XII Banking Chapter 3 Commercial Banks
Short Question/Answer
Q1) Give five differences between Commercial Bank and
Central Bank?
ANS)
Central
Bank
|
Commercial Bank
|
|
1.
This bank is set up
either under an ordinance of the government. Or under an Act of parliament. 2.
The earning of profit is
not its primary aim. 3. This bank acts as a government bank, agent and advisor. 4. The Central bank cannot have foreign branch. 5. A Central bank is called the leader of money market. |
1. Pakistan present commercial banks are established under the
companies Ordinance 1984. Prior to it they were established under Joint Stock
Companies Act 1913. 2. It is the primary aim to earn maximum profit. 3. This bank does not acts as government bank rather if
facilitates general public. 4. A Commercial bank may have hundreds of foreign branches. 5. A Commercial bank is a member of money market. |
Q2) List the general/common utility services of commercial
bank Describe any one?
General/Common Utility
Services of Commercial Bank
Commercial banks also
perform many public utility functions or services for their clients or
customers. They provide lockers, business information, underwriting services
and many other functions important
public utility services of commercial banks are following.
1.
Provision of Lockers
2.
Provision of Business Information
3.
Underwriting Services
4.
Credit Insurance
5.
Acceptance of bill of
Exchange
6.
24 Hr. Cash Delivery
7.
Foreign Exchange
Provision of Lockers
Commercial banks provide lockers for their customers. They
provide safe custody to the valuables of the customers. This has minimized the
risk of losing valuables like gold diamond and jewellery special documents due
to theft, robbery and spoilage.
Q2) Describe the methods/ tools used in e-banking?
Methods or Tools used in
E-Banking
The methods of tools used in e-banking are following.
1. Credit Cards
In e-banking, the banks issue credit cards to their
customers. These credit cards have a magnetic strip and a magnetic chip. The
credit cards holder can make immediate payment of goods purchased without using
cash. Credit cards are classified into two groups Bank charge cards and
Non-Bank Charge cards.
2. Debit Cards
Debit cards are also considered as a useful product or tool
of e-banking. It is a facility which is provided by commercial banks to their
customers. They do not need to keep cash amount for buying goods from different
outlets.
3. Automated Teller Machine
(ATM)
Automated Teller Machine (ATM) is a useful tool of
e-banking. The customers keeping in view his own convenience can withdraw money
through ATM of his bank and its branches but also from any other bank.
4. On-line Banking
On-line banking is an important method of e-banking. In
on-line banking the customer can deposit and withdraw money through interest.
Q3) describe the primary functions of a commercial bank?
Primary Function of a
Commercial Bank
The functions which are required to establish the basis of
the operations of commercial banks are called Primary Functions. These
functions are central in nature and cover the whole operations of Commercial
Banks. Important primary functions of commercial Bank are following.
1.
Acceptance of deposits
2.
Advancing Loans
Q4) Describe the secondary functions of a commercial Bank?
Secondary Functions of a
Commercial Bank
Commercial Banks perform various secondary functions along
with their basic and primary functions are related to their services to their
customers. Important secondary functions of commercial banks are following.
1.
Agency Functions
2.
Public Utility Services
Q5) How do commercial banks create credit-money?
Commercial Banks and
creation of Credit Money
A commercial bank is an institution which accepts deposits
of money and repays cash to its depositors on demand. The bank borrows money at
a lesser rate of interest and lands borrowers at a higher rate of interest,
therefore bank is considered as a profit making institution. It is desire of
every commercial bank that it should lend all money deposited with it. But it
cannot do it. All commercial bank have to deposit a certain portion of the
total deposits in cash with them in order to meet the cash requirement of the
individual and business concern. Cash reserve is the liquid from asset. It is
to be kept by a bank in vaults and with central bank of the country in order to
meet the demands of their customers. The cash reserves present in a bank for
the payment of cheques is called Till Cash. If the amount of Till Cash becomes
less according to the payment of cheques then this inability of the payment of
cheque makes the bank in the condition of insolvency. Following factors are
responsible for the determination of cash reserves or Till Cash to a required
level for a bank.
Q6) Define commercial Bank?
Commercial Bank
A banking company is one that receives deposits and advance
loans and plays an important role in the creation of credit money
There are two types of commercial banks
1.
Scheduled Bank
2.
Non-Scheduled Bank
Q7)Distinguish, between a scheduled bank and non-scheduled
bank?
Scheduled Bank
|
Non-Scheduled Bank
|
|
1. A bank which is entitled as a recognized ban with the central
bank and satisfy all the conditions mention is SBP Act 1956, clause 37, sub
clause 1 is known as Scheduled bank. 2. Its minimum paid up capital is Rs.10 billion (by 31-12-2013) 3. Scheduled banks work in the interest of depositors to win the
faith of the Central Bank. 4. Since the Central Bank control and guides all the scheduled
banks, therefore their business remains more stable and successful. 5. With permission of Central Bank, scheduled bank can obtain
loans from international institution. |
1. A bank is no entitled as recognized bank with the Central bank
and not satisfy the conditions of SBP Act 195, clause 37, sub clause 1 is
known as Non-Scheduled Bank 2. Its paid-up capital is less then Rs.10 billion. 3.
They have no need to win
the faith of Central Bank. 4.
Non-Scheduled banks have
a possibility of failure in business because of lack of control and proper
guidance. 5. Non-Scheduled Banks are not allowed to obtain funds from
international institution. |
Long Question/Answer
Q1) Define commercial bank. Describe the function of
commercial bank?
Commercial Bank
A banking company is one that receives deposits and advance
loans and plays an important role in the creation of credit money. It also
provides various utility services to its customers. Commercial Banks accepts
deposits and provides them short, medium and long terms loans. The examples of
commercial banks are following,
1.
Habib Bank Limited
2.
Muslim Commercial Bank
3.
National Bank of Pakistan
4.
Allied Bank Limited
5.
United Bank Limited
Functions of Commercial
Bank
There are two functions of commercial bank.
1.
Primary Function
2.
Secondary Function
Primary Function
The functions which are required to establish the basis of
the operations of commercial banks are called Primary Functions. These
functions are central in the nature and cover the whole operations of
Commercial Banks. Important primary functions of commercial bank are following.
1.
Acceptance of deposits
2.
Advancing loans
Acceptance of Deposits
The fundamental primary function of a commercial bank is to
receive demand deposits and to honor cheques drawn upon them. A second
important function is to lend money to local merchants, farmers and
industrialists. Acceptance of deposits is the fundamental primary function.
Banks accepts deposits from those who have surplus money. The commercial bank
provides an opportunity to general public to make good use of their savings by
depositing them in a bank. The commercial bank also motivates people to save
their surplus money. Bank receives deposits from public and pay interest.
Different kinds of commercial banks are following.
a)
Current Account
b)
Fixed Deposit Account
c)
Saving Account
d)
Foreign Current Account
Advancing Loans
The second important primary function of a commercial bank
is to lend money to common people, traders, farmers and industrialists. All the
commercial bank lends money at a rate of higher interest then the interest they
are playing to the depositors. These loans are provided on the basis of some
legal terms and conditions. These loans can be recovered as lump sum or
installments according to the desire of borrowers. Commercial Banks Advancing
loans are following.
b)
By Opening Loan Account
c)
Mortgage
d)
Discounting Bill of
Exchange
e) Cash Credit
Overdraft
Q2 How do Commercial Banks create credit? Explain.
Commercial Banks and Creation of Credit Money
All the
deposits of money which commercial banks obtain from different sources and use
them for productive and non-productive purposes to corm their profit are called
as Bank Funds.
Sources of Bank Funds
The primary
functions of commercial banks are receiving deposits and advancing the loans.
All the other functions are well connected with these primary functions. Banks
collect funds from different sources to make their profitable use. The sources
of bond funds are the following.
(1) Bank’s Own Funds:
The funds
which are created by commercial banks from their own resources are called as
Bank’s Own Funds. Bank’s own funds can be classified into the following groups.
i.
Paid–Up or Share Capital
The capital which is collected at
the time of formation of a commercial bank by selling its share to the general
public is called Bank’s Own Capital. It is also known as paid-up
or share capital. The people who purchase the share of the bank are known as
shareholders of the bank. It is the maximum amount of capital which is mentioned
in the capital clause of the Memorandum of Association of the company. It is
further divided into paid up capital and Subscribed capital.
ii.
Reserve Fund:
At the time of declaration of dividend,
a certain portion of the profit is saved with a view to meet any deficiency in
the future by commercial banks which are called Reserve Funds. This accumulated
reserve fund becomes a huge amount and a good source of further investment.
This reserve fund belongs to the shareholders and at the time of liquidation,
the shareholders are entitled to this reserve along with the capital.
iii.
Profit:
Profit is
another source of the bank’s own funds. The banks invest their deposits and earn
profit. Profit signifies the credit balance of the profit and loss account
which has not been distributed. The accumulated profits over the year increase
the working capital of the bank and strengthen its financial position.
(2) Borrowed Funds:
The funds
which are obtained from the loans and grants from other banks and financial
institutions at the time of need are called Borrowed Funds. The sources of
Borrowed Funds are following.
i.
Central Bank:
Commercial banks in times of emergency borrow loans from the central bank of the country. The central bank extends help as and when financial help is required
by commercial banks.
ii.
Deposits:
Public deposits are a powerful
source of funds of commercial banks. The banks collect these deposits from
current accounts, saving accounts and Term deposit accounts.
iii.
Other Sources:
Commercial banks also raise their
funds by, issuing bonds, debentures, and cash certificates. This process of obtaining the loans is not
common but by making comprehensive policies the banks collect the funds from
their sources.
Q3) Classify and explain the
functions of Commercial Bank?
Functions of a Commercial
Bank
The two functions of a commercial bank are the following:
1.
Primary Function
2.
Secondary Function
1.
Primary
Function
Important Primary Function of a commercial Bank is following:
i.
Advancing Loans
ii.
Receiving deposits
i.
Advancing Loans
Types of advancing Loans are following:
a)
Call loans
b)
Loans
c)
Cash loans
d)
Overdrafts
e)
Discounting B/E
ii.
Receiving Deposits
Types of Receiving Deposits are the following:
a)
Fixed Deposit
b)
Saving accounts
c)
Current account
2.
Secondary
Functions
Important secondary
functions are the following:
i.
Public Services
ii.
Agency Services
i.
Public Services
a)
Lockers
b)
Foreign exchange
c)
Financial advice
d)
Underwriting
e)
Accepting B/E
f)
Trade information
g)
Status inquiry
h)
Foreign trade
i)
Credit creation
j)
Payment of salaries
k)
Transfer of money
ii.
Agency Services
a)
Receiving cheques, bills,
b)
Receiving interest, premium
c)
Buying and selling shares