiency of the bank increases if clearing is made quickly by the central bank. The bank’s performance will decrease in the absence of a clearinghouse or inefficient clearinghouse.
Re-financing
The advantage of re-financing creates a favorable environment for the bank. When a bank needs additional funds, it may get that from the central bank. So re-financing is related to the success of the bank business. The possibility of reimbursement of funds from the central bank for the priority sector will create a better banking environment.
Loan Facility
The central bank’s attitude regarding sanctioning loans to the commercial bank in case of its shortage of loans creates a favorable environment for the banking business.
But if the central bank doesn’t allow this opportunity, banks must borrow from the sister banks at higher interest rates. This will lower the profit-earning capacity of the banks, which appears to be a factor in the unfavorable banking environment.
Supervision and Advising
Supervision and advising by the central bank occasionally bring good regulatory compliance from the bank. Such arrangement facilitates banks to correct their wrong decisions /action made earlier.
2. Political Factors of Bank Environment
A country’s political condition may positively or negatively affect the banking business. The banking sector and the whole economic system become vulnerable to instability in the political atmosphere.
4 main political factors affecting the banking environment are;
- The ideology of the state.
- The attitude of the Govt.
- Development Work.
- Support to the Businessmen.
However, a stable political condition also expedites the economy and banking business.
The ideology of the State
The ideology of the state influences the banking business directly. In socialism, as the whole economic activities are controlled centrally, there is no chance to grow up competitive banking business.
On the other hand, there is a better environment to grow a competitive banking business in capitalism. In the free market economy, wealth ownership is allowed, which helps developers in the banking business.
The attitude of the Government
Whether the banking business environment will be favorable or unfavorable depends on the government’s attitude. If the government wants to develop banking, it may make favorable laws and give different opportunities and facilities to the banking sector.
Development Work
The more the government takes steps for development, the greater the activities will be of the banking sector.
These development activities are very helpful for the mobility of economic activities- surplus savings may be generated, and demand for loans can be created, ultimately creating a favorable environment for the bank. The expenditures by the government are the income of the people.
So. if the government increases its development expenditure, it would be a good signal for the banking industry.
Support to the Businessman
Government supports the businessmen by making favorable policies that ultimately create a favorable environment for the banking business.
3. Socio-cultural Factors of the Bank Environment
How society shapes itself; has a greater impact on the banking environment than anything else. For example, many international and western banks provide Islamic-Banking services for business in Muslim-majority countries. Sometimes, they also provide Islamic-Banking services to Muslim communities in western countries.
In other parts of the world, banks must change their business practices for social values and causes. Several banks in western countries are advertising that they don’t invest or do business in fossil fuel and weapons manufacturing industries.
6 socio-cultural factors affecting the banking environment are;
- Values.
- Security.
- Social Status of the Businessman.
- Education.
- Cultural Consciousness.
- Banking Habits.
The factors at socio-cultural factors affecting the bank business are as follows:
Values
Social values are very important for any society and economy as well. People with truthfulness, business trust, hard work, patriotism, culture, and dignity provide a favorable environment to the banking business.
Security
Social security brings happiness to the citizen of a country. Establishing a business relationship between the public and banks in an unsecured environment is impossible. Social security encourages the public to operate financial activities, finally creating business for the bank.
Social status of the businessman
If a businessman does not get his proper status from society, he will be discouraged and may withdraw from business activities. This type of situation is dangerous for the whole economy.
So, it is impossible to develop a banking business in that society. However, a high status given to business people enlarges their activities, consequently expediting the banking business.
Education
To develop any sector, education is essential. In an illiterate society, a clear concept does not grow about bank business and banking habits remains unpopular, obstructing business expansion.
On the other hand, in an educated society, people show positive attitudes towards bank business that helps banks flourish the banking business.
Cultural Consciousness
A society having people with cultural spirit is favorable for the banking business. The history of the banking business of ancient Babilion and Mesopotamian civilization has proved that.
Banking Habits
The progress of the bank business highly depends on the tendency of people to relate to banking activities. Having sufficient income and home savings, the bank will not get its business from them if people lack banking habits.
Again, if. the bank is not used in the business transaction by the people, it will fail to achieve its goal. So, there is a need to grow the tendency of banking habits among people.
4. Legal Factors of Bank Environment
The government needs to monitor, regulate, and control the activities of banks; otherwise, the banking industry alone can destroy an economy.
We have seen this in the housing bubble economic crash of 2008, where banks gave loans without many considerations. Later they used these loans to create derivatives. Banks were creating risky derivatives because the derivatives market and its rating system were almost unregulated.
We have also seen some banks in the USA; create user accounts without the users’ consent; to earn commission and fulfill the quarterly target.
So, regulations for the banking industry need to be robust, and authorities must always be vigilant.
4 legal factors affecting the banking environment are;
- Business Control Laws.
- Tax Laws.
- Import & Export Laws.
- Fiscal Laws.
Let’s try to understand these legal factors.
Business Control Laws
The government controls the activities of all types of organizations by law.
So, suppose the law declares the policy issues which work for the extension and development of the organization.
In that case, that will obviously provide a good signal to the organization in general and the banking business in particular. The laws that have encouraging impacts constitute a favorable environment for the banking business.
Tax Laws
Tax laws have two types of impact. One is bank-related lax law, and another is client-related. Banks’ business will be discouraged if a high tax is charged on bank profit.
On the other hand, a high tax reduces the income of the public, which ultimately discourages people from working for profit. In this situation, the bank cannot be able to collect funds when it needs. So. there should be tax laws that also encourage people and businesses.
Import and Export Laws
If the laws strictly control the import/export business or discourage those businesses, the overall economic activities will go downward. As a result, there will be a negative impact on the banking business.
Fiscal Laws
Fiscal laws announced by the government can have a greater influence on the economic activities of bank businesses.
Under this law, the income and expenditures of banks are reflected. The government’s expenditure activities give life to a country’s total economy, which finally helps banks achieve rapid success in their business. On the other hand, the government’s austerity policies and laws create an unfavorable environment for the bank business.
5. Technological Factors of Bank Environment
Technological improvement has a positive impact everywhere in the country. Technological development modernizes the era rapidly, and modernization ensures quality services. These technological developments have a special impact on bank business. Serving traditionally may dissatisfy customers in this modem age of technology.
With the help of technology, if a bank can provide more services within a short time, then clients will be attracted by that bank, and this process helps the bank achieve success and encourages them to do work efficiently.
If technological development occurs in all sectors, production will increase, ultimately increasing people’s income.
The savings tendency of people accelerates the businesses of the banking sector. Thus, technological improvement is one of the important factors for the overall development of the banking business environment.
Managerial Problems of Bank as Caused by External Environment
Banker faces different types of problems in doing their day-to-day activities. By using different strategies, it tries to reach the ultimate goal.
A banker may face five different problems due to the influences of the environment, especially the external environment.
- Liquidity Problems.
- Loan Policy.
- Investment Policy.
- Earnings Management.
- Assurance of Solvency.
Let’s understand these problems of banks’ external environment.
Liquidity Problems
In banking, liquidity means the ability to meet the immediate liability of the bank. The bank always keeps a reserve by using its experience to ensure liquidity. The environment has an impact on liquidity.
A variation in liquidity is observed due to the effect of the environment. A decision regarding this variation and management is one of the critical problems of the bank. So a banker should be very careful about liquidity. In doing so, bankers need to observe and scrutinize various liquidity indicators caused by the environment.
Loan policy
The effect of the environment there creates a variation in the demand for loans. So. in changing environment, making and implementing proper loan policy at the right time is difficult for a banker. To solve this problem, it is necessary to change and extend loan policy after identifying and analyzing the environmental factors used to determine the loan demand.
Investment Policy
External factors influence investment possibilities. Thus, formulating and executing accurate and contemporary investment policy is challenging for the banker. If investment policy considers environmental factors, bankers may face little or no problems.
Earnings Management
Environment influences the possibilities of earnings and the increase/decrease of expenditures. So. bankers need to manage earnings by identifying the sources of income and using them based on a practical assessment of the banking environment.
Assurance of Solvency
Solvency is one of the important factors for a b.mk during the adverse situation of the environment. A banker can assure solvency by properly managing income, credit, investment, and liquidity.
Conclusion
It can be said that whole socio-economic, political, cultural, legal, and technological i.c. The bankers need to identify all the elements of the bank environment to succeed. There is nothing uncontrollable about the internal elements of the environment.
But by evaluating the nature and features of some factors (internal) of the environment, we can control them.
The influence of the environment on the banking business is very natural.
But some other factors (external) are not controllable directly. But with the help of progressive thoughts and intelligence, unfavorable influences can be reduced to a greater extent with the support of the government and other related organizations or persons.
In recent years changes in regulation have allowed banks to compete in many different markets and to offer many new products and services.
The financial management of banks involves selecting the portfolio and mix of products and services to balance expected returns with the assumed risks within (the objective of maximizing shareholders’ value. There is a fundamental trade-off between risk and return.
Many issues managers face, even when a bank is in strong financial condition, may adversely change if the environment becomes unhealthy.
Managers must determine how to earn a reasonable return while controlling the bank’s credit, liquidity, capital, operations, and interest rate risk within acceptable targets.
