Chapter

An Overview of Banks and

their Services 1

In this chapter, you will learn about the basics of the banking in case
you are from a non-business backgrounds. I will endeavour to
explain the fundamental way a bank functions, its sources and uses
of funds. The avenues of income for a bank and the myriad of
services rendered by a financial institution like bank.

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 Ask Yourself!
What is a Bank? Why its needed?
 Bank is a financial intermediary/institution which collects
deposits from surplus units and extend credit to deficit units.
 In doing so, the banks act as the intermediary in between the
surplus unit and deficit units and facilitates the flow of funds to
Household units to Business units.

Banks
• Keep Deposit • Takes Loans
 • Gets Moderate • Collect from SU • Pays High
interest & Lends to DU Interest
• Enjoys the
Spread
Surplus Unit Deficit Unit

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 Functions of Banks
 Primary Functions
 Acceptance of Deposits
 Current Account Savings Account FDR
 Advancing Loans
 Creation of Credit

 Clearing of Cheques

 Financing Foreign Trade

 Remittance of Funds

 Secondary Function:
 Agency Services
 General Utility Services

 Miscellaneous Functions

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 Bank Vs. NBFIs
 Non Bank Financial Institutions (FIs) are those types of financial
institutions which are regulated under Financial Institution Act, 1993
and controlled by Bangladesh Bank.
 Major sources of funds of FIs are Term Deposit (at least three months
tenure), Credit Facility from Banks and other FIs, Call Money as well
as Bond and Securitization.
The major difference between banks and FIs are as follows:
 FIs cannot issue cheques, pay-orders or demand drafts.
 FIs cannot receive demand deposits,
 FIs cannot be involved in foreign exchange financing,
 FIs can conduct their business operations with diversified financing
modes like syndicated financing, bridge financing, lease financing,
securitization instruments, private placement of equity etc.

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 Sources of Bank Funds
 Shareholders’ Equity
 Deposits from Surplus Units

 Borrowed Capital
 Long-term: Equity Issue & Bond Issue
 Short-Term: Inter-bank Borrowing

Commercial papers
Bankers’ Acceptances
Call Money from other banks
 Accumulated Reserve Fund

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 Uses of Banks
 Cash
 Loans and Advances
 Term Loan
 Consumer Loan

 Overdraft

 Cash Credit

 Money at Call & Short Notice

 Consortium Financing

 Investments in Securities
 Money Market instruments: T-Bill, Commercial Paper
 Capital Market Instruments: T-Bond, Equity, Bond, Mortgage

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 Sources of Bank’s Income
 Interest on Loans and Advances: Majority of the banks income
come from the spread or Net Interest Income (NNI)
 Fees and Commissions

 Dividend/Coupon/Interest & Capital Gain from Investment

 Discount Income from Discounting on Bill of Exchange

 Agency Fees from Agency & Correspondent Banking

 Miscellaneous Income

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Traditional Services Offered By Banks

 Exchange of Currency: Commercial Bank’s AD

Branches
 Commercial Notes and Loans

 Offering Savings Deposits

 Safekeeping of Valuables: Vault Facility

 Supporting Government Activities with Credit

 Checking/ Current Accounts

 Trust Services

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 Recent Services of Banks

 Consumer Loans-Credit Cards, Car, Education,

Health & Home Loan
 Financial Advice: Individuals & Corporate Clients

 Cash Management

 Equipment Leasing: Leasing Equipments by FIs

 Venture Capital Loans: To Start-Up Companies

 Selling Insurance Products: To banking clients

Cash management is the corporate process of collecting and managing cash, as

well as using it for short-term investing. It is a key component of a company's
financial stability and solvency.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Recent Services of Banks
 Mutual Funds and Annuities: Mutual Funds Manager
 Asset Management

 Wealth Management

 Security Underwriting

 Brokerage Services

Asset management is a process of developing, operating, maintaining, upgrading, and

disposing of assets cost-effectively. The term is most commonly used in the financial
sector to describe people and companies who manage investments on behalf of
others.
 Wealth management is a high-level professional service that combines financial and
investment advice, accounting and tax services, retirement planning, and legal
or estate planning for one set fee.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 The Roles of Commercial Banks

 Intermediation Role
 Payment Role
 Guarantor Role

 Risk Management Role

 Savings/Investment Advisor Role

 Safekeeping/Certification of Value Role

 Agency Role

 Policy Role

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 Trends Affecting All Banks
 Service Proliferation: Demanding client & development of IT
services
 Competition: More & more banks, FIs but market remains same

 Deregulation: Its happening in USA, UK, Japan & Australia

 Rising Funds Costs: Huge competition bounds bank & FI to

offer higher interest to secure more deposits.
 Increased Interest Rate Sensitivity: Better Educated clients know
about better interest bearing options
 Technological Change & Automation: ATMs in 20’s & m-
banking during 2015 to onwards, Mobile Apps 2016 onwards
 Consolidation and Geographic Expansion: Bringing unbanked
people into the banking networks.
 Increased Risk of Failure: Globalisation & Cyber Security Risk
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Key Terms of Banking
 NNI or Spread
 SLR Vs. CRR

 Liquidity Vs. Profitability

 Bank Rate

 Money Market Vs. Capital Market

 Call Money or Money at Call

 Credit Creation

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 Review Questions
 What is a Bank? How is it different from NBFI? Enlist the
sources and uses of bank funds.
 How cash management differs from wealth management of a
bank?
 What is spread? Explain the avenues of banks income.

 What are the functions of a commercial banks?

 What role do banks play now-a-days?

 CRR vs. SLR

 Money market vs. capital market

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.