SECTION “A” (MULTIPLE CHOICE QUESTIONS)
1. Choose the correct answer for each from the given options:
(i) The difference of foreign exchange earnings and the expenditure of a country during a particular financial period is known as:
* Balance of payments
* Balance of trade
* Unfavorable payments
* Favourable payments
(ii) This ensures the exporter that all his dues will be paid:
* Bill of Exchange
* Promissory note.
* Letter of credit.
(iii) A notice must be served on dishonor of this:
* Bill of Exchange
* Promissory note
* Crossed cheque
(iv) Alteration in cheque must be signed by:
* the payee
* the drawer
* the drawee
* an Officer of grade 17 or above
(v) Bank deals in:
* Money & credit
* Gold and silver
(vi)The bank receives deposits, advances loans and discount bills:
* Central bank
* Commercial bank
* Agricultural bank
* Co-operative !lank
(vii) E-Banking refers to:
* Foreign banking
* Local banking
* Banking through electronic means
* none of these
(viii) The first ever regular bank in banking history is the:
* Bank of England
* Bank of India
* Bank of Venice
* Bank of Barcelona
(ix) Bank acts as the custodian of its customer’s:
(x) The central Bank advances loans to Commercial Banks by:
* Clearing house
* Against cash reserves
* Rediscounting bills of exchange
* Credit control
(xi) This is included in the secondary functions of a Commercial bank:
* Advancing items
* Receiving deposits
* Acting as a trustee and attorney
* none of these
(xii) All Commercial bank keep their minimum required cash reserves with the:
* Stock Exchange
* any other bank
* Central bank
* Mortgage bank
(xiii) General public can obtain loans from the:
* Agriculture bank
* Central bank
* Commercial bank
(xiv) Clearing House reduces the movement of:
* Plastic money
* Credit instruments
* Gold and Silver
(xv) Exchange bank deals in:
* Gold and Bullion
* Negotiable instruments
* Foreign exchange
* none of these
(xvi) No interest is given by the bank on:
* Term deposit account
* PLS account
* Current account
* none of these
SECTION ‘B’ (SHORT-ANSWER QUESTIONS)
Note: Attempt 7 questions from this section.
2.(i) List the kinds of B,anks. Explain anyone.
ANSWER: Please see Q.2 (v) of 2014 Regular
(ii) Describe the primary functions of a Commercial bank.
ANSWER: Please see Q.5 of 2014 Regular.
(iii) Which steps are followed in opening a Bank Account?
1. Decide the Type of Bank Account you want to open
2. Approach any Bank of choice & meet its Bank Officer
3. Fill up Bank Account Opening Form – Proposal Form
4. Give References for Opening your Bank Account
5. Submit Bank Account Opening Form and Documents
6. Officer will verify your Bank Account Opening Form
7. Deposit initial amount in newly opened Bank Account
OR What are the different types of Bank accounts? Explain anyone.
Following are the different types of accounts, which can to be continued in commercial bank.
(iv) List the profitable and non-profitable uses of bank funds. Explain any one.
ANSWER: Please see Q.4 of 2014 Regular
OR Differentiate between Secured and Unsecured loans.
Loans can either be secured or unsecured. A loan is secured when a borrower is asked to pledge assets to the lender as security or collateral for the loan. If the value of the ‘collateral falls below a certain proportion of the loan amount, the lender may ask you to top up the collateral (by pledging more assets). If you cannot repay your loan, the lender can sell off these assets to recover the money owed. If the money from the sale is not enough to recover what you
owe, you have to make up the amount (shortfall) still outstanding.
For unsecured loans, the borrower does not provide any assets to the lender as security for the loan. Interest rates for such loans tend to be higher.
(v) Write the kinds of Endorsement and explain anyone.
Please ‘see Q.2 (iii) of 2014 Regular
(vi) What are the sources of long term finance?
Long-term finance is the part of capital, which is required by the business enterprises to finance its blocked or fixed assets such as land, buildings, machinery and other appliances of a permanent nature.
SOURCES OF LONG TERM FINANCE:
1. Public subscription. to shares:
The initial capital is obtained by a new concern by floating shares of various kinds, preference, ordinary. These shares carry different rights and privilege both as regards to payment of dividends and repayment of capital. In case of sole proprietorship and partnership the capital contributed by the proprietor or partners becomes their sources.
2. Bonds and Debenture:
A running concern issues debentures to finance its long-term financial requirements. The difference between the shareholder and debenture holder is that the former is the owner of the company and the later is its creditor.
3. Public Deposits:
This is a system by which public savings are directly obtained by industries instead of through banks.
4. Government Loans:
In some countries, government provides long term finance to Industries by giving them cheque and adequate loans for long period.
5. Financing Institutions:
Other financing Institutions also perform the functions of extending long-term loans. For example ICP,ADBP, IDBP, PICIC,etc.
6. Amortization of Profit:
Companies may decide not to distribute their profits among shareholders and to retain the same in the business, which can be used for meeting the additional capital needs and expansion purposes.
(vii) Distinguish between Balance of trade and Balance of payments.
In order to calculate the balance of trade, you must calculate the difference. between a country’s imports and exports. The goal is to have a surplus. In this situation, the value of a nation’s exports is higher than the import’s value. A truly wealthy nation has a large surplus, and maintains a high level of valuable export trade. A poor nation is one that cannot maintain a surplus. They do not make enough money through exporting to make up for the debt they acquire from importing. The balance of trade isn’t technically stable in any country. This is due to crop failures unpredictable death of live stock, mining accidents, supply-and-demand issues, increases in taxes and tariffs, instability of the currency value, the availability and cost of raw materials needed in manufacturing, and production costs. Economies that have a wider variety of exports tend to have stronger economies because there is more probability that some of their exports. wiII make a profit. Balance of payments is calculated based on every type of transaction (this includes exports, imports, service trade, transfers, loans, debt payments, bonds, and capital) that a particular country has with everyone else in the entire world. If the country is in debt, it is called a deficit. If the country has money, they have a surplus. A country can have a surplus in the balance of trade, but have a deficit in the balance of payments. For example, a country might have millions of diamonds and rubies they export every year which creates a huge surplus. They might not need to import very many goods, so they gain wealth in trade. This same country might have racked up billions of dollars in debt by taking out roans with another country, and the amount of money gained through exports does not make up the difference. It would be
at a deficit overall.
(viii) Define Bill of Exchange and mention the parties to it.
The legal definition of bill of exchange is “A three-party negotiable instrument in which the first party, the drawer, presents an order for the payment of a sum certain on a second party, the drawee, for payment to a third party, the payee, on demand or at a fixed future date.”
Following parties are involved in the Bill of Exchange like:
• Drawee, is the party to whom the bill of exchange is addressed.
• Drawer, is the party who issues the bill Acceptor, is the party to whom a bill of exchange is addressed.
• Endorser, one who endorse the bill to another party
• Payee, One who receive the money.
(ix) Under what circumstances can a cheque be dishonored by the bank?
The cheque, which is refused to be paid by the banker, is known as dishonored cheque. The banker dishonored or returns the cheque unpaid generally on the following reasons.
1. When the funds of the drawee is not sufficient, i.e. when a depositor issues a cheque more than of his balance, it is generally called NSF cheque.
2. When the drawee’s signature differs from the signature preserved in the bank signature book.
3. When the amounts in figures and words differs.
4. When the drawer does not properly sign the alteration in the cheque.
5. When the cheque is presented at a branch where the customers have no account.
6. When some persons have joint account and the cheque is not signed by all jointly.
7. When the cheque is spoiled in some way.
8. Pre-dated cheque i.e. it has not been presented within six months after the date mentioned in it.
9. Post-dated cheque i.e. the cheque is issued in which the date was of some future month.
10. When the payment is stop by drawer due to stolen cheque or some other reason.
11. When the bank receives notice of the-customer’s death.
12. When the customer has become insolvent.
13. When an order of court prohibit payment.
14. When the bank receive notice form customer regarding closing of account.
15. When the date is not entered.
16. When a crossed cheque presented for encashment.
17. Incorrect endorsement.
18. When there are some conditions written on the cheques.
19. Clearing stamp required.
20. Refer to drawer.
(x) List the kinds of cheque. Describe Crossed cheque.
The cheques may be classified into four types.
1. Bearer Cheque
2, Order Cheque
3. Crossed Cheque
4. Open Cheque
It refers to that cheque which bears two parallel lines. Between these two lines the cheque may also contain the phrase “and Company”, “A/C payee only” etc. The effect of this cheque is that the payee or any person is not allowed to get money in cash. This cheque must be deposited with a bank account of the payee and then withdraw by the signature of the payee. This cheque is mostly used in the business circle.
SECTION C (DETAILED-ANSWER QUESTION)
Note: Attempt Two questions from this section
3. Describe the origin and evolution of Modern banking.
Our financial sector evolved very differently from banks in the developed world. For nearly a year after partition, Pakistan had no central bank. Habib Bank – established in 1941 – filled this gap initially, until the State Bank of Pakistan (SBP) was set up in 1948 under quasi-government ownership. The role of domestic banks was particularly limited at the time, accounting for only 25 of the total 195 bank branches in the country. Therefore, the SBP was initially mandated to develop commercial banking channels, and maintain monetary stability so trade and commerce could flourish in the newly created state. Subsequently, Habib Bank, Allied Bank and National Bank were amongst the first to start operations with strong
support from the central bank.
A legacy of public control, 1970 -1980
Commercial banking grew favorably in Pakistan until 1974. Under the nationalization policy implemented by Zulfiqar Ali Bhutto’s government, thirteen banks were brought under full government control, and consolidated into six nationalized banks. The Pakistan Banking Council was set up to monitor nationalized banks, marginalizing the SBP’s role as a regulator. These measures were meant to improve lending to prioritized industries. However, while directed lending was viewed favorably at the time, little can be said of the long-term gains that have been achieved.
Business as usual, 1980-1990
Over time, the financial sector grew to serve primarily large corporate business, politicians and the government. Board of Directors and CEOs were not independently appointed. Lending decisions were not always commercially motivated, and many billions of rupees were unsurprisingly funneled out of the financial system as “bad loans”. Banks were essentially not in control of their destinies during this period.
Privatization, 1990 – 1997
By 1991, the Bank Nationalization Act was amended, and 23 banks were established – of which ten were domestically licensed. Muslim Commercial Bank was privatized in 1991 and the majority ownership of Allied Bank was transferred to its management by 1993. By 1997, there were still four major state-owned banks, but they now faced competition from 21 domestic banks and 27 foreign banks. More importantly, administered interest rates were streamlined, bank-wise credit ceilings removed and a system of auctioning government securities was established, forcing the government to borrow at market determined rates.
Ushering in the reforms, 1997 – 2006
After privatization, transformational reforms were pushed through. The central bank’s regulatory powers were restored via amendments to the Banking Companies Ordinance (1962) and the State Bank of Pakistan Act (1956).
Subsequently, corporate governance, internal controls and bank supervision was strengthened substantially. Legal impediments and delays in recovery of bad loans were streamlined in 2001. Furthermore, the scope of prudential framework set up in 1989 was enhanced, allowing banks- to venture into hitherto untapped business segments. Lending to small and medium enterprise had previously been neglected, whereas consumer and mortgage finance -had not developed prior to reforms.
The post-reform era, 2006 – present
Buoyed by the spirit of liberalization, the sector’s .landscape has changed significantly. By 2010, there were five public commercial banks,25 domestic private banks, six foreign banks and four specialized banks. There are now 9,348 bank branches spread throughout the country, catering to the needs of some 28 million deposit account-holders. Banking in Pakistan – the long journey ahead Much still remains to be accomplished. In the absence of sustainable economic growth, banks will remain vulnerable to business cycle fluctuations. As recently as 2008, nonperforming loans increased sharply in response to the preceding years of easy credit and risky consumer lending practices.
Finally, the benefits of financial liberalization must trickle down to the common man. Banks are proactively exploring new business models to make this happen – such as branchless banking. But more headway needs to be made before existing deployments – such as Tameer Bank’s Easy paisa or UBl Omni – reach a critical mass of users. Reforms have helped banks come a long way, but unless the central bank remains autonomous, and continues to err on the side of caution; liberalization may quickly become a bitter pill to swallow.
OR Define Bank & describe functions of Commercial Bank.
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets.
Functions of Commercial Bank:
The functions of Commercial Bank may be decided in the following 4 groups.
1. Receiving Deposits:
The Commercial Bank receives deposits through different types of accounts. It advances interests on saving accounts and fixed deposit accounts no interest is allowed on Current account.
2. Investing Funds:
investing Funds is another main function of Commercial Banks The following are usual means of investment for a Commercial Bank.
(a) Advancing Credit:
Bank allowed credit to businessman and trader. Bank charged interest for advancing credit. These advances are naturally laid for short term and against approved securities. It advances money to its customers in three forms viz.
(iii) Cash Credit.
(b) Purchase of Shares& Securities:
Bank also purchases stock and shares of different company. The bank to earn higher interest also purchases govt. securities, debentures and bonds.
(c) Discounting of Bill:
Commercial Bank facilitates the trade and Commerce by discounting the bills. At the time of maturity of bill, the bank collects the whole amount from the draw.
(d) Money at Call & Short Notice:
Under this type of investing the loan is available is either at call or at short notice usually this type of loan is granted to stockbrokers.
3. General Unit Service:
The Commercial Bank renders services for the general public or businessman.
(a) Receiving of Utility Bills:
The bank on behalf of K.E.S.C, Telephone Department and Northern Sui Gas Company collects bills from their customers. It is a great service for general customers.
(b) Cheap Media of Exchange:
Bank draft and checks’ issued on banks are freely used for receipts and payment in the society. These checks and drafts economies the use of currency notes and coins for transacting business.
(c) Financing Trade:
Commercial Banks finance both home and foreign trade. Commercial Bank mostly advances money to trade industry and Commerce. This type of bank also finances foreign trade by issuing letter of credit.
(d) Transfer of Funds:
The Commercial Banks facilitate the transfer of funds from one place to another safely and cheaply through bank draft, traveler’s cheque, and telegraphic transfer.
(e) Dealing in Foreign Exchange:
Under this function, the Commercial Bank purchase and sell foreign currencies.
(f) Custodian of Valuables:
The Commercial Bank acts as the custodian of the customer’s jewellery documents or securities by providing them lockers.
The Commercial Banks also performs underwriting function to company, public bodies and Govt. by purchasing their shares and debentures.
4. Agencies Service:
Banks’ also performs the duties of an agent. It collects and pays on behalf of their customers in respect of the following:
a) The Commercial Bank makes payment in respect of subscription, insurance, premium, rents etc., and receives salaries, pensions, and dividends on behalf of the customers. The bank also collects bill of exchange on behalf of their customers.
5. Trusties & Executors:
The Commercial Bank acts the trusties and executors of will and documents on behalf of their customers.
4. What is meant by Credit Control? Describe the various methods adopted by the Central Bank in this regard?
It is the responsibility of the central bank to regulate the volume of credit and its directions to maintain stability in the price level. The central bank usually controls the volume of credit by different methods.
1. Bank Rate Policy:
Bank rate is the rate of interest, which is charged by the central bank on rediscounting the bill of exchange and advancing loans against approved securities. If the bank rate is raised by central bank, other rate of money also goes up. Conversely, the market rate of interest and other rates go down, when central bank decreases its bank rates. Borrowing is discouraged when the rate of interest increases and encouraged when the rate decreases.
2. .Open Market Operation:
The open market operation means the buying and selling of securities by the central bank in order to influence the money and credit supply in the country. This technique is effective up to some extent in both conditions inflation and deflation. In inflation it sales securities in the open market and secure money from the commercial banks and other purchasers. Cash balance of commercial banks is reduced which reduce the rate and volume of lending. In deflation, central bank can raised the supply of money and credit by purchasing securities. Consequently, the level of prices rises. The commercial banks lend- more money due to increase in money supply or cash balance.
3. Change in the Reserve Ratio:
Every commercial banks keeps a certain percentage of their deposits with the central bank, it is called as cash reserved ratio. The central bank may fluctuate credit by changing the reserve ratio. When the reserves ratio is increased the member bank to some extent are discouraged to bank money, When this ratio is falls, the member banks are encouraged to expand credit.
4. Credit Ceiling:
The central bank fixed the upper limit of the credit extension for the commercial banks to control the volume of the credit in the country.
5. Selective Credit Control:
Under this method, the central bank places some discriminatory terms and conditions in respect to credit given by commercial banks. When the .central bank consider that some sectors of economy need more credit, it encourages the commercial banks to give credit only to those sectors the credit is rationed by limiting credit for other sectors e.g. If central bank finds that electronic industry in the country should be developed it can fix up quota of credit for this industry.
6. Moral Persuasion:
The central bank can request commercial banks to act according to the advises of the central bank in respect of credit. If the central bank feels that the credit is expanded much, it will advice the bank reduce it according to the credit policy formed.
7. Direct Action:
When the central bank considers that some commercial banks are not following the credit policy the bank made direct action by charging the penalty or even it can refuse to grant rediscounting facility.
It means issuing of weekly and other periodicals statistical and review of money market condition trade and industry. In addition, the central bank may convince to borrow and Iends through publications keeping in view the national interest.
5. Define Rate of exchange. Explain the factors influencing the exchange rate.
ANSWER: Please see Q.3 of 2013 Private