Commercial banks

Commercial Bank
Mohammad Maksudul Huq Chowdhury

Bank, Banking and Banker
Bank is a Govt. approved Financial Institution which
collect/receive fund from surplus unit, repayable on
demand or otherwise and deploy the same to the
deficit unit duly observed some rules & regulations.
The Banking Company means any company which
transacts the business of banking.

Bank, Banking and Banker
“Banking” means accepting of deposits/money from
the public, payable on demand or otherwise
withdrawable by cheque, draft or otherwise, for the
purpose of lending or investing of the same.
“Banker means a person transacting the business of
accepting, for the purpose of lending or investment,
of deposit of money from the public, repayable on
demand or otherwise and withdrawable by Cheque,
Draft, Order or otherwise” (Section 3b, NI Act –
1881)

Banking System
Different countries have been following different
system of banking which are as under:
Branch Banking
Unit Banking
Group Banking
Chain Banking
Corresponding Banking
Deposit Banking
Mixed Banking
Industrial and Investment Banking
Amongst the above branch banking and unit banking
are widely used in many countries.

Branch Banking versus
Unit Banking comparison chart
Area Branch Banking Unit Banking
About A bank that is connected to
one or more other banks in
an area or outside of it.
Provides all the usual
financial services but is
backed and ultimately
controlled by a larger
financial institution.
Single, usually small bank that
provides financial services to
its local community. Does not
have other bank branches
elsewhere.
Stability Typically very resilient, able
to withstand local recessions
(e.g., a bad harvest season in
a farming community) thanks
to the backing of other
branches.
Extremely prone to failure
when local economy struggles
Operational
Freedom
Less More
Loans and
advances
Loans and advances are
based on merit, irrespective
of the status.
Loans and advances can be
influenced by authority and
power.

Branch Banking versus
Unit Banking comparison chart
Area Branch Banking Unit Banking
Decision-
making
Delay in Decision-making
as they have to depend on
the head office.
Time is saved as Decision-
making is in the same branch.
Funds Funds are transferred
from one branch to
another. Under utilization
of funds by a branch
would lead to regional
imbalances
Funds are allocated in one
branch and no support of other
branches. During financial crisis,
unit bank has to close down.
hence lead to regional
imbalances or no balance growth
Cost of
supervision
High Less
Distribution
of Capital
Proper distribution of
capital and power.
No proper distribution of capital
and power.
Rate of
interest
Rate of interest is
uniformed and specified
by the head office or
based on instructions from
Central bank.
Rate of interest is not uniformed
as the bank has own policies and
rates.
Deposits
and assets
Deposits and assets are
diversified, scattered and
hence risk is spread at
various places.
Deposits and assets are nt
diversified and are at one place,
hence risk is not spread.

Statistics on largest banks in the
world by total assets
(based on December 2015)
Rank Country Bank Name Total assets (US$
billion)
1 China Industrial and Commercial Bank of China 3,616.39
2 China China Construction Bank Corporation 2,939.15
3 China Agricultural Bank of China 2,816.60
4 China Bank of China 2,629.31
5 UK HSBC Holdings 2,571.71
6 USA JP Morgan Chase & Co. 2,449.60
7 France BNP Paribas 2,400.04
8 Japan Mitsubishi UFJ Financial Group (MUFG) 2,323.24
9 USA Bank of America 2,149.03
10 France Crédit Agricole Group 1,911.27
11 German Deutsche Bank 1,901.37
12 UK Barclays PLC 1,882.67
13 USA Citigroup Inc 1,829.37
14 USA Wells Fargo 1,720.62
15 Japan Japan Post Bank 1,701.60
16 China China Development Bank 1,613.20
17 Japan Mizuho Financial Group 1,563.88
18 Japan Sumitomo Mitsui Financial Group 1,526.98
19 Switzerland UBS AG 1,525.76
20 UK Royal Bank Of Scotland 1,517.66

Sources of Bank’s Funds
A. Deposit Account
1. Transaction deposit
2. Savings deposits
3. Time deposits
4. Money market deposit accounts
B. Borrowed Funds
1. Government funds purchased/borrowed
2. Borrowing from central bank
3. Repurchase agreement
4. Foreign currency borrowing
C. Long-Term Sources of Funds
1. Bonds issued by bank
2. Bank capital

Uses of Funds by Banks
The more common uses of funds by banks
include the followings:
1. Cash
2. Bank loans
3. Investment in securities (Govt./private)
4. Central bank’s loaned out
5. Repurchase agreement
6. Foreign currency loans
7. Fixed assets
8. Call money market

Off-balance sheet activities
Banks commonly engage in off-balance sheet
activities, which generate fee based income without
requiring an investment/engagement of funds.
However, these activities do create a contingent
obligation for banks. The following are some of the
more common off-balance sheet activities:
1. Loan commitments – related with commercial
papers
2. Letter of Credit
3. Forward contracts on currencies
4. Documentary Bills for collection
5. Outward Bill Collection (OBC)
6. Bang Guarantee

Banking System in UK
The British banking system has developed over the
past few hundred years to become one of the most
highly specialized centers of finance in the world. It
is highly centralized system. Al most all the important
home and overseas commercial banks have offices
or correspondents situated in closely proximity to
one another in the city of London.

Banking System in UK
Distinguishing features of British Banking System:
 it is an open system
 British banking has never been ordered or
codified by statute
 Banking is almost entirely in the hands of
institutions in the private sector of the
economy
 The credit techniques are still generally
simple and flexible
 Banking activities have often been subject to
certain convention.

Banking System in USA
As the central bank of the United States of America,
the Federal Reserve System (the FED) has the
responsibility for conducting national monetary
policy. The Fed, as it exists today has five major
components:
1. Federal Reserve District Banks – there are 12
Federal Reserve District banks out of which the
New York district bank is most important. Each
Fed district bank has nine directors- 3 from the
employee of the bank, 3 who are not associated
with any bank and nominated by member banks
and remaining 3 appointed by Board of
Governors.

2. Member Banks – Commercial banks that become
members of the Fed are required to purchase
stock of their Federal Reserve District bank. This
stock are not traded in a secondary market, pays
a maximum dividend of 6%.Commercial banks
can elect as member bank if the meet specific
requirements of the Board of Directors. All
nationalized banks (chartered by Comptroller of
the Currency) are required to be members of the
Fed, but other banks (chartered by their
respective states) are not.

3. Board of Governors – is made up of seven
members nominated by the president of USA and
serve as non-renewable 14-year term. One
member is selected as chairman by the president
for a term of 4-year which is renewable.
4. Federal Open Market Committee (FOMC) – is
made up of the seven members of the Board of
Governors plus the president of New York district
bank and 4president of 4 other district banks.
5. Advisory Committee – is consisting of one
member from each district bank.

Banking System in Bangladesh
After the independence, banking industry in
Bangladesh started its journey with 6 Nationalized
Commercial Banks, 2 State owned specialized
Banks and 3 Foreign banks. In the 1980’s banking
industry achieved significant expansion with the
entrance of private banks.

Now, banks in Bangladesh are primarily of two
types:
1. Schedule Banks: The banks which get license to
operate under Banking Company Act, 1991
(amended up to 2013) are termed as Scheduled
Banks.
2. Non-Scheduled Banks: The banks which are
established for special and definite objectives are
termed as Non-Scheduled Banks. These banks
can not perform all functions of scheduled banks.

Scheduled Banks:
There are 56 scheduled banks in Bangladesh who
operate under full control and supervision of
Bangladesh Bank which is empowered to do so through
Bangladesh Bank Order 1972 and Bank Company Act
1991. Scheduled Banks are classified into following
types:
1. State owned Commercial Banks (SOCBs) : 06
2. Specialized Banks (SDBs) : 02
3. Private Commercial Banks (PCBs) : 39
4. PCBs are two types according to
mode of operation: Conventional : 39
Islamic : 08
5. Foreign Commercial Banks (FCBs) : 09

Non-Scheduled Banks:
There are now 4 non-scheduled banks in
Bangladesh which are:
1. Ansar VDP Unnayan Bank,
2. Karmashangosthan Bank,
3. Probashi kollyan Bank,
4. Jubilee Bank

Central Bank
A central Bank is the bank established in a country
with the view to managing the monetary and credit
system to established domestic monetary value and
maintaining a competitive external par value of the
country and fostering growth and development of the
country in the best national practice. In every country
there must be a Central Bank. The name of the
central bank of Bangladesh is ‘Bangladesh Bank”.

Central Bank
Name of the central bank of few countries:
1. Bangladesh - Bangladesh Bank
2. India - Reserve Bank of India
3. Japan - Bank of Japan
4. USA - Federal Reserve System
5. France - Bank of France
6. England - Bank of England
7. Pakistan - State Bank of Pakistan
8. China - Central Bank of the Republic of
China (Taiwan)
9. Philippines - Bangko Sentral ng Pilipinas
10.Sri Lanka - Central Bank of Sri Lanka
11.Canada - Bank of Canada

Functions of Central Bank
Traditional Function:
1. Note issue (except Government notes & coins –
one taka, two taka, five taka and coins)
2. Bankers’ Bank
3. Governments’ Bank
4. Maintenance of Foreign Exchange reserve
5. Framing of monetary Policy

Functions of Central Bank
Modern Functions:
1. Declaration of bank rate
2. Clearing House maintenance
3. Maintain inflation situation at tolerable limit
4. Lender of last resort to Govt. & Banks
5. Advisor to the Govt. on financial matter
6. Supervisor of Banks & Financial Institutions
7. Research
8. Statistics (SBS – 1, 2, 3, 7 others)
9. Implementation of monetary policy
10.CAMELS (Capital, Asset, Management, Earnings,
Liquidity and Sensitivity) rating of Commercial banks.
11.Development of money market and capital market.

Functions of Commercial Banks
The traditional functions of a Commercial bank is to
receive deposit from the surplus unit with a condition
to repay on demand or otherwise and allowing
investment/advances/loans to the deficit unit. But
now-a-days the functions of a commercial bank
diversified and acting as a superstore.

So, the functions may be divided into five categories,
such as
1. General functions
2. Functions related to foreign trade and foreign
exchange
3. Agency functions
4. Welfare functions and
5. Other functions

1. General functions are:
 Maintain account of the clients,
 To receive deposits of various types,
 To make advance/investment against with or
without securities,
 To create deposits,
 To create medium of exchange through
cheque, Draft, Pay – order etc.
 To issue guarantees (local)
 To discount Bills.

2. Functions related to Foreign trade & Foreign
exchange:
 To make correspondent banking with overseas
banks
 To place foreign currency funds with
correspondents abroad
 To issue Letter of Credit (LC)
 To issue Back to Back Letter of Credit (BTB
L/C)
 To amend L/Cs
 To extend investment/credit facilities to the
importers through creating PAD/MIB,
MTR/LTR, LIM/LAM/MPI etc

exchange:
• To extend investment/credit facilities to the
exporters through the modes of Musharaka
Pre-shipment/PC/ECC, LDBP, FDBP etc
• Acceptance of Bill of Exchange and make
payment
• Make forward booking of foreign exchange on
behalf of importer for preventing them from
exchange loss
• Sale and purchase of Foreign currency, TC,
Credit Cards

exchange:
• Maintaining Foreign Currency accounts
• Outward foreign remittance for import, foreign
tour, travel, education, treatment, pilgrims,
training etc.
• Inward foreign remittance – export proceeds,
wage earners remittance etc.
• Issuing guarantees (foreign).

3. Agency functions:
• To transfer money
• To collect funds and makes payment for the
clients
• To maintain confidentiality of customers
• To sale and purchase of shares and securities
• To make payments for utility charges and
insurance premium on behalf of the client
• To receive rent, dividend, premium etc.
• To work as trustee
• To work as representative of Central Bank.

4. Welfare functions:
• Social welfare functions/Corporate Social
Responsibility (CSR),
• Scholarship to poor and meritorious students
• Blanket distribution
• Medical treatment support
• Donation of transport to school, college,
universities
• Ambulance donation

Social welfare functions/Corporate Social
Responsibility (CSR)
• Scholarship to poor and meritorious students
• Blanket distribution
• Medical treatment support
• Donation of transport to school, college,
universities
• Ambulance donation

Functions related to the welfare of the employees/
retired employees such as
• Establishment of institution
• Establishment of Trust
• Pensions and allowance.

5. Other functions:
• Underwriting
• Work as safe custody through Locker service
• Advices the clients on business matters
• Repo
• Customer financing
• Leasing
• Income sharing
• Syndication, arrangement of funds
• Issuance of Sanchay Patra, ICB Unit Certificate,
Bond
• Sale of Prize Bond
• Merchant banking
• Any other functions approved by the
Gov’t/Bangladesh Bank.

Justification of supervision and
control of scheduled banks by
Bangladesh Bank
The justification of supervision and control:
• To limit the risk of depositors
• To maintain public confidence
• To protect the financial infrastructure
• To maintain stability of banking system
• To maintain investment/credit discipline
• To maintain healthy foreign exchange reserve
of the country
• To ensure lawful transaction of foreign
exchange & foreign trade businesses
• To protect money laundering

Main functions/mechanism of
Bangladesh Bank to control over
scheduled banks
The main functions of Bangladesh Bank to control
over scheduled Banks are:
• Enlistment of Banks
• Central Bank is the Banker to the
Commercial Banks
• Submission of returns
• Management of Clearing House
• Audit & Inspection
• Appointment of MD/CEO
• Investment/Credit Control
• Discount rate policy

Main functions/mechanism of
Bangladesh Bank to control over
scheduled banks
The main functions of Bangladesh Bank to control
over scheduled Banks are:
• Open market operations
• Intervention in the Foreign Exchange Market
• Monitoring of non-performing
investment/loans
• Risk Management
• Foreign Exchange Regulation Act
• CAMELS rating
• Anti Money Laundering Act and Anti
Terrorism Act

Few special issues
A. Financial Inclusion
B. Women Entrepreneurs Refinance Scheme
C. CMSME (Cottage, Micro, Small and Medium
Enterprise) loans
D. Green Banking: Maximum utilization of natural
resources without distorting the nature

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