IVESTMENT

POLICIES
OF BANKS
Made by:deepti srivastava,
nayan jain

The financial
position of a
commercial bank
is reflected in its
balance sheet.
The balance
sheet is a
statement of the
assets and

The assets of the bank

are distributed in
accordance with
certain guiding
principles. These
principles underline the
investment policy of the
bank. They are
discussed below

Liquidity

1. Liquidity means
the ability of a bank
to meet the demand
of customers for his
money.
2. Simply to put it,
the ability of bank to
produce cash on
demand.

The need of liquidity arises

on account of the following
reasons :
Banks accept deposits from
the public. The public can
demand their deposits back at
any time. Inability to pay back
deposits leads to failure of the
banking system itself. Hence, a
bank must maintain adequate
liquidity.

Profitability

A commercial bank by definition, is a profit hunting institution. The bank has to

earn profit to earn income to pay salaries to the staff, interest to the depositors,
dividend to the shareholders and to meet the day-to-day expenditure.

Safety or Security

Apart from liquidity and profitability, the bank should look to the
principle of safety of its funds also for its smooth working .

While advancing loans, it is necessary that the bank

should consider the three C s of credit character,
capacity and the collateral of the borrower

Diversity

The bank should invest its funds in such a way as to secure for itself an adequate and permanen
return. And while investing its funds, the bank should not keep all its eggs in the same basket

Diversification of investment is necessary to avoid

the dangerous consequences of investing in one or
two channels.

Saleability of Securities

Further, the bank should invest its funds in such types of securities as can be
easily marketed at a time of emergency. The bank cannot afford to invest its
funds in very long term securities or those securities which are unsaleable .

It is necessary for the

bank to invest its funds in
government or in first
class securities or in
debentures of reputed
firms. It should also
advance loans against
stocks which can be
easily sold.

Stability in the Value of Investments

The bank should invest its funds in those stocks and securities the prices of which are more or
less stable. The bank cannot afford to invest its funds in securities, the prices of which are
subject to frequent fluctuations.

Principles of TaxExemption of
Investments

Finally, the investment policy

of a bank should be based on
the principle of tax exemption
of investments. The bank
should invest in those
government securities which
are exempted from income
and other taxes

THANK
YOU