Creation of Credit by the Commercial Bank

People keep their deposit in the bank. The bank gives interest on them. The bank has to earn in order to pay. The lend credit for all types of investment. Word credit is derived from the Latin word “credo”. It means “I believe”. The depositor believe that the bank shell pay him on demand. The bank believes that he will not turn up to with draw his entire mount. It believes that the debtor shell pay of the debt in time with interest.

The deposits of the people are called primary deposits. What the bank keeps to meet the demand of the depositor is called “Cash Reserve”. The excess of the primary deposits is called secondary deposits. Secondary deposits are the created credit. Every deposit creates credit and every credit creates deposits. Bank never lends cash. It always authorizes the borrower to draw upon it with cheques. All type of transaction is under take with cheques and drafts etc. Every person getting the loan does the business with another person. The business man gets the payment in cheques. He deposits the cheques with the bank. It gets the power to create the more credit on this basis. The size of the credit depends upon the Cash Reserve Ratio. Higher cash reserve ratio creates lesser credits while lower ratio creates more credit. Any with drawl are decrees in the primary deposits will decrease the credit creating capacity. It is not as destruction of credits.

Limitation

The credit creating capacity of the bank is not unlimited. There are certain limitation it creation of credit. They are as follow:

Size of the Deposit

The size of the primary deposit determines. The capacity of the bank to creates the credit. Increase in the deposit increases the capacity of the bank. Decrease in it decreases the capacity.

Reserve Ratio

Cash reserve ratio is a check on the capacity in the creation of credit by bank. Higher reserve ration lowers of credit. This ratio is mostly determined by the central bank of the country. Lower reserve ratio expands the creation of credit.

Demand for Loan

The bank may have big primary deposit. They are useless of there is no demand for them form the people. The demand for loan is always for investment. People demand loans when there is political, social and economic peace in the country. Any unrest will badly affects the demand for loan. It main the bank has not free hands to create on expands the money.

Collateral Securities


Bank always lend against collateral securities. They are in form of move able and unmovable property. Their size remains the same in the short period. The credit creating capacity of the bank is limited to the size of the collateral securities.

How Open Letter of Credit and it Operates

Letter of credit is a grantee are an assurance on behalf of the importer (opener) in the favor of exporter(Beneficiary) under taking (pledging) the payment provided the merchandise is ship according to term and condition of the contract. Importer and exporter is a known to each other. It is the bank with Letter of credit which brings them close to each other. The importer approaches the bank opening with:

i. Valid import license
ii. Original copy contract
iii. Invoice or indent
iv. Insurance cover not

They give him a printed form. It covers all the documents. It prepares four copies of that. The original copy of letter of credit is sent to the exporter. Another copy is dispatched to his bank (intermediary). The third copy is give to the opener (importer). The fourth one is kept by the opening bank for record. This is how letter of credit opened. The bank also demands “margin requirements” from the importer. It is a percentage of imports value.

Kinds of Letter of Credit

Irrevocable Letter of Credit

If terms and condition of letter of credit could not be cancelled or modified by any party. Letter of credit is irrevocable change can be made with the mutual consent of both the party.

Revocable Letter of Credit

Any party can change or cancelled the contract by informing the other. The terms and conditions of the contract are kept in view.

Confirmed Letter of Credit

The intermediary bank undertakes responsibility of making payment to the exporter in all cases. The importer may be declared insolvent are merchandise is lost or damaged.

Unconfirmed Letter of Credit

The intermediary bank simply commits to pass on the trade document (Bill of lading and bill of exchange) to the importer through his bank. It takes no responsibility of payment.

Red and Green Clauses Letter of Credit

The Letter of Credit with red clause allows the exporter to get advances for the purchases of raw material merchandise and packing etc. Under the green clause he can also get the advance for transit and storage etc.
When the merchandise shipped the exporter get a bill of lading from a shipping company. He also repairs a bill of exchange. All such documents are sent to the importer through his bank. The opening bank gets the bill of exchange endorsed by the importers. It is sent back to the exporter. He can negotiate it from his bank. It is called discounting. The opening bank gets a trust receipt from the importer. It hands over the bill of lading to the importer for the clearance of the goods. The importer clearance the goods and sell it in the market. He deposits the amount to the bank before the expiry period to the bill of exchange. This is how the Letter of Credit operates

Advantages

For International Trade

Importer and exporter are brought closer to each other with Letter of credit . the bank opens the way for international Trade.

For Exporter

The exporter gets advances for the purchases of merchandise packing transit and storage form his bank under the Red and Green Clauses. It also discounts the bill of exchange and provides him finances for trade development.

For importer

The importer gets the delivery of goods without making any payment from his bank against the trust receipt. He sells the goods and extends the market. It helps in keeping the prices stable in both the market.

For Banks


The opening as well as intermediary bank earned commission, interest and profit in all such transaction. The opening bank gets the margin requirement at the opening of Letter of credit. Intermediary hank earns by advancing under green and Red Calluses. It also earned by discounting the bill of exchange.

Rural Credit, Needs and Source of Rural Credit

Agricultural is a seasonal industry. The output depends upon weather condition. Good timely rainfall products good crops. The crops and the income for the farmer suffer when the weather conditions are not favorable. The farmer earns once a year. He spends throughout the year. The income is small. Expenditure is large. There is a gap which he fails to bridge over. He has to borrow for farming and non farming purpose. The loans taken for all such purpose is called rural credit.

Needs of Rural Credit

 Development Needs

1.     To purchase input like seeds, fertilizers, tools, pesticides and water etc

2.     To reclaim the land affected by water logging, salinity, floods, soil erosion etc. loan are also take for the leveling of uneven lands

3.     To modernize the farming with tractor, harvester, thresher, combine engine and tube well etc.

Non Development Needs

Loans are taken for their payment of old an ancestral loan, for litigation for ceremonies like marriage, festival etc.

Sources of Rural Credit

Individual, Friends, relatives, villager, shop keeper, money lender. Land lord, Trader etc. they all provide about ten percent of the total loan. The amount of loan is small, such loan are repaid as harvest.

Zarai Taraqiati Bank

They provide about 55% of the total loan. The bank provide short, medium and long term loan for development purpose- purchase of inputs, reclamation of land and modernization of farming. It grants loan in cash. Bank also provide development loans such loan are in kinds

Co- Operative Society

They have direct link with the farmer. They provides short and medium term loan to the farmer. The amount of loan is small. People get the loan against personal security, since the borrower is influential person. He seldom returns the loan.

Commercial Bank

Bank provides loan against the lender properly. Banks provide round about 25 % of the total loan. Under the supervised credit scheme, the banks provide cheap credit. State bank of Pakistan cover round about 50% less of the entire loan granted to the farmer. State bank also refinances the commercial bank if they run short of funds.

Taccavi Loan

Government provides relief loan to the farmer in emergencies like flood etc. the amount is small. Such loan is not popular due to the red – tape of the offices.

Causes of Failure of Gold Standard

In Elastic Supply of Gold

Population grew rapidly, economic expanded demand for gold rose up, and gold mine could not supply enough of gold to meet the rising demand.

In Elastic Economy

Elastic economy is the basic conditions of the working of gold standard. Economics were no free after First World War. The develop country like Germany and U.S.A adopted protection policy to develop industry. The developing country introduced license and Quota system. They also adopted exchange control to check imports and export, balance of payment. These worth of hurdles in the free working of this system.

Movement of Gold

Free inflow and outflow of gold is another basic condition of this system. Many develop countries did not follow this practice. USA and France demand gold as reparation interim of gold after the First World War 3.25 of the world gold assembled in these two countries. They dump this gold. They did not inflate their currency. The rest of the world war had not enough of gold to run this system. Thus gold standard broke down.

Abnormal Condition

Gold standard functions in normal condition only. It does not function well in abnormal conditions like wars, political crises and economic depression. The First World War and fit out fall, the changing political position of the world and the great economic depression in 1929 were the main causes of the failure of gold standard. Thus this standard broke down in the world in 1930
Why Gold Standard Broke Down In the World

Gold Standard

When gold determined the value of goods and services and place a vital role in all types of transaction. It is called gold standard. The following rules observe in the gold standard.

Rules of Gold Standards

Currency

All the coins are made of gold. They full bodied coin. Paper money is fully convertible into gold for all types of payment.

Movement of Gold

Inflow and outflow of gold is allowed. Payment can be made in titles to trade (bill of exchange, drafts etc) as well as gold. Govt. does not put any check on the movement of gold.

Co- Relation between Quantity Gold and Quantity of Money

The Quantity of gold is converted into gold coin are equal amount of paper currency is issued. Government does not dump any gold. In case of inflow of gold quantity of money is inflation. In case of out flow of gold the quantity of money deflated.

Free Flexible Economy

Economy is free all the checks. The Govt. does not interfere in the economic life of the people. In case of inflow of gold and the expansion of money, the price of goods and services must rise accordingly vice versa.

Free Trade

Import and export must be free of all the licenses, Quotas, exchange, control tariff (custom duty).

In case of gold bullion standard taken coins circulate. Paper currency is not convertible into gold for internal payments. It is convertible into gold for external payment only with some restriction. Quantity of gold supports the quantity of money. Inflow of gold is allowed economy is free and international trade is without checks. The central bank buys and sells gold on official rate. Bank of England bought gold at 3 ponds seventeen shillings 9.5 pence per ounas. In the gold exchange standard, gold place no direct role in and transaction. There are taken coin paper money is not convertible. Paper money can be converted into the currency of a country which is on gold standard. Indian rupee was taken coin. Paper money was not convertible to gold. Even the Indian rupee could be converted into pounds sterling which wan on gold standard. In this way Indian had gold exchange standard.

Rate of Exchange and How its Determine under Gold Standard

Rate of exchange is a convertible rate. It is rate at which the currency unit of a country is exchange into the currency unit of another country. Suppose 60 rupee are paid for dollar, the rate of exchange:

1 Dollar           =          60 R.S

1 Riyal             =          20 R.S

When two countries are on the gold standard the rate of exchange shell be determine at a point where the gold contents of their coins are equal. It is known as gold or special point. Suppose a rupee coins weigh one gram gold. The weight of dollar is 40gram gold. The rate of exchange is 1 dollar = 40 RS under the gold standard. Both the countries will follower the following rules.

1.     They have full bodies coin. Paper currency is convertible into gold.

2.     Inflow and out flow of gold is allowed for payment and receipts.

3.     There is co- relation between the quantity of gold and quantity of money.

4.     Economy is flexible

5.     International trade is free

The rate of exchange between Pakistan and USA will be stable ate the gold point.

If                           1 Dollar           =          60 RS

Imports            =          exports

Payment          =          Receipt

Demand          =          Supply

The rate of exchange is stable only under static conditions. Since the economy is dynamic the rate of exchange is always changing. Suppose

Pak Imports     =          12 Billion

Pak Exports     =          10 Billion

Pak Payment   >          Receipts

Pak Imports     >          Exports

A dollar will not be available at rupee 60. Pakistani trade has tow option

1.     To move then 60 Rs for a dollar

2.     To exchange gold to U.S.A

Export of gold involves the cost of transport. Suppose the cost of transport of 60 gram gold. It means of Pakistani trader pay 60 RS at the cost for dollar. At this point gold may outflow of Pakistani. It is the gold export out for Pakistani and gold import coin for USA. It is also upper gold coin (60+1) for Pakistan and lower gold coin (60-1) for USA. The rate of exchange will move upper between the upper gold coin and low gold coin the long period. In the short period the rate of exchange will be changes. It will change daily and move along the gold.

With outflow of gold money supply will deflate in Pakistan and inflate in USA. With inflow of gold goodwill will be cheaper in Pakistani and clear in USA. It will promote our export and discourages our imports and receipts will increase and payment will fall.

Rate of Exchange and How its Determine under in Convertible Paper Currency

Rate of exchange is a convertible rate. It is rate at which the currency unit of a country is exchange into the currency unit of another country.When the two countries are paper standard they follow the following rules.

1.     There are token coins. Paper currency is not convertible into gold

2.     There are free inflow and outflow of goods

3.     Quaintly of money of changes according to changes in the economic conditions of the country

4.     Govt. will regulate the economy with certain measure. Monitory fiscal commercial income and price

5.     Trade is free between the countries.

When the two countries are on paper standard dear rate of exchange is determine at a point where the purchasing power of their currency is qual. It is known as parity point. E.g. the price of one kg sugar in Pakistan is rupee 30 and a dollar is USA can purchase two Kg sugar. It means the purchasing power of dollar is equal to 60 rupees. The rate of exchange shell is equal to 60 rupee. Any change in the price level will change the rate of exchange. If the price of sugar rises from 30 to 35 rupees per Kg in Pakistan and the price level remains constant in USA. The new rate of exchange:

1Dollar            =          50 Rs

The rate of exchange at the parity point will be stable. If

PAK Export                            =          Imports

PAK Receipt                           =          Payment

PAK Income from Trade           =          Expenditure on Trade

Supply of FE                           =          Demand of FE

Since the economy is dynamic, imports and exports always change. Some time

Imports            >          Exports                        and some time

Exports            >          Imports

In this case under such condition the balance of payment is always discourages.

Suppose:

PAK Export                            =          Imports

PAK Receipt                           =          Payment

PAK Income from Trade           =          Expenditure on Trade

Supply of FE                           =          Demand of FE

Under such circumstances a dollar will not be available at the parity point. (1 dollar = 60 Rs)We shall have to pay more than 60 Rs in order to get one dollar. We can also make payment by sending goods to U.S.A. It involves the cost of transport. Suppose the cost of sending 2 Kg sugar to USA Rs One. In this way a Pakistan will be ready to pay 60 Rs for a dollar. Goods may start out flowing from Pakistan and inflowing in U.S.A. It is commodity export point for Pakistan and commodity import for U.S.A. It is also upper parity point for Pakistan (60+1) and lower parity point (60-1) for USA. Rate of exchange will move between upper parity point and lower parity point in the long period. In that short period it will move along the parity point. According to the size of 

Export and Import:

Upper =          60+1                            and                              lower   =          60-1

The export of goods from Pakistan will promote the export rate and improve receipts. Balance of Payment will bend to words Pakistan and against USA. It will automatically set the balance of payment right.

Business Finance, Needed and it’s Kinds

Capital required to conduct the business in audit to achieve different object is called business finance.

Needed of Finance

Finance is needed for the following objective.

Fundamental Need

The business man has to decided nature, sit, scale of technique and the marketing of his product. All such matters need finance for adviser, exports and surveyor etc.

Establishment

The business is to be set up. Land is purchased, machinery is ordered. Building is to constructed, supervisor, manager, watchman are to be employed. Infra-Structure like transport, communication water and power are to be arranged.

Operation

The business is to be started. Working capital is needed for the purchase of raw material; labor force is to be employed. Wages are to be paid to them. Interest is paid to the bank etc.

Maintenance

The productive capacity of the firm is maintain. The work out machinery is repaired some stock is replaced. Research is carried out to improve technique of production.

Growth and Development

Every firm has to grow and develop to earn maximum profit. New plants are setup. Latest machinery is installed. New markets are surveyed. Scale of production is extended.

Emergencies

Finance is needed to cover the unexpected risk and emergencies. More funds are needed to meet the labor strike, demand for higher wages bonus and new taxes etc.

Kinds of Business Finance

Finance is needed for development purpose like the purchase of land and stock capital of goods construction of building as well as infra structure. Funds are also needed for emergencies; social security’s and welfare of the labor force etc. finance are of three kinds.

Long Term Finance

The duration of such finance is between three to ten years. Such loans are taken for the purchase of land and equipment, construction of building and infra structure and the replacement of old machinery with latest one.

Medium Term Finance

The duration of finance is between one to three years. Such finance are needed to meet the fundamental needs of the firm as well as for operation

Short Term Finance


It ranges is between 30 days to one year. Such loans are taken for operation and maintenance like the purchase of raw material, payment of tax, wages and rent and all other emergencies.

Function of Central Bank

Central Bank is a financial institution which is responsible of changing the expansion and transaction of money in the large interest of nation.A central Bank perform many function but some main function are as under:

• Issue the currency

It has sole or near monopoly to issue the currency note. It follows any principal for doing this function. Bank of England issues the currency note under the principal of fixed fiduciary limit when State bank of Pakistan followed the proportional reserve system.

• Adviser of the Government

It advises the government on all financial matter like inflation, deflation and devaluation. It represents the government in all international monetary conference. It surreys the economy, collects the data and publish it before budget. It preserves the foreign exchange reserve. It fixes the rate of exchange and it buys and sells the foreign exchange. It provides the locker serves for all. It collects the taxes which are applied by the government. It disburses the government expenditure. It advance short term loan to government and it keeps the government surplus deposits

• Bank’s Bank

It leads and guides the commercial bank. The banks are to obey all its order and direction. No banks can open, transfer and close any of its branches without its permission. Every bank has to furnish its assets and liabilities in the form of balance sheet regularly. Every hank has to open it account in the central bank with it times and demand liabilities (current & Fixed A/C). The bank has also to keep some cash against the deposit which is called liquidity deposit. The central bank provides the clearance house facility to the scheduled bank. It is also the last option for the banks which provide them loan by re-discounting their bill of exchange.

• Custodian of the Money Market

It is responsible to expand and contract the money supply. It increases the rate of economics development with investment. It boosts up his growth of the economy. It tries to get the full employment level. It also tries to keep the value of money stable. For that it adopts bank rate policy, open market operation. It changes the reserve ration for creating loan. It also applies the rushing of credit to control the money supply. Efforts are make to expand and contract the supply of money according to the needs of the economy.

Bank Rate Policy

During inflation the central bank adopts the Bank Rate Policy. During inflation prices raise and value of falls. Demand and market are contract. Investment declines, GNP, employment, per capital income, export are badly affected.Saving, government revenue and balance of payment are also badly affected.

Under such circumstances, the central bank raises the bank rate. It is a rate at which it provides credit to the commercial banks and banks get dear credit. They enhance the lending rate. They also increase the call rate (discount rate) and deposit rate. Banks create lesser loan and lesser credit comes into circulation. Higher deposit rate encourage saving and discourages consumption. Higher lending rate and deposit rate contract the supply of money. It has good effect on the economy. Prices begin the fall values of money rises. It is extent the demand as well as the market. It promotes the investment and generates income. It increase per capital income, saving increases, taxable capacity increases and it increase the government revenue. Budget is balance, export boost up and improve the balance of payment. The rate of change also improves. Dear is economic development and employment level is full. So the objectives of monetary policy are achieved.

Introduction of NBP

National Bank of Pakistanis the oldest and largest commercial bank with more than 1250 branches all over the Pakistan as well as abroad. N.B.P is established by the Government of Pakistan in November 9, 1949.It set the base of banking for further growth and establishment of the structure for banking system in the Pakistan. N.B.P provide services to individual, business entity and also government sector. It is a trusty of public fund and work as the agent of the State Bank of Pakistan where S.B.P is not present. It is a leader in the debit equity market, retail & consumer banking, agriculture financing, treasure service and also corporate investment banking its business portfolio is diversified.

N.B.P is very important roll playing to promoting and developing small and medium enterprises in the country. Now a day N.B.P proved as a progressive, customer focus and efficient institution. It is offer wide range of consumer product to promote business and provide different society segment. Some of these products are specific for low and middle level income of the population like N.B.P Karobar, N.B.P Advance Salary, N.B.P Saiban, N.B.P Kisan and N.B.P Cash n Gold. Beside of this it is offer special credit scheme that is small financing for agriculture, industries, business activities and Qarz e Hasna to the students, Self employment Scheme for unemployed people and public transport Scheme.

N.B.P takes many steps to facilitate overseas customer that they send their remittances in an easy and efficient way. Therefore N.B.P signed agreement with Western Union in 2002 for the base of documented remittances. Recently bank has started Electronic home remittances project. This project is based on technology system to handle inward remittance effetely and ensuring that bank branches keep a track of the remittances received form abroad till its final receipt.

National Bank has received recognition and numerous awards locally and internationally. It has been the recipient of The Bank of the Year 2001, 2002, 2004, 2005, 2008 and 2010 Award by The Banker Magazine. The World Best Foreign Exchange Bank, Pakistan for 2004, 2005, 2006, 2007 and 2008. N.B.P receive Kisan Time Awards in 2005 for better services in agriculture sector. It is listed among the Region's largest banks and also among the largest banks in South Asia 2005 by The Asian Banker. It has also been presented a Recognition Award in 2004 for having a Gender Sensitive Management by WEBCOP AASHA besides other awards. N.B.P awarded President of Pakistan Trophy and Prime Minister of Pakistan Trophy in 2010. N.B.P received award by Global Finance Best Emerging Market Bank from Pakistan for the year 2003, 2005 and 2006. N.B.P is awarded the number 1 bank in Pakistan by Banker Magazine 2005.

Organizational Structure of NBP

Organization chart demonstrates the organizational structure.  Organization structure is totally based on organization objective and strategy to achieve them. In centralized organization structure, the power of decision making is hold top level of management and tight control applies over department. While in decentralized structure organization the decision making power is delegated and departments have varying level of autonomy.

Organization structure is decided the level of roll, power and responsibilities are controlled, coordinated and delegated among the management for flow.  N,B,P structure is a bureaucratic type of structure, in this structure formalized rules and regulation are followed, narrow span of control and centralized authority, task are set in the functional department, decision making through chain of command and operating task are achieved by specialization.

Critical Analysis of NBP

This report is concerning my internship program at National Bank of Pakistan. In this report you will find all features about the bank, its product and services.I found the knowledge about every main part of the bank, which I observed during my internship period.The main purpose of my internship program is learnt by working in practical environment and applies the knowledge in real world scenario which obtained during academic process.

N.B.P is the largest bank of Pakistan but some area where need to improve which I observe in doing my internship program is as under:

Customer Dealing & Satisfaction

In N.B.P customer dealing is well but during the rush customer wait for a long time it is very hard for a potential customer to get the information. Facilities for customer service are not proper and some time customer feels hesitation.

Poor Filing System Record

I observed during my internship program that filing system of the bank is poor when we need some specific record we spent a lot of time wasted to search it.

Work Differences

A vast difference exists between theory and practical and N.B.P has written procedure

Job Analysis

Job analysis is not effective because some people are simple graduate and don’t background about their job. So during the hiring trained, skillful and job oriented people are encouraged for the job.

Lack of Training

N.B.P does not provide adequate facility of specialized training to their staff because through training employee gained more knowledge and advance skill.

Lack of Computer Technology

Lengthy procedure of paper work which is due to lack of computer technology is the burdened over the bank employee so they are unable to give proper attention on the clients and judge their face difficulties during the doing job.

Lack of Secrecy of Customer

Bank duty is base on secrecy but employee don’t maintain secrecy especially during the rush they speak loudly account position and clearance of cheque so person can get whole information from the ledge.

Managerial Leadership

Develop a managerial and leadership skill because manage is not only responsible for their own units in business he control financial and administrative matter as well as he  also involve training, recruiting, grievance handling and taking immediate initiative in crisis situating to take major decision which affecting the future of the bank and banking community.

Low Profit

NBP gives low profit rate to their customer so most of the customer shifted their account to the National Saving Center for high profit. NBP increase their profit rates to attract the customer.

Employee Appreciation

Another very important thing which is ignored it is appreciation which give the employee on their good performance. Hard work and performance of employee are not recognized and appreciated which crates dissatisfaction and performance decline.

Manager Authority

Manager has a limited authority he is just approval the job so when manager is not present in his office. The customer having a wait for many hours and I  observed that there is delays in sanctioning loan cases form the head office which is causes the dissatisfaction of customer.

Efficient Banking

Efficient banking is don’t emphasize on number of accounts but grater amount of deposit while in NPB account are more but depositing are low.

Lack of Business Communication

There is no proper way to give the information to the customer. The Bank loses your confidence if create minor dissatisfaction and tension in the mind of customer. So bank services are slow down in efficiency.