Chapter5: Commercial Bank Services I- Commercial Banks Banks are legal entities licensed to carry out banking operation as: -It make commercial loans -It accepts deposit -The provision of means of payment The point is that a commercial bank would have been able to accommodate all of these needs, in addition to providing other services to all other: business, government units, correspondent banks, and consumers. It is a full-services institution.

Commercial Banks -Capital Requirement -Bank’s capital guarantee -Fixed assets of banks -Annual License Fee -Solvency ratio -Liquidity ratio -Non-Performing loans, provision -Classification of overdraft as non-performing -Reserve requirement

The importance of Commercial Banks If one wished to measure the importance of banks to the economy, several yardsticks could be used for that purpose. Banking is the one industry that is related to every other. Without the services that banks provide, other industry would find it difficult or impossible to continue operation.

Commercial Bank organization The typical commercial bank is a legally charter business venture that has directors, officer, and stockholders and is organized for profit. -The bank’s board of director constitutes the active, governing body of the corporations. -Directors are selected by the bank’s stockholders. -The chairman of the bank usually is the chief executive officer and is the person responsible for the basic policies of the institution. The president is typically the chief administrative officer, responsible for supervising operations and implement policies.

II-Bank Function 1-The deposit function A- How are deposit made? However, to increase and expedite the inflow of deposits and for the greater convenience of customers, banks today have developed many additional ways in which deposits can be made. -Convenience service -Electronic funds transfer system -Transfer between banks -Transfer within a bank

B- Examining deposit Before a deposit is accepted from a customer, it is essential that the deposit be examined so that the bank knows what it is accepting. -Counterfeit Currency -Endorsements -Business Deposit

2-Payment Function Checks are safe and convenient vehicles for payment, and are accepted on faith and trust. Money, for example, is easily lost or stolen. If a payment is made in cash, any receipt that is given also can be lost. By continually improving the payments mechanism, banks have made a great contribution to the economy. there is a constant search for a better way to serve the interests of customers and banks, and this has led to the development of various as EFTS and ATMs to obtain cash without issuing checks.

3-Credit Function A-Basic type of Bank loan -Real estate loans -Inter bank loans -consumer loans -commercial and industrial loans

Real Estate Loans Bank in recently years have become heavily involved in various types of real estate financial. They have supplied the funds needed for new office building, shopping center and other residential developments their involvement takes two forms: construction loans and mortgage loans.

Inter Bank loans The secondary category used in classifying bank loans refers to direct extensions of credit by one bank to a another, often on the basis of a correspondent relationship.

Consumer loans Commercial banks have shifted much of their emphasis to retail business, and the need and wants of consumers have become extremely important in the overall banking picture.

Commercial and industrial loans Commercial and industrial loans make up the largest category of banks loans. Some loans are made for terms longer than one year, most are made for shorter periods, and the most common maturity period of 90 days.

B-The credit process The fundamental objective of commercial and consumer lending is to make profitable loans with minimum risk and management should target specific market in which lending officers have expertise. The credit process include 3 functions: -Business development and credit analysis -Credit executive and administration -Credit review

C-Four Basic Credit Factors The essence of all credit analysis can be captured in four basic credit factors: -The borrower’s character -The use of loan funds -The primary source of loan payment -The secondary sources of repayment

Character Most bankers agree that the paramount factor in a successful loans is the honesty and goodwill of borrower and dishonest borrowers don’t feel morally committed to repay their debts.

Use of loan funds An understanding of the loan’s intended use helps the analyst to understand whether the loan request is reasonable and acceptable. Most business loans are made for working capital purpose usually additions to current asset.

Secondary source of payment In generally, cash flow from business operation is the most dependable source of loan repayment . Collateral should always be viewed as a secondary sources of repayment. Other secondary sources of repayment are guarantors and co-signers.

Worst Loans -Loans to relatives -Loans to employees -political loans -Loans to partners

Goals of Monetary Policy -High Employment. -Economic Growth. -Price Stability. -Stability of Financial Markets. -stability in foreign exchange market. -Interest rate stability.