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AHSAN BASHIR
Chapter 1 Introduction
Introduction to Bank Alfalah 05
BAL, Circular Road Lahore 07
Financial Standing of Bank Alfalah 08
500000
400000
300000
200000
100000
0
FY98 FY99 FY2000
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.
25,000
20,000
15,000
FY 99
10,000 FY 00
5,000
0
Deposits Advances Imports Exports
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.
NOTICE DEPOSIT:
7-29 days 4% 7% 6.1%
30 days and over 5% 8% 7.5%
TERM DEPOSIT:
1 Month 6% 9.50% 8%
2 Months - 9.75% -
3 Months 7.5% 10.0% 10%
6 Months 8% 10.5% 10.5%
1 Year 8.5% 11.0% 11.0%
2 Years 9% - -
3 Years 9.5% - 12.0%
5 Years 10.5% - 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.
Here is another table that signifies the growth rate in deposits and
advances, which constitute the basis of banking business.
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.
CHAIRMAN / DIRECTOR
BOARD OF DIRECTORS
EXECUTIVE INCHARGES
BOARD OF DIRECTORS
Executive Committee
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.
“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.”
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
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.
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.
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:
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.
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.
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.
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
“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.”
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
ROYAL PATRIOT:
ROYAL PATRIOT
1 3 6 12 2
Month Months Months Months Years
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
ROYAL GROUP
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%
1 Month 8.00%
3 Months 10.00%
6 Months 10.50%
1 Year 11.00%
3 Years 12.00%
5 Years 13.00%
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.
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
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
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.
PLACE
KARACHI
Main Branch
B.A. Building,
Chundrigar Road.
Clifton Branch
FL-10, Block-5,
KDA Scheme #5,
Khayaban-e-Roomi
S.I.T.E. Branch
D-38 S.I.T.E.,
LAHORE
LDA Plaza Branch
Kashmir Road, Lahore.
Gulberg Branch
125-E/I, Main Boulevard
Gulberg III
Defence Branch
G-9, Commercial Zone,
Phase-1, Main Boulevard, DHA
Lahore Cantt
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
SIALKOT
40-A, Paris Road,
Sialkot
GUJRANWALA
G.T. Road,
Gujranwala
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.
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
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.
COLLECTION
INCHARGE: Mr. Shaukat
ACCOUNTING PROCEDURE:
&
Account Titles Debit Credit
Concerned BAL br.‟s Account
LOCAL REMITTANCES
(Negotiable Instruments)
ACCOUNTING PROCEDURE:
i) When a Pay Order is issued, cash department debits cash account & Pay Order
issued account is credited as:
Account Titles Debit Credit
Cash Deposits
PO Issued
ACCOUNTING PROCEDURE:
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,
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.
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-
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.
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”.
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.
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).
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 .
The credit must specify whether this can be trans-shipped / part-shipped or not.
f) Collection of 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.
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.
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.
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”.
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.
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.
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:
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.
After getting L/C Margin, L/C Commission and other mailing charges, the
Letter of Credit is issued to the importer .
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 .
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
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.
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.
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:
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.
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:
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 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%
After getting the margin & commission Rs.800, bank issues the shipping
guarantee on behalf the importer and he gets his consignment cleared .
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
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.
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.
COLLECTION / NEGOTIATION
When the exporter comes to the bank with the documents, he has two
options:
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
• 1.00% for the export of finished goods
• 1.25% for the export of finished goods
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
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)
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 .
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
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.
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.
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.
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
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.
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 ).
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.
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.
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
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 .
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 .
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 .
Total existing facilities (limit), their outstanding value and the securities that
were provided against these facilities.
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.
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.
Assets
Cash 471,538 721,285 1,687,256 2,044,725
Balances with other banks 60,636 386,211 1,161,434 1,798,086
Money at call & short notice 400,000 248,000 100,000 890,000
Investments 3,348,747 3,406,514 4,993,035 4,967,542
Advances- net of provision 4,849,653 7,757,708 10,327,324 15,242,317
Opening fixed assets 175,397 263,760 1,153,607 1,231,161
Other assets 1,220,666 1,537,629 1,596,952 1,403,328
10,526,637 14,321,107 21,019,608 27,577,159
Liabilities
Deposits & other accounts 9,018,777 11,878,221 15,820,473 20,481,568
Borrowing from other
banks, agents etc. 553,042 1,348,313 2,972,240 4,639,130
Bills payable 64,491 51,737 120,868 106,353
Other liabilities 167,079 176,630 372,855 625,312
Deferred liabilities 9,807 7,400 6,892 6,694
9,813,196 13,462,301 19,293,328 25,859,057
Net Assets 713,441 858,806 1,726,280 1,718,102
Presented by
Share capital 600,000 600,000 600,000 600,000
Reserve fund, other reserves 111,021 255,094 286,399 299,469
Unappropriated profit 2,420 3,712 8,931 1,211
Shareholder’s equity 713,441 858,806 895,330 900,680
Particulars 1997 1998 1999 2000
TREND ANALYSIS
Presented by
Share capital - - -
Reserve fund, other reserves 130.11 12.31 4.54
Unappropriated profit 53.39 140.60 (86.44)
Shareholder’s equity 20.38 4.25 0.60
Total 20.38 101.01 (0.46)
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.
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.
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 .
Assets % % %
Cash 5.04 8.03 7.41
Balances with other banks 2.70 5.52 6.52
Money at call & short notice 1.73 0.48 3.23
Investments 23.79 23.75 18.02
Advances- net of provision 54.17 49.13 55.27
Opening fixed assets 1.84 5.49 4.46
Other assets 10.73 7.60 5.09
Total Assets 100.00 100.00 100.00
Liabilities
Deposits & other accounts 88.23 82.51 79.20
Borrowing from other banks,
agents etc. 10.02 15.50 17.94
Bills payable 0.38 0.63 0.41
Other liabilities 1.31 1.32 2.42
Deferred liabilities 0.06 0.04 0.03
Total liabilities 100.00 100.00 100.00
Presented by
Share capital 69.87 32.50 34.92
Reserve fund & other reserves 29.70 15.52 17.43
Surplus on revaluation of F/Assets - 45.00 48.36
Unappropriated profit 0.43 6.98 0.70
Total equity 100.00 100.00 100.00
Total liabilities 94.00 91.22 93.80
Total equity 6.00 8.78 6.20
Total liabilities & equity 100.00 100.00 100.00
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.
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.
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.
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 :
500000
400000
300000
200000
100000
0
FY98 FY99 FY2000
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.
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.
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%.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 .
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.
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 .
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.
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.
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.