Commercial Banks

By: Sajjad Ahmad

Origin of Word Bank

BANCO BANCUS BANCA BANQUE BANCK Italian word meaning Bench Italian word meaning Bench Italian word meaning Bench French word meaning Bench German word meaning Joint Stock Fund

Definition of Bank as per Companies Ordinance 1962

Section 2(b) Banking means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise.

Banker
As per definition of
Negotiable Instrument Act-1881, Section 3 (b)

A person transacting the business of accepting for the purpose of lending or investment, of deposit of money from the public, repayable on demand or otherwise and includes any post office savings bank

Prohibition on the use of word Bank

Section 8 of BCO 1962: Every company carrying on the business of banking in Pakistan shall use the word Bank or any derivatives as part of its name and no company other than a banking company shall use in its name any word calculated to indicate that it is a banking company.

Commercial Bank (CB)

CB is a type of financial intermediary that raises funds by collecting deposits from businesses and consumers via checkable deposits, saving deposits and time deposits. It makes loan to businesses and consumers. It also buys government bonds and securities. Its primary liability is deposit and primary asset is loan.

Phases of Banking Sector in Pakistan

Nationalization Privatization Islamization Consumerization Virtualization

Privatization Strategy
During early 1990s GoPs privatization strategy was to sell controlling shares to a single group of investors along with transfer of management instead of selling shares to general public. This strategy is still continued like Agha Khan Foundation, Bestway and Abu Dhabi Group, Ibrahim Group.

MCB- the First Privatized Bank

Reasons for selection: Less infected portfolio compared with other banks. Credibility in the market Solvent Bank

Nationalized on 01-01-1974 Privatized on 06-04-1991

Powers of SBP in terms of banking supervision

Section 40(A) of BCO 1962: It is the responsibility of SBP to systematically monitor the performance of every banking company to ensure its compliance with the statutory criteria, and banking rules & regulations. In every case in which the management of a bank is failing to discharge its responsibility in accordance with the applicable statutory criteria or banking rules & regulations or is failing to protect the interests of the depositors or for advancing loans and finance without due regard to the best interests of the bank or for reasons other than merit, the SBP is empowered to take necessary remedial steps.

Vested Powers of SBP

The State Bank of Pakistan can exercise the following powers vested upon it under the Banking Companies Ordinance: Prohibiting the bank from giving loans, advances & credits. Prohibiting the bank from accepting deposits. Cancel license of a bank. Give directions to the bank as it deem fit. Remove chairman, directors, chief executive or other managerial persons from the office and appoint a person as chairman, director or chief executive.

Vested Powers Continued

Supersede the Board of Directors. Direct institution of legal proceeding against directors, chief executive or other officer. Caution or prohibit bank against entering into any particular transaction(s). Require bank to make changes in management. Appoint its officers to observe the manner in which affairs of bank/its branches/office are conducted. Winding up the bank through high court. Apply to Federal Government for an order of moratorium in respect of a bank and to prepare scheme of reconstruction or amalgamation. Impose penalties on banks.

Primary Function- Regulation of Banking System

The "Prudential Regulations" for banks, besides providing for credit and risk exposure limits, prescribe guide lines relating to classification of short-term and long-term loan facilities, set criteria for management, prohibit criminal use of banking channels for the purpose of money laundering and other unlawful activities, lay down rules for the payment of dividends, direct banks to refrain from window dressing and prohibit them to extend fresh loan to defaulters of old loans.

Cash Reserve Requirement

In terms of Section36(1) SBP Act, 1956, every scheduled bank is required to maintain with State Bank a balance the amount of which shall not at the close of business or any day be less than such percentage of Time & Demand Liabilities in Pakistan as may be determined by State Bank. Presently the requirement is 5% on fortnightly average basis subject to daily minimum of 3% of Time & Demand Liabilities

Statutory Liquidity Requirement

In terms of Section 29(1) of Banking Companies Ordinance, 1962 every banking company shall maintain in Pakistan in cash, gold or un-encumbered approved securities valued at price not exceeding "the lower of cost or the current market price" an amount which shall not at the close of business in any day be less than such percentage of the total of its time & demand liabilities in Pakistan, as may be notified by State Bank from time to time. Presently the requirement is 19% (excluding 5% statutory cash reserve) of the total of its time and demand liabilities in Pakistan.

Minimum Paid up Capital Requirement of Banks

S# Minimum Paid up Capital (Free of Losses) Time Frame

1 2 3 4 5

Rs 6 billion Rs 7 billion Rs 8 billion Rs 9 billion Rs 10 billion

31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013

Banking Opertations
Remittances Utility Credit Bills Card

Deposits

Branch

Advances

ATM

Internet Banking

Cheque
A cheque is a bill of exchange drawn on a specific banker and not expressed to be payable otherwise than on demand. (Section 6) Requisites of a cheque can be derived from Section 5 and 6.

CHARACTERISTICS OF A CHEQUE:
a) b) c) d) e) f) g) Instrument in writing. Unconditional Order. Certain sum of money. Always drawn on specified banker. Always payable on demand. Payable to specified person. Signed by the drawer.

Difference between Bill of Exchange and Cheque

Bill of Exchange
Contains an order to pay may be drawn on banker/non banker. It is payable on demand or at fixed or determinable future time. When payable otherwise than on demand it is liable for stamp duty. May or may not be accepted When not payable on demand it is essential three days of grace for its maturity. It is not crossed.

Cheque
Contains order to pay can be drawn on banker only. It is always payable on demand. Being bill of exchange payable on demand is exempted from stamp duty. It never requires acceptance. It is payable on demand and no grace period is entitled. It may be crossed.

Types of Cheques
OPEN CHEQUE: Cheque which may be bearer or order, but is not crossed. CROSSED CHEQUE: Crossed cheque has been defined in Section 123, where a cheque bears across its face two transverse parallel lines with or without words & co. BEARER CHEQUE: When a cheque is payable to bearer, any person having such instrument can take payment of the said cheque. Identification is not required for receiving payment of bearer cheque. It is negotiated by delivery only. ORDER CHEQUE: Its payment can be made upon proper identification of payee / endorsee. It can be negotiated by endorsement and delivery.

Post Dated Cheque

Cheque which bears future date is post dated cheque. If a cheque is post dated, it does not make it invalid or irregular (Section 21-C). Post dated cheques are as much negotiable as other cheque, mere fact is that date of payment of cheque has been postponed to future date. It is payable on demand after due date. It is also admissible in evidence. If banker pays postdated cheque before due date, he looses protections as it will not be treated as payment in due course and is not in accordance with direction of drawer.

Stale Cheque
Section 21-A deals with stale cheque. Instrument which is payable on demand is considered as overdue (stale) if it appears on its face that it is in circulation for an unreasonable length of time. But unreasonable period has not been defined. To determine unreasonable period, nature of instrument, usage of trade and practice of bankers are to be the guiding lines. In Pakistan bank treat a cheque Six Months after date as stale and refuse to pay without direction from drawer.

Dishonor of Cheque
BANKERS LEGAL JUSTIFICATIONS TO DISHONOUR A CHEQUE: If the baker has not sufficient funds of the drawer with him. If the cheque is not duly presented for payment. If the cheque is not presented of six months has been considered as a reasonable time. If the cheque is post dated and is presented before actual date. If the customer draws the cheque on one branch while he has accounts in another branch of the same bank. Online banking has taken care of this issue. When the customer countermands payment.

Types of NIs

PROMISSORY NOTES

CHEQUES
BEARER ORDER

BILLS OF EXCHANGE

DEMAND

USANCE

SIGHT

USANCE

CROSSED

UNCROSSED

Automated Teller Machine

London, May 20, 2010 John Shepherd-Barron, who invented the world's first automatic cash dispensing machine, better known as ATM, is dead. He had come up with the idea after wondering why banks couldn't operate a system like a chocolate-vending machine. John had also thought of the four-digit Pin number. John had reached his bank a little late and then thought as why there could not be a system to get cash on the lines of the chocolate-vending machines. The first product was installed at Barclays Enfield branch in London June 27, 1967. He then realised that he could still remember his six-figure Army number, and decided to test his wife Caroline's memory. But, she could only recall four digits, so that became the world standard for Pin number.

Dimensions of Banking Operations

General Banking Advances

International Trade

Plastic Money
1) Debit Card 2) Credit Card 3) Charge Card A credit card is different from a debit card in that the credit card issuer lends the consumer money rather than having the money removed from an account. It is also different from a charge card (though this name is sometimes used by the public to describe credit cards) in that charge cards require that the balance be paid in full each month. In contrast, a credit card allows the consumer to 'revolve' their balance.