Bank Management

Reasons for Liquidity Fluctuations in Indian Banking System

Liquidity risk is inherent in bank’s core business because banking organizations employ a significant amount of leverage in their business activities and need to meet contractual obligations in order to maintain the confidence of customers and fund providers. The first step in measuring and managing liquidity risk is the identification of the most important sources of risk.

In the Indian context of banking, unexpected liquidity fluctuations are driven mainly by the following items:

  • Behavior of non-maturity deposits: A large fraction of deposits, in an Indian bank, consists of low-cost current and savings deposits which do not have any contractual maturity. Moreover, the depositor has the option to introduce or withdraw funds at any point of time.
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The Importance of Credit Risk Management in Banking

Credit risk implies a potential risk that the counterparty of a loan agreement is likely to fail to meet its obligations as per the original loan agreement, and may eventually default on the obligation. Credit risks can be classified into many forms such as options, equities, mutual funds, bonds, loans, and other financial issues as well, which in extensions of guarantees and the settlement of these transactions. 

Is it Important for the Banks to Manage their Credit Risks?

Risk is always associated with banking activities, and taking a risk is an important part of any banking operation, there is hardly any banking operation without the risk.… Read the rest

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8 Risks Faced by Modern Banks at the Present Competitive Business World

The unanticipated part of the return, that portion resulting from surprises is the true risk of any investment. If we always receive what we expect, than the investment is perfectly predictable and, by definition, risk-free. In other words, the risk of owning an asset comes from surprises-unanticipated events. RISK is a concept that denotes the precise probability of specific eventualities. It is simply the future uncertainty and not only the incidents of predictable outcomes but also the unpredictable favorable outcomes. All the firms or companies whether it is in real or providing service are facing some sort of risk at present competitive business world to run its business.… Read the rest

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Loan Against Securities

Considerations of security form an important basis of lending. In fact, they constitute necessary adjunct to financial appraisal. Lending institutions have to examine the loan proposals from the point of view of nature and extent of security offered. Sometimes, there is a greater reliance on security due to inadequate financial appraisal, which in its turn may be due to non-availability of the necessary data. The security cover of the loan should, however, not be regarded as a substitute for an adequate financial assessment.

Security considerations are of particular importance in less developed countries like India where information on the character, integrity and credit-worthiness of the borrowers is not readily available and much ground work has yet to be done in the establishment of credit information bureaus.… Read the rest

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Variable Cash Reserve Ratio and Credit Control

Considering the limitations of the bank rate policy and the open market operations, the need to develop a very effective method of credit control was felt. Especially  the need was to directly control the power of the commercial banks to create credit, Variable cash reserve ratio was suggested as one more method of quantitative credit control by Keynes. Further this method is considered necessary for promoting the overall liquidity and solvency of the banking system, apart from improving the public confidence on the banking system.

The process of working of this method of credit control can be easily understood with an example.… Read the rest

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Open Market Operations by the Central Bank

The open market operations as a method of quantitative credit control are interpreted in two ways. In a broad sense, it refers to the buying and selling of government securities as well as other eligible papers like bills and securities of private concerns by the central bank. In a narrow sense it means the buying and selling of only government securities by the central bank in the money market. The process of open market operations affects the volume of credit, the level of business activity and the internal price level. The process is explained below.

Suppose in an economy there is inflationary tendency and the expansion of credit is very high and the central bank wants to control this.… Read the rest

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