2nd year Banking IMportant Answers

Q.1. Define and explain the term “Banking”?

A bank is an institution that deals in money. But this definition does not cover all the aspects of banking business as it includes all persons dealing in money,

We may be definite as

“A bank is an organized house which borrows money from the people for the sake of providing loan or services of monetory nature to businessmen or need person.”

Q.4. Explain some of the kinds of banks?


How many types of banks are there? Briefly explain each of them.


Write a short note on kinds of banks.


Some important types of banks are as follows

i. Central Banks.
This bank is of great significance in the banking system of a country. Central Bank is considered as the Bank of government and directly or indirectly control the activities of all the banks operating in the country. State Bank of Pakistan is the central bank of Pakistan.

ii. Commercial Bank
This is another most important type of the banking system. It is main function is to receive deposits, advance loans and discounting of bills.

iii. Industrial Bank
These type of banks provide loans to industries. Generally these banks advance loans for long periods.

iv. Exchange Bank
These banks deal in foreign currencies in the form of bill of exchange, drafts, telegraphic transfers etc. They buy and sell foreign currencies.

v. Saving Bank
Saving Banks provide incentives to people of small means to save money. These banks provide monetary facilities to the people.

viii. Co-Operative Bank
Such type of banks are usually run by co-operative societies through its members. These are non-scheduled banks. They are meant for the benefits of the society and its members.

Q.9(A). Define Credit Instruments.

Q.9(B). Define the different kinds of Credit Instruments.

Credit Instruments are the documents describing details of credit and debit. Credit Instruments provide a written means from future reference describing terms and conditions of any debt and loan. Credit Instruments may be an order for payment of money to a specified person or it may be a promise to pay the loan. Credit Instruments generally in use are cheques, bills of exchanges, bank overdraft etc.

There are two broad kinds of Credit Instruments.

1. Negotiable Instruments
A negotiable instrument means a cheque, promissory note and a bill of exchange which are payable to the bearer of the instrument or the person to be ordered.

Features of Negotiable Instruments
i. It must be unconditional
ii. It must be in writing
iii. It is payable on demand

2. Non-Negotiable Instruments
Non-Negotiable Instruments can not be transferred by the issuer e.g. Money Order, Postal Order, Shares Certificate etc.

Following is the list of credit instruments: 1. Cheque 2. Bill of exchange 3. Promissory note 4. Travelers cheque 5. Letter of credit 6. Bank draft 7. Pay order 8. Hundies 9. Circular letter of credit 10. Treasury bills 11. Book credit 12. Bank notes 13. Documentary bills 14. Accommodation bills

Q.11. Define the different types / kinds of a cheque.

Cheque may be of different types. Some of them are

Order Cheque
Order Cheque is a which is expressed to be so payable or which is expressed to be payable to a particular person without containing words prohibiting transfer or indicating that it will not be transferable.

Open Cheque
They are payable in cash at the counter of the banks to the bearer of the cheque.

Crossed Cheque
These type of cheques are not encashed at the counter but which can be collected only by a bank from the drawer bank. But these days an individual can also draw a crossed cheque for the purpose of safety and security in certain cases.

Bearer Cheque
A bearer cheque is that which can be cashed for the bank by the bearer of the cheque. Any person who is in possession of a bearer cheque can cash it without any difficulty.

Compare the direct and Indirect methods adopted of exchange control.


These methods of exchange control are known as indirect methods because they do not control the exchange rate but only influence it. On the others hands the direct methods of intervention, restriction and exchange clearing agreements have the effect of directly controlling the exchange rate or the foreign exchange market.

PROCEDURE FOR OPENING A BANK ACCOUNT Following are the main steps in opening a bank account:
1. Selection of type of account:
The first step is to select the type of account to be opened . such as current account, saving account, fixed account.
2. Selection of bank and branch:
The second step is to select the bank . Usually those banks are chosen which provide high rate of interest or quality of service. Then such a branch is selected to which the access is easy.
3. Obtaining the account opening form:
An account opening form is obtained from the bank . It should be read carefully and filled carefully.
4. Obtaining the reference:
One or two reference are obtained by the account holder. The people who give references sign the form and give their account no. and name and address.
5. Submission of the from:
Now the form should be submitted along with the required documents.
6. Giving specimen signature:
Now, the account holder signs on a card called specimen signature card. These signatures are matched with the cheques of the account holder.
7. Making initial deposit:
The applicant is allotted an account and asked to make initial deposit in his account through a deposit slip.
8. Account is opened: As soon as the initial deposit is made, the account is opened.
9. Receiving of cheque book/term deposit certificate: Finally, a cheque book is issued which bears the applicant’s account no. The money can be withdrawn with the help of these cheques

Short Notes

Q.31. Define the following terms


International trade refers to that trade that take place between a country and a number of countries of the world. In other words we can say that all the trading activities that take place across the national boundaries is called International or Foreign trade. It is effect is called balance of payments.


Internal or Domestic or inter-regional trade is the trade between different regions in the same country. We can also say that all the trading activities that take place within a country is called Internal trade.


A country due to its most favourable geographical conditions may have an advantage in the production of a particular commodity over other countries. This advantage is known as absolute advantage for that country over rest of the world. The absolute advantage results in a regular inflow and outflow of goods which gives rise to International Trade.


When a country has an advantage of production and move than one commodity it prefers to produce only one commodity that is more advantageous for other. This advantage is calculated by comparing the different commodities that how much they paying commodity is selected and the country goes for specializing. This is known as comparative advantage.Q.15. Write Short Notes.


The promissory note is one of the simplest forms of the credit instrument. Section 4 of the Act defines a Promissory Note as an instrument in writing not being bank note or a currency note containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the orders of a certain person to the bearer of the instrument.

Characteristics of a Promissory Note
The essential characteristics of a promissory note are as follows
i. It is a written document signed as follows.
ii. It contains an unconditional promise to pay.
iii. Besides an acknowledgement a promissory note is an express promise to pay.
iv. Promissory note must always relate to a definite and certain amount of legal money of the country and not to foreign money.
v. It should not be a bank note or currency note.
vi. No particular from is prescribed for it.
vii. A promissory note is not payable to the bearer on demand.
viii. The person to whom the promise is made must be definite person.


A draft is a cheque drawn by one branch of a bank upon another situated at any other place required to pay a fixed / certain amount of money to a specified person or by his order. A bank draft may either by inland or foreign. Drafts are issued by banders after receiving written and signed applications. The person is required to remit the required amount of money along with its commission. The banker hands over the draft to the depositors and sends a credit advice to the branch upon which the draft is drawn.

Draft are a common media of transferring money from one place to another. They are of great importance for financing trade, specially foreign trade. The draft are also known as demand draft.


The letter of credit is a request made by the issuing bank to its correspondent or agent making the request on demand on any draft on the issuing bank up to the amount mentioned in the letter of credit. A letter of credit remain enforced for a fixed date only. They are issued only to the persons who furnish guarantee or securities or make payment of the full amount there in. The L.C’s are of great significance in international trade. Specially the importers and exporters frequently use them. It saves from the trouble of carrying money from place to place with the risk of loss or theft.

Q.8. Show how the Central Bank of a country controls CREDIT?

The modern economy is a credit economy. Credit is the life-blood of modern business. Accordingly control of credit is essential for stability and orderly growth of an economy. There are two types of controls used by the central banks in modern time for regulating bank advances.

i.Quantitive or General Control
ii.Quantitive or Selective Credit Controls
These are discussed below

i. Quantitive or General Control.
The aim of Quantitive Controls is to regulate the amount of bank advances i.e. to make the banks lend more or lend less. Some of the controls are

a. Manipulation of Bank Rate
The bank rate is the rate at which the central bank of a country is willing discount the first class bills. It is thus the rate of discount of the central bank. If the central bank wants to control credit, it will raise the bank rate. As a result the market rate will go up. Borrowing will consequently be discouraged. Those who hold stocks of commodities with borrowed money will unload their stocks, since as a result of the rise in the interest. They will repay their loans thus the raising of bank rate will lead to a contraction of credit.

b. Open Market Operations
The term open market operations in the wider sense means purchase or sale of any kind of papers in which it deals like government securities or any other trade securities etc. In practice this term is used to identify the purchase and sale of government securities by the central bank. When the central bank sells securities in the open market it receives payments in the form of a cheque on one of the commercial banks. If the purchaser is a bank the cheque is drawn against the purchasing bank. In both cases the result is the same. The cash balance of the bank in question which it keeps with the central bank is to that extent reduced with the reduction of its cash the commercial bank has to reduce its louding. Thus credit contracts.

c. Varying Reserve Ratio
The varying reserve ratio method is comparative a new method of credit control used by central banks in recent times. The minimum balance to be maintained by the member banks with the central banks are fixed by law and the central bank is given statutory power to change these minimum reserves. Variations of reserve requirements affect the liquidity position of the banks and hence their ability to lend. It reduces the excess reserves of member banks for potential credit expansions.

d. Credit Rationing
Credit rationing means restrictions placed by the central bank on demands for accommodation made upon it during times of monetary stringency and declining gold reserves. The credit is rationed by limiting the amount available to each applicant. Further the central bank restrict its discount to bills maturing after short periods.

ii. Quantitive or Selective Controls
In this regard the following methods are used.

a. Varying Margin Requirement
The central bank controls credit by varying margin requirements. While lending money against securities the bank keeps a certain margin. They do not advance money to the full value of the security pledges for the loan. If it is desired to curtail bank advances the central bank may issue directions that a higher margin be kept. The raising of margin requirements is designed to check speculative in the stock market.

b. Regulation of Consumer Credit
A part from credit for trade and industry a great deal of credit in development countries at any time may be for durable consumer goods like houses, motor cars, refrigerator etc on purchase or installment credit system. Central seek to control such credit in several ways. E.g.
by regulating the minimum down payments in specified goods.
by fixing the coverage of selective consumer goods
by regulating the maximum maturities on all installments credits.

c. Direct Action
Direct action implies measures like refusal on the part of the central bank to rediscount for the banks whose credit policy is not in accordance with the wishes of the central bank or whose borrowings are excessive in relation to their capital and reserves.

d. Moral Sausion
The central bank may request and persuade member banks to refrain from increasing their loans for speculative or non-essential activities.

e. Publicity
The method of publicity is used by issuing of weekly statistics, periodical review of the money market conditions, public finances, trade & industry the issue of weekly statements of assets & liabilities in the form of balance sheets.

Broadly speaking the central bank acts as a bankers bank in three capacities.

i. As the Custodian of Cash Reserves
In every country its commercial bank keep a certain percentage of their cash reserves with the central bank. Infact the establishment of central bank makes it possible for the banking system to secure the advantages of centralized cash reserves.

ii. As Lender of the Last Resort
As a lender of the last resort in times of emergencies the central bank gives financial accommodation to commercial banks by rediscounting by bills. The monopoly of note issue and centralization of cash reserves with the central bank increase its capacity of growing credit and thus to rediscount the bills as the lender of last resort.

iii. As a Bank of Central Clearance
The central bank act as a clearing house for member banks. As the central becomes the custodian of cash reserves of commerce was banks it is an easy and logical step for it to act as a settlement bank or clearing house for other banks as the claims of banks against one another are settle by simple transfers from and to other accounts.

By far the most important of all central banks in modern times is that of controlling credit operations of commercial banks i.e. regulating the volume and direction of bank loan. On the level or volume of credit depends largely the level employment and the level of prices in a country.

Maintenance of Exchange Rates
Another important function of a central bank is to keep stable the foreign value of the home currency. A stable exchange rate is necessary to encourage foreign trade and inflow of foreign investment which is so essential for accelerating the pace of economic growth particularly underdeveloped countries.

Custodian of Cash Reserves
It is the central bank which serves as the custodian of a nation’s reserves of gold and foreign exchange. It is the duty to take appropriate measures to safeguard these reserves.