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sACKNOWLEDGEMENTS

I would like to express my gratitude to the Institute of Business


Administration for giving me the opportunity and arranging such an extensive
internship programme.
I would also like to acknowledge my debts to those officers of Bank
Alfalah who have been extremely helpful for me.
First of all Mr. Gulistan Khan. He has been a permanent source of
encouragement and guidance. His helpful nature did not restrict him to the
premises to the branch but extended to any place and any matter I needed his
support on. He gave me a comprehensive summarization of the documentary
credits procedure. He made me perform all the functions of his desk at one
time or another.
I would also acknowledge my debt to Mr. Khurram Waheed, for the
knowledge he provided in a very frank and casual manner. Due to his gift of
wittiness, the time of my internship that was spent with him was the most
interesting and memorable one for me.
The young officers of the Credit department, Mr. Kashif and Mr.
Shaheryar, were a source of inspiration as well as admiration as they were
absolutely thorough gentlemen.
Moreover, I would also acknowledge my debt to Mr. Ulfat, Mr.
Anwaar, Mr. Jamsheed, Mr. Ahsan, Mr. Mughees, Mr. Shaukat and Miss Zeba
for the helpful hand they extended towards me at one time or another.
In short, I would always be thankful to all the managers and officers,
for their courteous and compassionate treatment given to me.
Thank you all

EVERYTHING WE DO IS FOR YOU 1


PREFACE
The pre-requisite of internship program is to make the students of
M.B.A, aware of the practical expertise and to acquaint them with the real
management process.
With an intention of grooming the best executives of the future, the
Institute of Business Administration has organized a comprehensive
internship-training program. All of us were placed in leading organizations of
business arena to gain first hand knowledge and insight into their
management and working. So, when I was given the chance of selecting an
organization, I opted for Bank Alfalah.
Getting a chance of working in Bank Alfalah proved to be very
beneficial for me. I think that I gained comprehensive insight into the working
of a bank. But nothing could have been possible without the co-operation and
guidance of the officers of BAL.
After the completion of internship program, internship report has been
prepared just in accordance with the practical exposure. It has been my
endeavor to stipulate my experience in a way that the reader may clearly
understand the core concepts.

AHSAN BASHIR

EVERYTHING WE DO IS FOR YOU 2


TABLE OF CONTENTS

Chapter 1 Introduction
 Introduction to Bank Alfalah 05
 BAL, Circular Road Lahore 07
 Financial Standing of Bank Alfalah 08

Chapter 2 Organizational Structure & Policies


 Organizational Hierarchy 10
 The Management 14
 Mission Statement 15
 Strategy Formulation & Implementation 15
 Names & Designations of Employees 16
 Job Satisfaction 18
 Management Styles 18
 Training of Employees 18
 Growth Strategy at Bank Alfalah 19
 Managerial Policies 20

Chapter 3 Marketing Mix of BAL


 Products / Services 26
 Price 34
 Place 35
 Promotion 37

EVERYTHING WE DO IS FOR YOU 3


Chapter 4 Internship Programme
 Consumer Banking 42
o Remittances
o Clearing
 Trade Finance 57
o Imports 58
o Exports 81
 Credits 88

Chapter 5 Financial Analysis


 Trend (Horizontal) Analysis 107
 Vertical Analysis 114
 Ratio Analysis 119

Chapter 5 SWOT Analysis


 Strengths 139
 Weaknesses 141
 Opportunities 142
 Threats 143
&
Recommendations 144

EVERYTHING WE DO IS FOR YOU 4


INTRODUCTION TO BANK ALFALAH
After the debacle of BCCI, the Ministry of Finance (Govt. of Pakistan)
acquired its three branches and Habib Credit & Exchange Bank was incorporated
on June 21, 1992 as a public limited company under the Companies Ordinance,
1984 and commenced banking operations from November 1, 1992. It engaged in
commercial banking and related services as defined in the baking Companies
Ordinance, 1962.
Following the privatization in July, 1997, Habib Credit & Exchange Bank
assumed the new identity of Bank Alfalah on February 25, 1998. And with this a
challenge was launched, the challenge to transform this bank into a highly
professional, most efficient & service oriented institution.
Charged with the strength of the Abu Dhabi based consortium, and under
the leadership of Highness Sheikh Nahayan Mabarak Al-Nahayan, Minister of
Education, Government of Abu Dhabi, and a prominent member of Royal Family –
the bank is energized with the vision, envisaging the development of consumer
sector in Pakistan.
Bank Alfalah has emerged as one of the leading commercial banks in the
financial sector of Pakistan. Bank has made significant contribution in building and
strengthening both the corporate and retail banking in Pakistan.
Prioritizing its product portfolio in line with consumer needs and wants, the
bank is committed to develop products that give more value to its customer – be it
a simple bank account or complex financing of a major project. Designing product
portfolio in response to customer‟s preferences, bank‟s products like Royal Profit,
Royal Patriot and Royal Custodial are prime examples of quality and innovation –
providing timely banking opportunities to its customers.
Assessment of the needs and wants of its customers is an on going process
at Bank Alfalah, which helps it to continually develop new products and services.
Some of our new products in the pipeline include Royal Forex, ATM Network and a
credit card.

EVERYTHING WE DO IS FOR YOU 5


To continuously offer courteous, professional and advanced banking
solutions, bank‟s team has recently been rejuvenated by going through training
programs with a focus on Information Technology. With a team of talented,
service-dedicated professional bankers, Bank Alfalah commits all its energies,
resources and time to cater to all banking and financial needs of customers.
To make banking solutions become accessible to more and more people,
BAL has embarked upon a rapid expansion program, aiming to provide a
networking that makes its services available to any of its customers in all the major
urban centers of Pakistan – with a view to go international by the coming
millennium.
With its key indicators of progress already soaring to new heights, the bank
is committed to put all its energies, resources and time to bring higher value and
satisfaction of its customers, employees and shareholders.
Technological developments are opening up new vistas of solutions for
distributing traditional financial products. Concurrently, rapid change in customer
preferences has resulted in a major shift from manual to automated services of the
bank. Information technology today, is the key to sustain and succeed in the
corporate world. Therefore, during the year 2000, Bank Alfalah made heavy
investments, towards enhancing its capabilities in the area of automation and
technology. BAL is well positioned to meet client needs, with improved competitive
advantage.
Bank Alfalah is on the way of expansion of its business and branch network.
Presently, there are 23 branches of BAL, spread all over the Pakistan covering
major business centers and principle cities.

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BAL CIRCULAR ROAD LAHORE
Valid city markets have their unusual importance regarding import business.
They are known as business and commercial hub of Lahore. Major commodities
and Industrial raw materials are being imported in these markets. Major industrials
are routing prefer to route their business through the banks situated in these areas.
These markets are highly profitable and important for banking sector.
Bank Alfalah‟s major competitors, Union Bank and Askari Commercial Bank
earned huge profits in this area. Therefore, to capture this business and to target
this very important segment, Bank Alfalah launched its Circular Road Branch in
October 2000, with a bright and clear vision of customer service.
Now, BAL Circular Road branch has the importance of backbone for Bank
Alfalah. It has 2nd largest volume of foreign trade business and has led to huge
profits, just with in a short span of 10 months.
Bank Alfalah launched its own Rupee Travellers Cheques during the course
of my internship, and till the completion of my internship, BAL Circular Road had
the highest sales volume of these TC‟s.
So, I have been much lucky that I got an opportunity for working in
concerned branch, and confronted with enough exposure and opportunities to
learn.

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FINANCIAL STANDING OF BANK ALFALAH
Confronted with a more open financial market but tougher competition, Bank
Alfalah, with its professional out look and commitment, maintained healthy growth
in resource mobilization and financing of foreign trade.
Bank‟s pretax profit for the year 1999 increased more than 5 times as
compared to the 98, and stood at 354 million. For the year 2000, it grew by 12.96
percent to Pak Rupee 400 million. Growth in profitability is evident from the graph:

Profit (Rs. In 000)

500000

400000

300000

200000

100000

0
FY98 FY99 FY2000

During the year 2000,the deposit base increased from Pak Rupees 15.82
billion to Pak Rupees 20.48 billion, an increase of 29.5 percent, with a balance
sheet footing of Pak Rupee 27.57 billion compared t previous year‟s figure of Rs.
21.02 billion.
Since Bank Alfalah is focused on Trade Financing; it attaches great
significance to the development and maintenance of healthy correspondent
relationships with banks and financial institutions, globally. Towards this pursuit,
BAL has developed excellent business relations with renowned banks, like ABN
Amro and Standard Chartered Bank, whose support in terms of lines of credit
extended to BAL, has enabled to handle its ever-growing trade volumes.
During the year 2000, BAL handled foreign trade business in excess of Pak
Rupees 30.6 billion, representing an increase of 92 percent over the previous year.

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It is also evident from the graph:

Consolidated Figures (Rs. in 000)

25,000

20,000

15,000
FY 99
10,000 FY 00

5,000

0
Deposits Advances Imports Exports

Whist, BAL peruses a stringent liquidity policy, the bank actively participated
in the interbank money market and Forex markets. Bank has put in place an
Assets- Liability Committee (ALCO) that not only sets the parameters of liquidity
and profitability but also reviews frequently the associated risks of interest rate
profile, exchange risk and targets for credit allocation to various sectors of the
economy.

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COMPARISON
Bank Alfalah is a newly emerged bank and going on the way of progress.
Even it is at the initial stages of development, but it is facing developed strong
competition with Union Bank Limited and Askari Commercial Bank which are
leading commercial banks in the local private sector in Pakistan.
For the purpose of comparison, I have taken some important figures
regarding these banks.

Account Title Union Bank Askari Bank


Comm. Alfalah
PLS SAVING ACCOUNT: 5% 8.5% 9%

NOTICE DEPOSIT:
7-29 days 4% 7% 6.1%
30 days and over 5% 8% 7.5%

TERM DEPOSIT:
1 Month 6% 9.50% 8%
2 Months - 9.75% -
3 Months 7.5% 10.0% 10%
6 Months 8% 10.5% 10.5%
1 Year 8.5% 11.0% 11.0%
2 Years 9% - -
3 Years 9.5% - 12.0%
5 Years 10.5% - 13.0%

It is evident from the above figures that how successfully Bank Alfalah is
carrying on its business. Bank Alfalah is providing highest rates of return against
different types of deposits to its customers.

Also, with these high rates of returns, there is consistent declining trend in
the cost of funds of Bank Alfalah.

EVERYTHING WE DO IS FOR YOU 10


Cost of Funds Bank Alfalah Askari Comm. Bank
1998 13.20 13.02
1999 9.26 10.04
2000 8.48 9.00

Here is another table that signifies the growth rate in deposits and
advances, which constitute the basis of banking business.

Growth rate in Deposits 97-98 98-99 99-2000


Union Bank (8%) (9%) 75%
Bank Alfalah
32% 33% 30%

Growth rate in Advances 97-98 98-99 99-2000


Union Bank (12%) (6%) 77%
Bank Alfalah 60% 33% 5%

Above figures shows the consistency in growth rates that signifies the
management’s efficiency.
As a whole, I can say that Bank Alfalah is organizing and expanding its
business operations very successfully and competing for becoming top leading
commercial bank in Pakistan.

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ORGANIZATIONAL HIERARCHY

CHAIRMAN / DIRECTOR

BOARD OF DIRECTORS

CHIEF EXECUTIVE OFFICER

EXECUTIVE INCHARGES

AREA MANAGER AREA MANAGER


NORTH SOUTH

EVERYTHING WE DO IS FOR YOU 12


CHAIRMAN

H.H Sheikh Nahayan Mabarak Al-Nahayan.

Chairman & Director

H.H Sheikh Nahayan Mabarak Al-Nahayan is an important and prominent


member of the ruling family of Abu Dhabi. After the culmination of his studies at
Oxford he returned shoulder important responsibilities in the state administration.
In 1988 he was appointed the President of the higher colleges of Technology
comprising of eight colleges throughout the UAE – a responsibility he fulfilled with
distinction. In 1990 he was appointed Minister of Higher Education and Scientific
Research. Presently he also holds the presidency of the Society of the Natural
History and National Heritage. In 1992 he became the Chairman of the Union
National Bank and has since remained involved in strategic management of the
institution.

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During the first five Trying years, he effectively managed the bank in the
absence of a Board of Directors and steered it to success as one of the leading
Bank of UAE.

BOARD OF DIRECTORS

Mr. Omar Z. Al-Askari, Director


Mr. Abdulla Khalil Al-Mutawa, Director
Mr. Abdulla Nasser Hawaileel Al-Mansoori, Director
Mr. Mohammad Saleem Akhtar, CEO &Director
Mr. Ikramul Majeed Sehgal, Director
Mr. Nadeem Iqbal Sheikh, Director

EVERYTHING WE DO IS FOR YOU 14


THE CORE GROUP

Board Advisory Committee

Mr. Omar Z. Al-Askari


Mr. Abdulla K. Al-Mutawa
Mr. Ganpat Singhvi
Mr. Bashir A. Tahir

Executive Committee

Mr. Mohammad Saleem Akhtar


Mr. Ikram Ul-Majeed Sehgal
Mr. Parvez A. Shahid
Mr. M. Waqas Mohsin
Mr. Tanweer A. Khan
Mr. Mohammad Yousaf

EVERYTHING WE DO IS FOR YOU 15


THE MANAGEMENT
Management refers to the universal process of effectively and efficiently
getting activities completed with and through other people. It is a process by which
certain basic functions, which are planning, organizing, leading and controlling are
performed to achieve the desired objectives of the organization. These functions
are being performed at three levels in Bank Alfalah.

BOARD OF DIRECTORS
At the top of the human resource hierarchy sits the Board of Directors and
Executive Committee. The most important task of this level of management is
strategic planning, determining the goals and objectives and to formulate the
policies.

TOP MANAGEMENT
Top management mostly involves strategy formulation, technical planning,
determining how to best get the job done and control. Chief Managers and Branch
Managers are included in this level. They define and interpret the objectives and
vision and then formulate policies for their completion.

MIDDLE MANAGEMENT, SUPERVISORS AND EMPLOYEES


Departmental heads constitute this level of management at Bank Alfalah.
They are directly responsible for planning and controlling the activities of officers.
Finally, the employees whose activities are monitored and controlled according to
the desired objectives.

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MISSION STATEMENT

Bank Alfalah is going on the road of progress very successfully.


Assessment of the needs and wants of consumers is an on going process at Bank
Alfalah, which helps it to continually develop new products and services. At BAL,
the philosophy is that the bank should go to all possible limits to satisfy the
customer needs. The bank is continuously formulating new products and services
for the growing and diversified needs of its ever-expanding client base. The bank‟s
commitment to its customers is evident from its mission statement:

“To provide innovative and high quality products to its customers at the
lowest possible rates. To achieve all set goals regarding service, performance and
goodwill.”

STRATEGY FORMULATION AND IMPLEMENTATION


In the considerations of set goals and objectives, policies are formulated at
higher level of management. To achieve the desired objectives, powers are
delegated at different levels of management. Each branch manager formulates
strategies in accordance with its branch structure and macro environment.
For the implementation of these strategies, meetings are conducted with
departmental heads. During my stay at Bank Alfalah Circular Road Br., I observed
that almost at every Saturday, there used to be a combined meeting, where the
business turnover throughout the week was observed, so that any deviation might
be identified and proper measure could be taken for controlling.
Along with these weekly meetings, whenever there was a special matter or
issue that was needed to be addressed. Special attention was paid to that and
views & ideas of different participant of management were always welcomed.

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NAMES AND DESIGNATIONS OF OFFICERS
BANK ALFALAH Circular Road, LAHORE BRANCH
NAME DESIGNATION
01 Mr. Malik Riaz-ul-Haq Branch Manager
02 Mr. Sardar Ahmed Mgr. Corporate Banking
03 Mr. Tariq Munir Manager Operations
04 Mr. Anwar Masood Incharge Credits
05 Mr. Jamshed Yousaf Incharge Trade Finance
06 Mr. Ulfat Hussain Incharge Cash Department
07 Mr. Malik Mughees Anwar Officer Credits
08 Mr. Kashif Hanif Officer Credits
09 Mr. Shaheryar Aziz Malik Officer Credits
10 Miss Zeba Maqsood Officer Trade Finance
11 Mrs. Zeenat Rabia Officer Trade Finance
12 Mr. Gulistan Khan Officer Trade Finance
13 Mrs. Fareeda Naheed Officer
14 Mr. Khurram Waheed Officer Remittance
15 Mr. Salman Ahmed Officer Remittance
16 Mr. Naveed Hussain Officer Cash Department
17 Mr. Azam Qaiser Officer Cash Department
18 Mr. Ahmed Mumtaz Officer Cash Department
19 Mr. Ahsan Butt Incharge Car Financing
20 Mr. Waseem Asif Mirza Officer Car Financing
21 Mr. Saqib Mohsin Sheikh Officer IT & Accounts
22 Mr. Shaukat Hussain Officer Accounts
23 Mr. Jul Habib-ur-Rehman Officer IT

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24 Mrs. Nudrat Adeeb Telephone Operator
25 Mr. Khawaja Ahmed Farooq Officer
26 Mr. Shoaib-ur-Rehman Officer

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JOB SATISFACTION
During my internship programme, I worked with different employees in
different departments. I observed their working and also their level of satisfaction
regarding their jobs and reward system.
In Cash and Trade Finance department, almost all the employees were
satisfied with their jobs, as far as the quality of work and rewards were concerned.
All the employees in these two departments were highly motivated and sincere
with their jobs.
However, their common complaint was the quantity of work. They were
overloaded with the huge work. Personnel in Trade Finance department, even, had
to work till 9 or 10 PM at night.
Employees in Credit department were almost young and there were not too
satisfied with the location of branch. They were, perhaps, the victims of complex.

MANAGEMENT STYLES
Management must have to adopt some administrative style to get all the
activities to be done effectively and efficiently. As far as the management styles at
BAL Circular Road Br., are concerned, there is some centralization and
decentralization to some extent.
Administrative style of Branch Manager Mr. Riaz-ul-Haq is authoritative.
His authoritative style was the requirement of administration. For the
implementation of strategies and getting all the activities to be done properly with
an organized environment, unity of command was the requirement of the time. In
the month of August, he remained on leave for one week. During his absence, I
observed the environment of uncertainty and deregulation in the bank.
But the scenario was different in case of departmental heads. In Cash and
Credit department, powers were delegated at low levels. Employees were allowed
to organized and take necessary actions to accomplish their work properly.
Whereas, situation was different in Trade Finance department. The incharge Trade

EVERYTHING WE DO IS FOR YOU 20


Finance, Mr. Jamshed was strict and martinet. There used to be a proper
monitoring of work of each employee.

TRAINING OF EMPLOYEES
Human resource constitutes the most valuable asset of Bank Alfalah. To
improve the staff‟s professional quality and proficiency, bank conducts on-job
training programs and in-house seminars/ courses, at its training center. Bank
Alfalah‟s training academy is equipped with the latest audio-visual training aids,
which facilitate in the dissemination of knowledge and skills.
Bank Alfalah has started a six-months extensive training program for
management trainees. The bank intends to continue, on need basis, such
programs each year.

GROWTH STRATEGY AT BANK ALFALAH


Business network of Bank Alfalah is continuously growing and expanding.
For the growth of its business operations, Bank is emphasizing on Internal
Growth Strategy.
Bank Alfalah objective has been to expand its own branch network to meet
client‟s needs so that it may better preserve its organizational culture, efficiency,
quality and image. Bank is well positioned and geographically poised, to cater for
increasing business demands, from its existing and potential clientele. During the
year 2000, bank opened 8 new branches and presently there are 23 branches
spread all over Pakistan covering major business centers and principle cities. BAL
plans to add more branches to its growing network in the ensuing years.

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MANAGERIAL POLICIES
Bank Alfalah is successfully going on the way of progress with its highly
qualified and professional management. Policies are formulated at top-level
management in accordance with its defined goals and objectives. Due to the
dynamic external environment, these policies keep on changing. So, here are
some major managerial policies that I observed during my course of internship at
Bank Alfalah.

RECRUITMENT POLICES:
Human resource is supposed to be the most valuable asset at Bank Alfalah.
With its expanding branch network, the requirement of new employees keeps on
arising. With an intention to recruit highly qualified employees, management has
formulated a comprehensive recruitment policy.
1) To provide an opportunity to new university graduates, so that they
may come up with fresh and innovative ideas, BAL has started an extensive
recruitment programme.
To locate brilliant business graduates, intimations are sent to universities
(including PU) and different business institutes. These MBA‟s must possess
a minimum of 3.2 GPA.
Written test is conducted for these graduates and the successful candidates
are selected for interviews. Such interviews are conducted at Area Offices
and Head Office, Karachi, respectively.
Finally, the graduates so selected, are imparted an extensive 6 months
training at Head Office, Karachi. After the completion of training programme,
they are appointed at different branches of Bank Alfalah throughout the
country.
During my course of internship, first batch of this training programme
completed their training, where one of my senior student, Mr. Gohar Irfan
stood first.

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2) With the passage of time, whenever there are some vacant seats
available at any branch of Bank Alfalah, new applicants are invited. After
passing through the written test, successful candidates are called for
interviews at respective branches and also at Area Office. So, after having a
comprehensive interview, new candidates are selected for jobs.

ACCOUNTING POLICIES:
Bank Alfalah has adopted almost the same accounting procedures that
other financial institutions are adopting at this time. These accounting procedures
or Accounting policies are made according to GAAP.

1) ACCOUNTING COVENTION
All the accounts have been prepared under the historical cost convention,
except that certain investments and fixed assets have been included at revalued
amounts.
2) ADVANCES
These are stated net of provision for bad and doubtful debts. The provision
for bad and doubtful balances is made in accordance with the prudential
regulations of the State Bank of Pakistan.

3) INVESTMENT
In 2000, the bank decided to value treasury bills, term finance certificates
and shares companies at market value. Any surplus/(deficit) on revaluation is
shown under equality. Previously all investments were stated at cost and carrying
amounts were reduced for each investment individually where the decline in value
was other than temporary. The policy has been changed to comply with the
requirements of State Bank of Pakistan BSD circular No 20 of august 4, 2001. Had
the policy remained unchanged there would have been no deficit on revaluation of
investment.
All other investments are stated as follows:

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 Short-term investments are stated at lower of cost and market value
determined on an aggregate portfolio basis.
 Long-term investments are stated at cost. Carrying amount is reduced
for each investment individually whenever decline in the value is other
than temporary.
Gains or losses on disposals during the year are taken to profit and loss
account. Premium/discount on purchase of investments are amortized over
the term of such investments.

4) FOREIGN CURRENCIES
 Assets and liabilities in foreign currencies are translated into Pak rupees
at the rate of exchange approximating those prevailing at the balance
sheet data.
 Outstanding forward exchange contracts are translated at the contracted
rates.
 Exchange gains or losses are included in profit and loss account.

5) OPERATING FIXED ASSETS AND DEPRECIATION


 Office premises are shown at revalued amount less accumulated
depreciation. All assets are stated at cost less accumulated depreciation.
Depreciation is charged to income applying the straight-line method.
 Maintenance and normal repairs are changed to income as when
incurred. Major renewals and improvements are capitalized. Gains or
losses on disposal of fixed assets are taken to profit and loss account.

6) TAXATION
Taxation charge in the accounts is based on the taxable income at the
current rates of taxation. The bank accounts for deferred taxation on timing
differences using the liability method.

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7) STAFF RETIREMENT BENEFITS
The bank operates an unapproved unfunded gratuity scheme for its clerical
staff who have completed the qualifying period of service under the scheme.
The bank also operates an approved funded gratuity scheme for officers
and executive. Contributions are made on the basis of actuarial valuation. The
actuarial valuation of the scheme was carried out as January 1, 1991 in
accordance with IAS-1 (revised) using the projected unit credit method, which
disclosed the fair values of fund‟s assets and liabilities of RS. 15.00 million and RS.
28.88 million respectively.
The transitional obligation of RS. 13.88 million is being recognized by the
bank over a period of five years beginning from 1999 on a straight-line basis. The
following significant assumption were used for valuation of the scheme:
 Expected rate of increase in salary level –10 percent per annum
compounded annually.
 Expected rate of interest on investment –12 percent per annum.

8) DEFERRED COSTS
These are amortized over a maximum period of five years commencing
from the year in which are incurred.

9) REVENUE RECOGNITION
Mark-up/return on advances and investments are recognized on accrual
basis. Fee, commission and brokerage except income from guarantees accounted
for on receipt basis.

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MARKETING MIX
Marketing Mix is defined as:
“The set of marketing tools that the firm uses to pursue its marketing
objectives in the target market”.
Two basic pillars of this basic concept are:

TARGET MARKET
Bank Alfalah‟s target market consists of individual clients as well as a
number of business organizations. Due to different market segments, BAL‟s
different branches have their target markets.
To capture the import business in Lahore, the targeted segments is valid
city markets known as business & commercial hub of Lahore and this has been
done via its Circular Road branch. Due to specialized services provided by BAL,
and its highly competitive foreign exchange rates, most of the major importers in
this area deal with BAL. Examples include; Mughal Steel and International, New
Shalimar Steel, Vellcone International, Rana Brothers etc.
As far as the individual clients are concerned, the targeted segment is posh
areas like DHA.

CONSUMER NEEDS
Assessment of the needs and wants of consumers is an on going process at
Bank Alfalah, which helps it to continually develop new products and services. At
BAL, the philosophy is that the bank should go to all possible limits to satisfy the
customer needs. The officers of the Import department, for example, try to get the
minimum possible exchange rates for their clients. Those in cash department do
not look at the clock while honouring the cheques. The bank is continuously
formulating new products and services for the growing and diversified needs of its

EVERYTHING WE DO IS FOR YOU 26


ever-expanding client base. The bank‟s commitment to its customers is evident
from its mission statement:

“To provide innovative and high quality products to its customers at the
lowest possible rates. To achieve all set goals regarding service, performance and
goodwill.”

FOUR P‟s OF MARKETING MIX


Marketing Mix is a Combination of Four P’s. Product, price, promotion
and place.

1) Product Service Provided by Bank


2) Price Commission and Bank Charges Received
3) Promotion Promotion of Services
4) Place Placement of Services i.e. Network of its
Branches

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PRODUCTS / SERVICES
Due to trend setting and innovative banking, Bank Alfalah presents a range
of quality products with revolutionary perks and convenience. BAL provides a wide
range of products/ services to its customers, which can be compared with any
foreign, or national bank in terms of quality and reliability.
Here is an overview of different products and services formulated by Bank
Alfalah.

ACCOUNTS OFFERED BY BAL


One of the basic function of a commercial bank is to receive deposits and to
honour cheques. Accounts offered by the banks for the deposits of customers
constitute the basis of their operations and develops the basic relationship
between a banker and customer.
Bank Alfalah has formulated a number of accounts for the deposits of
customers, with unique features, to facilitate them. These are:

ROYAL PROFIT:
“More the Saving, Higher the Profit Rate”
Royal Profit is a profit bearing current account. In Royal Profit account, a
customer enjoys a higher rate of return that increases with savings. Account holder
has the comfort of unlimited transactions and there is no restriction regarding the
withdrawals that means all time accessibility to the account. Profit is calculated on
daily basis with attractive rates as:

ROYAL PROFIT

From 50,000 to 999,999 9.00%

From 1,000,000 to 9,999,999 9.50%

From 10,000,000 & above 10.50%

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Minimum balance required is as low as just Rs.50,000/- which entitles the
customer to all the benefits.

ROYAL PATRIOT:

“Good for you, Good for the Nation”


Royal Patriot is a special term deposit account offering attracting profit rates
that improve with tenure and amount. Customer has a choice to deposit his
amount for terms of 1, 3, 6, 9, 12 & 24 months with a minimum balance of Rs.
25,000 only. There is no penalty in case of premature encashment (Profit will be
calculated according to the last tenure completed), & moreover, no prior notice is
required before withdrawals. Profit rates for different tenure and amount are as
follows:

ROYAL PATRIOT

1 3 6 12 2
Month Months Months Months Years

From 25,000 to 999,999 8.00% 10.00% 10.50% 11.00% 11.00%

From 1,000,000 to 4,999,999 8.10% 10.10% 10.60% 11.10% 11.25%

From 5,000,000 & above 8.20% 10.25% 10.70% 11.20% 11.50%

ROYAL GROUP:
“Pull in More Profits Together”
Royal Group is a joint investment account that provides a way to the
customers to have their joint accounts directing them towards more benefit.
Minimum number of people required to form a group is just 2. So, in this way, two
or more people get their joint account in the bank and can earn higher rates of
return. Profit is calculated on daily basis and disbursed monthly. It also provides an

EVERYTHING WE DO IS FOR YOU 29


opportunity to employees to get their salary disbursed through this account as it
provides better arrangements for secured collection of cash/ cheques. The rate of
return increases with the deposited amount as:

ROYAL GROUP

From 100,000 to 999,999 9.50%

From 1,000,000 to 9,999,999 9.70%

From 10,000,000 & above 10.00%

CLASSIC PLS DEPOSITS


Along with the above stated special Royal accounts, the bank also have
formulized the Classic PLS Deposits:

SAVING ACCOUNT:
Saving account is the most common account for individuals. Profit is
calculated on half yearly basis with the rate of 9.00%.

NOTICE DEPOSITS:
These are the short-term deposits of customers where the notice is to be
given to the bank prior to the withdrawal. Profit rates for these deposits are:

07 - 29 days 6.10%

30 days & above 7.50%

EVERYTHING WE DO IS FOR YOU 30


TERM DEPOSITS:
Term deposit is a fixed PLS account where the profit rates increase with the
amount as:

1 Month 8.00%

3 Months 10.00%

6 Months 10.50%

1 Year 11.00%

3 Years 12.00%

5 Years 13.00%

FOREIGN CURRENCY ACCOUNTS:


Due to the increasing globalized business, all leading commercial banks
have been offering foreign currency accounts to their customers. Same has been
done by Bank Alfalah by facilitating its customers to have their foreign currency
accounts in the bank.
At present, BAL offers US Dollar & UK Pound accounts and profit is being
paid on half yearly basis at the rate of 3.00% and 2.50% respectively.

ON-LINE SERVICE:
Bank Alfalah provides on-line services to its customers. At present, this
service facilitates the customers to deposit and transfer their amounts from one
branch to another of BAL. It is being planned to launch a universal account to
update this facility and make it more extensive.

OTHER CONSUMER PRODUCTS


Apart from the accounts offered for deposits of customers, BAL also
provides a lot of other consumer products like:

EVERYTHING WE DO IS FOR YOU 31


ALFALAH CAR:
Alfalah Car is a consumer-financing scheme that enables a customer to own
his desired car at easily affordable and flexible installation with minimum down
payment and insurance. All businessmen, Corporate Employees, Salaried and
self-employed professionals having net take home income in excess of three times
the monthly installment are eligible to take the advantage of this scheme.

Salient Features:
Lowest Financing cost available in the market
Tenure of 1 to 5 years as per requirement of customer
Quickest processing
Minimum documentation required
Down payment requirement of 20%
Repayment through monthly installments
Lowest insurance rates available from bank‟s approved insurance
companies

Documents Required:
National I.D card copy
Registered utility bill copy (Electricity/Phone/Gas)
Last six months Bank Statement (Duly Signed & Stamped by Bank)
Signature Verification by Banker
Salary Certificate
Sole-Proprietary Letter from the Bank
Sole-Proprietary Declaration on Business Letter Head or on Stamp Paper of
Rs.20/-
NTN Certificate
Partnership Deed copy (if necessary)
NOC from other partners
Recent Tax return of Firm

EVERYTHING WE DO IS FOR YOU 32


Form 29 of Limited Company
Form A of Limited Company
Salary Certificate of Director
Tax Return of Director
Basic Fact Sheet of Individuals
CIB Report

BAL RUPEE TRAVELLERS CHEQUES:


Bank Alfalah issued its own rupee travellers cheques with highest
denominations, during the course of my internship with the bank. BAL TCs have
been presented with ultimate combination of features, which allows the customers
the best way to make and accept payments (as it is called safe cash), or to save in
a rewarding way. Differentiating features of BAL TCs are as follows:
The highest denominations available as only BAL offers Rs.5 Lac and Rs.2
Lac traveller cheques
Widest range of travellers cheques as Rs. 1,000, Rs.5,000, Rs.20,000,
Rs.50,000, Rs.100,000, Rs.200,000 and Rs.500,000.
After 3 days of holding the TCs, customer may earn daily points and can
exchange these points for great gifts.
Another unmatched benefit of Bank Alfalah TCs is the commission on
encashment. Customer may receive a commission of 0.15% in case of
encashment after 7 days.
Special invisible UV printing, high definition micro-lines, anti-scanner effect,
mould based paper, Alfalah watermark and printing in the UK, are just some
of the security features of TCs which prevent counterfeiting .
BAL TCs are fully refundable. Customer can refund the TCs without any
penalty or loss.
A customer can transfer or endorse its TCs over to anyone.
Customer doesn‟t need to be an account holder to get BAL TCs benefits .

EVERYTHING WE DO IS FOR YOU 33


ALFALAH LOCKERS:
The client can also avail the facility of rent-free safe deposit lockers for their
valuables. The distinguishing features of these lockers are:
Highly effective security system
Fully refundable security deposit
Convenient locations
Flexible operating hours

BAL HOME LOANS: (For Overseas Pakistanis in UAE)


Alfalah Home Loan is specially designed for those NRP‟s in UAE whose
families live in Pakistan. BAL provides following types of Home Loans:
To purchase a new house
To renovate the existing house
To construct a house

Requirements:
A person can get a Home Loan from BAL if he fulfills the following
conditions:
Non Resident Pakistani of UAE, holding a valid Pakistani passport
Valid UAE Visa
Pakistani National Identity Card

EVERYTHING WE DO IS FOR YOU 34


Must be 21 years of age or over
Salaried, Businessman or Self Employed person

Similar to Home Loans scheme, Bank Alfalah has also offered Alfalah Car
for Overseas Pakistanis in UAE.

LENDING PRODUCTS
Bank Alfalah offers many lending products to its customer. They can get
running finance for their working capital requirements as well as trade finance for
importing their merchandise. Some of the major lending products of BAL are:
 Overdraft
 Cash Finance
 FATR
 FIM
 Export Bills Discounting (Not in Circular Road Branch)
 Letter of Credit etc.

EVERYTHING WE DO IS FOR YOU 35


PRICE
“The amount of money the customers pay for the product of a company”.
BAL provides different products and services to its customers, that have
been discussed in previous section. Pricing of products means the commission to
be paid by the customer in return of services provided by the bank. The
commission paid for the services mainly includes:
Mark up/ interest
Bank charges
Fees and bank commission etc.

These charges and commissions are prescribed on Schedule of Bank


Charges (SOC) that keeps on changing time-to-time, and issued by the bank
periodically (generally after six months).
There has been a lot of controversy regarding the price of banking
companies. Some scholars argue that the mark up received by the bank is rent for
capital that is used by others. On the contrary, some call it purely Riba. This
however is a very controversial and sensitive issue and I would like not to give any
comment on it.

EVERYTHING WE DO IS FOR YOU 36


PROMOTION
“All activities that a company undertakes to communicate and promote its
products”.
This is an age of competition. Numerous organizations are providing
financial services to the customer. These days every one is facing pressure of
competitors. In this world of growing competition, the only way to survive and grow,
for an organization, in the market place is the proper marketing and promotion of
its products. Same is the case with banking companies. There is large number of
foreign and local banks working in the country and it has been noticed that they are
emphasizing much on their marketing strategies. In this scenario, the key for a
bank to succeed and attract its customers is adequate promotion of its products
&services. The bank can attract and retain its customers through:
 Sales Promotion
 Advertisement
 Direct Marketing
 Public Relations

The most prominent and important way to attract a large number of


customers is the advertisement of bank and its products/services. Bank Alfalah has
adopted different approaches for the accomplishment of this purpose. For
example, formation of Alfalah Mini Golf near Gulberg is a major step taken by BAL.
It not only provides a source of recreation to the people but it serves as a major
source of marketing for the bank. Due to Bank Alfalah‟s assistance for the
construction of fountain in Liberty Market Square, it is named as Bank Alfalah
Square. BAL Square, for being situated in such a business and commercial area
has its unusual importance and has resulted into bank‟s promotion.
Construction of Shaahdin Manzil as main branch Lahore is going to be the
revolutionary step for BAL. It would not serve just as a main branch only, but it
would also be a great source of ever growing marking and promotion of bank.
BAL issued its own rupee travellers cheques with highest denomination
during the course of my internship. I have seen some coloured advertisements of

EVERYTHING WE DO IS FOR YOU 37


RTCs in some well-known magazines like Herald. Also, some fascinating
advertisements have been printed on Daewoo City Busses, which serves as a
dynamic source of marketing.
However, one drawback or shortcoming is that, BAL has formulized a lot of
products and services for its customers, even more than other commercial banks,
but any advertisement on electronic media has not been seen. Since, BAL‟s major
competitor Union Bank Limited has started large media campaign, so keeping in
view these threats, Bank Alfalah should emphasize more on its advertisement.
Along with the advertisement, the bank is providing personal services to its
clients with maximum security as other banks provide. Bank also encourages the
public relation policy of marketing.
Some brochures and promotional material has been printed but it is
distributed mainly through the clients who visit the branch for their day-to-day
business or through the customers who come to get information about new
schemes launched by the bank.

PLACE

EVERYTHING WE DO IS FOR YOU 38


“The activities a bank undertakes to make products and services easily
available or accessible to the customers”.
Bank Alfalah‟s objective has been to expand its branch network to meet
clients‟ needs. Bank is well positioned and geographically poised, to cater for
increased business demands, from its existing potential clientele. During last year
under review, BAL opened 8 new branches and presently it has 23 branches,
spread all over Pakistan covering major business centers and principle cities. Bank
plans to add more branches to his growing network in the ensuing years.
At present, BAL has opened all its branches at commercial and business
areas or near to commercial areas so that the customers or clients face no
problem in reaching the bank.
Head Office of BAL is situated in Karachi. The detail description of its
branches is as follows:

KARACHI
 Main Branch
B.A. Building,
Chundrigar Road.

 Cloth Market Branch


Laxmidas Street,

EVERYTHING WE DO IS FOR YOU 39


Cloth Market

 Clifton Branch
FL-10, Block-5,
KDA Scheme #5,
Khayaban-e-Roomi

 Sharee Faisal Branch


45-A, Fortune Towers,
PECHS, Block-6, Main Sharee Faisal

 Jodia Bazar Branch


Gulzar Manzil,
NP/12/49-50,
Muhammad Shah Street,
Jodia Bazar

 Korangi Industrial Area Branch


Plot No. ST 4/2, Sector 23,
Aiwan-e-Sanat,
Korangi Industrial Area

 M.A. Jinnah Road Branch


Plot No. 23/1,
Corner M.A. Jinnah Road /
Abdullah Haroon Road

 S.I.T.E. Branch
D-38 S.I.T.E.,

EVERYTHING WE DO IS FOR YOU 40


Near Siemens Chowrangi, S.I.T.E.

 North Karachi Branch


Plot No. SA-1, Sector 12-B,
Opp Police Station (Gabol Town),
North Karachi Industrial Area

LAHORE
 LDA Plaza Branch
Kashmir Road, Lahore.

(Proposed Main Branch, Lahore)

 Gulberg Branch
125-E/I, Main Boulevard
Gulberg III

 Defence Branch
G-9, Commercial Zone,
Phase-1, Main Boulevard, DHA
Lahore Cantt

EVERYTHING WE DO IS FOR YOU 41


 Circular Road Branch
43-A, Opp. Mazar Hazrat Shah
Muhammad Ghaus

 Township Branch
Akbar Chowk, Township

ISLAMABAD
1-B, Awan Arcade,
Nazimuddin Road, Blue Area

RAWALPINDI
Mall Road Branch
B.A. Building, 8-The Mall

HYDERABAD
Hyderabad Branch
Plot No. 476/1-2,
Adjacent to Hotel Faran,
Saddar Cantonment Area

PESHAWAR
6-38/L, Islamia Road,
Peshawar Cantt

FAISALABAD
Bazar Court,
Faisalabad Serena Hotel, Club Road

MULTAN

EVERYTHING WE DO IS FOR YOU 42


62-A, Abdali Road,
Multan

RAHIM YAR KHAN


City Centre, Shahi Road
Rahim Yar Khan

SIALKOT
40-A, Paris Road,
Sialkot

GUJRANWALA
G.T. Road,
Gujranwala

As per instructions of our internship incharge, Mrs. Sajida Nisar, I reported


at Bank Alfalah Limited (LDA Plaza, Lahore), accompanying my friends who had
also been assigned the same organization, on July 3, 2001. We were welcomed by
Mr. Amjad Imam, who is Senior Manager Operations and the internship training

EVERYTHING WE DO IS FOR YOU 43


incharge at BAL (LDA Plaza). He introduced us about the internship program at
Bank alfalah (BAL).
We were directed to intimate in our assigned branches. I, with a friend of
mine, reported at BAL Circular Road Branch, on the same day. Mr. Malik Riaz-ul-
Haq, Branch Manager, welcomed us and inquired us about our educational status.
He directed us to see Mr. Tariq Munir, Manager Operations. Mr. Tariq Munir
guided us about the banking operations and asked us about our intentions for the
internship program. Later he directed my friend to foreign trade department
whereas I was instructed to start my internship from Remittances, so that I might
understand the basic banking operations. Mr. Khurram Waheed, officer
remittances, was assigned the task of guiding me about working of department.
In this report, my endeavor has been to stipulate my experiences and
observations, during my internship in Bank Alfalah Circular Road, which would
always be memorable for me.

INTER-BRANCH ACCOUNTS
Like other successful commercial banks, Bank Alfalah Ltd. (BAL) has a
network of branches all over the country. These branches in different cities are
interlinked with each other through their correspondent accounts in other
branches.

EVERYTHING WE DO IS FOR YOU 44


In case, there are more than one braches of a bank in a city (as BAL has 9
branches in Karachi and 5 in Lahore), the main branch deals with other city
branches through their correspondent accounts. Similarly, in one city , all branches
of a bank have their corresponding accounts with each other.
So, all payments from one branch to another branch (in the same city or
another) are made by debiting and crediting these inter-branch accounts.

INTER-BANK ACCOUNTS
Like inter-branch accounts of a bank, different banks have correspondent
accounts with each other. Main branches of banks in a city maintain these inter-
bank accounts. So, money is transferred from one branch of a bank to another
bank‟s branch through these inter-bank and inter-branch accounts.

CLEARING
INCHARGE: Mr. Khurram

As we know that, one of the basic economic function of commercial banks is


to receive deposits and to honour cheques drawn upon them. So, cheque is a most

EVERYTHING WE DO IS FOR YOU 45


commonly used instrument for making payments by account holders. Along with
the cheques, there are some other negotiable instruments like PO, DD,TC, PS,
CDR etc. (discussed in the next part), that are used for making payments and are
drawn upon a bank.
The question arises that how these cheques & other negotiable instruments
drawn on one bank are deposited in other banks and money is transferred from
one bank to another.
Clearing House has provided this facility. Clearing house facilitates different
banks, in one city, to get their cheques drawn upon other banks to be cleared.

Cheques lodged in clearing constitute two types of clearing:


 Outward Clearing
 Inward Clearing

LODGEMENT OF CHEQUES IN OUTWARD


CLEARING
When cheques, TC‟s and other negotiable instruments drawn upon other
banks like MCB, ABN-AMRO of the same city(as Lahore) are presented in Bank

EVERYTHING WE DO IS FOR YOU 46


Alfalah Ltd. to deposit them in the respective payee‟s accounts, these instruments
are lodged in outward clearing(o/w clg) of Bank Alfalah.

STAMPS PUT ON THE CHEQUES:


When the cheques are presented in BAL to be deposited in their respective
payee‟s accounts, different stamps are put on cheques before their lodgment in
outward clearing.

i) CROSSING THE CHEQUES:


Crossing means two parallel transverse lines, drawn across the face of the
cheques with or without words written in between them.
Crossing may be general or special. In clearing cheques are crossed specially.
Cheques are stamped with bank‟s name between two transverse parallel lines to
constitute special crossing.
After the cheques have been crossed specially, the holder cannot receive
payment except through the banker named on the cheque. Basic advantage of
crossing is to save the instrument to go it from illegal hands. If, a crossed cheque
is lost or stolen, there is no risk of wrong payment. So it is an effective means of
minimizing the risk of loss or forgery.

ii) CLEARING STAMP:


After the cheques have been crossed specially, clearing stamp is put on the
cheques and other instruments, with the following day‟s date, as these cheques
would have to be presented in their concerned drawee banks on the subsequent
day.

iii) ENDORSEMENT STAMP:


The word endorsement is derived from Latin word „indorsum‟ which means
„on the back‟. Ordinarily, it means anything written or printed upon the back of an
instrument.

EVERYTHING WE DO IS FOR YOU 47


So, at the end, the cheques are endorsed in full (endorsed specially) by
putting the stamp with words describing “ Payee‟s account Credited in BAL Circular
road, Lahore”.

After putting these three stamps on cheques & other negotiable instruments,
they are sent to NIFT (National Institutional Facilitation Authority) with Add List.
NIFT after segregating the cheques of different banks delivers them to their
concerned banks, which constitute the inward clearing for those (drawee) banks.

ACCOUNTING PROCEDURE:
After lodgment of all cheques in outward clearing, Payee‟s accounts are
credited by the amount of their vouchers. Drawee banks will debit the drawer‟s
accounts in their inward clearing (discussed later).
As main branch Lhr. of BAL deals with other banks through inter-bank
accounts and we deal with our main branch. So, we (BAL Circular road) debit our
main br. account, maintained with us, by the total amount of outward clearing and
an IBDA (inter branch debit advise) with a debit voucher is sent to main branch
Lhr.

Account Titles Debit Credit


Local Clearing Main branch
Payee‟s Accounts

RETURN IN OUTWARD CLEARING:


Some of the cheques lodged in o/w clearing are dishonoured by the
concerned branches due to some deficiencies and returned back through NIFT.
This process is carried out under main branch‟s governance.
Either, these cheques are again lodged in outward clearing or returned to
customers by canceling bank‟s all stamps, based on the reasons.
Now, the accounting entries opposite to first are passed i.e. Payee‟s
accounts are debited & main branch‟s account is credited.

EVERYTHING WE DO IS FOR YOU 48


INWARD CLEARING
Cheques and other negotiable instruments (PO, DD, PS, CDR etc.) drawn
on Bank Alfalah Circular Road, sent by other banks, constitute the inward clearing
of BAL.
After having all the stamps and dates of cheques confirmed, the concerned
drawer‟s accounts are debited (in BAL Circular Road) and main branch‟s account
is credited by the total amount.

Account Titles Debit Credit


Drawer‟s Accounts
Local Clearing Main branch

RETURN IN INWARD CLEARING:


In case of cheques dishonoured (returned) due to some deficiencies, the
main branch‟s account is debited by the amount of cheques returned. As,

Account Titles Debit Credit


Drawer‟s Accounts
Local Clearing Main branch
Local Clearing Main branch

COLLECTION
INCHARGE: Mr. Shaukat

EVERYTHING WE DO IS FOR YOU 49


When cheques, TC‟s and other negotiable instruments drawn upon other
banks outside the city (Lhr.) are presented in BAL (Circular Road) to deposit in
payee‟s accounts, then instead of clearing, these instruments are lodged in
collection and constitute OBC‟s (outward bills for collection).
Cheques of cities, where BAL‟s branch exists (e.g. Faisalabad), are sent to
that branch where these cheques are lodged in outward clearing. Otherwise, they
are directly sent to the drawee bank. Postage & other charges are deducted on
account of payee according to SOC (Schedule of Charges).

ACCOUNTING PROCEDURE:

i) When a Cheque is lodged in OBC:

Account Titles Debit Credit


Customer‟s Liability on OBC
Banker‟s Liability on OBC

ii) On Realization of OBC:


when this cheque is got cleared (through outward clearing) in the concerned
BAL branch (e.g. Faisalabad Br.), then IBCA is sent to our branch and thus an
outstation cheque is deposited in payee‟s account. So,

Account Titles Debit Credit


Banker‟s Liability on OBC
Customer‟s Liability on OBC

&
Account Titles Debit Credit
Concerned BAL br.‟s Account

EVERYTHING WE DO IS FOR YOU 50


Payee‟s Account

LOCAL REMITTANCES
(Negotiable Instruments)

EVERYTHING WE DO IS FOR YOU 51


INCHARGE: Mr. Khurram

Besides cheques, banker‟s also handle Promissory Note, Bill of Exchange


(will be discussed in later part), Bank Drafts, Pay Orders, Traveler Cheques, Pay
Slips, Call Deposit Receipts; as negotiable instruments. Here, I have tried to
describe PO, DD, PS & CDR and their processing in accordance with my
observation, during first two weeks.

1) PAY ORDER (PO):


“Pay Order is a negotiable instrument made by the bank, on account of a
customer, to pay on order the specified amount to the directed person (payee)”.
Pay Orders are used to make payment or to transfer money, with in the
same city. Pay Order is always drawn on the bank that has issued it.

MAKING OFA PO:


When a person requires a Pay Order (made by BAL Circular Road, Lhr.), he
is asked to complete the prescribed application form in which the amount of pay
order is to be stated. Certain amount of commission and advance tax is charged
on issuance of pay order (according to SOC).
After having the total amount deposited in the bank (in cash or through
cheque, in case of account holder), pay order is issued in the favour of payee.
Like cheques, when pay orders issued by BAL Circular Road, are presented
in other banks to get them deposited in the payee‟s accounts, they constitute the
outward clearing for those banks and inward clearing for BAL Circular Road.

ACCOUNTING PROCEDURE:
i) When a Pay Order is issued, cash department debits cash account & Pay Order
issued account is credited as:
Account Titles Debit Credit
Cash Deposits
PO Issued

EVERYTHING WE DO IS FOR YOU 52


Commission on Remittances
Tax on PO & DD

ii) When Pay Order is received in inward clearing:

Account Titles Debit Credit


PO Issued
Cash Deposits

2) DEMAND DRAFT (DD):


“A Demand Draft is a negotiable instrument issued by the bank, on account of a
person, and drawn on its own branch in a specific city or on the branch of another
bank in that city (in case bank doesn‟t have any branch there), requesting it to pay
the specified amount to the person named on it”.
Demand Drafts are used to make outstation payments or to transfer money,
out of the city. Therefore, a DD is always made for a particular city.

MAKING OFA DD:


When a customer requests his banker to provide him a DD made on his
account for a particular city like Faisalabad. Then, after having the total amount
(including commission and advance tax) to be deposited with application form,
demand draft is issued in favour of the specified person in Faisalabad (supposed)
and is drawn on BAL Faisalabad Branch.
So, when this demand draft is presented by payee in any bank, it constitute
the inward clearing of BAL Fsd. Branch.

ACCOUNTING PROCEDURE:

EVERYTHING WE DO IS FOR YOU 53


i) When BAL Cir. Road issues a Demand Draft drawn on BAL Faisalabad
Br. Then, an IBCA with DD advice is sent to Faisalabad Br. (letter is also sent for
DD‟s amounting more than Rs.100,000.)
ii) Upon receipt of advice in Faisalabad Br. they will credit DD Payable a/c.
iii) DD Payable Account is debited (in Faisalabad Br.) when DD is presented
in inward clearing.
In case, advice is not received by BAL Faisalabad Br. and DD is presented
first, then instead of DD Payable, Suspense account is debited to make payment.
Similar is the process for demand drafts drawn on BAL Circular Road Branch.

3) CALL DEPOSIT RECEIPT (CDR):


BAL also issues Call Deposit Receipts (CDR). “It is an instrument like cheque
issued by the bank on account of a customer & in favour of a person, to pay the
specified amount”.
CDR‟s are issued to make payments, especially when a company goes for
some tenders or for purchase of government securities. The bank enjoys the
benefit of keeping funds deposited until the payment is not made. During this time,
the bank uses the deposit and earns income on that.

4) PAY SLIP (PS):


“It is a negotiable instrument like cheque issued by the bank on its own account to
pay a specified amount to the directed person”.
Pay Slips are used to make payment by the bank itself against certain
expenses incurred; like furniture purchased by bank, charges of Mucaddams etc.

For Example: If bank has purchased furniture (fixed asset) costing Rs.40,000 from
a company. Then a pay slip in the name of that company is made and,

Account Titles Debit Credit

EVERYTHING WE DO IS FOR YOU 54


Furniture
PS Issued

Instead of writing the issuing date on pay slip, date of encashment


(realization) is written when it is presented in bank.

CANCELLATION OF PO, DD & CDR


After issuance of Pay Order, Demand Draft or Call Deposit Receipt by BAL
Circular Road, when any one of these has to be cancelled by the customer and it is
returned in the bank. Then, after deducting the cancellation charges Rs.100, the
remaining (net) amount is paid to the customer through Cash Payment Voucher.
Suppose a demand draft amounting Rs.5,000 has to be cancelled, then

Account Titles Debit Credit


DD Issued 5,000
Cash 4,900
Misc. Earning 100

ADVANCE TAX AGAINST REMITTANCES


Advance Tax is deducted on issuance of PO & DD ( when customers don‟t
have tax exemption form) and credited in Tax on PO & DD account (discussed
earlier).
Tax deducted has to be paid to State Bank of Pakistan (SBP) with in one
week of issuance of these instruments. So to pay this tax, Pay Order in favour or
SBP Lahore is made, with a challan form. And,

Account Titles Debit Credit

EVERYTHING WE DO IS FOR YOU 55


Tax on PO & DD
PO Issued

ACCOUNT OPENING
During first two weeks of my internship program, I could not work properly in
account opening, but for being the basic operation of bank; I wanted to get some
information regarding it. Mr. Ulfat Hussain helped me a lot and guided me about
procedure & precautions in account opening. Here, I have described the procedure
of account opening in its simple form.

PROCEDURE OF ACCOUNT OPENING

Step 1-The Account Opening Form:


When a client comes to the bank, and makes a request for opening of an
A/C. The officer says that first fill up a prescribed application form. If he/she wants
to open a PLS A/C, then he/she has to fill a form according to the account.

Step II-Completion of The Form:


The name, occupation, and complete address of the person opening the
account are written in the columns are provided in the form. One signature of the
person is taken on the face of the form and one is taken on the backside. These
signatures should be usual signatures and he would operate the account with them
future.

Step III-Introduction:
The introduction of a current account holder is accepted for the opening of
either a current account or a solving account. The introduction of saving bank
account is accepted only for saving bank accounts. The signature of the account-

EVERYTHING WE DO IS FOR YOU 56


holder introducing the account is obtained at the place provided for in the account
opening form.

Step IV: Specimen Signature Card:


The signatures of the client are obtained on a specimen Signature card.
These cards are obtained in duplicate with two signatures on each card from the
customer. Every time a cheque is received for a payment from the client, the
signature on the cheque are verified by comparing them with the S.S. Card.

Step V-Account Number:


When all the formalities are completed then the final approval of account
has to be taken from the Branch Manager. After obtaining approval of the branch
manager an account number is allotted to the customer all the information is
entered into the computer. Then that account number is printed on the
chequebook, S. S. cards and account opening form.

Step VI- Issuance Of A Chequebook:


After opening an A/C with the bank, the A/C holder once again makes a
request in the name of bank for the issuance of a chequebook. the A/C holder
mentions title of A/C, A/C number, sign it properly and mentions the no of leaves
he requires. Normally BAL issues a chequebook having at least 25 leaves. Every
chequebook also contains one leaf that is used for another issue of a chequebook.

Step-VII Entry Of A chequebook:


Before issuance of a chequebook, the employee performs certain functions.
They include:
Stamping every leaf with specific A/C number.
Enters it in the chequebook issue register.
Check whether or not the signatures are verified by a senior officer, if no
then first he gets them verified.

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After entry in the manual register, the employee issues the chequebook to
the A/C holder after his/her signature on the register.

Step-VIII Filling Of Account Opening Forms:


For current and saving account, separate files are maintained in which the
forms are pasted or punched in numerical order and kept under lock and key in
fireproof steel or safe. This is because these forms are the basic documents of the
contract with the customer.

Step-IX Maintaining the Computer Record:


After opening of account, every information regarding the account is entered
into the computer. Currently, a program named „Bankexcel‟ is being used for this
purpose. Record of all the transactions regarding the account of a customer is kept
updated in the computer.

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TRADE FINANCE

After working in Remittances department for two weeks, I was advised by


Mr. Tariq Munir, Manager Operations, that I should move on to Trade Finance
department. I was much pleased to hear this as I had a great desire to work and
learn something regarding foreign trade operations.
So, I was sent to Mr. Jamshed Yousaf, Incharge trade finance. He
requested senior officer Mr. Gulistan Khan to help further my cause of gaining
knowledge. First, he asked me if I had any previous knowledge about L/C‟s.
Thanks to Mr. Fida Hussain Bukhari, our worthy teacher, I was in sound command
over the basic concept of what a letter of credit really is. Mr. Gulistan Khan
acknowledged the fact and told me that I should built on this theoretical base with
sound practical knowledge.
I would always be thankful to Mr. Gulistan Khan for having his full co-
operation and help throughout my stay there.

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IMPORT OPERATIONS

Valid city markets have unusual importance regarding import operation and
are considered as business and commercial hub of imports in Lahore.
Bank Alfalah Circular Road Lhr. for being situated in such an area has great
(2nd largest in BAL) volume of foreign trade, especially imports. So, I have been
much lucky for having enough exposure and opportunities to learn. Here, I have
tried to stipulate that how a whole import operation is carried out through a bank.
My endeavor has been to describe the procedure in steps, just in accordance with
my observation, during two weeks.

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The process of imports starts with the establishment of letter of credit.
Before going into the details of this process, I have tried to describe the letter of
credit (L/C) and its basic aspects.

LETTER OF CREDIT
International trade involves numerous factors such as payment for imports
in the exporter‟s country; shipment of goods within the limitations prescribed and
difficulties of enforcing legal rights in the foreign country etc. Therefore, to
overcome these impediments a system has been enforced, this system is
represented by „Letter of Credit”.
The letter of credit is today the foremost way of financing international
trade. In simple words, a letter of credit (L/C) can be defined as:
“A bank‟s written undertaking given to the exporter for payment of a certain
sum of money on behalf of the importer provided the exporter tenders to the bank,
or its overseas agents, the specified documents within a specified period in
accordance with the terms of the undertaking”.

There are four basic parties involved in an L/C:


i. Importer
ii. Issuing Bank
iii. Exporter (Beneficiary)
iv. Beneficiary‟s Bank
v. Other parties involved in L/C processing will be discussed in
subsequent sections.

ADVANTAGES OF AN L/C:
Following are some of the main advantages of a letter of credit:
i) Since a letter of credit is opened only for the importers with established
credit standing, the exporter is sure of receiving the price of his
commodity.

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ii) An exporter may obtain necessary finance immediately on shipment
under a letter of credit (through negotiation, OD Buying) .

iii) A letter of credit may help the importer to meet its financial difficulties.
He may obtain some finances against the L/C (as FIM, FATR etc. ).

iv) Similarly, an L/C enables the exporter to obtain finances from his bank,
for the operations of production even before shipment (e.g. Pre-shipment
finance).

CLAUSES OF A LETTER OF CREDIT


A letter of credit contains several clauses. The main ones are :

a) Type of Credit:
The heading of a credit indicates the type of credit and its purpose. For this
purpose, every bank has prescribed its own letter of credit forms .

b) Value of Credit:
The fixed amount to which the bank is liable is specially mentioned in the letter of
credit.

c) Specifications of Documents:
The documents required are specially mentioned in the credit.

d) Description of Goods:
A brief description of goods that are required by the importer is given .

e) Part-Shipment and Trans-Shipment:


Part-shipment means shipment of goods in lots or installments, that is in more than
one shipment.
Trans-shipment means the carriage of goods by more than one vessel or mode of
transport.

The credit must specify whether this can be trans-shipped / part-shipped or not.

f) Collection of Charges:

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The buyer and seller should have been decided as to which party would bear the
expenses because of interest/ markup and other bank charges. The credit
specifies the party that would bear the charges .

g) Validity Period:
This is a very important clause and because every credit indicates an expiry date
or the validity period. This period is so fixed to provide sufficient time to complete
the transaction.

h) Reimbursement Clause:
This clause indicates the method for obtaining the reimbursement by the foreign
negotiating bank. It will be discussed elaborately in later part.

FORMS OF A LETTER OF CREDIT

a) Revocable L/C:
“A revocable letter of credit may be amended or cancelled by the issuing bank at
any moment, without prior notice to the beneficiary”.
This form of credit gives the buyer maximum facility but it places the seller in
difficult position when the goods are in transit and the credit is revoked before the
documents are presented and payment has not been made on presentation .

b) Irrevocable L/C:
“An irrevocable credit constitute a definite undertaking of the issuing bank to
accept and pay the bills drawn upon it so long as the terms and conditions
stipulated in the letter are fulfilled”.
This form of credit can be amended or cancelled only with the agreement of
all parties to it. Therefore, it gives the seller complete protection.

In Pakistan, all banks including Bank Alfalah, are permitted to open


irrevocable L/C’s only.

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c) Confirmed & Unconfirmed L/C‟s:
A confirmed credit is the one that has been confirmed by the advising bank.
By confirming a credit, the bank agrees to take the liability of making payment to
the seller if the issuing bank defaults for any reason.
“When an issuing bank authorizes or requests another bank to confirm its
irrevocable credit and the latter has added its confirmation, such confirmation
constitutes a definite undertaking of such bank (the confirming bank), in addition to
that of issuing bank, provided the stipulated documents are presented and that the
terms and conditions of the credit are complied with.”
Whereas, an unconfirmed credit is one that exclusively depends upon the
issuing bank‟s obligation.
The parties to the present day international trade transactions prefer a
confirmed irrevocable credit because it is an instrument of highest quality which
ensures the payment to the seller by the advising bank while the buyer is assured
of receiving the documents of title to goods, as specified in the terms of credit.

TYPES OF A LETTER OF CREDIT


There are two main types of an L/C that are being practiced in BAL Circular
Road Lhr.

1) SIGHT L/C:
“If the beneficiary of a credit is to obtain payment immediately on presentation of
stipulated documents, it is a Sight Credit”.
In this form of credit the exporter draws a sight or demand draft payable at
the counters of the advising bank or the bank specified in the letter of credit. The
draft (bill of exchange) is paid on presentation provided that all the other terms of
the credit have been complied with.

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2) USANCE L/C:
“When a credit stipulates payment to the beneficiary upon the maturity of a bill of
exchange drawn under the terms of the credit, it is an „acceptance credit‟, „terms
credit‟ or usance credit”.
In this form of credit the beneficiary draws a draft for a particular usance
(e.g. 30, 60 or 90 days etc.), payable upon either the correspondent bank or the
issuing bank.
In normal practices, BAL Cir. Road opens Sight L/C‟s because in Sight L/C
the importer first pays the L/C amount (invoice price) to the issuing bank and then
gets the possession of documents. So the bank becomes secure in this way .

CONTRACT
Apart from an L/C, a foreign trade transaction can be carried out through a
contract. A contract is defined as:
“An agreement, certain and performable, made by competent parties, with their
free consent for the lawful object, and lawful consideration, and if not expressly
declared void”.

In banking circles, it is defined as:


“Mutual understanding between the buyer and seller without the involvement of the
letter of credit”.
The importer and the exporter might decide to carry on trade without the
involvement of a letter of credit. In this situation, trade is carried out based on a
mutual contract between them. In a contract, the bank is not liable to make
payment upon receipt of documents.

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QUALIFICATIONS FOR AN IMPORTER TO GET AN L/C
ISSUED
A Letter of Credit cannot be opened on behalf of a person unless he fulfills
the following requirements :
1) The person must be an account holder of BAL.
2) No person can be an importer without first being registered with EPB.
So the person must have valid import registration with Export
Promotion Bureau (EPB) of Pakistan. This registration is not
necessary for those who have been exempted from it .
3) The person must process a valid membership certificate of Trade
Organization, licensed and recognized by Federal Government like a
Chamber of Commerce (e.g. Lahore Chamber of Commerce)
4) The person must possess a valid NTN (National Tax No.) certificate.
5) The person must have the Sales Tax Registration Certificate.

Obtaining of Import License is no more required .

ESTABLISHMENT OF LETTER OF CREDIT


After verifying the eligibility of importer and having all the certificates, the
first thing that has to be taken into consideration before the issuance of an L/C is
the credit limit of the party. There may be two situations (discussed in detail in
lending operations):
1) The party routs a regular business with bank (BAL Cir. Road) and has an
approved credit limit. The limit has been approved against any collateral
by the credit department. So, in this case, no further approval is
required.

2) The party does not have an approved credit limit and undergoes a
business with the bank on OTT (One Time Transaction) basic. In this
case, the party first needs to get the credit proposal approved by bank.

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L/C APPLICATION FORM:
After having an approved L/C limit, the process of L/C opening starts with
L/C Application form. The bank has prescribed a standard application form that
contains the required guidelines, instructions and other relevant terms and
conditions under which the L/C is to be opened and claims from the beneficiary are
to be settled.

The application form contains the following:


1. Description of the goods, detail of quantity, unit price, total price and
currency of credit.
2. Instructions about the advice of credit, whether it should be sent by
airmail, by courier or telecommunicated.
3. Form of credit: whether revocable or irrevocable, confirmed or
unconfirmed. Due to permission of irrevocable credit only, it is prescribed
on form.
4. The name and address of the beneficiary.
5. Type of credit: whether sight, usance etc.
6. Validity period of credit and last dates for shipment and negotiation.
7. Port of shipment and port of destination and whether trans-shipment
and/or part-shipment are allowed.
8. Types and number of sets of documents required to be submitted by the
exporter.
9. Shipping terms in the contract of sale, e.g., FOB, C&F or CIF etc .

The application form is a formal contract between the issuing bank and the
applicant; therefore, it is signed by the customer, who by doing so undertakes to
abide by the terms and conditions of L/C, mentioned in the application form.

Adhesive Stamp:
The application form must possess a legal stamp of worth Rs.100. Form
without this adhesive stamp is not accepted.

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I have observed that, this legal stamp is pasted on application form before
giving it to the applicant.

DOCUMENTS REQUIRED FOR OPENING AN L/C


For getting an L/C issued, the importer needs to submit the following
documents along with the application form.

 PERFORMA INVOICE:
The foremost document required by the bank for establishment of an L/C is
the Performa Invoice (signed by both the importer & exporter). It is issued by the
exporter. When the importer has direct relations with exporter, then he gives
Performa Invoice or Contract form. It comprises all the terms and conditions that
has to be mentioned on L/C (discussed in L/C application form). Performa Invoice
constitutes the basis of the whole transaction.

INDENT:
When the importer and exporter don‟t have direct relations and are
connected to each other through an intermediary, called Indenter, then he
(indenter) issues an indent form containing all terms and conditions (like Performa
Invoice).

 INSURANCE POLICY:
Goods being imported serve as security for bank. So, these goods should
be properly insured. Therefore, bank requires the insurance documents (insurance
policy) from the importer. There are two types of insurance documents:

Open Policy:

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An open policy is for a specific amount. It provides cover to a number of L/C
„s upto the limit of policy.

Cover Note:
It is an L/C-to-L/C document and importer must provide a separate cover
note for every L/C, if he doesn‟t have an open policy.

 FORM I:
To assess all those transactions in the country, in which foreign currency is
involved, State Bank of Pakistan has made it compulsory to submit the I Form („I‟
stands for imports) when an import transaction is carried out. I Form contains all
the information about the transaction along with importer‟s NTN and import
registration number.
The importer should fill this form, but I have observed that, in usual
practices, it is filled by the bank officer itself.

PROMISSORY NOTE
“It is an unconditional written promise signed by the maker, to pay on demand or at
a fixed or determinable future time, a certain sum of money to the specified person
or to the bearer of the instrument”.
Therefore, to make the payment (by importer) secure, bank obtains a
promissory note signed by the importer, along with the above stated documents .

L/C MARGIN:
It is a certain percentage of the value of L/C that is retained by the bank as
security. In BAL Circular Road, margin requirements are usually 0-10% depending
upon the client‟s credibility.

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L/C COMMISSION:
Commission is also charged from the importer for the issuance of L/C.
commission is charged on quarterly basis (according to SOC) and its rate
decreases gradually in subsequent quarters.

After getting L/C Margin, L/C Commission and other mailing charges, the
Letter of Credit is issued to the importer .

BANKS INVOLVED IN THE PROCESSING OF AN L/C


Starting from the establishment of an L/C, till the retirement of documents,
following are the banks involved in the whole L/C Cycle.

ISSUING BANK (Opening Bank):


Banker opening the letter of credit is called Opening Bank or Issuing Bank.
Opening bank‟s undertaking under an irrevocable or confirming L/C is absolute.
Therefore, once an L/C has been communicated to the beneficiary through the
bank, the banker has no option, but to pay, provided the other terms and
conditions have been fulfilled.

ADVISING BANK:
The bank that advises the L/C means who physically delivers the L/C to the
exporter on the behalf of the issuing bank. It is a correspondent bank of the issuing
bank situated in the beneficiary‟s country or it can also be a branch of issuing
bank.

NEGOTIATING BANK:
The negotiating bank receives the documents and delivers to exporter.
When the exporter completes all the documents, after making shipment, the
negotiating bank sends them to the issuing bank .

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REIMBURSEMENT BANK:
According to ICC Rules, Reimbursement against foreign currency has to be
made through the country originating that currency. Therefore, for dollar
transactions, reimbursement has to be made (received) through the banks situated
in USA.
When issuing bank don‟t have any branch in USA (for dollar payments), like
BAL, the reimbursement is made through a bank in USA, where the issuing bank
has Nostro Account, that bank is known as Reimbursement Bank or Drawee Bank.
It is a correspondent bank of issuing bank and makes payment by debiting the
nostro account.

INTERMEDIARY BANK (Collecting Bank):


Intermediary Bank is that where the negotiating bank has its Nostro Account
and who obtains reimbursement against L/C from reimbursing bank and gives
credit to the negotiating bank. For dollar payments, intermediary bank would have
to be situated in USA. Similarly, for transactions in GBP, both the Reimbursement
& Intermediary banks would be in UK.
The number of banks involved in L/C Processing may vary from 1 to 6. Only
a single bank can perform all the functions through its different branches .

COMMUNICATING THE LETTER OF CREDIT


After establishing the letter of credit, it is communicated to the beneficiary
through many intermediaries.

TRANSMISSION OF L/C:
After issuance, the L/C is sent to the advising bank. There are many ways to
transmit an L/C to the advising bank. These are:
1) Through Airmail

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2) Through Courier, DHL
3) Through Telex

The medium is used according to the instructions of importer mentioned on


the top of the L/C Application form.

ADVISING THE L/C:


After transmitting the L/C to advising bank, it is advised (physically
delivered) to the exporter, through advising bank.
BAL has collaboration with a number of banks worldwide, for advising its
L/C‟s. For example, if an L/C has to be advised in Australia, it can be advised
through ABN AMRO or Standard Chartered Bank, Australia.

NEGOTIATING THE L/C DOCUMENTS:


Negotiating bank, after receiving the documents from advising bank,
intimates the exporter.
When the exporter makes the shipment and completes all the documents,
he presents them to the negotiating bank. The negotiating bank sends these
documents to the issuing bank, according to the date of negotiation mentioned on
L/C, and claims the reimbursement (procedure of reimbursement will be discussed
in the next sections).

DOCUMENTS SENT BY THE NEGOTIATING BANK


The documents sent by the exporter, through his negotiating bank,
constitute the most vital part of whole transaction for the bank as bank deals in
documents, and not in goods.
Following are the documents sent by the negotiating bank for the settlement
of L/C (documents are sent according to the requirements mentioned on L/C):

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 BILL OF EXCHANGE:
“A Bill of Exchange is an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of money on
demand or at a future determinable period, to a certain person or to the bearer of
the instrument”.
It is drawn by the exporter through negotiating bank (drawer) and is an order
for the importer or issuing bank (drawee; BAL Cir. Road) to pay a specified
amount. In case of sight bill (for sight L/C), it has to be paid immediately.

 COMMERCIAL INVOICE:
Commercial Invoice prepared by the exporter signifies the name and
address of importer, invoice price, invoice number and all the specifications of
goods being imported.

 PACKING LIST:
It is prepared by the exporter to show that the consignment is in accordance
with the order of importer. The list gives a detail that how goods have been packed
and the number of cartons they have been packed in .

 SHIPMENT ADVICE:
Shipment Advice is issued for the insurance company to provide every
information and specifications regarding shipment .

 CERTIFICATE OF ORIGIN:
This document is a certification for the origin of goods. It certifies that the
goods being importer (or exported) have the origin of a specific country. This
certificate is sent only if the importer, depending upon the nature of commodity,
requires it.

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 PHYTOSANITARY CERTIFICATE:
The exporter in case of commodities, like medicinal herbs, sends this
certificate. It certifies that the use of goods is not harmful.

 BILL OF LADING/ AIRWAY BILL/ RAILWAY RECEIPT:


Bill of Lading is a document issued by the shipping company which
stipulates the quantity of commodity, weight, port of shipment & discharge, date of
shipment and other specifications. Bank examines that whether all these
specifications are in accordance with the performa invoice and L/C, especially the
date of Bill of Lading (i.e. date of shipment).
Instead of shipping company, if an airline or railway has been assigned the
task of transporting the goods, then these companies issue Airway Bill or Railway
Receipt, respectively.
The medium used for transportation depends upon the nature of goods and
the country of beneficiary; as in case of India, goods are generally transported
through railway.

 INSURANCE POLICY (If Applicable):


If insurance is responsibility of exporter i.e. in case of CIF price, then the
L/C issuing bank also requires the insurance policy along with other documents.
But, during my stay in BAL Circular Road Lhr., no such case was practiced.
Usually, all the transactions were being carried out in FOB or C&F prices .

 COVERING SCHEDULE:
Along with the above stated documents, the negotiating bank sends its
Covering Schedule on which the instructions regarding the whole transaction are
prescribed. It also mentions the number of each document sent by the exporter.
The number of each document depends upon the instructions of importer
mentioned on L/C.

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SCRUTINY OF DOCUMENTS
After receiving all the documents, next and the most important step is to
scrutinize the documents. For this purpose, a list called “Check List of Import
Documents” is prepared.
All the documents must be in accordance with the requirements of L/C. In
case of any deviation the documents can be rejected and payment can be
stopped. Negotiating bank must be intimated about any discrepancy found, with in
7 days.

LODGMENT OF DOCUMENTS IN „PAD‟


(For Sight L/C’s only)
After all the documents are scrutinized carefully, the next step is to lodge
the documents in PAD (Payment Against Documents).
For this purpose, the documents are stamped with PAD for a specific PAD
number and entered into the register by the total amount. Exchange rate (selling)
approved by the BAL Treasury (for that day) is charged.
When the documents are lodged in PAD, L/C becomes a fund-based facility.
Until the party does not make the payment, PAD remains outstanding and the bank
keeps the documents in its safe custody. Record of every information regarding
PAD is maintained in the PAD Register.

A PAD Register contains:


a. Date of Lodgment of PAD
b. PAD Number
c. Importer‟s Name
d. Invoice Price in Foreign Currency
e. Invoice Price in PKR
f. L/C Margin (if any)
g. PAD Amount (e-f)

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h. Name of Vessel
i. Date of Retirement of Documents

In case of Usance L/C, instead of lodging the documents in PAD, they are
lodged in Acceptance, which will be discussed in the next sections.

REIMBURSEMENT
When the documents are lodged in PAD, the reimbursement is made
through the reimbursement bank.
There might be two possibilities regarding the reimbursement:

1) If it is mentioned on L/C (reimbursement clause) that the reimbursement will


be made on receipt of documents (i.e. on confirmation of credit) in such a way:
“Upon receipt of credit confirmed documents, we will remit the proceeds as
per instructions of negotiating bank”.
Then reimbursement is made upon receipt of documents, when PAD is
lodged. In this case, after receiving the documents, Payment Order is made for
reimbursing bank (e.g. ABN AMRO) to make the payment according to the
instructions of negotiating bank, stipulated on the covering schedule. Reimbursing
bank makes payment by debiting the nostro account. In this case, mark-up on PAD
is charged from the date of lodgment.

2) On the contrary, sometimes the negotiating bank directly claims the


reimbursement from the reimbursing bank, after dispatching the documents,
irrespective of the fact that whether the documents have been received by the
issuing bank or not. In this case, mark-up on PAD is charged from the day, the
reimbursement is obtained by the negotiating bank, mentioned on covering
schedule.
Reimbursement method is mentioned in the reimbursement clause and
reimbursing bank is authorized through „Bank-to-Bank Reimbursement Authority

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(BTB), to make the reimbursement, and the reimbursing bank, after making the
reimbursement sends a debit note.

RETIREMENT OF DOCUMENTS
The whole transaction of foreign trade in which an L/C is involved,
completes with the retirement of documents.
The documents that are first lodged in PAD are retired when the importer
pays the total amount (payable). This amount includes the PAD plus the mark-up
charged on PAD and other charges (mentioned on cost memo). Upon receipt of
payment, when the documents are retired, they are given to the importer and he
gets the consignment cleared from custom authorities (by submitting the Bill of
Entry).
This completes the whole transaction of Foreign Trade, carried out through
a Letter of Credit.

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ACCOUNTING PROCEDURE OF COMPLETE L/C
CYCLE
(For Sight L/C’s only)
The bank maintains different accounts in the whole transaction, starting
from the establishment of L/C till the documents are retired. In the beginning, the
procedure of accounting entries was looking to be much complicated, but after
working for two weeks, it became quite clear to me.
So, here I have tried to stipulate all the important accounting entries
involved in complete L/C cycle (for a sight credit ).

a) At, Establishment of L/C:


1) When an L/C for a specific foreign currency amount is established, two
liability accounts are created. These accounts show the total outstanding value of
an L/C.
Account Titles Debit Credit
Customer‟s Liability on SLC
Banker‟s Liability on SLC

Amounts are written in PKR. For this purpose, the foreign exchange rate approved
by the BAL Treasury for the current day (when L/C is established) is charged.

2) Before issuance of L/C, bank obtains L/C Margin, Commission & other
charges:

Account Titles Debit Credit


Party (customer)
Margin on L/C
Income
(Commission & charges)

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b) Upon Receipt of Documents (on Realization of Credit):
1) Upon receipt of documents, sent by the exporter, the liability account
created first are eliminated by making contra entries (for the total invoice price), at
the previous rate.
Account Titles Debit Credit
Banker‟s Liability on SLC
Customer‟s Liability on SLC

2) Reimbursement is made by the reimbursing bank and BAL‟s Nostro account


is debited. Documents are lodged in PAD and head office account is credited by
sending ETCA (Exchange Transaction Credit Advice) through blotter.
Account Titles Debit Credit
PAD
Margin on L/C
H/O
Income (Exchange Earning)

To convert the foreign currency amounts in PKR, exchange rate (selling) for
the day of PAD lodgment is charged. Whereas, H/O is credited at the rate, 3
Paisas less than the rate charged from the importer. So, it constitutes the
exchange earning for the bank.

FORWARD BOOKING UNDER IMPORT


Forward Booking (in selling rate) under import is a facility provided to the
importers which enables them to have a fixed foreign exchange rate for the
retirement of documents, in the future period, irrespective of the market conditions.
So, it is a forward contract between an importer and the bank.
There are, usually, two situations under which forward booking is preferred
by an importer:

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1) When there is an increasing trend in the foreign exchange rate and the
importer expects that it will take enough time to reach the documents in
the bank. So, due to this delay a substantial increase in the foreign
exchange rate is possible. Then, the importer requests the bank for the
forward booking of selling rate.

2) Similarly, when a substantial increase in the foreign currency rate is


expected even within a short span of time (due to market conditions). In
such a case, the importer also prefers to go for the forward rate of
specific period.

Forward booking in the selling rate is made for a specific period (at least 1
month) and the documents, even if received earlier, cannot be lodged in PAD until
maturity. And if the documents are reached after maturity of forward rate, then the
rate prevailing at that time is charged from the importer.
Usually, the documents are received earlier before maturity. Since, the PAD
has to be lodged on the forward rate (at maturity), so when the documents are
received earlier, then after getting the net amount at forward rate i.e. (invoice price
* forward rate – L/C margin + other charges if any), documents are given to the
importer and he gets his consignment cleared.
The net amount received is transferred and kept in L/C margin till maturity .

SHIPPING GUARANTEE
Some times, it so happens that the consignment reaches the port in the
importer‟s country but the bank has not received the documents.
Since, the importer needs original bill of lading and commercial invoice (also
a packing list) to get his consignment cleared, through the bill of entry. Whereas
these documents has not reached the bank and without these, the importer cannot
claim possession of the consignment. So, the bank, in such a case, issues a
shipping guarantee. Bank does so against a certain margin, which should be 110%

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(of invoice price i.e. L/C value). But, in BAL Circular Road, margin requirement is
usually 100% (including L/C margin, if any).
Account Titles Debit Credit
L/C Margin (if any)
Party
Margin on LG Shipping
Income (commission)

After getting the margin & commission Rs.800, bank issues the shipping
guarantee on behalf the importer and he gets his consignment cleared .

FINANCE AGAINST IMPORTER MERCHANDISE


Finance against imported merchandise (FIM) is a credit facility provided to
the customer, in L/C transaction. In FIM, bank itself makes the payment to the
exporter and the goods are kept in the possession of bank. Delivery Order (DO) is
issued by the bank for every time, when the importer makes the payment and
goods are transferred in the possession of importer.

FINANCE AGAINST TRUST RECEIPT


The banks also offer credit facility FATR, against sight L/C‟s, like FIM.
Contrary to FIM, goods are given in the possession of importer. This facility is
provided to the customer having a credit rating A+.

USANCE L/C
When a credit is to be paid upon the maturity of a bill of exchange drawn
under the terms of credit, it is called an Acceptance Credit or Usance Credit.
Contrary to the sight L/C, when the documents are received under usance
L/C, the importer first gets the documents and then pays for them, at maturity of

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usance. When the importer gets the possession of documents from the bank, he
gives an acceptance to the bill of exchange and gives an undertaking that on the
maturity date, he would make the payment .
In this form of credit, when the documents are received, then instead of
lodgment of PAD, liability is lodged in acceptance account, when the importer
gives acceptance on the bill of exchange. Foreign bills stamps, amounting 0.2% of
invoice price, are pasted on the back of bill of exchange. So, after getting the
acceptance letter signed by the importer, the documents are given to him.
If, on the maturity date, the importer does not pay the amount, the liability is
shifted to the Overdue Acceptance account. The bank, however, has to make
payment to the negotiating bank. This is why the banks avoid Usance L/C‟s .

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EXPORT OPERATIONS
During the two weeks in trade finance department, I was much desirous to
know that how the export transactions are carried out through bank, along with the
imports. The export transactions in BAL Circular Road were not of such extensive
nature as imports due that specific area. So the processing of a normal export
transaction has been discussed.

CONDITIONS FOR EXPORTER:


Like an importer, there are certain conditions that a person must fulfill to
become an exporter.
1) The person must be an account holder of BAL.
2) No one can export any commodity until and unless he/she is a
Pakistani and has a valid export registration with the EPB.
3) The person must process a valid membership certificate of Trade
Organization, licensed and recognized by Federal Government like a
Chamber of Commerce (e.g. Lahore Chamber of Commerce).
4) The person must possess a valid NTN (National Tax No.) certificate .
5) A person cannot export any good unless he files a Form E (E stands
for exports) with his application to the bank. The form E must be filled
in writing and all specifications stipulated on the form, must be met.
6) The person must have the Sales Tax Registration Certificate.

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COMPLETE EXPORT CYCLE

 The process of export starts with the receipt of the letter of credit (or
contract) by the bank. The issuing bank sends the L/C to BAL Cir. Road through
the advising bank. Upon receipt of L/C, an intimation letter is prepared and is sent
to the beneficiary of the L/C, advising him that his reached BAL and he should
collect it immediately.

 As mentioned earlier, an E-form is necessary for exports out of the country.


It is a part of exchange control mechanism of the State Bank of Pakistan. When an
exporter receives an L/C, the next job is to get an E-form from the bank. The E-
form is a quadruplicate and contains the following information.
 The Commodity
 The quantity
 The price
 The port of shipment
 The port of destination
 Terms of shipment
 Export registration number

After filling in the complete information about the goods to be exported, the
exporter brings the E-form to the bank for verification. The bank verifies the
contents in accordance with the documents and not by physical checking .

 After getting the E-form verified from bank, the exporter starts preparing for
his shipment. As the banks only deal in documents, so in order to receive the
payment for his good to be exported, the exporter has to send certain documents
to the L/C issuing bank via negotiating bank. These documents have already been
discussed in import section.

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 A very important step in the export process is to scrutinize the documents,
before sending them to the issuing bank. It requires utmost care and attention of
the bank officer. When the documents are presented in the bank, they are always
scrutinized and they must be in accordance with the requirements stipulated on the
L/C. Any deviation could result in rejecting the documents by the importer, hence
causing loss to the exporter or even to the bank if the documents are to be
negotiated.

COLLECTION / NEGOTIATION
When the exporter comes to the bank with the documents, he has two
options:

a) Send them for collection


b) Get them negotiated

1) COLLECTION:
The bank sends the documents on behalf of the exporter to the issuing bank
and payment against them is received after a specific period. In collection, the
exporter is paid only when the bank obtains reimbursement from reimbursing bank.
The payment is made to the exporter in PKR (Pak Rupees) and the exchange rate
is the buying rate of the day normally called T.T Buying Rate.

 Deduction of Tax:
Withholding Tax is deducted on the realization of export proceeds, under
Income Tax Ordinance 1979. The rate of tax varies from 0.75 to 1.25 percent,
depending upon the nature of commodity, as:
• 0.75% for the export of finished goods
• 1.00% for the export of finished goods
• 1.25% for the export of finished goods

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2) NEGOTIATION:
In case of Negotiation, the bank purchases the documents (clean
documents having no discrepancy, against L/C‟s only) from the exporter, i.e. the
exporter gets them discounted before their maturity. For example, if the payment
against documents for the exports has to be received after 60 days. The exporter
might not want to block his payment for this period. So, he can get his documents
negotiated by the bank, the day he presents them to the bank. In this case, the
exchange rate he will get is called O.D Buying Rate. This rate is slightly less than
TT buying rate because the bank pays him an amount that it is going to receive
after 60 days. These buying rates are updated every day (like selling rates) and
are available to the exporter before he decides whether to get his bills discounted
or not.
Contracts are however not negotiated in any case. This is because, they are
unsafe documents and the bank does not take the risk of being denied the
payment by the importer after having made the payment to the exporter.
In BAL Circular Road branch, the export transactions are carried out on
collection basis, against TT buying rates only.
The documents brought by the exporter are in form of sets containing an
original and a number of copies. The number of each document required by the
importer is mentioned on the L/C. The exporter however deposits more copies of
documents than the number to be sent. The bank keeps the additional copies
along with the E form for its own record. A bill of exchange, drawn by BAL Circular
Road Br., on the issuing bank is prepared. Then these documents are sent to the
L/C issuing bank along with the covering schedule (discussed in imports section).
When the documents are sent to the issuing bank, it becomes an obligation
of the issuing bank to make the reimbursement. In case of sight credit, the
payment is to be made within 12 days of receipt of the documents by the issuing
bank (via reimbursing bank).
However, if the credit is a Usance credit, then an acceptance (to the bill of
exchange) is sent to the negotiating bank, in which the issuing bank gives the

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undertaking, to make payment on a specific date (maturity). The exporter is
intimated about the date on which the proceeds would be realized.
When, the proceeds for documents sent for collection are realized, the
exporter‟s account is credited with the PKR amount, by converting the foreign
currency amount into PKR at the TT buying rate of that day (after deducting the tax
and other charges). Also, the head office (H/O) account is debited with a few
paisas more than the rate that has been given to the exporter. This amount
constitutes the exchange earning for the branch (like imports). This completes the
whole transaction of export.

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DIAGRAMMATIC APPROACH TO COMPLETE
L/C CYCLE
After working for two weeks in trade finance department, the complete
process of international trade involving an L/C became clear to me. The process
involves a number of banks and becomes quite complicated at times but is very
logical.
In the previous pages, I have tried to describe this process elaborately, but at this
stage, I would explain the whole L/C cycle with the help of a diagram.

ASSUMPTIONS:
It is a sight L/C
The currency is U.S. Dollars
The importer is in Pakistan
The exporter is in Indonesia
L/C Issuing bank: BAL Circular Road
Negotiating bank: Deutsche Bank, Indonesia
Advising bank: Standard Chartered Bank, Indonesia
Reimbursing bank: ABN AMRO Bank, New York USA
Intermediary bank: American Express Bank, New York USA

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L/C CYCLE

IMPORTER EXPORTER
(Pakistan) INDENTER (Indonesia)

DOCUMENTS

PAYMENT

L/C ISSUING
BANK DOCUMENTS NEGOTIATING
(BAL Cir. Rd) BANK
(Deutsche Bank)
Indonesia
L/C

L/C ADVISING
BANK L/C
(Standard Chartered)
Indonesia

PAYMENT PAYMENT
INTIMATION

REIMBURSEMENT INTERMEDIARY
BANK PAYMENT BANK
(ABN AMRO, NY) (American Express
Bank, NY)

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CREDITS

After working for two weeks in Trade Finance Department, I was moved on
to the Credit Department. Mr. Anwar Masood, Incharge Credits, welcomed me in
his department. For him, I would just say, that I did not find such a lenient and
cooperative person in my career.
In Credit department, I worked for the last two weeks of my internship
program. One major difference that I observed in credit department and other
departments was the difference in the nature of work. After working in credit
department, I realized the importance of lending operations for a bank. Here, I
have tried to describe my experience and observation in credit department .

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LENDING OPERATIONS
Since, the basic function of a bank is to receive deposits (at low rate of
return) and to lend money (at high rate of return). So, the lending operations of a
bank constitute the most vital part of its business.
Bank‟s funds comprise mainly of money borrowed from numerous
customers on various accounts such as saving accounts, current accounts, fixed
deposits and notice deposits etc. whereas, the major part of total income of a bank
is generated through the utilization of these funds. So, a banker

KINDS OF CREDIT
Bank provides credit facilities to its customers for a specific maturity. This
maturity or duration of credit is not an independent factor; it depends upon the
purpose of the loan.
According to the maturity of credit, it has three basic kinds.
a) Short Term Credit
b) Medium Term Credit
c) Long Term Credit

SHORT TERM CREDIT:


The period of a short-term credit is generally less than or equal to one year.
This credit is used for the creation of current assets e.g. for the purchase of raw
material and to meet the working capital requirements.

MEDIUM TERM CREDIT:


Medium term credit is normally issued for one to three years. It is used for
the purchase of machinery, furniture etc. by the firms .

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LONG TERM CREDIT:
Credit facilities sanctioned for 3 to 5 years is considered as the long-term
credit. Long-term credit is required for capital expenditures, such as purchase of
building and heavy machinery.

RATE OF INTEREST:
Rate of interest against these advances vary according to the duration.
Shorter is the period of loan; greater is the rate of interest because, in long-term
credits, there is less risk of idle cost of funds.
In BAL Circular Road, only the short-term credit facilities are being provided.

CREDIT FACILITIES IN BAL


(Circular Road Branch, Lahore)
Bank provides different credit facilities to its customers, in form of short-term
credit. Following are the credit facilities that the customers usually avail to meet
their requirements.

OVERDRAFT (OD):
This is the most common form of bank lending. In overdraft facility, a
customer is allowed to withdraw on his account in excess of the balance that the
borrowing customer has in credit. So, when a customer withdraws in excess of his
balance, an overdraft occurs (balance becomes in debit). Overdraft facility can be
availed for a certain limit called OD limit and is used to meet the seasonal
requirements of cash.

CASH FINANCE (CF):


This is a very common form of borrowing by commercial and industrial
concerns, and is made available either against pledge or hypothecation of goods.

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Cash finance (being short term credit) is utilized for the creation of current assets
and to meet the permanent working capital requirements. In cash finance, a
borrower is allowed to borrow money from the bank upto a certain limit, either at
once or as required. The borrower prefers this form of lending due to the facility of
paying markup charges only on the amount he actually utilizes.

LETTER OF CREDIT (L/C):


Letter of credit, whether sight or usance, is an non fund based facility
provided to the customers. L/C has already been described elaborately in trade
finance section.

LETTER OF GUARANTEE (L/G):


Along with other credit facilities, bank also facilitates the customer by
issuing the letter of guarantee on behalf of the customer. These guarantees
include payment guarantee, shipping guarantee etc .

Difference Between an L/C & L/G:


An L/G has to be retired 4 or 5 days before the maturity i.e. the payment has
to be made within 4 or 5 days before maturity. After maturity, credit is considered
to be bad debt and client is considered defaulter. Whereas in L/C, payment can be
made after maturity with a certain markup .

PAD, FIM & FATR:


PAD, FIM and FATR are fund based facilities against L/C, and have already
been discussed in trade finance section. These facilities, availed for import
transactions are approved first by credit department against some collateral .

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SECURITIES FOR ADVANCES
No doubt, the advancing of credit involves a great risk for the bank.
Therefore, to cover this risk, the bank keeps different tangible and non-tangible
securities, before sanctioning the credit facility to a customer. The bankers prefer
such securities that carry less risk of depreciation due to market fluctuations and
are easily saleable, even under changing market conditions.
Common securities against banker advances are as under :

PLEDGE
Pledge is the actual delivery of the movable & tangible property to the
lender, as a security for a credit. In a pledge, the possession of movable assets is
with bank but the ownership remains with the client. Pledge is against short-term
finances and is considered to be the best security for the bank. The commodities
that are pledged include generally, raw material, consumables, finished goods and
in certain cases work in process (WIP).

MARGIN:
For every credit, the bank needs security with margin or cushion. Similar is
the case with pledge. For example, if, there is 25% margin requirement then to
obtain loan of Rs.1 million, the security that is to be pledged should be of worth Rs.
1.25 million.
Since, in pledge, the possession of the goods is with bank, so bank keeps
these goods in the godowns under the custody of Mucaddams .

MUCADDAMS:
People who look after the pledged goods for bank are called Mucaddam. If
cotton (raw material) is to be pledged by the bank, it doesn‟t mean that this cotton
will be kept in bank; such type of goods is kept in the godowns of the company. So,
to make these goods secure, the bank appoints its own men called Mucaddams to
take care of stock.

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PRECAUTIONS:
There are certain factors that a banker must take into consideration before
advancing against pledge.

1) Client:
In case of pledge, godowns are in the premises of the clients under the
custody of Mucaddams, whose honesty can be bought at any time. Therefore
greater risk is imposed by the client. So, the must be satisfied with the honesty and
credibility of the client.

2) Nature of Commodity:
The banker must be aware of the nature of the property i.e. whether the
commodity is a perishable item like sugar. Also the commodity being pledged
should be easily saleable, so that in case of default of client, bank can easily sell it
in the market.

3) Market Awareness:
A banker must have market awareness e.g.. fluctuation in prices. Such
commodities should not be pledged that might have low demand in the market and
have many associated risks.

4) Suitability of Godown:
Suitability of godown depends upon the nature of the commodity. Banker
must be fully satisfies with the appropriation of godown. Like in case of medicines
to be pledged, the godown should have clean environment and proper mechanism
of cooling, to maintain the temperature .

5) Proper Valuation:
Whenever goods are pledged, the banker should be aware of the true cost
of the product as the client always overvalues his products. Sales taxes, excise

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duties are also paid on the finished goods. So a banker must have knowledge
regarding all these things.

6) Insurance:
The goods offered for security must be properly insured. Banker must
analyze all the associated risks of the goods. So, to cover these risks banker
should decide about the insurance of the commodity .

HYPOTHECATION
When an immovable property is offered for security against a credit but both
the ownership and possession is left with the borrower, the goods are said to be
„hypothecated‟. Securities like machinery, stocks etc. are offered for hypothecation.
Lending against hypothecation of goods is very risky. The control of bank is weak
so greater risk is involved in hypothecation.
In case of hypothecation
a) The banker reserves the right to inspect the goods hypothecated to
him and can ask for periodic stock reports, where necessary.

b) The banker, for his protection, may ask the borrower to insure. The
banker may himself do so and recover the expenses from the
borrower.

c) The banker may ask the borrower to maintain a balance of goods


sufficient to fulfill the margin requirements.

For the creation of hypothecation, the bank gets the letter of hypothecation
signed by the client. This deed is got registered in case of both public and
private limited companies, with the Registrar of Companies (SECP ).

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MORTGAGE
In mortgage, immovable assets are offered as security. A mortgage means,
to surrender the proprietary rights of a property. The transferor of property is called
a mortgagor and the transferee (bank) is called a mortgagee .
Before advancing against immovable property as security, the bankers
conduct following preliminary enquiries:

1) NATURE AND VALUE OF PROPERTY:


The bankers satisfy themselves that whether the property is suitable for
security purposes and that in case of forced sale he would not suffer any loss. For
this purpose, the bankers inspect the property and property visit report (described
in next section) is prepared. Also, the bankers hire the services of different
valuators to assess the right value of property (property valuation report prepared
by the valuators will be discussed in the next section).

2) INVESTIGATION OF TITLE:
The must be satisfied that his borrower has a good title to the property. The
bankers, therefore, conduct a proper investigation into the borrower‟s title to the
property, through their own legal advisers.

3) SEARCH FOR PRIOR CHARGES:


A search is made (with Registrar of Companies), to ensure that there exists
no prior charge on the property. If the title deeds of the property are in the name of
more than one person, the search should be directed against the name of each
person through whom the title is made. For this purpose, the bank also gets fresh
NEC i.e. Non- Encumbrance Certificate, issued by the registrar indicating that no
lien or charge etc. has been created on property being mortgaged, upto a specific
date.
After, a banker is satisfied with the property offered for security; mortgage
against this property is created through „Mortgage Deed‟. For this purpose, the

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original title documents (e.g. registered sale deed) are deposited in the bank with
the mortgage deed. Along with having the title documents of property, the bank
requires:

 Memorandum of Deposit of Title Deed


 Agreement to Create Mortgage
 General Power of Attorney (registered)

General Power of Attorney is registered with the registrar of the area where
the property is located (i.e. where the sale deed had been registered .

Usually, two types of Mortgages are being created in the bank (BAL, Cir.
Road), for the purpose of collateral.

1) EQUITABLE MORTGAGE (E/M):


When a mortgage deed is attached with the title documents (registered sale
deed) only and is deposited in the bank, it is known as „Equitable Mortgage‟ or
„Mortgage by deposit of title deed‟. It is the most common form of mortgage
created in the bank.

2) REGISTERED MORTGAGE (R/M):


When the mortgage deed between the bank and the client is registered, it
becomes a registered mortgage. Mortgage deed is registered with the registered
with the Registrar of the Companies. It is an expensive mortgage and is created
when the title documents are weak or the client is not much trustworthy .

CREATION OF CHARGE:
Charge means the legal right on the assets of the person (company). In
case of limited companies, banks generally create their charge on the assets of the

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company, as security. The charge is registered with the Registrar of the
Companies (SECP).

LIEN ON DOCUMENTS:
Like charge, bank creates its lien on the documents in its possession, as
security. For example, in case of import transaction under L/C, bank creates lien
on import documents.

GUARANTEES:
Along with other securities, bank may rely on other guarantees like personal
guarantee, to protect himself against the advances .

PROCESSING OF LOAN APPLICATION


Whatever money the banker holds is that of his customers who have
entrusted the bank only because they have full confidence in the expert handling of
money by their banker. Therefore, the banker must be very careful and ensure that
his depositors‟ money is advanced to safe hands where the risk of loss does not
exist.
So, when a customer requests his banker to facilitate him with different
credit facilities. The banker, first, assess the credibility of customer and the market
conditions. The elements of character, capacity, capital and market conditions help
a banker in arriving at a conclusion regarding the safety of advances .

CHARACTER:
It is the most important factor in determining the safety of advances, for
there is no substitute for character. A borrower‟s character can indicate his
intention to repay the advance, since his honesty and integrity is of primary
importance. If the past record of the borrower shows that his integrity has been
questionable then the bakers usually try to avoid such a customer .

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CAPACITY:
This is the management ability factor, which tells how successful a business
has been in the past, and what are the future possibilities are. Before advancing
loan a banker must be satisfied with the sources of the repayment of the funds .

CAPITAL:
The bankers also check the property capital of the borrower. This property
can be kept as a security of loan. In other words if the businessman financial
condition is sound then can be lended, otherwise not .

CIB REPORT:
Bank cannot sanction any credit to a customer, unless it gets Credit report
from CIB report from CIB (Credit Information Bureau, SBP). Before making any
decision about the client, bank needs a CIB report. Therefore, first of all, the
banker requests CIB to provide him the credit report of client. This report indicates
all the credit facilities (outstanding) availed by the client .

CREDIT LINE PROPOSAL (CLP)


After being satisfied with the credibility and integrity of the applicant, the
processing of loan application starts with the preparation of Credit Line Proposal
(CLP). According to my observation, it has been the vital and most important task
assigned to the credit officers in BAL Cir. Road.
In a CLP, every information regarding the client and his business is
stipulated as:

 Total existing facilities (limit), their outstanding value and the securities that
were provided against these facilities.

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 Total proposed limit of credit and the securities provided against it. The
credit officer does the analysis and verification of these securities.

BUSINESS ON OTT BASIS:


Client may conduct a business with bank on OTT (One Time Transaction)
basis. When a client wants his banker to facilitate him with a certain credit only for
a single transaction, then he would ask for OTT limit of credit facility. For example,
in case of OTT limit for SLC, credit facility expires with the completion of L/C cycle .

REGULAR CREDIT LIMIT:


But, if the client wants to route a regular business with the bank, then he
requests for regular credit limit of credit facilities for a specific period .

 Customer‟s background, his relationship with the bank (if he is an existing


customer), his relationship with other banks.

 Purpose of facility and the terms and conditions regarding the credit .

 Nature of his business and what are the market conditions & opportunities
for the business.
 Business Reciprocity/ reciprocal business is stipulated on the proposal,
which means the expected business that would be routed through the bank for
these facilities. Banks calculates his profitability on the basis of this business.

 Financial Analysis:
Financial Analysis of the business of the customer constitutes the vital most
important part of a proposal. Banker makes an analysis on liquidity, leverage and
profitability of his business.
But, in BAL Circular Road Branch, I observed that most of the financial
statements were being prepared in a vague way (by the business concerns).
Therefore, an extensive financial analysis for such businesses was not possible.
Perhaps, it is because of that specific area where financial statements are not
given much attention.

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 Finally, along with other information, banker himself gives his comments
and recommendations for the proposal .

DOCUMENTS (REPORTS) ATTACHED WITH


PROPOSAL

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For having the complete information regarding the client, his business and
the securities offered for advances (that already have been discussed), different
documents are prepared by the credit officers. All these documents are attached
with the proposal to get approval. These documents are as follows:

GRADE APPROVAL SHEET:


On the basis of nature of business and the client‟s relationship with
the bank (and other banks also), grades are assigned to client. For this
assessment, the bank prepares Grade Approval Sheet.

BASIC FACT SHEET:


Basic Fact Sheet stipulates the information of the client and his businesses
like; address, NTN, import registration No., corporate status, directors &
management etc.

VALUATION SURVEY REPORT:


For the proper valuation of securities offered against credit facilities, bank
renders the services of valuators (like Harvester Services Pvt. Ltd.). These
companies after conducting a proper survey, prepare Valuation Survey Report.
Both the resale and forced sale values of securities are mentioned on the report, in
detail.

PROPERTY VISIT REPORT:


Credit officers conduct a proper visit of the property. After having a thorough
visit of property, Property Visit Report is prepared. It elaborately describes the
nature of property and associated threats. It can be prepared in tabular or essay
form, depending upon the nature of property .

SECURITY ANALYSIS SHEET:

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In Security Analysis Sheet, it is assessed that how much security have been
offered in form of cash, marketable securities and other illiquid securities, and after
meeting the margin requirements, how much facility can be sanctioned .

RELATIONSHIP PROFITABILITY (Projected):


Relationship Profitability report is prepared to calculate the net income (net
spread) of the bank against the credit facilities. Bank arrives at net spread by
subtracting the cost of funds from the total markup earned against credit facilities.
All these calculations are based on projections.

STATEMENT OF ACCOUNTS:
Account of a customer constitutes the basis of his relationship with bank.
So, account statement of a customer reflects the nature of the relationship
between the bank and costumer.
If required, the accounts statements of other banks of customer are also
obtained.

FINANCIAL STATEMENTS:
Along with other documents, financial statements of the business concern
are also attached.

APPROVAL OF CREDIT
When the credit officers are fully satisfied with the proposal of credit, then
they recommend it for approval by the BCC (Branch Credit Committee) or Head
Office.
BCC has an authority to approve the credit proposal upto a certain limit. But,
beyond that limit, it has to be approved be the Head Office Karachi. I have
observed that, head office raises different queries against the CLP and approves it
after being satisfied.

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PERIODIC INSPECTIONS
When a credit limit is approved for a customer and credit is sanctioned, the
major task of credit officers is to conduct periodic inspections (monthly, quarterly
etc.) of securities that have been offered. Banker must see that whether all the
margin requirements and other terms & conditions are being fulfilled by the
customer or not.

BANK ALFALAH LIMITED


BALANCE SHEET
1997-2000

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Particulars 1997 1998 1999 2000

Assets
Cash 471,538 721,285 1,687,256 2,044,725
Balances with other banks 60,636 386,211 1,161,434 1,798,086
Money at call & short notice 400,000 248,000 100,000 890,000
Investments 3,348,747 3,406,514 4,993,035 4,967,542
Advances- net of provision 4,849,653 7,757,708 10,327,324 15,242,317
Opening fixed assets 175,397 263,760 1,153,607 1,231,161
Other assets 1,220,666 1,537,629 1,596,952 1,403,328
10,526,637 14,321,107 21,019,608 27,577,159
Liabilities
Deposits & other accounts 9,018,777 11,878,221 15,820,473 20,481,568
Borrowing from other
banks, agents etc. 553,042 1,348,313 2,972,240 4,639,130
Bills payable 64,491 51,737 120,868 106,353
Other liabilities 167,079 176,630 372,855 625,312
Deferred liabilities 9,807 7,400 6,892 6,694
9,813,196 13,462,301 19,293,328 25,859,057
Net Assets 713,441 858,806 1,726,280 1,718,102
Presented by
Share capital 600,000 600,000 600,000 600,000
Reserve fund, other reserves 111,021 255,094 286,399 299,469
Unappropriated profit 2,420 3,712 8,931 1,211
Shareholder’s equity 713,441 858,806 895,330 900,680
Particulars 1997 1998 1999 2000

EVERYTHING WE DO IS FOR YOU 106


Shareholder’s equity 713,441 858,806 895,330 900,680
Surplus/(deficit) on
revaluation of investments - - - (13,528)
Surplus on revaluation of
fixed assets - - 830,950 830,950
713,441 858,806 1,726,280 1,718,102

BANK ALFALAH LIMITED


INCOME STATEMENT

EVERYTHING WE DO IS FOR YOU 107


1997-2000

Particulars 1998 1999 2000

Markup/interest & discount earned 1,625,352 1,905,808 2,258,527


Less: cost/return on deposits etc. 1,313,564 1,474,343 1,724,041
311,788 431,465 534,486
Fees, commissions & brokerage 39,438 58,043 103,838
Profit from investment securities 3,345 13,792 19,617
Other operating income 121,754 114,250 147,644
Total 164,537 186,085 271,369
Net Revenue 476,325 617,550 805,855
Operating expenses:
Administration expenses 337,447 402,734 503,256
Provisions against non-performing
advances – net 94,756 (136,076) (103,950)
Total operating expenses 432,203 266,658 406,925
Operating profit 44,122 350,892 398,930
Other income 23,614 3,523 1,420
Profit before tax 67,736 354,415 400,350
Profit after tax 145,365 156,524 215,350

TREND ANALYSIS

EVERYTHING WE DO IS FOR YOU 108


BANK ALFALAH LIMITED
BALANCE SHEET
1997-2000

Particulars 1998 1999 2000


Assets % % %
Cash 52.09 133.84 21.20
Balances with other banks 536.93 200.69 54.88
Money at call & short notice (38.11) 59.70 789.96
Investments 1.68 46.28 (40.02)
Advances- net of provision 59.98 33.11 4.91
Opening fixed assets 50.40 337.26 6.96
Other assets 26.21 3.84 (12.51)
Total Assets 34.81 46.79 31.21
Liabilities
Deposits & other accounts 31.71 33.22 29.50
Borrowing from other banks,
agents etc. 144.01 120.02 56.21
Bills payable (19.81) 133.64 (12.01)
Other liabilities 5.69 111.09 67.70
Deferred liabilities (24.49) (6.90) (2.87)
Total liabilities 37.20 43.31 34.06
Net Assets 20.38 101.01 (0.46)

EVERYTHING WE DO IS FOR YOU 109


Particulars 1998 1999 2000

Presented by
Share capital - - -
Reserve fund, other reserves 130.11 12.31 4.54
Unappropriated profit 53.39 140.60 (86.44)
Shareholder’s equity 20.38 4.25 0.60
Total 20.38 101.01 (0.46)

EVERYTHING WE DO IS FOR YOU 110


COMMENTS
ASSETS
1. The level of cash has increased by 53% in 1998, 134% in 1999, and 21.2%
in 2000 and the reasons behind increase in cash in 1998 were the opening of five
new branches in Karachi, Lahore & Sialkot, and the recovery of non-performing
loans. In 1999, economy was revived to some extent after Nuclear Test, which had
a positive effect on the cash of bank. Also the placement and the cash in hand in
local currency increase, and took the level of cash up with them. In 2000, there is a
normal increase in cash, which is because of expansion in branch network of the
bank.

2. Balances with other banks have increased by 53.7% in 1998, 200.7% in


1999 and 54.9% in 2000. Bank balances have increased drastically in 1999, due to
the drastic increase in bank balances outside Pakistan.

3. Money at call has decreased in 1998 by 36%, increased by 59.7% in 1999


and has increased tremendously by 790% in 2000. Call money is a highly valuable
account and its increase or decrease does not signify much. According to balance
sheet, call money increased to 38% in 1998 and increased by 790% in 2000. This
does not portray the true picture as the level of call money at the date of
preparation of the statements might be zero but that situation could have changed
ever in the next day.

4. Investment has increased in 1998 by 1.7%, in 1999 increase is 46.3% and


in 2000 it has decreased to 40%. The increase in 1999 by 46.3% is due to the
heavy investment in Federal Investment Bureau and Treasury Bills of Government.

5. Advances have increased to 60% in 1998, 33.1% in 1999 and 4.91% in


2000. Some negotiations have been held with almost all the borrowers and number
of accounts has been revived for non-performing loans converted into profit

EVERYTHING WE DO IS FOR YOU 111


generating assets. So increase in advances in 1998 & 99 is mainly due to this
reason.

6. Total Assets increase by 35.99% in 1998, 46.79% in 1999, which signifies a


tremendous increase in business of bank.

LIABILITIES
1. Deposits have increased in 1998 by 31.7%, in 1999 increase is 33.2% and
in 2000 the increase is 29.5%. This increase is due to the expansion of branch
network of the bank and this increasing trend is very encouraging for the bank.

2. Borrowing from other banks is increasing but following a decreasing trend,


which shows that the bank is gaining control over its borrowings and is
emphasizing more on deposits. This shows better management policies of bank in
order to decrease cost of funds.

3. Although the bank is on its way to expansion and for the purpose of
expansion it needs to have borrowing. Therefore increase in total liabilities is not
that much alarming.

EVERYTHING WE DO IS FOR YOU 112


TREND ANALYSIS
BANK ALFALAH LIMITED
INCOME STATEMENT
1997-2000

Particulars 1998 1999 2000


% % %
Markup/interest & discount earned 53.8 17.2 18.5
Less: cost/return on deposits etc. 40.6 12.2 16.9
154.9 38.6 23.8
Fees, commissions & brokerage (19.9) 47.2 78.8
Profit from investment securities 100 (97.1) 43.1
Other operating income (4.8) (36.0) 21.6
Total (7.11) (8.98) 45.8
Net Revenue 59.1 22.02 30.5
Operating expenses:
Administration expenses 44.7 19.3 25.0
Provisions against non-performing
advances – net 27.2 (243.6) (23.6)
Total operating expenses 46.5 (38.3) 52.6
Operating profit 633.7 613.4 13.7
Other income 57.3 68.6 (60.1)
Profit before tax 910.1 423.5 12.97
Profit after tax - 7.63 37.58

EVERYTHING WE DO IS FOR YOU 113


COMMENTS
1. Mark-Up
There is a continuous increase in mark up because the bank has increase
its advances due to which mark up recovered have increased. Also there is an
expansion in business.

2. Cost /Return on Deposits


Cost on deposits is continuously increasing because the bank deposits are
increasing. The increase in revenue has been in higher percentage as compared
to cost, which is encouraging feature.

3. Administrative Expenses
The administrative expenses have been on a consistent rise. This is not a
bad sign and shows the expansion in the business, but only if the deposits have
also been increasing along with expanses, which is true in case of BAL .

4. Total Operating Expenses


Total operating expenses increase by 40.5% in 1998, but decrease in 1999
by 38.3% and again increase in 2000 by 32.6%. The decrease in 1999 is due to
recovery of loans, which has resulted in decrease in provisions against non-
performing advances.

5. Profit Before Tax


The bank was going in loss in 1997 in respect of operating profit, which was
in negative figures, but the whole situation changed in 1998 and BAL recovered its
profitability.
In 1999, operating expanses have decreased tremendously which has
resulted in increase in profit before tax.

EVERYTHING WE DO IS FOR YOU 114


6. Total Equity
Total equity has increased in 1998-1999 from 20.38% to 114.98%, which is
a tremendous increase. This increase is due to the increase profitability of the bank
and surplus on revaluation of fixes assets but in 2000 a small decrease has been
observed, which is only due to the deficit in revaluation of fixed assets.

EVERYTHING WE DO IS FOR YOU 115


VERTICAL ANALYSIS
BANK ALFALAH LIMITED
BALANCE SHEET
1997-2000

Particulars 1998 1999 2000

Assets % % %
Cash 5.04 8.03 7.41
Balances with other banks 2.70 5.52 6.52
Money at call & short notice 1.73 0.48 3.23
Investments 23.79 23.75 18.02
Advances- net of provision 54.17 49.13 55.27
Opening fixed assets 1.84 5.49 4.46
Other assets 10.73 7.60 5.09
Total Assets 100.00 100.00 100.00
Liabilities
Deposits & other accounts 88.23 82.51 79.20
Borrowing from other banks,
agents etc. 10.02 15.50 17.94
Bills payable 0.38 0.63 0.41
Other liabilities 1.31 1.32 2.42
Deferred liabilities 0.06 0.04 0.03
Total liabilities 100.00 100.00 100.00

EVERYTHING WE DO IS FOR YOU 116


Particulars 1998 1999 2000

Presented by
Share capital 69.87 32.50 34.92
Reserve fund & other reserves 29.70 15.52 17.43
Surplus on revaluation of F/Assets - 45.00 48.36
Unappropriated profit 0.43 6.98 0.70
Total equity 100.00 100.00 100.00
Total liabilities 94.00 91.22 93.80
Total equity 6.00 8.78 6.20
Total liabilities & equity 100.00 100.00 100.00

EVERYTHING WE DO IS FOR YOU 117


COMMENTS
ASSETS
The advances and investments constitute the major portion of the total
assets. This is typical for a bank, as banks do not have considerable fixed assets.
The investments have been decreased and are at 18.02% in 2000. It is
because of the deficit on revaluation, which has resulted due to the decrease in the
value of government securities and shares of public limited companies (where BAL
had invested).
The portion of advances has increased by the year. This is a healthy sign
and shows that the business is expanding.

LIABILITIES
On the liability side, deposits and borrowings are the major accounts. The
percentage of deposits is decreasing whereas percentage of borrowings is
increasing.
Despite of the considerable increase of 30% (aprox.) in deposits, the
decrease in % of deposits to total liabilities is due to the increase in total liabilities
resulted due to the increase in borrowings from other banks. Since, the bank is on
its way to expansion and for the purpose of expansion it needs to have borrowing.
Therefore increase in total liabilities is not that much alarming.

EVERYTHING WE DO IS FOR YOU 118


VERTICAL ANALYSIS
BANK ALFALAH LIMITED
INCOME STATEMENT
1997-2000

Particulars 1998 1999 2000


% % %
Markup/interest & discount earned 90.81 91.10 89.27
Less: cost/return on deposits etc. 73.39 70.48 68.15
17.42 20.63 21.13
Fees, commissions & brokerage 2.20 2.77 4.10
Profit from investment securities 0.19 0.66 0.78
Other operating income 6.80 5.46 5.49
Total 9.19 8.90 10.73
Net Revenue 26.61 29.52 31.85
Operating expenses:
Administration expenses 18.85 19.24 19.89
Provisions against non-performing
advances – net 5.29 (6.50) (4.11)
Total operating expenses 24.15 12.75 16.08
Operating profit 2.47 16.77 15.77
Other income 1.32 0.17 0.06
Profit before tax 3.78 16.94 15.82

EVERYTHING WE DO IS FOR YOU 119


COMMENTS
Mark up earned and the cost paid constitutes the major portion of the total
revenue. During the last three years, there is almost consistency in mark up
earned and paid.
In year 99, deposits contributed more towards the revenue as compared to
year 2000. However, there is minor decrease in costs too.
There is no other significant change except the operating expenses, which
decreased drastically due to the recovery of non-performing advances that has
already been discussed in detail. This also has resulted in tremendous increase in
profits.

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PROFITABILITY RATIOS

1. PROFIT AFTER TAX / TOTAL REVENUE

1998 = [145365 / 1789889] * 100


= 8.12%

1999 = [156524 / 2091893] * 100


= 7.48%

2000 = [215350 / 2529896] * 100


= 8.51%

COMMENTS
The net profit margin of the bank shows an increasing trend. It, however,
came down to 7.48% in 1999,even despite the high profitability. It was because of
the greater amount of tax paid during the year. Moreover, the denominator i.e. the
total revenues have been increasing continuously which signifies the expanding
business operations.

2. NET INCOME / CAPITAL FUNDS

EVERYTHING WE DO IS FOR YOU 121


1998 = [67,736 / 858806] * 100
= 7.8%

1999 = [354,415 / 1,726,280] * 100


= 20.53%

2000 = [400,350 / 1,718,102] * 100


= 23.30%

COMMENTS
This ratio i.e. return on equity shows the return the owners of the business
enjoy after paying all the financial expenses and other liabilities of the business.
The return on equity increased from 7.8% to 23.30%, which is a tremendous
increase and has resulted due to the growing profits of the banks. In 1999, pre-tax
profit has increased almost by 5 times of previous year‟s profit. So, a consistent
increase in profit shows a positive and a very healthy and pleasing news for the
owners.

3. NET INCOME / TOTAL ASSETS

EVERYTHING WE DO IS FOR YOU 122


1998 = [67,736 / 14,321,107] * 100
= 0.47%

1999 = [354,415 / 21,019,608] * 100


= 1.70%

2000 = [400,350 / 27,577,159] * 100


= 1.51%

4. NET INCOME / RISK ASSETS

1998 = [67,736 / 7,757,708] * 100


= 0.87%

1999 = [354,415 / 10,327,324] * 100


= 3.40%

2000 = [400,350 / 15,242,317] * 100


= 2.62%

5. OPERATING EXPENSES / NET REVENUE

EVERYTHING WE DO IS FOR YOU 123


1998 = [432,203 / 476,325] * 100
= 90.0%

1999 = [266,658 / 617,550] * 100


= 43.17%

2000 = [406,925 / 805,855] * 100


= 50.49%

COMMENTS
With the expansion of business, the deposits have increased throughout
from year 98 to 2000, which resulted in an increase in mark-up received which in
turn has increased net income.
In year 98, Special Asset Management Division was made with an intention
to recover the non-performing advances. As a result, a large number of non-
performing advances were recovered in 1999, which resulted in drastic decrease in
operating expenses, as evident in ratio no.5. That‟s why; there is a tremendous
increase in pretax profit in year 99.
In 2000, increasing trend continued and bank‟s pretax profit for the year
grew by 12.96percent to Pak Rupees 400 million. This year, some non-performing
advances were also recovered.
So, as far as the whole profitability of the bank is concerned, I can safely
say that bank is going on the way of progress and its profitability is increasing
consistently. It is also evident from the following graph :

EVERYTHING WE DO IS FOR YOU 124


Profit (Rs. In 000)

500000

400000

300000

200000

100000

0
FY98 FY99 FY2000

EVERYTHING WE DO IS FOR YOU 125


ADMINISTRATIVE EXPENSES TO DEPOSITS

= [ADMIN. EXPENSES / DEPOSITS] * 100

1998 = [337447 / 11878221] * 100


= 2.84%

1999 = [402559 / 15820473] * 100


= 2.54%

2000 = [503256 / 20481568] * 100


= 2.46%

COMMENTS
This ratio is very helpful in determining the relationship between the
deposits and the costs associated with maintaining them. The benchmarked figure
is 2% to 3% in the banking sector. The administrative expenses should exceed the
level of 3%, for deposits.
The ratio signifies the management‟s efficiency and shrewdness of
maintaining deposits. In no year since 1998 this ratio crossed 3% and shows a
decreasing trend. This decreasing trend, even with the increase in deposits,
signifies management‟s commitment and professional outlook.

EVERYTHING WE DO IS FOR YOU 126


LIQUIDITY RATIOS
1. QUICK ASSETS / TOTAL DEPOSITS

1998 = [4,614,510 / 11,878,221] * 100


= 38.85%

1999 = [7,741,115 / 15,820,473] * 100


= 48.93%

2000 = [9,570,138 / 20,481,568] * 100


= 46.73%

COMMENTS
The main requirement for any commercial bank, according to the Prudential
Regulations of State Bank of Pakistan, cash reserve (statuary reserve) should be
5% & in form of government securities should be 15% of total deposits. So to meet
this collective requirement a bank should have at least 20% of total deposits in
form of quick assets. Here, in this case, the ratio in all three years is above 20%,
which is quite satisfactory.

EVERYTHING WE DO IS FOR YOU 127


2. FINANCING / DEPOSITS + BORROWED FUNDS

1998 = [7,757,708 / 13,226,534] * 100


= 58.65%

1999 = [10,327,324 / 18,792,713] * 100


= 54.95%

2000 = [15,242,317 / 25,120,698] * 100


= 60.68%

COMMENTS
As, continuous increase has been observed in borrowing from other banks
because of expansion in branch network.
Increasing trend in the ratio during the last three years indicates that the
bank is utilizing its funds properly. It would lead in a decrease in the idle cost of
funds. So it is a healthy sign and indicates the management‟s efficiency.
Decrease in year 1999, due to the increase in bank borrowing. However,
this is the position on the last day of the year, which might have been different
during the year. As far as the advances and deposits are concerned, both have
increased at a rate of 33%.

EVERYTHING WE DO IS FOR YOU 128


3. TOTAL FINANCING / TOTAL DEPOSITS

1998 = [16,721,673 / 11,878,221] * 100


= 140.8% or 1.4:1

1999 = [17,418,600 / 15,820,473] * 100


= 110.1% or 1.1:1

2000 = [33,558,826 / 20,481,568] * 100


= 163.8% or 1.63:1

COMMENTS
Total financing consists of both fund based and non-fund based. It
constitutes our receivables, whereas deposits are our liabilities. In case of BAL,
ratio between our receivables and payables is more than 1:1. More receivables
show a better liquidity position of the bank.

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4. DEMAND DEPOSITS / TOTAL DEPOSITS

1998 = [7,031,303 / 11,878,221] * 100


= 59%

1999 = [10,233,922 / 15,820,473] * 100


= 65%

2000 = [13,438,259 / 20,481,568] * 100


= 66%

COMMENTS
This is very important ratio that contributes in the banks cost of funds.
Demand deposits include the current and saving deposits, on which less return is
paid as compared to fixed deposits, which leads to the low cost of funds. In this
case, there must be more short-term advances given by the bank.
In Bank Alfalah, there is continuous increasing trend in this ratio, which
indicates that bank is emphasizing more on demand deposits. Benefit is also
evident from the decreasing trend in cost of funds. Bank is also dealing in short
term advances that reduce the fear of idle cost. So, here I would appreciate the
management policy.

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5. DUE TO BANKS / TOTAL DEPOSITS

1998 = [1,348,313 / 11,878,221] * 100


= 11.35%

1999 = [2,972,240 / 15,820,473] * 100


= 18.79%

2000 = [4,639,130 / 20,481,568] * 100


= 22.65%

COMMENTS
This ratio signifies the financial mix of bank. In ideal situations, there should
be decreasing trend or consistency in this ratio.
In case of BAL, although there is a tremendous increase in deposits but
borrowing is also increasing considerably. Since, this is the position on the last
day, so situation might have been different during the year. Also, the increase in
bank borrowing might be due to the expansion in branch network, where more
funds are required in initial years.

EVERYTHING WE DO IS FOR YOU 131


6. BORROWED FUNDS / TOTAL FINANCING

1998 = [1,348,313 / 16,721,673] * 100


= 8.06%

1999 = [2,972,240 / 17,418,600] * 100


= 17.06%

2000 = [4,639,130 / 33,558,826] * 100


= 13.82%

COMMENTS
This ratio depicts the contribution of borrowed funds in the total financing. In
Bank Alfalah, the borrowed funds comprise of borrowing from other banks and
agents. Increase in this ratio is due to increase in bank borrowing that has already
been discussed.
However in year 2000, due the considerable increase in non-fund based
financing, the ratio has come down.

EVERYTHING WE DO IS FOR YOU 132


7. DUE FROM BANKS / TOTAL ASSETS

1998 = [386,211 / 14,321,107] * 100


= 2.70%

1999 = [1,161,434 / 21,019,608] * 100


= 5.52%

2000 = [1,798,086 / 27,577,159] * 100


= 6.52%

COMMENTS
This ratio signifies the percentage of receivables in the total assets. In
normal practices, bank usually keeps some of its funds in other banks, as it is safe
source of financing. However, this percentage should not be too high. High
percentage would mean that bank is not financing in open market. But, again it
depends upon the market conditions.
In case of BAL, this ratio is quite normal. A minor increase in this ratio is
being observed which is normal practice with the expanding branch network.

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8. DUE FROM BANKS / DUE TO BANKS

1998 = [386,211 / 1,348,313]


= 0.29:1

1999 = [1,161,434 / 2,972,240]


= 0.39:1

2000 = [1,798,089 / 4,639,130]


= 0.39:1

COMMENTS
In ideal situations, this ratio should be 1:1 or more. Whereas, in this case,
the ratio is below the standards. Receivables are less than payables to banks,
which is due to increase in bank borrowing. But I have observed this scenario in
most of the cases of banks including many successful foreign banks like Habib
Bank AG Zurich etc. However, there is an increasing trend in this ratio, which
shows better management approach towards liquidity position.

EVERYTHING WE DO IS FOR YOU 134


CAPITALIZATION RATIOS

1. CAP. FUNDS / TOTAL ASSETS


1998 = [858,806 / 14,321,107] * 100
= 6.0%

1999 = [1,726,280 / 21,019,608] * 100


= 8.21%

2000 = [1,718,102 / 27,577,159] * 100


= 6.23%

COMMENTS
The ratio signifies the bank‟s contribution of equity in total assets. Strong
equity base indicates the low risk factor. In usual practice of banks, they
emphasize more on deposits than injecting new equity in the business.
In case of Bank Alfalah, the percentage of shareholder‟s equity to total
assets is almost consistent. However, the increase or decrease in capital funds is
due to surplus or deficit on revaluation.
Increase in 99 is due to the surplus, whereas decrease in year 2000 is due
to deficit on revaluation.

2. CAP. FUNDS / RISK ASSETS

1998 = [858,806 / 7,757,708] * 100


= 11.07%

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1999 = [1,726,280 / 10,327,324] * 100
= 16.72%

2000 = [1,718,102 / 15,242,317] * 100


= 11.27

3. CAP. FUNDS / TOTAL FINANCING

1998 = [858,806 / 16,721,673] * 100


= 5.1%

1999 = [1,726,280 / 17,418,600] * 100


= 9.91%

2000 = [1,718,102 / 33,558,820] * 100


= 5.12

4. CAP. FUNDS / TOTAL DEPOSITS

1998 = [858,806 / 11,878,221] * 100


= 7.23%

1999 = [1,726,280 / 15,820,473] * 100


= 10.91%

EVERYTHING WE DO IS FOR YOU 136


2000 = [1,718,102 / 20,481,568] * 100
= 8.39%

COMMENTS
These are very crucial ratio and have great importance especially for the
creditors. These show the long-term solvency of the organization.
In all the capitalization ratios, one thing is common during the last three
years, that with the expansion in branch network, and increase in business
operations in the form of advances and deposits, bank‟s capital base has been
consistent. The change (decrease) in year99 is just because of the revaluation.
It is because, that the bank is on the way of expanding its business and for
this purpose it is relying much on its deposits. But I think that the bank should also
increase its level of reserves to sustain the trust of creditors.

EVERYTHING WE DO IS FOR YOU 137


CAPITAL FORMATION RATE
(COST OF FUNDS RATIO)

= [(RETURN ON DEPOSITS + OPERATING EXP.) /


(TOTAL DEPOSITS + BORROWINGS)] * 100

1998 = [(1313564 + 432203) / (11878221 + 1348313)] * 100


= 13.20%

1999 = [(1474343 + 266658) / (15820473 + 2972240)] * 100


= 9.26%

2000 = [(1724041 + 406925) / (20481568 + 4639130)] * 100


= 8.48%

COMMENTS
This ratio indicates the bank‟s overall cost against its total obligations and
provides the base for banks overall lending (credit) operations. This ratio shows a
decreasing trend. Since, I have discussed earlier that the deposits constitutes the
major portion of bank‟s obligation, which are the cheapest source of finance. The
bank also has controlled its administrative expenses and recovered its non-
performing advances in 99 and 2000, which resulted in drastic decrease in total
operating expenses. That is why; average cost of funds has decreased from
13.20% to 8.48% during the last three years. This decrease in its cost of funds has
resulted in higher profitability of the bank.

EVERYTHING WE DO IS FOR YOU 138


For the purpose of comparison, here are the capital formation rates of
Askari Commercial Bank, a top leading Pakistani commercial bank in the private
sector.
Capital Formation Rate Bank Alfalah Askari Commercial Bank
1998 13.20 13.02
1999 9.26 10.04
2000 8.48 9.00

EVERYTHING WE DO IS FOR YOU 139


RELATION BETWEEN CONTINGENT LIABILITIES AND
SH. CAPITAL & RESERVES

1998 = [2,242,152 / 855,094]


= 2.62 times

1999 = [2,711,578 / 866,399]


= 3.13 times

2000 = [3,521,897 / 899,469]


= 3.92 times

COMMENTS:
According to the requirement of Prudential Regulations of State Bank of
Pakistan, contingent liabilities of a bank should not exceed 10 times of its paid up
capital and reserves.
In Bank Alfalah, the ratio is highly satisfactory. It is quite low and fulfills the
requirements of SBP. Even, there is a lot of margin available.

EVERYTHING WE DO IS FOR YOU 140


STRENGTHS
Bank Alfalah is considered to be a very sound bank in the financial circles. A
bank, where the customers can safely keep their money as long as they want. I am
pointing some of the major strengths of the bank:

COMPASSIONATE CUSTOMER SERVICE


The officers of BAL are considered as one of the most able professionals in
the banking world (some belong to BCCI). However, they have added some local
flavor in accordance with their targeted segmented. Especially, in Circular Road
Branch, I observed that they interact with their clients as if they are their personal
friends and discuss about their problems as their own .

GOODWILL & TRUST


As a result of the compassionate and personalized services of the officers,
the clients‟ perception for BAL is very high. They have trust and feel themselves to
be secure while banking with BAL.

LOCATION
Bank Alfalah has opened all its branches at commercial areas so that the
customers or clients face no problems in reaching to the bank. For example,
Circular Road branch for being situated in business and commercial hub of Lahore
has second largest volume in trade finance .

FOREIGN TRADE BUSINESS


The bank is focusing on Trade Financing; it attaches great significance to
the development and maintenance of healthy correspondent relationships with
other banks and financial institutions. Towards this pursuit, BAL has developed
excellent business relations with foreign banks, whose support in terms of lines of
credit extended to the bank, has enabled it to handle the ever-growing trade

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volumes. During year 2000, the bank handled foreign trade business in excess of
PKR 30.6 billion, representing an increase of 92% over the previous year .

WIDE BRANCH NETWORK


Bank Alfalah‟s objective has been to expand its branch network to meet
clients‟ needs. It is heartening to note that in just three years, which is considered
the infancy stage in the industry, the bank has increased the branch network from
3 to 23. And, due to the growing business requirements, there are 10 proposed
branches in different cities. The expansion program is strategically important to
increase customer base and to approach different customer segments .

THE COMPUTERIZED SYSTEM


BAL has got a reliable and easy to use internal computer system. Every
information regarding the transactions in customers‟ deposits has been
computerized. Currently, bankexel is being practiced for this purpose but very
soon, a new program named „banksmart‟ will start functioning (it has started
functioning in Clifton branch).

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WEAKNESSES
Perfection is only the claim of Allah Almighty. No other being living or dead
can say this for itself. Similarly, Bank Alfalah also has some shortcomings that
need to be mentioned:

ADVERTISEMENT
BAL has formulized a lot of products and services for its customers, even
more than other commercial banks, but any advertisement on electronic media has
not been seen. Since, BAL‟s major competitor Union Bank Limited has started
large media campaign, so keeping in view these threats, Bank Alfalah should
emphasize more on its advertisement.

PROBLEMS OF EMPLOYEES
I observed during my internship that some of the employees were burdened
with over work. So I think that the work should be distributed according to their post
and capabilities.

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OPPORTUNITIES
Bank Alfalah has grown up its business with a very high pace and it has got
tremendous popularity, even with in a very short span of time. There are many
opportunities for the bank and by availing that it can stand amongst the top foreign
banks.

INFORMATION TECHNOLOGY
All the opportunities of the 21st century are to be availed in the information
technology. Information technology is the future. Therefore BAL should emphasize
much on IT, especially the E Banking. Bank can design a universal account like
other foreign banks, to enhance online facilities .

EXTENSION OF BRANCH NETWORK


Bank Alfalah‟s growing business requires an extensive branch network.
There are great opportunities for BAL for the expansion of its business.

GROWTH IN DEPOSITS
BAL has introduced a number of financial schemes including special royal
accounts. These accounts have their unique features (discussed earlier). During
the last three years, BAL‟s deposits have been increasing @ 30%, which is a very
healthy sign. Therefore, with the commencement of new schemes there can even
be a greater increase in its deposits.

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THREATS

ECONOMIC CONDITIONS
Despite the difficult circumstances that confronted the banking sector in
particular and the country in general, Bank Alfalah has been still highly profitable.
But, the facts can‟t be denied and there might be an adverse impact of such
situation.

COMPETITORS
Bank Alfalah is facing a strong competition by its major competitors; Union
Bank and Askari Commercial Bank. Business of these banks is also growing with
very high pace.

The SWOT analysis of the bank signifies that its strengths overcome its
weaknesses and its opportunities are more than its threats. This is a positive sign
for any organization.

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RECOMMENDATIONS
I spent six weeks of my internship in BAL Circular Road, Lahore. During
these six weeks, I felt myself to be a part of BAL. Even, this was my first
experience of working in a banking organization, but I learned a lot from this
experience. Based on my experience & observation regarding the operations and
policies of Bank Alfalah, I have tried to stipulate some recommendations for further
improvement.

MARKETING
BAL has formulized a lot of products and services for its customers, even
more than other commercial banks, but any advertisement on electronic media has
not been seen.
So, I think that there should be a proper marketing department and
advertisement expenditures of the bank should also be increased to improve its
visibility and to publicize its financial schemes.

ENHANCED COMPUTER NETWORK


The bank should emphasize much on computer technology. Like other
banks, BAL should enhance its on-line services. Bank, also should concentrate on
E-banking and use of ATM. Moreover, bank should also emphasize on enhancing
its website information.
One drawback that I observed in Circular Road Branch was manual
preparation of negotiable instruments like PO, DD etc. Due to growing business
requirements of concerned branch, it should be provided more facilities .

EXPANSION IN BRANCH NETWORK


Bank Alfalah‟s business has grown with a tremendous pace. There have
been considerable profits just with in a short span of time. Therefore, due to the
expanding business requirements, BAL should expand its branch network to
capture other business markets.

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TRAINING FACILITIES AND SEMINARS
Human resource constitutes the most valuable asset for an organization. To
improve the professional skills and quality, BAL has started six-months
comprehensive training program, that is really a commendable step taken by BAL.
Bank, apart from this program, conduct some training programs for existing
employees to improve their proficiency .
Also, Bank Alfalah should arrange some seminars to make its visions and
objectives, clear to every one.

EQUAL STATUS OF BRANCHES


One major & alarming drawback that I observed in Circular Rd. Branch, is
the inferiority complex faced by some employees. BAL Circular Rd. Branch, for
being situated in business and commercial hub, has its unusual importance and
has huge foreign trade business. But I observed some employees to be the victim
of complex. So, to avoid such discrepancies, seminars should conducted to signify
the importance of each branch.

EXPANSION & RECRUITMENT IN CIRCULAR Rd. BRANCH


BAL Circular Rd. branch has huge business volume, whereas the staff is not
enough to meet these requirements. I found that some employees were burdened
with overwork, even some clients complaint for the slow service. Therefore, more
staff should be recruited. Also, there should be an expansion in the area of branch
to meet the requirements of growing business transaction .

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LIST OF ABBREVIATIONS

BAL Bank Alfalah Limited


NIFT National Institutional Facilitation Technologies
DD Demand Draft
PO Pay Order
CDR Call Deposit Receipt
PS Pay Slip
RTC Rupee Traveller Cheque
B/E Bill of Entry
L/C Letter of Credit
B/L Bill of Lading
SBP State Bank of Pakistan
I/S Income Statement
B/S Balance Sheet
CLP Credit Line Proposal

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