1. • INTRODUCTION:
A commercial bank is a business entity that deals in banking with a view to make profits. Every
commercial bank aims to make profits in such a way that it does not compromise on its
objective of liquidity, which is vital for its own security and safety.
• Meaning:
Since a commercial bank has to make profits in such a way that its liquidity remains intact, it
diversifies its funds into various assets. A well - diversified and balanced asset portfolio ensures
its sound and successful working. Various factors play an important role in determining the
profitability and liquidity of commercial banks. These factors are taken into consideration while
creating the asset portfolio of the banks.
• EXPLANATION:
A) FACTORS AFFECTING THE PROFITABILITY OF COMMERCIAL BANKS:
1) Amount of working funds:
Funds deployed by a bank in profitable assets are the working funds of the bank. Profitability of
a business is directly proportionate to the amount of working funds deployed by the bank.
2) Cost of funds:
Cost of funds are the expenses incurred on obtaining funds from various sources in the form of
share capital, reserves, deposits, and borrowings. Thus, it generally refers to interest expenses.
Lower the cost of funds, higher the profitability.
3) Yield on funds;
The funds raised by the bank through various sources are deployed in various assets. These
assets yield income in the form of interest. So, higher the interest, greater the profitability.
4) Spread:
Spread is defined as the difference between the interest received (interest income ) and the
interest paid (interest expense ). Higher spread indicates more efficient financial intermediate
and higher net income. Thus, higher spread leads to higher profitability.
5) Operating Costs:
Operating costs are the expenses incurred in the functioning of the bank Excluding cost of
funds, all other expenses are operating costs. Lower operating costs give rise to greater
profitability of the banks.

2. 6) Risk cost:
This cost is associated to the probable annual loss on assets. They include provisions made
towards bad debts and doubtful debts. Lower risk costs increase the profitability of banks.
7) Non - interest income:
It is the income derived from non - financial assets and services It includes commission &
brokerage on rencittance facility, rent of locker facility, fees for underwriting and financial
guarantees, etc. This income adds to the profitability of banks.
8) Level of technology:
Use of upgraded technology normally leads to decline in the operating costs of banks. This
improves the profitability of banks.
9) Level of Non - performing assets (NPAs):
The profitability of a bank is inversely related to the level of NPAs. Hence, over the years, the
NPAs of commercial banks have greatly declined.
10) Level of competition:
Increase in competition generally leads to higher operating costs. This leads to lower
profitability.
B ) FACTORS DETERMINING THE LIQUIDITY OF COMMERCIAL BANKS:
1) STATUTORY REQUIREMENTS:
The extent of liquid reserves held by banks depends on the statutory requirements of the
Central Bank (i.e. the RBI) According to RBI, commercial banks have to maintain a certain
CRR(cash Reserve Ratio ) and SLR (statutory liquid ratio) Higher CRR and SLR result in lower
liquidity.
2) Banking Habits of the people:
The nature of the economy has an impact on the banking habits of the people. In developing
countries, cheque transactions are confined to business. Individuals depend more on cash
transactions Hence, the need for liquidity is comparatively higher.
3) Monetary transactions:
The number and magnitude of monetary transactions determine the liquidity of banks. Higher
monetary transaction lead to higher liquidity.

3. 4) Nature of Money market:
In case of fully developed money markets, banks buy and sell securities easily. Therefore,
liquidity requirement is lower.
5) Structure of Banking system:
Branch banking system requires lower liquidity since cash reserves can be centralized in the
head office. Unit Banking System requires higher degree of liquidity.
6) Number and size of Deposits:
The number and sized of deposits influence the liquidity of banks. Increase in the number & size
of deposits will require higher liquidity.
7) Nature of Deposits:
Deposits trade with the banks are of various types like time deposits, demand deposits, short -
term deposits, etc. larger demand deposits /short - term deposits need higher liquidity
8) Liquidity Policies of other banks:
Various banks may function in the same area So, liquidity policies of other banks also have an
impact on the liquidity of a bank to build goodwill among depositors.
• CONCLUSION:
THUS, various factors determine the liquidity and profitability of commercial banks. So, these
factors are taken into consideration while creating the asset portfolio of commercial banks.
These factors influence the reconciliation of profitability and liquidity that leads to a sound and
successful banking system.
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4. HDFC Statistical table
Items 2005-06 2006-7 2007-08 2008-09 2009-10
Deposits 55797 68298 100769 142812 167404
Investment 28394 30565 49394 58818 58608
Advances 35061 46945 63427 98883 125831
Return on 1.38 1.33 1.32 1.28 1.53
assets
CRAR 11.41 13.03 13.60 15.69 17.44
Net NPA 0.44 0.43 0.47 0.63 0.31
ratio
Statistical table ICICI (Amount in crore)
Items 2005-06 2006-7 2007-08 2008-09 2009-10
Deposits 165083 230510 244431 218348 202017
Investment 74547 91258 111454 103058 120892
Advances 146163 195866 225616 218311 181206
Return on 1.30 1.09 1.12 0.98 1.13
assets
CRAR 13.35 11.69 13.97 15.53 19.41
Net NPA 0.72 1.02 1.55 2.09 2.12s
ratio
State Bank of India (SBI)
](SBI) is the largest banking and Financial Services company in India by revenue, assets
and market capitalization. It is a state-owned corporation with its headquarters in
Mumbai, Maharashtra. As of March 2012, it had assets of US$360 billion and 14,119
branches, including 173 foreign offices in 37 countries across the globe. Including the
branches that belong to its associate banks, SBI has 21,500 branches.
The Government of India nationalize the Imperial Bank of India in 1955, with the
Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In
2008, the government took over the stake held by the Reserve Bank of India. SBI has
been ranked 285th in the Fortune Global 500 rankings of the world's biggest
corporations for the year 2012.

5. SBI provides a range of banking products through its vast network of branches in India
and overseas, including products aimed at non-resident Indians (NRIs). The State Bank
Group has the largest banking branch network in India. SBI has 14 local head offices
situated at Chandigarh (Punjab & Haryana), Delhi, Lucknow (Uttar Pradesh), Patna
(Bihar), Kolkata (West Bengal), Guwahati (North East Circle), Bhubaneswar (Orissa),
Hyderabad (Andhra Pradesh), Chennai (Tamil Nadu), Trivandrum (Kerala), Bengaluru
(Karnataka), Mumbai (Maharashtra), Bhopal (Madhya Pradesh) & Ahmedabad
(Gujarat) and 57 Zonal Offices that are located at important cities throughout the
country.
SBI is a regional banking behemoth and is one of the largest financial institutions in the
world. It has a market share among Indian commercial banks of about 20% in deposits
and loans. The State Bank of India is the 29th most reputed company in the world
IDBI BANK
IDBI Bank is an Indian financial service company headquartered Mumbai, India. RBI
categorised IDBI as an "other public sector bank". It was established in 1964 by an Act of
Parliament to provide credit and other facilities for the development of the fledgling
Indian industry.[2] It is currently 10th largest development bank in the world in terms of
reach with 1594 ATMs, 1000 branches including one overseas branch at DIFC, Dubai
and 678 centers including two overseas centres at Singapore & Beijing. [3] Some of the
institutions built by IDBI are the Securities and Exchange Board of India (SEBI),
National Stock Exchange of India (NSE), the National Securities Depository Limited
(NSDL), the Stock Holding Corporation of India Limited (SHCIL), the Credit Analysis
& Research Ltd, the Exim Bank (India)(Exim Bank), the Small Industries Development
Bank of India(SIDBI), the Entrepreneurship Development Institute of India, and IDBI
BANK, which is owned by the Indian Government.IDBI Bank is on a par with
nationalized banks and the SBI Group as far as government ownership is concerned.It is

6. one among the 26 commercial banks owned by the Government of India.The Bank has
an aggregate balance sheet size of Rs. 2,90,837 crore as on March 31, 2012.