MCB Internship Report

Muslim Commercial Bank Internship Report, Internship Report on MCB, Internship Report on Muslim Commercial Bank

EXECUTIVE SUMMARY
In the domestic banking industry of Pakistan Muslim Commercial Bank of Pakistan possesses a unique position. MCB was incorporated in 1997 and was later privatized by the Government of Pakistan. The Nishat Group bought the majority shares of the bank and so got the rights to control the bank’s operations. Since the privatization of the bank, MCB has implement different policies to make it one of the best banks of Pakistan, which included introducing new products and services and increase its operations by opening new branches in Pakistan.
8 weeks internship at MCB House Lahore, and worked in Human resource Department.
Although there were no such big problems found in the working of MCB, but there were some problems in training of the employees, incentive schemes and product innovation.
Some of the recommendations include workshops for employees, job rotation, teams work to find innovative products and scholarship programs for employees.
Lastly MCB has seen a rapid growth in its activities by introducing a range of products and services and showing its presence in the country by opening new branches and in future should keep this momentum and always strive to become the best.

Introduction

Banking in Pakistan:
After independence successive Pakistani governments adopted apolicy of ‘supply-leading’ finance. A policy designed to implement the import substitution development model leading to long term industrialization, was possible only with the mobilization and allocation of large amounts of term finance. The problem of inadequate financial intermediation was overcome by creation of nationwide system of commercial bank branches. The banks were encouraged to mobilize deposits and lend to corporate sector at attractive terms.
 Pre- Nationalization:
In the formative years of development of banking in Pakistan, governments intervened in the banking system in three ways. First, a central bank i.e. the State Bank of Pakistan was established and given a multiplicity of functions: regulating monetary and credit system, fostering economic growth, undertaking money market operations, and supporting the development of the capital market. Second, low cost financing was made available both through the commercial banks. Third the increase in the number of branches allowed a profound increase in bank credit, based on the increase in commercial bank deposits. But these steps had some negative implications also. First the government policy supported lending to specific industrial groups. Second considerable proportion of the bank investments was directed towards government debt securities. Also high premium on liquidity made the banks frequently reverting to SBP for additional credit.

Nationalization:
During nationalization the system of credit ceiling, quotas, and control affected the performance of nationalized commercial banks. As substantial part of their investment was maintained in low yield government securities, given interest rate ceiling, banks controlled deposits rates, thus leading to a negative real interest rate. These trends affected the ability of financial system to generate resources for economic development. Negative real interest rates encouraged disintermediation from the formal to informal financial sector, where nominal rates of return were substantially high. By 1990, the financial performance of the nationalized commercial banks had declined substantially.
Post-nationalization:
From 1991, a liberalization policy introduced by government, involving disinvestments of state-owned commercial banks and deregulation of financial and monetary controls, had far reaching effects on banking system. The changing financial structure was accompanied by reforms which had an impact on the inter-linkage between financial and money markets. These reforms included:

• Introduction of a competitive auction market for government debt.
• An across-the-board increase in yields on government debt.
• An increase in rupee deposit rates to make them more attractive to investors.
• Permission for banks to raise deposits to attract funds from informal sector.
• And revised prudential ratios on both credit expansion and maximum lending and deposit rates.

An over view of MCB as an organization:
Muslim commercial bank was established on July 7, 1947 at Calcutta. Quaid-e-Azam M.A. Jinnah was very intent in the formation of MCB because of his apprehensions about the future of banking industry in Pakistan. Adam Jee Daud was the promoter of the bank, who commenced the venture with authorized capital of Rs. 300,000. After the partition of Indo Pak Subcontinent the head office of the Bank was shifted to Dhaka, capital of Bangladesh (formally known as East Pakistan). In 1956, the bank moved its registered office to Karachi. Until 1974, private management operated the Bank. In 1974, with the promulgation of Nationalization of Banks Act, the Bank was merged with the Premier Bank Ltd. and was handed over to Government. Under the Government umbrella most of the enterprises could not do well.
After the Government’s decision to privatize government owned entities in 1992, the MCB was first bank to be privatized. Privatization was the milestone in the progress of the Bank. Since privatization, MCB’s growth has been phenomenal. Today, MCB in one of the largest foreign banks in Sri Lanka, the first bank in Pakistan to launch Global Depository Receipts (GDR) in 2006, has strategic foreign partnership with Maybank of Malaysia which holds 20% shares in MCB through its wholly owned subsidiary Mayban International Trust (Labuan) Berhad since 2008, has international indirect regional presence in Dubai (UAE), Bahrain, Azerbaijan, Hong Kong and Sri Lanka and serving through a domestic network of over 1,130 branches and 600 ATMs across Pakistan with a customer base of 4.5 million (apprx.)
MCB is reputed as one of the most sound financial institution and as one of the leading banks in Pakistan with a deposit base of PKR. 462 bln (apprx.) and total assets of PKR 605 bln (apprx.). The bank is versed as one of the oldest and most responsible banks in Pakistan and has played pivotal role in representing the country on global platforms while being one of the few institutions that are recognized and traded in the international market.
The bank has also been acknowledged though prestigious recognition and awards by Euro money, MMT, Asia Money, SAFA (SAARC), The Asset and The Asian Banker.

MCB Mission & Vision

Mission:

We are a team of committed professionals, providing innovative and efficient financial solutions to create and nurture long-term relationships with our customers. In doing so, we ensure that our shareholders can invest with confidence in us.

Vision:

To be the leading financial services provider, partnering with our customers for a more prosperous and secure future.

Our Values

Integrity:

We are the trustees of public funds and serve our community with integrity. We believe in being the best at always doing the right thing. We deliver on our responsibilities and commitments to our customers as well as our colleagues.

Respect:

We respect our customer’s values, beliefs, culture and history. We value the equality of gender and diversity of experience and education that our employees bring with them. We create an environment where each individual is enabled to succeed.

Excellence:

We take personal responsibility for our role as leaders in the pursuit of excellence. We are a performance driven, result oriented organization where merit is the only criterion for reward.

Customer Centricity:

Our customers are at the heart of everything we do. We thrive on the challenge of understanding their needs and aspirations, both realized and unrealized. We make every effort to exceed customer expectations through superior services and solutions.

Innovation:

We encourage and reward people who challenge the status quo and think beyond the boundaries of the conventional. Our teams work together for the smooth and efficient implementation of ideas and initiatives.

MCB Organizational structure:

MCB Branches network:

Organizational hierarchy of MCB:

Groups in MCB:

I have learnt about different groups regarding compensation and benefits.

• Commercial branch banking group (CBBG)
• Operations Groups (ops)
• Audit Group (AG)
• Consumer banking Group (CBG)
• Treasury And Forex Group (try and fx)
• Special Asset Management Group (SAMG)
• Wholesale Banking Group (WBG)
• Strategic Planning & Investments Group (SPIG)

Commercial Branch Banking Group:
The pledge to bring improvement and development in banking services offered by MCB, made by made by the management on the eve of taking over the reins of bank in April 1991 stands largely fulfilled. Improvement of branches and development of its network formed the mainstay of pledge.
CBBG has been in the forefront of implementing its core values of integrity, Respect, Excellence, Customer Centricity and Innovation. Taking the above values as given, CBBG has translated them into a rapidly moving the wheel of dynamism, whose constituents the following:

• Know your portfolio
• Circular Liquidity
• Branch visit
• Monthly review meeting
• Service quality
• Operational Excellence

Operations Group:
Since privatization MCB Bank operations has been instrumental in managing various functions of the bank. Operations of the bank were managed by the several head office divisions. These divisions played a vital role in managing daily affairs of bank these operations include managed manually, real time online banking, MCB master cards and ATMs.
Audit Group:
Internal audit function is maintenance of the fundamental “checks and balances” for sound corporate governance. Adequate internal controls within the effective internal audit function that independently evaluate the control system within the banking institutions. This paper addresses the journey of MCB’s internal audit function over the past two decades.

Audit Committee:

Mr. Tariq Rafi	Chairman
Dr. Muhammad Yaqub	Member
Dato’ Mohammed Hussein	Member
Mr. Aftab Ahmad Khan	Member
Mr. Muhammad Ali Zeb	Member

Consumer Banking Group:
Consumer banking Group was formally structure in 2002 and started its operations in 2002. It has involved into an important pillar in MCB’s overall banking structure through its valuable presence.
This group is provided under the following services:

• Lending
• Remote banking
• Investment services
• Rupee traveler cheques
• Service quality

TREASURY & FOREX GROUP:
This group deals all foreign currency accounts network.
It also deals the following

• Managing the banks liquidity across the entire branch
• Ensuring liquidity in foreign currency account
• Maintain reserve with state bank
• Trading in Forex
• Interest rate risk
• Trading in government securities
• Treasury bills
• Pakistan investment bonds

Special Assets Management Group:

The primary business of this group is to optimize recovery yield in the loss classified segment of the loans assets. These loans primary pertain to the commercial banking, corporate banking, and Islamic banking groups also.

 Strategic Planning and Investment Group:
This group makes the future strategic planning for the bright future of MCB.
Wholesale Banking Group:
This group started its working in 2005 the roles performed by this group are as under:

• To raw control and manage investment banking
• To control and manage transaction banking
• Collections
• Payments
• Channel financing
• Local rupee Drawing arrangement
• Home remittances
• Trade products

Internship activities:

  Performance Appraisals of All above Mentioned Groups:

Performance Appraisals

Performance appraisal is that on which basis benefits and incentives are given to the employees of MCB.
There were more than 12000 employees whose appraisals were checked by us one by one. Each appraisal has 7 sections in it that are as under
Section 01:
It includes the detail of the appraisal and both employee and line manager signatures. It also includes the weight age and percentage of the employee rating.
Section 02:
This section includes the 70% of total rating plus 30% of average of the rating. and must be signed by the both employee as well as line manager.
Section 03:
In this section there were major 5 things that must be scored that were

• Customer focus
• Time management
• Leadership
• People management
• Corporate responsibility

Each point must be scored by the manager and then should check the average of this section and 30% of it calculates in the final rating of an employee. Both signatures must be there.
Section 04:
It contains the willingness of an employee whether he/she is agreed or disagrees with the appraisal and also commented by the manager of an employee.
Section 05:
Average rating plus final rating is mentioned in this section and properly signed by three people’s employee, line manager and supervisor also.
Section 06:
It contains all trainings required by the employee it includes

• Soft Skills training
• Technical training
• Leadership and people management training
• Other training

This section also properly signed by both persons.
Section 07:
This section contains the employee’s goals and targets he has to be achieved in the coming year. That is also properly signed by the employee and his manager as well.

• My part in this performance appraisal was to check section 6, which includes the trainings suggested by the employees themselves. And then write these trainings in front of those employees IDs and name. Then Put the same data on Excel Sheet.
• Check the trainings which are requested by the employers and get approvals from Head HR.
• Then budget which is used in Staff College was also signed and approved from the head of HR.
• Phone calls to the persons who are going to be interviewed and checked if they got their letters.
• Check the documents of the persons who are going to be interviewed and ask from them to get the documents.
• Enter the ratings of the interviewed persons given by the interviewers into their accessing sheets.
• Check the check list of internees whether they have given the whole documents or not.

Other tasks:

MCB SWOT Analysis:

Strengths:
The strengths of MCB are as:

•  MCB is the first Pakistani privatized bank and because of its quality management, marketing, innovation in products and services is performing well in financial market
• Has established a good reputation in the banking market.
•  Strict adherence with the banking procedures requirements, SBP’s prudential regulation requirements and its SROs and international banking requirement as well as to its own set policies.
• Strong and its attractive products.
• Better focus on customer services and customization.
• Flexibility with the changing environment.
• Induction of the highly qualified professionals to change overall set up

Weaknesses:
The noted weaknesses of MCB are as:

• The majority of people are not well aware about the products of MCB.
• Therefore it should advertise extensively especially RTC and Master Cards.
•  A behavior has been noted that bank tries to feel at ease with good looking, rich and educated people and the poor looking customers feel some bit strange in the environment of the bank. The bank employees should try to accommodate behaviorally all type of customers.
• In MCB there is lack of specialized skill because of job rotation policy of human resource department. The bank should concentrate upon increasing its abilities on individual service basis.
• Mismanagement of time is another big mistake in MCB branches, the bank official time of closing is 5:30pm but due mismanaging of time allocation and work the staff is normally on their seats till 7:00 or 8:00 clock.
•  Process of development is bit slow due to its conservative approach.
• Never prefer to be a leader and prefer to be a follower of other.
•  Slow improvement and acceptance of technological changes.
•  More emphasis on deposit accumulation and less on their mobilization

Opportunities:

• Greater potential and opportunities for Credit Division if Liberal Policies being adopted.
• Can grab more market share for its RTCs, remittances and forex department through effective promotional and liberal policies.
• Inclusion of highly qualified professional can change the whole scenario and position of the bank if they have given the due liberty in performing their duties.
• Adoption of information technology will improve the customer services.
• More mobilization of accumulated deposit is possible through innovative financing

· Agro Based Sector
· Leasing
· Personalized Financing

Threats:

• Change in government policies has affected the banking business. Still banks have to wait to get permission of state bank. The freezing of foreign currency accounts is a vital example of letting people not to trust on banks.
• The Competition has become severe by the entrants of so many banks, So to exist one will have to prove himself in its services through excellent management and will have to satisfy its shareholders. Otherwise he will be out the market.
•  Employees unions have been allowed if not managed properly can affect performance.
• The decrease purchasing power of consumer in the current economic situation of the country affecting the business activity speed too much and the result is the low investment from the investors in new projects can create problem for the bank because it is working a lot in trade.
•  Introduction of credit marketing by local and foreign banks is badly affecting the mobilization of the MCB’s deposits due to the non presence of such department in it.
•  Introduction and adoption of information technology as well as promotion of the computer culture by the local as well as foreign banks will definitely affect the services and business of the MCB.

Conclusion:

• This period of internship was very professional experience and I learned a lot from the MCB House.
• One thing which is very valuable in the practical life and I also learned it in this environment which is how to interact and communicate with the upper and lower level staff.
• And in this process in came to know that the practical life is too different and difficult and it is difficult to survive in such an environment where competition level remain at peek.
• Practical life is very difficult and its experience has a good impact on my carrier.
• I tried again and again to eliminate my mistakes and this experience will influence my future performance

 rizwan hailain ...

ROLE OF BANKS IN A DEVELOPING ECONOMY

ROLE OF BANKS IN A DEVELOPING ECONOMY-----


Banks play a very useful and dynamic role in the economic life of every modern state. 

A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and 19th centuries, the industrial revolution would not have taken place in Europe. 

The economic importance of commercial banks to the developing countries may be viewed thus:

1. Promoting capital formation

2. Encouraging innovation

3. Monetsation

4. Influence economic activity

5. Facilitator of monetary policy

Above all view we can see in briefly, which are given below:

• PROMOTING CAPITAL FORMATION:-


A developing economy needs a high rate of capital formation to accelerate the tempo of economic development, but the rate of capital formation depends upon the rate of saving. 

Unfortunately, in underdeveloped countries, saving is very low. 

Banks afford facilities for saving and, thus encourage the habits of thrift and industry in the community. 

They mobilize the ideal and dormant capital of the country and make it available for productive purposes.

• ENCOURAGING INNOVATION:-

Innovation is another factor responsible for economic development. 

The
entrepreneur in innovation is largely dependent on the manner in which bank credit is allocated and utilized in the process of economic growth. 

Bank credit enables entrepreneurs to innovate and invest, and thus uplift economic activity and progress.

• MONETSATION:-

Banks are the manufactures of money and they allow many to play its role freely in the economy.

Banks monetize debts and also assist the backward subsistence sector of the rural economy by extending their branches in to the rural areas. 

They must be replaced by the modern commercial bank’s branches.

• INFLUENCE ECONOMIC ACTIVITY:-

Banks are in a position to influence economic activity in a country by their
influence on the rate interest. 

They can influence the rate of interest in the money market through its supply of funds. 

Banks may follow a cheap money policy with low interest rates which will tend to stimulate economic activity.

• FACILITATOR OF MONETARY POLICY:-

Thus monetary policy of a country should be conductive to economic
development. 

But a well-developed banking system is on essential pre-condition to the effective implementation of monetary policy. Under-developed countries cannot afford to ignore this fact. 


A fine, an efficient and comprehensive banking system is a crucial factor of the developmental process

AND SOME OTHER HEADINGS

1. BANKING OPERATIONS 
2. BANKS INCREASE MOBILITY OF CAPITAL 
3. ENCOURAGE SAVING 
4. TRANSFER OF MONEY 
5. CREATION OF CREDIT INVESTMENT 
6. ROLE ON EXPORT AND IMPORT 
7. BANKS ACT AS AGENT 
8. SAFE CUSTODY 
9. OPTIMUM UTILIZATION OF RESOURCES 
10. PROMOTE CAPITAL FORMATION 

.

15 main Functions of Commercial Banks

The commercial banks serve as the king pin of the financial system of the country. They render many valuable services. The important functions of the Commercial banks can be explained with the help of the following chart.
Primary Functions
The primary functions of the commercial banks include the following:
A. Acceptance of Deposits
1. Time Deposits:
These are deposits repayable after a certain fixed period. These deposits are not withdrawn able by cheque, draft or by other means. It includes the following.
(a) Fixed Deposits:
The deposits can be withdrawn only after expiry of certain period say 3 years, 5 years or 10 years. The banker allows a higher rate of interest depending upon the amount and period of time. Previously the rates of interest payable on fixed deposits were determined by Reserve Bank.
Presently banks are permitted to offer interest as deter­mined by each bank. However, banks are not permitted to offer different interest rates to different customers for deposits of same maturity period, except in the case of deposits of Rs. 15 lakhs and above.
These days the banks accept deposits even for 15 days or one month etc. In times of urgent need for money, the bank allows premature closure of fixed deposits by paying interest at reduced rate. Depositors can also avail of loans against Fixed Depos­its. The Fixed Deposit Receipt cannot be transferred to other persons.
(b) Recurring Deposits:
In recurring deposit, the customer opens an account and de­posit a certain sum of money every month. After a certain period, say 1 year or 3 years or 5 years, the accumulated amount along with interest is paid to the customer. It is very helpful to the middle and poor sections of the people. The interest paid on such deposits is gener­ally on cumulative basis. This deposit system is a useful mechanism for regular savers of money.
(c) Cash Certificates:
Cash certificates are issued to the public for a longer period of time. It attracts the people because its maturity value is in multiples of the sum invested. It is an attractive and high yielding investment for those who can keep the funds for a long time.
It is a very useful account for meeting future financial requirements at the occasion of marriage, education of children etc. Cash certificates are generally issued at discount to face value. It means a cash certificate of Rs. 1, 00,000 payable after 10 years can be pur­chased now, say for Rs. 20,000.
2. Demand Deposits:
These are the deposits which may be withdrawn by the deposi­tor at any time without previous notice. It is withdraw able by cheque/draft. It includes the following:
(a) Savings Deposits:
The savings deposit promotes thrift among people. The savings deposits can only be held by individuals and non-profit institutions. The rate of interest paid on savings deposits is lower than that of time deposits. The savings account holder gets the advantage of liquidity (as in current a/c) and small income in the form of interests.
But there are some restrictions on withdrawals. Corporate bodies and business firms are not allowed to open SB Accounts. Presently interest on SB Accounts is determined by RBI. It is 4.5 per cent per annum. Co-operative banks are allowed to pay an extra 0.5 per cent on its savings bank deposits.
(b) Current Account Deposits:
These accounts are maintained by the people who need to have a liquid balance. Current account offers high liquidity. No interest is paid on cur­rent deposits and there are no restrictions on withdrawals from the current account.
These accounts are generally in the case of business firms, institutions and co-operative bodies. Nowadays, banks are designing and offering various investment schemes for deposit of money. These schemes vary from bank to bank.
It may be stated that the banks are currently working out with different innovative schemes for deposits. Such deposit accounts offer better interest rate and at the same time withdraw able facility also. These schemes are mostly offered by foreign banks. In USA, Current Accounts are known as 'Checking Accounts' as a cheque is equivalent to check in America.
B. Advancing of Loans
The commercial banks provide loans and advances in various forms. They are given below:
1. Overdraft:
This facility is given to holders of current accounts only. This is an ar­rangement with the bankers thereby the customer is allowed to draw money over and above the balance in his/her account. This facility of overdrawing his account is generally pre-arranged with the bank up to a certain limit.
It is a short-term temporary fund facility from bank and the bank will charge interest over the amount overdrawn. This facility is generally available to business firms and companies.
2. Cash Credit:
Cash credit is a form of working capital credit given to the business firms. Under this arrangement, the customer opens an account and the sanctioned amount is credited with that account. The customer can operate that account within the sanctioned limit as and when required.
It is made against security of goods, personal security etc. On the basis of operation, the period of credit facility may be extended further. One advantage under this method is that bank charges interest only on the amount utilized and not on total amount sanctioned or credited to the account.
Reserve Bank discourages this type of facil­ity to business firms as it imposes an uncertainty on money supply. Hence this method of lending is slowly phased out from banks and replaced by loan accounts. Cash credit sys­tem is not in use in developed countries.
3. Discounting of Bills:
Discounting of Bills may be another form of bank credit. The bank may purchase inland and foreign bills before these are due for payment by the drawer debtors, at discounted values, i.e., values a little lower than the face values.
The Banker's discount is generally the interest on the full amount for the unexpired period of the bill. The banks reserve the right of debiting the accounts of the customers in case the bills are ulti­mately not paid, i.e., dishonored.
The bill passes to the Banker after endorsement. Dis­counting of bills by banks provide immediate finance to sellers of goods. This helps them to carry on their business. Banks can discount only genuine commercial bills i.e., those drawn against sale of goods on Credit. Banks will not discount Accommodation Bills.
4. Loans and Advances:
It includes both demand and term loans, direct loans and advances given to all type of customers mainly to businessmen and investors against per­sonal security or goods of movable or immovable in nature. The loan amount is paid in cash or by credit to customer account which the customer can draw at any time.
The inter­est is charged for the full amount whether he withdraws the money from his account or not. Short-term loans are granted to meet the working capital requirements where as long-term loans are granted to meet capital expenditure.
Previously interest on loan was also regu­lated by RBI. Currently, banks can determine the rate themselves. Each bank is, however required to fix a minimum rate known as Prime Lending Rate (PLR).
Classification of Loans and Advances
Loans and advances given by bankers can be classified broadly into the following categories:
(i) Advances which are given on the personal security of the debtor, and for which no tangible or collateral security is taken; this type of advance is given either when the amount of the advance is very small, or when the borrower is known to the Banker and the Banker has complete confidence in him (Clean Advance).
(ii) Advances which are covered by tangible or collateral security. In this section of the study we are concerned with this type of advance and with different types of securities which a Banker may accept for such advances (Secured Advance).
(iii) Advances which are given against the personal security of the debtor but for which the Banker also holds in addition the guarantee of one or more sureties. This type of advance is often given by Banker to persons who are not known to them but whose surety is known to the Banker. Bankers also often take the per­sonal guarantee of the Directors of a company to whom they agree to advance a clean or unsecured loan.
(iv) Loans are also given against the security of Fixed Deposit receipts.
5. Housing Finance:
Nowadays the commercial banks are competing among them­selves in providing housing finance facilities to their customers. It is mainly to increase the housing facilities in the country. State Bank of India, Indian Bank, Canara Bank, Punjab National Bank, has formed housing subsidiaries to provide housing finance.
The other banks are also providing housing finances to the public. Government of India also encour­ages banks to provide adequate housing finance.
Borrowers of housing finance get tax exemption benefits on interest paid. Further housing finance up to Rs. 5 lakh is treated as priority sector advances for banks. The limit has been raised to Rs. 10 lakhs per borrower in cities.
6. Educational Loan Scheme:
The Reserve Bank of India, from August, 1999 intro­duced a new Educational Loan Scheme for students of full time graduate/post-graduate professional courses in private professional colleges.
Under the scheme all public sector banks have been directed to provide educational loan up to Rs. 15,000 for free seat and Rs. 50,000 for payment seat student at interest not more than 12 per cent per annum. This loan is on clean basis i.e., without calling for security.
This loan is available only for stu­dents whose annual family income does not exceed Rs. 1, 00,000. The loan has to be repaid together with interest within five years from the date of completion of the course. Studies in respect of the following subjects/areas are covered under the scheme.
(a) Medical and dental course.
(b) Engineering course.
(c) Chemical Technology.
(d) Management courses like MBA.
(e) Law studies.
(f) Computer Science and Applications.
This apart, some of the banks have other educational loan schemes against security etc., one can check up the details with the banks.
7. Loans against Shares/Securities:
Commercial banks provide loans against the se­curity of shares/debentures of reputed companies. Loans are usually given only up to 50% value (Market Value) of the shares subject to a maximum amount permissible as per RBI directives. Presently one can obtain a loan up to Rs.10 lakhs against the physical shares and up to Rs. 20 lakhs against dematerialized shares.
8. Loans against Savings Certificates:
Banks are also providing loans up to certain value of savings certificates like National Savings Certificate, Fixed Deposit Receipt, Indira Vikas Patra, etc. The loan may be obtained for personal or business purposes.
9. Consumer Loans and Advances:
One of the important areas for bank financing in recent years is towards purchase of consumer durables like TV sets, Washing Machines, Micro Oven, etc. Banks also provide liberal Car finance.
These days banks are competing with one another to lend money for these purposes as default of payment is not high in these areas as the borrowers are usually salaried persons having regular income? Further, bank's interest rate is also higher. Hence, banks improve their profit through such profit­able loans.
10. Securitization of Loans:
Banks are recently trying to securities a part of their part of loan portfolio and sell it to another investor. Under this method, banks will convert their business loans into a security or a document and sell it to some Investment or Fund Manager for cash to enhance their liquidity position.
It is a process of transferring credit risk from the banker to the buyer of securitized loans. It involves a cost to the banker but it helps the bank to ensure proper recovery of loan. Accordingly, securitization is the process of changing an illiquid asset into a liquid asset.
11. Others:
Commercial banks provide other types of advances such as venture capital advances, jewel loans, etc.
1. Effective October 18, 1994 banks were free to determine their own prime lending rates (PLRs) for credit limit over Rs. 2 lakh. Data relate to public sector banks.
2. The stipulation of minimum maturity period of term deposits was reduced from 30 days to 15 days, effective April 29, 1998. Data relate to public sector banks.
3. The change in the Bank Rate was made effective from the close of business of respective dates of change except April 29, 1998.
4. Effective April 29, 1998.
C. Credit Creation
Credit creation is one of the primary functions of commercial banks. When a bank sanctions a loan to the customer, it does not give cash to him. But, a deposit account is opened in his name and the amount is credited to his account. He can withdraw the money whenever he needs.
Thus, whenever a bank sanctions a loan it creates a deposit. In this way the bank increases the money supply of the economy. Such functions are known as credit creation.
Secondary Functions
The secondary functions of the banks consist of agency functions and general utility functions.
A. Agency Functions
Agency functions include the following:
(i) Collection of cheques, dividends, and interests:
As an agent the bank collects cheques, drafts, promissory notes, interest, dividends etc., on behalf of its customers and credit the amounts to their accounts.
Customers may furnish their bank details to corporate where investment is made in shares, debentures, etc. As and when dividend, interest, is due, the companies directly send the warrants/cheques to the bank for credit to customer account.
(ii) Payment of rent, insurance premiums:
The bank makes the payments such as rent, insurance premiums, subscriptions, on standing instructions until further notice. Till the order is revoked, the bank will continue to make such payments regularly by debiting the customer's account.
(iii) Dealing in foreign exchange:
As an agent the commercial banks purchase and sell foreign exchange as well for customers as per RBI Exchange Control Regulations.
(iv) Purchase and sale of securities:
Commercial banks undertake the purchase and sale of different securities such as shares, debentures, bonds etc., on behalf of their customers. They run a separate 'Portfolio Management Scheme' for their big customers.
(v) Act as trustee, executor, attorney, etc:
The banks act as executors of Will, trustees and attorneys. It is safe to appoint a bank as a trustee than to appoint an individual. Acting as attorneys of their customers, they receive payments and sign transfer deeds of the properties of their customers.
(vi) Act as correspondent:
The commercial banks act as a correspondent of their customers. Small banks even get travel tickets, book vehicles; receive letters etc. on behalf of the custom­ers.
(vii) Preparations of Income-Tax returns:
They prepare income-tax returns and provide advices on tax matters for their customers. For this purpose, they employ tax experts and make their services, available to their customers.
B. General Utility Services
The General utility services include the following:
(i) Safety Locker facility:
Safekeeping of important documents, valuables like jewels are one of the oldest services provided by commercial banks. 'Lockers' are small receptacles which are fitted in steel racks and kept inside strong rooms known as vaults. These lockers are available on half-yearly or annual rental basis.
The bank merely provides lockers and the key but the valuables are always under the control of its users. Any customer cannot have access to vault.
Only customers of safety lockers after entering into a register his name account number and time can enter into the vault. Because the vault is holding important valuables of customers in lockers, it is also known as 'Strong Room'.
(ii) Payment Mechanism or Money Transfer:
Transfer of funds is one of the important functions performed by commercial banks. Cheques and credit cards are two important payment mechanisms through banks. Despite an increase in financial transactions, banks are managing the transfer of funds process very efficiently.
Cheques are also cleared through the banking system. Correspondent banking is another method of transferring funds over long distance, usually from one country to another. Banks, these days employ computers to speed up money transfer and to reduce cost of transferring funds.
Electronic Transfer of funds is also known as 'Chequeless banking' where funds are transferred through computers and sophisticated electronic system by using code words. They offer Mail Transfer, Telegraphic Transfer (TT) facility also.
(iii) Travelers' cheques:
Travelers Cheques are used by domestic travelers as well as by international travelers. However the use of traveler's cheques is more common by interna­tional travelers because of their safety and convenience. These can be also termed as a modi­fied form of traveler's letter of credit.
A bank issuing travelers cheques usually have banking arrangement with many of the foreign banks abroad, known as correspondent banks. The purchaser of traveler's cheques can encase the cheques from all the overseas banks with whom the issuing bank has such an arrangement.
Thus traveler's cheques are not drawn on specific bank abroad. The cheques are issued in foreign currency and in convenient denominations of ten, twenty, fifty, one hundred dollar, etc. The signature of the buyer/traveler is written on the face of the cheques at the time of their purchase.
The cheques also provide blank space for the signature of the traveler to be signed at the time of encashment of each cheque. A traveler has to sign in the blank space at the time of drawing money and in the presence of the paying banker.
The paying banker will pay the money only when the signature of the traveler tallies with the signature already available on the cheque.
A traveler should never sign the cheque except in the presence of paying banker and only when the traveler desires to encash the cheque. Otherwise it may be misused. The cheques are also accepted by hotels, restaurants, shops, airlines companies for respectable persons.
Encashment of a traveler cheque abroad is tantamount to a foreign exchange transaction as it involves conversion of domestic currency into a foreign currency.
When a traveller cheque is lost or stolen, the buyer of the cheques has to give a notice to the issuing bank so that stop order can be issued against such lost/stolen cheques to the banks where they are permitted to be encased.
It is also difficult to the finder of the cheque to draw cash against it since the encasher has to sign the cheque in the presence of the paying banker. Unused travellers cheques can be surrendered to the issuing bank and balance of cash obtained.
The issuing bank levies certain commission depending upon the number and value of travellers cheques issued.
(iv) Circular Notes or Circular Letters of Credit:
Under Circular Letters of Credit, the cus­tomer/traveller negotiates the drafts with any of the various branches to which they are addressed. Thus the traveller can obtain funds from many of the branches of banks instead only from a particular branch. Circular Letters of Credit are therefore a more useful method for obtaining funds while travelling to many countries.
It may be noted that travellers letter of credit are usually paid for in advance. In other words, the traveller first makes payments to the issuing bank before obtaining the Circular Notes.
(v) Issue "Travellers Cheques":
Banks issue travellers cheques to help carry money safely while travelling within India or abroad. Thus, the customers can travel without fear, theft or loss of money.
(vi) Letters of Credit:
Letter of Credit is a payment document provided by the buyer's banker in favour of seller. This document guarantees payment to the seller upon production of document mentioned in the Letter of Credit evidencing dispatch of goods to the buyer.
The Letter of Credit is an assurance of payment upon fulfilling conditions mentioned in the Letter of Credit. The letter of credit is an important method of payment in international trade. There are primarily 4 parties to a letter of credit.
The buyer or importer, the bank which issues the letter of credit, known as opening bank, the person in whose favour the letter of credit is issued or opened (The seller or exporter, known as 'Beneficiary of Letter of Credit'), and the credit receiving/advising bank.
The Letter of Credit is generally advised/sent through the seller's bank, known as Negotiating or Advising bank. This is done because the conditions mentioned in the Letter of Credit are, in the first instance; have to be verified by the Negotiat­ing Bank. It is mostly used in international trade.
(vii) Acting as Referees:
The banks act as referees and supply information about the business transactions and financial standing of their customers on enquiries made by third parties. This is done on the acceptance of the customers and help to increase the business activity in general.
(viii) Provides Trade Information:
The commercial banks collect information on business and financial conditions etc., and make it available to their customers to help plan their strategy. Trade information service is very useful for those customers going for cross-border business. It will help traders to know the exact business conditions, payment rules and buyers' financial status in other countries.
(ix) ATM facilities:
The banks today have ATM facilities. Under this system the custom­ers can withdraw their money easily and quickly and 24 hours a day. This is also known as 'Any Time Money'. Customers under this system can withdraw funds i.e., currency notes with a help of certain magnetic card issued by the bank and similarly deposit cash/cheque for credit to account.
(x) Credit cards:
Banks have introduced credit card system. Credit cards enable a cus­tomer to purchase goods and services from certain specified retail and service establishments up to a limit without making immediate payment. In other words, purchases can be made on credit basis on the strength of the credit card.
The establishments like Hotels, Shops, Airline Companies, Railways etc., which sell the goods or services on credit forward a monthly or fortnightly statements to the bank.
The amount is paid to these establishments by the bank. The bank subsequently collects the dues from the customers by debit to their accounts. Usu­ally, the bank receives certain service charges for every credit card issued. Visa Card, BOB card are some examples of credit cards.
(xi) Gift Cheques:
The commercial banks offer Gift cheque facilities to the general public. These cheques received a wider acceptance in India. Under this system by paying equivalent amount one can buy gift cheque for presentation on occasions like Wedding, Birthday.
(xii) Accepting Bills:
On behalf of their customers, the banks accept bills drawn by third parties on its customers. This resembles the letter of credit. While banks accept bills, they provide a better security for payment to seller of goods or drawer of bills.
(xiii) Merchant Banking:
The commercial banks provide valuable services through their merchant banking divisions or through their subsidiaries to the traders. This is the function of underwriting of securities. They underwrite a portion of the Public issue of shares, Deben­tures and Bonds of Joint Stock Companies.
Such underwriting ensures the expected mini­mum subscription and also convey to the investing public about the quality of the company issuing the securities. Currently, this type of services can be provided only by separate subsidiaries, known as Merchant Bankers as per SEBI regulations.
(xiv) Advice on Financial Matters:
The commercial banks also give advice to their custom­ers on financial matters particularly on investment decisions such as expansion, diversifica­tion, new ventures, rising of funds etc.
(xv) Factoring Service:
Today the commercial banks provide factoring service to their customers. It is very much helpful in the development of trade and industry as immediate cash flow and administration of debtors' accounts are taken care of by factors. This service is again provided only by a separate subsidiary as per RBI regulations.
Balance sheet is a statement of assets and liabilities on a given date. In India, banks have to publish their balance sheets according to the preformed i.e., 'Form A' given in the III sched­ule of the Banking Regulation Act, 1949. The study of the balance sheet along with its profit and loss account reveals its financial soundness.
A customer has to carefully study these statements to choose his banks. The combined balance sheet of all banks in the country reveals certain economic trends. A specimen of a Bank's Balance Sheet is given at the end of this chapter.

kinds of banks ( 2 )

Explain some of the kinds of banks?

OR

How many types of banks are there? Briefly explain each of them.

OR

Write a short note on kinds of banks.


KINDS OF BANKS

Some important types of banks are as follows


i. Central Banks.

This bank is of great significance in the banking system of a country. Central Bank is considered as the Bank of government and directly or indirectly control the activities of all the banks operating in the country. State Bank of Pakistan is the central bank of Pakistan.


ii. Commercial Bank

This is another most important type of the banking system. It is main function is to receive deposits, advance loans and discounting of bills.


iii. Industrial Bank

These type of banks provide loans to industries. Generally these banks advance loans for long periods.


iv. Agricultural Bank

The main functions of these banks is to provide loans for long and short periods to the agriculturists. Long period loans are used for acquisition of and improvement of land while short period loans is used for purchasing seeds manures and for current expenditure.


v. Exchange Bank

These banks deal in foreign currencies in the form of bill of exchange, drafts, telegraphic transfers etc. They buy and sell foreign currencies.


vi. Saving Bank

Saving Banks provide incentives to people of small means to save money. These banks provide monetary facilities to the people.


vii. Land Mortgage Banks

These banks are meant to provide loans to agricultural by mortgaging their lands. An agricultural has to mortgage his his land if he wants to take loan from this particular type of a bank.


viii. Co-Operative Bank

Such type of banks are usually run by co-operative societies through its members. These are non-scheduled banks. They are meant for the benefits of the society and its members

kinds of banks ( 1 )

Different Types of Banks - What are Various Kinds of Banks ?

Type 1. Saving Banks

Saving banks are established to create saving habit among the people. These banks are helpful for salaried people and low income groups. The deposits collected from customers are invested in bonds, securities, etc. At present most of the commercial banks carry the functions of savings banks. Postal department also performs the functions of saving bank.

Image Credits © crispyteriyaki

Type 2. Commercial Banks

Commercial banks are established with an objective to help businessmen. These banks collect money from general public and give short-term loans to businessmen by way of cash credits, overdrafts, etc. Commercial banks provide various services like collecting cheques, bill of exchange, remittance money from one place to another place.

In India, commercial banks are established under Companies Act, 1956. In 1969, 14 commercial banks were nationalised by Government of India. Thepolicies regarding deposits, loans, rate of interest, etc. of these banks are controlled by the Central Bank.

Type 3. Industrial Banks / Development Banks

Industrial / Development banks collect cash by issuing shares & debenturesand providing long-term loans to industries. The main objective of these banks is to provide long-term loans for expansion and modernisation of industries.

In India such banks are established on a large scale after independence. They are Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India (ICICI) and Industrial Development Bank of India (IDBI).

Type 4. Land Mortgage / Land Development Banks

Land Mortgage or Land Development banks are also known as Agricultural Banks because these are formed to finance agricultural sector. They also help in land development.

In India, Government has come forward to assist these banks. The Government has guaranteed the debentures issued by such banks. There is a great risk involved in the financing of agriculture and generally commercial banks do not take much interest in financing agricultural sector.

Type 5. Indigenous Banks

Indigenous banks means Money Lenders and Sahukars. They collect deposits from general public and grant loans to the needy persons out of their own funds as well as from deposits. These indigenous banks are popular in villages and small towns. They perform combined functions of trading and banking activities. Certain well-known indian communities likeMarwaries and Multani even today run specialised indigenous banks.

Type 6. Central / Federal / National Bank

Every country of the world has a central bank. In India, Reserve Bank of India, in U.S.A, Federal Reserve and in U.K, Bank of England. These central banks are the bankers of the other banks. They provide specialized functions i.e. issue of paper currency, working as bankers of government, supervising and controlling foreign exchange. A central bank is a non-profit making institution. It does not deal with the public but it deals with other banks. The principal responsibility of Central Bank is thorough control on currency of a country.

Type 7. Co-operative Banks

In India, Co-operative banks are registered under the Co-operative Societies Act, 1912. They generally give credit facilities to small farmers, salaried employees, small-scale industries, etc. Co-operative Banks are available in rural as well as in urban areas. The functions of these banks are just similar to commercial banks.

Type 8. Exchange Banks

Hong Kong Bank, Bank of Tokyo, Bank of America are the examples of Foreign Banks working in India. These banks are mainly concerned with financing foreign trade.

Following are the various functions of Exchange Banks :-

1. Remitting money from one country to another country,
2. Discounting of foreign bills,
3. Buying and Selling Gold and Silver, and
4. Helping Import and Export Trade.

Type 9. Consumers Banks

Consumers bank is a new addition to the existing type of banks. Such banks are usually found only in advanced countries like U.S.A. and Germany. The main objective of this bank is to give loans to consumers for purchase of the durable like Motor car, television set, washing machine, furniture, etc. The consumers have to repay the loans in easy installments.