What do you know understand by employment funds and explain the principle of liquidity and profitability or What do you mean by investment of bank fund
EMPLOYMENT OR ADVANCING FUNDS :-
When we talk about advancing of funds by commercial banks, it mean the profitable and safe use of funds.
The main business of the commercial bank is to obtain money from the customer and invest this money. It earns the profit and pays interest to the customers from this profit. So it keeps in view its own interest and also the customer, so there are two objectives :
i. It earns the profit for the customers.
ii. To meet the demand of the customers it should keep sufficient cash.
So profitability and liquidity are two main objectives.
A bank provides loans to the companies, firms and individuals. So major function is that it should advance the loans. But lending of money is very risky. Before advancing the loans keeps in view some precautions or principles. These are following :
1. Profitability :-
It is the major objective in the banking business. Bank can earn maximum profit by investing its deposits in securities yielding height returns while advancing the loans this factor is considered by the banker.
2. Liquidity :-
If assets in a short time with minimum cost is called liquidity. It is the basic principle for investing the funds before the banker. If the investment is not liquid then bank will fail to meet the demand of its depositors. So every bank tries to invest the funds in to ready convertible securities.
3. Ability To Repay :-
It is the most important principle for investing funds. The bank keeps in view the borrower ability to repay the debt before lending the money. Character goodwill and business integrity of the borrower must be checked.
4. Productive Purpose :-
A banker should advance the loan for productive purpose. It will be very secure and definite source of repayment. Unproductive loans must be discouraged. It is observed that short term productive loans are very ideal.
5. Reasonable Security :-
While advancing the loan a banker secures loan by getting reasonable security from the borrower. It is called insurance against the risk of non repayment. The security offered against loan must be adequate and it can be disposed off without a loss and delay.
6. Ready Cash :-
A bank must keep the ready cash to meet the demand of the depositors. Any particular limit can be fixed keeping in view the daily experience.
7. Advance Distribution :-
In case of lending there is a risk of loss every time, so it is better that loan may not be given to any single particular area. It may be given to large number of borrowers over a large number of areas. It minimizes the risk.
8. Preference To National Interest :-
The bank must keep in view the policy of the state. If Govt. asks to provide loan to the agriculturist and small business, it should not be ignored it.