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Management of Financial Institutions

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Management of Financial Institutions - MGT 604
VU
Lecture # 19
ROLE OF COMMERCIAL BANKING
(xi)LegalReforms
Legaldifficulties and time delays in recovery of defaulted loanshave been removedthrough
a new ordinance i.e. TheFinancial Institutions (Recovery of Finances) Ordinance,2001.
Thenew recovery laws ensuresexpeditious recovery of stuck up loans by the right of
foreclosure and sale of mortgaged propertywith or without intervention of court and
automatictransfer of case to executionproceeding. A BankingLaws ReformsCommission
is reviewing, revising, and consolidatingthe banking laws and drafting new laws such as
bankruptcylaw.
(xii)Taxation
Thecorporate tax rates on banks were exorbitantly high in Pakistan thus adverselyaffecting
theirprofitability and attractiveness as an avenue for investment and new equity injection.
TheGovernment has already reduced the tax rate from 58 percent to 44 percent duringthe
lastthree years and it is envisaged that the rate will be reduced gradually and brought at par
withthe corporate tax rate of 35 percent in the next three years. This will in turn help in
reducingthe spread between the deposit rate and lending rate and benefitfinancial savers.
(xiii)AgricultureCredit
A complete revamping of AgricultureCredit Scheme has been done recently with thehelp
of commercial banks. The scope of the Scheme which was limited to production loansfor
inputshas been broadened to thewhole value chain of agriculture sector.
We have, with the grace of Allah, become a surpluscountry in foodgrains, livestocketc. and
thusthe needs of agriculture sector have also expanded. The SBPhas included financingfor
silos,godowns, refrigerated vans, agro processing and distribution under thecover of this
scheme.This broadening of the scope as well the
removal of other restrictions have enabled the commercial banks to increasetheir lending
foragriculture by a multiple of fourtimes compared to FY 1999-00 thusmainstreaming
agriculturelending as part of theircorporate business. Unlike theprevious years whenthey
wereprepared to pay penaltiesfor under performance theyhave set up higher targets for this
year.The private commercial banks have also agreed to step in and increase their lending to
agriculture.
(xiv)E-Banking
The banks are being encouraged to movetowards Electronic banking.There is a big surge
amongthe banks including NCBs to upgrade their technology and on-linebanking services.
Duringthe last three years there is a large expansion in the ATMs has been witnessed and at
present about 500 ATMs are nowworking throughout thecountry. The decisionmandating
the banks to join one of either two ATM switches available in thecountry will provide a
furtherboost. Progress in creatingautomated or on-line branches of banks has been quite
significant so far and it is expected that by 2004 a majority of the bank branches will be on-
line or automated. Utilitybills payment and remittances would be handledthrough ATMs,
Kiosks or Personal Computers reducing bothtime and cost. Investment in information
technology is being undertaken by the banks to enhance efficiency, reduce transactioncosts
and promote E-Commerce. It hasbeen estimated that a bankingtransaction through ATM
costs one fourth as much a transactionconducted over the counter in a traditional branch ­
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Management of Financial Institutions - MGT 604
VU
and the similar transaction overthe internet costs a mere fractionof the traditionalteller
costs.
(xv)HumanResources
The banks have recently embarked on merit-based recruitment to build up theirhuman
resource base ­ an area which hasbeen neglected so far. Theprivate banks have taken lead
in this respect by holdingcompetitive examinations, interviews and selecting the most
qualified candidates. The era of appointment on the basis of sifarish and nepotism has come
to an end. This new generation of bankers will usher in a culture of professionalism and
rigour in the banking industry and produce bankers of stature who will provide the
leadership in the future.
(xvi)CreditRating
To facilitate the depositors to make informed judgments aboutplacing their savings withthe
banks, it has been made mandatoryfor all banks to get themselvesevaluated by creditrating
agencies. These ratings are then disclosed to the general public by theSBP and also
disseminated to the Chambers of Commerce and Trade bodies. Such public disclosure will
allowthe depositors to choose betweenvarious banks. For example, those who wish to get
higherreturn may opt for banks with B or C rating. But those who want to play safemay
decide to stick with only AAA or AA rated banks.
(xvii)Supervision and Regulatory Capacity
Thebanking supervision and regulatorycapacity of the Central Bankhas beenstrengthened.
Merit­ based recruitment, competency ­ enhancing training, performance ­ linked
promotion,technology ­ driven process,induction of skilled humanresources and greater
emphasis on values such as integrity,trust, team work havebrought about a structural
transformation in the character of theinstitution. The responsibilityfor supervision of non-
bankfinance companies has beenseparated and transferred to SecuritiesExchange
Commission.The SBP itself hasbeen divided into two parts ­ one looking aftercentral
banking and the other after retailbanking for thegovernment.
(xviii)PaymentSystems
Finally,the country's payment systeminfrastructure is being strengthened to provide
convenience in transfer of payments to thecustomers. The Real-Time Gross Settlement
(RTGS)system will process largevalue and critical transactions on real time while
electronicclearing systems will be established in allcities.
These reforms will go a long way in further strengthening theBanking sector but a vigilant
supervisoryregime by the State Bank will help steer the futuredirection.
CommercialBanking in a FreeSociety
Although we can say a great deal about theinstitutions of a free society, and why they are
desirable, speculating about thespecific ways in which people will choose to organize
themselveswithin such institutions is always a trickymatter
·
Afterall, the whole justificationfor the institutions of a free society is thatonly
throughits institutions can human beings discover progressively betterways of dealing with
scarcity(of both goods and knowledge)
·
and thus improve both ourmaterial and non-material welfare.Our ignorance of the
details of a free society is precisely why having a free society is so important.
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Management of Financial Institutions - MGT 604
VU
Thebanking industry is especiallysuited for just thiskind of analysis. If we want to know
whatcommercial banking mightlook like in a free society, we need only turn to
contemporaryregulation and the historicalrecord to begin to piecetogether a coherent
story.
PrivateDeposit Insurance
·
Banks in a free society mightchoose to purchase privately supplied deposit
insurance as a way to reassure customers.They might also enter intointerbank mutual aid
agreements, or be insured throughclearinghouses.
·
Historically, banks have used these and other methods to conveytrust to customers.
Before deposit insurance banks would advertisetheir balance sheets and listthe members of
theirboards of directors.
·
Providingthis kind of information was a way to establish theirtrustworthiness to
actual and potential depositors. With deposit insurance, banks need not do this.
·
It is reasonable to expect that banks in a free society will use theseways, and
discovernew and imaginative ones, of creating the trust on whichall banking systems rest.
·
Banks in a free society will be literallynothing special. What makesbanking so un-
freetoday is that banks are treated differently from otherbusiness enterprises.
·
Therule of law that wouldcharacterize a free societywould demand that banks be
treated no differently than otherfirms. If they arefraudulent or use force,then they need to
face the consequences. Otherwise,any sort of voluntaryarrangement banks make with
customers will be allowed.
·
Theresult will not only be a more free banking system,but a more efficient,safe,
and productive one.
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Table of Contents:
  1. Financial Environment & Role of Financial Institutions:FINANCIAL MARKETS &INSTITUTIONS
  2. FINANCIAL INSTITUTIONS:Non Banking Financial Companies
  3. CENTRAL BANK:Activities and responsibilities, Interest Rate Interventions
  4. POLICY INSTRUMENTS:Open Market Operations, Capital Requirements
  5. BALANCE OF TRADE:Balance of Payments Equilibrium, Public Policy and Financial Stability
  6. STATE BANK OF PAKISTAN:History, Regulation of Liquidity, Departments
  7. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS:Banking Inspection Department
  8. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Debt Management
  9. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Training Programs by SBP
  10. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Human Resources Department
  11. MAJOR DRIVERS OF FINANCIAL INDUSTRY:GLOBAL FINANCIAL SYSTEM, The World Bank
  12. INTERNATIONAL FINANCIAL INSTITUTIONS:ADB Projects in Pakistan, Paris Club
  13. PAKISTAN ECONOMIC AID & DEBT:Macroeconomic Stability, Strengthening Institutions
  14. INCREASING FOREIGN DIRECT INVESTMENT:Industrial Sector, Managing the Debt
  15. ROLE OF COMMERCIAL BANKS:Services Typically Offered by Banks, Types of banks
  16. ROLE OF COMMERCIAL BANKS:Types of investment banks, The Management of the Banks
  17. ROLE OF COMMERCIAL BANKS:Public perceptions of banks, Capital adequacy, Liquidity
  18. ROLE OF COMMERCIAL BANKS:Problem bank management, BANKING SECTOR REFORMS
  19. ROLE OF COMMERCIAL BANKING:Private Deposit Insurance,
  20. BRANCH BANKING IN PAKISTAN:Remittances, Online Fund Transfer
  21. ROLE OF COMMERCIAL BANKS IN MICRO FINANCE SECTOR
  22. Mutual funds:Types of international mutual funds, Mutual funds vs. other investments
  23. Mutual Funds:Criticism of managed mutual funds, Money Market Fund
  24. Mutual Funds:Balanced Funds, Growth Funds, Specialized Funds, Measuring Risks
  25. Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders
  26. Mutual Funds:Internet Fraud, The Pyramid Scheme, How to Avoid Investment Fraud
  27. Mutual Funds:Investing In International Mutual Funds, How to Pre-Select a Mutual Fund
  28. Role of Investment Banks:Recent evolution of the business, Possible conflicts of interest
  29. Letter of Credit:Elements of a Letter of Credit, Commercial Invoice, Tips for Exporters
  30. Letter of Credit and International Trade:Terminology, Risks in International Trade
  31. Foreign Exchange & Financial Institutions:Investment management firms, Exchange Traded Fund
  32. Foreign Exchange:Factors affecting currency trading, Economic conditions include
  33. Leasing Companies:Basic Purpose of Leasing, Technological Benefits
  34. The Leasing Sector in Pakistan and its Role in Capital Investment
  35. Role of Insurance Companies:Indemnification, Insurer’s business model
  36. Role of Insurance Companies:Life insurance and saving
  37. Role of financial Institutions in Agriculture Sector:What is “Revolving Credit Scheme”?
  38. Agriculture Sector and Financial Institutions of Pakistan:What is SMEs
  39. Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment
  40. Financial Crimes:Process of Money Laundering, Terrorist Financing
  41. DFIs & Risk Management:Managing Credit Risk, Managing Operational Risk
  42. Banking Fraud & Misleading Activities:Rogue Traders, Uninsured Deposits
  43. The Collapse of ENRON:Auditing Issues, Corporate Governance Issues, Corrective Actions
  44. Classic Financial Scandals:Corruption, Discovery, Black Wednesday
  45. RECAP:FINANCIAL INSTITUTIONS, CENTRAL BANK,