Principles of Sound Banking Systems
Principles refer to the general guidelines. It drives a company in the right way. The economic development of a country is dependent on sound banking. Reliable and efficient banking is a must for production, trading, and total development. Banking means, the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order, or other.
To establish powerful and efficient banking systems, the following principles should be followed:
- Principle of Safety
Making a safe and sound banking system is one of the main principles of any bank. It has to give safety to the deposited money. Otherwise, people do not keep money in the bank. In the use of credit, a bank should keep enough collateral to safe the credited money.
- Principle of Liquidity
The encashment of the bank’s property is known as liquidity. One of the essentials of a sound banking system is to have a higher degree of liquidity. Banks should look carefully at liquidity to make a payment on demand to depositors. A commercial bank is under an obligation to pay its depositors cash on demand. This is only possible if the bank possesses such securities which can be easily liquidated. Banks keep some deposits in the vault and give the rest balances as a loan. But the bank has to be careful in giving loans. If it cannot fulfill the demand of depositors its goodwill will be damaged. Central banks have made it obligatory on the commercial banks to keep a certain proportion of their assets in cash to ensure liquidity.
- Principle of Purposes
Before the establishment of the bank has to define its purpose to establish. Then according to purpose, it has to select its activities. For that reason one has come to take a loan, it should be justified. The bank should not give a loan to a party that has no certain and valid reason.
- Principle of Profitability
It is important in case of advances. Bank cannot operate without profit. Profit in advance is the main earning source of the bank.
- Principle of Solvency
The bank should keep deep look insolvency. Enough property is a must for the bank to avoid bankruptcy. Without enough solvency, the bank will be bankrupt at any time.
- Principle of Economy
The bank should maintain frugality. It should cut its extra expenses. Frugality increases banks’ income and solvency.
- Principle of Situation
The success of a bank business is related to where the bank is situated. In a town, the commercial area is suitable for a bank, but a not village. So, in opening a bank one must consider the place.
- Principle of Services
The bank is established to serve the people. Every bank has to serve the best to their client. The best service will bring high goodwill.
- Principle of investment
To make a profit banks should invest in many productive sectors. It is necessary to follow some standard in investment.
- Risk Controls
Banks must manage risk exposures proactively. On the market side, this means measuring value-at-risk, stress testing portfolios, etc. On the credit side, it must analyze and monitor clients constantly, and provision losses based on credit ratings and probabilities of default.
- Expansion of Banking
In an economy, banking services must spread across the different sections of the society. Further, the under-developed regions or segments of society must have greater access to banking services.
Above discussed principles arc viol for a bank to be popular. Those principles are equally applicable to almost all of the books.