Investment of funds

The main motive of bank is to earn profit from collected deposit .Collected deposit is invest in productive sector so that they can pay interest to depositors. Bank is pool gap between lending and investing. The bank invest their surplus fund in different sectors but mainly in securities .like government securities, corporate securities and others securities. Government securities are securities of both central and state governments such as Treasury bill, long term government bond, municipal bonds, etc. Bank also purchase securities issue by corporate sectors. For e.g. corporate bonds, preferred stock and common stock, etc. Banks also invest their fund in hydro power, land and housing, vehicle, Bank also plays important role in development of trade and commerce.

Reconciliation

A bank opens account with other banks to ensure smooth functioning of remittance, placements trading etc. The bank has to ensure whether funds have been received in account on value date, funds have been paid on value date, amount debited and credited is right etc. For this, the bank having account with other banks should reconcile the transactions reflected in their ledger with the transaction appeared in the account statement supplied by the other bank (the bank which has real account) on a regular basis. If any deviation is observed, rectification should be made immediately because wrong entry from either end may result in the loss to the banks. 

Unsettled/irreconciled items are presented under following heads in the reconciliation sheets:

1. We Debit, They do not Credit : Items debited in ledger but not credited in the account statement.
2. They Debit, We do not Credit : Items debited in the account statement but not credited in the ledger
3. We Credit, They do not Debit : Items credited in the ledger but not debited in the account statement.
4. They Credit, We do not Debit : Items credited in the account statement but no debited in the ledger

Deposit

The main function of commercial bank is to acceptance of deposit. The bank allows for opening the three types of account to accept deposit for their customer they are current, saving and fixed deposit account but the interest is given to saving and fixed interest isn't given to current account. Customer can withdraw their money  from their account according to their need .The commercial bank can perform the important function  of accepting all types of deposit .Commercial bank earns profit by investing collected money from deposit in various part . A bank accepts deposit in three forms namely:

Saving deposit: It is one of the deposits, which collected from small depositors or low income investor. The bank usually pays small interest to the depositors against the deposit.

Current account: It is also known as demand deposits. Under this deposit, any account may be deposited. The bank doesn't pay any interest on such deposits but charges a small amount on the customer having current account.

Fixed deposit; It is also known as time deposit. Customer is required to keep a fixed amount with bank for a specific period .The pays a higher interest on such deposit. In the emergency period customer are permitted to borrow 90 %of money in lieu of extra interest.

Credit Policy

Loan and advances dominate the asset side of the balance sheet of any bank. Similarly, earnings from such loans and advances occupy a major space in income statement of the bank. Lending can be said to be the reason d'etre of a bank. However, it is very important to be reminded that most of the bank failures in the world are due to shrinkage in the value of loan and advances. Hence, loan is known as risky assets. Risk of non-repayment of loan is known as credit risk or default risk.

Performing loans have multiple benefits to the society while non-performing loan erodes even existing capital. Considering the importance of lending to the individual bank and also to the society it serves, it is imperative that the bank meticulously plans its credit operations. Sound credit policy, whose objectives are as follows, is a foundation in this direction:

1. To have performing assets
2. To contribute to economic development
3. To give guidance to lending officials
4. To establish a standard for control.

Cards

Banks issue various types of cards to their customers. This relieves the customer of cash carrying burden.

Credit Card: An instrument of payment used to pay the price of goods and/or services in lieu of cash or cash items with the option of repayment at a fixed later date or over a period of time. The instrument is plastic containing several security features together with customer's personal details and unique account number.

Debit Card: An instrument of payment used to pay the price of goods and/or services in lieu of cash or cash items. Payment is made by debiting customer's depository account immediately. The instrument is plastic containing several security features together with customer's personal details and unique account number.

Smart Card: This is a card with a chip embedded in its body. The chip contains both personal and financial data. Payment is made under smart card like that of credit card or debit card pr pre-paid card (funds loaded in advance).

Credit Risk

It is the risk of non-payment of interest and principal by the security issuer. Government securities are said to be risk free securities. There is inverse relation between the price of securities and level of credit risk. If market perceives such risk increased in the securities after purchase, the investor can sell it at the reduced price only. On the basis of probability of default, there is a practice of rating the debt securities by various rating agencies. If the issuers default, they file for creditor protection under bankruptcy laws. This culminates either in liquidation of the firm (sale entirely to another firm or sale in piecemeal) or in reorganization (merger or any other arrangement). In both the cases, security holders may lose part of principal and accrued interest due to lost goodwill and litigation costs. The credit policy should specify what rated securities it wants to hold in the portfolio. If unrated, whether it buys or not. Since risk is overpriced during recession and under-priced during boom, banks prefer buying medium grade and high-grade securities during recession and boom respectively. Normally, banks buy investment rated securities only.

Liquidity

Liquidity is defined as bank's capacity to pay cash in exchange of deposits. Liquidity needs of commercial banks are unique because in no other types of business there will be such a large proportions of deposits payable on demand.In other organizations too, liquidity is required for various purposes. Inadequate liquidity does damages credit-standing of those organizations but if bank fail to repay the deposits on demand, the bank loses the trust of the public. This leads to "run" in the bank and probably bankruptcy thereof.Liquidity is the lifeline of the bank.

Banks maintain liquidity in the form of:

- Cash and bank balance (primary reserve)

- Placements/money at call or short notice (secondary reserve)

- Investment in government securities and other securities readily convertible into cash (secondary reserve).

Since bank deal in various foreign currencies, liquidity refers to bank's capacity to pay off the liabilities in all those currencies. Maintaining excess liquidity in one currency while demand is for other currencies is not effective liquidity management because the liability in the demand currency can not be met.