Definition Of

Anticipated Income Theory

Anticipated income theory developed in 1945 by H. V Prochnow and presented on his book named “ Term loan and Theories of Bank Liquidity”

Central theme:

  • Maintaining cash and near cash assets even though increases liquidity, but it forgoes income opportunity.
  • So bank should go for term loan of different dimension where from principal and interest can be received on installment basis.
  • In fact it argues that the installment CIF can be a source of continuous liquidity

 H.V. Prochnow has considered the following factors in his theory

       •  Maintaining liquidity in the form of cash is not important as installment CIF of term loan is enough to fulfill liquidity requirement.

       •  Bond and securities can be used as collateral to give term loan so bank can collect fund in times of emergencies by selling them in the secondary market or by keeping it as collateral to central bank.

       • Bank must given such long term loan from which the fund be recollected on due time.

       • From the long and mid-term loan amortization schedule, the flow of interest and principle repayment can be known and it gives a picture of future liquidity position. As a result the necessary plan can be formulated in advance.

       • It provides a broader spectrum of firm's financial structure compared to other theories of liquidity.

Share it:

More from this Section

  • Partnerships
    Partnerships shared ownership among two or more individuals, some of whom may, but do not necessarily, have limited liability with respect
  • Issuing bank
    Issuing bank is the bank which establishes a documentary credit at the request of the buyer, in favour of the beneficiary (the seller/exporter).
  • Standing lending facility
    Standing lending facility is a lending facility in which healthy banks are allowed to borrow all they want from a central bank.
  • Money position manager
    Money position manager is the managerial position within a bank that is responsible for ensuring that the institution maintains an adequate
  • Political Risk
    Political Risk is the possibility that political events in a particular country will have an influence on the economic well-being of firms in that country. The political risks ...
  • Shiftability theory
    Shiftability theory is developed in 1918 by M.G Mouton and published on his article named ‘Commercial banking and capital formation.
  • Bank for International Settlements (BIS)
    The Bank for International Settlements attempts to facilitate cooperation among countries with regard to international transactions. It also provides assistance to countries experiencing a financial crisis.