COMMERCIAL Banks of Pakistan Fi

7/28/2019 COMMERCIAL Banks of Pakistan Fi

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COMMERCIAL BANKS IN PAKISTAN

INTRODUCTION:

Commercial banks are in the business of providing banking services to individuals,

small businesses and large organizations. While the banking sector has beenconsolidating, it is worth noting that far more people are employed in the commercial

banking sector than any other part of the financial services industry. Jobs in bankingcan be exciting and offer excellent opportunities to learn about business, interact

with people and build up a clientele.

Today's commercial banks are more diverse than ever. We can find a tremendous

range of opportunities in commercial banking, starting at the branch level where youmight start out as a teller to a wide variety of other services such as leasing, credit

card banking, international finance and trade credit.

The banking sector in Pakistan has been going through a comprehensive but complex and

painful process of restructuring since 1997. It is aimed at making these institutions

financially sound and forging their links firmly with the real sector for promotion ofsavings, investment and growth. Although a complete turnaround in banking sector

performance is not expected till the completion of reforms, signs of improvement are

visible. The almost simultaneous nature of various factors makes it difficult todisentangle signs of improvement and deterioration.

THREATS FOR COMMERCIAL BANKS

Commercial banks have been exposed and withstood several types of pressure since1997. Some of these are:

1) multipronged reforms introduced by the central bank,

2) freezing of foreign currency accounts,

3) continued stagnation in economic activities and low growth and

4) drive for accountability and loan recovery. All these have brought a behavioural

change both among the borrowers as well as the lenders. The risk aversion has been more

pronounced than warranted.

Categories of commercial banks in Pakistan:

Commercial banks operating in Pakistan can be divided into four categories:

1) Nationalized Commercial Banks (NCBs),


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2) Privatized Banks,

3) Private Banks and

4) Foreign Banks.

The central bank has been following a supervisory framework, CAMEL, which involvesthe analysis of six indicators which reflect the financial health of financial institutions.

These are:

1) Capital Adequacy,

2) Asset Quality,

3) Management Soundness,

4) Earnings and Profitability,

5) Liquidity and

6) Sensitivity to Market Risk.

Capital adequacy

To protect the interest of depositors as well as shareholders, SBP introduced the risk

based system for capital adequacy in late 1998. Banks are required to maintain 8 per centcapital to Risk Weighted Assets (CRWA) ratio. Banks were required to achieve a

minimum paid-up capital to Rs 500 million by December 31, 1998. This requirement hasbeen raised to one billion rupee and banks have been given a deadline up to January 1,

2003 to comply with this.

The ratio has deteriorated after 1998. However, it was a fallout of economic sanctions

imposed on Pakistan after it conducted nuclear tests. The shift in SBP policy regarding

investment in securities also led to a fall in ratio. However, most of the banks have been

able to maintain above the desired ratio as well as direct their investment towards moreproductive private sector advances. Higher provisioning against non-performing loans

(NPLs) has also contributed to this decline. However, this is considered a positive

development.

Asset quality

Asset quality is generally measured in relation to the level and severity of non-

performing assets, recoveries, adequacy of provisions and distribution of assets.

Although, the banking system is infected with large volume of NPLs, its severity hasstabilized to some extent. The rise over the years was due to increase in volume of NPLs


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following enforcement of more vigorous standards for classifying loans, improved

reporting and disclosure requirements adopted by the SBP.

In case of NCBs this improvement is much more pronounced given their share in totalNPLs. In case of privatized and private banks, this ratio went up considerably and

become a cause of concern. However, the level of infection in foreign banks is not onlythe lowest but also close to constant.

The ratio of net NPLs to net advances, another indicator of asset quality, for all banks hasdeclined. Marked improvement is viable in recovery efforts of banks. This has been

remarkable in the case of NCBs, in terms of reduction in the ratio of loan defaults to

gross advances. Although, privatized banks do not show significant improvement, theirratio is much lower than that of NCBs. Only exception is the group of private banks for

which the ratio has gone up due to bad performance of some of the banks in the group.

However, it is still the lower, except when compared with that of foreign banks.

Management soundness

Given the qualitative nature of management, it is difficult to judge its soundness just bylooking at financial accounts of the banks. Nevertheless, total expenditure to total income

and operating expenses to total expenses help in gauging the management quality of any

commercial bank.

Pressure on earnings and profitability of foreign and private banks caused theirexpenditure to income ratio to rise in 1998. However, it started tapering down as they

adjusted their portfolios. An across the board increase in administrative expenses to total

expenditure is visible from the year 1999. The worst performers in this regard are the

privatized banks, mostly because of high salaries and allowances.

Earnings and profitability

Strong earnings and profitability profile of banks reflects the ability to support present

and future operations. More specifically, this determines the capacity to absorb losses,finance its expansion programme, pay dividend to its shareholders and build up adequate

level of capital. Being front line of defense against erosion of capital base from losses,

the need for high earnings and profitability can hardly be overemphasized. Although

different indicators are used to serve the purpose, the best and most widely used indicatoris return on assets (ROA). Net interest margin is also used. Since NCBs have

significantly large share in the banking sector, their performance overshadows the otherbanks. However, profit earned by this group resulted in positive value of ROA of bankingsector during 2000, despite losses suffered by ABL.

Pressure on earnings was most visible in case of foreign banks in 1998. The stress on

earnings and profitability was inevitable despite the steps taken by the SBP to improve

liquidity. Not only did liquid assets to total assets ratio declined sharply, earning assets tototal assets also fell. T-Bill portfolio of banks declined considerably, as they were less


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remunerative. Foreign currency deposits became less attractive due to the rise in forward

cover charged by the SBP. Banks reduced return on deposits to maintain their spread.

However, they were not able to contain the decline in ROA due to declining stock andremuneration of their earning assets.

Liquidity

Movement in liquidity indicators since 1997 indicates the painful process of adjustments.

Ratio of liquid assets to total assets has been on a constant decline. This was consciouslybrought about by the monetary policy changes by the SBP to manage the crisis-like

situation created after 1998. Both the cash reserve requirement ((CRR) and the statutory

liquidity requirement (SLR) were reduced in 1999. These steps were reinforced bydeclines in SBP's discount rate and T-Bill yields to help banks manage rupee withdrawals

and still meet the credit requirement of the private sector.

Foreign banks have gone through this adjustment much more quickly than other banks.

Their decline in liquid assets to total assets ratio, as well as the rise in loan to depositratio, are much steeper than other groups. Trend in growth of deposits shows that most

painful part of the adjustment is over. This is reflected in the reversal of decelerating

deposit growth into accelerating one in year 2000.

Sensitivity to market risk

Rate sensitive assets have diverged from rate sensitive liabilities in absolute terms since1997. The negative gap has widen. Negative value indicates comparatively higher risk

sensitivity towards liability side, while decline in interest rates may prove beneficial.

Deposit Mobilization

Deposit mobilization has dwindled considerably after 1997. Deposits as a proportion ofGDP have been going down. Growth rate of overall deposits of banks has gone down.

However, the slow down seems to have been arrested and reversed in year 2000.

Group-wise performance of deposit mobilization is the reflection of the varying degree

with which each group has been affected since 1998. Foreign banks were affected themost due to their heavy reliance of foreign currency deposits. They experience 14 per

cent erosion in 1999. However, they were able to achieve over 2 per cent growth in year

2000. Similar recovery was shown by private banks.

Deposit mobilization by NCBs seems to be waning after discontinuation of their rupeedeposit schemes linked with lottery prizes. Growth in their deposits were on the decline.

Despite the decline NCBs control a large share in total deposits. Aggressive posture of

private banks in mobilizing more deposits in year 2000 is clearly reflected in their depositgrowth, from 1.9 per cent in year 1999 to 21.7 per cent in year 2000. This has also helped

them in increasing their share in total deposits to over 14 per cent in year 2000.


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Due to the shift in policy, now banks are neither required nor have the option to place

their foreign currency deposits with the SBP. Although, the growth in foreign currency

deposits increase the deposit base, it does not add to their rupee liquidity. The increasingshare of foreign currency deposits in total base is a worrying development. In order to

check this trend, SBP made it compulsory for the banks not to allow foreign currency

deposits to exceed 20 per cent of their rupee deposits effective from January 1, 2002.

Credit extension

Bulk of the advances extended by banks is for working capital which is self-liquidating in

nature. However, due to an easing in SBP's policy, credit extension has exceeded deposit

mobilization. This is reflected in advances growing at 12.3 per cent in year 1999 and 14per cent in year 2000.

Group-wise performance of banks in credit extension reveals three distinct features. 1)Foreign banks curtailed their lending, 2) continued dominance by NCBs and 3)

aggressive approach being followed by private banks. Private banks were the only groupthat not only maintained their growth in double-digit but also pushed it to over 31 per

cent in year 2000. With this high growth, they have surpassed foreign banks, in terms of

their share in total advances in year 2000.

Banking spreads

Over the years there has been a declining trend both in lending and deposit rates.Downward trend in lending rates was due to SBP policy. The realized trend in lending

rates was in line with monetary objectives of SBP, though achieved with lags following

the sharp reduction in T-Bill yields in year 1999, needed to induce required change in

investment portfolio of banks.

Downward trend in deposit rates was almost inevitable. One can argue that banks should

have maintained, if not increased, their deposit rates to arrest declining growth in total

deposits. However, this was not possible at times of eroding balance sheet, steadyearnings were of prime importance. Consequently banks tried to find creative ways of

mobilizing deposits at low rates. However, due to inefficiencies of the large banks, the

spread has remained high.

Asset composition

Assets of banking sector, as per cent of GDP, have been on the decline. Slowdown inasset growth was also accompanied by changing share of different groups. Negative

growth in the assets of foreign banks during 1998 and 1999 was the prime reason behind

declining growth in overall assets of the banking sector. Share of NCBs have beendecreasing since private banks were allowed to operate in 1992. In terms of asset share,

private banks are now as large as foreign banks.

Problem bank management


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The central bank is the sole authority to supervise, monitor and regulate financial

institutions. It is also responsible to safeguard the interest of depositors and shareholders

of these institutions. Lately, SBP took actions against two private banks which became athreat to viability of the financial system in the country. These were Indus Bank and

Prudential Commercial Bank. On the basis of detailed investigations, the license of Indus

Bank was cancelled on September 11, 2000. After successful negotiations, managementand control of Prudential Bank handed over to Saudi-Pak group.

Outlook

Commercial banks have been going through the process of restructuring. There are

efforts to reduce lending rates. The SBP has been successful in implementing its policies.Most of the banks have been able to adjust to new working environment. The proposed

increase in capital base will provide further impetus to financial system in the country.

In the post September 11 era, the GoP borrowing from SBP and commercial banks is

expected to come down substantially and private sector borrowing to increase. However,a temporary decline in repayment ability of borrowers may increase provisioning for the

year 2001. The situation is expected to improve in year 2002.

Unless efforts are made by banks to shrink spread, depositors will not be able to get

return which corresponds with the rate of inflation in the country.

Privatization of NCBs is expected to be delayed due to external factors. However, it is anopportunity for the banks to further clean their slate.

COMMERCIAL BANKS

The new era of consolidation

A closer look at commercial banks operating in Pakistan reveals some emerging trends.

The nationalized commercial banks (NCBs) are going through extensive restructuring

programme. Private banks are consolidating their position by increasing their paid-up-capital and expanding branch network. Foreign banks are selling their operations to local

banks and taking an exit from Pakistan. Are the conditions not conducive for foreign


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banks for operating in Pakistan? Or, the higher profit made in the past was only because

of the inefficiency of local banks?

To explore this one has to look at the shift in paradigm in Pakistan's commercial bankingsector. The process was initiated in early nineties with the privatization of Muslim

Commercial Bank (MCB) and Allied Bank of Pakistan (ABL) and establishment of adozen banks in the private sector. This was followed by the first phase of financial sector

reforms. Now the consultations with banks is going on to initiate the second phase . Thelocal banks have been asked to: raise their paid-up capital to one billion rupee, follow

maximum disclosure requirement and make full provisions against non-performing loans

(NPLs). Efforts are also being made to restructure NCBs for their ultimate privatization.All these measures have changed the working environment. The local banks have

emerged strong competitor of foreign banks. Have the foreign banks lost the zeal to

compete or do they find themselves inadequate to compete with the local banks?

Foreign banks operating in Pakistan have thrived in the past mainly due to selective

clientele, better standard of services and virtually no burden of NPLs. Their biggeststrength was the ability to mobilize foreign currency deposits and to swap these deposits.

As they were mobilizing dollar deposits, they were also considered blue-eyed kids of theGovernment of Pakistan (GoP). Then came freezing of foreign currency accounts (FCAs)

in May 1998. Though, there was restriction on withdrawal of money in foreign exchange,

foreign banks experienced, initially, large erosion in deposits. They also found mobilizinglocal currency deposit difficult due to limited branch network.

Foreign banks were, and still, competing mainly with the five big banks. The private

banks have intruded, to a large extent, into their niche market. They also realized the fact

that they could not put up effective resistance against the local banks due to their limited

number of branches. Opening more branches was not only an expensive proposal but alsonot enough to compete with the five big banks and to face the ambitious branch

expansion plan of the private banks. To overcome this limitation, foreign banks aremaking huge investment in technology, i.e. on-line banking, ATMs, credit cards, etc.

However, these services could only be used in urban areas, mostly. With the gradual

increase in the paid-up capital of private banks and depositors' confidence in them,

branch rationalization programme followed by the NCBs and privatized banks, thefeeling of inadequacy among the foreign banks further intensified.

Some of the foreign banks have either already sold their Pakistan operations to local

banks or are actively involved in the negotiations. The two banks which have already

taken an exit are Bank of America and Societe Generale of France (SG). Earlier, a veryimportant feature was conversion of Pakistan branch network of foreign banks into

locally incorporated banks followed by acquiring of large equity stakes by foreign

groups, particularly from the Middle East, in the local banks. Faysal Bank of Bahrain wasthe first to convert its Pakistan operations into a locally incorporated bank Faysal

Bank. A foreign investors' group acquired Habib Credit & Exchange Banks (previously

branch network of BCCI) and renamed it, Bank Alfalah. Schon Bank was bought bysome foreign investors from the Middle East and given the name, Gulf Commercial


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Bank. This was subsequently takenover by Pakistan Industrial Credit and Investment

Corporation (PICIC) and became PICIC Commercial Bank.

As a result of merger ANZ Grindlays Bank of Australia and Standard Chartered Bank ofUK, now the two banks are operating under Standard Chartered banner. The majority

shares of Union Bank were acquired by another group from the Middle East. Union Bankhas also acquired Pakistan operations of Bank of America and some business of

American Express in Pakistan. It has also acquired Pakistan operations of Emirates BankInternational of UAE.

It is very important to explore the motives behind the above mentioned transactions, but

first the SG deal. Al-Meezan Investment Bank, established by Pakistan KuwaitInvestment Company, recently acquired commercial banking licence and the name was

changed to Meezan Bank. The new bank also acquired Pakistan operations of SG. An

interesting point is that SG sold its Pakistan's operations to Meezan Bank but also

acquired substantial stake in the bank. The point which makes it further interesting is the

declaration of Meezan Bank to undertake commercial banking activities on the basis ofRiba free transactions only. It is rather unusual that a European bank has become a

partner in a bank which promises Riba free banking.

There has been no official announcement about the takeover of Emirates Bank's Pakistanoperations by Union Bank. However, the sources in banking sector say that the deal has

been concluded at a substantial cost and formal approval from the shareholders of Union

Bank was acquired at a recently held extraordinary general meeting. It may look a bitstrange that Emirates Bank, which has been going strong in Pakistan, makes such a

decision. However, banking sector experts say that Emirates Bank's decision is due to the

shift in its policy which envisages making the bank a strong domestic bank. It has already

sold its operations in the UK and India and it was expected they would also pull out ofPakistan.

It is also important to look at the recently held bidding for the sale of 51 per cent shares

alongwith transfer of management of United Bank Limited (UBL). Muslim CommercialBank (MCB) submitted the highest bid, almost double the amount offered by other

participants. Though, State Bank of Pakistan (SBP) has suggested to the Privatization

Commission to ask the bidders to raise the bids further, it seems that MCB will ultimatelytakeover UBL. A question was raised, why did MCB offered such a high price? The

sector experts say, "MCB has most probably submitted such a bid to make it difficult for

others to match the price."

Why should MCB be so keen in taking over UBL? The sector experts say, "The biggestattraction for MCB, in UBL, is its overseas operations. MCB has already attained the

status of the largest private sector bank in Pakistan and now intends to make its presence

felt in the global market. Whereas Union Bank should be keen in consolidating itsoperations after the takeover of Pakistan operations of Bank of America, American

Express and Emirates Bank." It must be kept in mind that UBL's ultimate handing over to

any bidder is largely dependent on the formal clearance of the buyer by the Bank of


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England. Therefore, the transfer of ownership and management of UBL to MCB seems

most likely.

It may be of some interest to compare MCB with Union Bank in slightly more detail.MCB has a long history of operations and successful restructuring after its privatization.

It also enjoys extensive and intensive branch network. Lately it has invested heavily intechnology to improve quality and range of its services which include on-line banking,

ATMs and MNET. Under the new management efforts were made to recover NPLs andfull provisioning against such loans.

Compared to MCB, Union Bank has a rather bumpy track record. The initial sponsors,

Saigol Group, relinquished their stake in the bank under a distressed sale. The newmanagement, mostly comprising of zealous and ambitious bankers, have yet to make a

mark. It is true that the bank is making a lot of investment to become the preferred bank

but has little control on expenditures. According to the annual report for year 2001, bulk

or almost total income was eaten up by operating expenses and the bank posted a meager

profit of around Rs 10 million for the year.

It is often said that most of the banks listed in Pakistan follow orthodox or conservative

approach and they must come out of this syndrome. However, the critics are often not

able to differentiate between orthodox and prudent approach in banking. It is still thebetter to be a little conservative and make stable profit rather than being adventurous and

posting marginal profit or incurring loss. Ensuring decent return to depositors and

shareholders should always be the key objective of the management of any bank.

ELIMINATION OFRIBA

According to an order by the Supreme Court of Pakistan local financial institutions wererequired to eliminate Riba from the system by June 30, 2001. However, taking into

consideration the quantum of work, the deadline was extended for one more year, to June30, 2002. While the intellectual deliberations continued, the battle in the court of law

became more focused. Now, the court has ordered for determination afresh in the light of

contentions of the parties and the observations. The financial institutions may no longer

face the pressure to re-engineer the system, at least for the time being. However, one mayraise a question, Is the court order more important or the Islamic injunctions demanding

elimination ofRiba ?

The future deliberations must address key issues like: 1) what is the real definition of

Riba ? 2) Does the prevailing system provides assurance against exploitation ofborrowers by the lenders? 3) Are the borrowers paying market-based rates? 4) Are the

fixed lending and borrowing rates only notional? There are host of other issues which

have to be dealt with. However, both the sides, religious scholars and economists, mustnot enter into due diligence with rigid stands. This is an academic discussion of the

highest importance it deals with the basic teaching of Islam, Rizzaq-e-Halal.

PRIVATIZATION


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The present government is making efforts to ensure swift and smooth privatization of

NCBs. This includes two tier strategy, sale of remaining shares of GoP in already

privatized banks and sale of majority shares alongwith transfer of management ofremaining NCBs. There was plan to list the NCBs on stock exchanges first and then off-

load part of GoP holding, according to the market appetite. Following this policy,

National Bank of Pakistan was listed on local stock exchanges and 5 per cent shares wereoffered to general public. As the issue was heavily over-subscribed, the GoP decided to

exercise 'green-shoe option' and off-loaded its 10 per cent shares.

As regards UBL, the GoP decided to sell 51 per cent shares alongwith transfer of

management. The bidding was held and MCB submitted the highest bid of Rs 8.5 billion.The next major transaction on agenda is sale of majority shares of Habib Bank Limited

(HBL) alongwith transfer of management. Initially the GoP had the plan to first enlist

HBL on local stock exchanges and sell part of its holding to general public. However, theplan has been changed. Now the GoP wishes to make outright sale of the bank. The GoP

has also offered to sell its holding in Bank Alfalah.

KEY PLAYERS

Askari Commercial Bankposted over one billion rupee profit before tax and improved

its payout for the year 2001 compared to dividend paid for the previous year. The Boardof Directors approved payment of 20 per cent dividend and issue of 5 per cent bonus

shares.

Bank Alfalah may rightly term year 2001, 'another year of remarkable performance andanother year of consistent growth'. This is evident from a 47 per cent growth in deposits,

24 per cent increase in advances, 31 per cent growth in profit before tax and 44 per cent

hike in profit after tax as compared to the previous year. At the end of the year equity ofthe bank also stood at Rs 1.361 billion, a growth of 51 per cent over the previous year.

Faysal Bankwas able to wipe out its accumulated losses. Over the last couple of years

the bank not only managed to clean its slate but to also pay 10 per cent dividend. There

was improvement in mark-up as well as non-mark up income. The management was able

to control expenses, though there was slight increase in administrative expenses. Therewas also improvement in basic earning per share from Rs 1.53 to Rs 1.82.

Habib Bankposted Rs 2.2 billion profit before tax for the year, almost double the

amount posted for the previous year. This was despite the fact that the bank made

provisions amounting to Rs 2.6 billion as compared to Rs 1.2 for the year 2000. Profitafter tax of Rs 1.1 billion was more than double the amount posted for the previous year.

The bank managed to curtail administrative expenses. There was a reduction in non-

performing loans. The bank has increased lending to SMEs. There was improvement inoverseas operations which contributed towards higher profit. Another improvement was

the increase in number of ATMS 61 of its own and over 100 machines through sharing

with other banks.


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Metropolitan Bankposted Rs 742.7 million profit before tax as compared to Rs 567.9

million profit for the year 2000. Out of Rs 338 million profit after tax, Rs 200 million

were appropriated for issue of bonus shares. Rs 175 million bonus shares were alsoissued in year 2000.

Muslim Commercial Bankis the largest private sector bank and the third largest bank ofPakistan. The year 2001 was yet another year of achievements. The bank posted over Rs

2.1 billion profit before tax and total dividend payout for the year 2001 was 25 per cent.

PICIC Commercial Bank(formally Gulf Commercial Bank) completed the first

successful year of operations since the acquisition of the bank by Pakistan Industrial

Credit and Investment Corporation (PICIC). The various structural and financial changesintroduced, yielded positive results. Some of the indicators of improvement were, a hefty

153 per cent growth in profit before tax and 79 per cent increase in deposits. The Board

of Directors approved issue of 25 per cent bonus shares and 40 per cent right shares to

further improve the balance sheet footing.

Prime Commercial Bankwas able to improve its earnings per share due to higher

income, though there was also increase in expenses. The bank posted Rs 241 million

profit before tax as compared to a profit of Rs 158.6 million for the previous year. Out of

Rs 152.6 million profit after tax Rs 122 million were transferred to revenue reserve andthe Board of Directors preferred to skip dividend payment.

The Bank of Khyber posted Rs 231 million profit after tax for the year 2001 as

compared to a loss of Rs 157 million for the previous year. One of the reasons for

+++

on against NPLs. By making such a provision the bank has cleaned its slate and the step

would augur well in the future performance.

Union Bankposted a meager Rs 9.95 million profit before tax for the year 2001. A

closer look at the financial results reveals that out of an interest income of Rs 597.5million, provision against non-performing loans and advances amounted to Rs 197.6

million. While interest income amounted to Rs 597.5 million, non-interest incomeamounted to over one billion rupee. An interesting observation was that as against a total

income of Rs 1,064.6 million for the year, administrative expenses were as high as Rs

1,040 million.


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The financial results of commercial banks for the year 2001 seem good despite economic

slow down, barring a few. However, analysts say that the earnings for the year 2002 may

come under pressure due to shrinking spread. The central bank has been not onlylowering discount rate but also persuading the commercial banks to curtail average

lending rates. Since the demand for funds has not picked up significantly, shrinking

spread is adversely affecting profitability of the banks. Meeting the enhanced capitalrequirement of one billion rupee may not pose any serious problem for most of the banks.

DEPOSITS

(Rs in million)

Name 2001 2000

41,200 30,359


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ommercial Bank

Bank Alfalah 30,207 20,482

Bank Al Habib 24,697 17,823

Metropolitan Bank 17,902 13,136

Platinum Commercial Bank 3,991 6,416

Prime Commercial Bank 10,367 8,264

PICIC Commercial Bank 9,619 5,371

Soneri Bank 16,054 14,030

Union Bank 20,721 17,171

ADVANCES

(Rs in million)

Name 2001 2000

Askari Commercial Bank 23,291 17,893

Bank Alfalah 19,131 15,242

Bank Al Habib 15,902 14,722

Metropolitan Bank 12,988 11,367


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Platinum Commercial Bank 2,147 6,355

Prime Commercial Bank 6,853 6,794

PICIC Commercial Bank 6,330 4,746

Soneri Bank 10,199 10,931

Union Bank 13,869 13,346

OUTLOOK

Most of the banks have been able to make full provisions against NPLs. The impact ofSeptember 11 incident did not appear in first quarter reports. The real impact can only be

quantified after half-year results are announced.

The demand for funds by the private sector has not increased despite reduction in lending

rates. State Bank of Pakistan has been consistently reducing T-Bill yields and discounting

rates which have reduced the spread. Therefore, profits of banks are expected to remainunder pressure despite reduction in corporate tax rate.

While further reduction in lending rates seems improbable. The analysts forecast for slow

and gradual increase in interest rates during October-December quarter this year. That isthe time when funds are needed the most by textile and sugar industries.

Analysts hint towards more foreign banks leaving Pakistan. These include Doha Bank,

Mashriq Bank, IFIC and Rupali Bank. Operations of some of these banks may be taken

over by local financial institutions and closure of a couple of banks seems certain, if localbuyers do not come forward. The three foreign banks, namely Standard Chartered,

Citibank and ABN AMRO are expected to get further strength mainly because of thediversified range of their products and services.

ADB's Support to the Government of Pakistan's Effortsfor Creating an Enabling Environment for MSMEs1

Introduction

The Government of Pakistan, under its I-PRSP, emphasizes the importance of the

private sector and enhanced investment as core elements of the strategy for highgrowth and employment generation. Because of its under-utilized potential for

generating employment, increasing incomes, and reducing poverty, the Governmentaccords high priority to the development of micro, small, and medium enterprises

(SMEs). ADB has been assisting the Government in the development of the SMESector through facilitating SME access to Trade Finance under the SME Trade

Enhancement Finance Program, or SMETEF, approved in 2000 for $150 million.

SMETEF has four components including:


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A $150 million revolving facility, the so-called Foreign Currency Export

Finance Facility (FCEF);

A Partial Risk Guarantee facility up to a maximum exposure of $150 million

for import/letter of credit confirmation2;

An equity investment of up to $2 million in the Pakistan Export Finance

Guarantee Agency (PEFG) to provide an alternative to traditional collateral

instruments3; An $800,000 technical assistance to support the reform of the Export

Promotion Bureau as a facilitator for exports.

At the request of the Government, ADB is currently preparing a second major

operation, the SME Sector Development Program (SDP), which intends to specificallyaddress the policy environment, which is the topic of today's workshop. In addition,

the SDP will also support market based financial and business services, anddevelopment of service institutions for SMEs. The SDP is part of ADB's 2003 lending

assistance package to Pakistan.

To assist the Government to prepare the SDP, the ADB approved a grant technical

assistance of $800,000 in February 2002, the implementation of which is currently inprogress. The diagnostic phase of the TA has been completed, on the basis of which

the following opportunities and issues in Pakistan's SME sector have been identified:

Large, untapped growth potential. Pakistan's SMEs contribute more than

30% to GDP and absorb more than 80% of nonfarm employment. Because of

an unfavorable business environment, coupled with low investments and rentseeking behavior, the SMEs' growth potential for employment, income

generation, and poverty reduction remains largely untapped.

The lack of SME-friendly tax regulations imposes high barriers for entry

into the documented economy. Most SMEs prefer to remain in the informal

economy, which in turn precludes them from improving their competitivenessby accessing business support and financial services.

Labor, tax, and industry legislation, and implementation procedures

are complex and written in language, which is not understood by a

large part of the population. This constitutes a common source for thereported abuse of power by officials, e.g. labor, industry, and tax inspectors

and adds to the costs of doing business. As a result, enterprises have anegative attitude toward such legislation.

Industry associations and chambers of commerce and industry often

fail to act collectively, which undermines their lobbying power and potential

to assist the SMEs at improving their competitiveness.

SME lack of access to finance is a major impediment to investment,

business growth and innovation. The existing prudential regulations of theState Bank of Pakistan (SPB) require financial information and physical

collateral for lending. This results in lending policies and processes of banks,which effectively preclude the SMEs' access to finance.

Banks have yet to realize the full potential of SME market from a

commercial perspective, and lack the skills to develop profitable financialservices for the SMEs.

In the absence of effective market-based support to the SMEs, the

Government has established and maintains institutions to support the


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SMEs access to finance, provide business support services and represent SMEinterests within the Government. However, the Government recognizes that

direct government intervention is not an effective approach and that amarket-based mechanism and private ownership will ultimately need to

replace these institutions.

Against the background of these issues and opportunities in the SME sector, five keyareas have been identified for support and assistance under ADB's SDP. Theseinclude:

Key policy reforms to enhance competitiveness

Access to finance

Access to Business Support Services

Restructuring and capacity building of key institutions supporting the SMEs

Investments supporting the reform process

Given the focus of this workshop, I will elaborate further on key policy, regulatory,

and institutional reforms ADB is considering to support under the SDP. On the legal

side, under the ongoing technical assistance, we have reviewed a number of lawsaffecting the operations of enterprises and have identified several areas forimprovement and proposed modifications of legislation and regulations, which will be

finalized in consultation with the Government. The Government has already takenthe following initiatives on the legal side:

Establishment of a deregulation commission under the chairmanship of the

Minister for Commerce top review existing labor, industry, and taxation laws

and regulations;

Major effort being undertaken, with World Bank support, to revise the

Factories Act of 1934, which is the main reference for enterprise legislation;

The Government issued in September 2002 a new Industrial Relations

Ordinance, which is the first of a set of six laws amalgamating more than 50labor related laws.

While continued law reforms and simplification of procedures are essential, a focuson law reforms alone will not be effective to improve the business environment in a

tangible way. To this end, ADB proposes support to address a number of keycrosscutting concerns, which undermine the purpose of laws in practice, for a higher

impact of reforms on the SMEs. These include the following:

Establishing simple business registration and financial incentives to

facilitate SMEs entry into the formal economyComplicated and poorly drafted laws and regulations pose a severe barrier for

SMEs to enter the formal sector. Also taxation at entry, and registration feesare perceived to be high for enterprises. Registration processes are

cumbersome. As a result, the benefits of formalization such as the access toservices are poorly understood, and even if they are understood,

entrepreneurs are reluctant to enter the formal sector. Against thisbackground, ADB proposes to assist the Government in undertaking measures

of awareness building and support the development of simple, cheap, andeasy registration processes and business friendly one-stop-shop

arrangements to improve the coverage of registration. Also, effective SME


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friendly arrangements for entry under the formal tax net will be identified andconsidered.

Improving quality standards for industry and labor and reduce the

abuse of power by inspectors

To reduce the widespread abuse of power by inspectors, ADB wouldencourage the Government to limit inspection visits to a single inspector and

by adopting a selective risk-based inspection approach. The risk-basedapproach adopts measures through three tiers of intervention. First,

individual, selective inspection of enterprises, which are prone to particularrisks at the work place or those known for non-compliance. Second, self-

inspection by the private sector trade bodies or alternatively inspection by theprivate companies assigned by the Government, which would cover a majority

of SMEs. Third, awareness building for very small SMEs. ADB also proposes tofocus on the improvement of the labor and industry inspection function

through the preparation of an appropriate inspection policy andimplementation process, and pilot testing in a number of locations. Meeting

international product quality standards will be a gradual but significant benefitto the SMEs, and the image of Pakistan.

Enhancing export readiness of SMEs

It has been recognized that enterprises need to meet minimum quality

standards and practices to be ready for competitive export markets. To thisend, effective collaboration of institutions such as SMEDA, the EPB, and the

Pakistan Standard and Quality Control Authority (PSQCA) is required. ADBproposes the development of a policy and action plan to enhance export

readiness of SMEs. The current operations of SMEDA, EPB, and PSQCA needto be reviewed and modified to foster export readiness and export

performance. Business plans for SMEDA and EPB need to accommodate this.

Supporting SME-Neutral prudential regulations

Prudential regulations based on lending processes to corporate customerspose an unnecessary barrier to effective, prudent approaches that would

enhance SME access to finance. Especially collateral and documentation

requirements limit access severely. In the design phase of the ongoingtechnical assistance, ADB will support the State Bank of Pakistan's initiative inpreparing prudential regulations. ADB would like to propose the preparation of

the Final draft regulations by mid-March 2003.

Restructuring the SME Bank

The SME Bank has the mandate to serve the SMEs through providing accessto finance and related services. However, fulfilling its mandate has been

severely constrained, due to its creation through the amalgamation of twoinsolvent and inappropriately staffed financial institutions. Against this

backdrop, ADB is proposing assistance for the restructuring and ultimateprivatization of the SME Bank for it to play an important and effective role in

serving SMEs. To this end, the SME Bank needs to focus on commercialbanking services to the SMEs. While recovery operations over the last three

years proved very successful, the Bank should now concentrate on newbusiness and transfer recovery operations, including portfolio, staff and

related liabilities outside the Bank, for example to a dedicated company witha limited lifetime.

Supporting SMEDA

SMEDA was established in October 1998 and obtained legal status in August

2002 through an Ordinance. So far it has undertaken significant advocacywork, awareness-building activities, and prepared a number of important


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sector strategies, publications and feasibility studies for SMEs. To assistSMEDA in achieving a significant outreach to the SMEs and fulfill its mandate

more effectively, ADB is proposing support in the preparation of SMEDA's newstrategy and business plan. This plan will entail the focus of SME facilitator

function and well-defined performance benchmarks.

Organizational Review of Export Promotion Bureau

Although the Export Promotion Bureau (EPB) is neutral to firm size inprinciple, larger firms in the traditional sectors have historically been the main

beneficiaries of EPB's trade promotion. To support a global and commerciallydriven approach EPB's functions, staffing, and organizational set up will need

to be adjusted taking into account the needs of the SMEs as well as largerenterprises. Under the ongoing ADB supported SME Trade Enhancement

Facility, an organizational review of EPB is currently being carried out toenhance the effectiveness of trade promotion. This will be of immediate

relevance to the SME SDP.

In conclusion, let me reiterate that ADB considers the creation of a conducive

policy environment through following the broad policy and institutional reformagenda I have just highlighted as indispensable to promote SME development in

Pakistan. In this regard, we would be happy to provide the necessary support andassistance requested of us by the Government to further the reform agenda. ADB

will be processing a $100 million nationwide SME Sector Development Program in

2003 which will be a hybrid of program and project activities, and require reform atthe policy, regulatory and institutional level beyond the 'project' aspects that would

directly benefit SMEs. We look forward to working together with all stakeholders topromote a dynamic and vibrant SME sector in the country that lives up to its full

potential.

HABIB BANK LIMITEDRETAIL BANKING GROUP

FINANCIAL CONTROL DIVISION

ATM Switch Network as on 07.09.2004

The Retail Banking network, with 1425 branches, is the core strength of Habib Bank. Itsextensive reach in all geographic locations urban and rural throughout the country

provides access to over 5 Million customers across all sectors of the economy. The

network provides HBL with the largest diversified low cost deposit base of any bank in

Pakistan, and forms the basis for many of our other business lines: corporate andinvestment banking and treasury activities.

Retail Banking Group (RBG) has two principal areas of activity; the retail network fordeposit mobilization and the consumer-banking group. Deposits mobilization, the

traditional strength, continued to perform strongly in 2002 with deposits growing by

12%.

HBL is the only major bank to have a very dedicated group to serve the Small &

Medium Enterprises (SME) sector. We believe the SME sector can be an engine of
http://www.habibbankltd.com/html/retail_banking.htm#%23http://www.habibbankltd.com/html/retail_banking.htm#%23


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growth for the economy and represents an area of opportunity for the Bank.

CBG was therefore established in late 2000 to provide banking services and credit on astructured and systemized basis. It now covers 25 branches in the six major industrial

cities of Pakistan. The Group now works closely with its customers, which cover allsegments of the economy including the textile sector, vendors and suppliers to structure

the finances and improve their capabilities. We have been very encouraged by theoutcome that reaffirms our belief in the potential of this sector.

There is a growing propensity for consumer spending to uplift living standards.Recognizing that consumer demand can be a major driver of investment and economic

growth, the Government has also moved towards an enabling regulatory framework and

has also taken initiatives to create an appropriate legal regulatory framework to enablethe development of a housing finance market.

With its extensive branch network and large customer base, we believe HBL has animportant role to play in the development of this sector of the economy in which we

expect substantial growth in the next five years. HBL has moved aggressively and has

already introduced three major products; Personal Loans, Car Financing and Consumer

Durable Financing, in association with major suppliers of consumer products. Thesehave been well received and volumes have been building up steadily. It is our intention

to be a leader in consumer financing. Plans are also underway to develop mortgage

financing for the housing sector.

Agriculture is the most important contributor to Pakistans economy. HBL, which has

been a leader in agriculture financing, plans to increase further its credit to this sector

with a particular focus on providing a wider range of products to small and medium sizefarmers. In this regard, to provide flexibility, the Haryali scheme for farmers was

introduced which is a 3-year revolving facility rather than the traditional short term

seasonal financing. Our specialized agricultural finance department helps farmers inmodernizing their farming techniques. The Government has also provided a regulatory

framework to encourage corporate farming and as this develops our participation in this

sector will grow even further.

While we continue to develop our products, we recognize that quality of customer

service will become an even greater differentiating factor in the market. We have takena number of initiatives in this area; investing in technology, training and upgrading of

our branches. Extended banking hours and better facilities for utility bill payments have

been made available.

In 2002, we launched real time inter-city banking, internet banking www.hblEbank.com

for 500,000 customers and PC banking for our corporate and commercial banking

customers. Our ATM network has expanded and its usage is also growing rapidly.

A Debit Cardprogram has also been introduced which will be available in over 1,000
http://www.habibbankltd.com/html/debitcard.htmhttp://www.habibbankltd.com/html/debitcard.htm


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point of sale terminals within the country.

Inward remittances from overseas Pakistanis provide an immeasurable support to theeconomy. Owing to our unique combination of the largest domestic and international

networks, we process the highest volume of overseas remittances into Pakistan. Werecognize that speed and efficient processing is the requirement of remitters and to meet

these needs, we have put in place our FAST Transfer service and our fully automatedprocessing center in Karachi ensures that all remittances are delivered within 24 hours in

urban areas and 48 hours in rural areas.

In our Retail network, we have an unmatched distribution network, which provides usmany opportunities for growth, and we plan to use this to soon provide additional

services, including wealth management services.

]

OPERATIONS OF COMMERCIAL BANKS:

Commercial banks are authorized to engage in only the following types of activities:

a) receiving interest-bearing and interest-free deposits (time, demandand other) and other returnable means of payment;

b) extending consumer loans, mortgage loans other credits bothsecured and unsecured credits and engaging in factoring operations

with and without the right of recourse, trade finance including thegranting of guaranties, letters of credit, acceptance finance, and

forfeiting.c) buying, selling, paying and receiving monetary instruments, such as

notes, drafts and checks, certificates of deposit, as well as securities,futures, options and swaps on debt instruments, and interest rates,

currencies, foreign exchange, precious metals and precious stones.d) cash and non-cash settlement operations and the provision of

collection services.e) issuing money orders and managing money circulation (including

tax cards, checks and bills of exchange).f) securities brokerage services;

g) trust operations on behalf of clients and funds management

h) safekeeping and registration of valuables including securities;

i) credit-information services;j) activities incidental to each of the above types of services.

Functions of CBS

Commercial Banks act as intermediaries between those who have surplus money and those whoneed it. To receive deposits and advance loans are thus two main functions of all commercialbanks. In short they borrow to lend. They borrow in the form of deposits and lend in the form ofadvances. Besides there are other incidental functions which have developed according to the


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needs of society. We discuss all of them below.1. ACCEPTING DEPOSITSBanks attract the idle savings of people in the form of deposits. These deposits may be of any ofthe following types.(a) Demand Deposits or Current Accounts: There are repayable on demand without any notice.Usually no interest is paid on them; because the banks cannot utilize short term deposits andmust keep almost cent percent reserve against them. On the other hand a little commission ischarged for the service rendered. Occasionally, however a small interest is paid to the peoplewho keep large balances.(b) Fixed deposits or time deposits: These deposits can only be withdrawn after the expiry of theperiod for which these deposits are made. Higher interest is paid on them, the rate rising with thelength of the period and the amount of deposit.(c) Savings Bank Deposits: These deposits stand midway between current and fixed accounts.One or two withdraws up to a limit of one fourth of the deposit is allowed in a weak. The rate ofinterest is less than on fixed deposits.2. GIVING LOANSReceiving of deposits is not the whole story about a banks function. It that were so, how could abank pay interest? Hence after collecting money, a bank invests it or lends it out. Money is lent tobusinessmen and traders usually for short periods only. This is so because the bank must keepitself ready to meet the demand of the depositors who have deposited money for short periods.

Money is advanced by banks in any one of the following ways.(a) By allowing an Overdraft: Customers are given the right to over-draw their accounts. In otherwords they can get more than they have deposited, but they have to pay interest on extra amountwhich has to be repaid within a short period. The amount of permisable over draft varies with thefinancial position of the borrower.(b) By Creating a Deposit: Cash-credit is another way of lending by banks. When a person want aloan from a bank, he has to satisfy the manager about his ability to repay, the soundness of hisventure and his honesty of purpose. After that the bank may require a tangible security, or it maybe satisfied with borrowers personal security. Usually such security is accepted as can be easilydisposed of in the market e.g. government securities or shares of approved concerns. The detailsof time and rate of interest are settled and the loan is advanced.

A borrower rarely wants to draw the whole amount of his loan in cash. Usually he opens a currentaccount with that amount in bank, if he has already not got an account with this bank. Now it is

exactly as if that sum had been deposited by him. This is how a deposit is created by a bank.That is why it is said every loan creates a deposit.

After the period for which the money has been borrowed is over, the borrower returns the amountwith interest to the bank. Banks make most of their profits thus by giving loans.(c) Discounting Bills: Discounting of bills is another way of lending money. The banks purchasethese bills through bill brokers and discount companies or discount them directly for themerchants. These bills period a very liquid asset (i.e. asset which can easily be turned into cash).The banks immediately pay cash for the bill after deducting the discount (interest) and wait for thebill to mature when they got back their full value.The investment in the bills is quite safe, because a bill bears the security of two businessmen thedrawer as well as drawer, so that if one proves dishonest or fails, the bank can claim money fromother. This is regarded as the best investment by the banks. It is liquid, lucrative and safe. This iswhy it is said that a good bank manager knows the difference between a bill and mortgage.

3. REMITTING FUNDSBanks remit funds for their customers through bank drafts to any place where they have branchesor agencies. This is the cheapest way of sending money, it is also quite safe. Funds can also beremitted to foreign countries.4. MISCELLANEOUS FUNCTIONSBeside these main functions, the banks perform several other functions as given below.(a) Safe Custody: Ornaments and valuable documents can be kept in safe deposit with a bank, inits strong room fitted with lockers, on payment of a small sum per year. Thus risk of theft isavoided.(b) Agency Functions: The banks works as an agent of their constituents. They receive payments


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on their behalf. They collect rents, dividends on shares etc. They pay insurance premia and makeother payments as instructed by their depositors. They accept bills of exchange on behalf of thecustomers. They pass bills of lading or railway receipts to the purchasers of goods when they payfor them. The amount is passed on to the suppliers.Banks also collects the amount of utility bills from customers of different utility agencies.(c) References: They give references about the financial position of their customers. Whenrequired they supply this information confidentially. This is done when their customers want toestablish business connections with some new firms within or out side the country.(d) Letters of Credit: In order to help the travellers, the banks issue letters of credit. A man who isgoing abroad takes with him a letter of credit from his bank. It is mentioned these that he can bepaid sum up to a certain limit. He shows this letter to banks in other countries which make thepayment to him and debt the bank which has issued the letter of credit.(e) Collection of Statistics: The modern bank collects statistics about money, banking, trade andcommerce and publishes them in the form of pamphlets and hand outs. This helps the bankscustomer in acquiring knowledge about the latest economic situation on the basis of which theycan formulate their business policy.(f) Under writing Services: Some time private companies issue debentures for public sale. But thepublic may hesitate in buying these debentures unless they are under written by the banks. Thepublic has full confidence in the banks. If debentures carry the signatures of a bank, the publicwould not hesitate in buying them. For under writing these debentures, the bankers charge a

small underwriting commission from the companies.(g) Advice of Financial Letters: Since the bank is fully acquainted with the economic situation inthe county, it is in a position to render useful advice to its customers on financial matters.UTILITY OF BANKS

An efficient banking system is absolutely necessary for a country. It is to prosper commerciallythe services that an efficient banking system can render a county cannot be exaggerated. Thebanking system can be useful in the following ways in addition to what has been mentionedabove in the functions of banks.1. The banks create instruments of credit: The banks create instruments of credit which serve asvery convenient substitutes for money. This means a great saving.2. The Banks increase the mobility of capital: They bring the borrowers and the lenders together.They collect money from those who can not use it and give it to those who can. They thus helpthe movement of funds from place to place and form person to person in a very convenient and

inexpensive manner.3. The bank encourage the habbit of thrift: One of the requisite conditions of saving is that thereshould be channels of investment so long as money is kept in one pocket, the chances are that itwill be spent and not saved. But if it is put in the bank, it is out of sight and to be out of sight is tobe out of mind. The chances are that it will remain in the bank.4. Accumulation of Capital: By encouraging savings, the banks bring about accumulation of largeamounts of capital in the country from small individual savings. In this way they add toproductivity of the resources of the country and contribute to the general prosperity and welfare.In a word banks are indispensable not only to maintain economic activity i.e. consumption,production, exchange distribution but also for promoting economic development.

Role of commercial banks

Banks play an important role in the economic development of a country. It the banking system isunorganized and inefficient, it creates maladjustments and impediments in the process of development. InPakistan, the banking system is very well organized. The State Bank of Pakistan established on July 1, 1948stands at the apex and is responsible for the operation of the banking system in Pakistan. The other bankswhich form the banking structure in Pakistan are playing an active role in the economic development of theCountry.

The role of the commercial banks in the growth and development of sound and healthy economy of the


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country is briefly discussed as under:

1. Saving mobilization. The commercial banks namely National Bank of Pakistan, Habib Bank, Allied Bank,United Bank and Muslim Commercial Bank have opened up branches in urban and rural areas to mobilizesavings of the people.

2. Financing development project. The banks and other development finance institutions like IDBP, Zarai

Taraqiati Bank Limited, PICIC etc. advance short and medium term loans for financing of the developmentprojects both in the private and public sectors and thus help in accelerating the rate of economicdevelopment in the country.3. Facilitating trade activities. The credit institutions collect the savings of the people arid make themavailable for facilitating trade activities both inside and outside the country.

4. Creating climate for capital formation. A developed banking system is a stimulant to growth and iscreating favourable climate for capital formation in the country.

5. Helping SBP in achieving monetary policies. The commercial banks under the supervision andguidance of the State Bank of Pakistan help in implementing and achieving the objectives of the monetarypolicy which vary from time to time.

6. Assisting in the development. The commercial banks are profit seeking enterprises. In order tomaximize the profits, they have the incentive 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.

7. Provision of agency services. The commercial banks provide agency services to the clients. Theyreceive and pay cheques. They collect dividends and pay interest and premium on behalf of the clients.They keep their valuables in safe custody. They help in the mobility of capital and thus stimulate capital inthe country.

8. Making capital available for investment. The organized banking system helps in directing physicalresources into productive channels. It also keeps a balance between the availability and requirements of thecapital in the country.

9. Less reliance on foreign capital. A planned banking system by launching a vigorous campaign ofmobilizing idle saving in the country can meet the capital development requirements from within the country.The country will thus have to rely less on foreign capital for financing the development projects.

10. Profit, sharing scheme. The commercial banks receive surplus balances of households and businessand pay interest on the deposits of the clients. The banks have now introduced interest free banking inPakistan. The depositors instead of having a fixed return on the deposits will share in the profit and loss ofthe banks. The Profit and Loss Sharing (PLS) arrangement which is an alternative to interest under anIslamic Economic System is now operating in Pakistan.

11. Provision of Qarze Hasna. Qarz-e-Hasna Scheme has been prepared and launched by PakistanBanking Council through nationalized commercial banks. Under the Qarz-e-Hasria Scheme, financialassistance is provided to the students of in sufficient means and of outstanding calibre who are unable topursue their studies due to financial difficulties. Loans are provided for pursuing studies both Within andoutside Pakistan.

12. Export promotion cell. In order to boost the exports of the country, the banks have established ExportPromotion Cell for the information and guidance of the exporters

Types of loans granted by commercial banks

Secured loan

Asecured loan is a loan in which the borrower pledges some asset (e.g. a car or property)

ascollateralfor the loan, which then becomes a secured debt owed to the creditor who gives the

loan. The debt is thus secured against the collateral in the event that the borrower defaults, the

creditor takes possession of the asset used as collateral and may sell it to regain some or all of
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the amount originally lent to the borrower, for example, foreclosure of a home. From the creditor's

perspective this is a category of debt in which a lender has been granted a portion of the bundle

of rights to specified property. If the sale of the collateral does not raise enough money to pay off

the debt, the creditor can often obtain a deficiency judgment against the borrower for the

remaining amount. The opposite of secured debt/loan is unsecured debt, which is not connected

to any specific piece of property and instead the creditor may only satisfy the debt against theborrower rather than the borrower's collateral and the borrower.

Amortgage loanis a very common type of debt instrument, used to purchase real estate. Under

this arrangement, the money is used to purchase the property. Commercial banks, however, are

given security - alien on the title to the house - until the mortgage is paid off in full. If the

borrowerdefaultson the loan, the bank would have the legal right to repossess the house and

sell it, to recover sums owing to it.

In the past, commercial banks have not been greatly interested in real estate loans and have

placed only a relatively small percentage of assets in mortgages. As their name implies, such

financial institutions secured their earning primarily from commercial and consumer loans and left

the major task of home financing to others. However, due to changes in banking laws and

policies, commercial banks are increasingly active in home financing.

Changes in banking laws now allow commercial banks to make home mortgage loans on a more

liberal basis than ever before. In acquiring mortgages on real estate, these institutions follow two

main practices. First, some of the banks maintain active and well-organized departments whose

primary function is to compete actively for real estate loans. In areas lacking specialized real

estate financial institutions, these banks become the source for residential and farm mortgage

loans. Second, the banks acquire mortgages by simply purchasing them from mortgage bankers

or dealers.

In addition, dealer service companies, which were originally used to obtain car loans for

permanent lenders such as commercial banks, wanted to broaden their activity beyond their local

area. In recent years, however, such companies have concentrated on acquiring mobile home

loans in volume for both commercial banks and savings and loan associations. Service

companies obtain these loans from retail dealers, usually on a nonrecourse basis. Almost all

bank/service company agreements contain a credit insurance policy that protects the lender if the

consumer defaults.

[edit]Unsecured loan

Unsecured loans are monetary loans that are not secured against the borrower's assets (i.e.,

no collateral is involved). There are small businesss unsecured loans such as credit cards and

credit lines to large corporate credit lines. These may be available from financial institutions undermany different guises or marketing packages:

bankoverdrafts

An overdraft occurs when money is withdrawn from a bank account and the available balance

goes below zero. In this situation the account is said to be "overdrawn". If there is a prior

agreement with the account provider for an overdraft, and the amount overdrawn is within the
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authorized overdraft limit, then interest is normally charged at the agreed rate. If the POSITIVE

balance exceeds the agreed terms, then additional fees may be charged and higher interest rates

may apply.

corporate bonds

credit card debt credit facilities or lines of credit

personal loans

What makes a bank limited liability company

A corporate bond is a bond issued by a corporation. It is a bond that a corporation issues to raise

money in order to expand its business.[1] The term is usually applied to longer-term debt

instruments, generally with a maturity date falling at least a year after their issue date. (The term

"commercial paper" is sometimes used for instruments with a shorter maturity.) Sometimes, the

term "corporate bonds" is used to include all bonds except those issued by governments in their

own currencies. Strictly speaking, however, it only applies to those issued by corporations. Thebonds of local authorities and supranational organizations do not fit in either category.[clarification

needed] Corporate bonds are often listed on major exchanges (bonds there are called "listed"

bonds) and ECNs like Bonds.com and MarketAxess, and the coupon (i.e. interest payment) is

usually taxable. Sometimes this coupon can be zero with a high redemption value. However,

despite being listed on exchanges, the vast majority of trading volume in corporate bonds in most

developed markets takes place in decentralized, dealer-based, over-the-counter markets. Some

corporate bonds have an embedded call option that allows the issuer to redeem the debt before

its maturity date. Other bonds, known as convertible bonds, allow investors to convert the bond

into equity. Corporate Credit spreads may alternatively be earned in exchange for default risk

through the mechanism of Credit Default Swaps which give an unfunded synthetic exposure to

similar risks on the same 'Reference Entities'. However, owing to quite volatile CDS 'basis' the

spreads on CDS and the credit spreads on corporate bonds can be significantly different.

Assets and Liabilities of Commercial Banks in the United States

Glass-Steagall Act

Mortgage constant

Functions of Commercial Banks

Commercial bank being the financial institution performs diverse types of functions. It satisfies the

financial needs of the sectors such as agriculture, industry, trade, communication, etc. That

means they play very significant role in a process of economic social needs. The functionsperformed by banks are changing according to change in time and recently they are becoming

customer centric and widening their functions. Generally the functions of commercial banks are

divided into two categories viz. primary functions and the secondary functions. The following chart

simplifies the functions of banks.

Primary Functions of Commercial Banks

Commercial Banks performs various primary functions some of them are given below
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1 Accepting Deposits : Commercial bank accepts various types of deposits from public

especially from its clients. It includes saving account deposits, recurring account deposits, fixed

deposits, etc. These deposits are payable after a certain time period 2 Making Advances : The

commercial banks provide loans and advances of various forms. It includes an over draft facility,

cash credit, bill discounting, etc. They also give demand and demand and term loans to all types

of clients against proper security. 3 Credit creation : It is most significant function of thecommercial banks. While sanctioning a loan to a customer, a bank does not provide cash to the

borrower Instead it opens a deposit account from where the borrower can withdraw. In other

words while sanctioning a loan a bank automatically creates deposits. This is known as a credit

creation from commercial bank.

Secondary Functions of Commercial Banks

Along with the primary functions each commercial bank has to perform several secondary

functions too. It includes many agency functions or general utility functions. The secondary

functions of commercial banks can be divided into agency functions and utility functions.

a) Agency Functions : Various agency functions of commercial banks are

1 To collect and clear cheque, dividends and interest warrant.

2 To make payment of rent, insurance premium, etc.

3 To deal in foreign exchange transactions.

4 To purchase and sell securities.

5 To act as trusty, attorney, correspondent and executor.

6 To accept tax proceeds and tax returns.

b) General Utility Functions : The general utility functions of the commercial banks include

1 To provide safety locker facility to customers.

2 To provide money transfer facility.

3 To issue traveller's cheque.

4 To act as referees.

5 To accept various bills for payment e.g phone bills, gas bills,

water bills, etc.

6 To provide merchant banking facility.

7 To provide various cards such as credit cards, debit cards, Smart

cards, etc.

Commercial banks engage in the following activities:

processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or

other means

issuing bank drafts and bank cheques

accepting money on term deposit


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lending money by overdraft, installment loan, or other means

providing documentary and standby letter of credit, guarantees, performance bonds,

securities underwriting commitments and other forms of off balance sheet exposures

safekeeping of documents & other items in safe deposit boxes

sales, distribution or brokerage, with or without advice, of: insurance, unit trusts and

similar financial products as a financial supermarket cash management and treasury

merchant banking and private equityfinancing

traditionally, large commercial banks also underwrite bonds, and make markets in

currency, interest rates, and credit-related securities, but today large commercial banks

usually have aninvestment bankarm that is involved in the mentioned activities
http://en.wikipedia.org/wiki/Letters_of_credithttp://en.wikipedia.org/wiki/Merchant_bankhttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Market_makerhttp://en.wikipedia.org/wiki/Investment_bankhttp://en.wikipedia.org/wiki/Investment_bankhttp://en.wikipedia.org/wiki/Letters_of_credithttp://en.wikipedia.org/wiki/Merchant_bankhttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Market_makerhttp://en.wikipedia.org/wiki/Investment_bank

COMMERCIAL Banks of Pakistan Fi

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