Liquidity and Profitability:
To become in a position to satisfy needs for money as so when these are typically produced bank should never just organize to possess cash that is sufficient nonetheless it additionally needs to circulate its assets in a way that a lot of them may be easily changed into money.
Hence, the bank’s cash reserves can be strengthened quickly in the function of hefty drawings to them. Assets that are easily convertible into money are known as fluid assets, probably the most fluid being money it self. The shorter the size of that loan the greater amount of fluid since it shall quickly grow and start to become repayable in money; the less profitable because, other activities being equal the interest rate differs straight aided by the lack of liquidity skilled by the loan provider.
Therefore a bank faces one thing of the dilemma in wanting to secure both liquidity and profitability. It satisfies these evidently incompatible requirements in just how it distributes its assets.