Central Banking

7/18/2019 Central Banking

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Central Banking

1. THE CENTRAL BANKING

1.1 Acts on behalf of the government to supervise, regulate and control the

country’s banking system. A nationalised corporation run by a board of

directions, governor, deputy governor, and some executive directors and part-

time directors.

(a) banker to the central government and holds the public deposits’.

!eposit include the national loans fund, the consolidated fund and the

account of the paymaster general

(b) central note-issuing authority in "akistan.

(c) manager of the national debt i.e. it deals #ith long-term and

short-term borro#ing by the central government

(d) the manager of the exchange e$ualisation account

(e) acts are agent for the government in carrying

(f) supervisor of the banking

(g) informal supervisor of other financial such as the %tock &xchange.

(h) 'anker to the commercial banks.

(i) As a lender to the banking system %tate 'ank of "akistan #ill

provide the money that banks need

The bank as manager of the exchange eq!"!sat!on accont

1. the deposits of a country’s gold and foreign currency reserves. sed toinfluence the exchange rate

The bank as s#er$!sor of the bank!ng s%stem

1.* has the responsibility under the 'anking Act for



The bank as "en&er of "ast resort to the commerc!a" bank!ng s%stem

1.+ %tate 'ank of "akistan lends money to the banking system.

(a) supply cash to the banking system, does this by buying eligible bills

from the discount houses exchange for cash’ bills (i.e. debt instruments)

(b) bank #ill remove excess cash from does this by selling bills to the

discount, discount houses obtain interest-bearing bills in place.

"rocess kno#n as open market operations describes the buying and selling of

eligible bills bet#een

'#en market o#erat!ons an& short(term !nterest rates

1. pen market operations provide a method of control over short-term

interest rates.

1. Are traded at a discount to their face value, /nterest rates on bills, have

an immediate influence on other money.

1.0 /f interest rates in the discount market’s open market operations #ent

up, soon be an increase in other money market rates, and then the banks’,

lending rates on bank loans.

1. pen market operations are an important feature of the government’s

monetary policy.

The !n&e#en&ence of act!on of the bank

An adviser to the government, not an agent of the government.

). *TATE BANK '+ ,AKI*TAN -*B,

2.1 have an independent currency and banking system. !ecided #ith /ndiathat the 3eserve 'ank of /ndia #ould continue to act as the central bank and as

currency authority for "akistan, by order called 45onetary %ystem and 3eserve

'ank rder 1*6.

(a) the sole not issuing authority in "akistan



(b) /ndian notes #ill remain legal tender in both "akistan and /ndia

until 7th %eptember, 1*0.

(c) 'ank of /ndia #ould transfer the assets of value e$ual to

"akistani notes to the 8overnment of "akistan after 7th %eptember,

1*0.

(d) 8overnment of "akistan #ould also issue coins in the countryafter 7th %eptember, 1*0.

(e) 3eserve 'ank of /ndia #ould perform the full functions

Estab"!shment of *tate Bank of ,ak!stan

2.2 3eserve 'ank of /ndia sho#ed reluctance in solving the banking crises.

3efusing to give 3s.++ crore #hich "akistan #as entitled to share

2. 9he 3eserve 'ank of /ndia #as relieved, the first day of :uly, 1*0, the

bank is entrusted #ith the duty of 4regulating the issue of bank notes and

keeping of reserve #ith a vie# to seeking monetary stability in "akistan and

generally to cooperate the currency and credit system of the country to its

advantage, %tate 'ank of "akistan Act, 1+, 4regulate the monetary and credit

system of "akistan and to foster its gro#th in the best national interest #ith a

vie# to securing stability fully and utilisation of the country’s productive

resources.

*hare ca#!ta"

2.* riginal share capital, three crore of rupees divided into three lac, +1;

#as contributed by the <entral 8overnment and the balance *; subscribed by

the private sector. pto 1st !ecember 1, the %tate 'ank #as a government-

cum-shareholders bank in terms of its original statute. =ationalisation

rdinance, 1*, the %tate 'ank has been a purely government-o#ned

institution. 9he private shareholders are compensated by the federal

government through endo#ment of negotiable bonds repayable at par at any

Const!tt!on

2.+ =ot guided by profit motive in its operation. >oster its gro#th in the

best national interest #ith a vie# to securing monetary stability and fuller

utilisation.

2. <onsists of one governor, one more deputy governor and nine directors.

&xecutive committee, empo#ered to transact business on behalf of the central



board of directions. chief executive, governor #ho controls and directors the

affairs of the bank on behalf, has 1* departments, over +777 persons.

(a) Accounts !epartment

(b) Administration !epartment

(c) Agricultural <redit !epartment(d) Audit !epartment

(e) 'ank <ontrol !epartment

(f) 'ank /nspection !epartment

(g) &ngineering !epartment

(h) &xchange <ontrol !epartment

(i) ?egal !ivision

(@) "ublic 3elations !epartment

(k) 3esearch !epartment

(l) %ecurity’s !epartment

(m) %tatistics !epartment, and

(n) 9raining !epartment.

9he functions of the various departments of the central directorate are briefly

described belo#.

/. +0NCTI'N* '+ *TATE BANK '+ ,AKI*TAN

.1 business and functions, governed by %tate 'ank of "akistan Act, 1+

and 'anking <ompany’s rdinance, 12, operates through t#o separatedepartments

(a) issue departmentB and

(b) banking departments.

.2 issue department issue of notes in the country. 'anking !epartment is

concerned #ith the carrying on and transacting banking business.

(a) %tate 'ank as a bank of issue, has the sole right to issue notes

except one rupees note and subsidiary coins #hich are issued by thegovernment. 9he hank adopted the proportional reserve system for the

issue of notes. <urrency backing by gold bullion, foreign securities is

no# fixed at 3s.1277 million through an rdinance in !ecember, 1+.

%ystem of note is kno#n as minimum reserve system. %iCe of notes

issue reflects the public demand for money. Assets of the /ssue

!epartment are al#ays e$ual to liabilities.



(b) 'anker to the government. Acts as a banker to the government,

balances of the central and provincial governments are deposited #ith

the %tate 'ank does not pay interest on them. 9he bank administers

exchange control on behalf of the government. /t carries out exchange,

remittances and other banking operations including the management of public debt. >loats ne# loans on behalf of the central.

(c) <ustodian of the cash reserves of the commercial banks in

"akistan. All the scheduled banks are re$uired to maintain #ith the %tate

'ank of "akistan at least +; balance of the replenishes the commercial

banks stocks of cash #hen they are running lo#.

(d) %tate 'ank as a clearing house. 9he clearing house is a place

#here the representatives of commercial banks meet each day to

exchange che$ues dra#n on each other and then settles the differences

o#ed to each other .

(e) Advisor to government. %ince, the bank is deeply involved in the

money and foreign exchange, its therefore, tender advice on financial

and economic matters to the government. /t also provides advice to

commercial banks %tate 'ank has a direct link #ith international bodies

like /53, /'3! etc.

(f)

%tate 'ank as a lender of last resort. <ommercial banks are shortof cash reserves due to large debt balances in the inter-bank. /t provides

cash to the commercial banks by rediscounting bills of exchange,

treasury bills and other gilt edged securities.

(g) %tate 'ank as a controller of credit. Das #ide po#er to use the

instruments of credit control for influencing the aggregate spending, the

inflation rate and the balance of payments in the country.

ses to tools of open market operations, discount rate and the percentage

reserve re$uirements

other minor tools such as issuing directives to restrict bank advancesregulating credit in the country.

(h) %tate 'ank and economic gro#th, playing a significant role in

facilitating and fostering economic development and gro#th of the

banking, promotional activities of the bank.



(i) 9he development of the capital market in the country

(ii) nder the %tate 'ank’s &xport >inance, provide finance to

the exporters at the concessional

(iii) Delped in the establishment of specialised creditinstitutions for meeting the medium and long-term, /!'", A!'9,

=/9, &">, (&$uity "articipation >und) =!><, D'><, /<"

. CLEARANCE H'0*E

+.1 Association of commercial banks, purpose of interchange and

settlement of credit claims. =ational 'ank of "akistan, as a representative,

"akistan, acts as a clearing house.

+.2 <he$ue, as #e kno#, is an effective method of making payments. Ehen

che$ues are dra# on one bank and the holder (payee) deposits the same in his

account at the bank of dra#er, the mutual obligations are settled by the internal

bank administration and there arises no interbank debits from the use of

che$ues. 9he total assets and total liabilities of the bank remain unchanged.

+. /n practice, the person receiving a che$ue is rarely a depositor of the

che$ue at the same bank as the dra#er. De deposits the che$ue #ith his bank

(other than of the payer) for the collection of the amount. =o#, the bank in

#hich the che$ue has been deposited becomes a creditor of the dra#er’s bank.9he debtors bank #ill pay his amount of the che$ue by transferring it from cash

reserves if there are no offsetting transactions. /n the course of everyday life,

there are large number of che$ues dra#n on a bank deposited in other banks.

9he banks on #hich the che$ues are dra#n become in debt to the banks in

#hich the che$ues are deposited.

*.+ 9his facility of net interbank payments is provided by the clearing

house.

*. ?ocal commercial banks meet at a fixed time on all, meeting is held inthe office of the bank #hich, che$ues payable at other local banks and receive

the che$ues dra#n, A summary sheet is prepared #hich sho#s the names of

the

difference bet#een the totals represents the amount to be paid by particular

bank and the amount, 9he net payments are made issuing a credit voucher on



*. 9he #orking of clearing house is no# explained #ith the help of an

example. ?et us assume there are five banks in city and at the end of days

operation, the follo#ing payments are due to the banks from each other

3s.Cheqes &ra2n on

,ackage of contents

Bank A Bank B Bank C Bank 3 Bank E Tota"

Rs. Rs. Rs. Rs. Rs. Rs.

'ank A - 1*,777 27,777 1*,777 0,777 +,777

'ank ' 17,777 - 12,777 17,777 1,777 *0,777'ank < ,777 17,777 - ,777 *,777 2,777

'ank ! *,777 1,777 1,777 - 12,777 *0,777

'ank & 0,777 12,777 0,777 10,777 - *,7779otal 20,777 +2,777 +,777 *0,777 *7,777 22*,777

*.0 >or clear understanding the table is summarised belo#

Banks Cheqe

Rece!$e&

-3eb!t

Cheqe

Broght

-Cre&!t

3eb!t

Ba"ance

Cre&!t

Ba"ance

'ank A 20,777 +,777 - 20,777'ank ' +2,777 *0,777 *,777 -

'ank < +,777 2,777 7,777 -

'ank ! *0,777 *0,777 - -'ank & *7,777 *,777 - ,777

9otal 22*,777 22*,777 *,777 *,777

*. >rom the above table it is clear that 'ank ' and < are to pay debit

balances of 3s.*,777 and 7,777 respectively (9otal 3s.*,777). 'ank A and &

are entitled to receive their credit balances of 3s.20,777 and ,777 respectively

(3s.*,777 in total). 'ank !’s credit and debit balances are e$ual. Dence,

che$ues #orth 3s.22*,777 are cleared by a more payment of 3s.*,777. 9he

clearing house thus helps in saving a lot of cash reserves and transactions,

reduces the number of entries made in the registers and eliminates the

unnecessary task of carrying the che$ue packages from one bank to another

bank.

4er!ts of c"ear!ng hoses

*.17 9he main advantages of clearing house are as under-

(a) %ettlement of mutual obligations of commercial banks



(b) Douse provides an opportunity to the commercial, off inter bank debits

#ithout making payments in cash

(c) 9he central bank keeping the cash reserves of the banks

(d) Douse provides an opportunity to promote the interest of the member banks.

uniform policy for issuing of bank

(e) <an also prove an effective device for preventing, competition

(f) >inancial stress, the member banks can assist.

. *TATE BANK '+ ,AKI*TAN A* C'NTR'LLER '+ CRE3IT

'b5ect!$es of cre&!t contro"

+.1 %tate 'ank of "akistan Act, 1+ gives special po#ers to the %tate 'ank

to regulate, credit policy pursued, %tate 'ank aims at channelising funds of the

commercial banks to productive sectors of the country. /t discourages the use of

bank loans for non-productive purposes so as to achieve prosperity, stability

and the gro#th of domestic economy. 9he long term ob@ectives of the credit

policy of the %tate 'ank, ho#ever, is the promotion of high and stable level of

employment in the country.

Instrments of cre&!t contro"

+.2 main instruments of credit policy applied by the %tate 'ank of "akistan

are no# discussed in brief.

6ant!tat!$e contro"

Bank rate

+. 'ank rate is also called the discount rate. /s the official rate at #hich the

%tate 'ank rediscounts the first class securities at its counter. the bank rate is

raised

follo#ed by an increase in the discount rate of commercial banks.

discourage in the country and it eventually, bank rate has the opposite effect.



+.* no# charging 17; on rediscounting the first class bills of exchange.

the discount rate has not proved to be an effective instrument of credit

as the bill market is not very organiCed and soundly

rate #eapon is no# replaced by the po#er for the bank to fix its profit sharing

ratio in respect of its o#n financial assistance.

Open market operations

+.+ meant the sale and purchase of government securities in the open

market by the central bank of the country. 9he sale of securities leads to

contraction of credit and the purchase, therefore, to the expansion of credit.

+. Das been using this #eapon to regulate the flo# of the credit in the

country.

(a) money market is not responsive in "akistanB

(b) the commercial banks are carrying excess reserves the

themselvesB and

(c) the marketable securities are inade$uate.

7ar!ab"e reser$e req!rements

+. &ffective #eapon of credit control of the central bank of a country.

%ection of the Act, re$uires the scheduled banks to maintain at least +; of

demand and time liabilities #ith it, the po#er to change the minimum reserverests #ith the %tate 'ank.

+.0 9he instrument of variable reserve ratio, is used for affecting the

li$uidity position of the banks and hence their ability to finance. Ehen the

reserve re$uirements are raised by the central bank, thus restricts and expansion

of credit in the country. <entral bank lo#ers the reserve ratio. 9he commercial

banks are also re$uired to maintain 2+; li$uidity ratio on a day to day basis

against their time an demand liabilities.

Cre&!t rat!on!ng

+. &mpo#ered to place limits on the amount available for each application

of loan.

Cre&!t target



+.17 "akistan has set up =ational <redit <onsultative <ouncil (=<<<) in

1*. 9he functions of =<<< is to examine overall credit situation in the

country and indicate the credit limits for the public and private enterprises. 9he

%tate 'ank of "akistan sets specific target of funds to be given to agriculture

business industry and lo# cost housing by the commercial banks. /f the

commercial banks fail to achieve the ceilings, it imposes penalty on them. 9hedefaulting commercial banks shall have to make interest free loan to the %tate

'ank of the amount falling short of the target.

6a"!tat!$e contro"s

5oral persuasion

+.11 'anks are advancing funds for speculative or non-essential, %tate 'ank

can persuade and directly appeal to them to follo#.

3!rect act!on

+.12 /f the commercial banks do not act upon the credit policy of the %tate

'ank, the %tate 'ank is empo#ered to take action against them.

+.1 5oeen Fureshi made the %tate 'ank of "akistan an autonomous central

bank. %et and implement standards for commercial banks lending vie#

independently.

,r&ent!a" contro"s

Intro&ct!on

+.1* Eith a vie# to provide for a continued health and viability of financial

system, the "rudential 3egulations ("3) have been issued in the follo#ing

areas

(a) "3 issued by %tate 'ank of "akistan

(i) <orporate and <ommercial 'anking

(ii) %mall and 5edium &nterprises financing

(iii) <ustomer financing

(b) "3 issued by %ecurity and &xchange <ommission of "akistan



(i) =on banking finance companies

(ii) 5odarabas.

,R for cor#orate an& commerc!a" bank!ng

+.1+ 9hese regulations are divided into follo#ing categories

(i) 3isk management

(ii) <orporate 8overnance

(iii) Gno# your customer H and anti-money laundering

(iv) perations.

+.1 A brief of the regulations dealing #ith credit control is as follo#s.

-a Reg"at!on R(1

?imited on exposure to a single person any single person shall not at

any point in time exceed 7; of the bank’s I !>/’s e$uity, to the

condition that the maximum outstanding against fund based exposure

does not exceed 27; of the bank’s

-b Reg"at!on R()

?imit on exposure against contingent liabilities exceed at any point in

time 17 times of its e$uity.

-c

Reg"at!on R(/5inimum conditions for taking exposure give due #eightage to the

credit report relating to the borro#er and his group obtained from <redit

statements duly audited by a chartered accountant.

-& Reg"at!on R(8

?imit on exposure against unsecured financing facilities

unsecured I clean financing facility in any form of a sum exceeding

3s.+77,777I- (3upees five hundred thousand only) to any one person.

-e Reg"at!on R(?inkage bet#een financial indicators of the borro#er and total exposure

from financial institutions.

(i) the total exposure (fund-based and I or non-fund based)

availed by any borro#er from financial institutions does not

exceed 17 times of borro#er’s e$uity.



(ii) the time of allo#ing fresh exposure I enhancement I

rene#al, the current assets to current liabilities ration of the

borro#er shall not be lo#er then 11.

-f Reg"at!on R(9

&xposure against shares I tfcs and ac$uisition of shares

(i) (1) &xposure against shares I 9><% 'anks I

!>/s shall not take exposure.

(ii) (2) Ac$uisition of shares scripts in excess of

+; of their o#n e$uity o#n e$uity investment of banks in

shares should not exceed 27; of their o#n e$uity.

(g) Reg"at!on 3-

8uarantees All guarantees issued by the banks I !>/s shall be fully

secured, except in the cases such as bid bonds, performance bonds and

guarantees.

-h Reg"at!on R(:

Assuming obligations on behalf of ='><% !>/s shall not issued by

guarantee or letter of comfort nor assume any obligation #hatsoever in

respect of deposits, sale of investment certificates, issued of commercial

papers, or borro#ings of any non-banking finance company.

-! Reg"at!on R(1;

>acilities to private limited company !>/s shall formulate a policy, duly

approved by their 'oard of !irectors, about obtaining personal

guarantees of directors of private limited companies.

-5 Reg"at!on R(1)

5onitoring %tatements from borro#ers that contain a bank-#ise.

,R for sma"" me&!m enter#r!ses f!nanc!ng -*4Es

+.1 3isk management category (3). >or the remaining three categories Ji.e.

<orporate 8overnance (8), Anti 5oney ?aundering (5) and perations ()K



"rudential 3egulations for %5&s >inancing, %5& means an entity, ideally not a

public limited company, #hich does not employ more than 2+7 persons

+7 persons

(a) A tradingIservice concern #ith total assets at cost excluding land and

building upto 3s.+7 million.(b) A manufacturing concern #ith total assets at cost excluding land an

building upto 3s.177 million.

(c) Any concern (trading, service or manufacturing) #ith net sales not

exceeding 3s.77 million as per latest financial statements.

An individual, if he or she meets the above criteria, can also be categoriCed as

an %5&.

+.10 A brief of the regulations dealing #ith credit control is an follo#s

-a Reg"at!on R(1

%ource and capacity of repayment and cash flo# backed lending to the

identified.

-b Reg"at!on R()

"ersonal guarantees All facilities except those secured against li$uid

assets, extended to %5&s shall be backed by the personal guarantees of the

o#ners of the %5&s.

-c Reg"at!ons R(/

?imited on clean facilities secured solely against personal guarantees, on a

%5& up to 3s. million provided that funded exposure should not exceed 3s.2

million.

-& Reg"at!on R(8

%ecurities 3elaxation in 3egulation 3-, for facilities upto 3s.

million, all facilities over and above this limit shall be appropriately secured as

per satisfaction of the banksI!>/s.

-e Reg"at!on R(

5argin re$uirements 'anksI!>/s are free to determine the margin

re$uirements on facilities provided by them to their clients taking into account

the risk profile of the borro#er(s) in order to secure their interests.

-f Reg"at!on R(9



"er party exposure limit 9he maximum exposure of a bank I !>/ on a single

%5& shall not exceed 3s.+ million.

-g Reg"at!on R(<

Aggregate exposure of a bank I !>/ on %5& sector shall not exceed the

prescribed limits.

-h Reg"at!on R(=

5inimum conditions for taking exposure !>/ should give due #eightage to

the credit report relating to the borro#er and his group.

-! Reg"at!on R(:

"roper utiliCation of loan 9he loans have been properly utiliCed by the %5&s

and for the same, ac$uired I obtained.

-5 Reg"at!on R(1;

3estriction on facilities to related parties n a %5& in #hich any of its

director, ma@or shareholder holding, any family member of these persons is

interested.

,R for Consmer +!nanc!ng

+.1 >inancing allo#ed to, personal, family or household needs.

(i) <redit <ard mean cards, #hich allo# a customer to make payments on credit. %upplementary credit cards shall be considered part

of the principal borro#er. <orporate <ard #ill not fall under this

category and shall be regulated by "rudential 3egulations for credit

cards shall also be applicable on charge cards, value cards and '9>

('alance 9ransfer >acility).

(ii) Auto loans mean the loans to purchase the vehicle for personal

use.

(iii) 5eans loan provided to individual for the

(iv) "ersonal loans mean the loans to individuals for the payment

3unning >inance I 3evolving <redit to individuals.

9hat any financing facility, other than %5&s >inancing, above, shall be

governed by the "rudential.



+.1 9hese are divided into follo#ing categories.

(a) 3egulations (general concept)

(b) 3egulations for credit cards

(c) 3egulations for auto loans(d) 3egulations for housing finance

(e) 3egulation for personal loan including loan for the purchase of

consumer durables.

+.27 A brief of the regulations dealing #ith credit control is as under

-a Reg"at!on R(1

&xtended by banksI!>/s to their directors, ma@or shareholders,

employees

persons shall be at arms length basis and on normal terms.

-b Reg"at!on R()

9he prescribed limit on exposure against total consumer financing shall

not be exceed.

-c Reg"at!on R(/

9otal financing facilities to be commensurate #ith the income.

-&

Reg"at!on R(88eneral reserve against consumer finance 8eneral reserve at least

e$uivalent to 1.+; of the consumer portfolio #hich is fully secured and

+; of the consumer portfolio #hich is unsecured.

-e Reg"at!on R(

'ar on transfer of facilities from one category to another to avoid

classification transfer any loan or facility to be classified

-f Reg"at!on R(9

5argin re$uirements !etermine the margin re$uirements on consumer facilities provided by them to their clients taking

,R for non bank!ng f!nanc!ng com#an!es -NB+Cs

+.22 =on 'anking >inancial /nstitutions (='>/s), <ompanies (='><s) and

are being regulated, =ovember 1+, 2772, information, returns and statements to

%&<" and <redit /nformation 'ureau, in the same manner.



+.2 "art // of these rules applies to borro#ing facilities for (a) corporate

borro#ers.

+.2* A brief of the conditions is as follo#s

(a) ?imit on ='><’s exposure to a single person ='>< to any

single person shall not at any point in time exceed 7;, &xceed 27; of

the ='>< e$uity.

(b) 5inimum conditions for grant of financing facilities.

(i) >undInon-fund based facility exceeding, /nformation

'ureau of the %tate 'ank of "akistan. /f the credit report

indicates.

(ii) btain copy of accounts relating to the business of each.

(iii) &nsure that the ?oan Application >orm prescribedIdevised

by a modaraba is accompanied, 6'orro#er’s 'asic >act %heet’.

(c) 'orro#er’s e$uity and total exposure from financial institutions

'orro#er from institutions does not exceed 17 times.

(d) >inancial indicators of the borro#ers !ebt-e$uity ratio of the

borro#er

current liabilities ratio is not lo#er than 11.

(e) 5argin against facilities 5inimum margins shall be maintained

against various facilities and all guarantees #ill be backed by 177;

realiCable securities.

(f) >acilities against %hares I 9><’s and ac$uisition of share ='><

shall not take exposure against the security of shares I 9><s issued by

them.

,R for 4o&arabas

+.2+ "art // of these rules applies to borro#ing facilities for (a)

corporate borro#ers an (b) individual borro#ers.

+.2 A brief of the conditions is as follo#s



(a) ?imit on modaraba’s exposure to a person "oint in time

exceed 7; of the modaraba’s e$uity, exceed 27; of the

modaraba’s e$uity.

(b) 5inimum conditions for grant of financing facilities

(i) 9o give due #eightage to credit report relating to

the borro#er and his group obtained from <redit

/nformation 'ureau of the %tate 'ank of "akistan.

(ii) Ehile granting any facility to the customers other

than individuals, modaraba shall obtain copy of accounts

relating to the business of each of its borro#er for

analysis and record.

(c) ?inkage bet#een a borro#er’s e$uity and total exposure,

moderabas shall ensure that the total exposure availed by any

borro#er from financial institutions does not exceed 17 times of

borro#er’s e$uity as disclosed in its financial statements.

(d) >inancial indicators of the borro#ers e$uity ration of the

borro#er does not exceed 7*7 and current assets to current

liabilities ratio is not lo#er than 11

(e) 5argin against facilities 5argins shall be maintained

against various facilities and all guarantees #ill be backed by

177; realiCable securities

(f) >acilities against %hares I 9><s and ac$uisition of shares

5odarabas shall not take exposure against the security of

shares I9>< issued by them.

(g) 3egulations for Dousing >inance for individuals

(i) 9he maximum per party limit in respect of housing

finance by the modarabas #ill be 3s..+ million.

(ii) 5odarabas are free to extend mortgage loans for

housing, for a period not exceeding t#enty years.

5odarabas should be mindful of their ade$uate asset

liability matching.



(iii) 9he house financed by the moderabas shall be

mortgated in modaraba’s favour by #ay of e$uitable or

registered mortgage.

(iv) 5odarabas shall either engage professional

expertise or arrange sufficient training for their concernedofficials to evaluate the property, assess the genuineness

and integrity of the title document, etc.

(v) 9he housing finance facility shall be provided at a

maximum ?oan to Lalue ratio of 0+177 (0+;)

(vi) 9he housing finance facility shall be provided at a

maximum of /ncome to installment ratio of 1.

9. CENTRAL BANK A* THE G'7ERN4ENT>* BANKER

.1 <entral bank in each country, has no# been assigned the responsibility

of acting as fiscal agent to the government. "reviously, this duty #as performed

by a large number of government treasuries spread all over the country. 9he

services performed by treasuries for receiving, holding and disbursing of

government funds #ere dissatisfactory. 9he treasury office established at

different places #ere expensive to operate. 9he net movement of coins and

paper money into and out of the treasury #ere also risky. /t #as, therefore,

decided that the central bank should be given the privilege and also theresponsibility to deposit free of interest all the cash balances of the government

and in lieu therefore perform some fiscal functions for the government. 9hese

functions in brief are as under

(a) <entral 'ank as government’s banker. 9he central bank acts as a

banker to the government. /t deposits free of interest all the cash

balances of the government. /n return, it performs all the services #hich

a commercial bank ordinarily does for its customers. /t receive on

deposits, income taxes, customers and other internal revenues taxes. /t

also undertakes the #ork of collection of che$ues and drafts dra#n onother banks and provides cash to the government. 9he bank pays

salaries, pensions, reliefs, public #orks, etc., on behalf of the

government. /t transfers funds from one part of the country to another or

from one account to another for the government. 9he central bank grants

short-term loans to the government against government securities. /n

time of emergencies like #ar or depression, it makes extraordinary



advances to the government. 9he bank charges no commission from the

government for all these banking services rendered by it.

(b) 'ank as agent of the government. 9he central bank acts as agent

of the government. /t is entrusted #ith the issued of ne# loans and

treasury bills on behalf of the government. /t pays interest on the publicdebt and redeems maturing securities. /t also under#rites securities of

the government. 9he central bank also acts as agent in gold and foreign

exchange transactions for the treasury. /t also buys and sells foreign

exchange on its o#n account and as agent for the treasury. /t services as

depository of /5> and /'3!.

(c) 'ank as a financial advisor. 9he central bank performs a very

important function by acting as financial advisor to the government.

9hough the government has its o#n staff for giving advice on matters of

economic policy, yet it obtains advice from the central banks also. 9he

central bank is constantly in touch #ith the money, securities and foreign

exchange market conditions in the country. /t, therefore, gives advice to

the government in its debt management, foreign exchange transactions,

deficit financing, devaluation of the currency, trade policies,

mobilisation of savings, agricultural and industrial credit, etc. 9he

central bank also acts as fiscal agent for various agencies and

corporation established by the government.

<.

R'LE '+ *TATE BANK '+ ,AKI*TAN IN THE EC'N'4IC3E7EL',4ENT

.1 9he role of the %tate 'ank of "akistan is not confined no# to the

regulation of overall supply of credit in the country. /ts aim is to create a

machinery #hich helps in mobilising domestic resources. 9hese resources are

directed into productive channels, helping in the establishment of specialised

financial institutions for carrying out development programmes in various

sectors of the economy, holding the price line, increasing employment and

maintaining e$uilibrium in the balance of payments. 9he role of %tate 'ank of

"akistan is, therefore, promotional and developmental. 9he %tate 'ank of "akistan since its establishment in :uly, 1*0 has taken the follo#ing measures

for promoting economic development in the country.

(a) 8ro#th of banking system. At the time of partition, there #ere

only t#o 5uslim scheduled banks, Dabib 'ank ?imited, and Australia

'ank operating in "akistan. 9he %tate 'ank immediately after its



establishment in 1*0, took up the herculean task in building up a sound

banking system in the country. 9he start #as made #ith the

establishment of =ational 'ank of "akistan in 1*. %ince then the total

number of domestic commercial banks and foreign banks have increased

to 2+ and 1 #ith 02 and * braches respectively in operation in the

country. 9hese banks are paying a prominent role in the mobilisation of saving in rural and urban areas an disbursing credit for promoting

developing in the country.

(b) Assistance to specialised financial institutions. 9he %tate 'ank of

"akistan is providing assistance to specialised financial institutions for

enabling them to extend ade$uate finance to different sectors of

economy. 9he loans are given to Agricultural !evelopment 'ank of

"akistan (A!'") for financing seasonal agricultural operations and for

development of agriculture. 9he Douse 'uilding >inance <orporation

(D'><), /ndustrial !evelopment 'ank of "akistan (/!'"), =ational

!evelopment >inance <orporation (=!><), /nvestment <orporation of

"akistan (/<") and >ederal 'ank of <ooperative also get financial

assistance from %'".

(c) 5onetary and credit policy. 9he bank is pursuing a monetary

policy #hich aims at

(i) checking inflationary pressureB and

(ii) ensuring ade$uate availability of bank finance for productive activities in general and the priority sectors in

particular.

(d) &xport finance scheme. nder the %tate 'ank >inance %cheme,

the banks are providing finance to the exports at the concessional rates.

9he refinance, in turn, is provided by the %tate 'ank at lo# rate of

interest.

(e) <redit targets for priority sectors. 9he %tate 'ank gave targets to

commercial banks for providing small loans in the fields of business,industry, agriculture, housing every year. 9he prescribing of credit target

for priority sectors have greatly helped in raising production.

(f) /slamisation of financial system. As a part of the government

policy, the %tate 'ank of "akistan has prepared and implemented a

programme of /slamic modes of financing, from :uly 1, 10+. All



financing and loaning operations of the banks conform to the /slamic

system. 9he non-bank financial institutions like the /<", =/9, %'><,

'&? ('anker &$uity ?imited) have also converted to entire investment

operations on an interest free basis.

(g) &stablishment of banking publicity board. 9he %tate 'ank ?imited to set up 'anking "ublicity 'oard in 1+ for developing

banking habit among the people and for mobilisation of savings in the

length and breadth of the country.

(h) 5anaged float. 9he %'" fixes the "akistan’s rupee exchange

parity against the basket of currencies. "akistani rupee has been made

fully convertible on current account from :uly, 1*.

(i) 9raining scheme. 9he %tate 'ank started a training scheme for

imparting banking kno#ledge to the persons #orking in the banks and to

those #ho are to @oin banks as their profession. 9he training scheme #as

a success and it produced a large number of trained bankers of financial

experts for the various banking concerns.

(@) %tate 'ank and autonomy. 9he %tate 'ank no# regulates 1

financial institutions in the country the breakup of #hich is as follo#s

!omestic 'anks 2+

>oreign 'anks 15odaraba <ompanies +2

?easing <ompanies 2

/nvestment 'anks 12

9otal 1

9he %'" should have constitutional po#ers to dictate monetary policy. /t

should be an independent institutions offering expert counsel #ith

po#ers to implement them.

.2 9hose #ho oppose this vie# are of the opinion that ultimate decision-making po#ers for guiding and managing the economy should rest #ith the

democratic government of the country. /t is correct that the ultimate decision

making po#er should be government of the country but the policies #hich

shape the level of inflation and interest rate should lie #ith the central bank. /f

the central bank’s autonomy is chipped a#ay, then the demand for budgetary



support to centre and provinces #ill continue rising leading to inflationary

pressure in the country.

Central Banking

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