Page 206 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 9: Commercial Banking Services

2. Political conditions: When there are uncertain political conditions in the country, banks Notes
generally lose public confidence and consequently and there is a run on the banks. In such
conditions to meet the heavy customers banks have to invest in secondary reserves more
and release conveniently.
3. Taxation policy of the government may affect the size and composition of the secondary
reserve. A bank may be tempted to invest more in government securities if the government
decides to exempt them from the levy of tax because this investment will not only
strengthen the liquidity position of the bank and also profitability.
4. Monetary policy: A banker has to understand the monetary policies announced by the
central bank and expected to be followed at the same time liquidity and profitability are
also balanced.

Local Factors

Character of the local economy- A banker must be familiar with the characteristics of the economy
in which in which he is operating because the character and magnitude of deposits and loans is
affected by them. Indian economy is dominated by agriculture and its requirements are highly
vulnerable therefore because banks receive large deposits after the harvest season, while
withdrawals take place throughout the year. Similarly the banks in industrial locality must
familiarize with the industrial requirements pattern and accordingly invest the surplus in
secondary reserves.
A large number of internal factors such as deposit structures, ownership of deposit accounts,
average size of bank accounts, access to money market, nature of bank loan, maturities and
diversification of investment portfolio are such other factors influence regarding the size of
secondary reserves of a bank.
Banks can apply statistical methods to analyse the various demand supply requirements of
money and accordingly determine the structure its secondary reserve portfolio to maintain
liquidity and profitability.

9.16 Management of Loans in a Commercial Bank

Lending is the most important function commercial banks. At they aim at lending results in
maximum return and their survival depends on high they can do it with in the frame work of
central bank regulations and guidelines along with the social responsibility for the economy
development as expected by the society. The important characteristics of commercial bank loans
are:

1. The bulk of the loans in India are provided to trade and industries.
2. As the banks look at liquidity they give maximum proportion of loans of less than year
type which are short term nature.

3. Commercial banks in India demand sound security like goods, financial assets, gold, and
hypothecation. Unsecured credit loans are given to firms with a sound financial position
and stable earning records.
Lending is the most profitable business of a commercial bank but at the same time it is highly
risky. A banker is supposed to do the lending business on the sound principles of safety, liquidity
and profitability. Banks should diversify their risk of lending by evolving to a right portfolio.
It should not be merely defensive but provide for earning for increasing average rate of return
on fund. The principle of maturity diversification allows the loan portfolio is staggered over
different maturity periods so that a certain amount of loans mature at regular intervals of time

LOVELY PROFESSIONAL UNIVERSITY 201