Why is Liquidity Needed for Banks?

How much liquidity exists in an economy in a particular period, depends on the policy of the central bank, the commercial banks, common people, and the government. The decision made by the central bank to fix the standard of money, what amount of money the commercial bank should keep as a liquid asset of giving loan and advance, or how much amount is to be invested. High liquidity is not good for commercial banks and the crisis of liquidity is not good.

The commercial banks and the financial institutions should keep a fund correctly which the percent fixed from time to time for the liability of total deposit. The process of fixing the fund is fixed by the central bank from time to time. The central bank can give the interest with the rate fixed by the ban from time to time to the amount in the fund. If a commercial bank or a financial institution does not keep the stock of liquid property as per the law and policy of the central bank. There is a provision to fine them. In this way, if a commercial bank and a financial institution cannot maintain liquidity, there is a legal provision that the Nepal Rastra Bank can impose fines as a punishment. SO, there is no dispute that liquidity is the most important thing for a bank. Hence, the importance of liquidity is briefly described pointwise as follows:

To Meet the Expenses for the Bank's Daily Administrative Work

A bank is a legal person. It can't run without cash stock. The transaction of the bank is related to the money. Many types of expenses go on taking place in the bank daily. With a lack of expenses, it is nearly impossible for the bank to do its transaction. SO, the liquidy is necessary for daily expenses that it is spent in the administrative functions. The administrative expenditure can't be fulfilled without liquidity. 

To Pay All Sorts of Deposits

A bank opens the current, saving, and fixed deposit accounts for its customers and accepts the deposits from the customers. Accordingly to the nature of deposits, the banks should pay in the time when the customer asks. The liquidity needs for it. It cannot pay the deposit without liquidity. That is why liquidity is necessary for the payment of all types of deposits.

To Maintain Liquidity to Meet the Cash Fund Ratio and Legal Liquidity Ratio

The commercial banks should keep certain percent cash as a treasury account in their own account in the banks from the liability of the total deposit and likewise by opening an account in the Nepal Rastra Bank. Therefore, to fulfill all these demands or to keep the balance, liquidity is necessary.

To Control the Economic Fluctuation

It can't be said there will e the same situations of transactions in the bank and the bank will always remain in balanced condition. There will be the effect of internal and external circumstances in the nation Such conditions may have an effect on the economic sector. The commercial banks too can't remain safe from the economic sector. there is the necessity of liquidity to keep the bank free from such economic rise and fall or economic crisis. The bank should maintain some liquidity of some percent cash fund to keep safe from such situations.

To Fulfill the Demand of the Debtor

A bank provides loans to debtors. The bak earns income from it. Many kinds of people come to the banks with the purpose of loans. After the loan is granted, the bank is obliged to give the loan to the debtors. Therefore, there is the necessity of liquidity in banks, to provide fresh loans to the debtors.

To Gain Trust or Faith

A bank has a great responsibility because of the financial institution that does monetary transactions. It must gain trust in its banking transaction. For this, a bank should do many types of functions. It has to pay attention to the time and the will of customers, to provide the banking services. For the name and frame, a bank should earn trust. There must be liquidity to gain trust, from the public including other sectors.

Providing Security to the Banks

A bank is a sensitive institution because it is an institution of banking transactions. Hence, the deposits are deposited in different types of accounts of common people, industrialists, and businessmen. Apart from it, the bak itself invests the cash in different sectors. Cash as a form of loan can be distributed in different sectors from the bank. SO, the bank is regarded as a sensitive and important institution. such institutions can be saved from the various risks in any situation. Hence, to provide all kinds of security to the bank, liquidity is necessary.