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The banking system has a vital role in supporting sustainable economic growth and meeting financial needs.
FREMONT, CA: Banking sector plays an essential role in economic growth. As they deal with money and data on customers, it is necessary to develop a sound banking system for them to operate. It must possess the following features.
Having a higher degree of liquidity is essential. The bank holds a proportion of its assets in cash. Therefore its other assets must possess the criterion of liquidity so that they may be turned into such easily. A bank is always under an obligation to pay its depositors cash on demand, and it is only possible if the bank possesses such securities which can be easily liquidated.
Sound banking must also be safe. Since the bank keeps the money of its customers, it must ensure the safety of it. To this end, banks should make secure loans and investments and avoid unnecessary risks. In case the debtors do not repay the loans in time or it loses on its investments, the bank shall become insolvent. Thus it is a must to ensure the safety of its deposits.
• Stability and Elasticity
A bank should be stable and operate rationally. There should neither be undue contraction nor expansion of credit. But the balance of banking operations should not be interpreted as rigidity. Instead, the banking system should have sufficient elasticity in its lending operations. It should be in a position to expand and contract the supply of loanable funds with ease in accordance.
• Reserve Management
A sound banking system should follow the principle of the efficient reserve management. A bank keeps some amount of money in reserve for meeting the demand of its customers in case of emergency. Though the funds held in reserve is idle money, yet the bank cannot afford the risk of keeping a small amount in reserve.
Banks lie at the core of financial systems and without banking infrastructure in financial operations would not be functional. Only a sound banking system can promote a higher and more sustainable rate of productivity and economic growth.