Investment Policy of Bank: Points to Considered before Investing

Commercial banks are inspired to earn profit. There are many reasons for the goal of gaining profit. A bank is legal, it can do nothing alone. It is an invisible and non-living thing. We can see only its building. But there are two bodies to run such a legal person in the bank. One of them is the supreme body of the bank that is a general meeting and the other is the board of directors of the bank. The whole shareholders make the general meeting. The shareholders are the owner of the bank. The board of directors is the agent of the bank. It operates (runs) the bank. To run the banks, many employees are appointed. It needs a great number of expenses in the bank. In addition, the aim of any person or the institution to invest the money in the bank is to earn more profit only. A bank established without the aim of gaining profit is the central bank. Other banks are inspired with eh objective of earning profit and helping the economic development and finally to take social responsibility. They should have the ability to use the policy of banking investment and to implement it much more carefully, otherwise, a bank may be unsuccessful in its goal.

Without investment, a bank cannot gain profit. The bank can't be successful until it gains profit. Therefore, after the establishment of the bank, it collects many deposits, gets the deposits from the current, saving, and fixed deposit accounts. In this way, the bank, apart from the amount deposited from such accounts, collets the capital by selling its shares. The bank can take loans. Thus, a great capital fund is formed in bank different sources. It is not better to keep such capital inactive. The bank should be able to clear the policy of its investment by making a deep study on the subjects that which sector would be more trustworthy and dependable to invest the amount collected in the bank. If the bank applies the following investment policies or principles it can be successful in its goal. Hence, these principles or policies or theories are as follows:

Principle of Liquidity

Liquidity means the whole money stock in the economy. In the case of Nepal, the use money, the money in the accounts of current, saving, and fixed period, and the money in margin account refers to liquidity. The liquid property means cash stock of the commercial banks the amount of short term, current account and short-term government and business security and the treasury bill.

A bank should not forget the principle of liquidy while it is following its investment policy. Commercial banks are considered to be financial mediators. The commercial banks have liability to the deposits and they immediately should give it in time when the depositors asked. For this purpose, the banks should keep adequate liquid funds. And also they should gain profit by utilizing the deposit as loan and advances, If the bank cannot return the deposit at the time of demand, it may lose the customers and their trust. If the adequate liquid fund is kept they can return the deposit at the will of the depositors but such bank cannot run for long. In the same way, if they invest the whole deposit on loans and advances, they cannot give it at the time of demand y the depositors, so the commercial bank should try to move the liquidity and profit together. It is a great challenge for the managers of the banks.

Commercial banks should attract deposits because a deposit is called raw materials of banking, without which a bank cannot run. It is an important thing in which sectors the amount of each deposit is to be invested. The interest is not given for the amount of the current deposit. But as it has to give payment immediately, plenty of liquidy is necessary for it. From the viewpoint of the property, loans and advances are more income-generating sectors but they are less liquidate. The amount would not be very liquidated but does not generate income for the bank. The quantity of liquidity is less for investment so maintenance of coordination between the property and the liquidity by keeping some part of its own property as liquid property to provide a loan, and to invest it is the success of the commercial banks. The central bank pays attention to this reality to give direction on liquidy to the commercial banks.

Principle of Profitability

The objective of commercial banks is to earn profit. The bank should follow the objective by focusing it on the sectors in which it can earn much profit. The bank should not keep its means and material inactive; it should keep on investing in the means and materials appropriate and safe area. The banks can gain much profit from safe and long-term investment. But there is less liquidity in such investment. It may lose the investment in the sector where profit is not gained where much risk is there, is much profit. But sometimes it may create a situation where the bank should face a great economic loss, by loss of the investment in such a risky sector. So, profit and liquidity are two opposite principles. If the bak pays its attention to the liquidy, it can't be a long-term investment and the bak does not get profit. SO, it should maintain equality in it. The profit should always think to apply an appropriate investment policy in such sector from which can earn much.

Principle of Safety

A bank should pay special emphasis on safety. If the infested area is unsafe, it is not a good omen for the bank. The bank should pay much emphasis on the principle of safety, to follow the investment policy. There will be no doubt of loss whether it is great or little if the bank has not invested in a safe sector. The bank should think about it with much sensibility. To invest in an unsafe sector with the hope of gaining much is to accept the security of low quality. To invest large loan against fewer securities by receiving a commission, to invest in new places without care, observation, and to flow the long-term loan including these all various reasons will make unsafe of the bank's investment. They should be avoided as much as can be. There will be no loss to the bank if it invested in the profitable sector. So, the bank should first seriously study whether there is a possibility of investment or not. It should invest in a safe sector. If the property taken as the securities are ruined, securities are low in standard or low valued, and if there is no possibility of sale of the security. the bank suffers from loss. The bank should follow the principle of safety, should flow the short-term loan, and finest in a profitable sector. In such conditions, there will be no possibility of loss. The secured sectors mean the securities of the inland and foreign, company's shares, debentures, and government bonds, etc.

Principle of Diversification

The principle of diversification means, the baking policy of investing the money in the various sectors. The bank should not follow the policy of investment only in one or two sectors. If it follows such a policy, certainly its investment policy will not be successful. The bank by studying and analyzing the different sectors where it is possible to earn more from little investment should extend its investment. If it invests in many sectors, it becomes successful to keep it in balance. There will be less profit from the investment of some sector and there will be maximum profit from some another sector. There may be a loss too in some sectors. On the whole, a bank should be able to make itself competent. If it happens so, the banking transaction does not go up and down. It can run the bank comfortably and smoothly. In the case of earning a profit, the bank should follow the policy of investing in various fields. So, there is a statement " a bank should not lay all its effs in the same basket." by following this principle, based on gold, silver, diamond, development bond, shares of the company, debentures, goods, imports, and export bills and other appropriate securities, the bak s have moved ahead of their investment policy. The bank always gets success in their working capacity from such investment. And the bank becomes successful in its goal.

Principle of Marketability

A bank should adopt the principle of marketability in investment policy. In a certain way, the bak moves its investment or flows loan against security. To invest the money, the bank should follow the policy of taking the security of high quality as far as possible. The market of Nepal is small. In such a small market, to give livingness t its banking transaction, a bank should flow its loan by taking the first-class securities. The bank should keep in mind the main principles of marketability while it makes investments. Are the goods taken as securities saleable in the market or not? Can the loan be recovered by selling it in the market or not? The bak should adopt the investment policy by paying the attention to the different aspects, it should study the market evaluation of the goods which are taken as a security. The ba should do such thing which would help to earn the profit and make the investment policy successful. The bank should not invest money by taking the securities of such goods which are not saleable in the market and though they are sold but not fetch the reasonable price, and there is no value of such things The bank should take as far as possible gods which keep may be safely and freshly in the market and the loan will be recovered like gold, silver, diamond, company's shares certificates, debentures, development bond and other similar types of securities. Byt securities of immovable property like house, land can't be sold in time. So, if the bank provides a loan by taking reasonable goods as security it can be sold in the market easily and the bank can be saved from becoming insecure.

Principle of National Interest

A bank, while it applies its investment policy should give importance to the principle of national interest; though an application of such policy will not earn much profitably. Any organization, institution, and individual should not forget the liability of society. The objective of banks to gain profit should not go against the national interest. The banks should follow the rules and regulations as well as policy, directions, instructions given from time to time by the Nepal Rastra Bank. The bank should make its investment suitable to the national interest, which carries benefits to society.

Principle of Price Stability

The bank should accept the principle of price stability to prepare the investment policy. Security of property, which takes by a bank must durable. It makes less possibility of the amount of a bank to be sunk in the future. But it cannot be said that the price stability of any property remains always the same. Yet, if the security is taken of the property which keeps the price stable, it will be easy for the bank to recover its loan. Sometimes if the price of the securities goes high, it will be beneficial to the bank. But there will be no possibility that it will always go high. IF there is a condition that the securities will not be sold or it is sold and the proceeds of the sale are not equal to recover the loan, the bank suffers from loss. The bank should make an investment by keeping the securities that keep the price stable, should flow the investment also create such situation which keeps the bank free fro the fear of losing its loan.

Principle of Tax Immunity

As far as possible, a bank should make an investment in such a sector, which is entitled to immunity. By increasing the investment to tax immunized sectors, the bank can achieve its goal. The tax immunized areas line treasury bills, national bonds, development bonds, etc. are notable. For example, if it is invested in the priority-declared sectors, the facility can be achieved. Therefore, the bank should make the investment in the areas where facility o tax immunity can be received.