Which Components Decide the Profitability and Liquidity of Banks?



A business financial institution is a enterprise entity that offers in banking with a view to make earnings. Each business financial institution goals to make earnings in such a approach that it doesn’t compromise on its goal of liquidity, which is important for its personal safety and security.

• That means:

Since a business financial institution has to make earnings in such a approach that its liquidity stays intact, it diversifies its funds into varied property. A properly – diversified and balanced asset portfolio ensures its sound and profitable working. Varied components play an vital position in figuring out the profitability and liquidity of economic banks. These components are considered whereas creating the asset portfolio of the banks.



1) Quantity of working funds:

Funds deployed by a financial institution in worthwhile property are the working funds of the financial institution. Profitability of a enterprise is instantly proportionate to the quantity of working funds deployed by the financial institution.

2) Price of funds:

Price of funds are the bills incurred on acquiring funds from varied sources within the type of share capital, reserves, deposits, and borrowings. Thus, it typically refers to curiosity bills. Decrease the price of funds, greater the profitability.

3) Yield on funds;

The funds raised by the financial institution by way of varied sources are deployed in varied property. These property yield earnings within the type of curiosity. So, greater the curiosity, better the profitability.

4) Unfold:

Unfold is outlined because the distinction between the curiosity obtained (curiosity earnings ) and the curiosity paid (curiosity expense ). Larger unfold signifies extra environment friendly monetary intermediate and better internet earnings. Thus, greater unfold results in greater profitability.

5) Working Prices:

Working prices are the bills incurred within the functioning of the financial institution Excluding price of funds, all different bills are working prices. Decrease working prices give rise to better profitability of the banks.

6) Threat price:

This price is related to the possible annual loss on property. They embody provisions made in direction of unhealthy money owed and uncertain money owed. Decrease danger prices improve the profitability of banks.

7) Non – curiosity earnings:

It’s the earnings derived from non – monetary property and companies It contains fee & brokerage on rencittance facility, lease of locker facility, charges for underwriting and monetary ensures, and so on. This earnings provides to the profitability of banks.

8) Degree of expertise:

Use of upgraded expertise usually results in decline within the working prices of banks. This improves the profitability of banks.

9) Degree of Non – performing property (NPAs):

The profitability of a financial institution is inversely associated to the extent of NPAs. Therefore, through the years, the NPAs of economic banks have drastically declined.

10) Degree of competitors:

Improve in competitors typically results in greater working prices. This results in decrease profitability.



The extent of liquid reserves held by banks is determined by the statutory necessities of the Central Financial institution (i.e. the RBI) In line with RBI, business banks have to take care of a sure CRR(money Reserve Ratio ) and SLR (statutory liquid ratio) Larger CRR and SLR end in decrease liquidity.

2) Banking Habits of the folks:

The character of the economic system has an influence on the banking habits of the folks. In growing nations, cheque transactions are confined to enterprise. People rely extra on money transactions Therefore, the necessity for liquidity is relatively greater.

3) Financial transactions:

The quantity and magnitude of financial transactions decide the liquidity of banks. Larger financial transaction result in greater liquidity.

4) Nature of Cash market:

In case of totally developed cash markets, banks purchase and promote securities simply. Subsequently, liquidity requirement is decrease.

5) Construction of Banking system:

Department banking system requires decrease liquidity since money reserves might be centralized within the head workplace. Unit Banking System requires greater diploma of liquidity.

6) Quantity and measurement of Deposits:

The quantity and sized of deposits affect the liquidity of banks. Improve within the quantity & measurement of deposits would require greater liquidity.

7) Nature of Deposits:

Deposits commerce with the banks are of assorted varieties like time deposits, demand deposits, quick – time period deposits, and so on. bigger demand deposits /quick – time period deposits want greater liquidity

8) Liquidity Insurance policies of different banks:

Varied banks might operate in the identical space So, liquidity insurance policies of different banks additionally have an effect on the liquidity of a financial institution to construct goodwill amongst depositors.


THUS, varied components decide the liquidity and profitability of economic banks. So, these components are considered whereas creating the asset portfolio of economic banks. These components affect the reconciliation of profitability and liquidity that results in a sound and profitable banking system.

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