Bank & Banking Rashedul Hasan What is it? • Bank is a Financial Institution which can accept money from people as a deposit and lend or make loan from that deposited money. • "banking business" means the business of receiving money on current or deposit account, paying and collecting cheque drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation). Types of Bank Based on Ownership • Nationalized/Public Bank • Private Bank • Co-Operative Bank Types of Bank Based on Objective • Central Bank • Commercial Bank • Islamic Bank The Islamic Banks perform their business operations as per the Sharia law, the Islamic code of law. In particular, this means that they operate sans interest. Types of Bank Based on Functions • Retail Banking Retail banks deal directly with consumers and small business owners. They focus on mass market products such as current and savings accounts, mortgages and other loans, and credit cards. • Corporate Banking Corporate banks provide services to businesses and other organizations that are medium sized. The clients of corporate banks are usually major business entities. • Investment Banking Investment banks provide services related to financial markets, such as mergers and acquisitions. • Merchant Banking Deals with Stock, Bond and other financial securities and performs trade-financing activities. • Postal savings banks Are basically savings banks that operate in conjunction with the national postal systems of that country. Functions of a Commercial Bank Receiving Deposits: • This is the main function of commercial banks to collect savings of individuals and firms. They offer different types of deposits for the facility of the customers. • Current Account or Demand Deposits: Any amount can be withdrawn from this account any time without any notice. No interest is allowed on this type of account. • Saving Account: This type of deposit account which is usually held by the middle class group. The saving account carries lower rate of interest. • Fixed Deposit: Amount cannot be withdrawn before the fixed future date in this type of deposit. High interest is allowed in fixed deposit which is different according to period. Functions of a Commercial Bank Advancing Loans: This is the important function of the commercial bank. Credit is given to the people in different ways. (a.): Making Loans: There are three types of loans given to borrowers. i. Short Term Loans: These loans are advanced for the period of six months to one year. High Interest rate is charged on this type of accounts. ii. Medium Term Loans: Loans from one to five years are called medium term loans. Functions of a Commercial Bank • iii: Long Term Loans: Loans which are advanced for the period, more than ten years are long term loans. • (b.): Bank Overdraft: Banks allows their trustful customers to draw more than the deposit they have in the Bank. Bank charges interest on overdraft. • (c.): Cash Credit: Bank also gives credit against immovable property and interest is charged by the bank. • (d.): Discounting of Bills: This is income source of bank to discount bills of exchange. They charge nominal Functions of a Commercial Bank Agency and General Utility Services • Collection and payment of cheque and bills on behalf of the customers; • Collection of dividends, interest and rent, etc. on behalf of customers, if so instructed by them; • Purchase and sale of shares and securities on behalf of customers; • Payment of rent, interest, insurance premium, subscriptions etc. on behalf of customers, if so instructed; • Acting as a trustee or executor; • Acting as agents or correspondents on behalf of customers for other banks and financial institutions at home and abroad. Functions of a Commercial Bank • Issuing letters of credit, travelers cheque, circular notes etc. • Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers; • Providing customers with facilities of foreign exchange. • Transferring money from one place to another; and from one branch to another branch of the bank. • Standing guarantee on behalf of its customers, for making payments for purchase of goods, machinery, vehicles etc. • Collecting and supplying business information; • Issuing demand drafts and pay orders; and, • Providing reports on the credit worthiness of customers. Functions of a Central Bank • The important functions of Central Banks are as follows:- 1-Sole right of note issue The Central Bank in every country, now, has the monopoly note issue. The issue of notes is governed by certain regulation which is enforced by the state. 2-Banker to the state A Central Bank acts as a banker to the government. It holds cash balances of the government free of interest. 3-Banker's bank. The central bank acts as a banker to the commercial banks. Functions of a Central Bank 4-Banker's clearing house The Central Bank acts as a clearing house for the settlement of mutual obligations of different commercial banks. If a difference exists, it is paid by a cheque drawn on the banks accounts carried at the Central Bank. 5-Lendor to the last resort The Central Bank helps the member banks in times of crisis. 6-Financial agent The Central Banks act as financial agents for the government. It is an agent for the government in purchasing and selling of gold and foreign exchange. Functions of a Central Bank 7-Effective monetary policy The aim of the government is to create employment in the country, resist undue inflation and achieve a favorable balance of payment. 8-External functions The Central Bank also performs a number of external functions. Wider commercial role • However the commercial role of banks is wider than banking, and includes: • issue of banknotes (promissory notes issued by a banker and payable to bearer on demand) • processing of payments by way of telegraphic transfer, EFTPOS, internet banking or other means • issuing bank drafts and bank cheque • accepting money on term deposit • lending money by way of overdraft, installment loan or otherwise • providing documentary and standby letters of credit (trade finance), guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures • safekeeping of documents and other items in safe deposit boxes • currency exchange • sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a 'financial supermarket' Economic functions • Issue of money, in the form of banknotes and current accounts subject to cheque or payment at the customer's order. These claims on banks can act as money because they are negotiable and/or repayable on demand, and hence valued at par and effectively transferable by mere delivery in the case of banknotes, or by drawing a cheque, delivering it to the payee to bank or cash. • netting and settlement of payments -- banks act both as collection agent and paying agents for customers, and participate in inter-bank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economise on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables payment flows between geographical areas to offset, reducing the cost of settling payments between geographical areas. • credit intermediation -- banks borrow and lend back-to- back on their own account as middle men • credit quality improvement -- banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and the bank's own capital which provides a buffer to absorb losses without defaulting on its own obligations. However, since banknotes and deposits are generally unsecured, if the bank gets into difficulty and pledges assets as security to try to get the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. • maturity transformation -- banks borrow more on demand debt and short term debt, but provide more long term loans. In other words; banks borrow short and lend long. Bank can do this because they can aggregate issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemptions of banknotes), maintain reserves of cash, invest in marketable securities that can be readily converted to cash if needed, and raise replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets) because they have a high and more well known credit quality than most other borrowers. Banking channels • A branch, banking centre or financial centre is a retail location where a bank or financial institution offers a wide array of face-to-face service to its customers. • ATM is a computerized telecommunications device that provides a financial institution's customers a method of financial transactions in a public space without the need for a human clerk or bank teller. Most banks now have more ATMs than branches, and ATMs are providing a wider range of services to a wider range of users. For example in Hong Kong, most ATMs enable anyone to deposit cash to any customer of the bank's account by feeding in the notes and entering the account number to be credited. Also, most ATMs enable card holders from other banks to get their account balance and withdraw cash, even if the card is issued by a foreign bank. Banking channels • Mail is part of the postal system which itself is a system wherein written documents typically enclosed in envelopes, and also small packages containing other matter, are delivered to destinations around the world. This can be used to deposit cheques and to send orders to the bank to pay money to third parties. Banks also normally use mail to deliver periodic account statements to customers. Banking channels • Telephone banking is a service provided by a financial institution which allows its customers to perform transactions over the telephone. This normally includes bill payments for bills from major billers (e.g. for electricity). • Online banking is a term used for performing transactions, payments etc. over the Internet through a bank, credit union or building society's secure website.