The Roles Played by Banks by pnrkumar


									                                    The Roles Played by Banks

Due to the important role played by banks as financial intermediaries, banks have emerged as
unique institutions enjoying the trust of people. As a financial institution, banks perform the
following functions:

    •   Financial Intermediary
    •   Constituent of the payment system
    •   Provider of other financial services

Principles of Banking

In order to retain the trust of people, banks have to adhere to certain principles while conducting
their business. These principles are listed below:

    •   Liquidity: The main source of income for banks is the spread that they earn on loans.
        Banks have to necessarily lend most of their deposits to stay in business. At the same
        time, they should always be in a position to meet the monetary demands of their
        customers. A single default on part of the bank can lead to serious consequences. Thus,
        banks need to maintain sufficient cash reserves at all times. The more the banks lend,
        the profit they make, but they also need to balance the opposing needs of profits and
        liquidity. Banks cannot afford to compromise on the liquidity in order to make profits.
    •   Safety: The trust of the people depends to a great extent on the perception of how
        prudent a bank is in its business practices. Suppose a bank is imprudent to lend to risky
        businesses, then such a bank will not enjoy the trust the trust of its customers. Just as
        liquidity and profitability are related, risk and profitability also are inversely related. Banks
        need to find a fine balance between the two in order to survive in business. After all,
        banking essentially is the handling and/or management of risks. The more prudent the
        bank is in managing risks, the better will it be in terms of its image and prospects of
        survival and growth.
    •   Profitability: In case of a bank that does not have enough liquidity or incase it is unsafe,
        then customers are likely to avoid such a bank. But moreover this trust will depend on the
        profitability of the bank. If the bank is unprofitable, then the trust of customers is likely to
        dwindle more. If a bank incurs losses or makes only meager profits year after year, then
        the customers will think twice before dealing with such a bank unless of course they are
        enjoying some other benefits. In India, people have a general belief that the public sector
        banks will not fail because the government as their owners will come to their rescue.
        These people have a different attitude towards the private sector banks. Banks need to
        be significantly profitable in order to retain the trust of people and to be able to survive in
        the long run.
    •   Secrecy: During the course of their business and dealings with customers, banks get to
        know many details about the finances of their customers. Banks need to maintain
        confidentiality of such kind of information because revealing of such information to the
        wrong persons can lead to adversely affecting the customer. For instance, a competitor
        of the customer or a journalist can make use of this financial information to cause loss or
        may be eve damage the reputation of the customer. Banks, in a way, owe a duty to their
        customers to ensure absolute secrecy of customer information. A bank has to take this
        duty very seriously in order to enjoy the trust of customers.
   •   Service Quality: Banking is essentially a transaction oriented business. Customers have
       to deal with banks for most of their financial transactions. As the intensity of the
       interactions is very high, customers would naturally prefer to deal with those banks that
       make the transactions or interactions pleasant and fast. Poor quality service in terms of
       errors and delays can lead to seriously eroding the confidence of customers. This is
       because such errors and delays in financial dealings can result in a financial loss apart
       from causing bitterness. Banks that do not oblige to provide quality service cannot hope
       to enjoy the trust and patronage of its customers.

Around the world, banking is highly regulated to ensure the health of individual banks
and of the banking system as a whole. Banking regulations are aimed at encouraging
banks to adhere to the principles of liquidity, safety, profitability, and secrecy and service
quality in their day-to-day dealings. Such regulations are for the good of bank and the
economy. Hence compliant with regulatory and statutory requirements is sacrosanct.

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