Definition

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.

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