Date Module Contents

Lending Operations
i. Categories of Credit Facilities
Commercial Banking -Fund Based Facilities
05-June-2024 -Non-Fund Based Facilities
ii. Credit Risk
iii. Key Components of Credit Analysis
-Purpose, Amount, Repayment, Term, Security (PARTS)
-5 C's of Credit Analysis
iv. Types of Collaterals

Fund Based Credit

Fund Based Credit is the one where the Bank provides the Fund
directly to the Borrower without any third party involvement. It usually
involves an immediate flow of funds to the borrower’s account. For
e.g. Loans, ODs (Over Drafts), CCs (Cash Credit), PAD (Payment
Against Documents), Consortium loans, etc.

Fund-Based Credit comes with multiple advantages. Let’s take a look

at them.

1. The fund-based Credit offers immediate funding to the

borrower.
2. The fund-based Credit offers actual funding for business
operations.

The different types of fund based credits are as follows

1. Loan
A loan is a type of Fund-Based & Non Funded Based, Credit where the
Borrower has to repay the Credit within the pre-agreed time & interest.
Loans are given to the business to meet their various running
expenses, such as production, distribution, expansion etc. A huge
amount of loan can be given to the companies depending on their
requirements, like BMR, Green field/Brown field projects.

Let’s take a look at different types of loans.

A) Demand Loans & Term Loans

Demand loan:

Demand Loans, sometimes known as working capital loans, are

offered by the lender to the Borrower for the short-term.
As the name suggests, the Borrower has to repay the loan on the
demand of the lender. There is no fixed tenure for the repayment. The
Borrower can repay the loan in advance without paying any
prepayment charges. These loans are generally offered against
tangible assets or similar securities.

Term Loan:
These loans come with a predefined repayment schedule and
tenure. As the tenure is fixed, the Borrower will have to pay some pre-
payment charges in early payments. They are generally offered for
the large funding requirements.

B) Unsecured Loan & Secured Loan

Unsecured Loan
These loans are offered to the Borrower without any collateral but
generally carry a high interest rate. This means, if the Borrower
defaults on the repayment of loan, there is no way for the lenders to
acquire any asset of the Borrower whether it is tangible or non-
tangible. These loans include Personal loans and student loans as
well.

Secured Loan
The lenders offer these loans against any tangible or non-tangible
asset like home, piece of land, vehicle etc. If the Borrower defaults on
the payment, his/her assets can be acquired by the lender. Loans
such as home loans and loans against property are a few types of
secured loans.

2. Cash Credit
Cash credit is provided to the business owners to carry out their
regular business expenses. In Cash credit, the borrower is given
access to a current account from which they can withdraw money
within a predefined limit for an agreed amount of time. The interest is
charged on the daily closing balance of the account rather than the
borrowing limit.

3. OverDraft
This Credit Facility is offered to Current Account holders in a
particular bank, to borrow the fund more than their existing balance
for a specific period. These credits are secured by the physical
assets, pledge of FDs, Securities or Mortgage of some immovable
property in some cases.

4. Credit Card
Under this facility, a Credit Cardholder can spend a fixed amount of
money using the card offered to him/her by the Bank. The user has to
pay the credits used within the stipulated time regularly. Any failure
to pay the outstanding bills on time attracts a penalty from the Bank.

5. Export Finance
Export finance is the financing facility which is provided by the banks
to fund exporters to meet their production and export needs. The
different type of export finance are

A) Packing Credit Advances

These types of credits are offered to exporters to meet the expenses

for manufacturing and packing the goods for export as per the
buyer’s need. The credit is offered against hypothecation of goods
stock, and any other assets of the Borrower.

B) Post Shipment Finance

These type of credits are offered to the exporters once they export
their product to the buyers.These credits are offered to meet the
interim cash requirement of the exporter. It is offered based on the
document and invoices suggesting that the export is made.

6. Hire Purchase Finance

This type of finance is offered to the buyer when he/she is looking to
buy some expensive product. Under this Credit, it is agreed that the
buyer will pay some down payment initially and the rest of the
amount will be paid in installments.
7. Bill Finance
In bill finance, a Bank draws a bill of exchange from another bank to
transfer the funds due to Credit offered to the Borrower.

The different types of bill finance are

A) Bill Discounted

This Credit allows the seller to borrow money from Bank in advance
against the payment that will be received by the seller in the future.
The Bank deducts some charges as the fees from the payment, once
the buyer deposits it.

B) Bill Purchased

This Credit allows the seller to borrow funding based on a sales

document not drawn under the Letter of Credit. The lending bank
submits these documents to the buyer’s bank for the payments.

8. Leasing Finance
Under this credit facility, the owner of an asset gives the right to use
that asset to the Borrower against the payment of a specific amount.
It is one of the most important forms of medium and long-term
finance. As the owner leases his/her property, he/she is known as the
lessor, and the one who takes the property on lease is called the
lessee.

9. Retail Credit
The banks offer Credit or loan to the Borrower to purchase certain
moveable or immovable properties, durables, vehicles or similar
products. This Credit is offered to the Borrower based on his/her
credit history. This facility is offered on Business to Business
transactions as well as Business to Customer transactions.
10. Invoice Discounting

The Invoice Discounting facility caters to the financial needs of suppliers/

vendors of large manufacturing and service industries. This product will be
offered to vendors/ suppliers that supply goods to MNCs and/or large
corporate entities. A company’s ‘payables’ will be used to leverage credit to
maximize the efficiency of working capital and enhance its relationships with
its vendors/ suppliers. The company will get extended payment terms as the
suppliers receive advance payments against delivery of goods/ services.
Emphasis must be on the buyers of the ‘customer’ at the time of offering the
facility as the bank’s prime exposure will be on discounted invoices of these
entities

Non-Fund Based Credit

On the Contrary, Non-Fund Based Credit is where the Fund is not
transferred directly to the borrower. It is offered to a third-party as
agreed upon by the borrower, on behalf of the Borrower.

The bank usually acts as a guarantee provider to the seller on the

behalf of the buyer. If the payment is not received by the seller within
pre-agreed time, The bank pays the amount to the seller. For e.g.
Bank Guarantee, Buyer Credit, Letter of Credit, Supplier Credit.

Following are the advantages of Non-Fund Based Credits:

1. It offers financial security to the seller if the buyer defaults due to
any reason.
2. It offers Business expansion opportunities to the exporters.
The different types of non-fund based credit are

1. Letter Of Credit
A letter of credit is an assurance provided by the Bank to the seller on
behalf of the buyer that the seller will receive the buyer’s payment at
regular intervals. It also states that if the buyer fails to pay the seller
for any reason, the Bank will be responsible for the remaining or full
payment.

Letter of Credit is offered based on the collateral of cash or certain

securities. With the rising international trading, Letter of Credit is
becoming a crucial tool to manage the payments between parties
that hardly know each other and live in different countries with
different laws. The bank charges a certain percentage from the
buyer as the fees for offering the Letter of Security.

The Letter of Credit can be divided into the following parts:

A) Sight Credit

This letter of Credit is quicker than others. Here the Borrower can take
the lender’s funds by showing a bill of exchange and sight letter of
Credit.

B) Revocable & Irrevocable Credit

Revocable Letter of Credits is the one that can be revoked or

canceled by the issuing bank without prior notice to any party.

Irrevocable Letter of Credit cannot be revoked or canceled by the

issuing Bank. So once the LOC is generated, Bank will have to honor
the letter.

C) Confirmed Credit

In this type of Credit, a bank other than the issuing Bank confirms the
Letter of Credit by adding its confirmation. Only Irrevocable Letter of
Credit is eligible for confirmation.

D) Back-to-Back Credit
Under this type of Credit, the exporter requests the Bank to offer an LC
to his/her local supplier. The request is based on the export LC
received by the exporter from an overseas buyer. Here, an LC is
issued based on an export LC and hence the name, Back-to-Back
Credit.

The advantages of a letter of credit to the buyer is as follows

1. Allows the buyer to trade with the parties from any corner of the
world
2. The buyer can edit the terms and conditions that fit him/her
after consulting the seller.
3. It acts as a credit certificate for the buyer, and he/she can
perform multiple trades as a major financial institution like Bank
backs him/her.
4. Letter of Credit offers better Cash flow to the buyer.

The advantages Of a Letter Of Credit To seller is as follows

1. The seller receives the money on fulfilling the terms mentioned In

the Letter of Credit.
2. There is no risk of losing money for the seller if the buyer fails to
pay the money. Seller gets his/her dues from the Bank that has
issued the Letter of Credit.
3. The letter of Credit is easy to quick to avail based on good credit.
4. If there is a dispute in trading, the seller can withdraw funds from
the Bank even when the case is pending.
2. Bank Guarantee
Under this type of Credit, Bank offers assurance that under any
circumstances, the Guarantee issuing Bank will fulfill any financial
losses incurred by the protected party as mentioned in the Contract.

Let’s take a look at different guarantees

− Bid Bond

− Advance Payment Guarantee

− Performance Guarantee

− Retention Bond

− Payment Guarantee

− Shipping Guarantee

A) Financial Guarantee

In this type of Guarantee, the Guarantor takes responsibility for the

Borrower. This means, if the Borrower fails to repay the debt,
Guarantor will be liable to pay the unpaid amount.

B) Performance Guarantee
The Guarantor issued a security bond that assures the lender that
the Contractor will complete the work satisfactorily in the stipulated
time.

C) Deferred Payment Guarantee

This type of Guarantee is usually given on deferred or postponed

payments. The banks generally offer DPG on the purchase of certain
machinery and goods.

3. Letters Of Comfort for Availing Buyers Credit

Letter of Comfort can be understood as the Guarantee offered by the
Bank of Importer or buyer. The Importer can use this Letter of Comfort
to avail Buyer’s Credit from the Overseas banks. The Importer or
Buyer’s Bank charges certain fees for offering the Letter of Comfort.

4. Derivative Products
Derivatives are a type of financial security or financial contracts that
are backed by some underlying securities. These underlying
securities can be anything, ranging from currencies, bonds,
commodities to stocks.

Financial derivatives are financial instruments whose value is derived from the value of an
underlying asset, index, or rate. Here are a few common examples of financial derivatives:

1. Futures Contracts:
o Definition: Agreements to buy or sell an asset at a predetermined price at a
specified time in the future.
o Example: A wheat farmer and a bread manufacturer enter into a futures contract
where the farmer agrees to sell and the manufacturer agrees to buy 1000 bushels
of wheat at $5 per bushel in six months.
2. Options Contracts:
o Definition: Contracts that give the holder the right, but not the obligation, to buy
or sell an asset at a predetermined price before or at the expiration date.
o Types:
▪ Call Option: Right to buy the underlying asset.
▪ Put Option: Right to sell the underlying asset.
 oExample: An investor buys a call option for Company ABC’s stock with a strike
price of $50, expiring in three months. If the stock price rises to $60, the investor
can buy at $50 and potentially sell at $60.
3. Swaps:
o Definition: Agreements between two parties to exchange cash flows or other
financial instruments over a set period.
o Types:
▪ Interest Rate Swaps: Exchange of interest rate cash flows, typically a
fixed rate for a floating rate.
▪ Currency Swaps: Exchange of principal and interest in different
currencies.
o Example: Two companies, one in the U.S. and one in Europe, enter a currency
swap where they exchange $1 million for €0.9 million and agree to exchange
interest payments over five years.
o Example:An American company may be able to borrow in the United States at a
rate of 6%, but requires a loan in rand for an investment in South Africa, where
the relevant borrowing rate is 9%. At the same time, a South African company
wishes to finance a project in the United States, where its direct borrowing rate is
11%, compared to a borrowing rate of 8% in South Africa.

Each party can benefit from the other's interest rate through a fixed-for-
fixed currency swap. In this case, the American company can borrow U.S. dollars
for 6%, and then it can lend the funds to the South African company at 6%. The
South African company can borrow South African rand at 8%, then lend the
funds to the U.S. company for the same amount.

4. Forward Contracts:
o Definition: Customized contracts between two parties to buy or sell an asset at a
specified future date for a price agreed upon today.
o Example: A multinational corporation enters into a forward contract to buy €1
million in six months at an exchange rate of $1.2/€ to hedge against potential
currency fluctuations.
5. Credit Default Swaps (CDS):
o Definition: Financial derivatives that function like insurance policies for debt.
The buyer of a CDS makes periodic payments to the seller in exchange for
compensation if a specified credit event (e.g., default) occurs.
o Example: An investor buys a CDS on Company XYZ’s bonds. If Company XYZ
defaults, the CDS seller pays the investor the bond's face value.
6. Commodity Derivatives:
o Definition: Contracts based on underlying commodities like oil, gold, or
agricultural products.
o Example: An airline company enters into oil futures contracts to lock in fuel
prices and protect against potential price increases in the future.

These financial derivatives are used for various purposes, including hedging against risk,
speculating on price movements, and arbitrage opportunities.
 5. Buyer Credit
It is a short-term funding option, offered to the Buyers or Importers by
the Bank to manage their import Business. Using Buyer’s Credit, the
Importers can avail loans from foreign financial institutions which
offer Credit at comparatively lower rates. Buyer’s Credit can be
availed for importing almost all types of capital and non-capital
goods.

6. Supplier Credit
This type of Credit is used to support the importers financially in
Pakistan. Here any overseas Financial Institute or Supplier offers the
Credit to the Importer on the Libor rates, which are comparatively
low. Such Credit is backed by the Letter of Credit offered to the
Importer via Importer’s Bank.

The "5 Cs of Credit" are key factors that lenders evaluate to determine the
creditworthiness of a borrower. These factors help assess the risk involved in lending
money. The 5 Cs of Credit are:

1. Character: This refers to the borrower's reputation and track record for repaying debts.
Lenders often look at credit history, references, and the borrower’s experience and
reliability in managing debt.

2. Capacity: This assesses the borrower's ability to repay the loan by examining income,
employment history, and current debts. Lenders look at debt-to-income ratios to ensure
the borrower has sufficient income to meet debt obligations.
3. Capital: This factor considers the borrower's net worth or the value of their assets. It
includes savings, investments, and other assets that could be used to repay the loan if
income is insufficient.

4. Collateral: Collateral is an asset that the borrower pledges as security for the loan. It
gives the lender assurance that if the borrower defaults, the lender can recover the loan
amount by selling the collateral.

5. Conditions: This includes the terms of the loan and the overall economic environment.
Lenders evaluate how external factors, such as the state of the economy, industry trends,
and regulations, might affect the borrower’s ability to repay the loan.

Key Elements of Credit Risk Analysis:

Examples

 For Cash Finance in Account – CF

 Purpose:

 Account #

 Mark-up: Existing:

 Proposed:

 Clean up (adjustment):

 New / Renewal:

Examples

 For a _____ year term loan (Demand Finance) – DF

 Purpose:

 Mark-up: Existing:

 Proposed:

 Commitment Fee:

 Grace Period:

 Availability Period:

 Repayment Schedule:

 Prepayment: Allowed / Not Allowed

 Partial Disbursement: Allowed / Not Allowed

 Final Maturity:
  New / Renewal

Quick Reference to Income and Balance Sheet

 Liquidity Ratios
o Current Ratio and Gearing Ratio
 Leverage Ratios
o Debt to equity ratio
o Interest Coverage ratio
 Efficiency Ratios
o Inventory Turnover Ratio
o Accounts receivable Ratio
 Cash Cycle
o Days Inventory + Days receivable - Days payable

Types of Collateral:
 Current Assets (Stocks & Receivables)
 Margin

 Nature of Lien / Charge and ranking

 Amount of Total Charge and Lender’s share (in case of joint charges)

 Other conditions, if any

 Fixed Assets (Land, Building and/or Plant & Machinery)

 Description of Fixed Assets
  Location of Fixed Assets

 Charge and its ranking / EMP or Registered Mortgage (If registered mortgage, then
provide details either full or token and what is the percentage / amount in case of token
mortgage)

 Insurance (Amount and Risk Covered)

 Valuator’s Name

 Valuation Date

 Market Value

 Forced Sale Value with discount factor

Use of Collateral for securitization

Hypothecation over
 Current Assets, Fixed Assets, Specific Assets, Intangibles
Mortgages
 Equitable Mortgage
 Token Registered Mortgage
 Full Registered Mortgage
  Constructive Mortgage
 Legal opinion pre and post pertaining to the property documents
specially
Pledge
 Stocks and Cash Instruments
Lien and Charge
 Liquid Assets

Difference in Attributes for various Modes of Securitization

Mode of Security Ownership of Possession Control Use

Asset
Lien Borrower Lender Lender None
Charge Borrower Borrower Lender Borrower
Hypothecation Borrower Borrower Lender Borrower
Pledge Borrower Lender Lender None
Mortgage Borrower Borrower Lender Borrower
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In international traded goods shipped

destined for a country other than their
country of origin. Barter System Trade
Exchange of Values:
• Tangible
• Intangible
• Monetary

The goods that is sold to the global market is

an export, and goods that is bought from the
global market is an import.

• Variety of products
• Job creation

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International trade is the exchange of

products, services, & money transversely
Covering all the national borders; fundamentally trade
Covering all the activities
commercial involved in the
Covering all the
activities
between countries.
activities physical
involved in the
related to the transfer of
payment for
ordering of goods including
the goods.
goods. official control.

Origin WH Customs Customs Destination WH

Bank Seller Buyer Bank

POL POD
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Act of GOD
Buyer take or other wild
possession of issues like
Buyer can’t good prior Incomplete / Political risk volatile
pay
(insolvency)
payment
(credit risk)
incorrect
documents
(regime
change)
Exchange
rate Buyers & Sellers have lots of
CONCERNS / ISSUES
to address
Buyer rejects Change in Government War, Piracy,
goods rules interference Turmoil, Civil
(quality) (Regulatory to prevent unrest
risk) transaction

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Product Transport
•Sampling •Mode (Sea, Air, Land)
•Quality (Certificates…) •Contract of Carriage
Sales Contract (CISG) Payment
•INCOTERMS-2020 •L/C (UCP-600, ISBP)
(Risks / Costs / Delivery) •DA / DP (URC-522)
Price & Negotiation •Open Account (SBP)
Pricing •Advance Payment
(SBP)
•Duty & Taxes rate
•Exemption (if any)
Risk Management
•Insurance

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By UNCITRAL is the United Nations Commission on International Trade

• Contract of International Sales of Goods – CISG (UN)
Law. The U.N.
• Uniform Commercial Code – UCC (US, legal system based on common • To remove obstacles to the flow of trade drafted several uniform rules
law, e.g. the United States, contracts of a private nature, such as sales such as:
• International commercial arbitration and conciliation (UNCITRAL Rules of
or distribution contracts, are not registered in the commercial Arbitration and Conciliation); and
records, except in the case of some states.) • International sale of goods (U.N. Convention on Contracts for the International
Sale of Goods, 1980).
• Federal Law

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• Pact or Agreement • Often establishes detailed • SPHERE OF APPLICATION AND GENERAL • Headings
terms and conditions PROVISIONS • Names of the Parties
• Written or Oral • Delivery, product, obligations, • Sphere of Application (Articles 1-6) • Representation
• 2 or more parties agree to rights, parties, … • Definitions
• General Provisions (Article 7-13)
its terms and conditions. • Not always documented on • Terms
paper and signed • FORMATION OF THE CONTRACT • Terms of Payment
• It defines rights and • Often PO, Invoice serves as • Articles 14-24 • Penalties and Indemnity
obligations of the parties contract • SALES OF GOODS • Applicable Jurisdiction
• Purpose is to regulate • Some times even email • General Provisions (Articles 25-29)
communication with details • Arbitration
business relations becomes itself or part of the • Obligations of the Seller (Articles 30-52) • Confidentiality
contract. • Obligations of the Buyer (Articles 53-65) Amendments to the Contract
• Generally, for specific • Highly experienced business
•
period people often does that and • Passing of Risk (Articles 66-70) • Force Majeure
don’t go into detailed contract • Provisions Common to the obligations of • Other Issues
instead use references.
the Seller and of the Buyer (Articles 71-101)
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• UCP 600 [Uniform Customs and Practice for L/C]

• URC 522 [Uniform Rules for Documentary Collections]
• URR 725 [Uniform Rules for Bank-to-Bank Reimbursement under L/C]
• URDG [Uniform Rules for Demand Guarantees]
• DOCDEX [Rules for Dispute Resolution]

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EXW
FCA
FAS

Sea and Inland Waterway

Any Mode of Transport
International Rules for the
Interpretation of Trade Terms CPT
INCOTERMS is a registered trademark of ICC
FOB
ICC holds all copyright and other intellectual property rights in this work
CIP
CFR
DAP
CIF
DPU
…… rules enter into force on So called DDP So called
1st January 2020 “Multimodal INCOTERMS” “Maritime INCOTERMS”

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Seller’s Risk & Costs DDP

Seller’s Risk & Costs DAP Buyer’s Risk & Costs

Seller’s Risk & Costs DPU Buyer’s Risk & Costs

Seller’s Cost
CPT, CIP
Buyer’s Cost Simple/
Seller’s Risk Buyer’s Risk ‘E’ TERM repetitive ‘C’ TERMS
‘F’ TERMS Freight Freight ‘D’ TERMS
Seller’s Cost
CFR, CIF
Buyer’s Cost
FA S point-to-
Seller’s Risk Buyer’s Risk
FOB
CFR
Collect Prepaid
point
Seller’s Risk & Costs Buyer’s Risk & Costs
FOB
CIF shipments
Seller’s Risk & Costs FAS Buyer’s Risk & Costs

Seller’s Risk & Costs FCA Buyer’s Risk & Costs

EXW Buyer’s Risk & Costs

Origin WH Customs Customs Destination WH Origin WH Customs Customs Destination WH

Bank Seller Buyer Bank Bank Seller Buyer Bank

POL 19 POL 20
POD POD
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• At larger scale, the banks or other financial intermediaries are

involved in the payment process. The payment systems available, as
• A payment system is a combination of a payment instrument well as which payment methods are preferred, can vary significantly
(resource/tool), a clearing channel, a banking procedures / settlement from country to country.
mechanism and interbank transfer systems that certify transfer of • System require four things:
monetary value from one party to another. The two parties are
generally: Rules that defines the
Legal network to
Instrument Transfer mechanism guarantee irrevocable
The Payer / debtor: The Payee / creditor / beneficiary: procedure and standards
absolute finality
The one making the payment The one receiving the payment

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• These are the financial ‘roads, railways, bridges, and tunnels’ that allow • Banks maintain foreign currency accounts with each other.
currencies to be exchanged and capital to flow between countries. • For example
• That system includes links between correspondent banks; messaging systems • National Bank of Pakistan may have nostro account in US$ with Bank of America for routing
such as Swift; money transfer businesses and credit card networks; as well as the money from the senders to the recipients from/to anywhere in the world, anytime of the
year.
foreign exchange markets, and arrangements between central banks.
• Bank of America may have vostro account in US$ with National Bank of Pakistan for routing
• In global supply chains international merchants engaged are dealing the money.
with a network of institutions and banks that route the payments
from one end of the supply-chain or the value-chain to the other.
• Furthermore, when countries trade with each other and when central
banks transact with each other along with banks in different countries
transact with each other, then they are all participating in the cross-
border payment system generating worldwide payment flows.
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• For instance, the payer, the payee, the intermediary, and the address and other
details are to be captured in a specific format that is standard across all banks
so that each member in the payment knows exactly what is contained in the
• Transferring money to each other at global scale require common
payment message.
standards and protocol through which they can communicate with
each other in a language that is understood by them all. • Example of how Cross-border Payment Work
• SWIFT “Society for Worldwide Inter-bank Financial Telecommunication” Bank of America NBP - ISB
mechanism, TRANSPAY, CIPS (Cross-border Interbank Payment system, China), Credit $50,000 Credit $50,000

SPFS (Russian), RTP (wells fargo) Debit NBP-ISB $50,000 Payee $50,000

Partner bank either one in-case

• Cryptocurrencies (digital currencies) Payer
Bank’s Ledger
$300,000 Payee
Bank’s Ledger
$9,000

• Personal small scale: Western Union, MoneyGram etc. Payer $250,000 Payee $59,000

• These protocols prescribes the rules and regulations that all Thanks!

participants in the cross-border payment network must abide with to

Payee-PK
make certain that there is a common standard of messaging and

Payer-USA
communication between the banks and other financial institutions. Set-up beneficiary and transfer $ 50,000

By: AHSAN ULHAQ SIDDIQUI 25 By: AHSAN ULHAQ SIDDIQUI 26

25 26

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• Advance Payment
• Open Account Payment

COLLECTION DOCUMENTARY
Bank Contract CREDIT Under ‘Clean Payments’ all shipping and commercial documents including title
Bank Undertakes
(URC 522)
ADVANCE to Pay OPEN document are handled directly by the merchants i.e. exporter (seller) dispatches
PAYMENT D/P (sight) ACCOUNT
OR
(UCP 600 & ISBP)
Letter of Credit
all documents to the importer (buyer), and title is generally straight to the buyer
D/A (usance)
(Bill of Exchange) (sight/usance) or his/her order. The bank’s role is limited to the remittance of funds as required.

By: AHSAN ULHAQ SIDDIQUI 27 By: AHSAN ULHAQ SIDDIQUI 28

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Friday, June 21, 2024 Friday, June 21, 2024

• In this instrument of payment buyer makes the payment in advance • In this instrument of payment seller dispatches the goods in advance
to the seller and wait for the goods to be received. to the buyer and wait for the payment to be received.
• The buyer is exposed to: • The seller is exposed to: Why choose OA?
Why choose AP? • Buyer may be offering Good price
• Seller defaults on the obligation to deliver goods Seller may be offering • Buyer’s willful defaults • Credit risk insurance can mitigate
special discounts risk of exporters if available
• The delay in delivery • Inability to pay for the goods or delay the payment
• The quality and/or quantity of goods is not conforming to the contract • May claim on the quality of goods and enforce discounts
1) Sales Contract 1) Sales Contract
2) Pro. Inv. (claim payment) 3) Release Payment
3) Release Payment

4) Goods + Shipping Documents 2) Goods + Shipping Documents

By: AHSAN ULHAQ SIDDIQUI 29 By: AHSAN ULHAQ SIDDIQUI 30

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• In documentary collection payment instrument the merchants use The seller gives shipping documents and the goods title document to
the services of their banks to interchange documents and payment. his bank, which later forward to buyer’s collecting / importer’s bank
The goods are dispatched to the buyer by the seller, but shipping and along with the instructions on how to collect payment from the buyer.
financial documents are moved through banks with instructions on The title of goods remain on the disposal of the seller till buyer pays for
how these to be exchanged with the buyer.. the goods against shipping documents and title in his favor; once title is
• In collections exporter gives bank duty of collecting payment from the transferred goods can be released to the buyer against title document.
buyer for the shipped goods. The bank collects shipping documents Once payment is received, the collecting bank transmits the funds to
including title document from the shipper and sends these to buyer’s the remitting bank for payment to the seller.
bank along with payment instructions. Payment Time After shipment, but before releasing title and other shipping documents
1. Documents against Payment (D/P)
Transfer of Goods After payment made at sight
2. Documents against Acceptance (D/A)
Seller’s Risk Buyer may refuse to take delivery, although seller keeps the right of disposition

By: AHSAN ULHAQ SIDDIQUI 31 By: AHSAN ULHAQ SIDDIQUI 32

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Friday, June 21, 2024 Friday, June 21, 2024

1) Sales Contract

In this instrument seller loose control over the goods when title is given
2) Goods Shipped
5b
to the buyer by accepting and signing bill-of-exchange (B/E), a legal
obligation, to pay in future date (30/60/…./180 days) i.e. credit. In the
3 7 event if buyer fails to make payment on the due date the accepted B/E
5a can be used as a legal resource. At maturity, the collecting bank
Title & Shipping contacts the importer for payment and upon receipt transmits the
docs. funds to the remitting bank for payment to the exporter.
6 The accepted B/E can also be used to factoring / discount (forfaiting) finance.
4 Payment Time On maturity of draft at a stated future date
Seller’s / Remitting Buyer’s / Collecting
Bank With instructions Bank Transfer of Goods Before payment, but upon acceptance of draft

Seller’s Risk No control on goods after draft acceptance, and the buyer may dafault

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Friday, June 21, 2024 Friday, June 21, 2024

1) Sales Contract

ICC in its UCP 600 defines Letter of Credit as: “Credit means any
2) Goods Shipped
7
arrangement, however named or described, that is irrevocable and
thereby constitutes a definite undertaking of the issuing bank to
3 9 honor a complying presentation.”
Trade
6 Honor means:
Acceptance
B/E + a) to pay at sight if the credit is available by sight payment.
Title & Shipping
docs.
b) to incur a deferred payment undertaking and pay at maturity if the credit is available by
5 deferred payment.
8
c) to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the
4 credit is available by acceptance.
Seller’s / Remitting Buyer’s / Collecting /
Bank With instructions Presenting
Bank
L/C is irrevocable since UCP600 unless consent of all concerns.
By: AHSAN ULHAQ SIDDIQUI 35 By: AHSAN ULHAQ SIDDIQUI 36

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9
 39
37

Sight
• A L/C that is payable once presented along with
compliance documents. Partial payment is not allowed
in this type of L/C

Issuance
Notify L/C

confirmation)
(with or without
• A kind of a credit where payment is made as per

Usance
agreed duration between the buyer and seller. In this
way seller gets the delivery of goods and make
payment afterwards. It is also referred to as ‘Deferred
L/C’.

• Special type of L/C where bank other issuing bank add

Advising Bank
its guarantee to the L/C. Although costlier but more
advantageous as beneficiary gets double guarantee.

Confirmed
(swift clause 49 / issuing bank’s authorization or request)
Covering letter OR stamp on swift OR in advise

• L/C is opened with security of another L/C. It is also

referred to as counter-credit that finances both sides
in which a trader buy goods from seller and sells the
same to another buyer.

Back-to-Back
Issue L/C
• The terms of back-t0-banc and main L/C are nearly
identical.
1) Sales Contract

• A credit type in which the first beneficiary

(trader/buying house/indenter) may request the

By: AHSAN ULHAQ SIDDIQUI

By: AHSAN ULHAQ SIDDIQUI

nominated bank to transfer credit in part or whole to

2nd beneficiary. The L/C clearly mentions the margins

Transferable
of 1st beneficiary.
• In this type there is a right to substitute the invoice.

• Initially used by US banks this type of L/C is similar to

Trainer:
Issuing Bank

bank guarantee. The objective is to secure bank loans.

Unlike traditional credit where beneficiary obtains

Standby
payment against compliance documents beneficiary is
allowed to get payment even if applicant failed to
perform as per bond.
(UCP, ICC publication 500 of 1993 rev. or ISP, ICC publication 590 of 1998.

• A revolving letter of credit is a single letter of credit

Types not permitted (ch13 clause 14 e.g. clean and transferrable – FEOD approval required)
that covers multiple transactions over a long period of
limit and against specified documents within prescribed deadlines.

Order to

Revolving
time.
Open L/C

Clause 47A – cumulative OR non-cumulative

(auto OR by amendment)
(beneficiary) up to a stated sum of money, within a prescribed time
known as the “Issuing Bank” - on behalf of its customer, and the
importer (applicant), promising to effect payment i.e. by making a
A “Letter of Credit” is a written undertaking by the importer’s bank,

payment, or by accepting or negotiating bills of exchange (drafts)

through exporter bank (advising bank) in favor of the exporter

Friday, June 21, 2024

Friday, June 21, 2024

39
37

40
38
2) Present
Documents

• ISO Standardized
ahsiddiqui2020@gmail.com
Advising Bank
Settles Financing

4) Honors or negotiate
3) Examine Documents
(may also be nominated bank)

By: AHSAN ULHAQ SIDDIQUI

• Cryptocurrencies (digital currencies)

1) Goods Shipped

(China), SPFS (Russian), RTP (wells fargo)

5) Forward Documents
8) Reimburse at maturity

By: AHSAN ULHAQ SIDDIQUI

By: AHSAN ULHAQ SIDDIQUI

• Personal small scale: Western Union, MoneyGram etc.

• Swift Code (Business Identifier Code: BIC #) of Banks:
Issuing Bank

• XXXX (bank code) XX (country code) XX (location) XX (branch)

6) Examine Documents
9) Pays at Maturity

Telecommunication”(US) communication mechanism, TRANSPAY, CIPS

• Interbank: SWIFT “Society for Worldwide Inter-bank Financial
7) Release
Documents
June 06, 2024

Friday, June 21, 2024

Friday, June 21, 2024

40
38

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• Founded in 1973, head quartered in Belgium • SWIFT is a network designed as a secure communication system
• The biggest and most trusted financial messaging system in the world between banks that allow them to quickly process cross-border
payments by carrying payment information from the sender’s bank to
• Limited liability co-operative society the beneficiary’s bank as a communication channel.
• Doesn’t settle money itself • It identifies each bank by its unique ISO Standardized ID code (ISO 9362)
• More than 11,000 financial institutions across more than 200 • Swift Code (Business Identifier Code: BIC #) of Banks: 8-11 characters
• XXXX (bank code) XX (country code) XX (location/city) XXX (branch - optional)
countries and territories use SWIFT. 2021, an average of 42 million
• SCBLPKKXEQI
SWIFT messages were sent per day. • SCBL: Standard Chartered Bank Limited, PK: Pakistan, KX: Karachi, XXX: Branch Code
• Controlled by central banks of G10 countries, EU central bank and • The banks then move funds between the accounts according to the
national bank of Belgium payment instructions by using a network of nostro or vostro accounts.
• SWIFT operations centers are in USA, Netherlands & Switzerland • All this is possible even when a customer has a different bank than the vendor.
By: AHSAN ULHAQ SIDDIQUI 41 By: AHSAN ULHAQ SIDDIQUI 42

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• The process of a SWIFT transfer requires:

• Verify senders' identity and address
• CAT-1: Customer Payments and Cheques (19 MT)
• Send money to the bank that will transfer funds
• CAT-2: Financial Institution Transfers (18 MT)
• The bank will send a quote for the transfer which you can accept or decline
• CAT-3: Treasury Markets – Foreign Exchange, Money Markets and Derivatives (27 MT)
• After accepting the exchange rate, it’s fixed, and your money is sent off in the • CAT-4: Collections and Cash Letters (17 MT)
destination’s currency.
• It takes 1-4 days for money transfer considering time zones and processes involved. • CAT-5: Securities Markets (60 MT)
• CAT-6: Treasury Markets – Commodities (precious markets and syndications) (22 MT)
• To transfer money using SWIFT, here’s the information needed:
• CAT-7: Documentary Credits and Guarantees / Standby Letters of Credit (29 MT)
• Name of the recipient
• Banks use MT760 (message type: MT) when issuing a demand guarantee or a standby letter of credit.
• Address of the recipient MT700 is used to indicate the terms and conditions of a commercial documentary credit or a standby
letter of credit which has been originated by the Sender (issuing bank). This message is sent by the
• Name and address of the recipient’s bank issuing bank to the advising bank.
• SWIFT code of the destination bank • CAT-8: Travellers Cheques (11 MT)
• IBAN number or account number of the recipient
• CAT-9: Cash Management and Customer Status (21 MT)
• SWIFT fees can include transfer fees, correspondent fees, and priority fees. Most of the cost
of SWIFT transfers comes from the exchange rates, which can be from 3 to 5 percent. • CAT-n: Common Group Messages (17 MT)
By: AHSAN ULHAQ SIDDIQUI 43 By: AHSAN ULHAQ SIDDIQUI 44

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MT 700 Example
MT 700 EXAMPLE Narrative
• SWIFT MESSAGES TYPES ABC Company, Kaerntnerstrasse 3, Vienna, imports beer from Amdam Company, PO Box 123, Amsterdam, under a documentary credit.
1. CAT-1: Customer Payments and Cheques ABC Co.'s bank is Oesterreichische Laenderbank, Vienna. Amdam Co.'s bank is Bank Mees en Hope, Amsterdam.
In addition to the above information, the documentary credit is comprised of the following:
2. CAT-2: Financial Institution Transfers Documentary Credit Number: 123456

3. CAT-3: Treasury markets – foreign exchange, money markets and derivatives Date of Issue: 02 February 2015
Expiry Date: 30 April 2015
4. CAT-4: Collections and Cash Letters Place of Expiry: Confirming Bank
5. CAT-5: Securities Markets Amount: EUR 100000,
Advising Bank: Amsterdam-Rotterdam Bank
6. CAT-6: Treasury markets – precious markets and syndications Amsterdam
Confirming Bank
7. CAT-7: Documentary Credits and Guarantees / Standby Letters of Credit Available with: By sight payment
400,000 Bottles of beer
Banks use MT760 (message type: MT) when issuing a demand guarantee or a standby letter of credit. Description of goods: Packed 12 to an export carton
MT700 is used to indicate the terms and conditions of a commercial documentary credit or a standby FCA Amsterdam
letter of credit which has been originated by the Sender (issuing bank). This message is sent by the Signed Commercial Invoice in duplicate
issuing bank to the advising bank. Documents required: Packing List in duplicate
Forwarding Agent's Certificate of Receipt, showing goods addressed to Applicant
[39: 1,2,3,5,6,7,9,10,11,14, and 34 are ‘M’; others are ‘O’ clauses] Documents to be presented within 6 days after date of issuance of the Forwarding Agent's
Presentation period: Certificate of Receipt
8. CAT-8: Travellers Cheques Confirming Bank: Bank Meese n Hope, Amsterdam
9. CAT-9: Cash Management and Customer Status Transshipment: Allowed
Partial Shipment: Not Allowed
10. CAT-0: FIN System Messages
By: AHSAN ULHAQ SIDDIQUI 45 By: AHSAN ULHAQ SIDDIQUI 46

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Friday, June 21, 2024 Friday, June 21, 2024
Explanation Format
Sender OELBATWW
Message Type 700
Receiver AMRONL2A
Message Text
Sequence of Total :27:1/1
Form of Documentary Credit :40A:IRREVOCABLE

• Running Finance (RF)

Documentary Credit Number :20:123456
Date of Issue :31C:150202
Applicable Rules :40E:UCP LATEST VERSION
Date and Place of Expiry :31D:150430AMSTERDAM • Running finance or overdraft facility is a short term finance provided to
Applicant
:50:ABC COMPANY
KAERNTNERSTRASSE 3
AT/VIENNA
customers to fulfill their working capital needs by allowing withdrawals from
Beneficiary
:59:AMDAM COMPANY
PO BOX 123
NL/AMSTERDAM
their account in excess of the credit balance, maintained with the Bank.
Currency Code, Amount :32B:EUR100000, • Facility primarily secured against mortgage of property and/or hypothecation of stock, etc.
Available With … By … :41A:MEESNL2A

• Finance against Trust Receipt (FATR)

BY PAYMENT
Partial Shipments :43P:NOT ALLOWED
Transhipment :43T:ALLOWED
Port of Loading :44E:AMSTERDAM • In FATR deals, the imported goods are released to the importer on the basis of a
Port of Discharge
Latest Date of Shipment
:44F:VIENNA
:44C:150415 trust receipt.
Description of Goods and/or Services :45A:+400,000 BOTTLES OF DRINKS PACKED 12 TO AN EXPORT CARTON
+FCA AMSTERDAM • This is a short-term facility for financing imported goods. [6months, m/q margins,
Documents Required
:46A: +SIGNED COMMERCIAL INVOICE IN DUPLICATE
+PACKINGL LIST IN DUPLICATE
+FORWARDING AGENT'S CERTIFICATE OF RECEIPT, SHOWING GOODS ADDRESSED TO APPLICANT
L/C/commodity]
Charges :71D:ALL BANKING CHARGES OUTSIDE ISSUING BANK ARE FOR THE BENEFICIARY
Period for Presentation in Days :48:6/FORWARDING AGENT'S CERT OF RECEIPT
Confirmation Instructions :49:CONFIRM
Requested Confirmation Party :58A:MEESNL2A
‘Advise Through’ Bank :57A:MEESNL2A
End of Message Text/Trailer

By: AHSAN ULHAQ SIDDIQUI 47 By: AHSAN ULHAQ SIDDIQUI 48

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• Pledge Financing
• The goods are held as security and are placed under the custody of the Bank’s
authority. • The guarantor undertakes the performance of 3rd party
• Value of the goods placed under pledge along with stipulated margin. [local, 6months, • Bank Guarantee is a binding undertaking given by the bank (the guarantor), to
quarter margins]
pay against the presentation of a written statement of the guarantee holder
• Finance Facility to Pre-shipment (Packing Credit) & Post Shipment (the beneficiary), if a contract is not fulfilled by the customer (the applicant).
• Against confirm orders, DC and contracts • Bid bonds [seeking contract, tender, ..]
• Upto 50% of turnover in previous year • Performance bonds [compensation against default, ..]
• Retention bonds [future discovery of faults, ..]
• Finance against Imported Merchandise (FIM) • Advance payment bonds [security if default, till goods shipped, L/C expiry or few days, ..]
• FIM is a short term facility offered by ADs to the importers for retirement of
Sight-LC. The facility is given against the pledge of imported goods. FIM is
settled thorough release of pledged goods against gradual or lump sum
payments made by borrower.
• Time period, Pledge, Mark-up

By: AHSAN ULHAQ SIDDIQUI 49 By: AHSAN ULHAQ SIDDIQUI 50

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Friday, June 21, 2024 Friday, June 21, 2024

BUYER will SELLER

issue will issue
Marine Insurance Types

Property Liability

Financial Instrument
Hull Cargo Others Collision P&I Marine Liability

52
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Friday, June 21, 2024 Friday, June 21, 2024

GOODS

By: AHSAN ULHAQ SIDDIQUI 53 By: AHSAN ULHAQ SIDDIQUI 54

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LCL FCL

Hold Ship
Load Load

Less than Truck-Load Full-Truck-Load

By: AHSAN ULHAQ SIDDIQUI 55 By: AHSAN ULHAQ SIDDIQUI 56

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Friday, June 21, 2024

By: AHSAN ULHAQ SIDDIQUI 57

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Trainer: By: AHSAN ULHAQ SIDDIQUI

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15
 6/20/2024

Commercial Banking
Session 1

Financial institutions can be classified as

banking and non-banking financial institutions

1. Banking institutions are creators and

spreaders of credit
2. liabilities of banks are part of the money
supply

1. while non-banking financial institutions are

spreaders of credit
2. Not allowed to take deposits

1
 6/20/2024

Need of Financial Services for

 Borrowingand funding
 Lending and investing
 Buying and selling securities
 Making and enabling
 Payments and settlements
 Managing risk

Bank
A bank is a financial institution licensed by a
government. Its primary activities include borrowing
and lending money.

2
 6/20/2024

Historical Synopsis of Banking

 In fact the development of banking has

spanned over centuries and is not the
development of any particular period.

 In all the countries of the world, banking has

been in existence in one form or the other.

The Word bank

French Word Italian Word

• Banque • Banca

It is thought that, “Bank” may have derived its

meaning from the practice of Jewish money-
changers of Lombardy, a District in North Italy, who,
in the Middle Ages, used to do business while sitting
on Benches in the market place.

3
 6/20/2024

History of Banking in Pakistan

 Most of the banking business was in the hands

of Hindus or British People

History of Banking in Pakistan

HBHL was established in early
1947 in Bombay shifted in
Pakistan after Independence

MCB was established in July

1947 in Calcutta shifted in
Pakistan after Independence

Australian Bank renamed as

Allied Bank in 1942 and was
in Lahore

4
 6/20/2024

Evolution of Banking

487 Offices of Scheduled Banks

By 30th June 1948, the number of offices of scheduled

banks in Pakistan declined from 487 to 195.

After Independence- Phases

1947-1974
Establishment of commercial
banking system

1974-1979
Nationalization of Banks

1979-1991
Islamization Process

1991……
Deregulation Process

5
 6/20/2024

Evolution of Banking in Pakistan

 To strengthen the financial system in
Pakistan Government decided to
established a full-fledge Central Bank
and for this purpose promulgated
State Bank of Pakistan Order on May
12, 1948

 Accordingly The Governor General of

Pakistan and Father of the Nation
Quaid-i-Azam Muhammad Ali Jinnah
inaugurated the State Bank of
Pakistan (SBP) on July 1, 1948.

Evolution of Banking in Pakistan

 To strengthen the financial system in
Pakistan Government decided to
established a full-fledge Central Bank
and for this purpose promulgated
State Bank of Pakistan Order on May
12, 1948

 Accordingly The Governor General of

Pakistan and Father of the Nation
Quaid-i-Azam Muhammad Ali Jinnah
inaugurated the State Bank of
Pakistan (SBP) on July 1, 1948.

6
6/20/2024

7
 6/20/2024

After Independence- Phases

Commercial banking grew
favorably in Pakistan until 1974.

Under the nationalization policy,

13 banks were brought under
full government control

PBC was set up to monitor

nationalized banks, marginalizing
the SBP’s role as a regulator.

These measures were meant to

improve lending to prioritized
industries.

Evolution of Banking in Pakistan

 Under the nationalization policy, thirteen banks were brought under full
government control, and consolidated into six nationalized banks

Name of amalgamating bank Name of transferee bank

The Bank of Bahalpur Ltd The National Bank of Pakistan

HBL Overseas, Standard bank Habib Bank Ltd.

Commerce Bank, The United Bank Ltd.

Prime bank, The Muslim Commercial Bank Ltd

Sarhad Bank, Pak Bank, Australasia Allied bank

8
 6/20/2024

After Independence- Problems of Nationalizations

BODs and CEOs were not
independently appointed

Lending decisions were

not always commercially
motivated,

Billions converted into

bad debts

Mostly pollical hiring

and influence

Steering in the reforms

The central bank’s regulatory
powers were restored

Corporate governance, internal

controls and bank supervision was
strengthened substantially

Legal impediments and delays

in recovery of bad loans were
streamlined

Scope of prudential
framework set up in 1989

9
 6/20/2024

Public Sector Commercial Banks

Banking Sector in Pakistan

State Bank of Pakistan

Public
Local
Sector Specialized Islamic Foreign
Private
Commercial Banks-4 Banks-5 Banks-4
Banks-15
Banks-5

The impact of banking on our lives

 Where would we be without being able to pay people?

 Safety of our savings and access to our money

 Want a loan on reasonable terms?

 Helping companies with financial market transactions

10
 6/20/2024

Banker Defined
1 2 3
 Dr. A.C. Heart has given a typical definition. According to
him, a banker or bank is a person or company carrying on
the business of receiving money and collecting drafts of
customers subject to the obligation of honoring cheques
drawn by them from time to time by the customers to the
extent of the amounts available in their current accounts.

According to Sir John Paged

 “That no person or body corporate or otherwise, can be

a banker, who does not
1. take deposit accounts,
2. take current accounts,
3. issue and pay cheques and
4. collects cheques crossed and uncrossed for his
customers”

11
 6/20/2024

Legal Definition
3 (b) of Negotiable Instrument Act 1881, which says;
“Banker means a person transacting the business of
accepting, for the purpose of lending or investment,
of deposits of money from the public, repayable on
demand or otherwise and withdraw able by cheque
draft order or otherwise.

Deposits
Deposits

Time Demand

withdraw able by
cheque,
Draft /order,
or otherwise

12
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Customer Defined
 According to Heber L. Hart: A customer is a person who has
an account with a banker. Coming to the meaning of the
word, Hart says that a person is a “customer” of a bank if he
keeps a deposit account with the bank, or , it would seem if
the bank systematically transacts with him, or for him, any
kind of banking business.

Customer Defined
 According to Sir John Paget: “To constitute a customer,
there must be some recognizable course of habit of dealing
in the nature of regular banking business”

Bill of Exchange:

A written, unconditional order by one party (the drawer) directing another party (the
drawee) to pay a specific sum of money to a third party (the payee) at a future date.

13
 6/20/2024

Functions Of Banker
According To BCO 1962, Section 7:

1. Borrowing and lending of money.

2. Discounting Bills of Exchange and other Negotiable
Instruments.
3. Collecting Negotiable Instruments on behalf of the
customers.
4. Buying and selling bullion and foreign exchange.

Functions Of Banker
According To BCO 1962, Section 7:
5. Granting of Letters of Credit to the customers.
6. Receiving valuables for safe custody.
7. Underwriting and dealing in stocks, shares, debentures and
other securities on behalf of the customers and others
8. Acting as agent to his customers; undertaking and executing
trust.
9. Carrying on guarantees and indemnities position.
10.Dealing with any property that may come to it as security in
satisfaction of its outstanding claims.

Indemnities are contractual agreements between parties in

which one party agrees to compensate the other for any
losses, damages, or liabilities incurred as a result of specific
events or conditions.
14
 6/20/2024

BANKING BUSINESS

 Banking operations encompass a wide range of activities,

all of which contribute to the asset and liability profile of a
bank.

 Next slide shows selected banking activities and type of

earning they generate

Service or function Revenue generated

Lending
– Retail Interest income, fees
– Commercial Interest income, fees
– Mortgage Interest income, fees
– Syndicated Interest income, fees
Credit cards Interest income, fees
Project finance Interest income, fees
Trade finance Interest income, fees
Cash management
– Processing Fees
– Payments Fees
Custodian Fees
Remittances Commission income / fees
Asset management Fees, performance

– Investment banking Fees

– Bonds Trading income, interest income, fees
– Foreign exchange Trading income, fees
– Derivatives Trading income

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 6/20/2024

Financial Intermediation

 Basically concept of banking services revolve

around the model of linking the savers to the
borrowers

16
 6/20/2024

Financial Intermediation
Banking System

A
A
Cash L Demand
T Deposits
L
T
O Decision Time
R
Investments C Makers Deposits
A
A
C
T Other
T Liabilities
E
S
Lending S

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Benefits of Financial Intermediaries

 Lower search costs. You don’t have to find the right lenders,
you leave that to a specialist.

 Spreading risk. Rather than lending to just one individual, you

can deposit money with a financial intermediary who lends to
a variety of borrowers – if one fails, you won’t lose all your
funds.

Benefits of Financial Intermediaries

 Economies of scale. A bank can become efficient in collecting
deposits, and lending. This enables economies of scale – lower
average costs. If you had to seek out your own saving, you
might have to spend a lot of time and effort to investigate best
ways to save and borrow.
 Convenience of Amounts. If you want to borrow Rs.50, 000 – it
would be difficult to find someone who wanted to lend this
amount. But, a bank may have 1,000 people depositing
Rs.5000 each. Therefore, the bank can lend you the
aggregate deposits from the bank

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The flow of funds and financial intermediation

Taxes Household

savings Loans
Return

Government Financial
Borrowings Institute
Direct
purchase
Markup/Interest Taxes Deposits of shares

Government Borrowings
Return
on
Loans

Taxes Business

Demirguc Kunt and Levine, using a database of 150

countries, have classified countries according to the
structure and level of financial development
Extent of Bank-based Market-based
Development
Developed Japan, Germany, US, UK, Singapore,
France, Italy Malaysia, Korea
Under-developed Argentina, Brazil, Mexico, the
Pakistan, Sri Lanka, Philippines, Turkey
Bangladesh
Demirguc Kunt, A. and R. Levine (1999), Bank-based and Market-based Financial System: Cross-Country
Comparisons, World Bank Policy Research Working Paper No. 2143.

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Regulation of Banks in Pakistan

Regulatory Framework
 SBP Act
 An Ordinance to provide for the establishment of SBP Banking Services
Corporation.
 The Financial Institutions (Recovery Of Finances) Ordinance, 2001
 Banking Companies Ordinance
 Microfinance Institutions Ordinance, 2001
 Payment Systems and Electronic Fund Transfer Act, 2007
 The Negotiable Instruments Act, 1881
 Foreign Exchange Regulation Act 1947
 Credit Bureau Act 2015
 Electronic transaction Act

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Privatization of banks and

licensing to private bank

 SuperiorFinancial Services
 Designed Innovative Products
 Tapped new markets
 Greater efficiency

Non-deposit Resources of Bank

 Through public issues in the capital

market
 By borrowing in Money Market
 Through private placement
 Through ECBs & inter bank borrowings
External Commercial Borrowings

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How Banks Add Value

 Through their deposit-taking and lending operations, banks
add value for their customers by offering terms that are
respectively attractive to both depositors and borrowers.
Banks are able to add value to both depositors and
borrowers through their ability to:

How Banks Add Value

 Through their deposit-taking and lending operations, banks
add value for their customers by offering terms that are
respectively attractive to both depositors and borrowers.
Banks are able to add value to both depositors and
borrowers through their ability to:

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How Banks Add Value

 Package savings vehicles and advance funds in a manner that
prospective depositors and borrowers would find difficult to undertake
on their own.

 Spread their risks over many transactions, and in the process mitigate
risk.

 Gain an information advantage not only from their participation in a

volume of transactions, but also through their access to the financial
accounts of borrowers, actual and prospective, and depositors.

Borrowers generally benefit from:

1. A ready source of finance on terms that, at least to a degree,

meet their particular needs.

2. A degree of certainty concerning the cost of finance and the

term over which it will be available.

3. A degree of confidentiality

4. Ancillary services offered by banks.

Ancillary services offered by banks are supplementary financial services
provided alongside their core functions of accepting deposits and providing
loans.
Wealth management
Forex management
Home loans, Car loans
Credit and debit card services 23
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Depositors benefit from banks accepting their deposits as

a consequence of being able to:

1. Place excess funds with the bank in the amount and at

the time suitable to their individual needs.

2. Earn return on all or a portion of those funds deposited.

3. Withdraw the funds with few or no restrictions as they see

fit.
4. Use the bank’s payment services (e.g., checking
accounts) to transfer funds to third parties.

How Banks Earn Money

 Using the funds that depositors have placed with it, the
bank provides credit to customers in the form of loans,
revolving lines of credit, overdraft facilities, and similar
mechanisms, among its other activities.

 Banks earn income on the difference between their

funding costs (the interest rate paid to depositors and
others who advance funds to the bank) and their yield on
loans (the interest rate charged to borrowers). This
difference is the bank’s spread.

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Bank Spread:
 The net interest margin, measured as a difference
between lending and deposit rates, is a commonly
accepted measure of how costly bank
intermediation services are for a society.

Spread
 to arrive at a sensible lending rate for any type of business that
a bank undertakes, must have a good idea of its cost base as
well as a good idea of what the expected frequency of bad
loans will be in the following 12 months.
 The interest rate on a loan is then set as a spread over the
bank's funding cost, a credit spread to cover anticipated loan
losses, and any additional spread to cover its operating
expenses.

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Spread
 Difference between interest payable and interest
receivable

Asset Management

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Liquidity versus Profitability

1 Cash/ Most liquid No profit
Instrument
2 Money at call &short Early en-cashable Very low profit
notice
3 Bills discounted Can be rediscounted in Low profit
case of need

4 Investments Can be sold in security Higher rate of

market profit
5 Advances Less Liquid Highest rate of
profit

In managing a bank’s assets the senior team

must balance out the three factors
Highest possible
return on loans
made and
securities bought

Asset
Management

Adequate
liquidity Low risk

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Credit side of Asset Management

Managing
Credit delinquent
accounts

Asset Diversification

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Liability Management

Mechanism of deposit creation

Commercial banks enhance deposits through

marketing of various products. These products
are a mix of various conditions related to
liquidity, return, minimum requirements and
transaction costs to make them client-friendly
and easy to manage for the institution.

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How Diversification Strategy Works

To make this Strategy effective, a bank needs to set internal targets for
diversifying its liabilities.

• Nature of fund provider

• Instrument type
• Maturity

Deposit generation

 Branch network
 Customer service
a) product
b) counter service
 Rate of Return
 Trust
 Technology

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Diversification of Products
 Generic
 Current Accounts
 Saving Accounts CASA

 Time Deposits Good deposit mix should be a

blend of both demand and
 TDRs time deposit
 Notice Deposits
 Regular Income Products

Asset Liability Management (Branches & HO)

Cash Cash
Liabilities ALM Assets
5.5 % 7%

Deposit 4% 9% Cash
-Cash

Depositors Borrowers

The price of the loan is not dependent on the price of the deposit. Lending
and funding are independent activities. Each has to stand on its own and
be profitable on its own.

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Internal & External Lending

Assets and Liabilities Management

Funding ALM Lending

Liabilities Assets Liabilities Assets Liabilities Assets

Loan to
Transfer Received Received customers
Receives to ALM from from ALM
one year Funding Transfer to
deposit lending

Banker-Customer Relationship

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Nature of Relationship
 Basic legal relationship between banker and customer is
contractual relationship.

 This relationship is established from the time of opening an

account in a bank.

 This relationship is at the origin of all other legal

relationships that exist between the banker and customer.

Functions Of Banker
According To BCO 1962, Section 7:

1. Borrowing and lending of money.

2. Discounting Bills of Exchange and other Negotiable
Instruments.
3. Collecting Negotiable Instruments on behalf of the
customers.
4. Buying and selling bullion and foreign exchange.

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Functions Of Banker
According To BCO 1962, Section 7:
5. Granting of Letters of Credit to the customers.
6. Receiving valuables for safe custody.
7. Underwriting and dealing in stocks, shares, debentures and
other securities on behalf of the customers and others
8. Acting as agent to his customers; undertaking and executing
trust.
9. Carrying on guarantees and indemnities position.
10.Dealing with any property that may come to it as security in
satisfaction of its outstanding claims.

Banker-Customer Relationship

Creditor Debtor

Banker Customer

When a bank grants loan or other credit facilities to the

customer, relationship is reversed, that is now Customer is
Debtor & Banker is Creditor.

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Banker-Customer Relationship

Debtor Creditor

Banker Customer

When customer deposits money in a bank the relationship of debtor and

creditor is established, in this case; Banker is Debtor & Customer is
Creditor.

Banker-Customer Relationship

Agent Principal

Banker Customer

When a banker performs Agency Service, he becomes

agent to his customer.

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Banker-Customer Relationship

Bailee Bailor

Banker Customer

When a banker accepts valuables from customers for safe

custody

Banker-Customer Relationship

Mortgagee Mortgagor

Banker Customer

When immovable property is taken as security against

lending

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Banker-Customer Relationship

Pawnee Pawner

Banker Customer

When goods are pledged with the bank as security

Cheques

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Cheque
A Cheque Is A Bill of Exchange drawn on a specified banker
and not expressed to be payable otherwise than on demand

Parties To a Cheque & Their Respective

Rights & Legal Obligations
Drawee Payee

Zafar Iqbal
Ten thousand only 10,000/=

Shahid Iqbal

Drawer

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The Requisites of a cheque

It should be in writing
The unconditional order
Drawn on a specified banker only
Cheque must be payable to or to the order of a specified person or
bearer.
Payment on demand
Sum certain in money
Signed by the drawer

Types of cheques

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Types of Cheques

Mode of Payment
Open Crossed

Bearer Order Bearer Order

Mode of Transferability

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Classification
Open cheque Without any crossing on its

Payee. Bearer or endorsee may obtain payment by direct

Effect presentation on the counter of the drawee bank

Classification
One which bears on its face either two parallel transverse
Crossed Cheques
lines or the addition of the name of the bank

Payee. Bearer or endorsee cannot obtain payment by

Effect direct presentation on the counter of the drawee bank

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Classification
The words Bearer of Order govern the mode by which legal ownership may be
transferred

Cheques payable to The holder may transfer legal ownership merely by

Bearer delivery

Legal ownership is transferred by Endorsement followed

Order Cheques by Delivery

Concept of transfer of cheque to

3rd party

A B
C

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Classification
The words Bearer of Order govern the mode by which legal ownership may be
transferred

Legal ownership is transferred by Endorsement followed

Order Cheques
by Delivery

Zafar Iqbal
Ten thousand only 10,000/=

Nabeel Khan

Can be
transferred with
endorsement &
delivery

Option 1

Zafar Iqbal
Ten thousand only 10,000/=

Shahid Iqbal

Zafar Iqbal

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Legal ownership is transferred by Endorsement followed

Order Cheques
by Delivery

Zafar Iqbal
Ten thousand only 10,000/=

Sahahid Iqbal

Can be
transferred with
Please pay to or to the order endorsement &
of Shabbir Jan
Zafar Iqbal delivery

Classification
The words Bearer of Order govern the mode by which legal ownership may be
transferred

Cheques payable to The holder may transfer legal ownership merely by

Bearer delivery

Zafar Iqbal
Ten thousand only 10,000/=
Can be
Shahid Iqbal transferred with
just delivery

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Classification of cheques
Zafar Iqbal
Ten thousand only 10,000/=

Shahid Iqbal

Please pay to or to the order of

Shabbir Jan
Zafar Iqbal

Shabbir Jan

Legal & Regulatory

Implications in
Account Opening
O n l i n e Tr a i n i n g M o d u l e

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Anti-Money Laundering Act of 2020 (AMLA 2020)

What regulatory compliance

ATA AMLA
Statue

Regulations
•To avoid unwanted
customers
•To avoid penalties SBP AML
•To avoid prosecution Regulations
•To save the bank
Requirements

Add a footer 92

Account Opening
Accounts

Personal Impersonal
• Minor • Proprietorship
• Illiterate Peron • Partnership
• Joint Account • Limited Companies
• Blind • Liquidator’s Accounts
• Agent • Clubs & Societies
• Administrator and Executor • Trusts

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Dimensions To Follow
Dimensions

Legal/Regulatory Procedural

•Basic laws •Bank procedure

•Other legal aspects •Approvals
•SBP Guidelines •System Feeding

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CURRENCY MANAGEMENT
STRATEGY– VISION, SCOPE &
INSTRUCTIONS

96

VISION OF CURRENCY MANAGEMENT

STRATEGY
Automation of Bank Ensuring Increased
Note Processing Availability of Involvement of
and Minimizing Good Quality Bank Commercial Banks
Human Notes in in Bank Note
Involvement Circulation Processing

Improved Detection
Development of of Counterfeit
Interbank Currency and
Exchange of Cash Implementation of
Clean Note Policy
97

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PHASES OF CMS
(For Ease of Implementation)
3rd April, 2017
2nd July, 2018
Phase-I
4th January, 2021
Rs. 500 and above Phase-II
30 Cities Rs. 100 and above Phase-III
All Cities Rs. 50 and above Rs. 20 and Rs. 10
All Cities excluded from scope
of CMS (However,
BPIs are applicable
on them)

98

02 CMS Scope and Instructions

99

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EXCHANGE OF NOTES AT BANK COUNTERS

The exchange of notes at bank counters should be governed by these key
principles:

o Cash Authentication
Banks shall only disburse machine authenticated and sorted cash from
their cash payment counters

o Cash Adequacy
Cash payment counters must have adequate machine authenticated /
sorted cash to meet their daily payment needs

100

Objective
• Improving the quality of
notes in circulation
Banknote • Standardize the cash
handling practices as per
Packing international best practices
Instructions • Increase life of notes in
circulation
• Improve banknote transport
processes and its security
101

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102

Phase-I- April 2, 2017 to July 2, 2018

Applicable
• The balance shall not contain staples, pins, metallic objects, tapes, jute,
Instructions thin rubber bands
• Banknote packets must be paper banded

Applicable • Rs. 500 and above in 30 cities

• Balance of Rs. 100 and above shall not contain staples across country
Exception • Since these balances will likely be machine authenticated

103

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Phase-II- from July 2, 2018

Applicable on
• Deposits with SBP BSC /NBP Chests
• IEC
Denominations
•Rs.100 and above across country, from July 2, 2018
Not Applicable
• Bilateral arrangements among banks or inter-branch/CPC transfer

Note: From March 17, 2020, BPI have been mandated for all Denominations
104

Category of Banknotes
December 1, 2017
Re-Issue Soiled Machine Rejected
•Good Quality Paper (at least 30 mm)
Type of Banding •30 mm PE coated paper band
Packet

•In case paper band is less than 30 mm, two bands (of at least 15 mm each) may be placed

Number of Bands 1 or 2
Stamp √
Bundle Card √
Colour of Bundle
White Yellow Red
Card
Dimensions of
As per the banknote denomination
Bundle Card
Bundle

•At least 30 mm white paper band

Type of Banding •Atleast 30 mm PP/ OPP transparent band/film
•However, nylon bundle banding will not be allowed.

Number of Bands 1

Shrink Wrapping √

Gramm-age of
At least 15 microns
Shrink-Wrap
105

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1st October, 2018

a) Bin Size (mm) 520 × 393 × 95

Size of Cash
b) Lid Size (mm) 520 × 393 × 15.4
Tray
c) Assembled Bin (mm) 520 × 393 × 102

Cash Plastic Seals √

Trays
Sticker Tag √
Color of Sticker
White Yellow Red
Tag

Applicable for Deposits with SBP BSC only

Trays to be returned to concerned bank
Not applicable on NBP Chest/Sub Chests
106

PACKETS PREPARATION

107

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Incorrect Manner

108

PREPARATION OF BANKNOTE BUNDLES

109

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INCORRECT MANNER OF BUNDLE PREPARATION

110

Preferred-Transport Mechanism-Cash Trays

Banknotes shrink wrapped and placed in Cash Trays after Preparation

111

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BUNDLE CARD FORMAT– FIT/ RE-ISSUE

112

BUNDLE CARD FORMAT– UNFIT/ SOILED

113

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BUNDLE CARD FORMAT– REJECTED

114

03 PROCESSING MODELS
ADOPTED BY BANKS

115

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116

ONSITE CASH MONITORING

05 PROCESS

125

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Onsite Cash Monitoring Process

Following are the key aspects of the cash monitoring process:

oCash Monitoring is conducted by Cash Monitoring Hubs stationed at Karachi, Lahore &
Rawalpindi Offices and directly report to the Currency Management Department (CMD),
Head Office, Karachi.
o Cash Monitoring is scheduled as per approval of monitoring plan by CMD.

o Selection of branches is based on category of branch, previous observations and overall

compliance history.

o The Cash Monitoring Report is duly scrutinized by a separate team, designated for back
office.
o In case of observations, a penalty imposition letter is issued.
126

06
SBP CURRENCY
MANAGEMENT STRATEGY
PENALTY STRUCTURE
& APPEAL MECHANISM

127

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1. CPC/Feeding Branch/Standalone Branch

Penalty Per
Sr. Description Penalty Per Unit
Instance
Issuance of unauthenticated and unprocessed
1 100,000/- N/A
banknotes to public.
CPC/feeding branches/other branches do not have
2 separate clean and secure vault space, with proper safe 20,000/- N/A
keeping arrangements.

The vault does not have insurance cover in line with

3 10,000/- N/A
value of cash held.
The entire CPC/sorting area is not covered by high
4 20,000/- N/A
resolution CCTV cameras.
Recording of CCTV cameras is not available for 60
5 N/A 10,000/- per day
Days.

128

Sr. Description Penalty Per Penalty per

Instance Unit
Banknotes sorting and authentication machines are not 5,000/- per
6 processing/authenticating banknotes as per SBP standards as N/A machine
outlined in Finance Department Circular No. 03/2015.
7 Police verification of all employees deployed at CPC/feeding branch is
not available. 5,000/- 5,000/- per
employee
8 Record of visitors is not maintained. 5,000/- N/A

9 No approval has been obtained from SBP Finance Department, where

deviations to requisite capabilities in cash handling/packing machines. 20,000/- N/A

10 Suspected counterfeit banknotes are not surrendered to SBP BSC

within 48 hours of detection along with all particulars and record. 30,000/- N/A

11 Packets and bundles are not prepared/packed as per requisite

specifications. 20,000/- 100/- per
packet
12 Cash offered in IEC or deposit with SBP BSC are not packed as per
Packing Instructions. 20,000/- 1000/- per
bundle
Any other non-compliance and circumvention of instructions issued Min. 5,000/- to Max.
13 from time to time by SBP, relating to CPC/feeding branch/standalone 100,000/- depending upon
branch. the severity of instance

129

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2. ATM FEEDING
Penalty
Sr. Description Per Penalty Per Unit
Instance
1 Machine authenticated and sorted cash is not being fed into ATMs. 100,000/- N/A
2 Presence of forged banknotes in ATMs. N/A 100 times the value
of banknote found
3 Bags/cassettes are not prepared and sealed in high resolution
CCTV environment, as per requisite specifications. 20,000/- N/A
The records pertaining to bags are not maintained including
4 denomination, date and time of sorting, sealing, preparing/sealing
personnel, transporting personnel, transporting vehicles and name of 20,000/- N/A
supervisor.
5 Separate bags/trays are not prepared for all attached ATMs. 10,000/- 5,000/- per ATM

6 Bags/cassettes are remitted without receipt of written

acknowledgement from feeding team/officials/armor guards/CITs. 10,000/- N/A

7 CCTV and documentation record for sixty days is not available or CCTV
record of all disputed cases is not available. 20,000/- N/A
Leftover cash taken from ATMs, if any, is not packed and sealed in
8 CCTV environment and is not transported to CPC/feeding branch N/A 5,000/- per ATM
for processing. 130

3. Arrangements with Other Banks

Penalty Per
Sr. Description Penalty Per Unit
Instance

Claims/disputes for any balances pertaining to

1 5,000/- 1,000/- per day
IEC are not settled within sixty (60) days.

Any other non-compliance and circumvention of

instructions issued from time to time by SBP, Min. 5,000/- to Max. 100,000/-
2
relating to arrangements with other banks or depending upon the severity of instance
IEC.

131

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4. Supplementary Instructions
Sr. Description Penalty Per Penalty Per Unit
Instance

Bank does not maintain prescribed statement of daily 500/- per day
1 closing cash balance. 5,000/- for which default
continues

Minimum one day's fresh/re-issuable machine authenticated 1,000/- per day

balances is not maintained in accordance with the average 10,000/- for which
2 daily cash payment requirements. default
continues

3 Branch does not accept small denomination banknotes as 10,000/- N/A

well as cut/soiled/mutilated and defective.

The soiled banknotes deposited by commercial banks Rs.500/- per

4 found to contain more than 20% of re-issuable banknotes N/A bundle
or vice versa. (Variance within 20% is tolerable)
Banks do not accept legal tender coins and do not provide
5 banknotes-to-coins exchange facility to all the customers 2,000/- N/A
and general public.
132

5.Penalty scales pertaining to Irregularities specifically for issuance of

fresh cash on specific events

Sr. Description Penalty Per Penalty Per Unit

Instance
A penalty will be imposed if fresh banknotes issued to a 20,000/- per bundle
a) commercial bank for specific events are found in the N/A found in market,
informal market during mystery shopping. 10,000/- per 05 packets
found in series
Zonal/feeding branches do not ensure replenishment of
b) authorized branches, as per time, demand, supply and 50,000/- N/A
quota.
Bank branches do not ensure issuance of fresh cash to
c) general public over the counter or against requests 10,000/- N/A
received through SMS, as per quotas and stock available.
d) Any other non-compliance and circumvention of
instructions issued from time to time by SBP.
Min. 5,000/- to Max. 100,000/- depending
upon the severity of instance

133

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Appeal Mechanism
• Time: 15 days from receiving the penalty letter
• To: Monitoring Hub In-charge
• Hub In-charge will reject appeals containing invalid
justifications
Appeal for • Admissible appeals forwarded to Director CMD for final
waiver decision

• Time: Within 30 days from issuance of debit advice

(deduction of penalty amount)
Appeal for • To: Director Finance Department, SBP
Refund

134

Real Scenarios- Recalling today’s learning

➢A Linked Branch sending balance to another Linked Branch.

➢Any angry customer demanding cash at 9:05 am. Cash is to yet to be

received from CPC. Only unsorted balance is available.

➢Replenishing ATM, cashier saw that half of the tray is filled with good
quality notes. He simply filled the remaining cassette with similar quality
notes.

➢Sorting Machine of standalone branch is out of order. Branch emailed to

vendor for its repair. How to run cash operations now?

135

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THANK YOU

136

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