Chapter# Introduction to Bank. results of the Industrial Revolution and the child of economic. and a machine for facilitating exchange.

Transcription

1 Chapter# Introduction to Bank Md Amzad Hossain * Banking occupies one of the most important positions in the modern economic world. It is necessary for trade and industry. Hence it is one of the great agencies of commerce. Although banking in one form or another has been in existence from very early times, modern banking is of recent origin. It is one of the results of the Industrial Revolution and the child of economic necessity. Its presence is very helpful to the economic activity and industrial progress of a country. Definition of a Bank The term Bank has been defined in different ways by different economists. A few definitions are: According to Walter Leaf A bank is a person or corporation which holds itself out to receive from the public, deposits payable on demand by cheque. Horace White has defined a bank, as a manufacture of credit and a machine for facilitating exchange. According to Prof. Kinley, A bank is an establishment which makes to individuals such advances of money as may be required and safely made, and to which individuals entrust money when not required by them for use. The Banking Companies Act Bank as A Bank is a financial institution which accepts money from the public for the purpose of lending or investment repayable on demand or otherwise withdrawable by cheques, drafts or order or otherwise. Thus, we can say that a bank is a financial institution which deals in debts and credits. It accepts deposits, lends money and also creates money. It bridges the gap between the savers and borrowers. Banks are not merely traders in money but also in an important sense manufacturers of money. Types of Bank There are many types of banks such as deposit banks, industrial banks, savings banks, agricultural banks, exchange banks, and miscellaneous banks. Deposit Banks Commercial Bank Industrial Banks Savings Banks Agricultural Banks Exchange Banks Miscellaneous Banks 1. Deposit Banks:

2 Md Amzad Hossain * The most important type of deposit banks is the commercial banks. They have connection with the commercial class of people. These banks accept deposits from the public and lend them to needy parties. Since their deposits are for short period only, these banks extend loans only for a short period. Ordinarily these banks lend money for a period between 3 to 6 months. They do not like to lend money for long periods or to invest their funds in any way in long term securities. 2. Industrial Banks: Industries require a huge capital for a long period to buy machinery and equipment. Industrial banks help such industrialists. They provide long term loans to industries. Besides, they buy sharess and debentures of companies, and enable them to have fixed capital. Sometimes, they even underwrite the debentures and shares of big industrial concerns. The important functions of industrial banks are: a. They accept long term deposits. b. They meet the credit requirements of industries by extending long term loans. c. These banks advise the industrial firms regarding the sale and purchase of shares and debentures. The industrial banks play a vital role in accelerating industrial development. In Bangladesh, after attainment of independence, several industrial banks were started with large paid up capital. 3. Savings Banks: These banks were specially established to encourage thrift among small savers and therefore, they were willing to accept small sums as deposits. They encourage savings of the poor and middle classs people. In Bangladesh we do not have such special institutions, but post offices perform such functions. After nationalization most of the nationalised banks accept the saving deposits. 4. Agricultural Banks: Agriculture has its own problems and hence there are separate banks to finance it. These banks are organised on co-operative lines and therefore do not work on the principle of maximum profit for the shareholders. These banks meet the credit requirements of the farmers through term loans, viz., short, medium and long term loans. There are two types of agricultural banks, i. Agricultural Co-operative Banks, and ii. Land Mortgage Banks. Co-operative Banks are mainly for short periods. For long periods there are Land Mortgage Banks. Both these types of banks are performing useful functions in Bangladesh. 5. Exchange Banks: These banks finance mostly for the foreign trade of a country. Their main function is to discount, accept and collect foreign bills of exchange. They buy and sell foreign currency and thus help businessmen in their transactions. They also carry on the ordinary banking business. In Bangladesh, there are some commercial banks which are branches of foreign

3 Md Amzad Hossain * banks. These banks facilitate for the conversion of Bangladesh currency into foreign currency to make payments to foreign exporters. They purchase bills from exporters and sell their proceeds to importers. They purchase and sell forward exchange too and thus minimise the difference in exchange rates between different periods, and also protect merchants from losses arising out of exchange fluctuations by bearing the risk. The industrial and commercial development of a country depends these days, largely upon the efficiency of these institutions. 6. Miscellaneous Banks: There are certain kinds of banks which have arisen in due course to meet the specialised needs of the people. In England and America, there are investment banks whose object is to control the distribution of capital into several uses. American Trade Unions have got labour banks, where the savings of the labourers are pooled together. In London, there are the London Discount House whose business is to go about the city seeking for bills to discount. There are numerous types of different banks in the world, carrying on one or the other banking business. Nationalisation of Banks The Government of Bangladesh nationalised 12 major banks in the country in 26 March The nationalisation of banks was described as historic, momentous, bold and timely by certain sections of the people. Nationalized Banks 1. National Bank of Pakistan 2. Bank of Bhawalpur Limited 3. Premier Bank Limited 4. United Bank Limited 5. Union Bank Limited 6. Habib Bank Limited 7. Commerce Bank Limited 8. Muslim Commercial Bank Limited 9. Standard Bank Limited 10. Australasia Bank Limited 11. Eastern Mercantile Bank Limited 12. Eastern Banking Corporation Limited Renamed After Nationalization 1. Sonali Bank 2. Janata Bank 3. Agrani Bank 4. Rupali Bank 5. Pubali Bank 6. Uttara Bank Achievements of Nationalised Banks A banking revolution occurred in the country during the post-nationalisation era. There has been a great change in the thinking and outlook of commercial banks after nationalisation. There has been a fundamental change in the lending policies of the nationalised banks. Bangladesh banking

4 Md Amzad Hossain * has become development-oriented. It has changed from class banking to mass-banking or social banking. This system has improved and progressed appreciably. Various achievements of banks in the post-nationalisation period are explained below. 1. Development-oriented Banking: Historically, banks in this region were mainly concerned with the growth of commerce and some of the traditional industries such as, cotton textile and jute and also performed work for West Pakistan. The banks were concentrated in the big commercial centres. They mostly granted short-term to venture into new fields of financing. But after commercial loans. They were unwilling nationalisation of banks, the concept of banking has widened from acceptance of deposits and mere lending to development oriented banking. Banks are increasingly catering to the needs of industrial and agricultural sectors. From shortterm lending, banks have been gradually shifting to medium and even long-term lending. From well-establishehouses, banks are positively shifting to assisting small and weak large industries and business industrial units, small farmers, artisans and other neglected groups of people in the country. They have adopted the Lead Bank Scheme. Under this scheme, all the districts of the country are allotted to some bank or the other. The lead bank of district is actively engaged in: (a) Opening bank branches in all important localities. (b) Providing maximum credit facilities for development in the district, and (c) Mobilising the savings of the people in the district. 2. Branch Expansion: Rapid economic development pre-supposes rapid expansion of commercial banks. Initially, the banks were conservative and opened branches mainly in cities and big towns. Most of them were in West Pakistan. Branch expansion gained momentum after nationalization. 3. Expansion of Bank Deposits: Since nationalisation of banks, there has been a substantial growth in the deposits of commercial banks. Development of banking habit among people through publicity, extensive branch banking and prompt service to the customers led to increasee in bank deposits. To attract deposits, Bangladeshi banks have introduced many attractive saving schemes. Apart from the quantitative increases in deposits, there has been an impressive qualitative shift. The number of small account holders with the banks has been increasing day-by-day. Aggregate deposits are composed to time deposits and demand deposits. Earlier there was predominance of demand deposits. Now there is predominance of time deposits. The ratio of time deposits to total deposits has been increasing. 4. Credit Expansion: The expansion of bank credit has also been more spectacular in the post-bank nationalisation period. At present, banks are also meeting the credit requirements of industry, trade and agriculture on a much larger scale than before. Credit is the pillar of development. Bank credit has its crucial importance in the context of development and growth with social justice. 5. Investment in Government Securities: The nationalised banks are expected to provide finance for economic plans of the country through the purchase of government securities. There has been a significant increase in the investment of the banks in government and other approved securities in recent years.

5 Md Amzad Hossain * 6. Advances to Priority Sectors: An important change after the nationalization of banks is the expansion of advances to the priority sectors. One of the main objectives of nationalisation of banks to extend credit facilities to the borrowers in the so far neglected sectors of the economy. To achieve this, the banks formulated various schemes to provide credit to the small borrowers in the priority sectors, like agriculture, small-scale industry, road and water transport, retail trade and small business. Under the new banking policy stress is laid on the weaker and under-privileged groups in the priority sector weaker sections refer to all persons who became suppressed, depressed and oppressed because of socio-political, socio-economic or socio-religious reasons. The concept of profitability has been substituted by social purposes with regard to lending to weaker sections of the society. Quantitatively, banks have done well in priority lending. But overdues and bad debts have been a serious problem faced by banks in respect of advances made to the weaker sections of the society. There is always the problem of ensuring the effective end use of the loans given to the priority sectors. 7. Social Banking -Poverty Alleviation Programmes: Commercial banks, especially the nationalised banks have been participating in the poverty alleviation programme launched by the government. (a) Differential Interest Scheme: With a view to provide bank credit to the weaker sections of the society at a concessional rate the government introduced the Differential interest rates scheme. The scheme has shown notable progress. (b) Integrated Rural Development Programme (IRDP): This is a pioneering and ambitious programme to rectify imbalances in rural economy and also for allround progresss and prosperity of the rural masses. Other important scheme introduced by the government of Bangladesh and implemented through the banking system includes (a) self-employment scheme for educated youth, (b) self- employment programme for urban poor, and (c) credit to minority communities. 8. Growing Importance of Small Customers: The importance of small customers to banks has been growing. Most of the deposits in recent years have come from people with small income. Similarly, commercial banks lending to small customers has assumed greater importance. Thus banking system in Bangladesh has turned from class-banking to mass- have been banking. 9. Innovative Banking: In recent years, commercial banks in Bangladesh adopting the strategy of innovative banking in their business operations. Innovative banking implies the application of new techniques, new methods and novel schemes in the areas of deposit mobilisation, deployment or credit and bank management. Mechanisation and computerisation processes are being introduced in the day-today working of the banks. 10. Diversification in Banking: The changes which have been taking place in Bangladesh since 1972 have necessitated banking companies to give up their conservative and traditional system of banking and take to new and progressive functions. The government had been encouraging commercial banks to diversiy their functions. As a result, commercial banks have set up merchant banking divisions and are underwriting new issues, especially preference shares and debentures. Commercial banks have started lending directly or indirectly for housing. Venture capital fund is also started by one public sector bank.

6 11. Globalisation: The liberalisation of the economy, inflow of considerable foreign investments, frequency in exports etc., have introduced an element of globalization in the Bangladesh banking system. Classification of Banking (Structural): Unit banking: Unit banking is a system where the operations of a bank are confined to a single office located in a particular area. A unit bank has virtually no branches. In order to provide facilities to its customers in remittance and collection of funds, a unit bank resorts to correspondent banking system. United States of America can rightly be termed as the home of unit banking system. Branch banking: Branch banking is a system where a bank with a network of branches throughout the country carries out its banking operations. Sometimes branches are also opened outside the country. However, small banks may like to restrict their branches of offices to a certain region of the country. Chain banking: Chain banking is a system where an individual or group of individuals or members of a family control the operations of two or more banks. The control is exercised either through holding majority of shares in each bank or inter-locking directorships. However, each bank retains its individual entity. Group banking: It is a system where two or more banks are controlled by a holding company. Thus, group banking is similar to chain banking except with the difference that instead of an individual or group of individuals or members of a family, an incorporated company having a separate legal entity holds majority of the voting power in the companies of the group. Such holding company may or may not be engaged in the banking business. Deposit banking, Investment banking and Mixed banking: Md Amzad Hossain * Deposit banking: It is a system of banking where the banks involve themselves only in acceptance of deposits repayablee on demand and lending money to trade and industry for short periods not exceeding a year or for meeting working capital requirements. England is considered to be the home of deposit banking. Investment banking: the system was first developed in Germany in the middle of the nineteenth century. It is a system where banks arrange long-term funds for business and industry. They work both as financier as well as underwriters. Mixed banking: It is a system where banks combine both the deposit banking and investment banking functions. Thus in this type of banking, banks raise deposits from the public repayable on demand and lend it to meet both short-term as well as long-term requirements of trade and industry. The system of mixed banking also started with Germany in the beginning of 20th century.

7 Md Amzad Hossain * Meaning and Definition of a Banker The term banker refers to a person or company carrying on the business of receiving moneys, and collecting drafts, for customers subject to the obligation of honouring cheques drawn upon them from time to time by the customers to the extent of the amounts available on their current accounts. There are differences of opinion regarding the meaning of the term banker. We have discussed here some of the important ones. 1. Sheldon H.P.: The function of receiving money from his customers and repaying it by honouring their cheques as and when required is the function above all other functions which distinguishes a banking business from any other kind of business. 2. Sir John Paget: No person or body corporate or otherwise can be a banker who does not take deposit accounts, take current accounts, issue and pay cheques and collect cheques crossed and uncrossed for his customers. 3. G. Crowther: A banker is a dealer in debt, his own and other people. 4. Macleod: The essential business of banker is to buy money and debts, by creation of other debts. A banker is therefore essentially a dealer in debts or credit. 5. Dr. H.L. Hart: A banker or bank is a person or company carrying on the business of receiving moneys, and collecting drafts, for customers subject to the obligation of honouring cheques drawn upon them from time to time by the customers to the extent of the amounts available on their current accounts. Meaning and Definition of a Customer The term customer of a bank is not defined by law. In the ordinary language, a person who has an account in a bank is considered its customer. The term customer also presents some difficulty in the matter of definition. Theree is no statutory definition of the term either in Bangladesh or in England. However, the legal decisions on the matter throw some light on the meaning of the term. According to an old view, as expressed by Sir John Paget, to constitute a customer, there must be some recognizable course or habit of dealing in the nature of regular banking business... It has been thought difficult to reconcile the idea of a single transaction with that of a customer that the word predicates, even grammatically, some minimum of custom, antithetic to an isolated act. According to this view, in order to constitute a customer of a bank, two conditions are to be fulfilled. (a) There must be some recognizable course or habit of dealing between the customer and the banker. (b) The transactions must be in the form of regular banking business. The Banker-Customer Relationship The relationship between the banker and the customer arises out of the contract entered in between them. This contract is created by mutual consent. A contract that existss between a bank and its customer is a loan contract. This is because if the customers account is in credit, the bank owes him that money and vice versa, if the account is overdrawn. This contractual relationship between banker and customer is regulated by the rules contained in the Negotiable Instruments Act, 1881 and the Contract Act, The relationship between the banker and the customer is vital. The relationship starts right from the moment an account is opened and it comes to an end immediately on closure of the account. This relationship is of two types: A. General relationship, and B. Special relationship. A. General relationship:

8 The general relationship between banker and customer can be classified into two types, viz., 1. Primary relationship, and 2. Secondary relationship. These are discussed below. 1. Primary Relationship Primary relationship is in the form of a Debtor which arises out of a contract between the banker and customer. Banker is neither a bailee nor a trustee nor an agent but only a debtor. Thus, the fundamental relationship is that of Debtor and Creditor. Sometime the banker discharges agency functions like collection of bills, cheques etc., acts as a bailee by keeping valuables in safe custody and acts as trustee by administering the property for the benefit of defined beneficiary. Here the relationship is not that of Debtor and Creditor. The authorities on banking law and many court decisions have said that primary relationship is that of Debtor and Creditor. Relation of Debtor and Creditorr The true relationship between a banker and his customer is that of a debtor and a creditor. Sir John Paget says: The relation of banker and customer is primarily that of a debtor and creditor, the respective positions being determined by the existing state of the account. Instead of money being set apart in the safe room, it is replaced by a debt due from the banker. The money deposited with him becomes his property and is absolutely at his disposal. As long as the customer s account shows a credit balance, the banker would be a debtor and in case the customer s account show a debit balance, the banker would be creditor. 2. Secondary Relationship It will be in the form of: (a) Banker as agent (b) Banker as trustee (c) Banker as bailee Let us analyse these three aspects. Md Amzad Hossain * (a) Banker as Agent: A banker acts as an agent of his customer and performs a number of agency functions for the convenience of his customers. These are as follows: (1) Purchasing or selling of securities. (2) Collection of income (3) Making periodical payments as instructed by his customers. (4) Collecting interest and dividend on securities lodged by his customers. (5) Receiving safe custody valuables and securities lodged by his customers. (6) Collecting cheques, hundies, drafts of the customers.

9 In this case, the banker and customer relationship is, in the form of an Agent and Principal. (b) Banker as Trustee: Ordinarily, a banker is a debtor of his customer in respect of the deposits made by the latter, but in certain circumstances he acts as a trustee also. The customer may request the banker to keep his valuables in safe vaults or one may deposit some amount and can request the bank to manage that fund for a specific purpose, which the bank does, or in case of corporate debentures, the bank can becomee trustee for debenture holders or the bank collects the cheques, hundies of the customers in the capacity of trustee. Thus, there are wide varieties of trustee functions discharged by the banker. (c) Banker as Bailee: Section 2 of the Contract Act defines that bailment as the delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person delivering them. As a bailee, the banker should protect the valuables in his custody with reasonable care. If the customer suffered any loss due to the negligence of the banker in protecting the valuables, banker is liable to pay such loss. If any loss is incurred due to the situation beyond the control of the banker, he is not liable for penalty. To conclude, the primary general relationship exists when the account is opened by customer with bank. The relationship is that of debtor and creditor. When the bank acts as trustee or agent or bailee for the valuables, he will be establishing the secondary general relationship. B. Special relationship The special relationship between banker and customer takes the form of rights which the banker can exercise and the obligations which he owes to his customers. Following are the rights enjoyed by the banker with regard to the customer s account: 1. Right of general lien 2. Right of set-off 3. Right to appropriate payments 4. Right to charge interest, incidental charges 5. Right not to produce books of accounts 6. Right under Garnishi order 7. Right to close accounts Md Amzad Hossain * Creation of Credit Creation of credit has become a major function of commercial banks with the rapid growth in banking habit among the people. It simply means increase in creation of deposits with the bank which can help in further credit creation. The borrower may issue cheques in favour of his creditors for making payments which in turn again are deposited by the creditors in their respective bank accounts. In this process the transaction between the borrower and the creditors are settled without any transfer of legal tender money but simply through cheques.

10 Banks have two types of deposits: Md Amzad Hossain * (i) Primary deposits (ii) Derivative deposits The creation of credit is mainly concerned with Derivative Deposits. Mechanism of credit creation: The formula for deposit creation can therefore to put as follows: ( M) = M k Where, ( M) = Total Deposit Creation M = Cash in hand available with bank k = Deposit Multiplier The deposit multiplier (k) can be ascertained as follows: k =1/r Where, k = Deposit multiplier r= Cash reserve ratio