Question

Discuss and elaborate On each  benefits of budgeting in regard to banks

*Defining objectives

*Planning

*Organizing

*Controlling

*Co- ordinating

*Communicating

*Motivating

Answer 1

Banks in today's world are complex organizations. Apart from regular functions like mobilizing public deposits and extending loans to customers banks do have several different kind of businesses like facilitating trade transaction services, various cash management serves, agency and trustee services etc. Further banks employ large number of people working in various departments. In order to efficiently perform every bank should have robust system of planning and budgeting to handle the complexity of its businesses and enable efficient coordination among various departments and their employees.

Defining objectives - Benefits of defining objectives in a bank is to give overall direction to bank's long term and short term financial objectives. The broader objectives of the bank will provide basis for the top management for strategic planning and thereby budgeting. A well laid strategic plan helps the departments of the bank to plan its budgets accordingly. Objectives may contain the level growth and capital requirement, high priority business areas, branding strategy, etc

Planning - Planning is a management function, which means deciding things beforehand. It sets business and operational targets from top management to the middle and lower management which in turn leads to generation of bottom-up budget. Banks need strong planning exercise to increase its profitability, efficiently manage its capital, risk exposure and asset liability mismatches. It also sets the quarterly budget for deposit mobilization, capital raising and loan disbursements. Set or scale up operational capacities to handle increase in business volumes.

Organizing - Organizing involves developing an framework for the Bank to allocate physical and human resources to meet its strategic and operational plans. Bank needs to have a budget to decide on its organizational framework i.e. the departments it should have, number and location of its branches, number of human resource it needs in those departments in those branches, their skill set and education requirement etc. Like a person having experience in credit card sales cannot work in bank's security department.

Controlling - Business and operation of bank attracts various kinds of risks such as credit risk, market risk, currency risk, interest rate risk etc. Hence the controlling function of the bank must ensuring that performance does not deviate from budgeted standards otherwise the bank will attract risk beyond its level of tolerance. Therefore bank should compare actual performance against budgeted standards set and take steps in case of deviation.

*Co- ordinating - Inter-departmental and intra departmental coordination is very critical for bank. A detailed budget framework helps in developing departmental coordinations. Any lack of coordination may lead to operational, compliance and legal failure which may lead to financial and reputational loss to bank.

*Communicating - Budgeting exercise promotes communication from top management to middle and junior management, between the departments, within the departments, employee to customer and vice versa. Communication in bank is of utmost important and it should be accurate, timely, and precise. Like changes in the interest rate in the bank deposits should be informed to all concerned departments by the treasury department in a timely manner. If treasury department delays it or erroneously mentions wrong rates bank may face a loss by giving higher rates to the customers or runs reputational risk by giving lesser rates to customers.

*Motivating - Employee motivation is an essential ingredient of success for a bank. Employees adequately motivated are more productive, and more engaged in their work. On the other hand demotivated and disgruntled employees may bring down bank's performance and by omission or commission may invite various kind of risk to the bank. Involvement of middle and junior management in budgeting exercise motivates bank's employees.