CHAPTER # 1 EVOLUTION OF BANKING

ORIGIN OF THE WORD

The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentines bankers, who used to make their transactions above a desk covered by a green tablecloth. However, there are traces of banking activity even in ancient times. Roman Empire, where moneylenders would set up their In fact, the word traces its origins back to the Ancient stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome that of the Imperial Mint.

DEFINITION OF BANK
Bank is an institution which deals in money, receives savings of the people as deposits, which is a loan for a bank, and therefore it pays interest on it. It gives this amount of money to business enterprises as loans and receives interest on it. By keeping the rate of interest low on deposits and high on advances it makes profit. According to P. Crowther Bank is an institution which gets loans to lend and in this way creates credit money. The first modern bank was founded in Italy in Genoa in 1406, its name was Banco di San Giorgio (Bank of St. George).

Many other financial activities were added over time. For example banks are important players in financial markets and offer financial services such as investment funds. In some countries such as Germany, banks are the primary owners of industrial corporations while in other countries such as the United States banks are prohibited from owning non-financial companies. In Japan, banks are usually the nexus of cross share holding entity known as zaibatsu. In France "Bancassurance" is highly present, as most banks offer insurance services (and now real estate services) to their clients.

HISTORY
Banks have influenced economies and politics for centuries. Historically, the primary purpose of a bank was to provide loans to trading companies. Banks provided funds to allow businesses to purchase inventory, and collected those funds back with interest when the goods were sold. For centuries, the banking industry only dealt with businesses, not consumers. Banking services have expanded to include services directed at individuals, and risk in these much smaller transactions are pooled.

MAJOR FUNCTIONS OF COMMERCIAL BANKS

Creating Money

Commercial banks have the ability to create and to utilize the money. This is accomplished by lending and investing activities of commercial banks in cooperation with central bank. The increase in supply of money causes inflation and decrease in supply than the rate of production of goods causes deflation and both have bad effects on the economy. Payment Mechanism Providing for payment mechanism or the transfer of funds is one of the important functions performed by commercial banks and it is increasingly important as greater reliance is placed on the use of checks and credit cards. The increasing deficiency with which funds are managed is indicated by the gradual decline in money holding relative to the GNP (Gross National Production) over the year. Pooling of Savings Commercial banks perform a very important service to all sectors of economy by providing facilities for pooling of savings and making them available for economically and socially desirable purposes. Extension of Credit The primary function of commercial banks is the extension of credits to worthy borrowers. From the beginning, organizers of banks have been motivated by the opportunities presented by lending function and charters have been granted by the governments primarily because there was a need for credit in a particular community. In making credit available, commercial banks are rendering a great social service through their actions, production is increased, capital investments are expanded and higher standard of living is realized. Facilities for Financing of Foreign Trade Although foreign trade is basically the same as domestic trade, some differences necessitate international banking services provided by commercial banks. These

differences arise because of the existence of national monetary system, unfamiliarity with the financial ability of the buyers and sellers in foreign countries. Utilization of Resources In the new era, it is difficult to imagine that in the absence of banks people can make possible their savings and then their investments in different businesses. It is through the agency of banks that people can make savings and then these savings automatically flow into the channels, which are productive, both for saver and investor. Capital Formation Capital formation is one of the major factors in economic development. It is the increase in the stock of both material and human capital. Capital formation results when some proportion of societys present income is saved and invested in order to increase materials as well as humane capital. Safe Keeping Valuables The safe keeping of valuables is one of the oldest services provided by commercial banks. They have vaults that are difficult to enter even by the best of burglars and have established record of proper custody.

ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF PAKISTAN

Banks play an important role in the economic development of a country. If the banking system is unorganized and inefficient, it creates maladjustments and impediments in the process of development. In Pakistan, the banking system is very well organized. The State Bank of Pakistan established on July 1, 1948 stands at the apex and is responsible for the operation of the banking system in Pakistan. The

other banks, which form the banking structure in Pakistan, are playing an active role in the economic development of the country. The role of commercial banks in the growth and development of sound and healthy economy of the country is briefly discussed as under;

Saving Mobilization The commercial banks like National Bank of Pakistan, Habib Bank, Allied Bank, United Bank and Muslim Commercial Banks have opened up branches in urban and rural areas to mobilize savings of people. Financing Development Projects The banks and other development finance institutions like IDBP, ADBP, PICIC etc advance short and medium term loans for financing of the development projects both in the private and public sector and thus help in accelerating the rate of economic development in the country.

Facilitating Trade Activities The credit institutions collect the savings of the people and make them available for facilitating trade activities, both inside and outside the country. Creating Climate for Capital Formation A developed banking System is stimulant to growth and creates favorable climate for capital formation in the country. Helping SBP in Achieving Monetary Policies

The Commercial Banks under the supervision and guidance of the State Bank of Pakistan help in implementing and achieving the objectives of the monetary policy, which vary from time to time. Assisting in Development The commercial banks are profit-seeking enterprises. In order to maximize the profits, they have to maximize the loans. An organized banking system keeps a balance between liquidity and profitability and thus assists in the planned development of the economy. Provision of Agency Services The commercial banks provide agency services to the clients. They collect dividends and pay interest and premium on behalf of the clients. They keep their customers valuables in safe custody. They help in the mobility of capital and thus stimulate capital formation in the country. Making Capital Available for Investment The organized banking system helps in directing physical resources into productive channels. It also keeps a balance between the availability and requirements of the capital in the country.

Less Reliance on Foreign Capital A planned banking system by launching a vigorous campaign of mobilizing idle savings in the country can meet the capital development requirements from within the country. The country will thus have to rely less on foreign capital in financing the development projects. Profit Sharing Scheme

The commercial banks receive surplus balances of households in business and pay interest on the deposits of the clients. The banks have now introduced interest free banking in Pakistan. The depositors, instead of having a fixed rate on the deposits, will share the profit and loss of the banks. The profit and loss sharing (PLS) arrangement, which is an alternative to interest under Islamic Economic System, is now operating in Pakistan. Provision of Qarz-e-Hasna Qarz-e-Hasna Scheme has been prepared and launched by Pakistan Banking Council through nationalized commercial banks. Under the Qarz-e-Hasna Scheme, financial assistance is provided to the outstanding students, who are unable to pursue their studies due to financial difficulties. Loans are provided for pursuing studies both in and outside Pakistan. Export Promotion Cell In order to boost the exports, the banks have established Export Promotion Cell for the information and guidance of the exporters.

CHAPTER # 2 HISTORY & ORGANIZATIONAL STRUCTURE

HISTORICAL BACKGROUND OF BANKING IN PAKISTAN.

The history of banking system in Pakistan dates back to independence of Pakistan in August 1947 when various banks transferred their Head Quarters and funds to areas likely to fall in Indian banking system. According to various books there were 3106 branches of Indian scheduled banks in the undivided sub continent as on 1st March 1947 out of which only 487 branches were located in areas presently constituting Pakistan. However the number of scheduled banks drastically declined to 195 from 487 by 30th June 1948. At the time of partition there were only two banks having the honor to be the first commercial banks of Pakistan, namely Habib Bank Ltd, which was set up in 1941 with its Head Office in India and the Australasia Bank Ltd, which was established in 1944 with its Head Office in Pakistan. After the partition, an expert committee was set up and this committee recommended that the Reserve Bank of India being the central Bank of the

undivided India should continue to function as Central Bank of Pakistan and the Indian currency notes would continue to be legal tender in Pakistan till 30th September 1948. Subsequently it was set up and started functioning from 1st July 1948. Thus the history of Banking system in Pakistan started with the establishment of the State Bank of Pakistan which was inaugurated by Quaid-e-Azam Mohammad Ali Jinnah on 1st July, 1948. Consequently three banks were established which include Muslim commercial Bank Ltd. Bank of Bahawalpur in October 1948 and National Bank of Pakistan in 1949.

HISTORY OF NATIONAL BANK OF PAKISTAN

National Bank of Pakistan (the Bank) was established on November 9, 1949 under the National Bank of Pakistan Ordinance, 1949 in order to cope with the crisis conditions which were developed after trade deadlock with India and devaluation of Indian Rupee in 1949. Initially the Bank was established with the objective to extend credit to the agriculture sector. The normal procedure of establishing a banking company under the Companies Law was set aside and the Bank was established through the promulgation of an Ordinance due to the crisis situation that had developed with regard to financing of jute trade. The Bank commenced its operations from November 20, 1949 at six important jute centers in the then East Pakistan and directed its resources in financing of jute crop. The Bank's Karachi and Lahore offices were subsequently opened in December 1949. The nature of responsibilities of the Bank is different and unique from other banks/financial institutions. The Bank acts as the agent to the State Bank of Pakistan for handling Provincial/Federal Government Receipts and Payments on their behalf. The Bank has also played an important role in financing the country's growing trade, which has expanded through the years as

diversification took place. The various phases through which the bank went have been discussed in a sequence below: Formative Phase 1950s When NBP was first formed it had authorized capital equivalent to the amount of Rs. 60 million. In 1950 shares of the bank were also floated and taken up and by 1951 NBP had started foreign exchange business. The ordinance that was passed at the time of inception of NBP was amended to include ordinary commercial banking business as well and by 1952 it was felt that the development of NBP was so immense that it should be considered as the agent of State Bank of Pakistan. Thus by May of 1952 NBP had taken over the Government treasury work from the former agent, Imperial Bank. The expansion of NBP was quite apparent by 1959 when it had 129 fully functioning branches as compared to the meager 17 in 1950. Period of Expansion 1960s After the quick growth of the 50s NBP worked to establish itself as a sound and stable bank in the 60s. The expansion efforts were put into force during these years and marketing efforts were made to target specific market segments. For example NBP directed its attention towards popularizing schemes among school and college students, industrial workers, and ladies. Under the School and College Banking scheme, introduced in 1962 all branches of NBP performed School Banking in the premises of selected schools. By December 1969 NBP had 720 branches, 713 at home and 7 in foreign countries. Period of Organizational Development: 1970s The 1970s witnessed the nationalization of Pakistani commercial banks operating in the country. On January 1, 1974 National Bank of Pakistan along with 13 other scheduled Pakistani banks was nationalized by the promulgation of the Banks Nationalization Ordinance 1974. Shares not formerly held by the Government were acquired from the private holders after compensating them.

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The decade of the 70s saw major changes at NBP.

In 1972 there was

reorganization in the top management structure of the bank. This structure had remained unchanged since the inception of the bank and had originally been inherited from the old Imperial Bank of India. Period of Consolidation: 1980s On February 10, 1980 the Government of Pakistan announced a three year plan for the implementation of an Islamic Economic System. The institutionalization of Zakat and introduction of interest free banking were the two most important measures directed to Islamize the economy. The system was introduced by the nationalized commercial banks with effect from January 1, 1981. National Bank of Pakistan evolved and introduced a wholly separate and comprehensive procedure for banking under this system from branch level to Head office. Along with development activities of the bank, consolidation of branch network was pursued. NBP decided to delegate administrative and financial powers to Principal Offices and Zonal Offices. Challenges and New Initiatives: 1990s-2003: With the geographical development of its branches, NBP has been able to take services to a much larger number of Pakistanis all over the country. Today it has more than 6 million accounts. It maintains a presence in all the major financial centers of the world through its 23 overseas branches and 5 representative offices. In 1995 NBP became the first bank in Pakistan with a deposit base which crossed the Rs. 200 billion mark to become the largest financial institute in the country. Total deposits of the bank have since risen to Rs. 362 billion1 by end December 2002. NBP continues to render active help in provision of services like Hajj services, collection of utility bills, paying of pension to central/provincial government pensioners, as well as to civilian military pensioners and retired army personnel.
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VISION STATEMENT
To be recognized as a leader and a brand synonymous with trust, highest standards of service quality, international best practices and social responsibility.

MISSION STATEMENT
To be recognized in the market place by Institutionalizing a merit & performance culture, Creating a powerful & distinctive brand identity, Achieving top-tier financial performance, and Adopting & living out our core values.

ORGANIZATIONAL OBJECTIVES:
All the objectives of the National Bank of Pakistan were compatible to the mission statement of the bank. As a business organization its main objective was profit maximization, the only yard of performance. NBP tries to maximize its profits by its two basic functions i.e. deposits and finances. To Increase Deposits Due to the tough competition faced in every field, banking has no exemption from this category. Whether the bank is Pakistani, Private, Foreign or Nationalized, competition is there. In the competition NBP has the goal to achieve the greatest possible amount of deposits. The tool used by the bank in order to increase its deposits was to provide the best of facilities to their customers. Extension of Loans

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The profitability of the bank depends upon the amount of loan sanctioned or given to the people. The loans provided by NBP constitute the major portion of the profit of the bank. The mark up charged by the bank varies with the type of loan issued to the customer; the terms and conditions of the loans were also negotiable depending upon the relationship between the customer and the bank.

THE INSTITUTIONAL APPROACH

The unique role of NBP in Pakistans financial sector confers on the institution a dual responsibility to be a commercial bank in its own right and at the same time, as a trustee of public finances, to act as a custodian of the public interest. The continuing validity of this role means that the kind of responsibility born by National Bank of Pakistan is unlike any other financial institution. As the only institution of its kind, its performance and operational direction need to be reflected in an ethos of productivity, efficiency, flexibility and quality of service both to the individual customer and the nation at large.

CORPORATE CULTURE
National Bank of Pakistan, after its pure commercialization, focused its eyes on the corporate sector and initiated an ambitious and farsighted Corporate Culture Change Program in collaboration with Price Water House (U.K.) and AF Ferguson & Co. in 1995. In order to change the banks posture from reactive to proactive, four major areas had been highlighted for concerted plans of actions. 1) 2) 3) 4) Personnel-Human Resource Management Plan. Operations and Strategic Management Plan. Marketing. Technology-Information Technologies Acquisition Plan.

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CHAPTER # 3 THE ORGANIZATIONAL STRUCTURE

GENERAL OUTLOOK

After the elimination of Pakistan Banking Council, each bank was put under the supervision of an independent board of directors. Since the new organizational structure of the bank, National Bank of Pakistan constitutes a board of directors, and an executive committee as the governing bodies. The Head office is operationally in charge of central affairs including the delegation of powers and authority to 9 Regional Headquarters all over the country. These Regional Headquarters direct the functions of the 40 Zonal Offices and 12 Corporate Branches. The Head Office has 9 divisions that are further divided into wings. Board of Directors nominates the members of the executive committee and executive committee nominates divisional Heads. A general view of the structure is shown in the following organizational chart.

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ORGANIZATIONAL CHART OF NATIONAL BANK OF PAKISTAN

BOARD OF DIRECTORS

PRESIDENT/CHAIRMAN

EXECUTIVE COMMITTEE

REGIONAL CHIEF EXECUTIVE

CORPORATE BRANCH MANAGER

ZONAL CHIEF

BRANCH MANAGER

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BOARD OF DIRECTORS
The members of the Board of Directors of National Bank of Pakistan are as follows: i) ii) iii) iv) v) vi) vii) Syed Ali Raza (Chairman & President) Mian Kausar Hameed (Director) Mr. Ibrar A. Mumtaz (Director) Mr. Tariq Kirmani (Director) Sikandar Hayat Jamali (Director) Azam Faruque (Director) Ekhlaq Ahmed (Secretary Board of Directors)

HEAD OFFICE
Head Office of the National Bank of Pakistan is situated at Karachi, the industrial capital of Pakistan, from where it controls all the affairs of the bank. The President of the bank chairs Head Office. A secretariat is also working at the Head Office level for the assistance of the president. The secretariat includes one Senior Executive Vice President as Advisor to the president. Head Office is rather a big body with a huge task. For smooth functioning of these matters, the whole head office is divided into twelve Departments & Groups. Each Department or group is under the control of a Senior Executive Vice President and Group Chief. The various departments/groups coming under the Head Office Management are illustrated in the chart below.

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HEAD OFFICE MANAGEMENT STRUCTURE

Operations Group

Corpora te & Invest. Banking Group & Finance Group

Special Assets &

Remedial

Strategic Planning &

Economic

Treasury

Mgt. Group

Risk Mgt. Group

Mgt. Group

Research Group

Comm -ercial & Retail Bankin g Group

Audit & Inspec -tion Group

I.T. Plann ing Dept. & Imple menta tion

Group

HRM Dept.

Org. Deve lopm ent & Trai ning Dept.

Over -seas Oper ation s

DOMESTIC NETWORK
The domestic network of NBP consists of 9 Regional Offices, 40 Zonal Offices, 1,189 branches and 5 subsidiaries. The domestic network of NBP has been shown below in the map:

Annual Report, 2002.

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Subsidiaries The five subsidiaries of NBP are as under: i) ii) iii) iv) v) National Discounting Services Ltd. Taurus Securities Ltd. National Bank Modaraba Management Company Ltd. National Agriculture Ltd. NBP Exchange Company Ltd.

OVERSEAS NETWORK

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The Overseas network of National Bank of Pakistan consists of 15 Overseas branches, 4 Representative Offices and 1 Subsidiary in Kazakhstan. The overseas network of NBP is shown below in the map:

Overseas Branches The Overseas branches are in the following countries: i) ii) iii) iv) v) vi) vii) viii) USA Germany France Hong kong Japan South Korea Bahrain Egypt 2 1 1 2 2 1 1 1 19

ix) x) xi) xii)

Bangladesh Kyrgyzstan Turkmenistan Pakistan EPZ

1 1 1 1

Representative Offices The four Representative offices are situated in USA, Peoples republic of China, Uzbekistan and Azerbaijan.

CORPORATE BRANCHES Despite being the premier commercial bank of the country the impact of NBP on the corporate banking sector has been marginal. The concept of corporate branches has now been made an integral part of the banks operational thrust. It aims at providing optimum performance and one-stop shop service to the banks corporate and high network clients. The concept of corporate branch is based on a package of services aimed at full customer satisfaction across the entire spectrum of banking and financial service needs. The client is enabled to accomplish all his banking and financial requirements under one roof and with one contact. In this regard the functions of the corporate branch will revolve around an account/relationship officer. Each individual account will be opened with a minimum deposit of Rs. 5,000,000. The different corporate branches are listed below:

CHAPTER # 4

DEPOSITS & REMMITTANCES DEPARTMENTS

INTRODUCTION

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Deposits are the foundation out of which the bank grows and thrives. They are unique items on a banks balance sheet that certainly distinguishes a bank from other types of business firms. Deposits provide most of the raw material for bank loans and thus, represent the ultimate source of bank profits and growth. Bankers who fail to stay abreast of changes in their competitors deposit pricing and marketing programs stand to lose both customers and profits.

Types of Deposits/Products offered by National Bank of Pakistan

National Bank of Pakistan maintains its position as Pakistans premier Bank determined to set higher standards of achievements. It is the major business partner for the Government of Pakistan with special emphasis on fostering Pakistans economic growth through aggressive and balanced lending policies, technologically oriented products and services offered through its large network of 1,189 (2001:1230) branches. National Bank classifies deposits on the basis of duration and purpose for which these are kept with the bank. They are as follows:

PLS (Saving Deposits) PLS means Profit and Loss sharing Account. Here the bank shares with the customer the profit or loss resulting from investment of customers funds along with the banks pool of funds. Salient Features i) ii) iii) iv)

This account is opened with Rs.100/- at the end of each half accounting period. Profit is declared by the head office of NBP and the profit distributed amongst all the branches. Profit is calculated @ 4.10% p.a. For profit the minimum balance is Rs.5,000.

Annual Report, 2002.

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v) vi) vii)

Profit or return is paid bi-annually on minimum monthly balance (JanJune & July-Dec.) which is announced in July and January respectively. Generally withdrawals from PLS saving accounts are allowed on demand, i.e. without any prior notice of withdrawal. All cheques and other instruments should be crossed, before they are

deposited for credit into account. viii) ix) x) Zakat @2.5% is deducted from the balance outstanding on the first day of every valuation date i.e. 1st Ramadan. Overdraft/CF is not allowed in PLS saving accounts. Withholding tax @ 10% on the profit amount is to be recovered whenever profit is paid on deposit account.

National Income Daily Account (NIDA) The scheme was launched in December 1995 to attract corporate customers. It is a current account scheme and is part of the profit and loss system of accounts in operation throughout the country. Rs. 2 Million is needed to open the account with no maximum limit. Profit is paid on a half-yearly basis on a monthly average balance. The rates of profit vary according to the slabs of deposit. On Deposits of Rs.2 million Rs.2,000 million, the rate fluctuates from 7.50% to 8.75%. It is a checking account and there is no limit of withdrawals.

PLS (Term Deposits) The PLS Term Deposit is non-interest bearing techniques. It is also called time liability because it is kept for a certain period of time by the bank. Initially this type of deposit was called as fixed deposits but after the islamization of banking system in 1985, its name has been changed from fixed to PLS Terms Deposit. 22

Salient Features a. b. The minimum deposits is accepted by the bank with the sum of Rs.1000/The maximum deposit has got no limit. c. The deposits are accepted for the period from three months maximum to above. d. e. f. g. h. The maturity dates are 5 years, 4 years, 3, 2, 1 year, 6 months and 3 months. Every six months the profit rates are changed. The PLS term depositors would be eligible for sharing profit/loses with the bank at true rate determined by the bank. Where profits and losses would be distributed on half yearly basis. On the maturity, the depositors shall have an option either to draw the deposit and the amount of his profit share if any or renew the deposit.

PLS Special Notice Deposits NBP opens profit and loss special Notice Deposits of 30 days and 7 days maturity. This is a special type of Term deposit being offered by NBP. Profit @ 4.0% on 7 days deposit and @ 5.0% on 30 days deposit is given to the deposit holders. Current Deposits A current account is that account which is payable on demand. A holder can withdraw the money on any date during working hours without giving any prior notice to the bank. That is why the bank has to keep sufficient funds to meet uncertain funds of the current account holder. Salient Features i) The account holder is expected to maintain a minimum balance of Rs.500/- in his account or whatever the minimum amount is prescribed for the purpose. ii) No profit or return is paid on current accounts.

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iii) iv)

The deposits and withdrawals can be made through cheques, demand drafts, pay orders etc. drawn on the branch. These accounts are completely exempted from withholding tax and Zakat deduction.

Call Deposit Account It means the deposit from which the money deposited can be withdrawn at any time by presenting receipt of call deposit issued from the bank. The purpose of these deposits is to serve as a guarantee provided by bank to any department either public or private in taking or giving tenders. This type of account is for the purpose of to participate in tender bid; contractors are required to deposit a certain amount or percentage of the tender amount along with the tender documents for which Call Deposit Receipt are issued by Banks. Call deposit are return free. When a contractor requires such a receipt, He approaches his bank for the issuance of Call Deposit Receipt. Foreign Currency Term Deposits All individuals including resident citizens and corporate bodies are entitled to get term deposits. Foreign currency accounts are opened on proper introduction and submission of required documents along with an initial deposit prescribed from time to time. Banks are allowed by SBP to fix their own rates of interest for term deposits of 3 months, 6 months, 12 months, 2 years and 3 years provided they do not exceed the Euro-Dollar Bid rates of Barclays Bank, London, plus the margins prescribed by SBP from time to time. The Barclays Bank Bid rates and the maximum rates for payment of interest including margins allowed by State Bank are published daily by Foreign Exchange Rates Committee. Salient Features i) Interest on term deposits of 2 years and 3 years will be paid on yearly basis.

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ii) iii)

The return on foreign currency account will be paid on six monthly basis during June & December. The return on term deposits will be paid on maturity or as prescribed by the state bank of Pakistan.

iv)

Term deposits will be automatically renewed for a like period and amount including or excluding return as per instruction by the depositor.

ACCOUNT OPENING PROCEDURE FOR OPENING OF AN ACCOUNT The opening of an account is the establishment of banker customer relationship. Before a banker open a new account, the banker should determine the prospective customers integrity, respectability, occupation and the nature of business by the introductory references given at the time of account opening. Preliminary investigation is necessary because of the following reasons 2. Avoiding frauds Safeguard against unintended overdraft. Negligence. Inquiries about clients.

FORMAL APPLICATION: The customers are to fill in an account opening form. It is a formal request by a customer to the bank to allow him to have and operate the account. OBTAINING INTRODUCTION:

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The bank before opening an account obtains introduction of the customer from an old customer. SPECIMEN SIGNATURE: The customer gives the banker a specimen signature generally taken on a card specially designed for the purpose, and rules for the customer, full name and account number are entered on it. It expresses customers authority for the payment of cheques drawn on his banker. MINIMUM INITIAL DEPOSIT: The customer must have to maintain the minimum amount with the bank according to the requirements. OPERATING THE ACCOUNT: After opening an account the banker gives to the customer Pay-in-slip book Pass book Cheque book

QUALIFICATION OF A CUSTOMER: The relation of the banker and the customer is purely a contractual one. However, he must have the following basic qualifications He must be of the age of majority. He must be of sound mind. He must not be disqualified by law.

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The agreement should be made for lawful object, which create legal relationship.

Not expressly declared void.

NATURE OF ACCOUNTS
The different types of accounts being generally opened by a bank are as follows:

INDIVIDUAL ACCOUNTS The accounts opened in the name of one person are called individual or personal account. While opening the individual account, the details about following columns should be taken carefully: Occupation Address Special instructions Next of kin Copy of N.I.C.

PARTNERSHIP FIRMS ACCOUNT As per section 4 of the Partnership Act, 1932: Partnership is the relation between persons who have agreed to share the profits of the business, carried on by all or any of them acting for all. A partner is the agent of the firm having powers to execute transactions for the purpose of the business of the firm. A retiring partner has no liability so far as the transactions after retirement are concerned, if a notice of such retirement has been given to the bank. Otherwise, the retiring partner continues to be liable, even for finances made after his/her retirement.

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In case of the death of a partner, the firm will be dissolved. The account should therefore, be closed and a new account will be opened with the remaining partners. The following procedure and documents should be taken: The names of all partners should be written in AOF. Specimen signatures of all partners. On SS card & on form A only authorized person(s) will sign. Letter of partnership should be obtained. If the firm wants to authorize manager to operate the account then they will sign the Form CD 55 and the bank will send Form 62 to all partners for confirmation. Partnership deed should be obtained (not necessary).

JOINT ACCOUNTS The account in the name of more than one person is called joint account. The account shall be operated on by: Any one singly or survivor or either or survivor(s). Any two or jointly or survivor(s). All jointly or survivor(s). The survivorship mandate should be taken. Signature of all partners at the specified places.

JOINT STOCK COMPANIES ACCOUNT All companies having been formed by incorporation under Companies Ordinance, 1984. It is an artificial person created by law and the assent of this artificial person is signified by means of a common seal and perpetual succession. Just like an individual, it can hold property and incur debits. It can sue and can be sued in the

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same way as that of an individual. Bank is a joint stock company registered under companys act 1984. While opening the account of the company the following documents should be taken: Attested copy of the N.I.C of each Director. Copy of the Certificate of Incorporation. Copy of Memorandum and Articles of Association. Copy of the Resolution of the Board of Directors. List containing the names and signatures of the Directors. Copy of the Commencement of Business (in case of public limited company). Audited Balance Sheet.

ASSOCIATIONS, SOCIETIES & CLUBS ACCOUNTS Accounts are often opened in the names of non-trading institutions such as Clubs, association, schools, committee, funds and Unions. The following documents should be taken: Attested copies of N.I.C of all the office bearers. Certified Copy of the bye-laws or rules & regulations. Copy of the Resolution of the Governing Body/Managing Committee. Account opening form duly signed by the authorized persons. List containing the names, addresses and signatures of the Directors.

PROPRIETARY FITRMS ACCOUNT A firm owned by one person is called proprietary firm or solo proprietor. 29

Only Current A/C is opened for the proprietary firms. The following procedure should be followed: Take the solo proprietorship form from the customer. The signature of the sole proprietor is obtained in his/ her personal capacity under the declaration. If He wants to give authority to some other person to operate the account He will sign the Form CD 55. In case of death of the proprietor, any authority given to any one will be ceased. TRUST ACCOUNT A Trust has been defined in section 3 of Trust Act, 1882, in the following terms: A Trust is an obligation annexed to the ownership of property and arising out of a confidence proposed in and accepted by him for the benefit of another, or of another and the owner. Any person who is competent to contract may create a Trust which must be for a property transferable to the beneficiary. The account should be opened in the name of Trust and all the trustees should sign the account-opening form. The banker should examine the Instrument of Trust very carefully, and a copy of it should be kept on record.

CHAPTER # 5 REMITTANCES/CLEARING DEPARTMENTS

INTRODUCTION
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Along with other services, NBP is also providing the facility of transfer of funds from one bank to another bank and from one place to another place. The transfer of funds is the main responsibility of the remittances department.

Mail Transfer (MT)

It is a mode of transferring money from one branch to another branch within the city or outside the city or outside the country. It is an order by a bank to its branch, agent or correspondent in a foreign center. It is an order to pay a specified sum of money to the person named in the mode of transfer. It is sent by sea or airmail. If the customer is an account holder of the bank, then the bank will debit his account. The concerned officer will fill three forms to make the mail transfer complete. The forms used for this purpose are listed below 1. Debit Voucher 2. Credit Voucher 3. Mail Transfer Register Entry If the customer is not an account holder of the bank, firstly, he/she has to deposit money and then the above said procedure will be adopted to transfer his/her money.

Telegraphic Transfer (TT)

With the changing requirements of today, NBP has introduced the fastest transfer of money possible, i.e. telegraphic transfer. This service may be provided to the public on their written request and against the value received. In case of telegraphic transfer, instructions regarding payment are sent to the drawee branch telegraphically i.e. the order to pay is sent by cable. These telegrams, which authorize payment to the payee, should be sent to the drawee

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branch in a coded language and under a confidential number known as a test number The rate of TT is always higher than the rate of MT.

Demand Draft (DD)

Demand draft (DD) is another way of transfer of money from one bank to another bank. It is a written order, drawn by one branch of a bank upon another branch of the same bank, to pay a certain sum of money to or to the order of a specific person. Drafts are not issued, or drawn on branches situated within the same city. If you are looking for a safe, speedy and reliable way to transfer money, you can now purchase NBPs Demand Drafts at very reasonable rates. Any person whether an account holder of the bank or not, can purchase a Demand Draft from a bank branch. Types of Demand Drafts NBP deals in two types of DDs. 1. Open DD

It is one which is payable directly at the counter and there is no need of crediting it to the account. 2. Cross DD

It is one whose payment is done through account. The amount of DD is credited to the favoring account and then the amount can be withdrawn through cheque.

Payment Order (PO)

Payment order (PO) is the most convenient, simple and secure way of transfer of money. It is used for local transfer only. A pay order is a written order issued by a bank or its branch, drawn upon and payable by itself. It is an order to pay a specified sum of money to or to the order of a specific person. For the issuance of Pay Order NBP charges Rs.50 (flat) and for the Cancellation/Issuance of Duplicate NBP charges again Rs.50 (flat).

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Travelers Cheque
Travelers cheque is an order drawn by a bank upon itself to pay a specified sum of money on demand to the purchaser of the cheques. The paying bank after comparing the signature of purchaser which he has signed at the time of the purchase of cheques, makes the payment. Salient Features Negotiability: Pak Rupees Travelers Cheques are a negotiable instrument Validity: Availability: There is no restriction on the period of validity At 700 branches of NBP all over the country

Encashment: At all 400 branches of NBP Denomination: Rs.5000, 10000, 50000 and of Rs.100,000. Limitation: Safety: No limit on purchase NBP Travelers Cheques are the safest way to carry our money

COLLECTION CELL/CLEARING DEPARTMENT

The main function of the clearing department is the interchange and settlement of credit claims. This is usually done through a clearing house. A clearinghouse is an association of commercial banks setup in a given locality, for the purpose of interchange and settlement of credit claims. The function of a

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clearinghouse is performed by the central bank of a country by tradition or by law. In Pakistan, the clearing system is operated by the State Bank of Pakistan. If SBP has no office at a place, then the NBP, as a representative of SBP, acts as a clearinghouse. The mechanism whereby cheques are exchanged in bulk and the cross obligations of banks are offset is explained in brief as follows. In practice the person receiving a cheque as payment deposits the cheque at the bank where he/she has an account. The cheque is deposited for collection purposes. The bank stamps the cheque which states that the payees account will be credited on realization from the other bank i.e. the bank on which the cheque is drawn. Now the bank in which the cheque has been deposited becomes creditor of the drawer (other) bank. The debtor bank will pay the amount of cheque by transferring it from cash reserve, if there are no offsetting transactions. At the same time, the creditor bank receives large amounts of cheques drawn on it by other banks giving claims of payments by them. It will be most uneconomical and confusing if the bank had to transfer cash for meeting each liability. The easiest and safest way is to offset the reciprocal claims against one another and receive only the net amount owned. This facility is provided by the clearing house i.e. SBP. In Peshawar, the cheques of the clearing department are sent to the NBP City Branch (Main Branch) for clearing at clearinghouse. The official of the clearing department make entry of Cheque coming form each branch in a register, which is called Transfer Delivery Register. Then they arrange the entire cheques bank wise. The representative of all commercial banks meets at a fixed time on all the business days of the week in the morning is SBP. The representative of NBP hands over the cheques drawn on other banks to the representative of the bank and collects the cheques drawn on NBP. A summary sheet is prepared which shows the amount and name of the Branch and bank on which the cheque was drawn; the total number of cheques delivered and received by them and the total amount is calculated.

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After this process the officials of clearing department separates cheques of each branch of NBP. Which are then send to the respective branches via peon for clearing. Then three copies of Inter Office Advice Clearing are prepared. This show the net amount credited or debited. One copy is sent to HOK, one to the concerned branch and the other for office record. The branches of NBP receive the cheques, DDs RTC for clearing. They check all these and if some condition is unfulfilled, they are returned to City Branch with the reason showing the causes of dishonor. The branches keep the honored cheques. The peon collects the remaining cheques form branches and submits these to the City Branch. The officials at the clearing department makes required changes in Transfer Delivery Register, if cheques are returned from branches. In the second session of the clearinghouse, representatives of the banks meet again. There the dishonored cheques are returned to the representatives of the banks. The net amounts owed or payable are settled by debiting/crediting the bank by the SBP official. The functions of the clearing department are very technical and require accuracy and quick response. Delay or negligence in the clearing department is very costly to the bank.

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CHAPTER # 6 ADVANCES/FINANCES DEPARTMENT

INTRODUCTION

The principal reason banks are chartered by state and federal authorities is to make loans to their customers. Banks are expected to support community with an adequate supply of credit for all legitimate business and consumer activities. Indeed, making loans is the principal economic function of banks-to fund consumption and investment spending by businesses, individuals, and units of government. How well a bank performs its lending function has a great deal to do with the economic health of its region because banks support the growth of new businesses and jobs within the banks trade territory and promote its economic vitality.

PRINCIPLES OF FINANCING
Basically there are six principles, which must be duly observed while advancing money to borrowers. Safety: Covering the elements of character, capacity, capital, security and condition. Liquidity: Covering the element of capability to liquidate or repay on maturity and also prior to the maturity, in case of need.

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Term or Period of the Period: The facilities granted should be for a predetermined period of the time, which would depend on whether the bank is offering short, medium, or long term facility and as the purpose of financing. Dispersal: The lending portfolio should be as wide-based and diversified as possible in order to spread the risk. Remuneration: Pricing the loan according to the risk undertaken and the ancillary business income committed is very important in order to ensure that optimum revenue is generated from the advance portfolios. Suitability: Purpose of the facility should be acceptable under law and conform to the policies and imperatives of the bank, as outlined in its credit policy guidelines. Types of credit: On the basis of funds involved can be categorized as fund and non-fund based. Fund based financing involves immediate disbursement and flow of funds. Here the funds are provided to the customers upon sanction of the respective credit lines. While the non-fund based facilities are contingent facilities such as letter of credits and L/Gs. Credits on the basis of period involved are classified as: Short term Up to 1 year Medium Term Up to 3 years Long Term Above 3 years LOANS, ADVANCES & FINANCES 37

Fund Based Finances Short Term Medium Term Long Term

Non-Fund Based Finances Letter of Credit Letter of Guarantees

TYPES OF ADVANCES OFFERED BY NATIONAL BANK OF PAKISTAN

NBP Credit department deals with all the advances, which are made to the customers. Advances are important for the banking business because it gives the bank interest on the amount loaned. NBP is also very active in advancing loans to customers, thus helping the economy of the country in its development. It provides the following finances: Running Finance This is a type of Finance which meets the day to day finance requirements of the business. The amount is transferred to the debtors current account and can be withdrawn through cheques. The limit of this type of finance is 35000 and the maximum period for this type of finance is one year and can be renewed by a new application. Repayment is on discretion of the customer to pay back lump sum amount or otherwise. Secured Running Finance It is also called overdraft. In such type of finance a customer is authorized to borrow up to an agreed amount in excess of his bank balance. The NBP provides this facility to its customer usually; such loans are extended for small amount at lower rate for shorter period. The time period for this type of finance is less than one year. The mark up is paid at monthly basis and the principal amount is repaid at a specific date. 38

Cash Finance Cash finance is also called working capital. It is a short-term loan. Probably the most popular form of providing funds to the clients in the banking sector is the Cash Finance system or traditionally known as Cash Credit. In this, the bank lends money to borrowers against tangible security. The total amount of loan, which is granted, is not paid in one installment. The borrowers have to pay markup on the amount borrowed. Cash finance is obtained either by a. Hypothecation (When goods are not physically handed over to the bank as security for loan advanced, but the bank has a lien over the goods) b. Pledge (When goods are physically handed over to the bank as security for loan advanced) Borrowers prefer this type of lending because he has only to pay the makeup if the amount is actually utilized. The time period for this type of finance is normally for one year but also depends on the manufacturing cycle of the business. DOCUMENTS REQUIRED UNDER CASH FINANCE Against Pledge Application/agreement with the customer for

opening cash finance account. IB 6 (revised) (Mark-up Agreement) IB 26 (Letter of Pledge) IB 12 (Demand Promissory Note)

Letter from customer authorizing the bank to debit salaries of godown staff, insurance premia and other incidental charges to his account. Insurance cover together with premium paid receipt.

Against Hypothecation and Third Party Guarantee

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Application/agreement with the customer for

opening cash finance account. charges to his account. receipt. The controlling officer may require other documents. Demand Finance Demand finance is one of the long-term loans and is allowed against fixed assets. It can also be short term. Usually businessmen avail this facility for the purchase of machinery and other installations. Demand Finance in NBP can be classified into two classes: Those granted on the personal liability of the borrowers alone. In this category appear: Finance against Government and authorized securities and the Banks Term deposit receipts, Finance against joint stock company shares and debentures approved by Head Office, Finance against pledge of bullion and gold ornaments, and Finance against pledge of other goods and produce or documents of title thereto. Insurance cover together with premium paid IB 6 (revised) (Mark-up Agreement) IB 12 (Demand Promissory Note) IB 29 (Letter of Hypothecation) Letter from customer authorizing the bank to

debit salaries of godown staff, insurance premia and other incidental

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Those granted on the personal liability of the borrowers jointly with co-obligants.In this category appear: Clean finance under Section 25(1)(g) of the Bank Ordinance, and Finance which are collaterally secured by joint stock company shares or debentures or by title deeds of immovable property under Section 25(1)(h) of the Bank Ordinance. Against Gold Ornaments Gold finance/loan is a type of demand finance being offered by NBP to a large number of customers. Demand financing against the security of gold ornaments under State Bank of Pakistan scheme for Financing Small Business/Industry or otherwise may be made to borrowers known or introduced to the Bank by constituents, in multiples of Rs. 100/- with a minimum of Rs. 1000/-. The rate of valuation of gold and the gold ornaments will be advised to the branches by Head Office from time to time keeping in view the rise or fall in the market price of gold after providing for the necessary margin. The valuation of the gold ornaments must be based on the weight and fineness of the gold contents only. The rate per 10 grams will be regulated by the fineness of the gold and will be expressed to the nearest rupee. It must not exceed the maximum rates laid down from time to time by Head Office. Documentation for Financing against Gold Ornaments: a) IB 6A (Mark-up Agreement) b) IB 26 (Letter of Pledge) c) IB 12 (Demand Promissory Note) Industrial Small Finance This Type of Finance is for industrial owners only. This type of finance is usually for expansion purpose. The limit of this type of finance is up to 3,000,000/Securities demanded against this type of finance are immovable properties or Demand Financing

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against stock of raw material and finished goods. The time period for this type of finance is for five years. This amount is repaid in installments determined by the bank. High rate of mark up is charged against this type of finance. Agricultural Credit: The agricultural financing strategy of NBP is aimed at three main objectives:

Providing reliable infrastructure for agricultural customers Help farmers utilize funds efficiently to further develop and achieve better production Provide farmers an integrated package of credit with supplies of essential inputs, technical knowledge, and supervision of farming.

Agricultural Credit (Medium Term):

Production and development Watercourse improvement Wells Farm power Development loans for tea plantation Fencing Solar energy Equipment for sprinklers

Farm Credit: NBP also provides the following subsidized with ranges of 3 months to 1 year on a renewal basis.

Operating loans Land improvement loans Equipment loans for purchase of tractors, farm implements or any other equipment 42

Livestock loans for the purchase, care, and feeding of livestock

Incase of Farm Credit NBP charges 14% to 16% Markup on both Short Term and Medium/Long Term credit. While for Non-Farm Credit the rate of Markup is 16%. Production Loans: Production loans are meant for basic inputs of the farm and are short term in nature. Seeds, fertilizers, sprayers, etc are all covered under this scheme. Staff Finance NBP is also serving its employees along with its customers. It gives loans to its employees for the purchase of a car, house, and motorcycle and for the marriage ceremonies of their sons/daughters. NBP provides the following loans to its staff: House Building Finance The employee having served for 5 years in the bank, either clerk or an officer will be granted 80 basic pays as a loan for building house. If the granted loan exceeds Rs. 160,000 the 10% interest rate will be charged. Motor Cycle, Car, and Personal Vehicle Finance The car loan may be granted to those employees whose minimum basic pay is at least Rs. 10,000 and have served for at least 3 years. The employee will be granted 18 basic pays as loan. If the amount is exceeding Rs. 160,000 the 10% interest rate will be charged. The maximum Motor Cycle Loan is 56,000. In this case the officers of above Grade will pay 5% interest.

Consumer Finance

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NBP has launched a scheme with collaboration with LG. The Scheme is known as Gar Ka TV it is specifically for Televisions. Customer will get a TV set and will have to pay monthly installments to the bank. Export Finance Scheme This facility is provided under the rules, regulations issued by SBP. The bank may provide facility against pre/post-shipment exports at agreed rate of return. SBP then grants that loan to commercial banks given to Exporters under this scheme. Foreign Bills Purchased (FBP) This is a post shipment finance facility provided within the sanction limit and is provided against export documents under collection. Banks normally prefer holding collateral security in such cases. Foreign Bills Purchased against L/C (FBP) Under this arrangement foreign documentary bills are negotiated / discounted at prevailing exchange rate. The Bank ensures that documents are compliant with the L/C terms and reimbursement instructions are carefully studied. Payment against Documents Under Sight L/C Import documents if compliant are lodged in PAD and released upon payment from the party. The amount of bill, plus charges, if any, claimed by the negotiating bank would be converted into Pak Rupees at the exchange rate prevailing on the date of lodgment or at the booked rate where forward booking was done at the time of opening of L/C.

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Inward Foreign Documentary Bills for Collection under Usance LC Such documents are lodged in IFDBC and are released against acceptance or trust Receipt or pledge of imported goods. In the later case goods are cleared through banks approved clearing and forwarding agents and delivery orders issued against cash receipts. Finance Against Trust Receipt (FATR) This facility is extended to valuable customers to enable them to obtain delivery of the goods received under L/C or against bills under collection and shall retire the documents out of the sale proceeds of goods or from other sources. The borrower will sign a standard Trust Receipt form and related security documents covering hypothecation of goods. Finance Against Imported Merchandise (FIM) Under the import L/C either at partys request or importers inability to discharge liability immediately FIM facility for a period not more than 90 days against pledge of the imported goods on mark- up basis is extended. Inland Bills Purchased (Documentary / Clean) This facility is allowed to customers against documentary bills and other negotiable instruments. In case of dishonor the related pastys a/c is debited and the drawer is asked to arrange for sufficient funds in his a/c for adjustment therefore. Besides the above mentioned products NBP is providing various fund / nonfund based facilities such as, overdrafts, loan against salary, LMM etc. amongst these, facilities which are governed under the rules/.regulations of SBP, are allowed by NBP if clients fulfill the criteria provided by SBP.

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Term Finance or NIDF This facility is extended for a period of more than one year, with a fixed repayment schedule. Tenor of Term Finance including grace period is not more than 7 years otherwise competent authoritys approval will be required. It has clear purpose, strong financial, resourceful management, viable cash flows, properly perfected tangible security etc. All term loans are annually reviewed and are evaluated. Demand finance is extended in lump sum for specified period and the borrower repay the entire finance amount and markup at the agreed rate.

Procedure for Applying for Finance

Any customer who applies for finance should have an account (usually current account) with the concerned NBP branch, which should be in a running position. First of all the customer or company has to submit a feasibility report which is sent to the higher authority for recommendation. Following this, the authority prepares its own feasibility report of the customer/company and then hands over these to the sanctioning authority which finally approves whether finances should be released or not. After approval is granted, then the bank gives terms and conditions to the party concerned. The bank does not advance 100% finance rather a 30% margin is deducted from all finances. A charge form is taken from the party if it becomes bankrupt. The bank can go to a court of law and it is then that this agreement or documentation helps.

LOAN PROCESS

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Each and every bank has the similar loan process with slight differences. Every bank performs few basic actions while granting advances. Loan process is described in detail: Establishment of Relationship: Opening of a current or saving account by the customer with the bank results in the establishment of banker-customer relationship between the two. This relationship enables the banker to develop understanding of the customers corporate status, nature and place of his business, age, major stakeholders, and ultimately the genuineness of the customer.

CREDIT INVESTIGATION: It involves the following steps: Preliminary enquiries: The banker approaches other banks functioning in the same area and gathers information about the track record and creditworthiness of his customer. Bank can also take information from the SBP central information bureau (CIB). Credit Analysis: WHAT MAKES A GOOD LOAN? Credit analysis refers to the process through which qualitative and quantitative factors having direct bearing on the business of the customer are analyzed. This effort can help in making a lending decision, positive or negative. The analysis must be based on facts and should encompass all the relevant aspects of the credit deal. Findings of the analysis must be logically drawn and supported by relevant documents and reports. The division of the bank responsible for analyzing and making recommendations on the fate of most loan applications is the Credit Department. Experience has shown that this department must ask and satisfactorily answer the following question regarding each loan application:

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Is the Borrower Creditworthy? The question that must be dealt with before any other is whether or not the customer can service the loan-that is, pay out the credit when due, with a comfortable margin for error. This usually involves a detailed study of five aspects of the loan application known as 5 Cs-Character, Capacity, Capital, Collateral, and Conditions. All must be satisfactory for the loan to be good one from the lenders point of view. CHARACTER

The loan officer must be convinced that the customer has a well defined purpose for requesting bank credit and a serious intention to repay. In character the banker looks for the Customers Integrity, Purpose of loan, Customers obedience to law, Credit rating, His loyalty to nation, His environment, Intention to repay, Customers personal habits, Customers business code of ethic, His keeping of words. When a loan officer is satisfied with the above conditions, he grants the loan. CAPACITY The loan officer must be sure that the customer requesting credit has the authority to request a loan and the legal standing to sign a binding agreement. The customer characteristic is known as the capacity to borrow money. The banker here checks the customers past payment record, experience of other lenders with this customer, purpose of loan, customers track record in forecasting, credit rating, presence of consignors or guarantors of the proposed loan CAPITAL Does the borrower have the ability to generate enough available cash (capital) to repay the loan? The loan officer satisfies himself in respect of the loan applicants past earnings, dividends and sales record, Adequacy of projected cash flow, Availability of liquid reserves, Turnover of payables, receivables and inventory,

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Capital structure and leverage, Expense controls, Coverage ratios, Recent performance of borrowers stock and P/E ratio, Management quality, Content of auditors report and statement footnotes, Recent accounting changes COLLATERAL In assessing the Collateral aspect of a loan request, the loan officer must ask about the Ownership of assets, Age of assets, Vulnerability of assets to obsolescence, Liquidation value, Degree of specialization in assets, Liens, encumbrances, and restrictions, Leases and mortgages issued, Insurance coverage, Guarantees and warranties issued, Banks relative position as creditor, Lawsuits and tax situation, Probable future financing needs. CONDITION The loan officer while assessing a loan request must also take into account those aspects which come under the environmental conditions head like Customers position in industry and expected market share, Customers performance vis--vis comparable firms in industry, Competitive climate for customers product, Sensitivity of customer and industry to business cycles and changes in technology, Labor market conditions, Impact of inflation on customers balance sheet and cash flow, Long run industry outlook, Regulations, political and environmental factors. Qualitative Analysis: It is carried out to ensure that the credit is extended to a genuine borrower who has the capacity to borrow and good intention to repay. Following points are taken into consideration like: (i) (ii) (iii) Ownership of business, track record, market reputation etc. Personal traits of owner and qualification. Experience and management qualities.

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Quantitative Analysis: For qualitative analysis, financial statements provided by the borrower are thoroughly examined. The focus of financial analysis is on key figures in the financial statements and the significant relationship that exist between them. Ratio analysis enables the analyst to carry out comparison of the following: Trend Ratios: Involve the comparison of ratios of a firm over a period of time i.e. present ratios are compared with past ratios for the same firm. Inter-firm Comparison: Involve comparison of the ratios of a firm with those in the same line of business for the industry as a whole reflecting its performance in relation to its competitors.

Market Appraisal: Market appraisal becomes imperative when credit facilities are desired by a customer desirous to establish a new manufacturing unit. In order to determine the extent of demand for the products of the proposed industrial unit, the banker must apprise himself of the ground situation with regard to the following: (i) (ii) (iii) Demand and supply situation. Major producers and local distribution channels. Price and credit terms availed by the retailers.

Evaluation of Feasibility Reports: The projections and forecasting contained in the feasibility reports need to be checked and adjusted by using varied standards. As a result of this exercise, the banker is in a position to determine the break-even quantities, revenues and profit and loss of the firm at different operating capacities.

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Credit Reports: Credit reports obtained from other banks and the CIB report provide a base for the lending decision of a banker. Problem Identification: The main objective of credit analysis is to avoid problems that may crop up due to lack of good judgment with regard to the following: I. Negative Macro Indicators Including: a) Unfavorable change in the government policies. b) Excessive and negative competition. c) Change in consumers taste, fashion, income and spending. d) Labor unrest or deteriorating law and order situation. II. Negative Business Factors Including: a) Inconsistent business structure and Ineffective business plan. b) Inadequate market share and unplanned expansion. c) Plant and machinery obsolescence and loss of stakeholders confidence. III. Negative Management Factors Including: a) Change in ownership and unnecessary centralization. b) Evasive style and lavish spending behavior. c) Unsatisfactory past performance. IV. Negative Financial Indicators Including: a) Change in auditors and accounting policy. b) Late submission of statements. c) Climbing up debt-equity ratio and abnormal reduction in fixed assets. Processing of Credit Proposal: Normally standard formats designed by the banks are used for this purpose where in all relevant information and recommendations for grant of credit are recorded.

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Necessary documents are attached with proposal like request letter, financial statements, resolution of the BOD, letter of partnership etc. Sanction of Credit: Credits are sanctioned either at the branch level or by the competent authority at the controlling offices. At the controlling office the credit proposal are assessed and approved on the basis of accuracy of credit analysis and other considerations as recommended by the branch management. Sanction advice is issued which is important and essential to ensure proper record of the terms and conditions of a credit, for legal purpose, execution of the required security documents, monitoring recoveries, timely renewal and audit purpose. Security Documentation: After sanction but before disbursement of a loan, the credit administration department must ensure that charge documents are obtained from the borrower in accordance with the nature of credit facility, terms of credit and nature of approved security. The charge documents must be properly filled in, signed by the customer and designated officer and two witnesses where required. In case of mortgage then registration of it is with the Registrar of Assurances before disbursement is essentially required. In case of limited company, charge is to be created on the assets of limited company with the Security Exchange Commission within 21 days. In case of partnership firm, authorize officials of the borrowing firm must sign the documents in their official capacity and affix their stamp thereon. In the meanwhile facility letter is issued wherein the terms and conditions of the loan are intimated to seek his acceptance thereto. Disbursement: Disbursement of the credit facility is made through either of the following method i.e. Running finance/Cash finance/Term finance.

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Monitoring and Periodic Evaluation: The credit administration department is responsible to ensure that the credit customers: a) Maintain their accounts regularly and pay profit. b) Pay the markup accrued on their accounts within a reasonable period. c) Pay installments on due date. d) Adjust their liability accounts as per stipulation of the loan agreement.

Recovery and Follow Up: This is the most critical activity of the credit administration department. Default puts the bank in an embarrassing situation as not only its funds are tied up for indefinite period but in most of the cases is involved in circuitous litigation entailing high cost. The following steps are involved in the recovery process: a) Verbal and written reminders to the credit customer for payment. b) Service of legal notice, in case of default. c) Making preparation for legal action. d) Filing of recovery suit and follow up of legal process. e) Tracing out assets of the defaulting and putting the same to auction through the court & Collection of proceeds.

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CHAPTER # 7 FOREIGN EXCHANGE DEPARTMENT

INTRODUCTION

As import and export business is very risky. The importers want the surety of goods to be delivered to his prescribed destination while exporter wants surety of the money to be reached to his prescribed bank. So, with a view to overcome such difficulties a system of L /C is designed and its operation is controlled under the Article of the Uniform Customs And Practices for documentary credits as adopted by The Council Of International Chamber Of Commerce and enforced with effect from Jan 1983. Foreign exchange department plays a vital role in the international trade of any country.

VARIOUS TYPES OF PAYMENTS UNDER U.C.P 500 FOR DOCUMENTRY CREDITS.

Article 10 of U.C.P. states that All credits must clearly indicate whether they are available by: o o o o Sight Payment. Deferred Payment. Acceptance. Negotiation.

Sight payment The meaning of the term payment is self-evident. The named bank will pay the beneficiary on receipt of the specified documents and on fulfillment of all the terms and conditions of the credit. Deferred Payment. In deferred payment credits, there is no need for the exporter to draw a bill of exchange. The issuing bank simply guarantees that payment will be made on a

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fixed or determinable future date provided that all other conditions have been fulfilled. Although the exporter does not draw a bill of exchange, in all other respects these credits are identical to other documentary credits. Acceptance The acceptance credit is also referred to as a term credit or usance credit which means that the seller draws a draft on the advising/confirming bank demanding payment at some determinable future date, e.g. at 30 days sight instead of at sight. Negotiation Sometimes the issuing bank negotiates a credit; it then will advance money to the beneficiary on presentation of the required documents and will charge interest on the advance from the date of the advance until such time as it receives reimbursement from the issuing bank. NBPs FOREX DEPARTMENT The National Bank of Pakistan Foreign Exchange department is divided into the following sections: Licensing Section. Licensing section is working under chief controller of imports. The main function of this section is to grant the registration to importers. Imports. Imports can be defined as bringing any commodity good into a country from out side the country through any way or channel. In Pakistan imports are regulated by Ministry of Commerce, under the export and import act 1950.

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LETTER OF CREDIT
Definition: In simple terms, a documentary letter of credit can be defined as a conditional undertaking of payment by the bank. Expressed more clearly, it is a written undertaking by an issuing bank given to the seller (beneficiary) at the request, and in accordance with the instructions, of the buyer (applicant) to effect payment. This is by making a payment, or by accepting or negotiating bill of exchange upto a stated sum of money, against presentation of stipulated documents and fulfillment of all other terms and conditions as laid down in the letter of credit. The Procedure of L/C is shown in the diagram below:
LETTER OF CREDIT

Seller
Merchandise

Sales Contract

Buyer

Advising/Negotiating/Confirming Bank

Issuing Bank

TYPES OF LETTERS OF CREDIT Bankers must properly understand various types of letters of credit, their main features, how they differ from each other and what are the duties and responsibilities of different bankers with regard to different types of letters of credit. The bankers are also required to guide sellers and buyers about various types of letters of credit and their mechanism.

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Various types of letter of credit are given below, the buyer will select one which best suits his requirements in agreement with the seller:-

1.

Revocable Letter of Credit. Irrevocable Letter of Credit. Confirmed Letter of Credit. With or without recourse Letter of Credit. Transferable Letter of Credit. Revolving Letter of Credit. Letter of Credit available by Installments Back to back Letter of Credit. Counter Letter of Credit. Red clause Letter of Credit. Green Clause Letter of Credit. Stand by Letter of Credit. Acceptance Letter of Credit. Deferred payment Letter of Credit. Transit Letter of Credit.

Revocable Letter of Credit

A revocable credit is one that may be withdrawn, amended or cancelled by the opening bank any time without giving notice or reference to the beneficiary. Revocable credit does not constitute a legally definite undertaking between the banks and the beneficiary as it can be amended or cancelled at any time without notice to the beneficiary.

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2.

Irrevocable Letter of Credit

Irrevocable credits are more practical and popular, as their terms can not be changed without the agreement of all concerned parties and specially the beneficiary. In irrevocable credit the seller enjoys very comfortable and strong position. 3. Confirmed Letter of Credit

At the request of opener the issuing bank ask its branch or correspondent bank in the country in which the seller resides to add its confirmation. When it does so, the credit becomes a confirmed credit. 4. With or without Recourse Letters of Credit

A drawer may draw a bill on another (the drawee) and discount it with a third party for value received. The holder in due course (the third party) gets good title and can hold the drawer responsible if the drawee does not pay, i.e., in due course the holder has recourse on the proceeding holders or the drawer for payment. If a seller draws a bill without recourse on him, the holder in due course can not fall back on the seller for payment and the holder would need to seek payment from the drawee. Normally, a bill will be with recourse to the seller or beneficiary unless there is a provision to the contrary in the credit. 5. Transferable Letter of Credit

In article 48 of UCP 500 the transferable credit has been defined credit under which the beneficiary (first beneficiary) may request the bank authorized to pay, incur a deferred payment undertaking, accept or negotiable (the transferring bank) or in the case of a freely negotiable credit, the bank specifically authorized in the credit as a transferring bank, to make the credit available in whole or in part to one or more beneficiary (ies) [second beneficiary (ies)]. It is to be noted that a credit can only be transferred on the terms and conditions specified in the original credit--- the only exceptions being the amount of the 58

credit, any unit price stated, the period of validity, the last date of presentation of documents and the period for shipment. 6. Revolving Letter of Credit

A revolving credit is a credit where the amount is automatically/ renewed or reinstated from time to time without a specific amendment. It can be revocable or irrevocable and can revolve in relation to time or value. A revolving letter of credit is opened by the buyer when the seller has to continuously supply the goods over a longer period of time. 7. Letter of Credit available by Installments

A credit available by installments is a credit requiring specific quantities to be shipped weekly or monthly and allowing partial shipments. 8. Back-to-Back Letter of Credit

A back-to-back credit is issued on the strength of a credit already received. It is in fact a secondary or counter credit of a primary credit and is issued if, for some reason, a credit cannot be issued in a transferable form. 9. Counter Letter of Credit

A counter credit is similar to a back-to-back credit. Its identifying factor is that the seller opposed to the advising/confirming bank, has his own bank to issue the credit as counter to the first credit. 10. Red Clause Letter of Credit

The Red Clause is a special clause printed on the Letter of Credit, whereby the opening banker authorizes the advising banker to grant advances to the exporter to enable him to purchase the goods for shipment. The advising bank then reimburses itself by negotiating the documents presented by the exporter. 11. Green Clause Letter of Credit

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Green clause letter of credit is the refined form of the Red Clause credits in a sense that it allows the grant of storage facilities at the port of shipment over and above pre-shipment finance. It should be noted that now a days usually the Green Clause and Red Clause letters of Credits are not very often opened. 12. Standby Letter of Credit

A standby letter of credit is a guarantee for the performance of a contract and is realizable on the presentation to the issuing bank of a declaration that a named party has not fulfilled the contract. 13. Acceptance Letter of Credit

Under the acceptance credit the beneficiary draws a bill of exchange (bill) for a period of time (30 days, 60 days, etc). The bill may be drawn on a bank and the bank accepts it and pays the bill on maturity. These are used when the transaction involves suppliers credit. 14. Deferred Payment Letter of Credit

Under this credit, Payment is made in installments for the purchase of heavy machinery and other capital goods. 15. Transit Letter of Credit

A transit credit involves the Advising/Confirming of a letter of credit by a bank of a country other than that of the buyer or the seller. These credits are opened when the issuing bank do not know or does not have any correspondent arrangements in the exporters country or due to some political or other reason there is no direct communication between the buyer and seller countries. The other reason may be that the bank does not deal in alien currency.

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BANKS (NBPs) STANDARD PROCEDURE FOR DOCUMENTARY CREDIT OPENING OF L.C. STEP-ONE Importer must be our customer having some business account with The bonafides of customer /importer must be established. The financial standing and market reputation of the customer The customer/importer must have valid import registration (Now us for some time.

/importer must be checked and established. registration is granted by the Export Promotion bureau for a period of 5 years). E.P.B issues category Pass Book direct to the bank as follows: Pass Book for Commercial Importers. Pass Book for Industrial Importers. Preferably importer/customer must have a valid membership of

recognized Chamber of Commerce / Trade or Industry. STEP-TWO For fresh limit the customer/importer may be asked for the 1. 2. 3. 4. Application for limit. Financial Statements. Statement of Liabilities. Details of Personal Properties/Assets. The branch must have L.C. Opening Limit following:-

favoring the customer. Otherwise, the L.C. will be opened on case to case basis after obtaining permission of the competent authority for opening of the L.C. STEP-THREE 61

The importer /customer will submit the following. 1. L.C. Application /Agreement form duly signed and stamped on IB-8 and appendix B. 2. Proforma Invoice/Indent duly accepted by the importer. 3. Insurance Policy form banks approved company with premium paid receipt for 10% above the Invoice value with Institute Cargo Clause. 4. Authority letter from the importer to debit the account.

STEP-FOUR Check documents submitted by customer/ importer. Check the items with import policy. Check the validity of registration. Work out the liability of the importer. Prepare offering sheet for obtaining permission of the Manager.

STEP-FIVE Pass the following accounting entries. i) Dr. Cr. Dr. Partys Account. Cr. Cr. Cr. number. Make the entries in Liability Card. STEP-SIX 62 Margin Account. PLS Income Postage & Telegram Charges. Constituent Liabilities for Acceptance Account. Acceptance for Constituent Account.

(With the amount of L.C. converted into Pak Rs.)

Incorporate entries in L.C. Opening Register and allot appropriate serial

Prepare draft of L.C. as per document No.IB-8A and IB-8. Transmit the L.C. to the Advising Bank as per request of the 2. 3. 4. By Post By Telex/Cable or By Fax Advising Bank (First Two Copies). Reimbursing Bank (if any) F.E. Accounts Wing, NBP, Head Office, Karachi. Importer. Place one copy in L.C. File.

customer as following:-

Copies of the L.C. to be sent as under:1. 2. 3. 4. 5.

Arrange forward booking with F.E. Accounts Wing at Head Office, Check that acknowledgment of L.C. has been received from the

Karachi if so desired by the importer at his cost. advising bank. STEP-SEVEN under: Recover Amendment and P & T Charges and Margin (If any). Prepare Message of Amendment as per importers request, after Pass the accounting/liability entries, if any. Intimate the amendment to the advising bank , reimbursing bank, Check that acknowledgement of amendment of L.C. has been Amendment, if any, at the request of importer will be made as

obtaining Managers permission.

F.E.A.W and the importer. received from the advising bank.

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Lodgment of Documents. On receipt of documents, Check with L.C. terms conditions and Check the documents as per international practice (UCP-500), Check the covering schedule (Collection Order) for any In case the documents are in conformity with the terms and Brand the documents with branch stamp. Brand and cross bill of exchange and bill of Record the documents in Bill of Exchange Convert foreign currency into Pak Rupees at amendments, if any. banks Instructions/Standard check List. contradictory remarks/discrepancies in the documents. conditions of the credit, the following action will be taken.

lading and enter in Inward Mail Register. Register and allot serial number. Banks prevailing rate. Pass the following entries: Cr. Dr. PLS Bill of Exchange.

NBP, General Account (FE-T). Reverse the liability entries for the amount of documents received. Dr. Acceptance for Constituent Liabilities Account. Cr. Constituent Liabilities for Acceptance Account.

Intimate the party through letter and on phone. Keep the documents under joint custody in a fire proof almirah.

Retirement of Documents On retirement of documents Pass the following entries: Dr. Marginal Deposit Account. (If any).

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Dr. Cr. Cr. Cr. Cr.

Partys Account. PLS Bill of Exchange Account. PLS Income account (For Service Charges). Markup (As per tariff) P & T. Charges.

(Other charges, if any should also be recovered as per tariff). Endorse the bill of lading in favor of the importer. Discharge the bill of exchange and obtain acknowledgement of Prepare Form I for submission to SBP.

the documents form the importer.

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CHAPTER # 8 CRITICAL ANALYSIS OF NBP

During my 2 months internship at National Bank of Pakistan Bank Street branch Bannu, my observation and interviewing the staff members and the manager of the branch the information that I got is not sufficient as of such a big organization. I have pointed out some of the shortcomings, which I observed during my internship. Now government is serious to bring some reforms in the NBPs for privatization. And National Bank of Pakistan management is working on the restructuring program. The shortcomings, which are present in NBPs Bank Street branch of Bannu are as discussed below.

PROBLEM AT THE BRANCH LEVEL

COMMUNICATION PROBLEM Bank staff uses peon and the clerical staff to communicate with each other. It automatically creates a lot of problem disturbance in the branch. The flow of communication is very slow and creates gap between various counters and branch departments. And the peon does verification of my sign or balance, which is not a skilled person and time consuming. LIMITED STAFF In the branch the staff is limited and customers wait for a long time. National Bank of Pakistan also deals with most of the government affairs, federal and provincial pensions salaries and taxes. Handling these people is very difficult and at the beginning of the month large number of customers wait for their turn. But the staff is low to handle such large number of customers. NON-AVAILABILITY OF COMPUTER EXPERT

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In the modern era of computer the usefulness of computer is ignored. There is lack of properly trained staff to operate the computer properly. NO LADIES SECTION There is no ladies section in the bank, as a banking facility for the ladies, catering to hijab needs of the ladies customers. CUSTOMERS DISSATISFACTION In National Bank of Pakistan customer dealing is not so much good during the hours of rush the customers have to wait for their turn. The staff is not able to handle large number of customers. This creates a lot of tension and dissatisfaction in the mind of the customers and staff and there is a chance of error, which might be very harmful. The bank should provide more satisfaction to its customers. PROPER RECORD MANAGEMENT The record which is kept for the future use of the band is not properly managed, if any record needed, the staff has to struggle to find the record and waste a lot of time. UNEQUAL DISTRIBUTION OF WORKLOAD Distribution of workload is not properly managed. Some of the employees are sitting idle all the day without having work and on the other hand some dont find time to relax for a moment. So this creates a lot of overwork situation for some while relaxation for others.

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FUNCTIONAL ANALYSIS
DIFFERENCE BETWEEN THEORY AND PRACTICE A vast difference exists between the theory and practice in the National Bank of Pakistan, the written procedure is somewhat different from the practice that is done by the employees. EXCESSIVE PAPERWORK It is notified that due to lengthy procedure of paper work at bank employees are overburdened. They are unable to give proper attention to clients and face difficulty in getting the work done, one of the reasons for lengthy procedures and excessive paperwork in the bank is the lack of computerization and lack of skilled and educated staff. MORE ACCOUNTS DEPOSITS Efficient banking is one in which emphasis is not on the number of accounts but on greater amounts of deposits. National Bank of Pakistan is more interested in increasing its number of accounts irrespective of deposits. It is difficult to maintain and provide personalized services to the entire account holders. DELEGATION OF AUTHORITY Manager has a very limited authority. He has to take the approval from his senior authorities in case of advances; he has to the approval of general manager and regional manager.

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ADMINISTRATIVE ANALYSIS
JOB ANALYSIS IS NOT EFFECTIVE Only on the basis of job analysis it can be decided how a right person could be hired. Trained, compensated or promoted. It is very important for an organization in which nature of the job is described and job specification is mentioned. Most of the employees are simple graduates and dont have proper know how about their job. This creates problems both for organization and for employees. Persons performing simple or complex responsibility are getting the same salary and facilities. This creates dissatisfaction among the employees. CARELESSNESS IN OPENING ACCOUNT When customers come to open an account, the staff does not bother to check his/her phone number or address. Phone number and address is very necessary because anything can happen. They should be careful in this respect. LACK OF SPECIALIZED TRAINNING National Bank of Pakistan does not provided adequate facility of specialized training to its staff. Training is provided on the basis of generalization rather than specialization. As the worker finishes his training he is inducted in specialized field. Since he does not have knowledge about the specified job assigned to him, thus he feels difficulty to perform his job. POOR JOB ROTATION There is absence of job rotation in the branch. A person places in one department remains there forever. It reduces the career opportunities to the workers as well as results in boredom and will not take interest in work. DELAYS IN LOAN ADVANCEMENT

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It has been observed that there are delays in sanctioning of cases from the head office that result in to customer dissatisfaction.

LACK OF APPRECIATION Another very important thing, which is ignored in the bank, is appreciation of the employees and their good performance is not recognized and appreciated. It makes the employees dishearten and they lose interest in work, which result in poor efficiency. HEAVY WORKLOAK The workload on the employees of National Bank of Pakistan is very heavy. It is usual practice for the employees to stay beyond the official working hours.

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PERSONAL MANAGEMENT ANALYSIS

NEED FOR BETTER TRAINING PROGRAM The need of training is felt all over the world. Training of the personnel is a part of human resource management. It has been noticed that the training program of National Bank of Pakistan is not adequate. DEVELOPING MANAGERIAL LEADERSHIP Leadership is a practical term of visible, clear on objectives and communicating better control on financial and administrative matter, so the manager is not only responsible for their own units in business, but also in people terms. RECRUITING POLICY Human resources are the lifeblood for organization, if the person is recruited carefully they can become assets to the organization and in the case of carelessness the personnel can become a liability. As National Bank of Pakistan is government bank, they dont follow recruitment policy, political interruption is very high and unsuitable candidates are selected. PROMOTION Promotion in the National Bank of Pakistan is purely on seniority, so the new young person having high qualification is not having any chance of promotion.

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RECOMMENDATIONS
During my internship of two months at the NBP Bank Street branch Bannu, I observed a lot of things and there is always a better way of doing things. Some of the recommendations suggested for the stated branch and National Bank of Pakistan as whole are as follows. Required staff should be provided to branch in order to improve the functioning of the branch to reduce the workload on the staff members. Computer should be introduced in all the branches and department of the bank. Branch should be connected through computers with Zonal/Regional office and headquarter, this will help in solving communication and coordination problems. Recruitment in the bank should be made purely on merit basis, and the human resources development should be fully free from any influence of higher authority and staff union in conduction of test and in the selection of candidates. There should be inter-department transfer of employees, so that they should know about all departments. They must have some basic information of other departments. There must be proper job rotation. Special marketing training should be given to employees, who are concerned with marketing. The training program should include scientific techniques to improve decision making and interpersonal as well as individual needs of the employees. Constant improvement in customers service is needed in today competitive environment. Personalized banking should be introduced to attract more 72

customer and more facilities. Equal respect should be given to all customers. Remittance is a basic function and main source of income of the bank. Unfortunately there is an increasing shift in the use of informal means like Hundi. National Bank of Pakistan has to play a vital role in mobilizing such remittances. The banks foreign branches have to become more competitive and service oriented. The management should delegate some of the responsibilities to the lower and middle management, so that to increase the performance and working efficiency of the bank. Promotion is a very sensitive and important issue and thus great care should be observed in the decision of promotion. Personal liking and disliking should not be involved in such sensitive matter.

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