Need For Study of Environment of Banking: It is undeniable that all socio-economic activities are controlled by the environment. It is not possible to achieve success in any enterprise by denying the impact of the environment. A reader interested in banking and an entrepreneur, manager and a banker in banking business must gain adequate knowledge about banking business environment and its elements.
In order to gain a detailed understanding of what kind of economic infrastructure banking business can be built on, what kind of decisions act as determinants of success and failure of bank business, the importance of studying the environment of banking business is immense.
The particularly important reasons why it is necessary to study the environment of a banker and any person or persons involved in the banking business are briefly discussed below in 5 parts:
Need For Study of Environment of Banking:
1. Variations in Demand for Money:
A bank’s business is money, it collects people’s money through deposits, lends it to others and earns profit from it. Therefore, if the demand for money from potential people decreases, then there is a possibility that the money collected as deposits with the bank will lie idle, which will only increase the cost of the bank, but will not give any profit.
Again, if the demand for money increases abnormally, then it may not be possible for the bank to meet that demand immediately. That is, not being able to anticipate the variation in demand for money from both sides and taking necessary steps is harmful. So you have to get an idea about it. Adequate knowledge of the environment needs to be acquired and this requires monitoring the environment and identifying its changing direction and making necessary adjustments in business policies.
2. Variations in Credit Demand:
Loan needs are of different types and of different tenors. Not all types of loans are created for the same purpose. For example, short-term loans to meet current needs and long-term loans to meet permanent needs. The amount of loan demand is not constant at all times. The factors that cause its change are some elements of the environment. By keeping a close watch on them, necessary steps can be taken in time to use the surplus funds elsewhere if the demand decreases to meet the additional demand. So it is necessary to read the environment to take necessary actions knowing what type of loan demand may increase or decrease in any economic situation.
3. Variations in funds Supply:
The largest source of bank funding is public savings and in exceptional circumstances the central bank provides financial assistance. It is therefore essential to study the banking environment to gain a special understanding of when, to what extent and why savings may increase or decrease and for what reasons and under what circumstances the central bank may adopt a policy of reducing the supply of funds in the hands of commercial banks.
If the fund is unused, the bank’s profit is reduced; On the other hand, if there is a shortfall in funds, the reputation is damaged. Therefore, by carefully studying the banking environment and taking necessary measures in advance, it is possible to control the adverse effects of the variation in the supply of funds in a timely manner.
4. Variations in Interest Rates :
Frequent fluctuations in interest rates have a detrimental effect on banking business. A rise in interest rates may reduce the demand for credit, which directly and indirectly hurts the banking business. On the other hand, if the interest rate on deposits falls, the funds will decrease and if the interest rate rises, it may increase suddenly. It is important to observe when the interest rate changes and take necessary steps to identify the direction of the change and reduce the adverse reaction. So reading the banking business environment is vital to understand the determinants of interest rate changes.
5. Variations in Credit Condition:
The conditions may need to be changed only if the environment changes. So it is necessary to study the environment of banking business to gain knowledge about under what circumstances what conditions can be imposed or what conditions can be withdrawn in the provision of credit.
In other words, bankers and people involved in banking business must take the right action at the right time by properly observing, understanding and analyzing the business environment in order to understand the determinants of success and failure of this business. It should be remembered that as the environment affects the operations of the bank, the forward-looking steps taken by the bank can also control the environment, even if partially. So finally it can be said that environmental study and monitoring is essential and beneficial for banks.