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 income. Each business financial institution goals to make income in such a method that it doesn’t compromise on its goal of liquidity, which is significant for its personal safety and security.

• That means:
Since a business financial institution has to make income in such a method that its liquidity stays intact, it diversifies its funds into varied belongings. A properly – diversified and balanced asset portfolio ensures its sound and profitable working. Numerous components play an essential function 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 belongings 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) Value of funds:
Value of funds are the bills incurred on acquiring funds from varied sources within the type of share capital, reserves, deposits, and borrowings. Thus, it usually refers to curiosity bills. Decrease the price of funds, greater the profitability.

3) Yield on funds;
The funds raised by the financial institution by varied sources are deployed in varied belongings. These belongings yield revenue within the type of curiosity. So, greater the curiosity, higher the profitability.

4) Unfold:
Unfold is outlined because the distinction between the curiosity acquired (curiosity revenue ) and the curiosity paid (curiosity expense ). Increased unfold signifies extra environment friendly monetary intermediate and better web revenue. 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 higher profitability of the banks.

6) Danger price:
This price is related to the possible annual loss on belongings. They embrace provisions made in direction of dangerous money owed and uncertain money owed. Decrease threat prices improve the profitability of banks.

7) Non – curiosity revenue:
It’s the revenue derived from non – monetary belongings and providers It contains fee & brokerage on rencittance facility, hire of locker facility, charges for underwriting and monetary ensures, and so on. This revenue provides to the profitability of banks.

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

9) Stage of Non – performing belongings (NPAs):
The profitability of a financial institution is inversely associated to the extent of NPAs. Therefore, over time, the NPAs of economic banks have enormously declined.

10) Stage of competitors:
Improve in competitors usually results in greater working prices. This results in decrease profitability.


The extent of liquid reserves held by banks relies on the statutory necessities of the Central Financial institution (i.e. the RBI) In response to RBI, business banks have to take care of a sure CRR(money Reserve Ratio ) and SLR (statutory liquid ratio) Increased CRR and SLR lead to decrease liquidity.

2) Banking Habits of the individuals:
The character of the economic system has an impression on the banking habits of the individuals. 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. Increased financial transaction result in greater liquidity.

4) Nature of Cash market:
In case of absolutely developed cash markets, banks purchase and promote securities simply. Due to this fact, 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 sorts 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:
Numerous banks could perform 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.