The banks are institutions which deal in money and have the power to create money. In fact banking is a business, which is run on the confidence and trust of people. The confidence enjoyed by the banks enables them to mobilize the dormant funds of public and make them available for productive purpose. Commercial Banks play significant roles in the economic development of a country broadly by promoting mobilization of resources and allocating these resources in the form of loans and advances. The resources available with the financial institutions are to be carefully managed and distributed in order to maintain efficiency. . Efficiency of funds management lies not only in the efficient mobilization of funds but also in the effective and optimum use of resources. The present study shows that Banking Sector Reforms have change the face of Indian banking industry. The reforms have led to the increase in resource productivity, increasing level of deposits, credits and profitability. Banking institutions have a good share of the total resources to be kept as reserves and to improve their spread by efficiently managing the remaining resources. The problem becomes further complicated in the current environment of global economic reforms and the resultant cut-throat competition. Commercial banks are also not free from this global problem. The study then suggests that commercial banks should focus on mobilizing more deposits as this will improve their lending performance and should formulate realistic and comprehensive strategic and financial plans.
Keywords: Lending, Deposits, Investment, Portfolio, Liquidity, Solvency
Introduction
Need of the Banks
Before the establishment of banks, the financial activities were handled by money lenders and individuals. At that time the interest rates were very high. Again there were no security of public savings and no uniform pattern regarding loans. So as to solve these Problems the organized banking sector was established, which was fully regulated by the government. The organized banking sector works within the financial system to provide loans, accept deposits and provide other services to their customers. Thus, banks are intermediaries between those who have and those who have not. Banks are almost life reservoir into which saving of people flow and from which loans are given for productive purposes. Secondly, and more importantly banks create money by converting less liquid assets into liquid ones.
Economic development has become the most important objective of developing nation. These days' banks occupy an important place as it provides finance to move the wheels of development. It is difficult to imagine, how economic system could function efficiently without the services of banks. The success of development depends mainly on the extent of mobilization of resources and credit deployment. Banking sector play an important role in mobilization and allocation of resources in an economy. An efficient banking system collects savings and diverts them into productive channels for the attainment of desired objectives.
Banking has become an important feature, which renders service to the people in financial matters, and its magnitude of action is extending day by day. A profitable and sound banking sector is at a better point to endure adverse upsets and adds performance in the financial system (Athana soglou 2008). Banks supports capital accumulation through the institutionalization of saving and investment to foster economic growth.
Overview of Indian Commercial Banks
The Indian financial system consists of different types of financial institutions which are responsible for the development of the country's economy. Financial institutions can broadly be classified into two parts, Banking and Non-banking institutions. The Banking sector consists of Reserve Bank of India, Commercial Banks and Co-operative Banks, and Specialized Financial Institutions. The Non- banking institution, which is not homogeneous, is largely made up of money lenders and indigenous bankers. The most active sector of the Indian money market is the commercial banking sector.
Commercial banks in India can be classified into three groups: Public sector, Private sector and Foreign banks. The majority of commercial banking in India is in the public sector with the State Bank of India and its associate's banks. After liberalization, several Private sector banks and foreign banks were allowed to open their business in the Indian financial system.
In terms of business, the public sector banks now have a dominant position. They account for more than 80 percent of the entire banking business in the country. Commercial banks are the most important savings, mobilization and financial resource allocation institutions. Consequently, these roles make them an important phenomenon in economic growth and development. In performing this role, it must be realized that banks have the potential, scope and prospects for mobilizing financial resources and allocating them to productive investments. Therefore, no matter the sources of the generation of income or the economic policies of the country, commercial banks would be interested in giving out loans and advances to their numerous customers bearing in mind, the three principles guiding their operations which are, profitability, liquidity and solvency.
Relevance of the study
Funds management in Indian Banking Sector has received only limited attention. This has been brought out in the review of literature presented in the next heading. The above problem invites greater attention today especially because of the growth of competitive banking and the liberalized economic policies which are likely to affect the working of Indian Banking Sector. The present study is an attempt to bring out the various facets in the working of Commercial Sectors in relation to funds management (deposits mobilization & Credit deployment).A very unhealthy activity is happening in the banking business. After the loan is provided by the bank, regular inspection and monitoring are not made to know whether the debtor has used the loan in productive or not. Due to This reasons, there is great amount of unrecovered bank loan. Banks only depend upon the direction and guidelines issued by RBI.
Review of literature
As regards product type Goldstein et al (1999) identified two categories of savings products, namely Voluntary and Compulsory. Voluntary Savings come in two forms, Cash Deposits and Time Deposits. Cash deposits are the most commonly used savings products. They offer a great deal of flexibility to savers. A small sum is required to open an account; deposits are made according to clients' needs, while accounts are highly accessible and provide liquid deposit facilities. This kind of savings offers an opportunity for customers to place excess liquidity in a safe and secure place thus providing the capital for future investment or consumption expenditures. Institutions relying on savings to finance lending operations are concerned with attracting cash deposits while at the same time keeping transaction costs low. A time deposit on the other hand represents a large sum of savings for a fixed term and at a fixed interest rate. Time deposits are primarily utilized by middle income earners. Das, Abraham and Ramanathan, (2000) in their study concluded that much of the lost output of Indian Commercial banks during 1998 was the result of underutilization of resources. Shirai, Sayuri (2002) in her study analyzed the Indian banking sector reforms and consequences in detail. Chodechai (2004) while investigating factors that affect interest rates, degree of lending volume and collateral setting in the loan decision of banks, says: "Banks have to be careful with their pricing decisions as regards to lending as banks cannot charge loan rates that are too low because the revenue from the interest income will not be enough to cover the cost of deposits, general expenses and the loss of revenue from some borrowers that do not pay". Moreover, charging too high loan rates may also create an adverse selection situation and moral hazard problems for the borrowers. Reserve Bank of India (2008) in its "Report on Trend and Progress of Banking in India-2007-08" highlighted the policy developments and the operations of commercial banks in India.Dr. Mohi-ud-Din Sangmi and Dr.Tabassum Nair (2010) in their research study, analyzed through the CAMEL Approach, that both the Punjab National Bank and Jammu & Kashmir Bank have adopted prudent policies of financial management and both banks have shown significant performance as far as asset quality is concerned.
Objectives of the study
To highlight on operational efficiency of mobilization of deposits, advances, recovery and financial management during study period of Scheduled Commercial Banks in India.
To find out relationship between total investment, deposit and loan & advance.
To evaluate the liquidity, efficiency, risk position and profitability of the selected banks.
To analyze the financial position of Scheduled Commercial Banks in terms of deposit collection and Loans & investment procedure.
To suggest and evaluate management practices adopted for harnessing the mobilization and deployment of funds by Commercial Banks.
Hypothesis of the Study
H0: There is no significant difference between the mobilization of Demand deposits and the Time deposits
H1: There is significant difference between the mobilization of Demand deposits and the Time deposits
H0: There is no significant difference in performance between Credit Deposit Ratio and the Investment Deposit Ratio
H1: There is significant difference in performance between Credit Deposit Ratio and the Investment Deposit Ratio
Research Methodology
Period of study
The post- reform period of seven years has been taken for measuring the liquidity performance on Schedule commercial banking sector. The years selected for analysis are 2005-2011.
Sample- size The study is related to Indian Schedule commercial banking sector.
Data collection
The study is primarily based on secondary data. A major part of the database has been drawn from the published secondary sources, primarily the reports of Indian Bankers Association (IBA) and the Reserve Bank of India (RBI). The data relating to deposits mobilization and credit deployment of Schedule commercial banks have been obtained from various sources like "Financial Analysis of Banks" brought by Indian Banker's Association, "Statistical Tables Relating to Banks of India". "Reserve Bank of India Monthly Bulletin", "Report on currency and Finance" and other publications of Reserve Bank of India.
Data Analysis
The following accounting, statistical and diagrammatic techniques are used
(A) Statistical techniques- (1) Mean (x), (2) Standard deviation (3) Coefficient of variation
(B)A two tailed sample 't'-test was performed to test the Hypothesis.
Analysis and Discussion
Deposit Mobilization
In general terms money deposits in banks are known as bank deposits. Deposits are the most important sources of funds for commercial banks. Collectively banks hold the largest resources through deposits. Banks are able to generate large deposits as they also provide for the settlement process and machinery for mutual claims. Deposit mobilization is the most important function of the Commercial banks. Deposits mobilization gets added attention in a developing country like India where resources mobilization acts as a prime mover of the development process.The success of the banking greatly lies on the deposit mobilization performance of the bank as the deposits are normally considered as a cost effective source of working fund. The commercial banks have emerged as one of the major financial intermediaries in the country to mobilize the community's financial savings. Sustained efforts have been made by commercial banks to induce people to keep a part of their savings as bank deposits. Deposits mobilized by the banks are utilized for: (i) loans and advances, (ii) investments in government and other approved securities in fulfillment of the liquidity stipulations, and (iii) investment in commercial papers, shares, debentures, etc. up to a stipulated ceiling. There has been a substantial increase in the deposits of scheduled commercial banks during the post-nationalization period.
Mobilization of deposits for a bank is as essential as oxygen for human being. In the post liberalization scenario, the number of players in banking industry has increased considerably which developed competition in bank marketing.' The survival of the fittest' has made applicable for the banks. To enhance profitability, banks take steps to minimize the interest paid expenditure and so banks are forced to mobilize low cost deposits. Deposit means a credit to an individual or to a firm. The two main kinds of bank deposits are: (a) Demand Deposit - this may be withdrawn at any time (on demand) and (b) Time Deposit - this stipulates that when withdrawals should be made. Bank deposits represent the principal kind of money in circulation.
Time Deposit is a money deposit at a banking institution that cannot be withdrawn for a certain "term" of period of time. When the term is over it can be withdrawn it can be held for another term. The longer the term the better the yield on the money. A certificate of deposit is a time -deposit product.
Demand Deposit is also known as sight deposit or "on call" which can be withdrawn at any time, without any notice or penalty.
In the present context bank's efficiency is measured based on the deposit mix and on the quantum of low cost deposits in the mix.
Table 1. Aggregate Deposits of Scheduled Commercial Banks (Rs.crore)
Years
Demand
deposits
% to Total
Deposits
Time Deposits
% to Total
Deposits
Aggregate
Deposits
2005
248028
15
1452171
85
1700198
(100%)
2006
364640
17
1744409
83
2109049
(100%)
2007
429731
16
2182003
84
2611934
(100%)
2008
524310
16
2672630
84
3196940
(100%)
2009
523085
14
3311025
86
3834110
(100%)
2010
645610
14
3847216
86
4492826
(100%)
2011
641705
12
4566264
88
5207969
(100%)
Mean
482444
2825102
3307575
Standard Dev.
145487
1140332
1278660
C.V (%)
30.16
40.36
38.66
Source: Database from Reserve Bank of India, 2011
Aggregate Deposits of Scheduled Commercial Banks-Deposits are the basic raw materials for the banks. Deposits help the banks to channel credit for productive investment in the economy. The higher the deposit mobilization is the larger the scope for deployment of funds in the economy. Deposits play a key role in commercial banking activities because the lending power of a bank and the size of its operations are determined by only the quantum of deposits.
Aggregate deposits, including the demand and time deposits, are furnished in Table-1.It showed that the aggregate deposits mobilized by the Scheduled Commercial Banks have significantly gone up from Rs. 1700198 crores to Rs. 5207969 crores in the year 2005 to 2011. Demand deposits have been increasing year after year Rs.248028 crores in the year 2005 and Rs.641705 crores in the year 2011. The year 2009 shows decline in trend. Compared to the demand deposits with mobilization of time deposits has been constantly rising from Rs.1452171 crores in 2005 to Rs.4566264 crores in 2011.
Hypothesis Testing
In order to test the relation between the mobilizations of demand deposits with the time deposits of Scheduled Commercial Banks the t-test was performed. The results are given in Table1a.
The mobilization of demand deposits and the time deposits of the Indian Scheduled Commercial Banks have an inverse relationship. A two tailed sample 't'-test rejected H0 .This means that as the demand deposits decrease the time deposits are increasing.
Table 1(a)
Demand
Deposits
Time Deposits
Aggregate
Deposits
Mean
482444
2825102
3307575
Standard Dev.
145487
1140332
1278660
C.V (%)
30.16
40.36
38.66
H0 is rejected because there is an inverse relation- ship between Demand Deposits and Time Deposits.
Credit Deployment
Credit means the ability to buy or borrow in consideration of a promise to pay within a specified time period following delivery. Bank credit means the loans (advances) made by banks to customers. Credit deployment is the major force through which banks helps in the transformation of saving into capital. This is considered to be the single most important causal factor in the process of economic development. Prior to the nationalization of banks in 1969, the flow of Commercial Bank credit took place mainly in favour of trade, commerce and industry to meet their short -term needs. It generally led to regional imbalances and creation of business and industrial monopolies. The nationalization of Commercial banks has brought about a definite shift in the credit policy of these banks. Thus, the agriculture, small scale industries and other small borrowers, which were rarely provided credit before the nationalization, are now the very segments of the economy specially meant to be catered to and covered under the priority sector programme. These earlier- neglected sectors have now become the focal point of credit deployment by the commercial banks.
A Commercial bank provides credit to the public directly or indirectly. Lending is done on the basis of the funds raised by accepting deposits from public. So, on the one hand banks accept deposits from people, they lend from that very corpus of funds on the other hand. Lending is imperative to earn revenue. A major portion of the bank deposits gets blocked in cash reserves and liquid assets to meet CRR and SLR requirements. The residual or deployable funs have to be lent very carefully so that not only can the banks meet establishment expenses and interest obligations comfortably but also earn reasonable returns on funds. The very important question for any banker is that, why a customer is in need for loan. If borrower misused the loan granted by the bank, he can never repay. Therefore, in order to avoid this situation each and every bank should demand all the essential detailed information about the scheme of the project or activities would be examined before lending.
"A bank should not lay all its eggs on the same baskets." This saying is very important to the bank and it should be always careful not to grant loan in only one sector. To minimize risk, a bank must diversify its investment on different sectors. Diversification of loan helps to sustain loss according to the low of average; if a security of a company is divided of there may be an appreciation in the securities of other companies. In This way, the loss can be recovered. Unless loans are used for the purposes for which it is borrowed it will prove to be dangerous both for the bank and the borrowers. Wrong use of credit facilities destroys its user. So, there is a need for providing not only a package of financial services but it is also necessary that professional guidance also be given along with it.
Table 2. Credit of Scheduled Commercial Banks (Rs.crore)
Years
Amount
% of increase over
previous year
2005
1100428
------
2006
1507077
37
2007
1931190
28
2008
2361913
22
2009
2775549
18
2010
3496720
26
2011
4298740
30
Source: Database from Reserve Bank of India, 2011
Credits Deployed by Scheduled Commercial Banks -Banks accept deposits to lend the same at a higher rate of interest. Commercial Banks are the dealers of money and suppliers of credit. They are the active participants in the process of deposit mobilization and credit creation.
The year-wise credits supplied by these banks are furnished in Table-2.The data in table-2 shows that the Indian Scheduled Commercial Banks have been successful in performing the credit function. The credits which were Rs.1100428 crores in 2005 have gone up to Rs. 4298740 crores in 2011. It is an encouraging sign that higher percentages of increase have been recorded from the year 2005 to the year2011.
Investment
Investment can be defined as sacrifice of present consumption with expectation of return in future. Investment takes place at present but return can be expected in future but return in uncertain too. Uncertainty is measured by risk that why there is always involvement of risk in investment. Investment usually involves putting money into abet, which is not necessarily marketable in order to enjoy a series of return the investment is expected to yield. On the other hand speculation is usually a shorter than phenomena. Speculators tend to buy assets with expecting of a profit that can be earned from subsequent price change & sale. Investments are usually made expecting a certain stream of income, which has existed, will not change in the future. "Investment is made in assets. Assets in all are of two types' real assets (land, building, factures etc.) and financial assets (stock, bond, etc.). These two investments are not competitive but complementary. Highly developed institutions for financial greatly facilitate real investment."Investment is nothing but deploying our saving in manner that ensures safety of our money & provides a sustained return to supplement our regular income (Delhi Stock exchange 2002).
Years
Amount
% of increase over
previous year
2005
739154
-----
2006
717454
-3
2007
791516
10
2008
971714
23
2009
1166410
20
2010
1729006
48
2011
1916053
11
Table 3. Investments of Scheduled Commercial Banks (Rs. Crore)
Source: Database from Reserve Bank of India, 2011
Investments made by Scheduled Commercial Banks- Investment as a window of deployment of funds was given more emphasis than lending. The year-wise investments made by the banks are presented in Table-3.
In table-3, it's shown that Indian Scheduled Commercial Banks have been quite successful as far as investment is concerned. During the period under reference, the banks have been able to mark a rising trend in investment with Rs. 739154 crores in the year 2005 to Rs. 1916053 crores in 2011. Although it declined in 2006, it has picked up in the subsequent years. Higher percentages of increase have been recorded in the years 2011.
4(A) Credit Deposit Ratio (CDR)
The CDR is nothing but the quantum flow of advances to the deposits mobilized by banks in terms of percentage. This ratio explains about the bank's credit deployment and mobilization capacity of the banks. Banks are required to maintain a CDR of at least 60 per cent particularly in rural and semi-urban branches so as to ensure that the financial resources mobilized from rural pockets are fruitfully utilized without diverting the same to urban and metropolitan centers.
Commercial banks act as the backbone of economic growth and prosperity by acting as a catalyst in the process of development. They inculcate the habit of saving and mobilize funds from numerous small households and business firms spread over a wide geographical area. The funds so mobilized are used for productive purposes in agriculture, industry and trade.
The banking system in India should not only be hassle free but it should be able to meet the new challenges posed by the technology and any other external and internal factors. For the past three decades, India's banking system has several outstanding achievements to its credit. The Banks are the main participants of the financial system in India. The Banking sector offers several facilities and opportunities to their customers. All the banks safeguards the money and valuables and provide loans, credit, and payment services, such as checking accounts, money orders, and cashier's cheques. In spite of these changes, banks continue to maintain and perform their primary role-accepting deposits and lending funds from these deposits.
The credit / deposit ratio (CD ratio) is a major tool to examine the liquidity of a bank. CD ratio measures the ratio of fund that a bank has utilized in credit out of the deposit total collected. More the CD ratio more the effectiveness of the bank to utilize the fund it collected.
The CD ratio is derived by the following formula: Total Credit/Total deposit collectedÃ-100
This ratio measures the extent to which the banks are successful to mobilize their total deposit on loan and advances. Loan and advances are outside asset which yield profit to the bank. Increment of loan and advances is the main target of all Commercial Banks. So higher the ratio better is the mobilization of the funds.
4(B) Investment Deposits Ratio (IDR)
Investment policy is the proper management of any fund or wealth to maximize value or to obtain this high or favorable return with law risk considering the protection of Invest forms the inflation and other possible harms. Banks are disbursing their money as investment in trade business and industry. Due to huge competition, investments are comparatively losses. Therefore, Banks should be following the principle of investment for profit. An investment policy should ensure maximum profit and minimum Risk. Investment policy determines the investor's objective and the amount of its investable wealth because there is possible relation between risk and return for sensible investment strategies. The banks also offer investment and insurance products. As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms have diminished.
Investment / Deposit Ratio help to know how the banks are mobilizing their deposit in the investment of the various securities. A high ratio indicates the success in mobilizing the funds in securities.
The ID ratio is derived by the following formula: Total Investment/Total deposit collectedÃ-100
Table 4. C-D and I-D Ratios of Scheduled Commercial Banks
Years
Credit Deposit Ratio
(%)
Investment Deposit
Ratio (%)
2005
62.6
47.3
2006
70.1
40.0
2007
73.5
35.3
2008
74.6
35.5
2009
73.8
35.7
2010
73.7
36.4
2011
76.5
34.1
Mean
72.11
37.76
Standard deviation
4.61
4.6
C.V (%)
6.39
12.18
Source: Database from Reserve Bank of India, 2011
Credit-Deposit Ratio and Investment Deposit Ratio-Commercial banks enjoy a special privilege of credit creation by multiple expansions of deposits. Bank credit implies loans and advances. The Credit Deposit Ratio of the bank indicates the creation of credit out of the deposits .Investment-Deposit Ratio is calculated by investments made by banks, divided by the aggregate deposits of the banks. Investments of Scheduled Commercial Banks in India include only investments in government securities and other approved securities. The year-wise C-D Ratio and I-D Ratios are given in Table-4.
Table-4 reveals that the Credit Deposit Ratio of Scheduled Commercial Banks has been rising from 62.6% in the year 2005 to 76.5% in 2011. It has picked up in the subsequent years.
A further analysis of the table 4 reveals that the I-D Ratios of Scheduled Commercial Banks has been constantly decreasing from 47.3% in 2005 to 34.1%in 2011. From the year 2006, this ratio shows a declining trend as more credits deployed by these banks.
The test results are given in Table-4a.
Table- 4a provides the result that there is strong evidence that ('t' is > 2.306004), HO is rejected. Hence, there is a difference in performance between the Credit Deposit Ratio and the Investment Deposit Ratio of Scheduled Commercial banks.
Hypothesis Testing
Table 4(a)
Credit Deposit Ratio (%)
Investment Deposit Ratio (%)
Mean
72.11
37.76
Standard deviation
4.61
4.6
C.V (%)
6.39
12.18
Apply a two-tailed test for determining the rejection regions at 5% level which comes to as under, using table of t-distribution for 12 degrees of freedom. H0 is rejected it means that there is a difference between performance of Credit -deposits and Investment -deposits.
5.Deposits and Credits of Scheduled Commercial Banks per Office
Banks accept deposits to lend the same at a higher rate of interest. Deposits and credits are just like inflow and outflow of funds of the banks. Banks deploy funds by way of providing credits to needy people. Credits (loans and advances) are the largest income earning asset of the bank and the most profitable and high risk associated item on the asset side of the bank balance sheet. The sound financial position of a bank is the guarantee not only to its depositors but equally important for the whole economy of the nation.
Table 5. Deposits and Credits of Scheduled Commercial Banks per Office(Rs.lakh)
Years
Deposits of SCBs per
Office
Credits of SCBs per
Office
2005
2574
1700
2006
3047
2209
2007
3675
2757
2008
4344
3222
2009
4980
3615
2010
5479
3983
2011
6090
4575
Mean
4313
3152
Standard deviation
1291
1007
C.V (%)
29.9
32
Source: Database from Reserve Bank of India, 2011
Table-5 exhibits the deposits and credits of the banks per office. The analysis of table 5 reveals that Scheduled Commercial Banks have been successful so far as deposit is concerned. During the period under reference, these banks have been able to mark a rising trend in deposits and Credits, with Rs. 2574 crores, and Rs.1700 crores respectively in the year 2005 to Rs.6090 crores, and Rs.3152 crores in 2011.
Since the co-efficient of variation of deposits of Scheduled Commercial Banks per office is less than the co-efficient of variation of credits of banks per office, deposits of Scheduled Commercial Banks per office are more consistent.
Suggestions
Banks must continue to pay adequate attention to deposits and credit as they constitute the core of banking activity and a substantial portion of income and expenditure is associated with them. So far as deposits are concerned, it is safe area of business expect for few stray instances of operational risks like human errors, frauds and forgeries. Credit is the real activity that should be managed to generate profits by keeping three cardinal principles of investment in mind "Liquidity, Solvency and Profitability".
Commercial banks should develop credit procedures, policies and analytical capabilities and these efforts should be expanded into full credit management including origination, approval, monitoring and problem management tailored to the needs of each bank.
Commercial banks should strategize on how to attract and retain more deposits so as to further improve on their lending performance.
There should be closer consultation and cooperation between commercial banks and the regulatory authorities so that the effect of regulatory measure on commercial banks will be taken into account at the stage of policy formulation.
The cost associated with lending to priority sectors as a national goal, should be borne by the society as a whole through the government budget instead of burdening the commercial banks with such cost. This is necessary because the commercial banks cannot afford to overprice or under price their loans for efficient lending performance.
Commercial banks should ensure good planning which encompasses budgeting, reviews and incentives. They should formulate critical, realistic and comprehensive strategic and financial plans. This will help them be better positioned to enjoy the positive effects in a volatile environment of the economy.
It is essential for commercial banks to build system and skills in liquidity management, assets and liability management and foreign exchange management. Banks should try as much as possible to strike a balance in their loan pricing decisions. This will help them to be able to cover cost associated with lending and at the same time, maintain good banking relationship with their borrowers.
Conclusion
Banking is the back-bone of modern economy. Our economy is so much dependent upon the banking system that any cessation of banking activity even for a day would completely paralyze the economic life of the nation .The operation of the banks recorded the pulse of the economy as repositories of people's savings and purveyors of credit, especially as the success of economic development depends on the mobilization of resources and their investment in an appropriate manner. Lending which may be on short, medium or long-term basis is one of the services that commercial banks do render to their customers. The size and composition of their transaction reflect the economic happenings in the economy. The country's economic progress is judged and determined by the progress and development of its banking system. In other words, banks do grant loans and advances to individuals, business organizations as well as government in order to enable them embark on investment and development activities as a mean of aiding their growth in particular or contributing toward the economic development of a country in general. However, commercial banks decisions to lend out loans are influenced by a lot of factors such as the prevailing interest rate, the volume of deposits, the level of their domestic and foreign investment, banks liquidity ratio, prestige and public recognition to mention a few.
Savings mobilization as a part of full financial intermediation is much more complex than administering a credit-only program, requiring special attention to developing appropriate management capacity. In addition to special technical knowledge in liquidity and risk management, staff needs to display competence in interacting with their clients to overcome social barriers and to establish confidence in the institution as a prerequisite for successful savings mobilization. The complexity of deposit taking also requires effective incentive and bonus systems to stimulate staff performance.
In developing countries, the rate of saving is quite low and existing institutions are half successful in mobilizing such savings as most people have incomes so low that vertically all current income must be spent in maintain a subsistence level of consumption. Investment is an essence of the national economy. Banking system is the integral part of investment system in productive sector. It involves the sacrifice of current rupees for future rupees. It is concerned with the allocation of present fund for later reward, which is uncertain. When people deposit money in a saving account in bank for example; the bank must invest the money in new factories and equipments to increase their production. In addition borrowing from the banks most issues stocks and bonds that they sell to investors to raise capital needed for business expansion.
