An Introduction of Banks and Their Services in BD (Chapter 1)
An Introduction of Banks and Their Services in BD (Chapter 1)
An Introduction of Banks and Their Services in BD (Chapter 1)
-which are regulated otherwise but do not fall under the jurisdiction of ,
-Central Bank
- Insurance Authority
- Samabay Bank
The informal sector includes private intermediaries which are completely unregulated.
_____________End_________________
2. Financial System of Bangladesh
- insurance companies,
- co-operative banks,
- merchant banks,
▪ Banks:
After the independence, banking industry in Bangladesh started its journey with.
In the 1980's banking industry achieved significant expansion with the entrance of private
banks. Now, banks in Bangladesh are primarily of two types:
a)Scheduled Banks:
-The banks that remain in the list of banks maintained under the Bangladesh
Bank Order, 1972.
b)Non-Scheduled Banks:
-The banks which are established for special and definite objective and operate
under any act but are not Scheduled Banks.
- which is empowered to do so through Bangladesh Bank Order, 1972 and Bank Company
Act, 1991.
-In the system, Bangladesh Bank (BB), as the central bank, is regulating banks and non-bank
financial institutions,
-Bangladesh Securities and Exchange Commission (BSEC) is acting as the regulator of the
capital markets,
-the Insurance Development and Regulatory Authority (IDRA) is acting as regulator of the
insurance sector, and
_________End_____
Bank : A bank is a financial institution that accepts deposits from the public and creates
a demand deposit while simultaneously making loans.
Lending activities can be directly performed by the bank or indirectly through capital
markets.
1.Financial intermediaries
Banks are financial intermediary—that is, an institution that operates between a saver who
deposits money in a bank and a borrower who receives a loan from that bank.
2. Payment functions
-They process payments, from the tiniest of personal checks to large-value electronic
payments between banks.
-The payments system is a complex network of local, national, and international banks and
- -often involves government central banks and private clearing facilities that
match up what banks owe each other.
3. Other services
A discussion of the most prominent of these services is provided below.
1. Fiduciary services.
-Commercial banks have operated separate 'trust' banks for many years in which they
manage the funds of others.
-In its fiduciary role, the bank manages employee pension and profit sharing programs
-and handles a variety of securities-related activities for corporate businesses.
2. Security-related services.
-Commercial banks provide a number of brokerage and investment banking-related services.
-However, the nature of these sel1vicesis severely restricted by Glass Steagal Act of 1933.
- One new area of rapid growth has been in the off-balance sheet risk-taking whereby banks
(especially, large banks) generate fe'3income by assuming certain contingent liabilities.
-The standby letter of credit is perhaps the best known of these contingent claims .
1. Accepting of deposits
2. Granting of loans and advance
Accepting of Deposits
Bank accepts different types of deposits from the public such as:
-The account for saving deposits can be opened in a single name or in joint names.
- The depositors just need to maintain minimum balance which varies across different banks.
-Also, Bank provides ATM cum debit card, cheque book, and Internet banking facility.
- In case depositors withdraw before maturity, banks levy a penalty for premature
withdrawal.
- As a lump-sum amount is paid at one time for a specific period, the rate of interest is
high but varies with the period of deposit.
- Bank charges a high-interest rate along with the charges for overdraft facility in
order to maintain a reserve for unknown demands for the overdraft.
- The interest for overdraft is paid only on the borrowed amount for the period for
which the loan is taken.
2. Cash Credits: a short term loan facility up to a specific limit fixed in advance.
-Banks allow the customer to take a loan against a mortgage of certain property
(tangible assets and / guarantees).
-Cash credit is given to any type of account holders and also to those who do not have
an account with a bank.
- Through cash credit, a larger amount of loan is sanctioned than that of overdraft for
a longer period.
3. Loans: Banks lend money to the customer for short term or medium periods of say 1
to 5 years against tangible assets.
- The borrower repays the money either in a lump-sum amount or in the form of
instalments spread over a pre-decided time period.
-Bank charges interest on the actual amount of loan sanctioned, whether withdrawn or
not.
- The interest rate is lower than overdrafts and cash credits facilities.
4. Discounting the Bill of Exchange: It is a type of short term loan, where the seller
discounts the bill from the bank for some fees.
- It pays the bill amount to the drawer(seller) on behalf of the drawee (buyer) by
deducting usual discount charges.
-On maturity, the bank presents the bill to the drawee or acceptor to collect the bill
amount.
1. Agency functions
2. Utility Functions
____________End_______________
• Compliance: Banks must comply with various laws and regulations, including
anti-money laundering (AML) and know your customer (KYC) requirements,
to maintain their license to operate.
▪ Risk Management
a. Credit Risk
b. Interest Rate Risk
c. Operation Risk
d. Liquidity Risk
e. Price Risk
f. Compliance Risk
g. Foreign Exchange Risk
h. Reputation Risk
a) Credit Risk: This is the risk that a borrower may default on their obligation to repay
the loan or credit facility.
-Banks use a variety of tools to manage credit risk, including,
- credit scoring,
- collateralization,
-and diversification of the loan portfolio.
b) Interest Rate Risk: This is the risk that changes in interest rates will negatively impact
the bank's net interest margin (NIM) and profitability.
-Banks can manage interest rate risk by using hedging strategies, such as,
- interest rate swaps, and
- by adjusting the maturity profile of their assets and liabilities.
c) Operational Risk: This is the risk of loss resulting from inadequate or failed internal
processes, people, and systems, or from external events.
-Examples of operational risk include,
-fraud,
- errors,
- system failures,
-and cyber-attacks.
-Banks manage operational risk by implementing robust internal controls, investing in
technology, and providing training to staff.
d) Liquidity Risk: This is the risk that a bank may be unable to meet its financial
obligations as they fall due.
- Banks manage liquidity risk by
-holding adequate levels of liquid assets,
-maintaining diverse funding sources,
-and developing contingency plans.
e) Price Risk: This is the risk that changes in the price of financial instruments, such as
securities or commodities, will negatively impact the bank's profitability.
- Banks manage price risk by diversifying their investments and using hedging
strategies.
f) Compliance Risk: This is the risk of legal or regulatory sanctions, financial loss, or
damage to reputation resulting from failure to comply with laws, regulations, or
ethical standards.
- Banks manage compliance risk by ,
-establishing robust compliance programs,
-conducting regular training,
-and monitoring compliance with internal policies and external
regulations.
g) Foreign Exchange Risk: This is the risk that changes in exchange rates will negatively
impact the bank's profitability.
- Banks manage foreign exchange risk by using hedging strategies and by maintaining
a diversified portfolio of assets denominated in different currencies.
h) Reputation Risk: This is the risk of damage to the bank's reputation resulting from
negative public perception or media coverage.
-Banks manage reputation risk by,
- maintaining high ethical standards,
- providing excellent customer service,
- and responding quickly and appropriately to any negative events.
Although banks fail for many reasons, the principal one is bad loans. Banks, of course, do not
make "bad" loans.
-They make loans that go bad.
-At the time the loans were made the decisions seemed correct.
-However, changes in oil prices, real estate prices, crop prices, and other factors that were
not foreseen resulted in credit problems.
-Bank management must carefully balance risk and return in seeking to maximize
shareholder wealth.
-However, such decision; are constrained by a number of factors.
-Of course, all businesses face constraints in their decision-making, but the constraints under
which banks operate are particularly important.
-These constraints maybe classified into three separates though overlapping areas:
1. Market constraints
2. Social constraints
3.Legal constraints
1. Market constraints: The market constraints take the form of competition from other banks, from
non-bank providers of financial services, and from the capital market.
2. Social constraints: Social constraints stern from the historical position of commercial bank at the
core of the financial system.
3. Legal/regulatory constraints: Perhaps more significant is the enormous variety of legal and
regulatory constraints on the portfolio management [i.e., its risk/return position of a commercial
bank.
- There-are constraints on balance sheet composition, pricing, geographic expansion, entry, and
customer relationship.
____________End______________
I. Service proliferation
II. Rising competition
III. Deregulation
IV. Rising Funding Costs
V. An increasingly Interest-sensitive Mix of Funds
VI. A Technological Revolution
VII. Consolidation and Geographic Expansion
VIII. Globalization of Banking
IX. Increased Risk of Failure
I. Service Proliferation: Banks are diversifying their product and service offerings to
attract and retain customers.
- This trend is driven by changing customer preferences.
-the need to generate new revenue streams in a highly competitive market.
II. Rising Competition: Banks face increasing competition from non-bank financial
institutions, such as fintech companies and peer-to-peer lenders.
-This trend is driven by the rise of digital technology,
-which has lowered barriers to entry and enabled new players to enter the
market.
IV. Rising Funding Costs: Banks are facing rising funding costs due to,
- regulatory requirements,
- market volatility,
-and changing interest rates.
-This trend is making it more difficult for banks to maintain profitability and is
driving them to seek alternative sources of funding.
VIII. Globalization of Banking: Banks are becoming increasingly global, with operations
spanning multiple countries and regions.
- This trend is driven by the need to serve global customers, access new markets, and
diversify risk.
IX. Increased Risk of Failure: Banks are facing an increased risk of failure due to,
- market volatility,
- regulatory requirements,
-and changing customer preferences.
- This trend is driving banks to adopt more conservative risk management strategies
and to diversify their business lines and revenue streams.
_________________End___________________
Shifts in the market shares of commercial banks and other financial service organizations
reflect the confluence of a number of ,
-economic,
- technological
- and regulatory factors.
• Inflation, High and volatile interest rates:
-High inflation and high interest rates encouraged other less regulated financial service firms
to develop new products such,
- money market funds and cash management account,
- types of products that the traditional intermediaries could not offer because of
regulatory constraints.
• Technological advances:
✓ Advances in technology have greatly affected the competitive position of different
providers of financial services.
✓ -the ability of the financial institutions to compete directly with the capital market in
the intermediation function.
✓ Rapid advances in electronic technology have lowered transaction costs for
processing financial transactions.
✓ The firms that have been effective in implementing the new financial technology have
achieved an edge through lower costs.
✓ Perhaps more important, the advances in technology have made the production of
diverse financial services within one firm more feasible.
- through increasing the prospects for realizing economies of scope.
✓ Also, advanced financial technology has greatly increased the geographical
boundaries over which financial services could be produced,
-thereby substantially intensifying the extent of competition in the industry.
• Consumers:
✓ Most sophisticated consumers have also played a major role in the changing structure
of the financial services industry.
✓ Greater education in personal money management and high real and nominal returns
on financial assets have made funds flows more volatile.
✓ Consumers of financial services increasingly move funds around for very small
differences in expected returns.
• Securitization
✓ Securitization refers to the process of making some or all of the loan portfolio
marketable by establishing pools of loans and selling interest in the pools.
✓ Securitization also involves the creation of those pools by investment bankers, thereby
by passing the traditional intermediation process.
✓ Until the mid-1980s, securitization was limited to mortgages related to residential real
estate. Recently, however, investment bankers have created pools of consumer and
commercial loans.
✓ Capital market Increased competition for the capital market has played a role in the
decline of bank market share.
✓ Large, high-quality corporations have found that they can excess funds cheaper
through direct borrowing in the capital market (through selling commercial paper, for
example) than by borrowing from banks.
• Deregulation
✓ Deregulation has also affected the operations of commercial banks and other
depository financial institutions.
✓ De specialization Rather than individual financial service organizations offering a
simple service or a limited set of services,
-the trend has been for financial service organizations to offer multiple services.
✓ Deregulation has made this possible for some of the depository financial institutions. -
-However, more important has been the expansion of financial service offerings by
non-depository institutions.
• Globalization
✓ Globalization of financial organizations has also affected the operations and structure
of these organizations.
✓ Funds increasing flow across national borders both for long-term investment purposes
and for short-run liquidity management.
✓ Reflecting global fund flows, many financial service organizations have entered the
U.S. market, and many U.S. financial service firms have expanded abroad.
Assets
✓ By far the greatest bulk of bank assets s in the loan portfolio.
✓ These loans include credit extensions to households, business, and government
for a wide variety of purposes.
✓ Reflecting the traditional orientation of commercial banks towards,
- business lending,
-the greatest portion of credit expansion at these banks is in the form of
loans to businesses for acquiring inventory,
- carrying accounts receivable,
-and purchasing new equipment and real estate.
✓ Substantial amounts of credit are also extended by commercial banks to other
financial institutions,
- particularly to securities firms and to sales and personal finance companies.
✓ In recent years, consumer loans have expanded rapidly, particularly in the
form of credit extensions under credit card arrangements.
BANKS PROFITABILITY
✓ Commercial banks have experienced great difficulty in attempts to obtain
adequate risk-adjusted profits.
✓ The return on assets for insured commercial banks has tended downward for
an extended period