Types of financial Ratios
(1)Liquidity ratios, which measure a firm’s ability to meet cash needs as they arise.
obligations.
It important to bank to determine how much deposit should be mobilized as a loan in economy to maintain enough liquidity.
It is important for banks to maintain its financial health and worthiness for the investors or the creditors.
It is important for banks to know when should increase or decrease liquidity.
It is important for commercial banks to avoid bankruptcy and insolvency.
It is important for commercial bank to rescue itself from suffering in order to maintain the day to day operational activities.
It is important for commercial bank to figure out how efficiently the bank is able to covert its inventories into cash.
It is important to bank to organize its working capital requirements by studying the leads of cash or liquid assets available at a certain time.
The banks maintain its liquidity ratio to balance liquidity problem i.e. over and under follow of liquidity. Both financial conditions are harmful to any BFI. Liquidity ratio analyzes the short term financial position and maintain sufficient liquidity to meets its short term liquidity to avoid such economic condition.
