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 Being a student of business administration, especially of finance, the purpose of conducting this study is to develop some insight into the working of banks, the bank of Khyber specially 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
Transcript
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
Being a student of business administration, especially of finance, the purpose of
conducting this study is to develop some insight into the working of banks, the
bank of Khyber specially 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 Islamabad
Branch. More specifically, the operation department of the above mentioned bank
branch is the major emphasis of the study.
1.4 Methodology of the Report
The method of data collection are mostly based on personal observations and
experiences of actually working at the Bank. Dealings with customers, along with
general procedures involved were observed. Moreover, as the departments are
always bustling with activity, there was not enough time to carry out formal
interviews or surveys, the methods used for data collection are:
Primary Data
Observations
Discussions with Bank officers.
Secondary Data
Manuals
Annual Reports
Information Memorandum
Internet.
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
Chapter seven consists of the recommendations based on the findings from the
study.
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 has
been set up for this purpose. Several line of credit from international agencies
have been arranged by BOK for meeting the funding requirements of
development projects in NWFP.
BOK has 29 branches with 23 in NWFP and 2 at Karachi, one each at Islamabad,
Quetta, Lahore, and Muzzaffarabad, (Azad Jammu and Kashmir). The Bank has
346 well qualified officers, and it places great importance on their professional
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 vacancies”5.
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.
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 entry training 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 job”6. Towards this main
objectives training courses have been organized, intitating a self-development
process in order to accelerate organizational growth and to further improve the
bank’s level of expertise and efficiency.
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 bank’s
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.
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.
Promotions up to the Joint Director are approved by the MD on the
recommendations of the promotion committee. Promotion of officers to the post
of Director and above are approved by the Board of directors on the
recommendation of the MD.
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
proforma 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
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.
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.
CHAPTER – 3
The bank of khyber Islamabad Branch Overview
3.1 Introduction
Islamabad branch is one of the important branch of BOK. It is a corporate branch.
It performs all the functions of a commercial bank, form deposits to advances, and
from remittances to safe custody service. Profit wise this branch is on the top and
recently it has got a shield in this regard. The manager of this branch is Mr.
Shahid Mehmood, he is a prudent and experienced banker. He manages all the
activities of bank with good and effective manners with the help and support of
the staff. Al the team members are very competent and highly committed with
their jobs.
3.2 Departmentation
Departmentation is, “grouping activities and people into departments make it
possible to expand organizations”.1
Chart – 3.1
The Bank of KhyberIslamabad Branch
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 information
about character, integrity, responsibility, occupation and the nature of business of
the perspective customer.
Chief Manager
Manager Operation
Foreign Exchange Department
General Banking (Operation) Department
Credit Department
Account Opening
Department
Cash Department
Remittances Department
Bills Department
Clearing Department
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 bank’s most valued relationships. This
department is the showcase of the bank and conveys the first impressions about
the bank’s 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.
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
country’s 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.
Foreign Exchange Department deals with foreign currency accounts (FC A/C),
letter of credit (L/C) and letter of guarantee (L/G).
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.
Overdrafts 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)
“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 enchasement. However in case of an early enchasement 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 are 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.
4.6 Security Deposit Receipts (SDR’S)
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 in the SDR.
A SDR is a non-negotiable instrument.
SDR’s 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 Travellers Cheques
“They are generally issued for the convenience of persons travelling 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.
TableDeposit Rates
Half Yearly Profit Rate On PLS DepositsDecember 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 DEPOSITSTwo 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 lumpsum and repayable in 2 years in the form of
monthly or quarterly installments.
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. Importer’s bank
4. Exporter’s bank
LCs may be on sight or issuance’s 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 (Bank’s 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 issues the guarantee and charges
commission for its commitment from the applicant at the exposure is secured
against some security.
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 NGO’s 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.
Verification of Identity1
a) Under recognized legal principles, banking conventions and SBP’s
prudential regulations (Regulation XI & XII), banks are required to
institute effective procedures to 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 NIC’s 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 customer’s 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 SBP’s 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.
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 know to the manager and whose account
has been well conducted may be accepted, under the manager’s
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 introducer’s 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 minor’s 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.
The married women can open bank account with banks.
However, they can’t 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 NIC’S
c) Letter of partnership
d) Partnership deed.
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 and operation 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.
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 or Remittance 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 Sec. 5 of the
same Act. Also called DDs’ meaning local Demand Drafts and FDD’s meaning
Foreign Demand Drafts.
Salient Features
a) Demand draft is a negotiable instrument.
b) An order instrument payable on payee’s identification or through
credit into payee’s 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 banker’s 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) TT’s 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 TT’s 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.
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 TT’s, funds remitted through MT’s 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,
“Payee’s 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 banker’s cheque, pay order is also used to make the bank’s
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 be collected 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
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 customer’s A/C is credited or TTR is issued in case when the
customer doesn’t 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.
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 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.
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.
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 account of the bank’s customers, are lodged in
Outward Collections Register either as OBC’s or FBC’s. 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, payee’s name, drawer’s signature, and amount are all material parts of a
cheque. Full signatures of the drawer(s) should confirm any material alterations,
in these parts.
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 can’t 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 payee’s account. A stamp
containing discharge is affixed as under:
Payee’s Account will be credited on realization.
For The Bank of Khyber
Manager Officer
In case, cheque or instrument is endorsed by the first payee in favor of another
person discharge will be as under:
First payee’s endorsement Confirmed,Second payee’s Account Will be credited on realization.
For The Bank of KhyberManager 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.
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
Bank’s schedule of charges. Collecting agent’s 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 postal charges/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.
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 requires bank’s 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 drawer’s account or due to
‘stop payment’ made by the drawer or difference in drawer’s 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
(OBC’s) or bills purchased but they become inward bills for collection (IBC’s) 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 payee’s name, amount, and drawer’s 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.
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, TDR’s, ad
CDR’s, etc. are handed over to the Deposits department while DD’s
TTR’s, MTR’s and PO’s 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.
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 OBC’s 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 credited to the client’s 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.
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 following general lines:
All the banks operating in a city who are members of the Clearing
House maintain an account with the SBP’s 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 customer’s
accounts and credited with the amount of their customer’s
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 customer’s 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.
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 the cheques/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 customer’s/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.
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 ‘Payee’s 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,
payee’s name and drawer’s signatures etc. given below is the specimen of the
stamps.
THE BANK OF KHYBERBranch ____________Date ______________
CLEARING
The Bank of KhyberJinnah Avenue Br. (Blue Area)
ISLAMABAD
The Clearing Stamp Crossing Stamp
Banker’s 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 Banker’s Discharge. If an instrument is being collected for the payee named
on the instrument, discharge would be simple as ‘payee’s account credited’. In
case of endorsements, there may be second or subsequent payees involved, in
which case the discharge would be like ‘First payee’s endorsement confirmed,
second payee’s account credited or ‘All endorsements confirmed, final payee’s
account credited ‘ etc., depending upon the nature and type of the instrument.
The Discharge stamps look something like this:
Payee’s Account Credited.For The Bank of Khyber______________Branch
OFFICER OR
First Payee’s Endorsement Confirmed
Second Payee’s Account CreditedFor The Bank of Khyber
_________BranchOFFICER
All Endorsements Confirmed.Final Payee’s 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.
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.
Dishonour 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 day’s
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 CDR’s etc. are handed over
to the deposits department while DD’s, 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.
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.
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 essure themselves that the banks are operating
in accordance with the requirements of the law and are in sound financial
conditions. Stock holders are interested in the general financial condition of the
bank and the earnings, the dividends, and the management’s 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 bank’s 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 =
Ratio for 1999 = x 100 = 6.95%
For 2000 = x 100 = 2.78%
For 2001 = x 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 =
Ratio for 1999 = x 100 = 0.29%
For 2000 = x 100 = -1.02%
For 2001 = x 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.
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 = x 100
Total income = Mark up earned + non-mark up income
Ratio for 1999 = x 100 = 12.6%
For 2000 = x 100 = 12.1%
For 2001 = 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 = x 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 = x 100 = 96.19%
For 2000 = x 100 = 108.38%
For 2001 = x 100 = 91.33%
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 = x 100
Ratio for 1999 = x 100 = 16.68%
For 2000 = x 100 = 27.88%
For 2001 = x 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 =
Ratio for 1999 = = 17.62 times
For 2000 = = 33.43 times
For 2001 = = 16.67 times
Analysis
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 shareholder’s equity.
Return on equity = x 100
Ratio for 1999 = x 100 = 5.44%
For 2000 = x 100 = – 35.28%
For 2001 = 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 = x 100 = 4.21%
Ratio for 1999 = x 100 = 2.69%
For 2000 = x 100 = 4.21%
For 2001 = x 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
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 = x 100
Ratio for 1999 = x 100 = 12.82%
For 2000 = x 100 = 12.15%
For 2001 = x 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 = x 100
For 1999 = x 100 = 15.51%
For 2000 = x 100 = 16.36%
For 2001 = x 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 bank’s
management.
11. Advances to Deposits Ratio
This ratio shows the relative extent to which deposits are lended in the form of
advances.
Advances to deposits ratio = x 100
Ratio for 1999 = x 100 = 55.88%
For 2000 = x 100 = 46.60%
For 2001 = x 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 = x 100
Ratio for 1999 = x 100 = 21.57%
For 2000 = x 100 = 30.14%
For 2001 = x 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.
Assets growth ratio
= x 100
Ratio for 1999 = x 100 = 9.55%
For 2000 = x 100 = 16.33%
For 2001 = 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.
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 = x100
Ratio for 1999 = x 100 = 7.03%
For 2000 = x 100 = 19.65%
For 2001 = x 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
= x 100
Ratio for 1999 = x 100 = 4.50%
For 2000 = x 100 = - 0.24%
For 2001 = x 100 = 20.53%
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.
6.4
COMMON SIZE ANALYSISTHE BANK OF KHYBER
BALANCE SHEETSAS AT DECEMBER 31,
AssetsRegular (Rs. In thousands) Common Size Analysis
1999 2000 2001 1999 2000 2001Cash and balances with treasury banks 818,000 389,907 810,424 6.20 2.54 4.70Balances with other banks 697,512 602,264 1,153,708 5.28 3.92 6.70Money 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 4,858,310 2,894,786 5,712,887 36.81 18.85 33.16Advances 5,760,125 5,746,240 6,925,680 43.64 37.42 40.20Capital 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 0.52Total Assets 13,200,091 15,356,001 17,228,792 100 100 100Liabilities and owner’s equity Bills payable 64,798 42,615 82,975 0,49 0.28 0.48Borrowing from financial institutions 1,397,628 1,667,724 940,724 10.59 10.86 5.46Deposits and other accounts 10,307,311 12,332,253 14,122,946 78.09 80.31 81.97Liabilities against assets subject to finance leases
