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Banking OperationsLecture 01 - Introduction to

Banking

Banking Ops (SZABIST) - Lecture 01 (Muhammad Ali Jangda)

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We will Cover

What is a bank ? Fractional Reserve Banking (Multiplier Effects) Evolution of Banking Modern Banking Banking in Pakistan Services offered Banker-Customer Relationship Accounts of Customers Banking Instruments (Negotiable Instrument Act) Career Opportunities in Banking and Financial Services.

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What is a bank?

Banking – Oldest and most important industry– Largest business firms ever created– Which nation has the largest number of commercial banks?

Definition of Money Measure of monetary aggregates (M0, M1, M2, M3 etc)

Composition of monetary aggregates in Pakistan Role of Money (Medium of Exchange, Unit of Account, Store of Value)

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What is bank? Continued ..

What is a bank? Economic functions it serves The Services it offers Legal basis of its existence

Bank definition (1)A bank is any business offering deposits subject to withdrawal and demand (such as by writing a cheque or making an electronic transfer) and making loans of a commercial or business nature (eg granting credit to private business seeking to expand the inventory of goods on their shelves or to purchase new equipment).

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What is bank? Continued ..

Bank definition (2) – as defined in the Banking Companies Ordinance 1962;(a) banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise;

(b) banking company means any company which transacts the business of banking in Pakistan and includes their branches and subsidiaries functioning outside Pakistan of banking companies incorporated in Pakistan;

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The many different roles banks play in the economy:– Intermediation role– Payment role– Guarantor role– Risk management role– Savings role/investment advisor loan– Safekeeping /certification of value – Policy role

Role of the banks

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Top banks in the world 2013 World’s top 10 banks:

– Combined assets of over US$ 25.0 trillion – World GDP (current prices): $74.171 trillion – Top 10 banks assets are 34% of the total world GDP

– Industrial and Commercial Bank of China (ICBC) is the world's largest bank with assets of CNY18.743 trillion (US$ 3.068 trillion)

- HSBC Holdings is the second largest financial

institution in the world with assets of US$2.723

trillion - Four of the top 11 banks are Chinese financial institutions.

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Top Investment banks by Volume 2013

Refer to the file

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Pakistan Financial Industry Landscape as at Dec 2012

BANKS PERFORMANCE AT A GLANCE– Total assets of the sector grew from Rs. 8.3 trillion in CY11 to Rs. 9.9 trillion in CY12 (increase of 19.3%)

– Profit before taxation increased by 6.7% in CY12 over CY11

– Investment grew by 32.1 percent while gross advances by 12.2 percent in CY12

– Lending to financial institutions decreased by Rs 36.9 billion or 17.8 percent in CY12 over CY11

– In case of Pakistani banks, the lending decreased by 25.7 percent in CY12, however, in case of foreign banks, it increased by 64 percent

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Pakistan Financial Industry Landscape as at Dec 2012

BANKS PERFORMANCE AT A GLANCE – Banks advances increased to Rs 4.3 trillion in CY12 showing an increase of 12.2 percent over CY11

– NPLs increased to Rs 600.2 billion in CY12 compared to Rs 573.1 billion in CY11

– NPLs to advances ratio decreased to 13.9 percent in CY12 as compared to 14.9 percent in CY11.

– NPL to total equity reduced from 73.9 percent in CY11 to 71.3 percent in CY12

– NPLs provision to NPLs increased to 71 percent in CY12 from 70 percent in CY11.

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Pakistan Banking Landscape 2012

• There is steady increase over 2008 to 2012 (from 22M to 36M)

• CASA constitute a major junk of the total accounts

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Pakistan Banking Landscape 2012

There is steady growth in deposits (about 72% from 2008 to 2012)

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Fractional Reserve Banking

What is fractional reserve banking? (play the video) Reserve Ratio Money Multiplier Effects

Reserve Requirements for Pakistani Banks Prudential Measure Tool for Liquidity Management Statutory Liquidity Reserve (SLR) is governed under Section 29 of the BCO, 1962

It is being monitored at 20% of the Total Demand & Time Liabilities of a Scheduled Bank

This 20% is comprised of 5% on account of Cash Reserve Requirement and 15% on account of Statutory Liquidity Requirement.

SLR and Interest Rate operating procedures

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Services Offered By the Banks

Historically

Currency Exchange Lending Saving Deposits Safe keeping of Valuables Supporting Government Activities with Credit Post Industrial Period (USA, Europe) offering Demand Deposits

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Services offered by the Banks More Recently

Granting Consumer loans Financial Advising Managing Cash (cash collection and disbursement for the clients, invest surplus in short term interest bearing assets)

Equipment Leasing Making Venture Capital Selling Insurance Services Mutual Funds and Annuities Merchant Banking Services Convenience: The Sum Total of All Banking and Financial Services

Specialized service delivery channels (ATM, call Centers, Internet Banking)

Trend towards universal banking (banking, fiduciary, insurance, security brokerage under one roof)

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Banker-Customer Relationship

Definition of the term “Customer” and “Banker”

Functions of the Banker Special Nature of the Relationship Rights, Secrecy, Confidentiality Accounts of Customers Account Relationship Opening; Legal & Operational aspects

Types of Accounts Termination of Relationship etc

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Banking Instruments

Negotiable Instruments Act Types Essential Elements Parties to the Instrument Payment of the Instrument Endorsements Payments Methods (Bankers Cheques, Demand Drafts)

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Loan officer Tellers Customer Service Officers

Credit Analyst Branch Managers System analyst Auditing and control personnel

Compliance Officers

Relationship Officers / Managers (RMs)

Teller Security Analyst and Trader

Marketing / Sales Resources

Investment Banking specialist

HR Acquisition / Talent Development Resources

Career opportunities in Banking