SECTION “A” (MULTIPLE CHOICE QUESTIONS)
1. Choose the correct answer for each from the given options:
i. Balance of Trade includes:
* Visible import and export items
* Invisible import and export item
* both visible and invisible import and export items
* none of these
ii. The crossing of cross cheque can be cancelled by the:
iii. The Central Bank may rediscount the Bill of Exchange at this rate of interest:
* Bank rate
* Interest rate
* Discount rate
* Rediscount rate
iv. This is not a quantitative-method in the Credit Control.
* Rationing of Credit
* Open market operation
* Reserve Ratio
v. The reputations of Bank depend on:
vi. The drawee of a cheque is the:
vii. The party on which the cheque is drawn is the:
viii. It is a non-negotiable credit instrument:
* Bill of exchange
* Letter of Credit
* Promissory Note
ix. Call rate is charged on these kinds of loans:
* Loans of demands
* term loans
* short term loan
* long term loan
x. Clearing House is managed and supervised by the:
* Industrial Bank
* Agricultural Bank
* Commercial Bank
* Central Bank
xi. The Mortgage bank give loans on this type of property.
xii. Bank does not pay interest on this account:
* none of these
xiii. This cannot be defined as a bank by ownership:
* Saving banks
* public bank
* Private bank
* Statutory bank
xiv. This is a Negotiable credit instrument:
* Money order
* share certificate
* Postal order
xv. The Purchasing power parity theory was presented by:
* David Ricardo
* J. S. Mill
* Alfred Marshal
* Gustar Cassel
xvi. The letter of credit is a / an:
SECTION ‘B’ (SHORT-ANSWER QUESTIONS)
Note: Attempt 7 questions from this section.
2.(i) Describe any two services of e-banking.
Online banking is a simple, hassle-free and secure internet-based banking service available to all customers. Online banking gives you access to your account anytime, anywhere as long as there is an internet connection.
Overview & Features
Online banking offers you the following services wherever you have access to the internet. Personal home page
* Consolidated and account by account balances for all accounts under your relationship numberls held with the bank
* Online banking inbox- this allows you to have instant communication with the bank. You will also receive e-mail alerts and confirmations for all transactions done through online banking.
* Change password
* Change contact details (residential, postal, work & home phone number and email)
* Subscribe for email alerts
* Transaction details and account information
* Cheque book request
* Request for statement
* Account statement download
* Status of issued cheques
(ii) When is a credit instrument called a cheque?
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time with the payer named on the negotiable instrument. More specifically, it is a document contemplated by a contract, which warrants the payment of money without condition which may be paid on demand or at a future date.
Examples of negotiable instruments include promissory notes, bills of exchange, banknotes and cheques.
(iii) What is meant by Endorsement? Describe its kinds.
Endorsement means authorizing a person to receive . the payment of cheque or bill of exchange or promissory notes on behalf of the payee.
Kinds of Endorsement:
Generally the four kinds of endorsement are used in the business transactions they are as follows.
1. Blank Endorsement:
When endorser signs his name only on the instrument without stating the name of any person or firm to whom the instrument is endorsed, such instrument is known as Blank Endorsement. A blank endorsement is transferable by mare .delivery of the instrument.
2. Special Endorsement:
When the endorsement specifies the name of the person to whom, or to whose order, the instrument is payable is become special endorsement. It is also known as
endorsement for a particular person.
3. Restrictive Endorsement:
An endorsement is restrictive which prohibits further negotiation of the instrument, in other words when the endorser puts his signature on the cheque or bill mentioning the name of the endorsee but.prohibiting further negotiations is called restrictive endorsement. For example pay to Mr. Ahmed Ali Only.
4. Conditional Endorsement:
Conditional endorsement is one where the transfer of the property in the cheque or bill is subject to fulfillment of certain conditions or the happenings of some events e.g. Pay to Mr. Saleem or order after his marriage.
OR What are Secured and Unsecured Loan,s'”
ANSWER: Please see Q.2 (v) of 2013 Private
(iv) Enlist the tools of exchange in international transaction.
The Foreign Exchange tool allows you to buy or sell foreign currency for immediate use, or to save in your Wallet for future transactions.
You do not necessarily need to buy foreign currency prior to initiating a transaction. If you elect to send a Beam, and cash out in a foreign currency, hyper WALLET will
automatically present you with an exchange rate and offer to perform the conversion prior to completing your transaction – provided that you have a sufficient balance to purchase the amount of foreign currency needed.
Hyper Wallet’s exchange rates are updated once daily and reflect the rates we obtain through our foreign exchange providers. If you would like to see our rates prior to initiating a transaction, please use the Foreign Exchange.
Calculator found in the Foreign Exchange Tool.
(v) List the kind of Banks by Ownership & describe any two.
The role of bank ownership types- foreign, state-owned, and private domestic banks-in banking relationships, these banks tend to serve as the main bank for transparent firms, and firms with foreign main banks are most likely to have multiple banking relationships, have the most relationships, and diversify relationships across bank ownership types. However, state-owned banks often do not provide the main relationship for firms they are mandated to serve (for example, small, opaque firms), and the predictions of negative effects on multiple banking and number of relationships hold for only one type of state-owned bank.
(vi) Under What· circumstance can a Bank account be closed?
Following are the reasons for closing bank Accounts.
1. When the account holder give an application for closing of account.
2. When there is no transaction for last six months.
3. When the balance is less then the amount required by the bank.
4. Death of the account holder
5. When it is known to the bank that the account holder is becomes unsound mind.
6. When the order received from the court.
(vii) Define letter credit and List its kinds.
LETTER OF CREDIT:
A banker, requesting some person to advance money or to give credit to a third person, has defined a letter of credit.” In a letter of credit, the banker under takes to pay in cash after the delivery of goods. Letters of credit are very useful instrument in facilitating commercial relation between businessmen at various places. Letter of credit is mostly used in financing trade, especially in foreign trade. Usually an importer through his banker in favor of the exporter opens a letter of credit. When a letter of credit is addressed to all merchants or other persons it is called a general letter of credit. When it is addressed to a particular person by name it is called as special letter of credit. The following may clear the functions of letter of credit.
For example suppose Mr. X of Japan wants to imports carpet from Mr. Y of Karachi. Mr. X will ask some banker in Japan to give him a letter of credit addressed to Mr. Y.
Satisfied by the promise of the bank Mr. Y will ready to export carpets to Japan and get payment from the banker in Japan in due course.
Kinds of Letter of Credit
1. Traveler’s letters of credit
2. Commercial Letters of Credit
3. Standby Letters of Credit
4. Revocable Letters of Credit
5. Irrevocable Letters of Credit
(viii) Define Foreign exchange & rate of exchange.
Definition of ‘Foreign Exchange’:
The exchange of one currency for another or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around-the-clock.
Definition of ‘Exchange Rate’:
The price of a nation’s currency in terms of another currency. An exchange rate thus has two components, the domestic currency and a foreign currency, and can be quoted either directly or indirectly. In a direct quotation, the price of a unit of foreign currency is expressed in terms of the domestic currency. In an indirect quotation, the price of a unit of domestic currency is expressed in terms of the foreign currency. An exchange rate that does not have the domestic currency as one of the two currency components is known as a cross currency, or cross rate.
(ix) Give five distinctions between a Cheque and Bill of Exchange.
Definition of a Cheque:
“Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument.”
Definition of bill of exchange:
An unconditional order issued by a person or business which directs the recipient to pay a fixed sum of money to a third party at a future date. The future date may be either fixed or negotiable. A bill of exchange must be in writing and signed and dated. also called draft.
(x) Describe any two quantitative methods of Credit Control.
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.
SECTION C (DETAILED-ANSWER QUESTION)
Note: Attempt Two questions from this section
3. How does the banking system influence the different sectors of the economy? Explain.
Any modern financial system contributes to economic development and the improvement in living standards by providing various services to the rest of the economy. These include clearing and settlement systems to facilitate trade, channeling financial resources between savers and borrowers, and various products to deal with risk and uncertainty. In principle, these various functions can be provided by banks or other financial institutions or directly through capital markets. Banks and other financial intermediaries exist because they are an efficient response to the fact that information is costly. Banks specialize in assessing the credit worthiness of borrowers and providing an ongoing monitoring function to .ensure borrowers meet their obligations. They are rewarded for these services by the spread between the rates they offer to the accumulated pool of savers, and the rates they offer to potential borrowers. This process is known as “maturity transformation” and is at the heart of modern banking. Banks offer a repository for savings, and then transform them into long-lived (illiquid) assets – housing loans and lending to businesses. In addition, banks play a role in providing payment and settlement services which are necessary for households, business and other financial institutions to settle day-to-day transactions. As a country becomes more developed, one typically. sees the capital markets playing a greater role in supplying financial products and services relative to that supplied by the banks. In many advanced economies, for example, raising business debt through securities rivals or exceeds that provided though the banking system. Unusually, New Zealand has a large banking sector, while the role played by the capital markets and non-bank financial institutions.
OR Discuss the functions of the state Bank of Pakistan.
As a central bank of the country, State Bank plays vital role in the economic development under following fields.
(a) Issuing notes:
Under Section 24 of the State Bank Act 1956, State Bank of Pakistan has sole authority for the issue of bank notes, which are legal tender in Pakistan. It issues notes under proportional reserve system.
(b) Banker to the Government:
The State Bank of Pakistan act as the banker of both federal and provisional government. The State Bank of Pakistan makes all receipts and payments of government.
(c) Lender to the Government:
The bank also extend unlimited amount of credit to ·the government for a maximum period of 3 months without any collateral security.
(d) Adviser and Agent to the Government:
The State Bank acts as an advisor to central and provisional Government. It makes recommendations on economic, financial and monetary matters and planning and development etc. State Bank also acts as government’s agent for exchange control.
(e) Banker to other Banks:
The State Bank of Pakistan acts as the bankers to the scheduled banks of the country. The scheduled banks of the country are to keep 5% of their deposits with this bank as reserve. The bank provides loans and rediscounting facilities to all other banks of a country.
(f) Clearing House:
State Bank performs the clearinghouse operation at some big cities where it got branches. It takes active part in the settlement of bills and cheques of other banks.
(g) Controlling of credit with bank rate:
The – State Bank.. takes all the usual measures for controlling credit. In addition to credit control state bank also established different bank rate in different times.
(h) Exchange control:
The State Bank of Pakistan is responsible for maintaining the internal and external value of Pak. Rupees. The bank purchases and sells approved foreign exchange and exercise full control on both the visible and invisible payments to and from the country.
(i) Safeguarding the interest of the depositors:
Scheduled Banks must maintained 20% of their total deposits in the form of liquid assets. The State bank makes periodical inspection to the bank to guard the interest of the depositors.
(j) Custodian of the National Reserve:
The State Bank acts the trustees of the entire economy of the country and thus keeps in its custody all material resources in the form of gold, silver, and securities.
(k) Miscellaneous Functions:
1. The State Bank taking every effort to ensure the smooth functioning and growth of commercial banks on sound and proper lines.
2. For the development of capital market the bank laid down procedures of purchasing and selling securities in Stock Exchange.
3. The State bank extends financial assistance for the development of agriculture and industry through different ways.
4. The State Bank publishes weekly’financial report and annual statement of accounts of the government.
The bank provides special facility for the training of the bank personnel.
4. What basic principles should be observed by a commercial bank before using its funds? Explain.
Definition of ‘bank Funds’:
Funds deposited to regional Federal Reserve Banks by commercial banks, including funds’ in excess of reserve requirements.
A banker has to be very careful when employing his funds. He is a custodian of the public money and he has given those funds for safe ‘custody and utilization into production channels. In utilizing funds the banker must follow the following 5 basic principles.
The money, which will be employed, must be secured. Therefore, the bankers must be very careful and insure that his depositor’s money is advanced to safe hands where the risk of loss does not exist. For the purpose of safety and security of advances before advancing a loan bank must be satisfied with the solvency of the-borrower, bank must take care utilizing the funds in those securities which are stable in value and can easily changed in money to enable it to refund the money to customers on there demand.
Bankers must keep his assets in the liquid form arid should not block his funds by advancing for long period. He must not float long-term loans and not invest funds in long term securities and other fixed assets like building and land, which takes time to be sold. This type of investment does not have liquidity as building and land cannot be readily used to discharged liability or the requirement of money of the depositor of the bank. If the banker purchased government securities, discounting bill of exchange, he keeps his funds in liquid form as these commercial papers can easily be converted into cash and the banker can discharged the demand of liability of the depositors.
Bankers must employ the funds in useful and profitable channels. In order to meet the various expenses the bankers faced great risks, and he has to think twice that the money advanced should not become bad or doubtful. He should not lend to a borrower with whom interest may be highest, but also equally risky. On the other hand, banker should prefer a borrower who is offering a higher rate of interest on a comparatively lesser risk. Therefore, the bank advances loans, purchases government securities, discounting bills, which are profitable and have no risk of any kind:
The banker must employ the funds in useful and productive channels. Advances should be allowed not only to carefully selected and suitable borrowers, but also in keeping with the overall national interest. He should confirm that the lending is in conformity with a current national policy laid down by the central bank of the country. This will increase the utility of their funds and produces greater margin of profit.
5. DIVERCIFICATION OF RISK:
The banker should not sink all his resources in on industry only. Again, he should not lend very large sums to a few individuals. In this way, a large number of borrowers may be benefited from the bank’s funds. Disposal of advances is very necessary from the point of security as well, because it reduces the risk of recovery when some thing goes wrong in one particular sector. As precautionary measures, many customers may make advances to a large no. of customers, as there are a less chances.pf being general default.
5. Differentiate between Non-Scheduled Banks and functions of a Commercial Bank.
Schedule banks are those which are included in the Second Schedule of Banking Regulation act 1965; others are non schedule banks.
To be included in the Second Schedule, a bank
(a) must have paid up capital and reserves of not less than Rs. 5 lakhs
(b) it must also satisfy the SBP that its affairs are not conducted in a manner detrimental to the interests of its depositors.
Schedule banks are required to maintain a certain amount of reserves with the SBP; they in return,. enjoy the facility of financial accommodation and remittance facilities at confessional rates from SBP.
The difference between schedule and non schedule is immaterial as the number of non schedule bank is almost nil.
Functions of a Commercial Bank:
Commercial Bank collects deposit from public and invests the collected funds for profit under the directions and guidance of the Central Bank. They are mainly engaged in financing internal trade but also deal in foreign exchange to help their customers in their foreign trade.
1. Receiving Deposits:
2. Investing Funds:
a. Advancing Credit:
b. Purchase of Shares & Securities:
c. Discounting of Bill:
d. Money at Call & Short Notice:
General Unit Service:
a. Receiving of Utility Bills Cheap Media of Exchange:
b. Financing Trade:
c. Transfer of Funds:
d. Dealing in Foreign Exchange
e. Custodian of Valuables: