What factors determine bank profitability and liquidity?
A vendeur bank is a négoce entity engaged in banking for avantage. Every vendeur bank aims to achieve profitability in such a way that it does not compromise its liquidity impartiale, which is essential for its own safety and security.
Since a vendeur bank has to make avantage in such a way that its liquidity is rescapé, it diversifies its funds into different assets. A well-diversified and balanced asset boîte ensures smooth and successful operations. Various factors play an insolent role in determining the profitability and liquidity of vendeur banks. These factors are taken into consideration while immeuble the bank’s asset boîte.
a) Factors affecting the profitability of vendeur banks:
1) Amount of Working Fund:
Funds invested by a bank in fructueux assets are working funds of the bank. The profitability of a négoce is directly proportional to the amount of working finances employed by the bank.
2) Cost of Funds:
Cost of funds is the cost incurred in obtaining funds from various pluies in the form of share finances, reserves, deposits and borrowings. Hence, it usually refers to interest expense. Cost of funds is low, butins are high.
3) yield on funds;
Funds raised by banks through various pluies are placed in various assets. These assets earn income in the form of interest. So, the higher the interest, the higher the avantage.
Spread is defined as the difference between interest received (interest income) and interest paid (interest expense). Higher spreads indicate more opérant financial intermediaries and higher net income. Hence, higher spreads lead to higher butins.
5) Operating Cost:
Operating cost is the cost incurred in the functioning of the bank except the cost of funds, all other costs are operating cost. Lower operating cost leads to higher profitability of the bank.
6) Cost of risk:
This cost is associated with the potential annual loss of assets. They include vivres made for bad debts and doubtful debts. Lower risk costs increase bank profitability.
7) Non-Interest Income:
It is the income derived from non-financial assets and principes including brevet and brokerage on residency facilities, rent of locker facilities, fees for underwriting and financial guarantees etc. This income increases the bank’s profitability.
8) Technology Level:
Use of upgraded technology generally leads to reduction in operational cost of banks. It increases the avantage of the banks.
9) Level of Non-Performing Assets (NPAs):
A bank’s profitability is inversely related to the level of NPAs. Hence, over the years, NPAs of vendeur banks have come down drastically.
10) Level of Competition:
Increased competition usually leads to higher operating costs. This leads to lower butins.
b) Factors determining liquidity of vendeur banks:
1) Statutory Requirements:
The amount of liquid reserves held by banks depends on the statutory requirements of the orthogonal bank (ie RBI), as per RBI, vendeur banks are required to maintain a transparent CRR (Cash Reserve Pourcentage) and SLR (Statutory Liquidity Pourcentage) higher CRR and SLR. As a result liquidity is low.
2) Banking Habits of People:
The entité of the economy affects people’s banking habits. In developing countries, check transactions are limited to businesses. Individuals rely more on cash transactions so the need for liquidity is relatively high.
3) Financial transactions:
The number and gabarit of financial transactions determine the bank’s liquidity. Higher financial transactions lead to higher liquidity.
4) Tempérament of Currency Market:
In a fully developed money market, banks buy and sell securities easily. Hence the demand for liquidity is low.
5) Agencement of Banking System:
A branch banking system requires less liquidity bicause cash reserves can be centralized at the head commerce. Unit banking systems require a higher degree of liquidity.
6) Number and Size of Deposits:
The number and size of deposits affect bank liquidity. Increasing the number and size of deposits will require higher liquidity.
7) Tempérament of Deposit:
Deposit transactions with banks are of various hommes such as time deposits, demand deposits, culotte term deposits etc. Ouvert demand deposits/culotte term deposits require higher liquidity
8) Liquidity policy of other banks:
Different banks may operate in the same area, therefore, liquidity policies of other banks also affect the liquidity of a bank to create goodwill among depositors.
Thus, various factors determine the liquidity and profitability of vendeur banks. Hence, these factors are taken into consideration while immeuble the asset boîte of vendeur banks. These factors aïeul the reconciliation of profitability and liquidity leading to a sound and successful banking system.
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