bank alfallah financial statment analysis project

EVERYTHING WE DO IS FOR YOU 1

sACKNOWLEDGEMENTS I would like to express my gratitude to the Institute of Business

Administration for giving me the opportunity and arranging such an extensive

internship programme.

I would also like to acknowledge my debts to those officers of Bank

Alfalah who have been extremely helpful for me.

First of all Mr. Gulistan Khan. He has been a permanent source of

encouragement and guidance. His helpful nature did not restrict him to the

premises to the branch but extended to any place and any matter I needed his

support on. He gave me a comprehensive summarization of the documentary

credits procedure. He made me perform all the functions of his desk at one

time or another.

I would also acknowledge my debt to Mr. Khurram Waheed, for the

knowledge he provided in a very frank and casual manner. Due to his gift of

wittiness, the time of my internship that was spent with him was the most

interesting and memorable one for me.

The young officers of the Credit department, Mr. Kashif and Mr.

Shaheryar, were a source of inspiration as well as admiration as they were

absolutely thorough gentlemen.

Moreover, I would also acknowledge my debt to Mr. Ulfat, Mr.

Anwaar, Mr. Jamsheed, Mr. Ahsan, Mr. Mughees, Mr. Shaukat and Miss Zeba

for the helpful hand they extended towards me at one time or another.

In short, I would always be thankful to all the managers and officers,

for their courteous and compassionate treatment given to me.

Thank you all


PREFACE The pre-requisite of internship program is to make the students of

M.B.A, aware of the practical expertise and to acquaint them with the real

management process.

With an intention of grooming the best executives of the future, the

Institute of Business Administration has organized a comprehensive

internship-training program. All of us were placed in leading organizations of

business arena to gain first hand knowledge and insight into their

management and working. So, when I was given the chance of selecting an

organization, I opted for Bank Alfalah.

Getting a chance of working in Bank Alfalah proved to be very

beneficial for me. I think that I gained comprehensive insight into the working

of a bank. But nothing could have been possible without the co-operation and

guidance of the officers of BAL.

After the completion of internship program, internship report has been

prepared just in accordance with the practical exposure. It has been my

endeavor to stipulate my experience in a way that the reader may clearly

understand the core concepts.

AHSAN BASHIR


TABLE OF CONTENTS

Chapter 1 Introduction

Introduction to Bank Alfalah 05

BAL, Circular Road Lahore 07

Financial Standing of Bank Alfalah 08

Chapter 2 Organizational Structure & Policies

Organizational Hierarchy 10

The Management 14

Mission Statement 15

Strategy Formulation & Implementation 15

Names & Designations of Employees 16

Job Satisfaction 18

Management Styles 18

Training of Employees 18

Growth Strategy at Bank Alfalah 19

Managerial Policies 20

Chapter 3 Marketing Mix of BAL

Products / Services 26

Price 34

Place 35

Promotion 37


Chapter 4 Internship Programme

Consumer Banking 42

o Remittances

o Clearing

Trade Finance 57

o Imports 58

o Exports 81

Credits 88

Chapter 5 Financial Analysis

Trend (Horizontal) Analysis 107

Vertical Analysis 114

Ratio Analysis 119

Chapter 5 SWOT Analysis

Strengths 139

Weaknesses 141

Opportunities 142

Threats 143

&

Recommendations 144


INTRODUCTION TO BANK ALFALAH

After the debacle of BCCI, the Ministry of Finance (Govt. of Pakistan)

acquired its three branches and Habib Credit & Exchange Bank was incorporated

on June 21, 1992 as a public limited company under the Companies Ordinance,

1984 and commenced banking operations from November 1, 1992. It engaged in

commercial banking and related services as defined in the baking Companies

Ordinance, 1962.

Following the privatization in July, 1997, Habib Credit & Exchange Bank

assumed the new identity of Bank Alfalah on February 25, 1998. And with this a

challenge was launched, the challenge to transform this bank into a highly

professional, most efficient & service oriented institution.

Charged with the strength of the Abu Dhabi based consortium, and under

the leadership of Highness Sheikh Nahayan Mabarak Al-Nahayan, Minister of

Education, Government of Abu Dhabi, and a prominent member of Royal Family –

the bank is energized with the vision, envisaging the development of consumer

sector in Pakistan.

Bank Alfalah has emerged as one of the leading commercial banks in the

financial sector of Pakistan. Bank has made significant contribution in building and

strengthening both the corporate and retail banking in Pakistan.

Prioritizing its product portfolio in line with consumer needs and wants, the

bank is committed to develop products that give more value to its customer – be it

a simple bank account or complex financing of a major project. Designing product

portfolio in response to customer‟s preferences, bank‟s products like Royal Profit,

Royal Patriot and Royal Custodial are prime examples of quality and innovation –

providing timely banking opportunities to its customers.

Assessment of the needs and wants of its customers is an on going process

at Bank Alfalah, which helps it to continually develop new products and services.

Some of our new products in the pipeline include Royal Forex, ATM Network and a

credit card.


To continuously offer courteous, professional and advanced banking

solutions, bank‟s team has recently been rejuvenated by going through training

programs with a focus on Information Technology. With a team of talented,

service-dedicated professional bankers, Bank Alfalah commits all its energies,

resources and time to cater to all banking and financial needs of customers.

To make banking solutions become accessible to more and more people,

BAL has embarked upon a rapid expansion program, aiming to provide a

networking that makes its services available to any of its customers in all the major

urban centers of Pakistan – with a view to go international by the coming

millennium.

With its key indicators of progress already soaring to new heights, the bank

is committed to put all its energies, resources and time to bring higher value and

satisfaction of its customers, employees and shareholders.

Technological developments are opening up new vistas of solutions for

distributing traditional financial products. Concurrently, rapid change in customer

preferences has resulted in a major shift from manual to automated services of the

bank. Information technology today, is the key to sustain and succeed in the

corporate world. Therefore, during the year 2000, Bank Alfalah made heavy

investments, towards enhancing its capabilities in the area of automation and

technology. BAL is well positioned to meet client needs, with improved competitive

advantage.

Bank Alfalah is on the way of expansion of its business and branch network.

Presently, there are 23 branches of BAL, spread all over the Pakistan covering

major business centers and principle cities.


BAL CIRCULAR ROAD LAHORE

Valid city markets have their unusual importance regarding import business.

They are known as business and commercial hub of Lahore. Major commodities

and Industrial raw materials are being imported in these markets. Major industrials

are routing prefer to route their business through the banks situated in these areas.

These markets are highly profitable and important for banking sector.

Bank Alfalah‟s major competitors, Union Bank and Askari Commercial Bank

earned huge profits in this area. Therefore, to capture this business and to target

this very important segment, Bank Alfalah launched its Circular Road Branch in

October 2000, with a bright and clear vision of customer service.

Now, BAL Circular Road branch has the importance of backbone for Bank

Alfalah. It has 2nd largest volume of foreign trade business and has led to huge

profits, just with in a short span of 10 months.

Bank Alfalah launched its own Rupee Travellers Cheques during the course

of my internship, and till the completion of my internship, BAL Circular Road had

the highest sales volume of these TC‟s.

So, I have been much lucky that I got an opportunity for working in

concerned branch, and confronted with enough exposure and opportunities to

learn.


FINANCIAL STANDING OF BANK ALFALAH

Confronted with a more open financial market but tougher competition, Bank

Alfalah, with its professional out look and commitment, maintained healthy growth

in resource mobilization and financing of foreign trade.

Bank‟s pretax profit for the year 1999 increased more than 5 times as

compared to the 98, and stood at 354 million. For the year 2000, it grew by 12.96

percent to Pak Rupee 400 million. Growth in profitability is evident from the graph:

During the year 2000,the deposit base increased from Pak Rupees 15.82

billion to Pak Rupees 20.48 billion, an increase of 29.5 percent, with a balance

sheet footing of Pak Rupee 27.57 billion compared t previous year‟s figure of Rs.

21.02 billion.

Since Bank Alfalah is focused on Trade Financing; it attaches great

significance to the development and maintenance of healthy correspondent

relationships with banks and financial institutions, globally. Towards this pursuit,

BAL has developed excellent business relations with renowned banks, like ABN

Amro and Standard Chartered Bank, whose support in terms of lines of credit

extended to BAL, has enabled to handle its ever-growing trade volumes.

During the year 2000, BAL handled foreign trade business in excess of Pak

Rupees 30.6 billion, representing an increase of 92 percent over the previous year.

0

100000

200000

300000

400000

500000

FY98 FY99 FY2000

Profit (Rs. In 000)


It is also evident from the graph:

Whist, BAL peruses a stringent liquidity policy, the bank actively participated

in the interbank money market and Forex markets. Bank has put in place an

Assets- Liability Committee (ALCO) that not only sets the parameters of liquidity

and profitability but also reviews frequently the associated risks of interest rate

profile, exchange risk and targets for credit allocation to various sectors of the

economy.

0

5,000

10,000

15,000

20,000

25,000

Deposits Advances Imports Exports

Consolidated Figures (Rs. in 000)

FY 99

FY 00


COMPARISON

Bank Alfalah is a newly emerged bank and going on the way of progress.

Even it is at the initial stages of development, but it is facing developed strong

competition with Union Bank Limited and Askari Commercial Bank which are

leading commercial banks in the local private sector in Pakistan.

For the purpose of comparison, I have taken some important figures

regarding these banks.

Account Title Union Bank Askari

Comm.

Bank

Alfalah

PLS SAVING ACCOUNT:

NOTICE DEPOSIT:

7-29 days

30 days and over

TERM DEPOSIT:

1 Month

2 Months

3 Months

6 Months

1 Year

2 Years

3 Years

5 Years

5%

4%

5%

6%

-

7.5%

8%

8.5%

9%

9.5%

10.5%

8.5%

7%

8%

9.50%

9.75%

10.0%

10.5%

11.0%

-

-

-

9%

6.1%

7.5%

8%

-

10%

10.5%

11.0%

-

12.0%

13.0%

It is evident from the above figures that how successfully Bank Alfalah is

carrying on its business. Bank Alfalah is providing highest rates of return against

different types of deposits to its customers.

Also, with these high rates of returns, there is consistent declining trend in

the cost of funds of Bank Alfalah.


Cost of Funds Bank Alfalah Askari Comm. Bank

1998

1999

2000

13.20

9.26

8.48

13.02

10.04

9.00

Here is another table that signifies the growth rate in deposits and

advances, which constitute the basis of banking business.

Growth rate in Deposits 97-98 98-99 99-2000

Union Bank

Bank Alfalah

(8%)

32%

(9%)

33%

75%

30%

Growth rate in Advances 97-98 98-99 99-2000

Union Bank

Bank Alfalah

(12%)

60%

(6%)

33%

77%

5%

Above figures shows the consistency in growth rates that signifies the

management’s efficiency.

As a whole, I can say that Bank Alfalah is organizing and expanding its

business operations very successfully and competing for becoming top leading

commercial bank in Pakistan.


ORGANIZATIONAL HIERARCHY

CHAIRMAN / DIRECTOR

BOARD OF DIRECTORS

CHIEF EXECUTIVE OFFICER

EXECUTIVE INCHARGES

AREA MANAGER AREA MANAGER

NORTH SOUTH


CHAIRMAN

H.H Sheikh Nahayan Mabarak Al-Nahayan.

Chairman & Director

H.H Sheikh Nahayan Mabarak Al-Nahayan is an important and prominent

member of the ruling family of Abu Dhabi. After the culmination of his studies at

Oxford he returned shoulder important responsibilities in the state administration.

In 1988 he was appointed the President of the higher colleges of Technology

comprising of eight colleges throughout the UAE – a responsibility he fulfilled with

distinction. In 1990 he was appointed Minister of Higher Education and Scientific

Research. Presently he also holds the presidency of the Society of the Natural

History and National Heritage. In 1992 he became the Chairman of the Union

National Bank and has since remained involved in strategic management of the

institution.


During the first five Trying years, he effectively managed the bank in the

absence of a Board of Directors and steered it to success as one of the leading

Bank of UAE.

BOARD OF DIRECTORS

Mr. Omar Z. Al-Askari, Director

Mr. Abdulla Khalil Al-Mutawa, Director

Mr. Abdulla Nasser Hawaileel Al-Mansoori, Director

Mr. Mohammad Saleem Akhtar, CEO &Director

Mr. Ikramul Majeed Sehgal, Director

Mr. Nadeem Iqbal Sheikh, Director


THE CORE GROUP

Board Advisory Committee

Mr. Omar Z. Al-Askari

Mr. Abdulla K. Al-Mutawa

Mr. Ganpat Singhvi

Mr. Bashir A. Tahir

Executive Committee

Mr. Mohammad Saleem Akhtar

Mr. Ikram Ul-Majeed Sehgal

Mr. Parvez A. Shahid

Mr. M. Waqas Mohsin

Mr. Tanweer A. Khan

Mr. Mohammad Yousaf


THE MANAGEMENT

Management refers to the universal process of effectively and efficiently

getting activities completed with and through other people. It is a process by which

certain basic functions, which are planning, organizing, leading and controlling are

performed to achieve the desired objectives of the organization. These functions

are being performed at three levels in Bank Alfalah.

BOARD OF DIRECTORS

At the top of the human resource hierarchy sits the Board of Directors and

Executive Committee. The most important task of this level of management is

strategic planning, determining the goals and objectives and to formulate the

policies.

TOP MANAGEMENT

Top management mostly involves strategy formulation, technical planning,

determining how to best get the job done and control. Chief Managers and Branch

Managers are included in this level. They define and interpret the objectives and

vision and then formulate policies for their completion.

MIDDLE MANAGEMENT, SUPERVISORS AND EMPLOYEES

Departmental heads constitute this level of management at Bank Alfalah.

They are directly responsible for planning and controlling the activities of officers.

Finally, the employees whose activities are monitored and controlled according to

the desired objectives.


MISSION STATEMENT

Bank Alfalah is going on the road of progress very successfully.

Assessment of the needs and wants of consumers is an on going process at Bank

Alfalah, which helps it to continually develop new products and services. At BAL,

the philosophy is that the bank should go to all possible limits to satisfy the

customer needs. The bank is continuously formulating new products and services

for the growing and diversified needs of its ever-expanding client base. The bank‟s

commitment to its customers is evident from its mission statement:

“To provide innovative and high quality products to its customers at the

lowest possible rates. To achieve all set goals regarding service, performance and

goodwill.”

STRATEGY FORMULATION AND IMPLEMENTATION

In the considerations of set goals and objectives, policies are formulated at

higher level of management. To achieve the desired objectives, powers are

delegated at different levels of management. Each branch manager formulates

strategies in accordance with its branch structure and macro environment.

For the implementation of these strategies, meetings are conducted with

departmental heads. During my stay at Bank Alfalah Circular Road Br., I observed

that almost at every Saturday, there used to be a combined meeting, where the

business turnover throughout the week was observed, so that any deviation might

be identified and proper measure could be taken for controlling.

Along with these weekly meetings, whenever there was a special matter or

issue that was needed to be addressed. Special attention was paid to that and

views & ideas of different participant of management were always welcomed.


NAMES AND DESIGNATIONS OF OFFICERS

BANK ALFALAH Circular Road, LAHORE BRANCH

NAME DESIGNATION

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

21

22

23

Mr. Malik Riaz-ul-Haq

Mr. Sardar Ahmed

Mr. Tariq Munir

Mr. Anwar Masood

Mr. Jamshed Yousaf

Mr. Ulfat Hussain

Mr. Malik Mughees Anwar

Mr. Kashif Hanif

Mr. Shaheryar Aziz Malik

Miss Zeba Maqsood

Mrs. Zeenat Rabia

Mr. Gulistan Khan

Mrs. Fareeda Naheed

Mr. Khurram Waheed

Mr. Salman Ahmed

Mr. Naveed Hussain

Mr. Azam Qaiser

Mr. Ahmed Mumtaz

Mr. Ahsan Butt

Mr. Waseem Asif Mirza

Mr. Saqib Mohsin Sheikh

Mr. Shaukat Hussain

Mr. Jul Habib-ur-Rehman

Branch Manager

Mgr. Corporate Banking

Manager Operations

Incharge Credits

Incharge Trade Finance

Incharge Cash Department

Officer Credits

Officer Credits

Officer Credits

Officer Trade Finance



Officer

Officer Remittance

Officer Remittance

Officer Cash Department



Incharge Car Financing

Officer Car Financing

Officer IT & Accounts

Officer Accounts

Officer IT


24

25

26

Mrs. Nudrat Adeeb

Mr. Khawaja Ahmed Farooq

Mr. Shoaib-ur-Rehman

Telephone Operator

Officer

Officer


JOB SATISFACTION

During my internship programme, I worked with different employees in

different departments. I observed their working and also their level of satisfaction

regarding their jobs and reward system.

In Cash and Trade Finance department, almost all the employees were

satisfied with their jobs, as far as the quality of work and rewards were concerned.

All the employees in these two departments were highly motivated and sincere

with their jobs.

However, their common complaint was the quantity of work. They were

overloaded with the huge work. Personnel in Trade Finance department, even, had

to work till 9 or 10 PM at night.

Employees in Credit department were almost young and there were not too

satisfied with the location of branch. They were, perhaps, the victims of complex.

MANAGEMENT STYLES

Management must have to adopt some administrative style to get all the

activities to be done effectively and efficiently. As far as the management styles at

BAL Circular Road Br., are concerned, there is some centralization and

decentralization to some extent.

Administrative style of Branch Manager Mr. Riaz-ul-Haq is authoritative.

His authoritative style was the requirement of administration. For the

implementation of strategies and getting all the activities to be done properly with

an organized environment, unity of command was the requirement of the time. In

the month of August, he remained on leave for one week. During his absence, I

observed the environment of uncertainty and deregulation in the bank.

But the scenario was different in case of departmental heads. In Cash and

Credit department, powers were delegated at low levels. Employees were allowed

to organized and take necessary actions to accomplish their work properly.

Whereas, situation was different in Trade Finance department. The incharge Trade


Finance, Mr. Jamshed was strict and martinet. There used to be a proper

monitoring of work of each employee.

TRAINING OF EMPLOYEES

Human resource constitutes the most valuable asset of Bank Alfalah. To

improve the staff‟s professional quality and proficiency, bank conducts on-job

training programs and in-house seminars/ courses, at its training center. Bank

Alfalah‟s training academy is equipped with the latest audio-visual training aids,

which facilitate in the dissemination of knowledge and skills.

Bank Alfalah has started a six-months extensive training program for

management trainees. The bank intends to continue, on need basis, such

programs each year.

GROWTH STRATEGY AT BANK ALFALAH Business network of Bank Alfalah is continuously growing and expanding.

For the growth of its business operations, Bank is emphasizing on Internal

Growth Strategy.

Bank Alfalah objective has been to expand its own branch network to meet

client‟s needs so that it may better preserve its organizational culture, efficiency,

quality and image. Bank is well positioned and geographically poised, to cater for

increasing business demands, from its existing and potential clientele. During the

year 2000, bank opened 8 new branches and presently there are 23 branches

spread all over Pakistan covering major business centers and principle cities. BAL

plans to add more branches to its growing network in the ensuing years.


MANAGERIAL POLICIES

Bank Alfalah is successfully going on the way of progress with its highly

qualified and professional management. Policies are formulated at top-level

management in accordance with its defined goals and objectives. Due to the

dynamic external environment, these policies keep on changing. So, here are

some major managerial policies that I observed during my course of internship at

Bank Alfalah.

RECRUITMENT POLICES:

Human resource is supposed to be the most valuable asset at Bank Alfalah.

With its expanding branch network, the requirement of new employees keeps on

arising. With an intention to recruit highly qualified employees, management has

formulated a comprehensive recruitment policy.

1) To provide an opportunity to new university graduates, so that they

may come up with fresh and innovative ideas, BAL has started an extensive

recruitment programme.

To locate brilliant business graduates, intimations are sent to universities

(including PU) and different business institutes. These MBA‟s must possess

a minimum of 3.2 GPA.

Written test is conducted for these graduates and the successful candidates

are selected for interviews. Such interviews are conducted at Area Offices

and Head Office, Karachi, respectively.

Finally, the graduates so selected, are imparted an extensive 6 months

training at Head Office, Karachi. After the completion of training programme,

they are appointed at different branches of Bank Alfalah throughout the

country.

During my course of internship, first batch of this training programme

completed their training, where one of my senior student, Mr. Gohar Irfan

stood first.


2) With the passage of time, whenever there are some vacant seats

available at any branch of Bank Alfalah, new applicants are invited. After

passing through the written test, successful candidates are called for

interviews at respective branches and also at Area Office. So, after having a

comprehensive interview, new candidates are selected for jobs.

ACCOUNTING POLICIES:

Bank Alfalah has adopted almost the same accounting procedures that

other financial institutions are adopting at this time. These accounting procedures

or Accounting policies are made according to GAAP.

1) ACCOUNTING COVENTION

All the accounts have been prepared under the historical cost convention,

except that certain investments and fixed assets have been included at revalued

amounts.

2) ADVANCES

These are stated net of provision for bad and doubtful debts. The provision

for bad and doubtful balances is made in accordance with the prudential

regulations of the State Bank of Pakistan.

3) INVESTMENT

In 2000, the bank decided to value treasury bills, term finance certificates

and shares companies at market value. Any surplus/(deficit) on revaluation is

shown under equality. Previously all investments were stated at cost and carrying

amounts were reduced for each investment individually where the decline in value

was other than temporary. The policy has been changed to comply with the

requirements of State Bank of Pakistan BSD circular No 20 of august 4, 2001. Had

the policy remained unchanged there would have been no deficit on revaluation of

investment.

All other investments are stated as follows:


Short-term investments are stated at lower of cost and market value

determined on an aggregate portfolio basis.

Long-term investments are stated at cost. Carrying amount is reduced

for each investment individually whenever decline in the value is other

than temporary.

Gains or losses on disposals during the year are taken to profit and loss

account. Premium/discount on purchase of investments are amortized over

the term of such investments.

4) FOREIGN CURRENCIES

Assets and liabilities in foreign currencies are translated into Pak rupees

at the rate of exchange approximating those prevailing at the balance

sheet data.

Outstanding forward exchange contracts are translated at the contracted

rates.

Exchange gains or losses are included in profit and loss account.

5) OPERATING FIXED ASSETS AND DEPRECIATION

Office premises are shown at revalued amount less accumulated

depreciation. All assets are stated at cost less accumulated depreciation.

Depreciation is charged to income applying the straight-line method.

Maintenance and normal repairs are changed to income as when

incurred. Major renewals and improvements are capitalized. Gains or

losses on disposal of fixed assets are taken to profit and loss account.

6) TAXATION

Taxation charge in the accounts is based on the taxable income at the

current rates of taxation. The bank accounts for deferred taxation on timing

differences using the liability method.


7) STAFF RETIREMENT BENEFITS

The bank operates an unapproved unfunded gratuity scheme for its clerical

staff who have completed the qualifying period of service under the scheme.

The bank also operates an approved funded gratuity scheme for officers

and executive. Contributions are made on the basis of actuarial valuation. The

actuarial valuation of the scheme was carried out as January 1, 1991 in

accordance with IAS-1 (revised) using the projected unit credit method, which

disclosed the fair values of fund‟s assets and liabilities of RS. 15.00 million and RS.

28.88 million respectively.

The transitional obligation of RS. 13.88 million is being recognized by the

bank over a period of five years beginning from 1999 on a straight-line basis. The

following significant assumption were used for valuation of the scheme:

Expected rate of increase in salary level –10 percent per annum

compounded annually.

Expected rate of interest on investment –12 percent per annum.

8) DEFERRED COSTS

These are amortized over a maximum period of five years commencing

from the year in which are incurred.

9) REVENUE RECOGNITION

Mark-up/return on advances and investments are recognized on accrual

basis. Fee, commission and brokerage except income from guarantees accounted

for on receipt basis.


MARKETING MIX

Marketing Mix is defined as:

“The set of marketing tools that the firm uses to pursue its marketing

objectives in the target market”.

Two basic pillars of this basic concept are:

TARGET MARKET

Bank Alfalah‟s target market consists of individual clients as well as a

number of business organizations. Due to different market segments, BAL‟s

different branches have their target markets.

To capture the import business in Lahore, the targeted segments is valid

city markets known as business & commercial hub of Lahore and this has been

done via its Circular Road branch. Due to specialized services provided by BAL,

and its highly competitive foreign exchange rates, most of the major importers in

this area deal with BAL. Examples include; Mughal Steel and International, New

Shalimar Steel, Vellcone International, Rana Brothers etc.

As far as the individual clients are concerned, the targeted segment is posh

areas like DHA.

CONSUMER NEEDS

Assessment of the needs and wants of consumers is an on going process at

Bank Alfalah, which helps it to continually develop new products and services. At

BAL, the philosophy is that the bank should go to all possible limits to satisfy the

customer needs. The officers of the Import department, for example, try to get the

minimum possible exchange rates for their clients. Those in cash department do

not look at the clock while honouring the cheques. The bank is continuously

formulating new products and services for the growing and diversified needs of its


ever-expanding client base. The bank‟s commitment to its customers is evident

from its mission statement:

“To provide innovative and high quality products to its customers at the

lowest possible rates. To achieve all set goals regarding service, performance and

goodwill.”

FOUR P‟s OF MARKETING MIX

Marketing Mix is a Combination of Four P’s. Product, price, promotion

and place.

1) Product Service Provided by Bank

2) Price Commission and Bank Charges Received

3) Promotion Promotion of Services

4) Place Placement of Services i.e. Network of its

Branches


PRODUCTS / SERVICES

Due to trend setting and innovative banking, Bank Alfalah presents a range

of quality products with revolutionary perks and convenience. BAL provides a wide

range of products/ services to its customers, which can be compared with any

foreign, or national bank in terms of quality and reliability.

Here is an overview of different products and services formulated by Bank

Alfalah.

ACCOUNTS OFFERED BY BAL

One of the basic function of a commercial bank is to receive deposits and to

honour cheques. Accounts offered by the banks for the deposits of customers

constitute the basis of their operations and develops the basic relationship

between a banker and customer.

Bank Alfalah has formulated a number of accounts for the deposits of

customers, with unique features, to facilitate them. These are:

ROYAL PROFIT:

“More the Saving, Higher the Profit Rate”

Royal Profit is a profit bearing current account. In Royal Profit account, a

customer enjoys a higher rate of return that increases with savings. Account holder

has the comfort of unlimited transactions and there is no restriction regarding the

withdrawals that means all time accessibility to the account. Profit is calculated on

daily basis with attractive rates as:

ROYAL PROFIT

From 50,000 to 999,999 9.00%

From 1,000,000 to 9,999,999 9.50%

From 10,000,000 & above 10.50%


Minimum balance required is as low as just Rs.50,000/- which entitles the

customer to all the benefits.

ROYAL PATRIOT:

“Good for you, Good for the Nation”

Royal Patriot is a special term deposit account offering attracting profit rates

that improve with tenure and amount. Customer has a choice to deposit his

amount for terms of 1, 3, 6, 9, 12 & 24 months with a minimum balance of Rs.

25,000 only. There is no penalty in case of premature encashment (Profit will be

calculated according to the last tenure completed), & moreover, no prior notice is

required before withdrawals. Profit rates for different tenure and amount are as

follows:

ROYAL PATRIOT

1

Month

3

Months

6

Months

12

Months

2

Years

From 25,000 to 999,999 8.00% 10.00% 10.50% 11.00% 11.00%

From 1,000,000 to 4,999,999 8.10% 10.10% 10.60% 11.10% 11.25%

From 5,000,000 & above 8.20% 10.25% 10.70% 11.20% 11.50%

ROYAL GROUP:

“Pull in More Profits Together”

Royal Group is a joint investment account that provides a way to the

customers to have their joint accounts directing them towards more benefit.

Minimum number of people required to form a group is just 2. So, in this way, two

or more people get their joint account in the bank and can earn higher rates of

return. Profit is calculated on daily basis and disbursed monthly. It also provides an


opportunity to employees to get their salary disbursed through this account as it

provides better arrangements for secured collection of cash/ cheques. The rate of

return increases with the deposited amount as:

ROYAL GROUP

From 100,000 to 999,999 9.50%

From 1,000,000 to 9,999,999 9.70%

From 10,000,000 & above 10.00%

CLASSIC PLS DEPOSITS

Along with the above stated special Royal accounts, the bank also have

formulized the Classic PLS Deposits:

SAVING ACCOUNT:

Saving account is the most common account for individuals. Profit is

calculated on half yearly basis with the rate of 9.00%.

NOTICE DEPOSITS:

These are the short-term deposits of customers where the notice is to be

given to the bank prior to the withdrawal. Profit rates for these deposits are:

07 - 29 days 6.10%

30 days & above 7.50%


TERM DEPOSITS:

Term deposit is a fixed PLS account where the profit rates increase with the

amount as:

1 Month 8.00%

3 Months 10.00%

6 Months 10.50%

1 Year 11.00%

3 Years 12.00%

5 Years 13.00%

FOREIGN CURRENCY ACCOUNTS:

Due to the increasing globalized business, all leading commercial banks

have been offering foreign currency accounts to their customers. Same has been

done by Bank Alfalah by facilitating its customers to have their foreign currency

accounts in the bank.

At present, BAL offers US Dollar & UK Pound accounts and profit is being

paid on half yearly basis at the rate of 3.00% and 2.50% respectively.

ON-LINE SERVICE:

Bank Alfalah provides on-line services to its customers. At present, this

service facilitates the customers to deposit and transfer their amounts from one

branch to another of BAL. It is being planned to launch a universal account to

update this facility and make it more extensive.

OTHER CONSUMER PRODUCTS

Apart from the accounts offered for deposits of customers, BAL also

provides a lot of other consumer products like:


ALFALAH CAR:

Alfalah Car is a consumer-financing scheme that enables a customer to own

his desired car at easily affordable and flexible installation with minimum down

payment and insurance. All businessmen, Corporate Employees, Salaried and

self-employed professionals having net take home income in excess of three times

the monthly installment are eligible to take the advantage of this scheme.

Salient Features:

Lowest Financing cost available in the market

Tenure of 1 to 5 years as per requirement of customer

Quickest processing

Minimum documentation required

Down payment requirement of 20%

Repayment through monthly installments

Lowest insurance rates available from bank‟s approved insurance

companies

Documents Required:

National I.D card copy

Registered utility bill copy (Electricity/Phone/Gas)

Last six months Bank Statement (Duly Signed & Stamped by Bank)

Signature Verification by Banker

Salary Certificate

Sole-Proprietary Letter from the Bank

Sole-Proprietary Declaration on Business Letter Head or on Stamp Paper of

Rs.20/-

NTN Certificate

Partnership Deed copy (if necessary)

NOC from other partners

Recent Tax return of Firm


Form 29 of Limited Company

Form A of Limited Company

Salary Certificate of Director

Tax Return of Director

Basic Fact Sheet of Individuals

CIB Report

BAL RUPEE TRAVELLERS CHEQUES:

Bank Alfalah issued its own rupee travellers cheques with highest

denominations, during the course of my internship with the bank. BAL TCs have

been presented with ultimate combination of features, which allows the customers

the best way to make and accept payments (as it is called safe cash), or to save in

a rewarding way. Differentiating features of BAL TCs are as follows:

The highest denominations available as only BAL offers Rs.5 Lac and Rs.2

Lac traveller cheques

Widest range of travellers cheques as Rs. 1,000, Rs.5,000, Rs.20,000,

Rs.50,000, Rs.100,000, Rs.200,000 and Rs.500,000.

After 3 days of holding the TCs, customer may earn daily points and can

exchange these points for great gifts.

Another unmatched benefit of Bank Alfalah TCs is the commission on

encashment. Customer may receive a commission of 0.15% in case of

encashment after 7 days.

Special invisible UV printing, high definition micro-lines, anti-scanner effect,

mould based paper, Alfalah watermark and printing in the UK, are just some

of the security features of TCs which prevent counterfeiting.

BAL TCs are fully refundable. Customer can refund the TCs without any

penalty or loss.

A customer can transfer or endorse its TCs over to anyone.

Customer doesn‟t need to be an account holder to get BAL TCs benefits.


ALFALAH LOCKERS:

The client can also avail the facility of rent-free safe deposit lockers for their

valuables. The distinguishing features of these lockers are:

Highly effective security system

Fully refundable security deposit

Convenient locations

Flexible operating hours

BAL HOME LOANS: (For Overseas Pakistanis in UAE)

Alfalah Home Loan is specially designed for those NRP‟s in UAE whose

families live in Pakistan. BAL provides following types of Home Loans:

To purchase a new house

To renovate the existing house

To construct a house

Requirements:

A person can get a Home Loan from BAL if he fulfills the following

conditions:

Non Resident Pakistani of UAE, holding a valid Pakistani passport

Valid UAE Visa

Pakistani National Identity Card


Must be 21 years of age or over

Salaried, Businessman or Self Employed person

Similar to Home Loans scheme, Bank Alfalah has also offered Alfalah Car

for Overseas Pakistanis in UAE.

LENDING PRODUCTS

Bank Alfalah offers many lending products to its customer. They can get

running finance for their working capital requirements as well as trade finance for

importing their merchandise. Some of the major lending products of BAL are:

Overdraft

Cash Finance

FATR

FIM

Export Bills Discounting (Not in Circular Road Branch)

Letter of Credit etc.


PRICE

“The amount of money the customers pay for the product of a company”.

BAL provides different products and services to its customers, that have

been discussed in previous section. Pricing of products means the commission to

be paid by the customer in return of services provided by the bank. The

commission paid for the services mainly includes:

Mark up/ interest

Bank charges

Fees and bank commission etc.

These charges and commissions are prescribed on Schedule of Bank

Charges (SOC) that keeps on changing time-to-time, and issued by the bank

periodically (generally after six months).

There has been a lot of controversy regarding the price of banking

companies. Some scholars argue that the mark up received by the bank is rent for

capital that is used by others. On the contrary, some call it purely Riba. This

however is a very controversial and sensitive issue and I would like not to give any

comment on it.


PROMOTION

“All activities that a company undertakes to communicate and promote its

products”.

This is an age of competition. Numerous organizations are providing

financial services to the customer. These days every one is facing pressure of

competitors. In this world of growing competition, the only way to survive and grow,

for an organization, in the market place is the proper marketing and promotion of

its products. Same is the case with banking companies. There is large number of

foreign and local banks working in the country and it has been noticed that they are

emphasizing much on their marketing strategies. In this scenario, the key for a

bank to succeed and attract its customers is adequate promotion of its products

&services. The bank can attract and retain its customers through:

Sales Promotion

Advertisement

Direct Marketing

Public Relations

The most prominent and important way to attract a large number of

customers is the advertisement of bank and its products/services. Bank Alfalah has

adopted different approaches for the accomplishment of this purpose. For

example, formation of Alfalah Mini Golf near Gulberg is a major step taken by BAL.

It not only provides a source of recreation to the people but it serves as a major

source of marketing for the bank. Due to Bank Alfalah‟s assistance for the

construction of fountain in Liberty Market Square, it is named as Bank Alfalah

Square. BAL Square, for being situated in such a business and commercial area

has its unusual importance and has resulted into bank‟s promotion.

Construction of Shaahdin Manzil as main branch Lahore is going to be the

revolutionary step for BAL. It would not serve just as a main branch only, but it

would also be a great source of ever growing marking and promotion of bank.

BAL issued its own rupee travellers cheques with highest denomination

during the course of my internship. I have seen some coloured advertisements of


RTCs in some well-known magazines like Herald. Also, some fascinating

advertisements have been printed on Daewoo City Busses, which serves as a

dynamic source of marketing.

However, one drawback or shortcoming is that, BAL has formulized a lot of

products and services for its customers, even more than other commercial banks,

but any advertisement on electronic media has not been seen. Since, BAL‟s major

competitor Union Bank Limited has started large media campaign, so keeping in

view these threats, Bank Alfalah should emphasize more on its advertisement.

Along with the advertisement, the bank is providing personal services to its

clients with maximum security as other banks provide. Bank also encourages the

public relation policy of marketing.

Some brochures and promotional material has been printed but it is

distributed mainly through the clients who visit the branch for their day-to-day

business or through the customers who come to get information about new

schemes launched by the bank.

PLACE


“The activities a bank undertakes to make products and services easily

available or accessible to the customers”.

Bank Alfalah‟s objective has been to expand its branch network to meet

clients‟ needs. Bank is well positioned and geographically poised, to cater for

increased business demands, from its existing potential clientele. During last year

under review, BAL opened 8 new branches and presently it has 23 branches,

spread all over Pakistan covering major business centers and principle cities. Bank

plans to add more branches to his growing network in the ensuing years.

At present, BAL has opened all its branches at commercial and business

areas or near to commercial areas so that the customers or clients face no

problem in reaching the bank.

Head Office of BAL is situated in Karachi. The detail description of its

branches is as follows:

KARACHI

Main Branch

B.A. Building,

Chundrigar Road.

Cloth Market Branch

Laxmidas Street,


Cloth Market

Clifton Branch

FL-10, Block-5,

KDA Scheme #5,

Khayaban-e-Roomi

Sharee Faisal Branch

45-A, Fortune Towers,

PECHS, Block-6, Main Sharee Faisal

Jodia Bazar Branch

Gulzar Manzil,

NP/12/49-50,

Muhammad Shah Street,

Jodia Bazar

Korangi Industrial Area Branch

Plot No. ST 4/2, Sector 23,

Aiwan-e-Sanat,

Korangi Industrial Area

M.A. Jinnah Road Branch

Plot No. 23/1,

Corner M.A. Jinnah Road /

Abdullah Haroon Road

S.I.T.E. Branch

D-38 S.I.T.E.,


Near Siemens Chowrangi, S.I.T.E.

North Karachi Branch

Plot No. SA-1, Sector 12-B,

Opp Police Station (Gabol Town),

North Karachi Industrial Area

LAHORE

LDA Plaza Branch

Kashmir Road, Lahore.

(Proposed Main Branch, Lahore)

Gulberg Branch

125-E/I, Main Boulevard

Gulberg III

Defence Branch

G-9, Commercial Zone,

Phase-1, Main Boulevard, DHA

Lahore Cantt


Circular Road Branch

43-A, Opp. Mazar Hazrat Shah

Muhammad Ghaus

Township Branch

Akbar Chowk, Township

ISLAMABAD

1-B, Awan Arcade,

Nazimuddin Road, Blue Area

RAWALPINDI

Mall Road Branch

B.A. Building, 8-The Mall

HYDERABAD

Hyderabad Branch

Plot No. 476/1-2,

Adjacent to Hotel Faran,

Saddar Cantonment Area

PESHAWAR

6-38/L, Islamia Road,

Peshawar Cantt

FAISALABAD

Bazar Court,

Faisalabad Serena Hotel, Club Road

MULTAN


62-A, Abdali Road,

Multan

RAHIM YAR KHAN

City Centre, Shahi Road

Rahim Yar Khan

SIALKOT

40-A, Paris Road,

Sialkot

GUJRANWALA

G.T. Road,

Gujranwala

As per instructions of our internship incharge, Mrs. Sajida Nisar, I reported

at Bank Alfalah Limited (LDA Plaza, Lahore), accompanying my friends who had

also been assigned the same organization, on July 3, 2001. We were welcomed by

Mr. Amjad Imam, who is Senior Manager Operations and the internship training


incharge at BAL (LDA Plaza). He introduced us about the internship program at

Bank alfalah (BAL).

We were directed to intimate in our assigned branches. I, with a friend of

mine, reported at BAL Circular Road Branch, on the same day. Mr. Malik Riaz-ul-

Haq, Branch Manager, welcomed us and inquired us about our educational status.

He directed us to see Mr. Tariq Munir, Manager Operations. Mr. Tariq Munir

guided us about the banking operations and asked us about our intentions for the

internship program. Later he directed my friend to foreign trade department

whereas I was instructed to start my internship from Remittances, so that I might

understand the basic banking operations. Mr. Khurram Waheed, officer

remittances, was assigned the task of guiding me about working of department.

In this report, my endeavor has been to stipulate my experiences and

observations, during my internship in Bank Alfalah Circular Road, which would

always be memorable for me.

INTER-BRANCH ACCOUNTS

Like other successful commercial banks, Bank Alfalah Ltd. (BAL) has a

network of branches all over the country. These branches in different cities are

interlinked with each other through their correspondent accounts in other

branches.


In case, there are more than one braches of a bank in a city (as BAL has 9

branches in Karachi and 5 in Lahore), the main branch deals with other city

branches through their correspondent accounts. Similarly, in one city , all branches

of a bank have their corresponding accounts with each other.

So, all payments from one branch to another branch (in the same city or

another) are made by debiting and crediting these inter-branch accounts.

INTER-BANK ACCOUNTS

Like inter-branch accounts of a bank, different banks have correspondent

accounts with each other. Main branches of banks in a city maintain these inter-

bank accounts. So, money is transferred from one branch of a bank to another

bank‟s branch through these inter-bank and inter-branch accounts.

CLEARING

INCHARGE: Mr. Khurram

As we know that, one of the basic economic function of commercial banks is

to receive deposits and to honour cheques drawn upon them. So, cheque is a most


commonly used instrument for making payments by account holders. Along with

the cheques, there are some other negotiable instruments like PO, DD,TC, PS,

CDR etc. (discussed in the next part), that are used for making payments and are

drawn upon a bank.

The question arises that how these cheques & other negotiable instruments

drawn on one bank are deposited in other banks and money is transferred from

one bank to another.

Clearing House has provided this facility. Clearing house facilitates different

banks, in one city, to get their cheques drawn upon other banks to be cleared.

Cheques lodged in clearing constitute two types of clearing:

Outward Clearing

Inward Clearing

LODGEMENT OF CHEQUES IN OUTWARD

CLEARING

When cheques, TC‟s and other negotiable instruments drawn upon other

banks like MCB, ABN-AMRO of the same city(as Lahore) are presented in Bank


Alfalah Ltd. to deposit them in the respective payee‟s accounts, these instruments

are lodged in outward clearing(o/w clg) of Bank Alfalah.

STAMPS PUT ON THE CHEQUES:

When the cheques are presented in BAL to be deposited in their respective

payee‟s accounts, different stamps are put on cheques before their lodgment in

outward clearing.

i) CROSSING THE CHEQUES:

Crossing means two parallel transverse lines, drawn across the face of the

cheques with or without words written in between them.

Crossing may be general or special. In clearing cheques are crossed specially.

Cheques are stamped with bank‟s name between two transverse parallel lines to

constitute special crossing.

After the cheques have been crossed specially, the holder cannot receive

payment except through the banker named on the cheque. Basic advantage of

crossing is to save the instrument to go it from illegal hands. If, a crossed cheque

is lost or stolen, there is no risk of wrong payment. So it is an effective means of

minimizing the risk of loss or forgery.

ii) CLEARING STAMP:

After the cheques have been crossed specially, clearing stamp is put on the

cheques and other instruments, with the following day‟s date, as these cheques

would have to be presented in their concerned drawee banks on the subsequent

day.

iii) ENDORSEMENT STAMP:

The word endorsement is derived from Latin word „indorsum‟ which means

„on the back‟. Ordinarily, it means anything written or printed upon the back of an

instrument.


So, at the end, the cheques are endorsed in full (endorsed specially) by

putting the stamp with words describing “ Payee‟s account Credited in BAL Circular

road, Lahore”.

After putting these three stamps on cheques & other negotiable instruments,

they are sent to NIFT (National Institutional Facilitation Authority) with Add List.

NIFT after segregating the cheques of different banks delivers them to their

concerned banks, which constitute the inward clearing for those (drawee) banks.

ACCOUNTING PROCEDURE:

After lodgment of all cheques in outward clearing, Payee‟s accounts are

credited by the amount of their vouchers. Drawee banks will debit the drawer‟s

accounts in their inward clearing (discussed later).

As main branch Lhr. of BAL deals with other banks through inter-bank

accounts and we deal with our main branch. So, we (BAL Circular road) debit our

main br. account, maintained with us, by the total amount of outward clearing and

an IBDA (inter branch debit advise) with a debit voucher is sent to main branch

Lhr.

Account Titles Debit Credit

Local Clearing Main branch

Payee‟s Accounts

RETURN IN OUTWARD CLEARING:

Some of the cheques lodged in o/w clearing are dishonoured by the

concerned branches due to some deficiencies and returned back through NIFT.

This process is carried out under main branch‟s governance.

Either, these cheques are again lodged in outward clearing or returned to

customers by canceling bank‟s all stamps, based on the reasons.

Now, the accounting entries opposite to first are passed i.e. Payee‟s

accounts are debited & main branch‟s account is credited.


INWARD CLEARING

Cheques and other negotiable instruments (PO, DD, PS, CDR etc.) drawn

on Bank Alfalah Circular Road, sent by other banks, constitute the inward clearing

of BAL.

After having all the stamps and dates of cheques confirmed, the concerned

drawer‟s accounts are debited (in BAL Circular Road) and main branch‟s account

is credited by the total amount.


Drawer‟s Accounts


RETURN IN INWARD CLEARING:

In case of cheques dishonoured (returned) due to some deficiencies, the

main branch‟s account is debited by the amount of cheques returned. As,


Drawer‟s Accounts



COLLECTION

INCHARGE: Mr. Shaukat


When cheques, TC‟s and other negotiable instruments drawn upon other

banks outside the city (Lhr.) are presented in BAL (Circular Road) to deposit in

payee‟s accounts, then instead of clearing, these instruments are lodged in

collection and constitute OBC‟s (outward bills for collection).

Cheques of cities, where BAL‟s branch exists (e.g. Faisalabad), are sent to

that branch where these cheques are lodged in outward clearing. Otherwise, they

are directly sent to the drawee bank. Postage & other charges are deducted on

account of payee according to SOC (Schedule of Charges).


i) When a Cheque is lodged in OBC:


Customer‟s Liability on OBC

Banker‟s Liability on OBC

ii) On Realization of OBC:

when this cheque is got cleared (through outward clearing) in the concerned

BAL branch (e.g. Faisalabad Br.), then IBCA is sent to our branch and thus an

outstation cheque is deposited in payee‟s account. So,


Banker‟s Liability on OBC

Customer‟s Liability on OBC

&


Concerned BAL br.‟s Account


Payee‟s Account

LOCAL REMITTANCES

(Negotiable Instruments)


INCHARGE: Mr. Khurram

Besides cheques, banker‟s also handle Promissory Note, Bill of Exchange

(will be discussed in later part), Bank Drafts, Pay Orders, Traveler Cheques, Pay

Slips, Call Deposit Receipts; as negotiable instruments. Here, I have tried to

describe PO, DD, PS & CDR and their processing in accordance with my

observation, during first two weeks.

1) PAY ORDER (PO):

“Pay Order is a negotiable instrument made by the bank, on account of a

customer, to pay on order the specified amount to the directed person (payee)”.

Pay Orders are used to make payment or to transfer money, with in the

same city. Pay Order is always drawn on the bank that has issued it.

MAKING OFA PO:

When a person requires a Pay Order (made by BAL Circular Road, Lhr.), he

is asked to complete the prescribed application form in which the amount of pay

order is to be stated. Certain amount of commission and advance tax is charged

on issuance of pay order (according to SOC).

After having the total amount deposited in the bank (in cash or through

cheque, in case of account holder), pay order is issued in the favour of payee.

Like cheques, when pay orders issued by BAL Circular Road, are presented

in other banks to get them deposited in the payee‟s accounts, they constitute the

outward clearing for those banks and inward clearing for BAL Circular Road.


i) When a Pay Order is issued, cash department debits cash account & Pay Order

issued account is credited as:


Cash Deposits

PO Issued


Commission on Remittances

Tax on PO & DD

ii) When Pay Order is received in inward clearing:


PO Issued

Cash Deposits

2) DEMAND DRAFT (DD):

“A Demand Draft is a negotiable instrument issued by the bank, on account of a

person, and drawn on its own branch in a specific city or on the branch of another

bank in that city (in case bank doesn‟t have any branch there), requesting it to pay

the specified amount to the person named on it”.

Demand Drafts are used to make outstation payments or to transfer money,

out of the city. Therefore, a DD is always made for a particular city.

MAKING OFA DD:

When a customer requests his banker to provide him a DD made on his

account for a particular city like Faisalabad. Then, after having the total amount

(including commission and advance tax) to be deposited with application form,

demand draft is issued in favour of the specified person in Faisalabad (supposed)

and is drawn on BAL Faisalabad Branch.

So, when this demand draft is presented by payee in any bank, it constitute

the inward clearing of BAL Fsd. Branch.



i) When BAL Cir. Road issues a Demand Draft drawn on BAL Faisalabad

Br. Then, an IBCA with DD advice is sent to Faisalabad Br. (letter is also sent for

DD‟s amounting more than Rs.100,000.)

ii) Upon receipt of advice in Faisalabad Br. they will credit DD Payable a/c.

iii) DD Payable Account is debited (in Faisalabad Br.) when DD is presented

in inward clearing.

In case, advice is not received by BAL Faisalabad Br. and DD is presented

first, then instead of DD Payable, Suspense account is debited to make payment.

Similar is the process for demand drafts drawn on BAL Circular Road Branch.

3) CALL DEPOSIT RECEIPT (CDR):

BAL also issues Call Deposit Receipts (CDR). “It is an instrument like cheque

issued by the bank on account of a customer & in favour of a person, to pay the

specified amount”.

CDR‟s are issued to make payments, especially when a company goes for

some tenders or for purchase of government securities. The bank enjoys the

benefit of keeping funds deposited until the payment is not made. During this time,

the bank uses the deposit and earns income on that.

4) PAY SLIP (PS):

“It is a negotiable instrument like cheque issued by the bank on its own account to

pay a specified amount to the directed person”.

Pay Slips are used to make payment by the bank itself against certain

expenses incurred; like furniture purchased by bank, charges of Mucaddams etc.

For Example: If bank has purchased furniture (fixed asset) costing Rs.40,000 from

a company. Then a pay slip in the name of that company is made and,



Furniture

PS Issued

Instead of writing the issuing date on pay slip, date of encashment

(realization) is written when it is presented in bank.

CANCELLATION OF PO, DD & CDR

After issuance of Pay Order, Demand Draft or Call Deposit Receipt by BAL

Circular Road, when any one of these has to be cancelled by the customer and it is

returned in the bank. Then, after deducting the cancellation charges Rs.100, the

remaining (net) amount is paid to the customer through Cash Payment Voucher.

Suppose a demand draft amounting Rs.5,000 has to be cancelled, then


DD Issued 5,000

Cash

Misc. Earning

4,900

100

ADVANCE TAX AGAINST REMITTANCES

Advance Tax is deducted on issuance of PO & DD ( when customers don‟t

have tax exemption form) and credited in Tax on PO & DD account (discussed

earlier).

Tax deducted has to be paid to State Bank of Pakistan (SBP) with in one

week of issuance of these instruments. So to pay this tax, Pay Order in favour or

SBP Lahore is made, with a challan form. And,



Tax on PO & DD

PO Issued

ACCOUNT OPENING

During first two weeks of my internship program, I could not work properly in

account opening, but for being the basic operation of bank; I wanted to get some

information regarding it. Mr. Ulfat Hussain helped me a lot and guided me about

procedure & precautions in account opening. Here, I have described the procedure

of account opening in its simple form.

PROCEDURE OF ACCOUNT OPENING

Step 1-The Account Opening Form:

When a client comes to the bank, and makes a request for opening of an

A/C. The officer says that first fill up a prescribed application form. If he/she wants

to open a PLS A/C, then he/she has to fill a form according to the account.

Step II-Completion of The Form:

The name, occupation, and complete address of the person opening the

account are written in the columns are provided in the form. One signature of the

person is taken on the face of the form and one is taken on the backside. These

signatures should be usual signatures and he would operate the account with them

future.

Step III-Introduction:

The introduction of a current account holder is accepted for the opening of

either a current account or a solving account. The introduction of saving bank

account is accepted only for saving bank accounts. The signature of the account-


holder introducing the account is obtained at the place provided for in the account

opening form.

Step IV: Specimen Signature Card:

The signatures of the client are obtained on a specimen Signature card.

These cards are obtained in duplicate with two signatures on each card from the

customer. Every time a cheque is received for a payment from the client, the

signature on the cheque are verified by comparing them with the S.S. Card.

Step V-Account Number:

When all the formalities are completed then the final approval of account

has to be taken from the Branch Manager. After obtaining approval of the branch

manager an account number is allotted to the customer all the information is

entered into the computer. Then that account number is printed on the

chequebook, S. S. cards and account opening form.

Step VI- Issuance Of A Chequebook:

After opening an A/C with the bank, the A/C holder once again makes a

request in the name of bank for the issuance of a chequebook. the A/C holder

mentions title of A/C, A/C number, sign it properly and mentions the no of leaves

he requires. Normally BAL issues a chequebook having at least 25 leaves. Every

chequebook also contains one leaf that is used for another issue of a chequebook.

Step-VII Entry Of A chequebook:

Before issuance of a chequebook, the employee performs certain functions.

They include:

Stamping every leaf with specific A/C number.

Enters it in the chequebook issue register.

Check whether or not the signatures are verified by a senior officer, if no

then first he gets them verified.


After entry in the manual register, the employee issues the chequebook to

the A/C holder after his/her signature on the register.

Step-VIII Filling Of Account Opening Forms:

For current and saving account, separate files are maintained in which the

forms are pasted or punched in numerical order and kept under lock and key in

fireproof steel or safe. This is because these forms are the basic documents of the

contract with the customer.

Step-IX Maintaining the Computer Record:

After opening of account, every information regarding the account is entered

into the computer. Currently, a program named „Bankexcel‟ is being used for this

purpose. Record of all the transactions regarding the account of a customer is kept

updated in the computer.


TRADE FINANCE

After working in Remittances department for two weeks, I was advised by

Mr. Tariq Munir, Manager Operations, that I should move on to Trade Finance

department. I was much pleased to hear this as I had a great desire to work and

learn something regarding foreign trade operations.

So, I was sent to Mr. Jamshed Yousaf, Incharge trade finance. He

requested senior officer Mr. Gulistan Khan to help further my cause of gaining

knowledge. First, he asked me if I had any previous knowledge about L/C‟s.

Thanks to Mr. Fida Hussain Bukhari, our worthy teacher, I was in sound command

over the basic concept of what a letter of credit really is. Mr. Gulistan Khan

acknowledged the fact and told me that I should built on this theoretical base with

sound practical knowledge.

I would always be thankful to Mr. Gulistan Khan for having his full co-

operation and help throughout my stay there.


IMPORT OPERATIONS

Valid city markets have unusual importance regarding import operation and

are considered as business and commercial hub of imports in Lahore.

Bank Alfalah Circular Road Lhr. for being situated in such an area has great

(2nd largest in BAL) volume of foreign trade, especially imports. So, I have been

much lucky for having enough exposure and opportunities to learn. Here, I have

tried to stipulate that how a whole import operation is carried out through a bank.

My endeavor has been to describe the procedure in steps, just in accordance with

my observation, during two weeks.


The process of imports starts with the establishment of letter of credit.

Before going into the details of this process, I have tried to describe the letter of

credit (L/C) and its basic aspects.

LETTER OF CREDIT

International trade involves numerous factors such as payment for imports

in the exporter‟s country; shipment of goods within the limitations prescribed and

difficulties of enforcing legal rights in the foreign country etc. Therefore, to

overcome these impediments a system has been enforced, this system is

represented by „Letter of Credit”.

The letter of credit is today the foremost way of financing international

trade. In simple words, a letter of credit (L/C) can be defined as:

“A bank‟s written undertaking given to the exporter for payment of a certain

sum of money on behalf of the importer provided the exporter tenders to the bank,

or its overseas agents, the specified documents within a specified period in

accordance with the terms of the undertaking”.

There are four basic parties involved in an L/C:

i. Importer

ii. Issuing Bank

iii. Exporter (Beneficiary)

iv. Beneficiary‟s Bank

v. Other parties involved in L/C processing will be discussed in

subsequent sections.

ADVANTAGES OF AN L/C:

Following are some of the main advantages of a letter of credit:

i) Since a letter of credit is opened only for the importers with established

credit standing, the exporter is sure of receiving the price of his

commodity.


ii) An exporter may obtain necessary finance immediately on shipment

under a letter of credit (through negotiation, OD Buying).

iii) A letter of credit may help the importer to meet its financial difficulties.

He may obtain some finances against the L/C (as FIM, FATR etc.).

iv) Similarly, an L/C enables the exporter to obtain finances from his bank,

for the operations of production even before shipment (e.g. Pre-shipment

finance).

CLAUSES OF A LETTER OF CREDIT

A letter of credit contains several clauses. The main ones are:

a) Type of Credit:

The heading of a credit indicates the type of credit and its purpose. For this

purpose, every bank has prescribed its own letter of credit forms.

b) Value of Credit:

The fixed amount to which the bank is liable is specially mentioned in the letter of

credit.

c) Specifications of Documents:

The documents required are specially mentioned in the credit.

d) Description of Goods:

A brief description of goods that are required by the importer is given.

e) Part-Shipment and Trans-Shipment:

Part-shipment means shipment of goods in lots or installments, that is in more than

one shipment.

Trans-shipment means the carriage of goods by more than one vessel or mode of

transport.

The credit must specify whether this can be trans-shipped / part-shipped or not.

f) Collection of Charges:


The buyer and seller should have been decided as to which party would bear the

expenses because of interest/ markup and other bank charges. The credit

specifies the party that would bear the charges.

g) Validity Period:

This is a very important clause and because every credit indicates an expiry date

or the validity period. This period is so fixed to provide sufficient time to complete

the transaction.

h) Reimbursement Clause:

This clause indicates the method for obtaining the reimbursement by the foreign

negotiating bank. It will be discussed elaborately in later part.

FORMS OF A LETTER OF CREDIT

a) Revocable L/C:

“A revocable letter of credit may be amended or cancelled by the issuing bank at

any moment, without prior notice to the beneficiary”.

This form of credit gives the buyer maximum facility but it places the seller in

difficult position when the goods are in transit and the credit is revoked before the

documents are presented and payment has not been made on presentation.

b) Irrevocable L/C:

“An irrevocable credit constitute a definite undertaking of the issuing bank to

accept and pay the bills drawn upon it so long as the terms and conditions

stipulated in the letter are fulfilled”.

This form of credit can be amended or cancelled only with the agreement of

all parties to it. Therefore, it gives the seller complete protection.

In Pakistan, all banks including Bank Alfalah, are permitted to open

irrevocable L/C’s only.


c) Confirmed & Unconfirmed L/C‟s:

A confirmed credit is the one that has been confirmed by the advising bank.

By confirming a credit, the bank agrees to take the liability of making payment to

the seller if the issuing bank defaults for any reason.

“When an issuing bank authorizes or requests another bank to confirm its

irrevocable credit and the latter has added its confirmation, such confirmation

constitutes a definite undertaking of such bank (the confirming bank), in addition to

that of issuing bank, provided the stipulated documents are presented and that the

terms and conditions of the credit are complied with.”

Whereas, an unconfirmed credit is one that exclusively depends upon the

issuing bank‟s obligation.

The parties to the present day international trade transactions prefer a

confirmed irrevocable credit because it is an instrument of highest quality which

ensures the payment to the seller by the advising bank while the buyer is assured

of receiving the documents of title to goods, as specified in the terms of credit.

TYPES OF A LETTER OF CREDIT

There are two main types of an L/C that are being practiced in BAL Circular

Road Lhr.

1) SIGHT L/C:

“If the beneficiary of a credit is to obtain payment immediately on presentation of

stipulated documents, it is a Sight Credit”.

In this form of credit the exporter draws a sight or demand draft payable at

the counters of the advising bank or the bank specified in the letter of credit. The

draft (bill of exchange) is paid on presentation provided that all the other terms of

the credit have been complied with.


2) USANCE L/C:

“When a credit stipulates payment to the beneficiary upon the maturity of a bill of

exchange drawn under the terms of the credit, it is an „acceptance credit‟, „terms

credit‟ or usance credit”.

In this form of credit the beneficiary draws a draft for a particular usance

(e.g. 30, 60 or 90 days etc.), payable upon either the correspondent bank or the

issuing bank.

In normal practices, BAL Cir. Road opens Sight L/C‟s because in Sight L/C

the importer first pays the L/C amount (invoice price) to the issuing bank and then

gets the possession of documents. So the bank becomes secure in this way.

CONTRACT

Apart from an L/C, a foreign trade transaction can be carried out through a

contract. A contract is defined as:

“An agreement, certain and performable, made by competent parties, with their

free consent for the lawful object, and lawful consideration, and if not expressly

declared void”.

In banking circles, it is defined as:

“Mutual understanding between the buyer and seller without the involvement of the

letter of credit”.

The importer and the exporter might decide to carry on trade without the

involvement of a letter of credit. In this situation, trade is carried out based on a

mutual contract between them. In a contract, the bank is not liable to make

payment upon receipt of documents.


QUALIFICATIONS FOR AN IMPORTER TO GET AN L/C

ISSUED

A Letter of Credit cannot be opened on behalf of a person unless he fulfills

the following requirements:

1) The person must be an account holder of BAL.

2) No person can be an importer without first being registered with EPB.

So the person must have valid import registration with Export

Promotion Bureau (EPB) of Pakistan. This registration is not

necessary for those who have been exempted from it.

3) The person must process a valid membership certificate of Trade

Organization, licensed and recognized by Federal Government like a

Chamber of Commerce (e.g. Lahore Chamber of Commerce)

4) The person must possess a valid NTN (National Tax No.) certificate.

5) The person must have the Sales Tax Registration Certificate.

Obtaining of Import License is no more required.

ESTABLISHMENT OF LETTER OF CREDIT

After verifying the eligibility of importer and having all the certificates, the

first thing that has to be taken into consideration before the issuance of an L/C is

the credit limit of the party. There may be two situations (discussed in detail in

lending operations):

1) The party routs a regular business with bank (BAL Cir. Road) and has an

approved credit limit. The limit has been approved against any collateral

by the credit department. So, in this case, no further approval is

required.

2) The party does not have an approved credit limit and undergoes a

business with the bank on OTT (One Time Transaction) basic. In this

case, the party first needs to get the credit proposal approved by bank.


L/C APPLICATION FORM:

After having an approved L/C limit, the process of L/C opening starts with

L/C Application form. The bank has prescribed a standard application form that

contains the required guidelines, instructions and other relevant terms and

conditions under which the L/C is to be opened and claims from the beneficiary are

to be settled.

The application form contains the following:

1. Description of the goods, detail of quantity, unit price, total price and

currency of credit.

2. Instructions about the advice of credit, whether it should be sent by

airmail, by courier or telecommunicated.

3. Form of credit: whether revocable or irrevocable, confirmed or

unconfirmed. Due to permission of irrevocable credit only, it is prescribed

on form.

4. The name and address of the beneficiary.

5. Type of credit: whether sight, usance etc.

6. Validity period of credit and last dates for shipment and negotiation.

7. Port of shipment and port of destination and whether trans-shipment

and/or part-shipment are allowed.

8. Types and number of sets of documents required to be submitted by the

exporter.

9. Shipping terms in the contract of sale, e.g., FOB, C&F or CIF etc.

The application form is a formal contract between the issuing bank and the

applicant; therefore, it is signed by the customer, who by doing so undertakes to

abide by the terms and conditions of L/C, mentioned in the application form.

Adhesive Stamp:

The application form must possess a legal stamp of worth Rs.100. Form

without this adhesive stamp is not accepted.


I have observed that, this legal stamp is pasted on application form before

giving it to the applicant.

DOCUMENTS REQUIRED FOR OPENING AN L/C

For getting an L/C issued, the importer needs to submit the following

documents along with the application form.

PERFORMA INVOICE:

The foremost document required by the bank for establishment of an L/C is

the Performa Invoice (signed by both the importer & exporter). It is issued by the

exporter. When the importer has direct relations with exporter, then he gives

Performa Invoice or Contract form. It comprises all the terms and conditions that

has to be mentioned on L/C (discussed in L/C application form). Performa Invoice

constitutes the basis of the whole transaction.

INDENT:

When the importer and exporter don‟t have direct relations and are

connected to each other through an intermediary, called Indenter, then he

(indenter) issues an indent form containing all terms and conditions (like Performa

Invoice).

INSURANCE POLICY:

Goods being imported serve as security for bank. So, these goods should

be properly insured. Therefore, bank requires the insurance documents (insurance

policy) from the importer. There are two types of insurance documents:

Open Policy:


An open policy is for a specific amount. It provides cover to a number of L/C

„s upto the limit of policy.

Cover Note:

It is an L/C-to-L/C document and importer must provide a separate cover

note for every L/C, if he doesn‟t have an open policy.

FORM I:

To assess all those transactions in the country, in which foreign currency is

involved, State Bank of Pakistan has made it compulsory to submit the I Form („I‟

stands for imports) when an import transaction is carried out. I Form contains all

the information about the transaction along with importer‟s NTN and import

registration number.

The importer should fill this form, but I have observed that, in usual

practices, it is filled by the bank officer itself.

PROMISSORY NOTE

“It is an unconditional written promise signed by the maker, to pay on demand or at

a fixed or determinable future time, a certain sum of money to the specified person

or to the bearer of the instrument”.

Therefore, to make the payment (by importer) secure, bank obtains a

promissory note signed by the importer, along with the above stated documents.

L/C MARGIN:

It is a certain percentage of the value of L/C that is retained by the bank as

security. In BAL Circular Road, margin requirements are usually 0-10% depending

upon the client‟s credibility.


L/C COMMISSION:

Commission is also charged from the importer for the issuance of L/C.

commission is charged on quarterly basis (according to SOC) and its rate

decreases gradually in subsequent quarters.

After getting L/C Margin, L/C Commission and other mailing charges, the

Letter of Credit is issued to the importer.

BANKS INVOLVED IN THE PROCESSING OF AN L/C

Starting from the establishment of an L/C, till the retirement of documents,

following are the banks involved in the whole L/C Cycle.

ISSUING BANK (Opening Bank):

Banker opening the letter of credit is called Opening Bank or Issuing Bank.

Opening bank‟s undertaking under an irrevocable or confirming L/C is absolute.

Therefore, once an L/C has been communicated to the beneficiary through the

bank, the banker has no option, but to pay, provided the other terms and

conditions have been fulfilled.

ADVISING BANK:

The bank that advises the L/C means who physically delivers the L/C to the

exporter on the behalf of the issuing bank. It is a correspondent bank of the issuing

bank situated in the beneficiary‟s country or it can also be a branch of issuing

bank.

NEGOTIATING BANK:

The negotiating bank receives the documents and delivers to exporter.

When the exporter completes all the documents, after making shipment, the

negotiating bank sends them to the issuing bank.


REIMBURSEMENT BANK:

According to ICC Rules, Reimbursement against foreign currency has to be

made through the country originating that currency. Therefore, for dollar

transactions, reimbursement has to be made (received) through the banks situated

in USA.

When issuing bank don‟t have any branch in USA (for dollar payments), like

BAL, the reimbursement is made through a bank in USA, where the issuing bank

has Nostro Account, that bank is known as Reimbursement Bank or Drawee Bank.

It is a correspondent bank of issuing bank and makes payment by debiting the

nostro account.

INTERMEDIARY BANK (Collecting Bank):

Intermediary Bank is that where the negotiating bank has its Nostro Account

and who obtains reimbursement against L/C from reimbursing bank and gives

credit to the negotiating bank. For dollar payments, intermediary bank would have

to be situated in USA. Similarly, for transactions in GBP, both the Reimbursement

& Intermediary banks would be in UK.

The number of banks involved in L/C Processing may vary from 1 to 6. Only

a single bank can perform all the functions through its different branches.

COMMUNICATING THE LETTER OF CREDIT

After establishing the letter of credit, it is communicated to the beneficiary

through many intermediaries.

TRANSMISSION OF L/C:

After issuance, the L/C is sent to the advising bank. There are many ways to

transmit an L/C to the advising bank. These are:

1) Through Airmail


2) Through Courier, DHL

3) Through Telex

The medium is used according to the instructions of importer mentioned on

the top of the L/C Application form.

ADVISING THE L/C:

After transmitting the L/C to advising bank, it is advised (physically

delivered) to the exporter, through advising bank.

BAL has collaboration with a number of banks worldwide, for advising its

L/C‟s. For example, if an L/C has to be advised in Australia, it can be advised

through ABN AMRO or Standard Chartered Bank, Australia.

NEGOTIATING THE L/C DOCUMENTS:

Negotiating bank, after receiving the documents from advising bank,

intimates the exporter.

When the exporter makes the shipment and completes all the documents,

he presents them to the negotiating bank. The negotiating bank sends these

documents to the issuing bank, according to the date of negotiation mentioned on

L/C, and claims the reimbursement (procedure of reimbursement will be discussed

in the next sections).

DOCUMENTS SENT BY THE NEGOTIATING BANK

The documents sent by the exporter, through his negotiating bank,

constitute the most vital part of whole transaction for the bank as bank deals in

documents, and not in goods.

Following are the documents sent by the negotiating bank for the settlement

of L/C (documents are sent according to the requirements mentioned on L/C):


BILL OF EXCHANGE:

“A Bill of Exchange is an instrument in writing containing an unconditional order,

signed by the maker, directing a certain person to pay a certain sum of money on

demand or at a future determinable period, to a certain person or to the bearer of

the instrument”.

It is drawn by the exporter through negotiating bank (drawer) and is an order

for the importer or issuing bank (drawee; BAL Cir. Road) to pay a specified

amount. In case of sight bill (for sight L/C), it has to be paid immediately.

COMMERCIAL INVOICE:

Commercial Invoice prepared by the exporter signifies the name and

address of importer, invoice price, invoice number and all the specifications of

goods being imported.

PACKING LIST:

It is prepared by the exporter to show that the consignment is in accordance

with the order of importer. The list gives a detail that how goods have been packed

and the number of cartons they have been packed in.

SHIPMENT ADVICE:

Shipment Advice is issued for the insurance company to provide every

information and specifications regarding shipment.

CERTIFICATE OF ORIGIN:

This document is a certification for the origin of goods. It certifies that the

goods being importer (or exported) have the origin of a specific country. This

certificate is sent only if the importer, depending upon the nature of commodity,

requires it.


PHYTOSANITARY CERTIFICATE:

The exporter in case of commodities, like medicinal herbs, sends this

certificate. It certifies that the use of goods is not harmful.

BILL OF LADING/ AIRWAY BILL/ RAILWAY RECEIPT:

Bill of Lading is a document issued by the shipping company which

stipulates the quantity of commodity, weight, port of shipment & discharge, date of

shipment and other specifications. Bank examines that whether all these

specifications are in accordance with the performa invoice and L/C, especially the

date of Bill of Lading (i.e. date of shipment).

Instead of shipping company, if an airline or railway has been assigned the

task of transporting the goods, then these companies issue Airway Bill or Railway

Receipt, respectively.

The medium used for transportation depends upon the nature of goods and

the country of beneficiary; as in case of India, goods are generally transported

through railway.

INSURANCE POLICY (If Applicable):

If insurance is responsibility of exporter i.e. in case of CIF price, then the

L/C issuing bank also requires the insurance policy along with other documents.

But, during my stay in BAL Circular Road Lhr., no such case was practiced.

Usually, all the transactions were being carried out in FOB or C&F prices.

COVERING SCHEDULE:

Along with the above stated documents, the negotiating bank sends its

Covering Schedule on which the instructions regarding the whole transaction are

prescribed. It also mentions the number of each document sent by the exporter.

The number of each document depends upon the instructions of importer

mentioned on L/C.


SCRUTINY OF DOCUMENTS

After receiving all the documents, next and the most important step is to

scrutinize the documents. For this purpose, a list called “Check List of Import

Documents” is prepared.

All the documents must be in accordance with the requirements of L/C. In

case of any deviation the documents can be rejected and payment can be

stopped. Negotiating bank must be intimated about any discrepancy found, with in

7 days.

LODGMENT OF DOCUMENTS IN „PAD‟

(For Sight L/C’s only)

After all the documents are scrutinized carefully, the next step is to lodge

the documents in PAD (Payment Against Documents).

For this purpose, the documents are stamped with PAD for a specific PAD

number and entered into the register by the total amount. Exchange rate (selling)

approved by the BAL Treasury (for that day) is charged.

When the documents are lodged in PAD, L/C becomes a fund-based facility.

Until the party does not make the payment, PAD remains outstanding and the bank

keeps the documents in its safe custody. Record of every information regarding

PAD is maintained in the PAD Register.

A PAD Register contains:

a. Date of Lodgment of PAD

b. PAD Number

c. Importer‟s Name

d. Invoice Price in Foreign Currency

e. Invoice Price in PKR

f. L/C Margin (if any)

g. PAD Amount (e-f)


h. Name of Vessel

i. Date of Retirement of Documents

In case of Usance L/C, instead of lodging the documents in PAD, they are

lodged in Acceptance, which will be discussed in the next sections.

REIMBURSEMENT

When the documents are lodged in PAD, the reimbursement is made

through the reimbursement bank.

There might be two possibilities regarding the reimbursement:

1) If it is mentioned on L/C (reimbursement clause) that the reimbursement will

be made on receipt of documents (i.e. on confirmation of credit) in such a way:

“Upon receipt of credit confirmed documents, we will remit the proceeds as

per instructions of negotiating bank”.

Then reimbursement is made upon receipt of documents, when PAD is

lodged. In this case, after receiving the documents, Payment Order is made for

reimbursing bank (e.g. ABN AMRO) to make the payment according to the

instructions of negotiating bank, stipulated on the covering schedule. Reimbursing

bank makes payment by debiting the nostro account. In this case, mark-up on PAD

is charged from the date of lodgment.

2) On the contrary, sometimes the negotiating bank directly claims the

reimbursement from the reimbursing bank, after dispatching the documents,

irrespective of the fact that whether the documents have been received by the

issuing bank or not. In this case, mark-up on PAD is charged from the day, the

reimbursement is obtained by the negotiating bank, mentioned on covering

schedule.

Reimbursement method is mentioned in the reimbursement clause and

reimbursing bank is authorized through „Bank-to-Bank Reimbursement Authority


(BTB), to make the reimbursement, and the reimbursing bank, after making the

reimbursement sends a debit note.

RETIREMENT OF DOCUMENTS

The whole transaction of foreign trade in which an L/C is involved,

completes with the retirement of documents.

The documents that are first lodged in PAD are retired when the importer

pays the total amount (payable). This amount includes the PAD plus the mark-up

charged on PAD and other charges (mentioned on cost memo). Upon receipt of

payment, when the documents are retired, they are given to the importer and he

gets the consignment cleared from custom authorities (by submitting the Bill of

Entry).

This completes the whole transaction of Foreign Trade, carried out through

a Letter of Credit.


ACCOUNTING PROCEDURE OF COMPLETE L/C

CYCLE

(For Sight L/C’s only)

The bank maintains different accounts in the whole transaction, starting

from the establishment of L/C till the documents are retired. In the beginning, the

procedure of accounting entries was looking to be much complicated, but after

working for two weeks, it became quite clear to me.

So, here I have tried to stipulate all the important accounting entries

involved in complete L/C cycle (for a sight credit).

a) At, Establishment of L/C:

1) When an L/C for a specific foreign currency amount is established, two

liability accounts are created. These accounts show the total outstanding value of

an L/C.


Customer‟s Liability on SLC

Banker‟s Liability on SLC

Amounts are written in PKR. For this purpose, the foreign exchange rate approved

by the BAL Treasury for the current day (when L/C is established) is charged.

2) Before issuance of L/C, bank obtains L/C Margin, Commission & other

charges:


Party (customer)

Margin on L/C

Income

(Commission & charges)


b) Upon Receipt of Documents (on Realization of Credit):

1) Upon receipt of documents, sent by the exporter, the liability account

created first are eliminated by making contra entries (for the total invoice price), at

the previous rate.


Banker‟s Liability on SLC

Customer‟s Liability on SLC

2) Reimbursement is made by the reimbursing bank and BAL‟s Nostro account

is debited. Documents are lodged in PAD and head office account is credited by

sending ETCA (Exchange Transaction Credit Advice) through blotter.


PAD

Margin on L/C

H/O

Income (Exchange Earning)

To convert the foreign currency amounts in PKR, exchange rate (selling) for

the day of PAD lodgment is charged. Whereas, H/O is credited at the rate, 3

Paisas less than the rate charged from the importer. So, it constitutes the

exchange earning for the bank.

FORWARD BOOKING UNDER IMPORT

Forward Booking (in selling rate) under import is a facility provided to the

importers which enables them to have a fixed foreign exchange rate for the

retirement of documents, in the future period, irrespective of the market conditions.

So, it is a forward contract between an importer and the bank.

There are, usually, two situations under which forward booking is preferred

by an importer:


1) When there is an increasing trend in the foreign exchange rate and the

importer expects that it will take enough time to reach the documents in

the bank. So, due to this delay a substantial increase in the foreign

exchange rate is possible. Then, the importer requests the bank for the

forward booking of selling rate.

2) Similarly, when a substantial increase in the foreign currency rate is

expected even within a short span of time (due to market conditions). In

such a case, the importer also prefers to go for the forward rate of

specific period.

Forward booking in the selling rate is made for a specific period (at least 1

month) and the documents, even if received earlier, cannot be lodged in PAD until

maturity. And if the documents are reached after maturity of forward rate, then the

rate prevailing at that time is charged from the importer.

Usually, the documents are received earlier before maturity. Since, the PAD

has to be lodged on the forward rate (at maturity), so when the documents are

received earlier, then after getting the net amount at forward rate i.e. (invoice price

* forward rate – L/C margin + other charges if any), documents are given to the

importer and he gets his consignment cleared.

The net amount received is transferred and kept in L/C margin till maturity.

SHIPPING GUARANTEE

Some times, it so happens that the consignment reaches the port in the

importer‟s country but the bank has not received the documents.

Since, the importer needs original bill of lading and commercial invoice (also

a packing list) to get his consignment cleared, through the bill of entry. Whereas

these documents has not reached the bank and without these, the importer cannot

claim possession of the consignment. So, the bank, in such a case, issues a

shipping guarantee. Bank does so against a certain margin, which should be 110%


(of invoice price i.e. L/C value). But, in BAL Circular Road, margin requirement is

usually 100% (including L/C margin, if any).


L/C Margin (if any)

Party

Margin on LG Shipping

Income (commission)

After getting the margin & commission Rs.800, bank issues the shipping

guarantee on behalf the importer and he gets his consignment cleared.

FINANCE AGAINST IMPORTER MERCHANDISE

Finance against imported merchandise (FIM) is a credit facility provided to

the customer, in L/C transaction. In FIM, bank itself makes the payment to the

exporter and the goods are kept in the possession of bank. Delivery Order (DO) is

issued by the bank for every time, when the importer makes the payment and

goods are transferred in the possession of importer.

FINANCE AGAINST TRUST RECEIPT

The banks also offer credit facility FATR, against sight L/C‟s, like FIM.

Contrary to FIM, goods are given in the possession of importer. This facility is

provided to the customer having a credit rating A+.

USANCE L/C

When a credit is to be paid upon the maturity of a bill of exchange drawn

under the terms of credit, it is called an Acceptance Credit or Usance Credit.

Contrary to the sight L/C, when the documents are received under usance

L/C, the importer first gets the documents and then pays for them, at maturity of


usance. When the importer gets the possession of documents from the bank, he

gives an acceptance to the bill of exchange and gives an undertaking that on the

maturity date, he would make the payment.

In this form of credit, when the documents are received, then instead of

lodgment of PAD, liability is lodged in acceptance account, when the importer

gives acceptance on the bill of exchange. Foreign bills stamps, amounting 0.2% of

invoice price, are pasted on the back of bill of exchange. So, after getting the

acceptance letter signed by the importer, the documents are given to him.

If, on the maturity date, the importer does not pay the amount, the liability is

shifted to the Overdue Acceptance account. The bank, however, has to make

payment to the negotiating bank. This is why the banks avoid Usance L/C‟s.


EXPORT OPERATIONS

During the two weeks in trade finance department, I was much desirous to

know that how the export transactions are carried out through bank, along with the

imports. The export transactions in BAL Circular Road were not of such extensive

nature as imports due that specific area. So the processing of a normal export

transaction has been discussed.

CONDITIONS FOR EXPORTER:

Like an importer, there are certain conditions that a person must fulfill to

become an exporter.

1) The person must be an account holder of BAL.

2) No one can export any commodity until and unless he/she is a

Pakistani and has a valid export registration with the EPB.

3) The person must process a valid membership certificate of Trade

Organization, licensed and recognized by Federal Government like a

Chamber of Commerce (e.g. Lahore Chamber of Commerce).

4) The person must possess a valid NTN (National Tax No.) certificate.

5) A person cannot export any good unless he files a Form E (E stands

for exports) with his application to the bank. The form E must be filled

in writing and all specifications stipulated on the form, must be met.

6) The person must have the Sales Tax Registration Certificate.


COMPLETE EXPORT CYCLE

The process of export starts with the receipt of the letter of credit (or

contract) by the bank. The issuing bank sends the L/C to BAL Cir. Road through

the advising bank. Upon receipt of L/C, an intimation letter is prepared and is sent

to the beneficiary of the L/C, advising him that his reached BAL and he should

collect it immediately.

As mentioned earlier, an E-form is necessary for exports out of the country.

It is a part of exchange control mechanism of the State Bank of Pakistan. When an

exporter receives an L/C, the next job is to get an E-form from the bank. The E-

form is a quadruplicate and contains the following information.

The Commodity

The quantity

The price

The port of shipment

The port of destination

Terms of shipment

Export registration number

After filling in the complete information about the goods to be exported, the

exporter brings the E-form to the bank for verification. The bank verifies the

contents in accordance with the documents and not by physical checking.

After getting the E-form verified from bank, the exporter starts preparing for

his shipment. As the banks only deal in documents, so in order to receive the

payment for his good to be exported, the exporter has to send certain documents

to the L/C issuing bank via negotiating bank. These documents have already been

discussed in import section.


A very important step in the export process is to scrutinize the documents,

before sending them to the issuing bank. It requires utmost care and attention of

the bank officer. When the documents are presented in the bank, they are always

scrutinized and they must be in accordance with the requirements stipulated on the

L/C. Any deviation could result in rejecting the documents by the importer, hence

causing loss to the exporter or even to the bank if the documents are to be

negotiated.

COLLECTION / NEGOTIATION

When the exporter comes to the bank with the documents, he has two

options:

a) Send them for collection

b) Get them negotiated

1) COLLECTION:

The bank sends the documents on behalf of the exporter to the issuing bank

and payment against them is received after a specific period. In collection, the

exporter is paid only when the bank obtains reimbursement from reimbursing bank.

The payment is made to the exporter in PKR (Pak Rupees) and the exchange rate

is the buying rate of the day normally called T.T Buying Rate.

Deduction of Tax:

Withholding Tax is deducted on the realization of export proceeds, under

Income Tax Ordinance 1979. The rate of tax varies from 0.75 to 1.25 percent,

depending upon the nature of commodity, as:

• 0.75% for the export of finished goods




2) NEGOTIATION:

In case of Negotiation, the bank purchases the documents (clean

documents having no discrepancy, against L/C‟s only) from the exporter, i.e. the

exporter gets them discounted before their maturity. For example, if the payment

against documents for the exports has to be received after 60 days. The exporter

might not want to block his payment for this period. So, he can get his documents

negotiated by the bank, the day he presents them to the bank. In this case, the

exchange rate he will get is called O.D Buying Rate. This rate is slightly less than

TT buying rate because the bank pays him an amount that it is going to receive

after 60 days. These buying rates are updated every day (like selling rates) and

are available to the exporter before he decides whether to get his bills discounted

or not.

Contracts are however not negotiated in any case. This is because, they are

unsafe documents and the bank does not take the risk of being denied the

payment by the importer after having made the payment to the exporter.

In BAL Circular Road branch, the export transactions are carried out on

collection basis, against TT buying rates only.

The documents brought by the exporter are in form of sets containing an

original and a number of copies. The number of each document required by the

importer is mentioned on the L/C. The exporter however deposits more copies of

documents than the number to be sent. The bank keeps the additional copies

along with the E form for its own record. A bill of exchange, drawn by BAL Circular

Road Br., on the issuing bank is prepared. Then these documents are sent to the

L/C issuing bank along with the covering schedule (discussed in imports section).

When the documents are sent to the issuing bank, it becomes an obligation

of the issuing bank to make the reimbursement. In case of sight credit, the

payment is to be made within 12 days of receipt of the documents by the issuing

bank (via reimbursing bank).

However, if the credit is a Usance credit, then an acceptance (to the bill of

exchange) is sent to the negotiating bank, in which the issuing bank gives the


undertaking, to make payment on a specific date (maturity). The exporter is

intimated about the date on which the proceeds would be realized.

When, the proceeds for documents sent for collection are realized, the

exporter‟s account is credited with the PKR amount, by converting the foreign

currency amount into PKR at the TT buying rate of that day (after deducting the tax

and other charges). Also, the head office (H/O) account is debited with a few

paisas more than the rate that has been given to the exporter. This amount

constitutes the exchange earning for the branch (like imports). This completes the

whole transaction of export.


DIAGRAMMATIC APPROACH TO COMPLETE

L/C CYCLE

After working for two weeks in trade finance department, the complete

process of international trade involving an L/C became clear to me. The process

involves a number of banks and becomes quite complicated at times but is very

logical.

In the previous pages, I have tried to describe this process elaborately, but at this

stage, I would explain the whole L/C cycle with the help of a diagram.

ASSUMPTIONS:

It is a sight L/C

The currency is U.S. Dollars

The importer is in Pakistan

The exporter is in Indonesia

L/C Issuing bank: BAL Circular Road

Negotiating bank: Deutsche Bank, Indonesia

Advising bank: Standard Chartered Bank, Indonesia

Reimbursing bank: ABN AMRO Bank, New York USA

Intermediary bank: American Express Bank, New York USA


L/C CYCLE

IMPORTER EXPORTER

(Pakistan) INDENTER (Indonesia)

DOCUMENTS

PAYMENT

L/C ISSUING

BANK DOCUMENTS NEGOTIATING

(BAL Cir. Rd) BANK

(Deutsche Bank)

Indonesia

L/C

L/C ADVISING

BANK L/C

(Standard Chartered)

Indonesia

PAYMENT PAYMENT

INTIMATION

REIMBURSEMENT INTERMEDIARY

BANK PAYMENT BANK

(ABN AMRO, NY) (American Express

Bank, NY)


CREDITS

After working for two weeks in Trade Finance Department, I was moved on

to the Credit Department. Mr. Anwar Masood, Incharge Credits, welcomed me in

his department. For him, I would just say, that I did not find such a lenient and

cooperative person in my career.

In Credit department, I worked for the last two weeks of my internship

program. One major difference that I observed in credit department and other

departments was the difference in the nature of work. After working in credit

department, I realized the importance of lending operations for a bank. Here, I

have tried to describe my experience and observation in credit department.


LENDING OPERATIONS

Since, the basic function of a bank is to receive deposits (at low rate of

return) and to lend money (at high rate of return). So, the lending operations of a

bank constitute the most vital part of its business.

Bank‟s funds comprise mainly of money borrowed from numerous

customers on various accounts such as saving accounts, current accounts, fixed

deposits and notice deposits etc. whereas, the major part of total income of a bank

is generated through the utilization of these funds. So, a banker

KINDS OF CREDIT

Bank provides credit facilities to its customers for a specific maturity. This

maturity or duration of credit is not an independent factor; it depends upon the

purpose of the loan.

According to the maturity of credit, it has three basic kinds.

a) Short Term Credit

b) Medium Term Credit

c) Long Term Credit

SHORT TERM CREDIT:

The period of a short-term credit is generally less than or equal to one year.

This credit is used for the creation of current assets e.g. for the purchase of raw

material and to meet the working capital requirements.

MEDIUM TERM CREDIT:

Medium term credit is normally issued for one to three years. It is used for

the purchase of machinery, furniture etc. by the firms.


LONG TERM CREDIT:

Credit facilities sanctioned for 3 to 5 years is considered as the long-term

credit. Long-term credit is required for capital expenditures, such as purchase of

building and heavy machinery.

RATE OF INTEREST:

Rate of interest against these advances vary according to the duration.

Shorter is the period of loan; greater is the rate of interest because, in long-term

credits, there is less risk of idle cost of funds.

In BAL Circular Road, only the short-term credit facilities are being provided.

CREDIT FACILITIES IN BAL

(Circular Road Branch, Lahore)

Bank provides different credit facilities to its customers, in form of short-term

credit. Following are the credit facilities that the customers usually avail to meet

their requirements.

OVERDRAFT (OD):

This is the most common form of bank lending. In overdraft facility, a

customer is allowed to withdraw on his account in excess of the balance that the

borrowing customer has in credit. So, when a customer withdraws in excess of his

balance, an overdraft occurs (balance becomes in debit). Overdraft facility can be

availed for a certain limit called OD limit and is used to meet the seasonal

requirements of cash.

CASH FINANCE (CF):

This is a very common form of borrowing by commercial and industrial

concerns, and is made available either against pledge or hypothecation of goods.


Cash finance (being short term credit) is utilized for the creation of current assets

and to meet the permanent working capital requirements. In cash finance, a

borrower is allowed to borrow money from the bank upto a certain limit, either at

once or as required. The borrower prefers this form of lending due to the facility of

paying markup charges only on the amount he actually utilizes.

LETTER OF CREDIT (L/C):

Letter of credit, whether sight or usance, is an non fund based facility

provided to the customers. L/C has already been described elaborately in trade

finance section.

LETTER OF GUARANTEE (L/G):

Along with other credit facilities, bank also facilitates the customer by

issuing the letter of guarantee on behalf of the customer. These guarantees

include payment guarantee, shipping guarantee etc.

Difference Between an L/C & L/G:

An L/G has to be retired 4 or 5 days before the maturity i.e. the payment has

to be made within 4 or 5 days before maturity. After maturity, credit is considered

to be bad debt and client is considered defaulter. Whereas in L/C, payment can be

made after maturity with a certain markup.

PAD, FIM & FATR:

PAD, FIM and FATR are fund based facilities against L/C, and have already

been discussed in trade finance section. These facilities, availed for import

transactions are approved first by credit department against some collateral.


SECURITIES FOR ADVANCES

No doubt, the advancing of credit involves a great risk for the bank.

Therefore, to cover this risk, the bank keeps different tangible and non-tangible

securities, before sanctioning the credit facility to a customer. The bankers prefer

such securities that carry less risk of depreciation due to market fluctuations and

are easily saleable, even under changing market conditions.

Common securities against banker advances are as under:

PLEDGE

Pledge is the actual delivery of the movable & tangible property to the

lender, as a security for a credit. In a pledge, the possession of movable assets is

with bank but the ownership remains with the client. Pledge is against short-term

finances and is considered to be the best security for the bank. The commodities

that are pledged include generally, raw material, consumables, finished goods and

in certain cases work in process (WIP).

MARGIN:

For every credit, the bank needs security with margin or cushion. Similar is

the case with pledge. For example, if, there is 25% margin requirement then to

obtain loan of Rs.1 million, the security that is to be pledged should be of worth Rs.

1.25 million.

Since, in pledge, the possession of the goods is with bank, so bank keeps

these goods in the godowns under the custody of Mucaddams.

MUCADDAMS:

People who look after the pledged goods for bank are called Mucaddam. If

cotton (raw material) is to be pledged by the bank, it doesn‟t mean that this cotton

will be kept in bank; such type of goods is kept in the godowns of the company. So,

to make these goods secure, the bank appoints its own men called Mucaddams to

take care of stock.


PRECAUTIONS:

There are certain factors that a banker must take into consideration before

advancing against pledge.

1) Client:

In case of pledge, godowns are in the premises of the clients under the

custody of Mucaddams, whose honesty can be bought at any time. Therefore

greater risk is imposed by the client. So, the must be satisfied with the honesty and

credibility of the client.

2) Nature of Commodity:

The banker must be aware of the nature of the property i.e. whether the

commodity is a perishable item like sugar. Also the commodity being pledged

should be easily saleable, so that in case of default of client, bank can easily sell it

in the market.

3) Market Awareness:

A banker must have market awareness e.g.. fluctuation in prices. Such

commodities should not be pledged that might have low demand in the market and

have many associated risks.

4) Suitability of Godown:

Suitability of godown depends upon the nature of the commodity. Banker

must be fully satisfies with the appropriation of godown. Like in case of medicines

to be pledged, the godown should have clean environment and proper mechanism

of cooling, to maintain the temperature.

5) Proper Valuation:

Whenever goods are pledged, the banker should be aware of the true cost

of the product as the client always overvalues his products. Sales taxes, excise


duties are also paid on the finished goods. So a banker must have knowledge

regarding all these things.

6) Insurance:

The goods offered for security must be properly insured. Banker must

analyze all the associated risks of the goods. So, to cover these risks banker

should decide about the insurance of the commodity.

HYPOTHECATION

When an immovable property is offered for security against a credit but both

the ownership and possession is left with the borrower, the goods are said to be

„hypothecated‟. Securities like machinery, stocks etc. are offered for hypothecation.

Lending against hypothecation of goods is very risky. The control of bank is weak

so greater risk is involved in hypothecation.

In case of hypothecation

a) The banker reserves the right to inspect the goods hypothecated to

him and can ask for periodic stock reports, where necessary.

b) The banker, for his protection, may ask the borrower to insure. The

banker may himself do so and recover the expenses from the

borrower.

c) The banker may ask the borrower to maintain a balance of goods

sufficient to fulfill the margin requirements.

For the creation of hypothecation, the bank gets the letter of hypothecation

signed by the client. This deed is got registered in case of both public and

private limited companies, with the Registrar of Companies (SECP).


MORTGAGE

In mortgage, immovable assets are offered as security. A mortgage means,

to surrender the proprietary rights of a property. The transferor of property is called

a mortgagor and the transferee (bank) is called a mortgagee.

Before advancing against immovable property as security, the bankers

conduct following preliminary enquiries:

1) NATURE AND VALUE OF PROPERTY:

The bankers satisfy themselves that whether the property is suitable for

security purposes and that in case of forced sale he would not suffer any loss. For

this purpose, the bankers inspect the property and property visit report (described

in next section) is prepared. Also, the bankers hire the services of different

valuators to assess the right value of property (property valuation report prepared

by the valuators will be discussed in the next section).

2) INVESTIGATION OF TITLE:

The must be satisfied that his borrower has a good title to the property. The

bankers, therefore, conduct a proper investigation into the borrower‟s title to the

property, through their own legal advisers.

3) SEARCH FOR PRIOR CHARGES:

A search is made (with Registrar of Companies), to ensure that there exists

no prior charge on the property. If the title deeds of the property are in the name of

more than one person, the search should be directed against the name of each

person through whom the title is made. For this purpose, the bank also gets fresh

NEC i.e. Non- Encumbrance Certificate, issued by the registrar indicating that no

lien or charge etc. has been created on property being mortgaged, upto a specific

date.

After, a banker is satisfied with the property offered for security; mortgage

against this property is created through „Mortgage Deed‟. For this purpose, the


original title documents (e.g. registered sale deed) are deposited in the bank with

the mortgage deed. Along with having the title documents of property, the bank

requires:

Memorandum of Deposit of Title Deed

Agreement to Create Mortgage

General Power of Attorney (registered)

General Power of Attorney is registered with the registrar of the area where

the property is located (i.e. where the sale deed had been registered.

Usually, two types of Mortgages are being created in the bank (BAL, Cir.

Road), for the purpose of collateral.

1) EQUITABLE MORTGAGE (E/M):

When a mortgage deed is attached with the title documents (registered sale

deed) only and is deposited in the bank, it is known as „Equitable Mortgage‟ or

„Mortgage by deposit of title deed‟. It is the most common form of mortgage

created in the bank.

2) REGISTERED MORTGAGE (R/M):

When the mortgage deed between the bank and the client is registered, it

becomes a registered mortgage. Mortgage deed is registered with the registered

with the Registrar of the Companies. It is an expensive mortgage and is created

when the title documents are weak or the client is not much trustworthy.

CREATION OF CHARGE:

Charge means the legal right on the assets of the person (company). In

case of limited companies, banks generally create their charge on the assets of the


company, as security. The charge is registered with the Registrar of the

Companies (SECP).

LIEN ON DOCUMENTS:

Like charge, bank creates its lien on the documents in its possession, as

security. For example, in case of import transaction under L/C, bank creates lien

on import documents.

GUARANTEES:

Along with other securities, bank may rely on other guarantees like personal

guarantee, to protect himself against the advances.

PROCESSING OF LOAN APPLICATION

Whatever money the banker holds is that of his customers who have

entrusted the bank only because they have full confidence in the expert handling of

money by their banker. Therefore, the banker must be very careful and ensure that

his depositors‟ money is advanced to safe hands where the risk of loss does not

exist.

So, when a customer requests his banker to facilitate him with different

credit facilities. The banker, first, assess the credibility of customer and the market

conditions. The elements of character, capacity, capital and market conditions help

a banker in arriving at a conclusion regarding the safety of advances.

CHARACTER:

It is the most important factor in determining the safety of advances, for

there is no substitute for character. A borrower‟s character can indicate his

intention to repay the advance, since his honesty and integrity is of primary

importance. If the past record of the borrower shows that his integrity has been

questionable then the bakers usually try to avoid such a customer.


CAPACITY:

This is the management ability factor, which tells how successful a business

has been in the past, and what are the future possibilities are. Before advancing

loan a banker must be satisfied with the sources of the repayment of the funds.

CAPITAL:

The bankers also check the property capital of the borrower. This property

can be kept as a security of loan. In other words if the businessman financial

condition is sound then can be lended, otherwise not.

CIB REPORT:

Bank cannot sanction any credit to a customer, unless it gets Credit report

from CIB report from CIB (Credit Information Bureau, SBP). Before making any

decision about the client, bank needs a CIB report. Therefore, first of all, the

banker requests CIB to provide him the credit report of client. This report indicates

all the credit facilities (outstanding) availed by the client.

CREDIT LINE PROPOSAL (CLP)

After being satisfied with the credibility and integrity of the applicant, the

processing of loan application starts with the preparation of Credit Line Proposal

(CLP). According to my observation, it has been the vital and most important task

assigned to the credit officers in BAL Cir. Road.

In a CLP, every information regarding the client and his business is

stipulated as:

Total existing facilities (limit), their outstanding value and the securities that

were provided against these facilities.


Total proposed limit of credit and the securities provided against it. The

credit officer does the analysis and verification of these securities.

BUSINESS ON OTT BASIS:

Client may conduct a business with bank on OTT (One Time Transaction)

basis. When a client wants his banker to facilitate him with a certain credit only for

a single transaction, then he would ask for OTT limit of credit facility. For example,

in case of OTT limit for SLC, credit facility expires with the completion of L/C cycle.

REGULAR CREDIT LIMIT:

But, if the client wants to route a regular business with the bank, then he

requests for regular credit limit of credit facilities for a specific period.

Customer‟s background, his relationship with the bank (if he is an existing

customer), his relationship with other banks.

Purpose of facility and the terms and conditions regarding the credit.

Nature of his business and what are the market conditions & opportunities

for the business.

Business Reciprocity/ reciprocal business is stipulated on the proposal,

which means the expected business that would be routed through the bank for

these facilities. Banks calculates his profitability on the basis of this business.

Financial Analysis:

Financial Analysis of the business of the customer constitutes the vital most

important part of a proposal. Banker makes an analysis on liquidity, leverage and

profitability of his business.

But, in BAL Circular Road Branch, I observed that most of the financial

statements were being prepared in a vague way (by the business concerns).

Therefore, an extensive financial analysis for such businesses was not possible.

Perhaps, it is because of that specific area where financial statements are not

given much attention.


Finally, along with other information, banker himself gives his comments

and recommendations for the proposal.

DOCUMENTS (REPORTS) ATTACHED WITH

PROPOSAL


For having the complete information regarding the client, his business and

the securities offered for advances (that already have been discussed), different

documents are prepared by the credit officers. All these documents are attached

with the proposal to get approval. These documents are as follows:

GRADE APPROVAL SHEET:

On the basis of nature of business and the client‟s relationship with

the bank (and other banks also), grades are assigned to client. For this

assessment, the bank prepares Grade Approval Sheet.

BASIC FACT SHEET:

Basic Fact Sheet stipulates the information of the client and his businesses

like; address, NTN, import registration No., corporate status, directors &

management etc.

VALUATION SURVEY REPORT:

For the proper valuation of securities offered against credit facilities, bank

renders the services of valuators (like Harvester Services Pvt. Ltd.). These

companies after conducting a proper survey, prepare Valuation Survey Report.

Both the resale and forced sale values of securities are mentioned on the report, in

detail.

PROPERTY VISIT REPORT:

Credit officers conduct a proper visit of the property. After having a thorough

visit of property, Property Visit Report is prepared. It elaborately describes the

nature of property and associated threats. It can be prepared in tabular or essay

form, depending upon the nature of property.

SECURITY ANALYSIS SHEET:


In Security Analysis Sheet, it is assessed that how much security have been

offered in form of cash, marketable securities and other illiquid securities, and after

meeting the margin requirements, how much facility can be sanctioned.

RELATIONSHIP PROFITABILITY (Projected):

Relationship Profitability report is prepared to calculate the net income (net

spread) of the bank against the credit facilities. Bank arrives at net spread by

subtracting the cost of funds from the total markup earned against credit facilities.

All these calculations are based on projections.

STATEMENT OF ACCOUNTS:

Account of a customer constitutes the basis of his relationship with bank.

So, account statement of a customer reflects the nature of the relationship

between the bank and costumer.

If required, the accounts statements of other banks of customer are also

obtained.

FINANCIAL STATEMENTS:

Along with other documents, financial statements of the business concern

are also attached.

APPROVAL OF CREDIT

When the credit officers are fully satisfied with the proposal of credit, then

they recommend it for approval by the BCC (Branch Credit Committee) or Head

Office.

BCC has an authority to approve the credit proposal upto a certain limit. But,

beyond that limit, it has to be approved be the Head Office Karachi. I have

observed that, head office raises different queries against the CLP and approves it

after being satisfied.


PERIODIC INSPECTIONS

When a credit limit is approved for a customer and credit is sanctioned, the

major task of credit officers is to conduct periodic inspections (monthly, quarterly

etc.) of securities that have been offered. Banker must see that whether all the

margin requirements and other terms & conditions are being fulfilled by the

customer or not.

BANK ALFALAH LIMITED

BALANCE SHEET

1997-2000


Particulars 1997 1998 1999 2000

Assets

Cash

Balances with other banks

Money at call & short notice

Investments

Advances- net of provision

Opening fixed assets

Other assets

Liabilities

Deposits & other accounts

Borrowing from other

banks, agents etc.

Bills payable

Other liabilities

Deferred liabilities

Net Assets

Presented by

Share capital

Reserve fund, other reserves

Unappropriated profit

Shareholder’s equity

Particulars

471,538

60,636

400,000

3,348,747

4,849,653

175,397

1,220,666

10,526,637

9,018,777

553,042

64,491

167,079

9,807

9,813,196

713,441

600,000

111,021

2,420

713,441

1997

721,285

386,211

248,000

3,406,514

7,757,708

263,760

1,537,629

14,321,107

11,878,221

1,348,313

51,737

176,630

7,400

13,462,301

858,806

600,000

255,094

3,712

858,806

1998

1,687,256

1,161,434

100,000

4,993,035

10,327,324

1,153,607

1,596,952

21,019,608

15,820,473

2,972,240

120,868

372,855

6,892

19,293,328

1,726,280

600,000

286,399

8,931

895,330

1999

2,044,725

1,798,086

890,000

4,967,542

15,242,317

1,231,161

1,403,328

27,577,159

20,481,568

4,639,130

106,353

625,312

6,694

25,859,057

1,718,102

600,000

299,469

1,211

900,680

2000



Surplus/(deficit) on

revaluation of investments

Surplus on revaluation of

fixed assets

713,441

-

-

713,441

858,806

-

-

858,806

895,330

-

830,950

1,726,280

900,680

(13,528)

830,950

1,718,102


INCOME STATEMENT


1997-2000

Particulars 1998 1999 2000

Markup/interest & discount earned

Less: cost/return on deposits etc.

Fees, commissions & brokerage

Profit from investment securities

Other operating income

Total

Net Revenue

Operating expenses:

Administration expenses

Provisions against non-performing

advances – net

Total operating expenses

Operating profit

Other income

Profit before tax

Profit after tax

1,625,352

1,313,564

311,788

39,438

3,345

121,754

164,537

476,325

337,447

94,756

432,203

44,122

23,614

67,736

145,365

1,905,808

1,474,343

431,465

58,043

13,792

114,250

186,085

617,550

402,734

(136,076)

266,658

350,892

3,523

354,415

156,524

2,258,527

1,724,041

534,486

103,838

19,617

147,644

271,369

805,855

503,256

(103,950)

406,925

398,930

1,420

400,350

215,350

TREND ANALYSIS



BALANCE SHEET

1997-2000


Assets

Cash



Investments



Other assets

Total Assets

Liabilities


Borrowing from other banks,

agents etc.

Bills payable

Other liabilities


Total liabilities

Net Assets

%

52.09

536.93

(38.11)

1.68

59.98

50.40

26.21

34.81

31.71

144.01

(19.81)

5.69

(24.49)

37.20

20.38

%

133.84

200.69

59.70

46.28

33.11

337.26

3.84

46.79

33.22

120.02

133.64

111.09

(6.90)

43.31

101.01

%

21.20

54.88

789.96

(40.02)

4.91

6.96

(12.51)

31.21

29.50

56.21

(12.01)

67.70

(2.87)

34.06

(0.46)


Particulars

Presented by

Share capital

Reserve fund, other reserves



Total

1998

-

130.11

53.39

20.38

20.38

1999

-

12.31

140.60

4.25

101.01

2000

-

4.54

(86.44)

0.60

(0.46)


COMMENTS

ASSETS

1. The level of cash has increased by 53% in 1998, 134% in 1999, and 21.2%

in 2000 and the reasons behind increase in cash in 1998 were the opening of five

new branches in Karachi, Lahore & Sialkot, and the recovery of non-performing

loans. In 1999, economy was revived to some extent after Nuclear Test, which had

a positive effect on the cash of bank. Also the placement and the cash in hand in

local currency increase, and took the level of cash up with them. In 2000, there is a

normal increase in cash, which is because of expansion in branch network of the

bank.

2. Balances with other banks have increased by 53.7% in 1998, 200.7% in

1999 and 54.9% in 2000. Bank balances have increased drastically in 1999, due to

the drastic increase in bank balances outside Pakistan.

3. Money at call has decreased in 1998 by 36%, increased by 59.7% in 1999

and has increased tremendously by 790% in 2000. Call money is a highly valuable

account and its increase or decrease does not signify much. According to balance

sheet, call money increased to 38% in 1998 and increased by 790% in 2000. This

does not portray the true picture as the level of call money at the date of

preparation of the statements might be zero but that situation could have changed

ever in the next day.

4. Investment has increased in 1998 by 1.7%, in 1999 increase is 46.3% and

in 2000 it has decreased to 40%. The increase in 1999 by 46.3% is due to the

heavy investment in Federal Investment Bureau and Treasury Bills of Government.

5. Advances have increased to 60% in 1998, 33.1% in 1999 and 4.91% in

2000. Some negotiations have been held with almost all the borrowers and number

of accounts has been revived for non-performing loans converted into profit


generating assets. So increase in advances in 1998 & 99 is mainly due to this

reason.

6. Total Assets increase by 35.99% in 1998, 46.79% in 1999, which signifies a

tremendous increase in business of bank.

LIABILITIES

1. Deposits have increased in 1998 by 31.7%, in 1999 increase is 33.2% and

in 2000 the increase is 29.5%. This increase is due to the expansion of branch

network of the bank and this increasing trend is very encouraging for the bank.

2. Borrowing from other banks is increasing but following a decreasing trend,

which shows that the bank is gaining control over its borrowings and is

emphasizing more on deposits. This shows better management policies of bank in

order to decrease cost of funds.

3. Although the bank is on its way to expansion and for the purpose of

expansion it needs to have borrowing. Therefore increase in total liabilities is not

that much alarming.


TREND ANALYSIS BANK ALFALAH LIMITED

INCOME STATEMENT

1997-2000







Total

Net Revenue

Operating expenses:



advances – net


Operating profit

Other income

Profit before tax

Profit after tax

%

53.8

40.6

154.9

(19.9)

100

(4.8)

(7.11)

59.1

44.7

27.2

46.5

633.7

57.3

910.1

-

%

17.2

12.2

38.6

47.2

(97.1)

(36.0)

(8.98)

22.02

19.3

(243.6)

(38.3)

613.4

68.6

423.5

7.63

%

18.5

16.9

23.8

78.8

43.1

21.6

45.8

30.5

25.0

(23.6)

52.6

13.7

(60.1)

12.97

37.58


COMMENTS

1. Mark-Up

There is a continuous increase in mark up because the bank has increase

its advances due to which mark up recovered have increased. Also there is an

expansion in business.

2. Cost /Return on Deposits

Cost on deposits is continuously increasing because the bank deposits are

increasing. The increase in revenue has been in higher percentage as compared

to cost, which is encouraging feature.

3. Administrative Expenses

The administrative expenses have been on a consistent rise. This is not a

bad sign and shows the expansion in the business, but only if the deposits have

also been increasing along with expanses, which is true in case of BAL.

4. Total Operating Expenses

Total operating expenses increase by 40.5% in 1998, but decrease in 1999

by 38.3% and again increase in 2000 by 32.6%. The decrease in 1999 is due to

recovery of loans, which has resulted in decrease in provisions against non-

performing advances.

5. Profit Before Tax

The bank was going in loss in 1997 in respect of operating profit, which was

in negative figures, but the whole situation changed in 1998 and BAL recovered its

profitability.

In 1999, operating expanses have decreased tremendously which has

resulted in increase in profit before tax.


6. Total Equity

Total equity has increased in 1998-1999 from 20.38% to 114.98%, which is

a tremendous increase. This increase is due to the increase profitability of the bank

and surplus on revaluation of fixes assets but in 2000 a small decrease has been

observed, which is only due to the deficit in revaluation of fixed assets.


VERTICAL ANALYSIS BANK ALFALAH LIMITED

BALANCE SHEET

1997-2000


Assets

Cash



Investments



Other assets

Total Assets

Liabilities


Borrowing from other banks,

agents etc.

Bills payable

Other liabilities


Total liabilities

%

5.04

2.70

1.73

23.79

54.17

1.84

10.73

100.00

88.23

10.02

0.38

1.31

0.06

100.00

%

8.03

5.52

0.48

23.75

49.13

5.49

7.60

100.00

82.51

15.50

0.63

1.32

0.04

100.00

%

7.41

6.52

3.23

18.02

55.27

4.46

5.09

100.00

79.20

17.94

0.41

2.42

0.03

100.00


Particulars

Presented by

Share capital

Reserve fund & other reserves

Surplus on revaluation of F/Assets


Total equity

Total liabilities

Total equity

Total liabilities & equity

1998

69.87

29.70

-

0.43

100.00

94.00

6.00

100.00

1999

32.50

15.52

45.00

6.98

100.00

91.22

8.78

100.00

2000

34.92

17.43

48.36

0.70

100.00

93.80

6.20

100.00


COMMENTS

ASSETS

The advances and investments constitute the major portion of the total

assets. This is typical for a bank, as banks do not have considerable fixed assets.

The investments have been decreased and are at 18.02% in 2000. It is

because of the deficit on revaluation, which has resulted due to the decrease in the

value of government securities and shares of public limited companies (where BAL

had invested).

The portion of advances has increased by the year. This is a healthy sign

and shows that the business is expanding.

LIABILITIES

On the liability side, deposits and borrowings are the major accounts. The

percentage of deposits is decreasing whereas percentage of borrowings is

increasing.

Despite of the considerable increase of 30% (aprox.) in deposits, the

decrease in % of deposits to total liabilities is due to the increase in total liabilities

resulted due to the increase in borrowings from other banks. Since, the bank is on

its way to expansion and for the purpose of expansion it needs to have borrowing.

Therefore increase in total liabilities is not that much alarming.


VERTICAL ANALYSIS BANK ALFALAH LIMITED

INCOME STATEMENT

1997-2000







Total

Net Revenue

Operating expenses:



advances – net


Operating profit

Other income

Profit before tax

%

90.81

73.39

17.42

2.20

0.19

6.80

9.19

26.61

18.85

5.29

24.15

2.47

1.32

3.78

%

91.10

70.48

20.63

2.77

0.66

5.46

8.90

29.52

19.24

(6.50)

12.75

16.77

0.17

16.94

%

89.27

68.15

21.13

4.10

0.78

5.49

10.73

31.85

19.89

(4.11)

16.08

15.77

0.06

15.82


COMMENTS

Mark up earned and the cost paid constitutes the major portion of the total

revenue. During the last three years, there is almost consistency in mark up

earned and paid.

In year 99, deposits contributed more towards the revenue as compared to

year 2000. However, there is minor decrease in costs too.

There is no other significant change except the operating expenses, which

decreased drastically due to the recovery of non-performing advances that has

already been discussed in detail. This also has resulted in tremendous increase in

profits.


PROFITABILITY RATIOS

1. PROFIT AFTER TAX / TOTAL REVENUE

1998 = [145365 / 1789889] * 100

= 8.12%

1999 = [156524 / 2091893] * 100

= 7.48%

2000 = [215350 / 2529896] * 100

= 8.51%

COMMENTS

The net profit margin of the bank shows an increasing trend. It, however,

came down to 7.48% in 1999,even despite the high profitability. It was because of

the greater amount of tax paid during the year. Moreover, the denominator i.e. the

total revenues have been increasing continuously which signifies the expanding

business operations.

2. NET INCOME / CAPITAL FUNDS


1998 = [67,736 / 858806] * 100

= 7.8%

1999 = [354,415 / 1,726,280] * 100

= 20.53%

2000 = [400,350 / 1,718,102] * 100

= 23.30%

COMMENTS

This ratio i.e. return on equity shows the return the owners of the business

enjoy after paying all the financial expenses and other liabilities of the business.

The return on equity increased from 7.8% to 23.30%, which is a tremendous

increase and has resulted due to the growing profits of the banks. In 1999, pre-tax

profit has increased almost by 5 times of previous year‟s profit. So, a consistent

increase in profit shows a positive and a very healthy and pleasing news for the

owners.

3. NET INCOME / TOTAL ASSETS


1998 = [67,736 / 14,321,107] * 100

= 0.47%

1999 = [354,415 / 21,019,608] * 100

= 1.70%

2000 = [400,350 / 27,577,159] * 100

= 1.51%

4. NET INCOME / RISK ASSETS

1998 = [67,736 / 7,757,708] * 100

= 0.87%

1999 = [354,415 / 10,327,324] * 100

= 3.40%

2000 = [400,350 / 15,242,317] * 100

= 2.62%

5. OPERATING EXPENSES / NET REVENUE


1998 = [432,203 / 476,325] * 100

= 90.0%

1999 = [266,658 / 617,550] * 100

= 43.17%

2000 = [406,925 / 805,855] * 100

= 50.49%

COMMENTS

With the expansion of business, the deposits have increased throughout

from year 98 to 2000, which resulted in an increase in mark-up received which in

turn has increased net income.

In year 98, Special Asset Management Division was made with an intention

to recover the non-performing advances. As a result, a large number of non-

performing advances were recovered in 1999, which resulted in drastic decrease in

operating expenses, as evident in ratio no.5. That‟s why; there is a tremendous

increase in pretax profit in year 99.

In 2000, increasing trend continued and bank‟s pretax profit for the year

grew by 12.96percent to Pak Rupees 400 million. This year, some non-performing

advances were also recovered.

So, as far as the whole profitability of the bank is concerned, I can safely

say that bank is going on the way of progress and its profitability is increasing

consistently. It is also evident from the following graph:


0

100000

200000

300000

400000

500000

FY98 FY99 FY2000

Profit (Rs. In 000)


ADMINISTRATIVE EXPENSES TO DEPOSITS

= [ADMIN. EXPENSES / DEPOSITS] * 100

1998 = [337447 / 11878221] * 100

= 2.84%

1999 = [402559 / 15820473] * 100

= 2.54%

2000 = [503256 / 20481568] * 100

= 2.46%

COMMENTS

This ratio is very helpful in determining the relationship between the

deposits and the costs associated with maintaining them. The benchmarked figure

is 2% to 3% in the banking sector. The administrative expenses should exceed the

level of 3%, for deposits.

The ratio signifies the management‟s efficiency and shrewdness of

maintaining deposits. In no year since 1998 this ratio crossed 3% and shows a

decreasing trend. This decreasing trend, even with the increase in deposits,

signifies management‟s commitment and professional outlook.


LIQUIDITY RATIOS

1. QUICK ASSETS / TOTAL DEPOSITS

1998 = [4,614,510 / 11,878,221] * 100

= 38.85%

1999 = [7,741,115 / 15,820,473] * 100

= 48.93%

2000 = [9,570,138 / 20,481,568] * 100

= 46.73%

COMMENTS

The main requirement for any commercial bank, according to the Prudential

Regulations of State Bank of Pakistan, cash reserve (statuary reserve) should be

5% & in form of government securities should be 15% of total deposits. So to meet

this collective requirement a bank should have at least 20% of total deposits in

form of quick assets. Here, in this case, the ratio in all three years is above 20%,

which is quite satisfactory.


2. FINANCING / DEPOSITS + BORROWED FUNDS

1998 = [7,757,708 / 13,226,534] * 100

= 58.65%

1999 = [10,327,324 / 18,792,713] * 100

= 54.95%

2000 = [15,242,317 / 25,120,698] * 100

= 60.68%

COMMENTS

As, continuous increase has been observed in borrowing from other banks

because of expansion in branch network.

Increasing trend in the ratio during the last three years indicates that the

bank is utilizing its funds properly. It would lead in a decrease in the idle cost of

funds. So it is a healthy sign and indicates the management‟s efficiency.

Decrease in year 1999, due to the increase in bank borrowing. However,

this is the position on the last day of the year, which might have been different

during the year. As far as the advances and deposits are concerned, both have

increased at a rate of 33%.


3. TOTAL FINANCING / TOTAL DEPOSITS

1998 = [16,721,673 / 11,878,221] * 100

= 140.8% or 1.4:1

1999 = [17,418,600 / 15,820,473] * 100

= 110.1% or 1.1:1

2000 = [33,558,826 / 20,481,568] * 100

= 163.8% or 1.63:1

COMMENTS

Total financing consists of both fund based and non-fund based. It

constitutes our receivables, whereas deposits are our liabilities. In case of BAL,

ratio between our receivables and payables is more than 1:1. More receivables

show a better liquidity position of the bank.


4. DEMAND DEPOSITS / TOTAL DEPOSITS

1998 = [7,031,303 / 11,878,221] * 100

= 59%

1999 = [10,233,922 / 15,820,473] * 100

= 65%

2000 = [13,438,259 / 20,481,568] * 100

= 66%

COMMENTS

This is very important ratio that contributes in the banks cost of funds.

Demand deposits include the current and saving deposits, on which less return is

paid as compared to fixed deposits, which leads to the low cost of funds. In this

case, there must be more short-term advances given by the bank.

In Bank Alfalah, there is continuous increasing trend in this ratio, which

indicates that bank is emphasizing more on demand deposits. Benefit is also

evident from the decreasing trend in cost of funds. Bank is also dealing in short

term advances that reduce the fear of idle cost. So, here I would appreciate the

management policy.


5. DUE TO BANKS / TOTAL DEPOSITS

1998 = [1,348,313 / 11,878,221] * 100

= 11.35%

1999 = [2,972,240 / 15,820,473] * 100

= 18.79%

2000 = [4,639,130 / 20,481,568] * 100

= 22.65%

COMMENTS

This ratio signifies the financial mix of bank. In ideal situations, there should

be decreasing trend or consistency in this ratio.

In case of BAL, although there is a tremendous increase in deposits but

borrowing is also increasing considerably. Since, this is the position on the last

day, so situation might have been different during the year. Also, the increase in

bank borrowing might be due to the expansion in branch network, where more

funds are required in initial years.


6. BORROWED FUNDS / TOTAL FINANCING

1998 = [1,348,313 / 16,721,673] * 100

= 8.06%

1999 = [2,972,240 / 17,418,600] * 100

= 17.06%

2000 = [4,639,130 / 33,558,826] * 100

= 13.82%

COMMENTS

This ratio depicts the contribution of borrowed funds in the total financing. In

Bank Alfalah, the borrowed funds comprise of borrowing from other banks and

agents. Increase in this ratio is due to increase in bank borrowing that has already

been discussed.

However in year 2000, due the considerable increase in non-fund based

financing, the ratio has come down.


7. DUE FROM BANKS / TOTAL ASSETS

1998 = [386,211 / 14,321,107] * 100

= 2.70%

1999 = [1,161,434 / 21,019,608] * 100

= 5.52%

2000 = [1,798,086 / 27,577,159] * 100

= 6.52%

COMMENTS

This ratio signifies the percentage of receivables in the total assets. In

normal practices, bank usually keeps some of its funds in other banks, as it is safe

source of financing. However, this percentage should not be too high. High

percentage would mean that bank is not financing in open market. But, again it

depends upon the market conditions.

In case of BAL, this ratio is quite normal. A minor increase in this ratio is

being observed which is normal practice with the expanding branch network.


8. DUE FROM BANKS / DUE TO BANKS

1998 = [386,211 / 1,348,313]

= 0.29:1

1999 = [1,161,434 / 2,972,240]

= 0.39:1

2000 = [1,798,089 / 4,639,130]

= 0.39:1

COMMENTS

In ideal situations, this ratio should be 1:1 or more. Whereas, in this case,

the ratio is below the standards. Receivables are less than payables to banks,

which is due to increase in bank borrowing. But I have observed this scenario in

most of the cases of banks including many successful foreign banks like Habib

Bank AG Zurich etc. However, there is an increasing trend in this ratio, which

shows better management approach towards liquidity position.


CAPITALIZATION RATIOS

1. CAP. FUNDS / TOTAL ASSETS

1998 = [858,806 / 14,321,107] * 100

= 6.0%

1999 = [1,726,280 / 21,019,608] * 100

= 8.21%

2000 = [1,718,102 / 27,577,159] * 100

= 6.23%

COMMENTS

The ratio signifies the bank‟s contribution of equity in total assets. Strong

equity base indicates the low risk factor. In usual practice of banks, they

emphasize more on deposits than injecting new equity in the business.

In case of Bank Alfalah, the percentage of shareholder‟s equity to total

assets is almost consistent. However, the increase or decrease in capital funds is

due to surplus or deficit on revaluation.

Increase in 99 is due to the surplus, whereas decrease in year 2000 is due

to deficit on revaluation.

2. CAP. FUNDS / RISK ASSETS

1998 = [858,806 / 7,757,708] * 100

= 11.07%


1999 = [1,726,280 / 10,327,324] * 100

= 16.72%

2000 = [1,718,102 / 15,242,317] * 100

= 11.27

3. CAP. FUNDS / TOTAL FINANCING

1998 = [858,806 / 16,721,673] * 100

= 5.1%

1999 = [1,726,280 / 17,418,600] * 100

= 9.91%

2000 = [1,718,102 / 33,558,820] * 100

= 5.12

4. CAP. FUNDS / TOTAL DEPOSITS

1998 = [858,806 / 11,878,221] * 100

= 7.23%

1999 = [1,726,280 / 15,820,473] * 100

= 10.91%


2000 = [1,718,102 / 20,481,568] * 100

= 8.39%

COMMENTS

These are very crucial ratio and have great importance especially for the

creditors. These show the long-term solvency of the organization.

In all the capitalization ratios, one thing is common during the last three

years, that with the expansion in branch network, and increase in business

operations in the form of advances and deposits, bank‟s capital base has been

consistent. The change (decrease) in year99 is just because of the revaluation.

It is because, that the bank is on the way of expanding its business and for

this purpose it is relying much on its deposits. But I think that the bank should also

increase its level of reserves to sustain the trust of creditors.


CAPITAL FORMATION RATE

(COST OF FUNDS RATIO)

= [(RETURN ON DEPOSITS + OPERATING EXP.) /

(TOTAL DEPOSITS + BORROWINGS)] * 100

1998 = [(1313564 + 432203) / (11878221 + 1348313)] * 100

= 13.20%

1999 = [(1474343 + 266658) / (15820473 + 2972240)] * 100

= 9.26%

2000 = [(1724041 + 406925) / (20481568 + 4639130)] * 100

= 8.48%

COMMENTS

This ratio indicates the bank‟s overall cost against its total obligations and

provides the base for banks overall lending (credit) operations. This ratio shows a

decreasing trend. Since, I have discussed earlier that the deposits constitutes the

major portion of bank‟s obligation, which are the cheapest source of finance. The

bank also has controlled its administrative expenses and recovered its non-

performing advances in 99 and 2000, which resulted in drastic decrease in total

operating expenses. That is why; average cost of funds has decreased from

13.20% to 8.48% during the last three years. This decrease in its cost of funds has

resulted in higher profitability of the bank.


For the purpose of comparison, here are the capital formation rates of

Askari Commercial Bank, a top leading Pakistani commercial bank in the private

sector.

Capital Formation Rate Bank Alfalah Askari Commercial Bank

1998

1999

2000

13.20

9.26

8.48

13.02

10.04

9.00


RELATION BETWEEN CONTINGENT LIABILITIES AND

SH. CAPITAL & RESERVES

1998 = [2,242,152 / 855,094]

= 2.62 times

1999 = [2,711,578 / 866,399]

= 3.13 times

2000 = [3,521,897 / 899,469]

= 3.92 times

COMMENTS:

According to the requirement of Prudential Regulations of State Bank of

Pakistan, contingent liabilities of a bank should not exceed 10 times of its paid up

capital and reserves.

In Bank Alfalah, the ratio is highly satisfactory. It is quite low and fulfills the

requirements of SBP. Even, there is a lot of margin available.


STRENGTHS

Bank Alfalah is considered to be a very sound bank in the financial circles. A

bank, where the customers can safely keep their money as long as they want. I am

pointing some of the major strengths of the bank:

COMPASSIONATE CUSTOMER SERVICE

The officers of BAL are considered as one of the most able professionals in

the banking world (some belong to BCCI). However, they have added some local

flavor in accordance with their targeted segmented. Especially, in Circular Road

Branch, I observed that they interact with their clients as if they are their personal

friends and discuss about their problems as their own.

GOODWILL & TRUST

As a result of the compassionate and personalized services of the officers,

the clients‟ perception for BAL is very high. They have trust and feel themselves to

be secure while banking with BAL.

LOCATION

Bank Alfalah has opened all its branches at commercial areas so that the

customers or clients face no problems in reaching to the bank. For example,

Circular Road branch for being situated in business and commercial hub of Lahore

has second largest volume in trade finance.

FOREIGN TRADE BUSINESS

The bank is focusing on Trade Financing; it attaches great significance to

the development and maintenance of healthy correspondent relationships with

other banks and financial institutions. Towards this pursuit, BAL has developed

excellent business relations with foreign banks, whose support in terms of lines of

credit extended to the bank, has enabled it to handle the ever-growing trade


volumes. During year 2000, the bank handled foreign trade business in excess of

PKR 30.6 billion, representing an increase of 92% over the previous year.

WIDE BRANCH NETWORK

Bank Alfalah‟s objective has been to expand its branch network to meet

clients‟ needs. It is heartening to note that in just three years, which is considered

the infancy stage in the industry, the bank has increased the branch network from

3 to 23. And, due to the growing business requirements, there are 10 proposed

branches in different cities. The expansion program is strategically important to

increase customer base and to approach different customer segments.

THE COMPUTERIZED SYSTEM

BAL has got a reliable and easy to use internal computer system. Every

information regarding the transactions in customers‟ deposits has been

computerized. Currently, bankexel is being practiced for this purpose but very

soon, a new program named „banksmart‟ will start functioning (it has started

functioning in Clifton branch).


WEAKNESSES

Perfection is only the claim of Allah Almighty. No other being living or dead

can say this for itself. Similarly, Bank Alfalah also has some shortcomings that

need to be mentioned:

ADVERTISEMENT

BAL has formulized a lot of products and services for its customers, even

more than other commercial banks, but any advertisement on electronic media has

not been seen. Since, BAL‟s major competitor Union Bank Limited has started

large media campaign, so keeping in view these threats, Bank Alfalah should

emphasize more on its advertisement.

PROBLEMS OF EMPLOYEES

I observed during my internship that some of the employees were burdened

with over work. So I think that the work should be distributed according to their post

and capabilities.


OPPORTUNITIES

Bank Alfalah has grown up its business with a very high pace and it has got

tremendous popularity, even with in a very short span of time. There are many

opportunities for the bank and by availing that it can stand amongst the top foreign

banks.

INFORMATION TECHNOLOGY

All the opportunities of the 21st century are to be availed in the information

technology. Information technology is the future. Therefore BAL should emphasize

much on IT, especially the E Banking. Bank can design a universal account like

other foreign banks, to enhance online facilities.

EXTENSION OF BRANCH NETWORK

Bank Alfalah‟s growing business requires an extensive branch network.

There are great opportunities for BAL for the expansion of its business.

GROWTH IN DEPOSITS

BAL has introduced a number of financial schemes including special royal

accounts. These accounts have their unique features (discussed earlier). During

the last three years, BAL‟s deposits have been increasing @ 30%, which is a very

healthy sign. Therefore, with the commencement of new schemes there can even

be a greater increase in its deposits.


THREATS

ECONOMIC CONDITIONS

Despite the difficult circumstances that confronted the banking sector in

particular and the country in general, Bank Alfalah has been still highly profitable.

But, the facts can‟t be denied and there might be an adverse impact of such

situation.

COMPETITORS

Bank Alfalah is facing a strong competition by its major competitors; Union

Bank and Askari Commercial Bank. Business of these banks is also growing with

very high pace.

The SWOT analysis of the bank signifies that its strengths overcome its

weaknesses and its opportunities are more than its threats. This is a positive sign

for any organization.


RECOMMENDATIONS

I spent six weeks of my internship in BAL Circular Road, Lahore. During

these six weeks, I felt myself to be a part of BAL. Even, this was my first

experience of working in a banking organization, but I learned a lot from this

experience. Based on my experience & observation regarding the operations and

policies of Bank Alfalah, I have tried to stipulate some recommendations for further

improvement.

MARKETING

BAL has formulized a lot of products and services for its customers, even

more than other commercial banks, but any advertisement on electronic media has

not been seen.

So, I think that there should be a proper marketing department and

advertisement expenditures of the bank should also be increased to improve its

visibility and to publicize its financial schemes.

ENHANCED COMPUTER NETWORK

The bank should emphasize much on computer technology. Like other

banks, BAL should enhance its on-line services. Bank, also should concentrate on

E-banking and use of ATM. Moreover, bank should also emphasize on enhancing

its website information.

One drawback that I observed in Circular Road Branch was manual

preparation of negotiable instruments like PO, DD etc. Due to growing business

requirements of concerned branch, it should be provided more facilities.

EXPANSION IN BRANCH NETWORK

Bank Alfalah‟s business has grown with a tremendous pace. There have

been considerable profits just with in a short span of time. Therefore, due to the

expanding business requirements, BAL should expand its branch network to

capture other business markets.


TRAINING FACILITIES AND SEMINARS

Human resource constitutes the most valuable asset for an organization. To

improve the professional skills and quality, BAL has started six-months

comprehensive training program, that is really a commendable step taken by BAL.

Bank, apart from this program, conduct some training programs for existing

employees to improve their proficiency.

Also, Bank Alfalah should arrange some seminars to make its visions and

objectives, clear to every one.

EQUAL STATUS OF BRANCHES

One major & alarming drawback that I observed in Circular Rd. Branch, is

the inferiority complex faced by some employees. BAL Circular Rd. Branch, for

being situated in business and commercial hub, has its unusual importance and

has huge foreign trade business. But I observed some employees to be the victim

of complex. So, to avoid such discrepancies, seminars should conducted to signify

the importance of each branch.

EXPANSION & RECRUITMENT IN CIRCULAR Rd. BRANCH

BAL Circular Rd. branch has huge business volume, whereas the staff is not

enough to meet these requirements. I found that some employees were burdened

with overwork, even some clients complaint for the slow service. Therefore, more

staff should be recruited. Also, there should be an expansion in the area of branch

to meet the requirements of growing business transaction.


LIST OF ABBREVIATIONS

BAL Bank Alfalah Limited

NIFT National Institutional Facilitation Technologies

DD Demand Draft

PO Pay Order

CDR Call Deposit Receipt

PS Pay Slip

RTC Rupee Traveller Cheque

B/E Bill of Entry

L/C Letter of Credit

B/L Bill of Lading

SBP State Bank of Pakistan

I/S Income Statement

B/S Balance Sheet

CLP Credit Line Proposal