AUSOM – SPRING 2021

BSAF 5 - COMMERCIAL BANKING AND LENDING

MAIN PURPOSE

 Accepting Deposit
 Lending
 Investment
 Financial (Banking) Transaction
 Management of Money
 Deposit taking entity / institution

EVOLUTION

Bank Origin, at best, UNKOWN

Bancus /Banque (Italian/French) meaning “Bench”

Currency (Legal Tender)

“Back” German meaning Joint Stock Co

Barter Trade

EUROPE

Bank of England established in 1694 Nationalized in 1946

17th Century US Discovered

UK 1853 stamp duty on cheques reduced to encourage bank accounts

1854 Joint Stock Company

1855 Limited Liability Act

1918 11 Clearing Banks in UK

USA

17th Century US Discovered

1791 1st US Bank established Capital USD 10M

1794 Eighteen banks established in USA

1838 Freed Act – Discourage monopolies

1860 No of Banks in USA - 562

1863 National Bank Act US Bonds equal to 33% of Capital

1913 Federal Reserve Act – Loss Reserve Requirement

1935 Banking Act – Foundation for FED (1914)

1939 14.5k + Banks in USA

INDIAN SUB-CONTINENT / PAKISTAN

Babylonians 2000 BC King Hammurabi

M Tughlaq 1325-1351 Currency in Indian Subcontinent

SBP 1-7-48

Oct 1948 1st Pak Note

1974 Nationalization HBL, UBL, MCB, NBP, ABL

1989 1st Women Bank established

1991-92 Privatization
DEFINITIONS

Companies that transact the business of banking

Banking Companies Ordinance 1962 Defines as

“Accepting, for the purpose of lending and investment, of deposit of money from
general public, repayable on demand or otherwise, and withdrawable through
cheques, drafts, order or otherwise”

A Commercial Bank is a type of financial institution that accepts deposits, offers

lending products to customers and invests excess liquidity to earn. The net
interest rate spread is defined as the difference between markup rate charged
and cost of funds

A Commercial Bank is a financial institution which performs the functions of

accepting deposits from the general public and giving loans for investment with
the aim of earning profit. In fact, commercial banks, as their name suggests, axe
profit-seeking institutions, i.e., they do banking business to earn profit

A Commercial Bank is a financial institution that offers checking accounts,

demand deposits, business and personal loans, savings vehicles and a variety of
other related financial services

Commercial Banks are financial institutions which accept demand and time
deposit that is payable on demand or otherwise, make loans to individuals and
organizations and provide services such as documentary collections, international
banking and trade financing.
Economy expand Strategic Mgt Control

SBP CONTROL

 Commercial banks

 Islamic Banks

 DFI (Development Financial Institutions) HBFC, Pak-Brunei, Pak-China,

Pak-Kuwait, Pak-Libya, Pak-Oman, Saudi-Pak (SAPICO)

 MFBs (MicroFinance Banks) FINCA, U, First, Khushhali, Advans, Telenor,

NRSP etc

SECP CONTROL

AMC, Pension Funds, REIT, Leasing Co, Modaraba, Insurance

SBP BSC (Banking Services Corp)

Public Sector Banks

NBP, BoP, ZTBL, BoK, Sindh Bank, 1st Women Bank, SME Bank

Private Sector Banks

HBL, MCB, ABL, UBL, AKBL, BAL, SCB, Soneri, Silk Bank, Bank AlHabib, ICBC, JS
Bank, Samba Bank, Habib Metropolitan Bank (HMB)
Bank Islami, Albaraka Bank, Meezan Bank, DIB, Faysal Bank, MIB

Citibank, Deutsche Bank

STRATEGIC CONTROL OF BIG 5

ABL Employees Stock Ownership Plan Ibrahim Group

UBL Bestway Group

HBL Agha Khan Group AKFED

MCB Mansha Group

NBP GoP

CORE FUNCTIONS OF COMMERCIAL BANKS

Accepting deposit

Lending

Investment (Debt Securities, Equity Securities, Money Market, Other)

Borrowing (Inter-bank, SBP, internationally)

Assume Risk

Management of Risk (Credit, Reputation, Default, Market Risk, Operating,

Liquidity)

Manage Bank’s Capital (Reserves, Capital, Ord Issue, Right Issue, TFCs )

Protect Depositor

Trade Facilitation / Intl Facilitation

Financial Intermediation

Corp Governance
Financial Integrity (AML / CFT)
INDIRECT LENDING TO GOVERNMENT
HELP TURN WHEEL OF ECONOMY
SAFETY, SECURITY, LIQUIDITY
FOREIGN TRADE
TRANSFER OF FUNDS
CAPITAL ASSETS MANAGEMENT
Assurance / Guarantee

Basic Benchmarks to Establish Commercial Bank

Initially PKR 250M (1992)

BASEL I, II, III (Liquidity, Leverage, Capital Adequacy, Risk Management)

Minimum Capital Requirement (MCR): PKR 10 BILLION (Absolute measure)

For foreign banks PKR 3Billion (1-5 Br)

PKR 6Billion (6-50 Br)
PKR 10Billion (51 or more Br)

Minimum 200 Branches for commercial Banks. (Financial Inclusion)

Capital Adequacy Ratio (2013): 10.25% and then 12.5% by 31-12-19

BASEL III

Capital >= 12.5% of your risk weighted assets

Total Eligible Capital >=12.5%

Credit RWA + Market RWA + Operational RWA

Customer Loan Rs 1M Security: Property PKR 0.6M.

Rs 1M Fixed Deposit Certificates PKR 0.9M

Assigned 60% weightage to your credit risk

Credit RWA reduce from PKR 1M to PKR 600,000

1 M x 60% = PKR 0.6 M or PKR 600,000/=

DFIs: MCR - PKR 6B.

MicroFinBanks MCR PKR 1B Nation-wide

MCR PKR 500M Province
MCR PKR 400M Region
MCR PKR 300M District
MFB CAR: 15%

BANKER – CUSTOMER RELATIONSHIP

By opening banks account

Honor cheque Section 31, Negotiable Instrument Act 1881

Right of Lien Right to retain as asset until debt paid (Section 171
Contract Act 1872)

Right of Set Off Adjustment a loan amount (Dr Balance) against Cr Bal

Right to Services Chgs Schedule of Charges 6 Monthly

SBP Approval

Calendar Year (Jan-June) (July-Dec)

BANKERS DUTY OF SECRECY

Mandatory under Bank Nationalization Act 1974

EXCEPTIONS

Under Legal Compulsion Bank can be sued. Court of Law, FBR, NAB (Sec
6, Banker Books Evidence Act 1891, CPC, ITO
2001)

Duty to Public Disclosure (National Emergency, Dormat A/c deposit

surrender to SBP Disclosure,)

Bank’s Interest (Defaulters, Unpaid rent of Lockers ( Safe keeping

of precious belongings)

Customers’ Consent Express/Implied Auditors Balance Confirmation

Common Inter-Bank Courtesy Credit Worthiness Report, Electronic-Credit

Information Bureau Report (CIB at SBP)
TYPES OF DEPOSIT ACCOUNT HOLDERS

 Need Driven, facilities, safety, legal/regulatory, systemic, convenience, cost,

transaction trace/ transparent/routing/disclosure – money laundering
CATEGORIES
 Profit / Non-Profit Bearing Accounts
 Time Based Deposit A/C 1) Daily Product Basis 2) Fixed Term Deposit
2a) Notice Deposit (7 days – 29 days) 2b) Term Deposit (1month – 5 years+)
o Short Term Fixed Deposit <= 1 Year
o Medium Term Fixed Deposit >1year<=3years
o Long Term Fixed Deposit > 3 years
 Deposit Account (Customer Type/need driven - compulsion):
o Minor Account
o Salary Account
o Individual Account
o Business Account
 Sole Proprietorship Account
 Partnership Account
 Private Limited Company Account
 Public Limited Company Account
 NGOs, Trust, Society, Club, Association Accounts (NPO)
 Conventional vs Islamic Deposit Accounts (Faith Based)

Profit Rate (on deposits) is a function of Time and Amount

Profit Rate is usually directly proportional to Time and Amount [Banks’ Size,
Vulnerability for deposit (survive through crisis), Time Criticality (June-end, Dec-
end)]

1M 1 month vs 10M for 1 year

TYPES OF DEPOSIT ACCOUNT HOLDERS

1. Individual Account
2. Joint Account
3. Partnership Account
4. Proprietorship Account
5. Private Limited Company Account
6. Public Limited Company Account
7. Trust / NGO / Society / Association

ROSHAN DIGITAL ACCOUNT

Pakistan Banao Certificates

FATF

INDIVIDUAL ACCOUNT

ID Proof: Valid NIC, Service Card, Student Card, Professional

Bodies IDs (PMDC (PMC) Card, RCCI, FPCCI, SCCI, LCCI, KCCI, PEC, etc)

Income Proof: Salary Slip, Bank Statement

Other Income Sources: Rental Income, Agri Income, Multiple

Businesses

Place of Business / Job: Visiting Card, (Followup-Br Staff Visit)

Residential / Correspondence Address: Utility Bill (Elec / Gas/PTCL)

Biometric Verification

Banks’ Processing Docs: AOF, SS Card, Cheque Book Requisition Slip

KYC / AML. Expected inflows

3rd party mandate

NIC verification (VeriSys)

 Business Income vs Personal Income

Initial Deposit / Deposit Slip

Letter of Thanks

Account Activation

Cheque Book

Dr Card, Net Banking / Mobile Banking

Permission for account utilization (deposit / withdrawal)

Cr Card

Centralized Bank Account Opening

Joint Account

2 or more person

a/c operation instruction (jointly operated, singly operated/any one can sign)

Joint Account Operation Declaration

3rd party mandate

Proprietorship Account

Single Person ownership

Business A/c

Proprietorship Declaration (signed and stamped on business letterhead)

On-spot / business premises verification

Title of Account will be business name/title (Aslam General Store) M. Aslam

AoF provided by bank also carries this proprietorship declaration form

Partnership Account

Unregistered

Registered Registrar of Partnership Firms

Partnership Resolution (Business letterhead signed by all partners. Account

operation instruction)

Partnership Deed (Stamp Paper) (It should be notarized by Notary Public)

Bank will retain photocopy of Partnership Deed (customer to verify the photocopy
by signing and stamping) Bank’s staff may also sign the photocopy as a proof of
having seen the original document. (Bank’s Policy Document known as Operations
Manual, Audit)

Information about business, owners/partner along with their particulars,

financial information (capital/sharholding), nature of business to be conducted,
mechanism for change in partnership, business wind up, rights and
responsibilities of partners/business, account operation instruction.

Private Limited Company

Memorandum of Association Initially filed with SECP & then certified

Articles of Association Initially filed with SECP & then certified

Form 29* Initially filed with SECP & then certified

Form A Initially filed with SECP & then certified

List of Directors

Certificate of Incorporation SECP certifies photocopy

SECP Registration Proof

*Director’s Name, CEO, Basic particular (address, NIC No etc) Legal Counsel,
Company Secretary

Board Resolution / Resolution of Board of Directors

SMC Private Limited Company (Single Member Company)

Public Limited Co

Listed PSX IPO

Unlisted

No SMC

Certificate of Commencement of Business (issued by SECP)

List of Directors (Sponsoring only)

Trust / NGO / Society / Association

Non-Profit Sponsors – Moral Obligation Public Welfare

Common Seal + Letterhead

List of Sponsors

Trust Deed

Trust/NGO/Society Bylaws

Resolution of Trust / NGO / Society signed by Sponsors/Trustees (account

operation instruction)

(Donor) Funding Agreement