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  • 1. • INTRODUCTION:A commercial bank is a business entity that deals in banking with a view to make profits. Everycommercial bank aims to make profits in such a way that it does not compromise on itsobjective of liquidity, which is vital for its own security and safety.• Meaning:Since a commercial bank has to make profits in such a way that its liquidity remains intact, itdiversifies its funds into various assets. A well - diversified and balanced asset portfolio ensuresits sound and successful working. Various factors play an important role in determining theprofitability and liquidity of commercial banks. These factors are taken into consideration whilecreating the asset portfolio of the banks.• EXPLANATION:A) FACTORS AFFECTING THE PROFITABILITY OF COMMERCIAL BANKS:1) Amount of working funds:Funds deployed by a bank in profitable assets are the working funds of the bank. Profitability ofa business is directly proportionate to the amount of working funds deployed by the bank.2) Cost of funds:Cost of funds are the expenses incurred on obtaining funds from various sources in the form ofshare capital, reserves, deposits, and borrowings. Thus, it generally refers to interest expenses.Lower the cost of funds, higher the profitability.3) Yield on funds;The funds raised by the bank through various sources are deployed in various assets. Theseassets yield income in the form of interest. So, higher the interest, greater the profitability.4) Spread:Spread is defined as the difference between the interest received (interest income ) and theinterest paid (interest expense ). Higher spread indicates more efficient financial intermediateand higher net income. Thus, higher spread leads to higher profitability.5) Operating Costs:Operating costs are the expenses incurred in the functioning of the bank Excluding cost offunds, all other expenses are operating costs. Lower operating costs give rise to greaterprofitability of the banks.
  • 2. 6) Risk cost:This cost is associated to the probable annual loss on assets. They include provisions madetowards bad debts and doubtful debts. Lower risk costs increase the profitability of banks.7) Non - interest income:It is the income derived from non - financial assets and services It includes commission &brokerage on rencittance facility, rent of locker facility, fees for underwriting and financialguarantees, etc. This income adds to the profitability of banks.8) Level of technology:Use of upgraded technology normally leads to decline in the operating costs of banks. Thisimproves the profitability of banks.9) Level of Non - performing assets (NPAs):The profitability of a bank is inversely related to the level of NPAs. Hence, over the years, theNPAs of commercial banks have greatly declined.10) Level of competition:Increase in competition generally leads to higher operating costs. This leads to lowerprofitability.B ) FACTORS DETERMINING THE LIQUIDITY OF COMMERCIAL BANKS:1) STATUTORY REQUIREMENTS:The extent of liquid reserves held by banks depends on the statutory requirements of theCentral Bank (i.e. the RBI) According to RBI, commercial banks have to maintain a certainCRR(cash Reserve Ratio ) and SLR (statutory liquid ratio) Higher CRR and SLR result in lowerliquidity.2) Banking Habits of the people:The nature of the economy has an impact on the banking habits of the people. In developingcountries, cheque transactions are confined to business. Individuals depend more on cashtransactions Hence, the need for liquidity is comparatively higher.3) Monetary transactions:The number and magnitude of monetary transactions determine the liquidity of banks. Highermonetary transaction lead to higher liquidity.
  • 3. 4) Nature of Money market:In case of fully developed money markets, banks buy and sell securities easily. Therefore,liquidity requirement is lower.5) Structure of Banking system:Branch banking system requires lower liquidity since cash reserves can be centralized in thehead office. Unit Banking System requires higher degree of liquidity.6) Number and size of Deposits:The number and sized of deposits influence the liquidity of banks. Increase in the number & sizeof deposits will require higher liquidity.7) Nature of Deposits:Deposits trade with the banks are of various types like time deposits, demand deposits, short -term deposits, etc. larger demand deposits /short - term deposits need higher liquidity8) Liquidity Policies of other banks:Various banks may function in the same area So, liquidity policies of other banks also have animpact on the liquidity of a bank to build goodwill among depositors.• CONCLUSION:THUS, various factors determine the liquidity and profitability of commercial banks. So, thesefactors are taken into consideration while creating the asset portfolio of commercial banks.These factors influence the reconciliation of profitability and liquidity that leads to a sound andsuccessful banking provides you free handwritten notes on FYJC, SYJC, FYBCOM, SYBCOM,TYBCOM, MCOM1, MCOM2 for Mumbai university students for the commerce field.Article Source: Source:
  • 4. HDFC Statistical tableItems 2005-06 2006-7 2007-08 2008-09 2009-10Deposits 55797 68298 100769 142812 167404Investment 28394 30565 49394 58818 58608Advances 35061 46945 63427 98883 125831Return on 1.38 1.33 1.32 1.28 1.53assetsCRAR 11.41 13.03 13.60 15.69 17.44Net NPA 0.44 0.43 0.47 0.63 0.31ratioStatistical table ICICI (Amount in crore)Items 2005-06 2006-7 2007-08 2008-09 2009-10Deposits 165083 230510 244431 218348 202017Investment 74547 91258 111454 103058 120892Advances 146163 195866 225616 218311 181206Return on 1.30 1.09 1.12 0.98 1.13assetsCRAR 13.35 11.69 13.97 15.53 19.41Net NPA 0.72 1.02 1.55 2.09 2.12sratio State Bank of India (SBI)](SBI) is the largest banking and Financial Services company in India by revenue, assetsand market capitalization. It is a state-owned corporation with its headquarters inMumbai, Maharashtra. As of March 2012, it had assets of US$360 billion and 14,119branches, including 173 foreign offices in 37 countries across the globe. Including thebranches that belong to its associate banks, SBI has 21,500 branches.The Government of India nationalize the Imperial Bank of India in 1955, with theReserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In2008, the government took over the stake held by the Reserve Bank of India. SBI hasbeen ranked 285th in the Fortune Global 500 rankings of the worlds biggestcorporations for the year 2012.
  • 5. SBI provides a range of banking products through its vast network of branches in Indiaand overseas, including products aimed at non-resident Indians (NRIs). The State BankGroup has the largest banking branch network in India. SBI has 14 local head officessituated at Chandigarh (Punjab & Haryana), Delhi, Lucknow (Uttar Pradesh), Patna(Bihar), Kolkata (West Bengal), Guwahati (North East Circle), Bhubaneswar (Orissa),Hyderabad (Andhra Pradesh), Chennai (Tamil Nadu), Trivandrum (Kerala), Bengaluru(Karnataka), Mumbai (Maharashtra), Bhopal (Madhya Pradesh) & Ahmedabad(Gujarat) and 57 Zonal Offices that are located at important cities throughout thecountry.SBI is a regional banking behemoth and is one of the largest financial institutions in theworld. It has a market share among Indian commercial banks of about 20% in depositsand loans. The State Bank of India is the 29th most reputed company in the world IDBI BANKIDBI Bank is an Indian financial service company headquartered Mumbai, India. RBIcategorised IDBI as an "other public sector bank". It was established in 1964 by an Act ofParliament to provide credit and other facilities for the development of the fledglingIndian industry.[2] It is currently 10th largest development bank in the world in terms ofreach with 1594 ATMs, 1000 branches including one overseas branch at DIFC, Dubaiand 678 centers including two overseas centres at Singapore & Beijing. [3] Some of theinstitutions built by IDBI are the Securities and Exchange Board of India (SEBI),National Stock Exchange of India (NSE), the National Securities Depository Limited(NSDL), the Stock Holding Corporation of India Limited (SHCIL), the Credit Analysis& Research Ltd, the Exim Bank (India)(Exim Bank), the Small Industries DevelopmentBank of India(SIDBI), the Entrepreneurship Development Institute of India, and IDBIBANK, which is owned by the Indian Government.IDBI Bank is on a par withnationalized banks and the SBI Group as far as government ownership is concerned.It is
  • 6. one among the 26 commercial banks owned by the Government of India.The Bank hasan aggregate balance sheet size of Rs. 2,90,837 crore as on March 31, 2012.