Liquidity Considerations In Investment Portfolio Of A Commercial Bank In India

Abstract

Commercial Banking System occupies a unique position in the Indian financial system. The practice of banking in our society is not something that can be refined to a set of given rules and formulas applicable to a static economy but an art to be pursued in a dynamic economy with a public, yet profitable, service as the end result. The overall environment today is much more challenging and much more difficult than the yesteryears. It is rather difficult to determine the relative priority that exists in the mind of a commercial banker between the concepts of liquidity and profitability, as the bank can’t operate for a long duration without either of them. Modern commercial banking is an exacting business where the rewards are modest; the penalties for bad banking are enormous. Profitability is of concern to any going business enterprise, the lack of which would result in wide criticism to the banker by the shareholders while lack of liquidity, which is peculiar to the banking system, in its most extreme form could affect the entire community and might have even more wide repercussions. Thus, it is assumed in this study that the problem of liquidity holds priority over profitability by the banker and that the concept of liquidity should not be overlooked in determining over-all loan or investment policy.