Page 78 - DMGT303_BANKING_AND_INSURANCE

Unit 4: Treasury Management & Banking Sector Reforms

3. ROI and maturity Notes
4. Minimum asset coverage of 1.25 times in case of secured debentures
5. Exposure limits as per the bank's policy

Public Sector Undertaking Bonds

1. Availability and quality of rating
2. Track record and efficiency in management of the issues

3. Since rating wouldn't be available in private placement method, it has to rely only on
financial strength
4. Industry profile of issuer's line of business

5. Past track regarding servicing of such bonds
6. Availability of put/call options and their suitability
7. Tax benefits available, if any.

4.6 Relevance of Profitability in a Commercial Bank

Should Banks Earn Profit?

Banking is a service-oriented industry. Similar to a business enterprise, profit is an essential
element in banking industry also. Economic surplus (profit) is an indicator of efficient and
effective utilisation of resources. Essentially the revenue must exceed expenditure incurred in
the process of earning that revenue.
A bank is a financial intermediary engaged in purchasing and selling of funds. It is expected to
earn a reasonable return to the savers, supply funds to investors and generate sufficient profit
margin for itself after covering cost of services.
Profit provides cushion to the bank to support its credit risk and face the contingencies. Profit is
also required by a banking organisation to finance its growth and diversification programmes
in future. Since profitability is an index of efficiency of a banking enterprise, a profit-making
bank can only infuse confidence in public at large, which is necessary for its survival and
growth.

Should Banks Concentrate Only on Social Objectives?

It is usually argued that bank being a socio-economic institution; profit earning should not be
the prime consideration. It should primarily focus on fulfilling social obligations and promoting
development of the economy. Hence it should channelise its resources and efforts towards
social ends.
Pursuit of social obligations will interfere with the pursuit of economic goals to the extent that
they prevent the bank from making economically optimal decisions. Acceptance of social
responsibility increases the costs and risks of doing business which mean decline in profit (as
discussed in chapter on priority sector lending). For meeting social obligations managerial
time, talent as well as scarce economic resources is substantially diverted. Thus, what is socially
desirable may be economically suicidal.

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