Principles of Commercial Banking [9 Principles Banks Follow]

Commercial banks follow certain principles to serve and maintain some principles which are very important for banks to remain in the competition in modern days. The bank that deals with money and money worth to earn prom is known as the commercial bank.

Commercial banks must maintain some principles that are very important for banks to remain in the competition in modern days.

Some principles are discussed below;

Principle of Liquidity

The principle of liquidity is very important for commercial banks. 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 the sense of banking.

Principle of Solvency

Solvency means financial capability or sufficiency in the capital. To stay in these competitive markets, commercial banks must have sufficient capital. If the funds are not sufficient, the bank cannot run its business.

The main source of funds of the commercial bank is the deposited money by the depositors through the different types of accounts.

Depositors keep cash in the bank, especially for safety. So commercial banks must ensure the safety of deposited funds.

Principle of Profitability

The main objective of the commercial bank is to earn a profit.

To earn a profit, commercial banks have to invest by providing short-term loans; before providing commercial loans, banks have to compensate a certain amount of money as liquidity.

Principle of Loan and Investment

Banks’ main source of profit is granting loans to any individual or organization. Investment is a profitable and sound source of income. Commercial banks invest in the business and investment sectors.

Principle of Savings

Commercial banks collect funds by creating savings facilities. Commercial banks try to collect savings from society surplus.

The commercial bank invests these savings to generate profit. So, more savings, more investment, and more profit.

Principle of Services

The commercial bank ensures the best services to their customers. The success of a bank depends on the services provided by the bank. The customer chooses those banks that provide improved services.

Principle of Secrecy

Customers want to keep secrets about their valuable assets and money.

So banks must have to keep secrets about their customer’s accounts. The customer will be dissatisfied if a commercial bank does not maintain secrecy.

Principle of Efficiency

Commercial bank should operate their business efficiently so that they can succeed at their objective.

In this competitive market, there is no alternative way without management efficiency. So, the commercial bank must train their employees to increase management efficiency.

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 an easy communication system must exist.

Other principles;

• The principle of goodwill.
• The principle of the economy.
• The principle of technology.
• The principle of publicity.

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