Bank of Khyber Pakistan Internship Report by Jalal Khan

8/8/2019 Bank of Khyber Pakistan Internship Report by Jalal Khan

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CHAPTER 1

INTRODUCTION OF THE STUDY

1.1 Background of the Study

This study is focused the Bank of Khyber Pakistan, which is the govt. bank, owned by the NWFP

Provincial Govt.

The study is carried out to familiarize the students with the working of banks and banking

environment and to produce a comprehensive report on it.

1.2 Purpose of the Study

The purpose of this study is to fulfill the requirement of Bachelor Degree at Institute Of

Management Studies, University Of Peshawar. Being a student of business, especially of human

resource management, the purpose of conducting this study is also to develop some insight into the

working of banks in the field of human resource, the bank of Khyber especially here. More

thoroughly, after some what understanding the procedures of the Bank, the aim is to make a

critical analysis of it and suggest recommendations.

Along with being a course requirement, the purpose of this study is to develop and enhance the

analytical skills of students.

1.3 Scope of the Study

The scope of this particular study confined to the Bank of Khyber Human Resource Division. and

the main focus is the Personnel and Training Department of the bank. Emphasis has been laid to

study their approach towards recruitment and selection, training and development, compensation

and benefits, performance appraisal, workload study and retirement and firing practices.

1.4 Methodology of the Report

The method of data collection is mostly based on personal observations and experiences of

actually working at the Bank. Every effort has been made to collect data and information of the

working of the organization; however the following data collection methods have been mainly

used for the compilation of this report.


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Primary Data

The data in the raw form collected for the first time is called primary data. The data is collected

during the time period of two months internship in Bank of Khyber and the sources for this dataare:

Observations

Discussions with Bank officers.

Secondary Data

The data which has undergone through some mathematical or statistical technique after being

collected and is visible in tabulated form is known as secondary data. The sources for secondarydata are:

Manuals and brochures

Annual Reports

Information Memorandum

Internet.

Prior internship reports

1.5 Scheme of the Report

The entire report is organized in the following manner.

Chapter one (already covered) gives the background of the study, the purpose of the study, the

scope and methodology that is used to collect all the relevant data and the scheme of the report

itself.

Chapter two is about the organizational review i.e. the history of the bank of Khyber, mission

statement, organizational structure and chart etc.

Chapter three give the Islamabad Branch overview where the Internship is conducted.

Chapter four is about the various financial products and services offered by the Bank of Khyber.

Chapter five emphasis on the department of specialization i.e. operation department and the

various types of facilities given by it.

Chapter six covers the financial analysis of the bank.


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Chapter seven consists of the recommendations based on the findings from the study.


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CHAPTER 2

ORGANIZATIONAL REVIEW

2.1 The Bank of Khyber Pakistan

The Bank of Khyber (BOK) was established in 1991 under the act of the NWFP assembly its

objectives included promotion of savings and investment in the NWFP. In 1994 it acquired the

status of a scheduled bank that allowed it to open branches outside NWFP, become a member of

the clearing house ,and engage in trade finance activity. Advantages of scheduling have had a

positive impact on the Bank after adjustments to State Bank of Pakistan (SBP) requirements during

1995.

The bank has a paid up capital of Rs. 750 million out of which Rs. 652.5 million has been provided

by the government of NWFP, while the remaining Rs. 97 .50 million has been contributed by

DEG, a German Development Bank.

BOK is distinguished by the fact that it is not only a schooled commercial bank but it also plays a

role of a development agent, through systematic long-term lending, specially to small and medium

size business. Separate project financing departments namely, long-term projects department and

Micro Finance Unit have been set up for this purpose. BOK has arranged several line of credit

from international agencies for meeting the funding requirements of development projects in

NWFP.

BOK has 43 branches with 26 in NWFP and 4 at Karachi and 9 at Lahore, one each at Quetta, and

Muzzaffarabad, (Azad Jammu and Kashmir). The Bank also has 2 sub-branches. The Bank has 346

well-qualified officers, and it places great importance on their professional achievements.

2.2 Mission Statement

Mission, broadly stating, is the purpose for which an organization exists and why should it

compete in certain sectors and industries. Within mission, sometimes stated as purpose, the

organization addresses itself to what it intends to accomplish both in the long and short run.

Mission is a very broad statement of organizational direction, and is normally summarized and

documented in a mission statement. In same way, the Bank of Khyber being an organization, has a

mission statement, as follow:


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To excel as a quality service provider, in a supportive environment with a special focus on micro-

business and to exploit the indigenous resources, while maintaining a highly motivated staff.1

2.3 Main Objectives of the BOK

Objectives are the ends towards which activities are aimed. In fact these are the results to be

achieved. The bank of Khyber has certain objectives, which are as follows;2

a. To mobilize private savings and public funds for diverting the same into productive

channels and ensure their availability.

b. To promote industrial, agricultural and socio economic processes through the active

participation of private and public sector in the province.

c. Help under develop areas and create employment opportunities, specially in the rural areas

of the province. Further, to guide and assist the people of NWFP serving overseas to

effectively and profitably invest their foreign savings in the province as well as the other

parts of Pakistan.

d. Create a diversified and sound portfolio for utilization of idle funds and their investment in

the existing and new ventures specially in the pioneering of high-tech agro based export

oriented and engineering projects to ensure maximum returns.

e. Participate and seek the share of the province in the capital market of Pakistan by way of

subscription through locally pooled resources in the leading stock exchanges of the country

and eventually paving the way for establishing a stock market in the province.

2.4 Organizational Structure

Organizational structure is the frame work that defines the boundaries of the formal organization

and within which the organization operates:3

The organizational structure of BOK is also aimed at achieving specific corporate objectives. The

Board of Directors controls all the activities and functions of BOK.

Board of Directors

The existing board of directors comprises the following:

Mr. Ghulam Dastgir Akhtar Chairman

Additional Chief Secretary Govt. of KHYBER PAKHTU

Mr. Bilal Mustafa- The Bank Of Khyber Managing Director/CEO


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Sahibzada Saeed Ahmad Director/Secretary Finance Govt. of KHYBER

PAKHTUNKHAWA

Mir Javed Hashmat Member Board of Directors/ Executive Director

Mr. Muhammad Maqsood Khan Director

Mr. Maqsood Ismail Director

Mr. Muhammad Asif Director/Chairman Audit Committee

Mr. Amjid Pervez Director

2.5 Organizational Chart

The BOK is a centralized organization in which little authority is given to the lower levels of

management.

The head office of BOK is divided into two divisions and each division has its own set ofdepartments, these two are:

Banking operation division

Personnel and establishment division

There are also two other independent departments.

Long term projects

Audit department

Long term projects (LTP) handles the investment proposals of huge industrial and agricultural

projects. Where as the audit department is responsible for having an internal control.


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Organizational Chart

THE BANK OF KHYBER

Organization

Board of Directors

Managing Director

Managing Committee

Long Term ProjectsResident Directors

AUDIT

Personnel & Establishment DivisionBanking Operation Division

Investment

Computers

M.B.D

P & E Deptt.

Public RelationDeptt.

Branch OperationsDeptt.

Foreign Exchange

Deptt.

Credits Deptt.

Monitoring &Recovery Deptt.

Branches43

Accounts &Treasury Deptt.


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2.6 Human Resource Policies

Human Resource Management is the part of the organization that is concerned with the staffing,

training, development, motivation and maintenance of employees.4

HRM is a step-by-step process, which is followed by many companies all over the world. The

personnel and establishment department of BOK performs all the above mentioned functions BOK

is also aware of the growing importance of personnel and its role in an organization. Therefore it

lays great emphasis on this aspect of management. BOK has a personnel programme, which

constitutes administrative matters relating to personnel right from recruitment to selection. Salary

administration, promotion, demotion, dismissal, disciplinary action, training, improving

performance, motivation and developing employees and retirement matters.

a. Recruitment in BoK

Recruitment is the process of discovering potential candidates for actual or anticipated

organizational vacancies5.

Recruitment Procedures

A candidate while coming to the services of BOK must be pass through a selection process.

Application Forms

When BOK advertise posts, the applicants are required to apply through a form, through this form

the bank tries to get as much information about the candidate as possible.

Test

The candidate fulfilling other requirements are then called for written test. This written test is

taken in three major subjects i.e. English, General knowledge and Arithmetic.


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Interview

The candidates who qualify the written test, are then called for interview, the main purpose of the

interview is to judge the personal qualities of the candidate.

Physical Examination

The selected candidate are required to bring a medical fitness certificate from any registered

medical practitioner, the main purpose of the certificate is to make sure the physical fitness of the

candidate at the time of appointment.

Appointment

The selected candidates receive their appointment letter through post at the address they have

given in the form. They are appointed for the period of one-year as probationary office. At the time

of appointment they have to submit the following documents.

a) Bank secrecy bond that they will not lack out secrecy to any one outside the bank.

b) Surety bond.

c) Service agreement bond.

Probation

The selection candidates remain under probation for the period of one year. They receive pre entrytraining at Union Bank Academy Lahore as BOK does not have its own training academy

probationary office receive a fixed salary.

Confirmation

After the successful completion of the probation period the probation officers are confirmed and

their services are secured. For confirmation they have to pass a test and fi they pass this test they

are permanently recruited as office Grade-III.

B. TRAINING

A learning experience that seeks a relatively permanent change in an individual that will improve

his or her ability to perform on the job6. Towards this main objectives training courses have been

organized, initiating a self-development process in order to accelerate organizational growth and to

further improve the banks level of expertise and efficiency.


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C. TRAINING PROGRAM

The institute of Bankers in Pakistan (IBP) arranges training programs for all the banks including

the Bank of Khyber, to upgrade their management skills. IBP also programs seminars, conferences

and training programs for one to two or more days.

IBP conducted three exams in the full service of a banker, part-I, part-II, and part-III. It is called

DAIBP (Diploma Associates Institute of Bankers in Pakistan). If a banker clears all the papers in

the first chance so he or she would get a cash prize.

After clearing Part-I, a lower grade officer is given the option of their taking the cash prize or a

promotion. In grade II only the cash prize is offered.

For improving the skills and knowledge of its employees, the management of the BOK has on job

training, job rotation and off the job training.

On- The-Job Training

On-the-job training is normally given by a senior employee or supervisor to the trainee in order to

enhance and polish the skills of his or her. The bank provides the opportunity to take part in the

courses and seminars conducted by the institute of Bankers Pakistan and other professional

institutes.

Job Rotation

Job rotation is defined as An alternative to job specialization that involves systematically moving

employees from one job to another.7 It enables the employees to work on different positions and

get an overall picture of the banks operations.

Off Job Training

Off job training in BOK includes conferences, seminars, meetings and refresher courses. This

mode to training is done to enable employees to upgrade their knowledge to new developments in

the banking profession and also to broaden their outlook.

D. PROMOTION

Main criteria for promotion are the performance and skills of the individual, though seniority is

also taken into consideration but it is secondary importance.


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BOK has defined perfect career paths for its employees and that staff gets accordingly in their

grades by way of transferring from one position to the others.

The MD on the recommendations of the promotion committee approves promotions up to the Joint

Director. The Board of directors on the recommendation of the MD approves promotions of

officers to the post of Director and above.

To keep the employees motivated the MD may promote and officer out of turn (who has not

completed 3 years of services in the grade) up to 10% of those eligible for promotion. Junior

offices and officers who pass DAIBP part-1& II have the option of promotion to the next higher

grade or to get the cash award.

Normally employees are promoted to the next grade after 3 years but promotion is totally based on

3 years performance of the employee.

e. Performance Appraisal

A formal assessment of how well an employee is doing his or her job. 8 Performance appraisal is

evaluating the performance of employees for a given period of time. it is a systematic evaluation of

the individual with respect to his performances on the job and his potential for development. The

performance of employees at the BOK is appraised on the basis of annual confidential reports. A

Performa made by head office is sent to immediate superior for filling.

Increments are decided on the basis of these appraisal reports according to the performance of the

employees. These increments or appraisals play a very important role in the development and

encouragement of the staff.

F. ALLOWANCES AND FRINGE BENEFITS

Allowances

House Rent

Conveyance/maintenance allowance.

Utilities allowance.

Medical allowance


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Benefits

Things of value other than compensation that an organization provides to its workers. 9 The BOK

allows the following benefits to its executives and managers only.

Residential telephone

Entertainment allowance

Bank car

Residential facilities

G. DISCIPLINARY RULES

Discipline is a force that prompts individuals or groups to observe rules, regulations and

procedures that are demand to be necessary for the effective function of the organization.

Discipline; in ordinary conduct of affairs by the members is to maintain harmony and peace in

organization willingly. Following are the examples of indiscipline.

Absence from duty

Misconduct

Disobedience with any lawful and reasonable order of the supervisor i.e. transfers.

Fraud and forgeries

Damage or loss (bank property)

Sleeping while on duty

Striking

Unauthorized use of bank property

Any violation in these disciplinary rules the different types of penalties are given.

H. PENALTIES

Any employee found guilty under any rule or any offense of misconduct is liable to one or more of

the following penalties.

Reprimand

With holding for a specified period confirmation on promotion of increment.

Recovery from salary of the whole or part of any particular loss caused to the bank

by the employee.


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Demotion to any lower grade.

Removal (Dismissal) from service.

Termination by way of punishment.

Compulsory retirement from the services with or without retirement benefits.

i. Separation in BOK

Any employee of the bank is separated from the service by three different ways.

i. Retirement

Any employee will retire from the service either on the completion of 25 years continuous service

or by attaining the age of 60 years.

ii. Resignation

An employee can leave the service of the bank on his own disposal by tendering resignation in

writing, but he is required to give a prior notice of 3 months in case of officer and one month in

case of clerical staff. If he fails to do so 3 months pay will be forfeited in case of officer and one

month in case of clerical staff. Although the bank authorities accept resign but he has to give a

genuine reason for the resignation

iii. Dismissal

Any act of an employee against the discipline may lead the termination from the services. By

doing wrong any employee of the bank can be separated as a punishment from the service, but this

will require a proper inquiry of the case.


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CHAPTER 3

The bank of Khyber any Branch Overview

3.1 Departmentation of branches:

Departmentation is, grouping activities and people into departments make it possible to expand

organizations.1

Chart 3.1

The Bank of Khyber

Branches

Organization Chart

Source: Personal Observation.

Account Opening Department

The opening of an account is the establishment of banker-customer relationship. This department

performs the duty of opening accounts for customers. It also issues checkbooks to customers. A

person who wishes to open an account with the bank has to fill an account opening form obtained

from any branch of BOK at the time of opening of account. The bank officer tactfully obtains

Chief Manager

Manager Operation

Foreign ExchangeDepartment

General Banking(Operation) Department

CreditDepartment

AccountOpening

Department

CashDepartment

RemittancesDepartment

BillsDepartment

ClearingDepartment


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information about character, integrity, responsibility, occupation and the nature of business of the

perspective customer.

Cash Department

Cash department owes its important to the fact that it is a major point of contract between the bank

and the customer, the banks most valued relationships. This department is the showcase of the

bank and conveys the first impressions about the banks commitment to professionalism in its

systems and procedures and to courteous and efficient customer service. This department performs

the function of receipts and payments.

Remittance Department

Funds transfer facility or remittance of funds is on of the key functions of the banks all over the

world. Remittances through banking channels save time, costs less and eliminate the risks involved

in physical transportation of money from one place to another. BOK transfers money in the

following ways.

1. Pay orders (P/O).

2. Demand draft (DD)

3. Mail transfer (MT)

4. Telegraphic transfer (TT)

Bills Department

The Bills department deals with the collection, purchase and discounting of bills on behalf of the

customers. The collection of cheques and other instruments has become a very important service

that commercial banks render to their clients. While collecting cheques and other instruments, a

bank acts as an agent of its customers and therefore, the banker customer relationship in this case

changes from the debtor creditor relationship to the agent principal relationship.

The collection of bills usually involves two banks; the Collecting bank and the Paying bank. Both,

collecting as well as paying, banks have certain obligations to each other and to their customers.

They have certain legal rights also and legal protection is available against fraudulent transactions

under various sections of the Negotiable Instruments Act, 1881.


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Clearing Department

BOK along with their daily business activity also provides the facility of collecting credit claims

for customers i.e. when a customers deposits a cheque or draft for collection which is of the some

other bank. Then bank collects this instrument for its customer through clearing and similarly in

case of payment the bank makes payment through clearing for the instruments (cheques or drafts)

which are given by its customer for his obligation fulfillment to customer of some other bank. The

function of clearing house system is operated by the State Bank of Pakistan (SBP) if SBP has no

office at a place then National Bank of Pakistan (NBP) as a representative of SBP acts as a

clearing house.

Credit Department

The bank is profit seeking institution. It attracts surplus balance from the customer at low rate of

interest and makes advances at a higher rat eof interest to the individuals and business firms. Credit

extensions are the most important activity of all the financial institutions, because it is the main

source of earnings. Credit departments is one of the most sensitive and important department of the

bank. The major portion of the profit is usually earned through this department. The job of this

department is to make proposals about the loans, the credit management division of head office

directly controls all the advances.

Foreign Exchange Department

The foreign exchange means that the amount of any foreign currency that will available in a

market at any given time against or in exchange for a particular countrys currency. This value of

rate or exchange may show a stable, rising or downward trend of position day to day and even at

different times during the same day.

Foreign Exchange Department is the main source of income for the commercial banks as well as

for the State bank. Commercial banks earn commission and service charges through letter of credit

and letter of guarantee. While the state Bank collects with-holding tax for the supply of goods

through letter of credit and govt. earns from stamps duties applicable to issuance bills of exchange

in case of L/C. it promotes the import and export business. It facilitate the local trade and foreign

trade.


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Foreign Exchange Department deals with foreign currency accounts (FC A/C), letter of credit

(L/C) and letter of guarantee (L/G).


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CHAPTER 4

FINANCIAL PRODUCTS AND SERVICES

4.1 Current Deposit Account (Rupees)

The BOK Rupee current deposit account allows the facility of unlimited withdrawals up to the

extent of the balance in account. There will be no tax deducted on the funds that some one choose

to keep in these accounts.1

Balance in current accounts are payable on demand. Any amounts can be with

drawn without prior notice. Similarly there are no restrictions on number of transactions

during the day. All individuals including foreigners, firms and corporate bodies are entitled to open

and maintain current accounts.

No profit is paid on current accounts.

An overdraft is allowed on this account.

4.2 Saving Deposit Account (Rupees)

The BOK rupee saving deposit account allows the facility of multiple withdrawals up to the credit

balance, while accruing profit on deposits. 2

Types of saving deposit account.

i. Profit and loss sharing (PLS saving) account.

ii. Special deposit account (SDA).

iii. PLS 7 days Notice Deposits.

iv. PLS 30 days Notice Deposits

Profit is paid bi-annually on minimum monthly balance (Jan-June & July-Dec)

which is announced in July and January respectively. Generally, withdrawals from this account are allowed on demand i.e. without any

prior notice of withdrawal.

Overdraft is not allowed on this account.

4.3 Term Deposit Account (Rupee)


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The BOK Rupee Term Deposit Account offers the dual benefit of attractive returns with high

liquidity. Options to take profit monthly, quarterly, bi-annually, annually or at maturity. Profit is

accrued on a daily balance basis. There is no penalty for premature encasement. However in case

of an early encasement the rate of the previous tender will be applied. The option of partial

liquidity is allowed i.e. with drawl to a certain percentage from the fixed deposit without disturbing

the remaining deposit is allowed.3

Term or fixed deposits are accepted by BOK mature between one month to five

years.

Profit on fixed deposits is paid on the maturity of deposits.

Each fixed deposit account is considered as a separate contract.

4.4 Foreign Currency Account

All individuals including resident citizens, firms and corporate bodies can open and

maintain foreign currency savings and current accounts.

Formalities for opening FC accounts are similar to those of rupee accounts.

Facility is presently available in four major currencies i.e. US dollar ($), Pound

sterling, (L), deutsche mark (DM) and Japanese Yen (Y).

Foreign currency saving accounts is interest based. Interest rates are fixed by bank

every month within the parameters given by SBP. The rates so announced unchanged

during respective month.

4.5 Khyber Monthly Scheme (KMS)

On KMS the BOK gives monthly interest on amount deposited with the bank. This is a sort of

fixed deposit and the customers will have to keep the deposits for the five years.


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4.6 Security Deposit Receipts (SDRS)

This is a receipt issued by the bank, at the instructions of the depositor, confirming that amount of

the SDR is held by the bank to be paid whenever called upon to do so by the beneficiary named inthe SDR.

A SDR is a non-negotiable instrument.

SDRs are generally used to make advance payments or as earnest money, retention

money or security deposits etc.

No profit is paid on call deposits.

A SDR can be repaid to a named beneficiary or the purchaser/depositor upon proper

identification.

4.7 Khyber Rupee Travelers Cheques

They are generally issued for the convenience of persons traveling abroad, but some Pakistani

banks issue them in Pakistan currency for use within the country as well. Before issuing, the

bankers receive an amount equal to the face value of the cheques, and also charge a small

commission. The travelers cheques are for fixed amount and are treated as order cheques payable

only to the purchaser whose specimen signature appears on the travelers cheques itself. Foreign

currency travelers cheques are issued and encashed in accordance with the provision of the

exchange control regulation Act 1947.4

Khyber Rupee Travelers cheque (KRTC) is a negotiable instrument, which can also be used for

remittance fund and as an alternate to cash.5

KRTC is available in the denomination of Rs. 5,000, Rs. 10,000, and Rs. 50,000.


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Table

Deposit Rates

Half Yearly Profit Rate On PLS Deposits

December 31, 2001

PLS saving account 5.50%SDA (up to 99,999/-) 4.20%

SDA (100,000/- to 5,000,000/-) 5.50%

SDA (5,000,001/- to 8,000,000/-) 7.00%

SDA (8,000,001/- and above) 8.00%

PLS 7 days Notice Deposits 4.00%

PLS 30 days Notice Deposits 4.50%

TERMS DEPOSITS

Two months 7.00%

Three months 7.50%

Six months 8.00%

Nine months 8.00%

One year 8.50%

Two years 9.00%

Three years 10.00%

Four years 10.50%

Five years 11.00%

Khyber monthly scheme 11.00%

Source: The Bank of Khyber Circular January 18, 2002

4.8 Consumer Financing

4.8.1 Fund Base Facilities

Fund base facilities are those which involve a cash disbursement at the time of allowing the

facility.

Running Finance

This is a working capital finance facility available for one year and renewed subject to satisfactory

utilization there of. Markup is charged on outstanding balance.

Demand Finance

It is a term loan disbursed in lump sum and repayable in 2 years in the form of monthly or

quarterly installments.


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Advance against Salaries

This facility is available to government and semi-government employees up to five gross salaries.

4.8.2 Non-Fund Base Facilities

The non-fund base facilities are those in which the bank does not invest its own funds rather its

commitment is involved against which the bank chargers a certain amount in shape of commission.

These facilities are available in the form of letter of credit and letter of guarantee.

Letter off Credit

Letter of credit is required in the settlement of international trade some times local transactions are

also done through the letter of credit which are termed as inland LCs.

Usually, there are four parties are involved in LCs.

1. Importer

2. Exporter

3. Importers bank

4. Exporters bank

LCs may be on sight or issuances basis. In sight based LCs, the importer has to pay the amount

upon payment of the value. In case of issuance LCs the exporter extends credit to the importer. The

documents are handed over to the importer against his acceptance of the bill and assurance of

payment on the maturity date of acceptance.

Letter of Guarantee

The bank provides assurance to the beneficiary of the guarantee about the satisfactory performance

of a certain act by the applicant of the guarantee.

In the letter of guarantee three parties are involved i.e.

1. Bank (provider of guarantee)

2. Applicant of the guarantee (Banks customer on whose behalf the bank issues a guarantee).

3. Beneficiary (in whose favor the guarantee is issued).

The banks at the request of applicant issue the guarantee and charges commission for its

commitment from the applicant at the exposure is secured against some security.


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CHAPTER 5

OPERATION DEPARTMENT

5.1 ACCOUNT OPENING REQUIREMENTS AND DOCUMENTATION

Account opening is the first step towards establishing Banker-Customer relationship. Any

individual, who has attained the age of majority and is of sound mind can open and maintain

his/her account. Two or more individuals may open an account jointly. Similarly, business

organizations such as sole proprietary concerns, partnership firms, and limited liability companies

as well as non-profit organizations like clubs, trusts, societies, associations and NGOs etc, may

open their accounts.

The following requirements are necessary for opening an account.

Identification of the new customer.

Ascertaining the genuineness of the stated occupation business of the customer.

Determining the correct residential and permanent address.

Completion of all relevant columns of the AOF.

Proper completion of documentation.

Personal Accounts

Accounts opened by individuals in their personal capacity are termed as personal or private

accounts. A personal account may be a PLS saving or current account in local currency or saving

or current account in foreign currency. There is no restriction as to number of accounts that an

individual may have with the bank.


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Verification of Identity1

a) Under recognized legal principles, banking conventions and SBPs prudential

regulations (Regulation XI & XII), banks are required to institute effective proceduresto ensure true identity of their customers.

b) Federal Ombudsman also, vide his ruling on a complaint, directed the banks to

retain a photocopy of the NIC with AOF of the person desiring to open an account as

well as of the introducer.

c) Account opening procedures at Bank of Khyber, therefore, have been adopted to

fulfill above requirements.

d) Authorized officers, therefore obtain NICs and photocopies of the new account

holder as well as of the introducer and then return the originals after attesting the

retained copies. Inquires are necessary to avoid potential frauds and losses not only for

our own bank but also to save other banks and general public and to claim legal

protection in the case of any such happening.

e) The identity of an individual can also be established by obtaining a copy of their

passport, driving license, or any other documents that certifies the customers name,

address, date of birth, citizenship, photograph, and signature etc.

Introduction

a) Whether introduced by a customer or banker, proper introduction is a mandatory

requirement under SBPs BCD circular No. 29 of 1968.

b) Generally, new customers are introduced by the existing customers, Staff members

themselves may introduce new accounts, provided they know the new customer, his/her

occupation and permanent residence etc. and are otherwise satisfied with his/her past

conduct or record with respect to financial dealings and bank relationships.


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Following Steps Are Taken To Ensure Proper Introduction2

a) Introductions from saving account holders for current accounts normally

discouraged. However, an introduction from a savings account holder who is well knowto the manager and whose account has been well conducted may be accepted, under the

managers authorization.

b) Whether the introducer/referee accompanies the account holders to the branch or

not, he/she properly identified by an authorized officer under his signature written

across the rubber stamp reading Signature Verified affixed in close proximity to the

introducers signature. A letter of thanks sent to the introducer. A copy of the letter

retained in the Account File.

Some Basic Information Regarding Account Opening Form & Procedures

The bank officer takes the interview of the customer to know his purpose of account

opening, identity and status.

The full name of the individual or the business is given as title to the account.

The permanent (Corresponding) address of the client is required in this regard.

The account holder describes his occupation in definite and adequate terms. In case

of employee the name and address of the employer is noted on AOF.

Clear instructions are obtained regarding operations on the account and for

repayment of the balance in the event of the death of any of the joint account holders

and in case of single account holder.

Signatures of the account holders are taken on AOF and SS Card.

An account in the name of minor may opened jointly with a parent or guardian

with the condition that account will be operated by the guardian. No overdraft is

allowed in a minors account. An illiterate person can open account with banks. This account will be Photo

account one photo is pasted on AOF and one is on SS Card. Left thumb impression in

case of male and right thumb in case of female account holders is obtained in place of

specimen signatures on SS Card. Such a person will put his thumb impression in the

cheque in the presence of bank officer.


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The married women can open bank account with banks. However, they cant bind

their husbands for any debts or borrowings obtained without their consent except

necessities of life.

Joint Accounts: Two are more persons may open an account jointly. AOF & SS

card are signed by all the parties. Special instructions are required for the operation of

account at the time of opening the account. Similarly instructions regarding operation

of account and payment of balance to the survivors are required in case of the death of

one party or more.

Sole proprietor ship account is the individual account in the name of business

concern.

All the partners of the Partnership firm will sign the AOF & SS card and it is

operated by any one or more partners.

The account of the company is opened on the resolution of the Board of Directors,

which nominates the persons authorized to operate upon the account. The signs of all

the members of the Board of directors will be provided to the bank.

DOCUMENTS REQUIRED FOR ACCOUNT OPENING FOR DIFFERENT PARTIES

Individual/Joint Accounts

a) Account opening form (AOF) and specimen Signature (SS) card.

b) A copy of NIC (National Identity Card).

Sole Proprietorships

a) AOF & SS cards.

b) A copy of NIC

c) Letter / declaration of sale proprietor ship.

Partnership

a) AOF & SS cards

b) Copies of NICS

c) Letter of partnership

d) Partnership deed.


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e) Mandate form, if applicable.

Limited Companies

a) AOF & SS cards.b) Copies of NIC ARE of the directors & authorized officials.

c) Memorandum and articles of association.

d) Certified true copy of the Resolution of the board of directors authorizing opening

of the account.

e) Certificate of incorporation original may be returned after inspection and a certified

true copy retained.

f) Certificate of commencement of Business (applicable only in case of public Ltd.

Companies)

g) Copies of the latest audited balance sheet and profit and loss account.

Trusts

a) AOF & SS cards.

b) Copy of the trust deed.

c) A certified true copy of the certificate of registration of the public trust.

d) A certified true copy of the resolution of the board of trustees for opening andoperation of the trust account with the Bank.

Societies, Associations, Clubs Etc.

a) AOF & SS cards.

b) Certified true copy of by laws/ rules and regulations.

c) Certified true copy of the resolution by the society / association or club, authorizing

opening and operation of the account.

d) A list of members of the executive / managing committee.


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Local Authorities, Municipal Corporations Etc.

a) AOF & SS cards.

b) Certified true copy of the statute under which the body was created by governed.c) Mandate authorizing designated persons who would operate the account.

5.2 Remittances

Funds transfer facility orRemittance of Funds is one of the key functions of the banks all over

the world. Remittances through banking channels save time cost less and eliminate the risks

involved in physical transportation of money from one place to another. Besides earning

commission, banks also get much-needed short term (cost free) liquid funds right from the receipt

of value till final payment.

Any person who is of sound mind and can sign the application form as a contracting party may

make a remittance.

Customers, in order to remit money from one place to another, have a variety of options or modes

available to them according to their needs.

Types of Remittances

Remittances can broadly be classified as Outward and Inward remittances. When a bank / branch

instructs another bank/branch to effect a remittance or payment, it is said to be effecting an

Outward remittance. While when a bank/branch is itself affecting a payment/disbursement at the

instructions of another bank/branch, it is said to be handling an Inward remittance. Different

modes and means of remittance are discussed below.

DIFFERENT MODES & MEANS OF REMITTANCES

Demand Draft

A demand draft is basically a bill of exchange. It is an order to pay money Drawn by one office of

a bank upon another office of the same bank or another bank. When it is drawn upon another office

of the same bank it is covered under Sec. 85 A of the Negotiable Instruments Act. However, when

it is drawn upon an office or branch of another bank it is considered as a bill of exchange under


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Sec. 5 of the same Act. Also called DDs meaning local Demand Drafts and FDDs meaning

Foreign Demand Drafts.

Salient Features

a) Demand draft is a negotiable instrument.

b) An order instrument payable on payees identification or through credit into payees

bank account.

c) Legal provisions as to crossings, endorsements, collections and payment in due

course are similar to those for cheques and other negotiable instruments.

Parties to a Draft

Following are the parties to a bankers draft:

The person who pays the value and on whose behalf draft is issued is called the

purchaser.

The branch/office, which issues a draft on another branch or office, is called the

drawer/issuing branch.

The branch/office on which draft is drawn is called the drawee branch.

The person entitled to receive the payment is called the payee.

Telegraphic Transfer

The transfer of funds from one branch of a bank to another branch of the same bank or to a

correspondent bank/office for payment to the beneficiary through telex/fax or telegram is called a

telegraphic transfer. It is also called TT.

Salient Features

a) TTs are affected through internal procedures of the bank and no instrument is

given to the remitter.b) Telegraphic transfers are not negotiable.

c) Funds remitted through TTs cannot be paid to order/bearer. Payment can be made

to the payee only upon identification or through a bank account.

d) TT instructions are sent under a coded number known as Test Number.

e) Telegraphic transfers are not affected on the branches within the same city.


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Mail Transfer

The transfer of funds from one branch to another branch/office of the same bank or a

correspondent bank through mail or courier service is known as Mail Transfer (MT).

Salient Features

a) Mail Transfer is not negotiable.

b) Like TTs, funds remitted through MTs are not payable to the bearer/order.

c) Mail transfer is internal instrument of the bank and, therefore, unlike DD, it is not

handed over to the remitter.

Pay Order

Pay order is also called bankers cheque, drawn upon the issuing branch/office itself. It is not

negotiable and, therefore, the instrument should be crossed, Payees Account only to avoid the

possibility of dealing with instruments with forged endorsements.

Main Characteristics

a) It is not negotiable under The Negotiable Instruments Act.

b) Protection available to collecting bankers in case of promissory notes, bills of

exchange and cheques under the above mentioned Act is not available in case of pay-

orders.

c) It is issued by, drawn upon and is payable at the same branch of the bank.

d) Pay order is used as a substitute for demand draft within local/city limits.

e) Being a bankers cheque, pay order is also used to make the banks own payments.

Basic Procedure In Case Of Issuance & Payment Of Different Remittances Instruments

The remitting bank collects the actual amount of remittance plus the commission, postage charges

and tax amount if the tax form is not attached with the application form. these amounts may becollected by cash, Cheque or by authority letter (given by the customer to debit my account for

actual amount plus charges etc).

Application &Agreement of Test Cod


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When TT & MT is issued then on the advice the special test code is applied. For this purpose

special test keys are provided to every branch and the HO also has. In case of payment of TT &

MT test is checked either it is agreed or not. If it is agreed then customers A/C is credited or TTR

is issued in case when the customer doesnt have the A/C with the bank.

When the amount of DD exeedsRs10, 000 then test code is applied to it.

Not over Rs ---------- only

When DD, P/O &Pay slip is issued this statement is protect graphed or is written

with red ink/ ballpoint on the instrument. e.g Not over RS 10,000 only.

For the issuance &payment of any instrument an entry is passed in their respective

register and the particulars are fed to the terminal and authenticated the transaction and

proper vouchers are prepared.


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5.3 COLLECTIONS

The collection of cheques and other instruments has become a very important service that

commercial banks render to their clients. While collecting cheques and other instruments, a bankacts as an agent of its customers and therefore, the banker customer relationship in this case

changes from the debtor creditor relationship to the agent principal relationship.

The collection of bills usually involves two banks; the Collecting bank and the Paying bank. Both,

collecting as well as paying, banks have certain obligations to each other and to their customers.

They have certain legal rights also and legal protection is available against fraudulent transactions

under various sections of the Negotiable Instruments Act, 1881.

Duties of a Collecting Bank

To act in Good Faith

To exercise due care and diligence and not be negligent

To act according to the instructions of the customer/principal

To follow the accepted norms and practices of banking

To abide by all the rules and regulations governing collections.

To account for the proceeds and charges/levies deducted from it, to the customer.

Duties of Paying Bank

The paying bank, in order to claim proper discharge.

Should make the payment according to the apparent tenor of the instrument

Should act according to the instructions of the Collecting Bank

Payment should be in good faith

Should act expeditiously and without negligence

Payment should be in the normal course of business.


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Outward Clean Bills For Collection

Cheques and other instruments, which are drawn on other banks or BOK branches in other

towns/cities or countries (outside clearing or transfer delivery arrangements), received for accountof the banks customers, are lodged in Outward Collections Register either as OBCs or FBCs.

The procedure for handling these bills is discussed below.

Initial Scrutiny

On receipt of bills for collection from the customers an initial scrutiny is conducted with the

following consideration.

Date

Cheques and other instruments should not be without a date, post-dated that is bearing a future date

or stale that is bearing an old date that is no more legally valid or is outdated.

Payee

Payee should be a customer of the bank whose account is required to be credited with the proceeds

of collection. In case a customer wants to deposit a cheque/instrument, which shows someone else

as the payee, there should be an appropriate endorsement by the named payee in favor of our

customer.

Amount

Currency and amount of the cheque/instrument should be mentioned both in words and figures and

the amounts in words and figures should be the same.

Drawer(s) Signatures

The drawer(s) should properly sign the cheques/instruments.

Material Alterations

Date, payees name, drawers signature, and amount are all material parts of a cheque. Full

signatures of the drawer(s) should confirm any material alterations, in these parts.


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Crossings

Cheques/instruments must be crossed before processing them for collection. Sec. 125 of the

Negotiable Instruments Act allows a collecting banker to cross a cheque generally as well as

especially for collection/clearing purposes. An un-crossed cheque is liable to be

misused/appropriated, since it would be payable to the bearer.

Endorsements

Order cheques should be properly endorsed if being collected for 2nd or subsequent payees.

Mutilations

Cheques/instruments should not be mutilated to the extent that they can be misinterpreted or not be

correctly read.

Procedure for Handling Outward Bills3

After scrutiny, if instrument is found in order, a Special Crossing stamp of the bank is affixed on

the face of the instrument. Where a cheque bears across its face an addition of the name of a

banker, with or without two transverse parallel lines, the cheque shall be deemed to be crossed

specially to that banker. Payment of an instrument which bears special crossing of a bank cant be

made to any one except the named bank or another bank who acts as a collecting agent of the first

one a bank which acts as a collecting agent for some other bank is also authorized to put its own

special crossing.

In addition to the special crossing, the collecting bank has to give a certificate/discharge on the

reverse side of the cheque/instrument to the effect that proceeds of the instruments

will be credited to the payees account. A stamp containing discharge is affixed as under:

Payees Account will be credited on realization.

For The Bank of Khyber

Manager Officer


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In case, cheque or instrument is endorsed by the first payee in favor of another person discharge

will be as under:

First payees endorsement Confirmed,Second payees Account Will be credited on realization.

For The Bank of Khyber

Manager Officer

Another stamp known as OBC STAMP is also affixed on the face of the cheque/instrument,

which indicates name of the collecting bank, OBC reference number and date of lodgment for

further reference. Form or style of an OBC stamp may differ from bank to bank and even branch to

branch, however, contents remain the same. A specimen is given below.

The Bank of KhyberOBC NO. .DATED

Lodgment

After initial scrutiny and stamping, bills are lodged for collection by being recorded in the OBC

Register or by using an appropriate computer option. An officer authorized to authenticate who

uses an appropriate computer option to authenticate the transaction should authenticate the entry.

Upon authentication, the computer generates an accounting entry (Vouchers are manually passed

where the branch is not fully computerized.)

The entry is made to record the fact that the bank has accepted the liability for collection of a

certain bill and simultaneously has obtained the right to receive the payment as a collecting agent.

When collection is realized or is returned by the drawee this entry is reversed since the liability of

the collecting banker as well as the right to receive payment does not exist any more.

Collection Schedules

The next step after computer processing is to prepare collection schedules/orders addressed to the

bank/branch, which we have chosen as our collecting agent.


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Dispatch of Items for Collection

After completion of above procedure, collections are sent to the designated collecting agents or

drawee banks/branches, as appropriate.

Commission & Charges

Commission on clean bills should be recovered strictly at the rate specified in the Banks schedule

of charges. Collecting agents charges will be extra if the collecting bank is other than the Bank of

Khyber. Mail/telegram/trunk call/fax charges should also be recovered, as per the schedule of

charges if fate of the instrument is asked for by telegram/telephone or fax etc. Cheque returning

charges should be recovered as per the schedule, in case the instruments are returned unpaid. If

collections are send by courier service, courier charges are also recovered. Normal postalcharges/registered mail charges for bills sent for collection are in-built in the commission.

Realisation

If a collection is realized through one of our own branches, proceeds are received by means of a

credit advice (IBCA) or telephonic/fax message depending upon instructions contained in the

collection schedule. Where collections are sent directly to the drawee banks/branches other than

our own branches or correspondent banks with whom we have agency arrangements, proceeds are

received by means of a demand draft which is finally collected through clearing.


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Bills Returned Unpaid

If a cheque/ Instrument is returned unpaid by a drawee bank/branch due to any procedural mistake

made by the collecting bank such as banks discharge irregular/required, endorsement requiresbanks guarantee/confirmation or OBC stamp or special crossing required etc., the mistake is

rectified immediately and collection is presented again by fastest available means such as courier

service/urgent mail service etc.

If collection is returned due to lack of funds in the drawers account or due to stop payment made

by the drawer or difference in drawers signature etc., the customer is immediately contacted and

informed. Proper entry is made in the Cheque Return Register. The returned instrument together-

with objection memo is handed over to the customer or his/her authorized representative after

getting acknowledgement on cheque return register. If a customer is not available, the returned

instrument may be send by registered mail or local express mail/courier service etc. depending

upon situation and circumstances in each case.

Inward Clean Bills For Collection

Bank receives cheques, drafts and other instruments for collection from its own branches or from

branches of other banks, which are not included in local clearinghouse arrangements. These bills

would be its outward bills for collection (OBCs) or bills purchased but they become inward billsfor collection (IBCs) for it.

Initial Scrutiny

Immediately upon receipt, all instruments are scrutinized on the following points:

Whether or not all instruments are apparently in order viz. a viz. genuineness, date

payees name, amount, and drawers signatures etc?

Whether or not instruments are drawn on our branch or banks/branches with whom

we have arrangements through clearing or transfer delivery procedures?

If the answer is yes only then instruments are processed further, otherwise they

are returned to the concerned banks or branches with relevant objection.


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PROCEDURE FOR HANDLING INWARD BILLS

Recording Receipt

Mail Received stamp is affixed on all collection schedules received which indicates

the date of receipt of each and every inward collection.

All inward collections are entered in the IBC Register and every collection is

allotted a serial number called IBC Number.

IBC stamp is also affixed on the face of the instrument.

Instruments are segregated department-wise Cheques, TDRs, ad CDRs, etc. are

handed over to the Deposits department while DDs TTRs, MTRs and POs are given

t the Remittance department.

Instruments, which are drawn on other banks or branches, are handed over to the

clearing department. However, only designated branches perform this last function.

Computer entry is made where a branch is computerized, otherwise manual entries

are passed.

Commission & Charges

No commission or service charge is recovered from the collections received from bank own

branches except withholding tax, if applicable. Only collecting branch is supposed to recover

commission and other charges. However, commission at the prescribed rate for the issuance of

draft plus courier charges and government levies like withholding tax and excise duty are

recovered, in case collections are received direct from other Banks.

DD along with a covering letter is sent to the bank concerned, mentioning their Ref. No. or OBC

No. and details of commission, charges, taxes etc. deducted from the bill amount. If any instrument

is drawn on some other Branch or other Bank in the city, it is processed in the transfer delivery or

clearing respectively, to pay the proceeds. Inward collections are generally routed through the

Main Branch or some specially designated Branch.


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Local Bills Collection

The bank of Khyber Islamabad Branch collects its local Bills, through its collecting agent Muslim

Commercial Bank Rawalpindi.

The cheques DD, P/O etc of the customers of Islamabad branch or OBCs of other branches which

are drawn on at any Bank in Pindi are sent to the MCB Pindi for collection. The MCB will present

these instrument in clearing at SBP Rawalpindi.

Before to send these instruments the entries are made for these in LBC Register. Proper stamp is

affixed on the Back side of the instrument.

The Next day the statement comes from MCB Pindi. The cleared (Passed) instruments are creditedto the clients A/C and instruments returned are sent to Drawer back and an entry is made in the

LBC Register.

5.4 CLEARING

As part of their daily business activity, banks receive cheques and other financial instruments from

their customers drawn on other banks, to be collected and credited to their accounts. Similarly,

banks receive cheques/instruments from other banks, deposited by customers of the banks drawn

on the customers of the drawee banks. Therefore, the banks act as Collecting Banks when they

send cheques/instruments for collection and as paying Banks, when they receive

cheques/instruments for collection from other banks. Since each bank receive and sends

cheques/instruments for collection to and from an number of banks, the process of settlement

would clearly be very cumbersome and time consuming if every cheques/instrument had to be sent

by the collection bank to each of the drawee banks or branch upon which different collection items

are drawn and to individually pay the proceeds to each of the bank sending cheques/instrument in

for collection. Therefore, the banks have evolved what is called the Bankers Clearing arrangement.


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Working of the Clearing Process

Under the clearing arrangements, the Central Bank or the State Bank of Pakistan (SBP) in our

country, offers a Clearing House or a centralized exchange facility, which works on the followinggeneral lines:

All the banks operating in a city who are members of the Clearing House maintain

an account with the SBPs Clearing House.

Every day representatives of all the banks in every city meet the Clearing House,

first meeting in the morning, at an appointed time, for the purpose of depositing their

own customers, cheques/instruments to be collected from other banks and receiving

cheques/instrument drawn on their account holders from the others banks.

At the Clearing House accounts of all the banks are debited by the total amount of

cheques/instruments drawn on their customers accounts and credited with the amount

of their customers cheques/instruments drawn on other banks, as per the list of cheques

submitted by each bank.

The cheques/instruments received, also called Inward Clearing, and are take back

by each bank to its bank/branch. The amounts of each cheques/instrument is debited or

recovered from each drawee customers account and credited to the Clearing House

account. Similarly, against the amount credited by the Clearing House as Outward

Clearing, the appropriate customers accounts are credited and clearing House account

is debited.

Any cheques/instruments received by a bank that cannot be paid, due to insufficient

balance in its customers account or for any other reason, are returned back to the

Clearing House and a credit is claimed and obtained there against.

Thus the Clearing System enables cheques to be paid or cleared centrally and settlement made for

receivables and payables between the banks. The SBP co-ordinates clearing activity through its

offices, called the Clearing Houses, set up in big cities and towns. Where SBP does not maintain

its own office, some other bank, usually National Bank of Pakistan (NBP) performs this function.

But the clearing house facility is available only for cheques/instruments drawn on banks situated

within the same city/clearing house area.


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First Clearing & Second Clearing

The business of the Clearing House is normally conducted in two sessions called First Clearing

and Second Clearing. During first clearing, receipts/payments are adjusted arising out of cheques

delivered and received against each other. In the second clearing, cheques which could not be paid

due to any reason, accompanied with objection memo, are also handed over or received back form

the member banks and adjustments made accordingly.

Where there are no Clearing Houses

At places where there are no clearing houses or clearing arrangements, local cheques drawn on

other banks are presented for clearance through and authorized representative under cash

received/payment received discharge arrangement. Under this arrangement thecheques/instruments have to be presented by an authorized officer of a bank over the counters of

the drawee/paying bank and the cash so received is credited to the customers/beneficiaries

accounts.

Outward Clearing

Cheques received by a bank from its customers to be collected from other banks are considered to

be in the Outward Clearing arrangement. The procedures and considerations that apply to Outward

Clearing are discussed below:

Initial Scrutiny

While accepting cheques for collection/clearing, the pay-in-slips and the cheques and other

negotiable instruments are properly scrutinized with respect to following points.

Payee/beneficiary must be customer of the Bank.

Separate pay-in-slips should be filled out for local cheques drawn on our own

Branches and on other Banks.

Title and account number should be mentioned.

Amount of the pay-in-slips tallies with that of the cheque.

There are no unauthorized alterations.

The amount, account number and the title of account on the counterfoil are the same

as on pay-in-slip.


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The pay-in-slip bears the signature of the depositor at the specified place.

In addition to the above, cheques/instruments are scrutinized on the following points:

Endorsements (if any) must be regular.

There are no previous special crossings.

The cheque is not post-dated, stale or undated.

The cheque payable to a firm, company or institution should not be accepted for

credit to the account of a partner, director, agent/attorney or manager of the firm,

company or institution.

Cheques/instruments crossed Payees Account only should not be deposited or

collected in any other account.

The first payee in favour of the depositor, if collected for another account, must

have properly endorsed order cheque.

Stamping4

After conducting initial scrutiny and being satisfied in all respects, the special crossing stamp of

the bank and clearing stamp are affixed on the face of the cheque/instrument without spoiling

material contents such as date, amount, payees name and drawers signatures etc. given below is

the specimen of the stamps.


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THE BANK OF KHYBERBranch ____________Date ______________

CLEARING

The Bank of KhyberJinnah Avenue Br. (Blue Area)

ISLAMABAD

The Clearing Stamp Crossing Stamp

Bankers Discharge

According to the type of cheque/instrument, appropriate discharge or endorsement on the reverse

side of the cheque/instrument has to affixed. Which is referred to as the Bankers Discharge. If an

instrument is being collected for the payee named on the instrument, discharge would be simple as

payees account credited. In case of endorsements, there may be second or subsequent payees

involved, in which case the discharge would be like First payees endorsement confirmed, second

payees account credited or All endorsements confirmed, final payees account credited etc.,

depending upon the nature and type of the instrument.

The Discharge stamps look something like this:

Payees Account Credited.For The Bank of Khyber______________Branch

OFFICER OR

First Payees EndorsementConfirmed

Second Payees Account Credited

For The Bank of Khyber_________Branch

OFFICER

All Endorsements Confirmed.Final Payees Account Credited.

For The Bank of Khyber_________ Branch

OFFICER

Segregation of Instrument and Forwarding Schedule

All cheques are sorted out and segregated bank-wise and Branch-wise. A schedule or summary is

prepared bank-wise, in triplicate, which gives the total number of cheques and the total amount

receivable form a particular bank. This schedule is prepared manually or generated on computer.


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Procedure at Clearing House

Bank-wise schedules together with the cheques are delivered to the representatives

of drawee banks and master schedule is delivered to the In-charge of the Clearing

House.

In-charge of the Clearing House obtains acknowledgement from each drawee bank

and passes a consolidated accounting entry for the total amount of outward clearing.

Dishonor or Returns

In case any cheque is not paid or honored then it is send back to the clients.

Completing The Process

After realization and accounting for returns, an appropriate option is used to close the clearing

process on the computer terminals. Then through another appropriate option a new schedule is

printed for the newly received items for the next days clearing.

INWARD CLEARING

Procedure at Drawee Branches

The Drawee branches immediately scrutinize the cheques and other instruments

received under inward clearing on the following points:

Whether all cheques/instruments are drawn on/payable at the receiving

branch?

Whether all cheques/instruments are genuine, properly dated and made out?

If answers to the above questions are yes then instruments are segregated

department-wise. Cheques and CDRs etc. are handed over to the deposits department

while DDs, Pay Orders, are given to Remittances Department.

Appropriate accounting entries are passed for the Inward Clearing items.

If there are any cheques/instruments to be returned unpaid, due to any reason,

appropriate computer entries are passed and it is ensured that the original

cheques/instruments returned unpaid are delivered to the collecting bank in second

clearing.


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Returns After Clearing Hours

If a cheque or instrument is not returned in time (during second clearing) then it cannot be returned

through the Clearing House. The Branch concerned immediately contacts the collecting

Bank/Branch and requests them not to release the funds against said collection item. The

cheque/instrument in question along with an objection memo is returned to the Collecting Bank

through a special representative/staff member. The Collecting Bank is requested to issue a Pay

Order in favor of the Bank for the amount of the cheques/instrument returned.


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CHAPTER 6

FINANCIAL ANALYSIS

6.1 Financial Analysis

Financial analysis is the process of identifying the financial strengths and weaknesses of the firm

by properly establishing relationships between the items of balance sheet and profit and loss

account.

The analysis of bank statements is undertaken by analyst, depositors, regulatory authorities,

stockholders, borrowers, the bank management etc. A depositor is interested in the solvency of the

bank, i.e. the safety and availability of his funds. The regulatory authorities desire to assure

themselves that the banks are operating in accordance with the requirements of the law and are in

sound financial conditions. Stockholders are interested in the general financial condition of the

bank and the earnings, the dividends, and the managements policy with reference to the

accumulation of surplus. The borrower is interested in knowing the extent of available funds and

the use that is made of the banks resources.

Financial ratio that relates two accounting numbers and is obtained by dividing one number by the

other.

6.2 ASSUMPTIONS

1. Ratios are calculated for three (3) years i.e. 1999, 2000 and 2001.

2. All the figures are taken in thousands i.e. Rs. In thousands .

3. Figures are rounded off up to 2 decimal points.

6.3 Financial Ratios

1. CASH RATIO

Cash ratio is the ratio of cash and its equivalents to current liabilities. It shows that how much cash

is available to cover the current liabilities.

Cash Ratio =sliabilitieCurrent

Cash


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Ratio for 1999 =737,769,11

000,818x 100 = 6.95%

For 2000 =592,042,14

907,389x 100 = 2.78%

For 2001 =407,146,15

424,810x 100 = 5.35%

Analysis

The cash ratio for the year 2000 decreased as compare to 1999. The exact decrease is 4.17% and in

the year 2001, the cash ratio increased. The exact increase is 2.57%. This shows that bank has

improved its liquidity in the year 2001 as compare to 2000.

2. RETURN ON ASSETS AFTER TAXES

This ratio is used in evaluating whether management has earned a reasonable return on the assets

under its control. It measures the over all effectiveness of the available assets in generating profits.

Return on assets after taxes =AssetsTotal

after tax)(profitIncomeNet

Ratio for 1999 =097,200,13

554,38x 100 = 0.29%

For 2000 =007,356,15

375,157x 100 = -1.02%

For 2001 =792,228,17

040,231x 100 = 1.34%

Analysis

ROA ratio in 2001 is higher than that of 2000 i.e. There is a sufficient increase in the ratio. This

shows that the bank has efficiently managed its assets portfolio to earn a reasonable return on total

assets in the year 2001 as compare to 2000.


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3. TOTAL INCOME TO TOTAL ASSETS RATIO

It is a ratio of total income to total assets. This ratio tells us that how much total income is

generated on available total assets.

Total income to total assets =AssetsTotal

IncomeTotalx 100

Total income = Mark up earned + non-mark up income

Ratio for 1999 =097,200,13

123,662,1x 100 = 12.6%

For 2000 =097,356,15

861489,1x 100 = 12.1%

For 2001 = 792,288,17

917,877,1

x 100 = 10.9%

Analysis

There is a persistent decrease in this ratio in the previous two years. In the year 2000 the exact

decrease is 0.5% as compare to 1999. While in the year 2001 it is 1.2% as compare to 2000. This

shows that bank has poorly utilized its total assets to generate total income.

4. TOTAL EXPENDITURE TO TOTAL INCOME RATIO

This ratio shows the relationship between total expenditure and total income i.e. how much

expenditure is incurred to generate total income.

Total expenditure to total income =incomeTotal

eexpenditurTotalx 100

Total expenditure = Total operating cost + Mark-up expensed

Total operating cost = Non-mark up expense + provision against non-performing advances

+ reversal of provision for diminution in value of investments + bad debts

written off directly.

Ratio for 1999 =123,662,1

794,598,1x 100 = 96.19%

For 2000 =489,861,1

412,017,2x 100 = 108.38%

For 2001 =917,877,1

195,715,1x 100 = 91.33%


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Analysis

This ratio is high in 2000 as compare to 2001 and 1999. The exact decrease in 2001 is 17.05% as

compare to 2000. This shows that bank has managed efficiently its operation to earn total income

with low total expenditure.

5. Operating Cost to Total Income Ratio

It shows the relationship between operating cost and total income. It tells us that how much

operating cost is incurred in generating total income.

Operating cost to total income =incomeTotal

costOperatingx 100

Ratio for 1999 = 123,662,1

254,277

x 100 = 16.68%

For 2000 =489,861,1

034,519x 100 = 27.88%

For 2001 =917,877,1

050,314x 100 = 16.72%

Analysis

In the year 2001, this ratio is decreased by 11.16% as compare to 2000. This shows that the bank is

efficient in its operation in the year 2001 and it generates its total income with low operating cost.

6. Debt to Equity Ratio

This ratio shows the extent to which the firm is financed by debt.

Debt to equity ratio =equityTotal

s)liabilitie(totaldebtTotal

Ratio for 1999 =905,708

192,491,12= 17.62 times

For 2000 = 031,446

976,909,14

= 33.43 times

For 2001 =012,975

780,253,16= 16.67 times

Analysis


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This analysis shows that bank is trying to reduce dependence on debt financing i.e. bank is trying

to finance its assets more by equity.

7. Return on Equity

This ratio shows that how much profit is generated by shareholders equity.

Return on equity =equityTotal

safter taxeofitPrx 100

Ratio for 1999 =905,708

554,38x 100 = 5.44%

For 2000 =031,446

375,157x 100 = 35.28%

For 2001 = 012,975

040,231

x 100 = 23.70%

Analysis

The analysis shows that the return on equity has been improved in 2001. The exact figure of

improvement is 58.98% in 2001.

8. Operating Cost to Deposits Ratio

This ratio reflects the relative extent to which operating cost is incurred on deposits.

Operating cost to deposits =Deposits

costOperatin x 100 = 4.21%

Ratio for 1999 =311,307,10

654,277x 100 = 2.69%

For 2000 =253,332,12

034,519x 100 = 4.21%

For 2001 =946,122,14

050,314x 100 = 2.22%

Analysis

This analysis shows that operating cost to generate and operate the deposits was high in 2000

while it was low in 1999 and 2001. There is 1.99% decrease in the year 2001 is compare to 2000.

9. Interest Expense to Deposits


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This ratio shows the relationship between interest expense and deposits. It tells us about the

interest expense paid on different types of deposits.

Interest expense to deposits =Deposits

expenseInterestx 100

Ratio for 1999 =311,7,30,10

140,321,1x 100 = 12.82%

For 2000 =253,332,12

378,498,1x 100 = 12.15%

For 2001 =946,122,14

145,401,1x 100 = 9.92%

Analysis

The interest expense to deposits ratio is decreasing in the previous two years. The exact decrease in

this ratio is 2.23% in the year 2001 as compare to 2000. This shows that deposits of bank are

increased in this period while the interest expense is decreased due to reduction in the profit rates

on various accounts.

10. Total Expenditure to Deposits

It reflect the extent to which total expenditure is incurred on deposits.

Total expenditure to deposits = Deposits

eexpenditurTotal

x 100

For 1999 =311,307,10

794,598,1x 100 = 15.51%

For 2000 =253,332,12

412,017,2x 100 = 16.36%

For 2001 =946,122,14

195,715,1x 100 = 12.14%

Analysis

Total expenditure to deposits ratio first increased in the year 2000 and then decreased in the year

2001. The exact decrease is 4.22% in the year 2001 as compare to 2000. This decrease is due to

efficient control of cost by the banks management.

11. Advances to Deposits Ratio


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This ratio shows the relative extent to which deposits are lended in the form of advances.

Advances to deposits ratio =Deposits

Advancesx 100

Ratio for 1999 =311,307,10125,760,5 x 100 = 55.88%

For 2000 =253,332,12

240,746,5x 100 = 46.60%

For 2001 =946,122,14

680,925,6x 100 = 49.04%

Analysis

In the year 2000 this ratio is decreased and in 2001, this ratio is increased the exact increase is

2.44% in 2001 as compare to 2000. In the year 2001 this ratio is 49.04%. This means that this year

49.04% deposits are lent in form of advances.

12. Interest Earned to Advances Ratio

This ratio reflects the relative extent to which interest is earned on advances.

Interest earned to advance =Advances

earnedInterestx 100

Ratio for 1999 =125,760,5

217,242,1x 100 = 21.57%

For 2000 =240,746,5

140,732,1x 100 = 30.14%

For 2001 =680,925,6

599,728,1x 100 = 24.96%

Analysis

The ratio of interest earned to advances in high is the year 2000 as compare to 1999 and 2001.

Interest earned on advances is high in 2000 because return on deposits of the Bank of Khyber with

financial institutions is high.

13. Asset Growth Ratio

This ratio highlights the percentage increase or decrease in the volume of total assets over a period

of time.


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Assets growth ratio

=assetstotalsyear'Previous

assetstotalsyear'previos-assetstotalsyear'Currentx 100

Ratio for 1999 = 200,049,12

200,049,12097,200,13

x 100 = 9.55%

For 2000 =097,200,13

097,13200007,356,15 x 100 = 16.33%

For 2001 =007,356,15

007,356,15792,228,17 x 100 = 12.20%

Analysis

Analysis shows that asset growth ratio is lower in 1999 and 2001. There is a decreasing trend in

this ratio in 2001. The exact decrease is 4.13% in 2001.


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14. Deposit Growth Ratio

This ratio reflects the percentage increase or decrease in the volume of deposits over a period of

time.

Deposit growth ratio =depositssyear'Previous

depositssyear'previous-depositssyear'Currentx100

Ratio for 1999 =454,630,9

454,630,9311,307,10 x 100 = 7.03%

For 2000 =311,307,10

311,307,10253,322,12 x 100 = 19.65%

For 2001 =12,322,253

12,322,253-946,122,14x 100 = 14.52%

Analysis

The deposits growth is higher in 2000 as compare to 1999 and 2001. There is 5.13% decrease in

deposit growth ratio in 2001.

15. Advances Growth Ratio

This ratio highlights the percentage increase or decrease in the volume of advances over a period

of times.

Advances growth ratio

=Advancdessyear'previous

Advancessyear'Previous-advancessyear'Currentx 100

Ratio for 1999 =194,512,5

194,512,5125,760,5 x 100 = 4.50%

For 2000 =5,760,125

5,760,125-240,746,5x 100 = - 0.24%

For 2001 =5,746,240

5,746,240-680,925,6x 100 = 20.53%


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Analysis

Advances growth was low in the year 2000. Due to better credit management and attracting new

and maintaining the existing clients the advances growth ratio grew high in 2001.


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6.4

COMMON SIZE ANALYSIS

THE BANK OF KHYBER

BALANCE SHEETS

AS AT DECEMBER 31,

Assets

Regular (Rs. In thousands) Common Size Analysis

2002 2003 2004 2002 2003 2004Cash and balances with treasurybanks

818,000 389,907 810,424 6.20 2.54 4.70

Balances with other banks 697,512 602,264 1,153,708

5.28 3.92 6.70

Money at call and short notice 30,000 460,000 200,000 0.23 3.00 1.16Lemding to financial institutions - 4,123,503 926,000 - 26.85 5.37Investments 4,858,31

02,894,786 5,712,88

736.81 18.85 33.16

Advances 5,760,125

5,746,240 6,925,680

43.64 37.42 40.20

Capital work in progress 2,568 - 1,297,689

0.02 - -

Other assets 907,421 1,010,438 - 6.87 6.58 7.53Operating fixed assets 114,641 110,828 133,635 0.87 0.72 0.66Deferred taxation 11,520 18,041 88,769 0.09 0.12 0.52


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Total Assets 13,200,091

15,356,001

17,228,792

100 100 100

Liabilities and owners equityBills payable 64,798 42,615 82,975 0,49 0.28 0.48Borrowing from financial institutions 1,397,62

81,667,724 940,724 10.59 10.86 5.46

Deposits and other accounts 10,307,3

11

12,332,25

3

14,122,9

46

78.09 80.31 81.97

Liabilities against assets subject tofinance leases

8,245 2,148 28 0.06 0.01 0.00

Other liabilities 704,278 865,236 1,107,345

5.34 5.63 6.43

Provision for staff retirement gratuity 8,932 - - 0.07 - -Total equity 708,905 446,031 975,012 5.37 2.90 5.66

Total liability and equity 13,200,097

15,356,007

17,228,792

100 100 100


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6.5

Common size analysis

The Bank of Khyber

Profit and loss accounts

For the ended December 31.

Regular (Rs. In thousands) Common Size Analysis (%)

2002 2003 2004 2002 2003 2004

Markup/interest earned 1,242,217

1,732,140

1,728,599

100 100 100

Markup/interest expensed 1,321,140

1,498,378

1,401,145

106.35 86.50 81.06

Net markup/interest income -78,923 233,762 327,454 -6.35 13.50 18.06Provision against non- performingadvances

77,081 309,971 79,458 6.21 17.90 4.60

Reversal of provision for diminution inValue of investmen

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Bank of Khyber Pakistan Internship Report by Jalal Khan

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