Product and services of cb

© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.Irwin/McGraw-Hill

Bangladesh Bank Training Academy, BBTA

Products and Services of Commercial Banks

Amatur Rab, DD


Functions of Commercial Banks

Primary function functions :A) Accepting of DepositB) Lending of Money - Bank product definition: It is every product or service produced by bank no matter if it is a debtor or a creditor and no matter if that is done in its own name and account or for somebody else’s name and account;

- Traditional bank task is to collect money and to invest money in different parts of the economy;

- General opinion: Bank has only mediator role in collecting money and extending credits;


Modern Banking Banks now a days , depending on customer baseor

particular groups of customers , Locations Different systems of Banking services …

Wholesale Banking ( Corporate Banking). Banking for Large entities , corporate, Governments etc. Money market, Foreign Trade,

Retail Banking . Mass market banking focused mainly on individual customers.

Virtual Banking ( Large banks operate through a large numbers of

branches, direct relationship between banker and customers). Offshore Banking (EPZ). Specialized zones, Low or no Taxation

5-2


Services of Banks in modern times

Teller System . Deposit of money, encashment of cheques, purchase of drafts, pay order

Core Banking. Central database for banking transactions are done centrally, online . Single

software is used for all the branches and is operated on WAN infrastructure. MICR, ATM, POS, BEFTN

E- Banking . Transactions via internet, Tele Banking, Remote Banking

Online Banking. Any branch banking

Others

Phone Banking, Internet Banking, Mobile Banking Credit Card, Debit Card, Premier Banking

5-3


Primary Functions Accepting Deposits .Deposit is the life blood of a bank. Mobilization of deposit is made by the banks by

opening different deposit accounts and introducing new and innovative saving schemes with attractive interest/profit

Current Deposit (CD) or Demand Deposit Savings Deposit Short Notice Deposit (SND) Fixed Deposit or Time Deposits Schemes and Recurring Deposits ( DPS, CSS, LDS, MDS, Double Benefit, monthly Benefit, Laksma puron, etc)

5-4


Primary Functions

Lending Money : Different forms of lending are

( Secured or unsecured) : Loans, Overdrafts, Cash Credit Bill purchase and discounting Lease Financing SME Financing Factoring Services Bank Guarantee International Trade Finance ( Import & Export) Call market


Secondary Functions :

In addition to the basic functions , perform a large number of other functions to provide 02 types services 1. Agency Services2. General Utility Services

Category of Functions :General BankingCredit / AdvanceInternational Trade and Foreign Exchange Business


Agency Services

Banks act agent of their customers Collection of Cheques, Drafts, BillsExecution of Standing InstructionsCollections of Interest, Dividends of Share and securities, IPO collections , Sock related TasksRemittance of Funds - DD, MT, TTReceiving Utility Bills ( gas, Electricity, T&T, Water, Internet )

Providing Income Tax servicesForeign exchange businessActing as executors and trustee


General Utility Services

Locker Services Issues of L/C, Guarantee and TC, FDD Arranging Corresponding relationship with

foreign counterparts for trade realted services and information

Consultancy, suitable investment advice Student file for study abroad Travel related services etc.


General Banking Services

Deposit Department- Account Opening, Cheque Book issue, Stop Payment, providing account statement, closing of Account, Balance Confirmation, transfer of Cheques & Vouchers, Collection of Cheques and instruments .

Cash Department- All cash receipts through deposit pay in slip and payment by cheques

Clearing Dept. - Clearing Department receives all cheques , drafts, Pay order etc for collection through Clearing house ( Bangladesh Automated Clearing House, BACH)

Bills Dept. - Collect cheques , drafts, pay order beyond the jurisdiction of Clearing House


General Banking

Remittance Dept. - Local Remittance are handled by Remittance dept. Demand Draft(DD), pay Order, Pay Slip, Telegraphic Transfer (TT), Mail Transfer (MT) are issued by the remittance Department .

Treasury Dept. - Centralized in Bank’s Head Office operate as a very effective manner to efficient FUND management taking into consideration of all market risks as well as earning profit .

Functions- Money Market, foreign Exchange, Asset Liability Management, Fixed Income

Accounts Dept.- All works of Bank branch are compiled by the accounts dept. All vouchers with supplementary sheet/ summary position are checked and kept by this dept. Accounts prepare salary sheet, PF position, Bonus , Increment, deductions etc.


CREDIT ( Loan and Advance)Credit Products and Services Project Loans, Agriculture and agrobased projects Cash Credit ( Hypo and Pledge)Secured Over Draft {SOD(FO)}Home Loans/ House repair and renovation SME loansLease FinanceGuaranteeFactoringConsumer FinancingPersonal LoansReal Estate and Civil ConstructionsBills Purchase and Discounting ( Negotiation)Over Drafts (OD)


International Trade ( Foreign Trade)

Import Dept.- L/C opening, Post Import Financing LTR- Loan against Trust Receipt, LIM- Loan against Imported Merchandise

Export Dept. - Pre Shipment Financing ( BTB L/C opening , Packing Credit(PC), CC(Export) etc

Post Export Financing – Foreign Documentary Bill Purchase (FDBP), Inland Documentary Bill Purchase ( IDBP)


Pre Import Finance

Opening /establishment of Letter of Credits / Documentary Credit : A Bank’s ( issuing Bank) written definite and irrevocable undertaking to the beneficiary ( Exporter) promising to pay (honor ) certain sum of money against complied presentation of specified documents within a stipulated period to the issuing Bank

Honor means – to pay by the issuing bank at sight if the L/C is available at sight,

- to incur a deferred payment undertaking and pay at maturity if the credit (L/C) is available by deferred payment

- to accept a Draft ( Bill of Exchange) drawn by the beneficiary and pay at maturity if the Credit is available by acceptance ( BTB L/C)

Negotiation means the giving of value to the beneficiary by the nominating bank ( authorized to negotiate) on or before payment by the issuing bank against complied presentation of documents


Post Import- Loan against Imported Merchandise (LIM)

When importer (Applicant) is not in a position to release the imported goods from own sources , LIM facilities are allowed as per request of the party for meeting immediate requirements of clearing goods from the port. The goods for LIM under lock and key are kept in the warehouse as pledge under effective and legal control of Bank. It is a short term credit allowed maximum for 45 days.

Delivery of LIM goods are made against Delivery Challan after proportionate payment by the party as per Delivery Order.


Post Import-Loan against Trust Receipt (LTR)

It is a usual practice that a bank allows advance LTR facility to the proven customer with highly satisfactory track records obtaining Letter of Trust Receipt from the Customer.

Short term credit usually allowed for 30 days to 120 days as per arrangement with the bank.

Goods are kept under the control of the Importer


Export FinancingPre Shipment Credit

Pre –shipment credit is required by the exporter to procure raw materials,process,manufacture , pack and for shipment for the finished goods to the importer abroad.

Pre – shipment credit is extended in the form of CC(Hypothecation), CC(Pledge)/Packing credit(PC) and opening Back to Back L/C (BTB LC)

These types of credit facilities are extended to the regular exporters for a particular period against Export Letter of Credit (Master L/C) from a first class foreign bank.

The genuineness of the export L/C must be ensured and terms and conditions of the L/C must be acceptable to the bank and should not contain any clause as may jeopardize bank’s /borrower’s interest

Value, quality , quantity etc. of the raw materials /goods procured under Back to back L/C must be in conformity with the Export L/C.


BTB L/C (Master L/C). The export L/C is kept under lien of the bank and raw

materials /goods procured are hypothecated or pledged , as the case may be , under supervision of the bank to ensure timely shipment as per terms of Export L/C.

Such advances are adjustable within advances are adjustable within the stipulated time as per terms of sanction of the bank.

Export Credit Guarantee from Sadharan Bima Corporation is obtained covering possible perils for pre-shipment and post-shipment period.

To minimize risk, collateral security , sometimes, also is obtained by the bank where necessary


Electronic Banking Services

Obtain cash. Check account balances. Transfer funds. Point-of-sale payments. Direct deposit of paychecks

and other regular income. Preauthorized payments. Web “cyberbanking.”

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Cyberbanking

Banking through the telephone, personal computer, and on-line services.

“Cyber” branches to do business on the Web.

Access 24 hours a day, 7 days a week.

Privacy and security are concerns. 5-6


Automated Teller Machines A computer terminal that allows customers to

conduct banking transactions. Debit card or cash card activates transactions. Linked to a bank account. Requires a PIN. Liability if debit card is lost or stolen.

To reduce ATM fees you can... Compare ATM fees before opening an account. Use your own bank’s ATM when possible. Withdraw larger cash amounts as needed. Use personal checks, traveler’s checks, credit

cards, and pre-paid cash cards when traveling.5-7


Plastic Payments Point-of-sale transactions.

Online card requires a PIN to authorize, and includes instant transfer from your account.

Offline card transactions are processed like credit card charges.

Stored-value cards. For long distance, tolls, library fees.

Smart cards have a microchip for prepaid goods and services and for data, such as your medical history.

Electronic cash, ex. www.cybercash.com 5-8


Opportunity Costs of Financial Services

Higher rate of return may be obtained at the cost of lower liquidity.

Convenience of a 24-hour ATM must be weighed against service fees.

The “no fee” checking account that requires a $500 non-interest-bearing minimum balance means lost interest of nearly $400 at 6 percent compounded over 10 years.

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Changing Interest Rates and Decisions Related to Financial ServicesThe prime rate is what banks charge large corporations.

See www.federalreserve.gov. When interest rates are rising...

Use long-term loans to take advantage of current low rates.

Select short-term savings instruments to take advantage of higher rates when they mature.

When interest rates are falling... If you refinance loans, use short-term loans. Select long-term savings instruments to

“lock in” earnings at current high rates. 5-10


Types of Financial Institutions

Deposit type institutions Commercial banks are corporations that

offer a full range of services including checking, savings and lending.

Savings and loan associations specialize in savings accounts and mortgage loans.

Mutual savings banks are like traditional savings and loan associations, but they are owned by their depositors.

Credit unions are user-owned and nonprofit.5-11


Types of Financial Institutions Non-deposit type institutions.

Life insurance companies offer insurance plus investment and retirement planning.

Investment companies offer a money market fund. You can write limited checks on your account.

Finance companies make personal loans. Mortgage companies lend for home purchase. Pawnshops make loans on possessions. Check-cashing outlets change 2-3%. Title and payday loan companies - high interest. Cyberbanking via phone and on-line, such as

bankamerica.com or wellsfargo.com.

(continued)

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Comparing Financial Institutions Basic concerns of a financial services customer.

Where can I get the best return on my savings?

How can I minimize the cost of checking and payment services?

Will I be able to borrow money when I need it?

Cost of convenience and personal service. Consider safety and interest rates.

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Types of Savings Plans

Regular savings accounts. Club accounts. Certificates of deposit.

Several types to chose from. Managing by looking at earnings and costs.

Interest earning checking accounts. Money market accounts and funds.

Money market accounts are covered by the FDIC, but money market funds are not.

U.S. savings bonds (see www.savingsbonds.gov).5-14


Evaluating Savings Plans Rate of return or yield.

Percentage increase in value due to interest. Compounding - interest on interest. Inflation - compare return with inflation rate. Liquidity. Safety via FDIC and NCUA.

FDIC insures up to $100,000 per person per financial institution (see www.fdic.gov).

Restrictions and fees. Tax considerations. 5-15


After Tax Rate of Return

(1 - tax rate) x yield on savings (1 - .28) x .06 .72 x .06 4.32% So even if you are earning 6%, after

you pay taxes on the interest you earn you are actually earning only 4.32% after you pay taxes on the interest.

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What is “Truth in Savings?”

Requires Disclosure of... Fees on deposit accounts. The interest rate. The annual percentage rate.

Interest must be compounded on the full principal amount in the account each day.

Sets formulas for computing the APY. Establishes rules for advertising accounts.

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Selecting Payment Methods Ninety percent of business transactions are

conducted by check, making it a necessity for most people.

Types of checking accounts include... Regular.

Usually have a monthly service charge. Activity account.

Charge a fee for each check written. Package account - a variety of services for a

set monthly fee. 5-18


Selecting Payment Methods (continued)

Interest-earning .Usually require a minimum balance.Sometimes called NOW accounts.Share draft - interest earning checking

account in a credit union. Evaluating checking accounts.

Restrictions, such as a minimum balance. Fees, which are increasing, and charges. Interest. Special services, such as home banking. Overdraft protection.

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Other Payment Methods Certified check.

Personal check with guaranteed payment. Cashier’s check.

Check of a financial institution you get by paying the face amount plus a fee.

Money order. Purchase at financial institution, post office, store.

Traveler’s check. Sign each check twice. Electronic traveler’s checks - prepaid travel card

with ability to get local currency at an ATM. 5-20