Banks

A banker or bank is a financial institution whose primary activity is to act as a

payment agent for customers and to borrow and lend money.
Importance of Bank
1. Safekeeping for cash. 2. Safe and convenient means of making payment. 3.
Provides finances. 4. Provides interest
Types of Banks Central Bank  One central bank in each country.
 Issues, controls and regulate the supply of money in the country.
 Designing and enforcement of monetary system (a policy related to
interest rates and money supply to control economy)
.  Acts as lender of last resort to commercial bank.
 Makes policies for controlling activities of commercial banks
.  Manages public debt (money borrowed by the government)
.  Manages foreign exchange reserves.
 Financial advisor of the government. Commercial Bank  Private owned
and profit seeking.
 Basic units of banking system.
Primarily all banks gather temporarily idle money for the purpose of lending
to others and investing, which bring gain in the form of return, profit and etc.
However, due to the variety of resources of money and the diversity in lending
and investment operations, banks have been placed in various categories, such
as:
• Commercial Banks • Savings Banks • Industrial Bank • Mortgage Banks •
Agriculture Bank • Investment Banks • Central Banks • Co-operative Bank
1. Commercial Banks The commercial banks receive deposits from the general
public, which are repayable on demand upon written orders of the depositors.
As their most distinctive feature the commercial banks maintain chequing
accounts for the constituents. The commercial banks are also distinguished for
providing short-term finance to trade, commerce and industry to enable these
sectors to expand their productive activities. Examples : Muslim Commercial
Bank, UBL, Citi Bank etc.
2. Industrial Bank: The primary functions of these banks is to grant loans to
Industrial sector so that the industries may grow . These are also called specialized
financial institutions. They play a vital role in economic development of a country.
Examples : Industrial Development Bank of Pakistan (IDBP)
3. Savings Bank The basic purpose of these banks is to inculcate the habit or savings
in the people. The savings bank deposits are not repayable upon only the written
orders of the depositors but the depositors or his agent has to appear personally at
the saving bank to make withdrawal, and for this purpose he must present a pass
book, a certificate of deposit or some similar documents to prove his right to receive
payment. Examples: Post office savings banks and savings account at National
Saving organization are well known operational Savings Banks in Pakistan
 4. Mortgage Banks These banks mainly deal in loans for the acquisition or
construction of real estate against the security of mortgages. Savings and
loans associations and farm – loan associations are some of the well known
forms of the mortgage banks. Examples : House Building Finance
Corporation(HBFC)
5. Agriculture Banks These banks provide loans to agriculturists for
purchasing seeds, fertilizers, tractors. Chemicals etc. In this way, they
provide assistance to make the agriculture sector stronger. Examples :
Agricultural Development Bank of Pakistan (ADBP, New name is Zarai
Tarasqiati Bank Ltd.)
.

Central banks Central banks occupy a unique position in the banking structure of
a country because they have been entrusted with the responsibility of
controlling the money supply, interest rates and financial market of the country
for the purpose of economic development. Examples : State Bank of Pakistan,
Bank of England and Federal Reserve Bank of USA are examples of central banks.
Cooperative banks: These banks are established under Cooperative Societies
Act. They are established to serve a specific area of society. Examples : Punjab
Cooperative Bank(PCB), Federal Cooperative Bank. Cooperative banking
refers to a small financial institution started by a group of individuals to address
the capital needs of their specific community. Such financial institutions are
owned and controlled by their members, and the board members are
democratically selected to oversee the operations.
Cooperative banks work on the principle of cooperation and are owned and
operated by their members. In order to support the financial needs of a
community such as a village or a specific community, people come together to
pool resources and provide banking services such as loans, savings accounts
etc.
Functions of commercial Bank:
1. Accepting deposits.
2. Lending Money.
3. Means of Payment.
4. Other services.
2. Accepting Deposits Banks Accepts deposits from customers into the
following account
3. Current Account
4. 1.2. Savings Account
5. 1.3. Fixed Deposit Account
Saving account
Fixed deposit Account
Current account
Lending Money 2
2.2. Bank Loan  Is a lending facility offered by the bank to meet long term
financial requirements of borrower.  Normally a loan is granted for acquiring any
fixed asset or for development of infra structure.
 If sanctioned, loan amount is paid to the borrower through a cross cheque/cashier
or manager’s cheque which can be deposited on any bank in which borrower
maintains an accounts.
 Borrower has to pay the principal amount along with the interest.  A bank
considers the following before granting the loan. 1. Purpose of loan. 2. Credit
worthiness of the borrower (CIB). 3. Amount of loan. 4. Duration of loan.
Bank Over Draft
 A short term facility offered by the bank to the borrowers where the
borrower can over draft (withdraw money more than their balance) their
accounts maintained with the banks.
 Normally available for the businesses.
 Also known as running finance facility
.  It is offered to manage cash flow problem.
 Only available for current account
Means of Payments
1. Drawer:
He is the person who signs the cheque and orders bank to pay a certain sum
of money.
2. Drawee:
The person to whom the account holder addresses is called drawee. He
is a banker in case of cheque.
3. Payee:
The person who has to receive the amount of the cheque is called payee.

.
Cheques
Cheque
Defnition: “A ‘Cheque’ is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand”.
.
A bill of exchange is a written order once used primarily in international trade that binds one
party to pay a fixed sum of money to another party on demand or at a predetermined date.

Specimen of a cheque
NATIONAL BANK Ltd
Regal chowk
Karachi
Account No. 49 095241 Date _________
Pay ________________________________ or Bearer
Rupees_______________________________Rs.___
a. Bearer Cheque:
The cheque which contains the phrase “or Bearer” is called bearer
cheque. This is cheque is payable to any person who bears it.
b. Order cheque:
The cheque which contains the phrase “or Order” is called order
cheque. This is cheque is payable to a specific person whose name is
written as payee or to the order of payee. This is a safer cheque and
in case f lost, it can not be enchased by someone else.
Open and cross cheque
The cheque which does not contain two transverse line across its face
called an open cheque. It means that this cheque can be presented at
the counter of the drawee by the bearer for payment.
On the other hand, a cross cheque bears two transverse lines across
it face. Such a chequeen not be presented at the counter of the bank
but must be presented through a bank. It is payable over the counter on presentment by the payee to the
paying banker. While a crossed cheque is not payable over the counter but shall be collected only through
a banker. The amount payable for the crossed cheque is transferred to the bank account of the payee.
 An open cheque is the bearer cheque. It is payable over the counter on presentment by the payee to
the paying banker. While a crossed cheque is not payable over the counter but shall be collected
only through a banker. The amount payable for the crossed cheque is transferred to the bank account
of the payee.
Advantages of Cheques
1. Minimum cash handling.
2. Convenient and Safe.
3. Track record of payment can be maintained.
4. Better business control
5. Some times it is a legal obligation.
Disadvantages of Cheques
2. Cheques can be dishonored.
3. Payments through cheques means limited hard cash.
4. Paper work increases.
5. Not suitable for petty purchases
How Cheques are dishonored
1. Balance not available in payers (drawers) account.
2. There is some discrepancy in amount written in words and in figures.
3. There is some cutting/over writing on the cheque.
4. Tempered cheque.
5. Cheques issued form frozen account.
6. Signatures do not tally.
7. Stale cheque (older than six months).
8. Post dated cheque.
9. Cheque issued from a person reported dead.
10. Payment is stopped by payer.
11. Cheque issued by insane person.
How to overcome the problem of dishonored Cheques
1. Check cheques before accepting them.
2. Keep careful records of customers who have caused problems.
3. Ask for cash payment.
4. Take the person to court.
5. Insist on the use of a cheque guarantee card (see below).
6. Do not accept cheques beyond the limit of the card (see below).
Cheque cards are issued by bank to their credit worthy customers,
guaranteeing to the payee that a cheque drawn by the card holder will be
honored by the bank even if there are insufficient funds in the account of
drawer.
Bank Draft
 Issued by the bank in favor of payee on the advice of the payer.
 The payer approaches the bank with the request and payment in cash or
through cross cheques in favor of the bank.
 Payer has to pay bank charges in addition to the amount of payment.
 At is a secured means of payment.
 Usually suitable when buyer and seller are not known to each other, and
seller wants secure means of payment (of course bank is more reputable than
a person).
Online Payment
 Payment can be deposited into payee’s account through internet.
 Used for both local and especially more common in international
transactions.
 Payer has to go to any branch of the bank where payee holds his account.
 Payer has to fill in ‘online deposit slip’ by mentioning payees account number
and branch name and code.
 Bank where payer deposits the money will remit it to payees bank branch.
 Remittance will be made in a few minutes.  Remittance is sending of
money without physical movement of money.
Other Services
4.1. Agency Service
 Banks acts as agent of the payee for accepting payments.
4.2. Foreign Exchange  In additional to central bank, commercial banks also
buy and sell foreign exchange.
4.3. Issuance of Bank Statement
 It is issued by the bank to their account holder on periodic basis or on demand.
 Acts as a summary of all the transactions that account holder makes.
 Generally mentioned in running balance format.
. 4.5 Debit Cards  A plastic card with a magnetic tape or with a micro chip on
it, issued by commercial banks to their account holders.  These can be used for
making payment at selected retailers or for drawing cash from ATMs.
ATM and ATM Cards
 ATM (Automated Teller Machines) is a computerized telecommunications
device that provides customers a method of financial transactions in a public
space without the need for a human clerk or bank teller. Most banks now have
more ATMs than branches, and ATMs are providing a wider range of services
to a wider range of users.
 ATM card is a plastic card which is issued by the bank to its account
holders on their request.
 This card is used to draw money by using it at ATMs.
 Services provided by ATMs: 1. Mini Bank Statement. 2. Utility Bills
payment. 3. Balance enquiry. 4. Balance Transfer (BTF). 5. Deposit Money.
 All debit cards are ATM cards but all ATM cards are not debit cards.
Telebanking
 A special facility which is offered by the banks to their account holders on their
request.
 It is a service which allows its customers to perform transactions over the
telephone.
This normally includes bill payments for bills from major billers (e.g. for
electricity)PIN is used to access the bank account.  Facilities: o Pay bills. o
Checking Bank balance. o Balance Transfer Facility (BTF). o Requesting cheque
books
Internet Banking
 It is a term used for performing transactions, payments etc. over the Internet
through a bank.
 Customer has to open the banks website.
 PIN code is used for authentication.
 Facilities are same as Telebanking.
Lockers  A facility offered by the banks to their customers on their request to deposit their valuables
in Bank Lockers.  Each locker has two keys one given to customer and one rests with the bank. 
Valuables kept may be under a insurance cover provided by the bank up to certain limit.