9 Basic Principles that Commercial Banks Follow

The bank which deals with money and money a worth with a view to earning prom is known as commercial bank.

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

Some principles are discussed below;

1. Principle of Liquidity

Principle of liquidity is very important for commercial bank. Liquidity refers to the ability of an asset to convert into cash without loss within short time.

Paying the deposited money on demand of’ customers is called liquidity in sense of banking.

2. Principle of Solvency

Solvency means the financial capability or sufficiency in capital. To stray in these competitive market commercial banks must have sufficient capital. If the funds are not sufficient the bank cannot run his business.

The main source of fund of the commercial bank is the deposited money by the depositors’ through different type of account.

Depositors keep cash in the bank especially for safety. So commercial bank must ensure the safety against deposited fund.

3. Principle of Profitability

The main objective of commercial bank is to earn profit. For earning profit commercial bank have to make investment by providing short term loan, before providing loan commercial bank have to compensate certain amount of money as liquidity.

4. Principle of Loan and Investment

The main source of profit of bank is granting loans to any individual or organization. Investment is profitable and sound source of income. Commercial banks invest in business and investment sector.

5. Principle of Savings

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

Commercial bank makes investment from this savings to generate profit. So, more savings, more investment and more profit.

6. Principle of Services

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

7. Principle of Secrecy

Customers want to keep secret about their valuable assets and money. So banks must have to keep secret about their customers account. If commercial bank does not maintain secrecy the customer will be dissatisfied.

8. Principle of Efficiency

Commercial bank should operate their business efficiently. So that they can be succeed at the objective.

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

9. 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 easy communication system must exist.

Other principles;

  • Principle of goodwill.
  • Principle of economy.
  • Principle of technology.
  • Principle of publicity.

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