Branch Banking Stage 1 PDF

Branch Banking Stage 1  Published by The Institute of Bankers Pakistan M.T. Khan Road Karachi – 74200, Pakistan...

Branch Banking Stage 1  Published by The Institute of Bankers Pakistan M.T. Khan Road Karachi – 74200, Pakistan Written by: Muhammad Ali, MBA, DAIBP (United Bank Limited) Compiled by: Farheen Ali, M.Com Finance and Mehwish Sarfaraz (IBP) Reviewed by: Sohail Bashir, MBA (Silk Bank) Khaleequr Rahman Usmani (Sindh Bank) Mahmood Akhtar Nadeem (National Bank of Pakistan) Editing by: Chartered Banker Institute and Keystone Business Associates, UK The Institute of Bankers Pakistan has taken all reasonable measures to ensure the accuracy of the information contained in this book and cannot accept responsibility or liability for errors or omissions from any information given or for any consequences arising. No part of this publication may be reproduced, stored in retrieval system or transmitted in any form or by any means – electronic, electrostatic, magnetic tape, mechanical, photocopying, recording or otherwise, without permission in writing from The Institute of Bankers Pakistan. Chartered Banker Institute is a trading name of The Chartered Institute of Bankers in Scotland: Charitable Body No SC013927 Contents Part 1: Introduction to Branch Banking Chapter 1: Importance of a Branch 1 Chapter 2: Branch Staff 8 Chapter 3: Historical Background 13 Chapter 4: Branch Banking in the future 17 Part 2: Services and products Chapter 1: Conventional Banking 20 Chapter 2: Retail Banking 53 Chapter 3: Islamic Banking 58 Part 3: The Banker’s Role Chapter 1: Banker – Customer Deposit 63 Banking Relationship Part 4: Account Relationship Establishment Chapter 1: Walk-In and Solicited Customers & 82 Establishing Customer Credentials Chapter 2: Introduction, Legal Documents, Authorized 91 Signatory and Account handling in various scenarios Part 5: Negotiable Instruments and Endorsements Chapter 1: Negotiable Instruments and Bills of Exchange 96 Chapter 2: Cheques 99 Chapter 3: Payment of cheques 105 Chapter 4: Crossings on Cheques 109 Chapter 5: Endorsements 113 Chapter 6: Clearing Services 118 Chapter 7: Collection Services and 122 Foreign Payment Arrangements Contents Part 6: Payment Methods Chapter 1: Banker’s Cheques and Traveler’s Cheques 133 Part 7: Control Policies and Compliance Chapter 1: Policies and Compliance 141 Chapter 2: Money Laundering 167 Chapter 3: Banking Mohtasib 170 Part 8: Cash Monitoring Chapter 1: Cash Monitoring 173 Part 9: Alternate Delivery Cahnnels Chapter 1: Alternate Delivery Channels 176 Part One Introduction to Branch Banking Chapter 1 Importance of a Branch Learning Outcome By the end of this chapter you should be able to: Discuss the concept of branch banking Discuss the importance/use of a branch and its role in commercial banking Differentiate between a branch, a booth and sub-branch Explain the difference between sales centre and service centre Define a sub-branch and list its functions Define inter-branch transfer of accounts Introduction The term “bank” is derived from the Italian word "banco". The Jews of Lombardy (a province in Italy) used to transact money sitting on benches placed in market places. Those benches were called '“banco” meaning “the money changer’s place”. “Banco” later converted into the word "bank". The first modern bank, “Bank of St. George”, was founded in Italy in 1406. In the beginning banking operations were restricted to the giving and taking of money, whereas today they are engaged in performing many other financial activities like management of investment funds, credit operations and insurance activities. "A bank is an institution transacting the businesses of accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise. " This definition also includes specialized banks such as agricultural banks, investment banks, SME banks, microfinance banks and Post Office Saving Banks, etc. A bank can also be defined as “an institution whose primary activity is to act as a payment agent for customers to borrow and lend". According to the Banking Companies Ordinance 1962 Sub Section (c): "Banking Company means any company that transacts the business of banking in Pakistan and includes their branches and subsidiaries functioning outside Pakistan of banking companies incorporated in Pakistan inserted by Finance Act 2007)". Section 13 of the Banking Companies Ordinance deals with the minimum paid-up capital and reserve requirement for the commencement of banking business in Pakistan. The authority to alter this requirement lies with the State Bank of Pakistan. Primarily there are two main functions of a bank – accepting money from the depositors and offering that money in the form of loans to the debtors. Branch staff 1  Depositors lend money to the bank and are paid for it; similarly the bank lends money to the debtors and is paid for it. The earnings of a bank and its shareholders are thus the difference between these two costs – the cost of deposits and the cost of credits. A bank’s primary aim is to keep its depositors and borrowers satisfied by giving both parties the maximum benefits in terms of attractive profits and quality services. At the time of partition there were only a limited number of commercial bank branches present in Pakistan and banking facilities were available only in big cities. With the passage of time, the number of banks and their branches has increased substantially. At present there are more than 10,000 branches of commercial banks providing banking services to more than 28.7 million (as per June 2011) customers. Banks have played a vital role in the development of Pakistan’s agricultural and industrial sector. Every country has its own set of laws and regulations for protection of public interest and to ensure smooth and lawful running of its banks. Similarly, in order to commence banking operations in Pakistan, either domestically or internationally, a bank has to obtain a banking license from the regulator. This license is issued upon ensuring successful adherence and fulfillment of relevant laws and regulations as prescribed by the State Bank of Pakistan. The State Bank of Pakistan is the official regulator of banks in Pakistan as per the Banking Companies Ordinance 1962. After obtaining a license to operate, a separate license is required to open every new branch under Section 28 of Banking Companies Ordinance 1962. Microfinance banks are licensed under Micro Finance Institutions Ordinance 2001, while Khushhali/Microfinance Banks were established under Khushhali/Microfinance Bank Ordinance 2000. The State Bank of Pakistan provides guidance and support to the banking sector for developing and maintaining good business practices. In order to ensure availability of banking facilities to all corners of the country, SBP has instructed banks to open at least 20% branches in rural/under-served areas. New options for opening sub-branches, sales and service centers and mobile banking units have also been introduced. Banks are being encouraged to enhance their scope towards branchless banking and collaborate by signing Service Level Agreements (SLA) with large companies to extend banking services to the public at non-banking locations. Functions of Commercial Banks Banks are vital for a country's overall economic growth and well-being. Banks receive deposits from all around the country and lend advances to areas where funds are insufficient. Due to the availability of abundant financial resources, banks are able to finance large projects and invest in those areas of the economy which need resources and funding. Commercial banks in Pakistan have been authorized to engage in any one 2 Branch Banking | Reference Book 2  or more forms of businesses in accordance with Section 7 of the Banking Companies Ordinance, 1962. Services mentioned in Section 7 of BCO of the present day banks can be categorized as under: a. Mobilizing money for its more productive use for economic development b. Agency services and issuing guarantees etc. c. Lending and Investment d. General utility services e. Underwriting of loans raised by the Government or public bodies and trading by corporations f. Providing specialized services to customers, including international trade financing. g. Helping the Hajj pilgrims in submission of their Hajj applications and other State Bank matters. Almost all the functions of commercial banks can be performed via their branch networks. Inter-Branch Transfer of Accounts With the increase in bank branch networks, inter-branch bookkeeping has become more important. It is generally handled on a branch-to-branch basis via the main / head office account. If an amount is due from head office, the head office account is debited and if the amount is to be received by the head office, the account is credited. It is also to be ensured that these accounts are reconciled immediately. In the event of entries in the head office account remaining outstanding for more than 30 days, the State Bank of Pakistan can penalize the bank for negligence. The penalty thus levied to the bank is at the rate of Rs 20,000 per instance and an additional Rs 1,000 per day after the specified duration of 30 days. Banking Channels Banks operate through various distribution channels, enabling customers to utilize their services and facilities as per convenience and preference: 1. Branch: A branch is a retail location that offers a wide array of face-to-face and automated services to its customers. These services range from account and locker operations to acquiring Importance of a Branch 3  loans/advances and repayment facilities. Most of the functions of a bank involving customer interaction are done via bank branches. Branches often act as both sales and service centers for bank products. Branches that are designated as per the bank’s policy to provide only customer support and not solicit new customers for their loan products can be termed service center branches. However, when a branch is involved both in providing sales support and selling loan products it can be termed a sales center. The sales and service specialists deployed in the branch function also act as the sales and operations staff. In addition to selling the bank’s products to the customers, the sales staff are also responsible for greeting and servicing the customers and performing teller transactions. The responsibilities of the Branch Manager, generally labeled as the “captain of the ship”, along with the sales staff, include functioning as a scheduled seller. Operations staff is responsible for establishing, retaining and encouraging relationships with existing and future potential customers to help achieve sales goals and provide quality customer service. They are also responsible for processing transactions accurately and efficiently to build customer confidence and trust, based on established policies and procedures. The head of operational work in the branch is called the Operations Manager. 2. ATMs: An Automated Teller Machine (ATM) permits the holder of the appropriate magnetic encoded card to obtain funds 24 hours a day, as well as allowing the account holder to view their account balances, statements, order cheque books and make money transfers. The latest ATMs also accept deposits and collect utility bills. These machines are automated and work electronically so does not require a physical teller. Pakistan’s ATM industry runs on two operating switches – 1-Link and MNET. As per SBP’s instructions both switches were interconnected in March 2004. All the member banks share their electronic networks using these two switches, which primarily means that customers of member banks can use MNET as well as 1-Link ATMs nationwide for carrying out their ATM transactions. VISA certification and connectivity is provided by 1-Link to the member banks to issue/acquire VISA debit cards which can also be used on the Global VISA Network, enabling the member banks to open their local networks for international card acceptance. Both switches are owned by the consortium of banks and operate through a Chief Executive Officer. Banks provide Debit / Credit Cards to their customers to facilitate their ATM transactions round the clock like balance inquiry / cash withdrawal from ATM centers or POS transactions like 4 Branch Banking | Reference Book 2  make purchases from any merchant outlets throughout the world, internet transactions, online purchases, etc. For this arrangement banks have tie-ups with shared networks or partners like VISA, MASTER CARD etc. These shared networks provide access on shared ATMs and at POS (point of sale) terminals (the merchant location). Every transaction depending on issuer or acquirer goes through the ATM, switch, general ledger (host) and ultimately the shared networks. At day end each shared network sends reports to the issuer bank for the transactions that were carried out using their network. Issuer Bank also generates corresponding reports for the day from general ledger, electronic journal (ATM) and switch. These are called on-us and off-us transactions. In other words on-us transaction from a network’s perspective means that any other network has used carried out a transaction using their net work and off-us means that their customers carried out transactions using other networks. 3. CDMs: A Cash deposit machine (CDM) permits the holder of the appropriate magnetic encoded card to deposit cash in the form of physical notes into his/her bank account. These machines can be further classified as a Single Note acceptor CDMs and Multiple note acceptor CDMs. 4. Mail/Post: Mail is also a banking channel whereby documents enclosed in envelopes are delivered to the customers. This can be used to deposit cheques and to send orders to the bank. Banks also use mail to deliver periodic account statements, product details and any change in policy to the customers. 5. Mobile Banking: Mobile banking is a service provided by the banks enabling their customers to perform banking transactions via mobile. 6. Internet Banking: Internet banking is used for conducting electronic monetary transactions over the Internet. Customers can use this channel for funds transfer, repayments and settlement of utility bills, etc. Branch Opening Procedure and Other Places of Business The Banking Policy & Regulation Department of the State Bank of Pakistan deals with branch licensing policy. This policy is revised via issuance of BPRD circulars as per the needs of the banking industry from time to time. Whenever any bank or a DFI wishes to open a new place of business, they are required to submit their Annual Branch Expansion Plan (ABEP) to the State Bank of Pakistan for approval by the 31st of October. SBP’s decision is conveyed to the relevant bank/institution generally by 31st of December. The branches approved by ABEP must be up and running Importance of a Branch 5  before 31st December of the subsequent year else permission stands cancelled. As per the SBP’s instructions, at least 20% of a bank’s branch network must exist in rural areas. Rural areas are defined as villages, small towns and tehsil headquarters where any bank branches do not already exist. Any bank willing to open branches in rural areas over and above 20% of the mandatory requirement can approach the SBP any time for permission. When opening a new branch, the following points should be considered to ascertain feasibility:  What is the population of the area?  How many branches are already functioning in the same locality?  What is the nature of the area? Is the area agricultural, commercial or industrial?   What means of transportation are available?  What is the deposit and business potential of the area?  Any other major considerations. Opening of a Sub-branch Banks can open a sub-branch as a conduit of a branch to which it is affiliated. Opening of a sub-branch should be a part of ABEP. Banks cannot convert an existing branch into a sub-branch. However, a booth can be converted into a sub-branch, and a sub-branch into a full branch under the ABEP after approval from SBP. A sub-branch is not empowered to open an account, including allotment of an account number. Completion of the Know Your Customers (KYC) process and exercise of due diligence before account opening are also to be carried out by the controlling branch. Sub-branches can perform the following functions:  Cash receipt and payment  Issuance and payment of remittances, travel cheques Disbursement and  recovery of Agri / rural financing  Settlement of insurance claims of Agri / rural financing  Group-based lending A sign board, both in English and in Urdu, stating that "this is a sub- branch/limited function branch of _______ bank" is required to be affixed on every sub-branch. 6 Branch Banking | Reference Book 2  Opening of Booths Permanent booths can be opened by any bank after obtaining a license from the SBP for performing the following activities:  Collection of utility bills  Collection of Government dues and revenues  Collection of fees from educational institutions  Collection and disbursement of loans to farmers  Collection of bills from hospitals  Providing limited banking activities at the embassies  Exchange of foreign currencies at the port of entry  Collection of cash for institutions such as National Bank of Pakistan  Collection of cash for the Pakistan Railways Temporary booths can be opened without prior permission from the SBP for a period not exceeding one month. For a temporary booth of over one month but not exceeding three months, prior written approval from SBP is required. Dates of opening and closing of temporary booths should be intimated to the SBP in the prescribed format within seven days of opening. Temporary booths can be opened for temporary facilities such as exhibitions, on-the-spot facilities for growers and for hajj pilgrims during hajj seasons, etc. Importance of a Branch 7 Part One Introduction to Branch Banking Chapter 2 Branch staff Learning Outcome By the end of this chapter you should be able to: Discuss the roles and responsibilities of branch staff ORGANOGRAM OF A TYPICAL BRANCH Roles and Branch Manager Responsibilities of Branch Staff A Branch Manager is considered as the “captain of the ship”. He/she is responsible for achieving, exceeding and maintaining the service, sales and control targets by managing, coaching and motivating the branch team to deliver outstanding performance. He/she should ensure that the branch team delivers results without compromising the bank's service and sales processes and procedures. He/she provides leadership, direction, and support to team members and is expected to maximize business performance and ensure that relationships with customers are strengthened. In a nut shell the responsibilities of a branch manager can be broadly categorized as follows: 1. People Management 2. Customer Franchise Management 3. Risk Management 4. Cost Management / Maintaining Financials of the branch 8 Branch Banking | Reference Book 2  Branch Operations Manager The Branch Operations Manager is also referred to as the second in command of the branch. As a retail banking operation manager he/she should lead, manage and coach the team to achieve and exceed branch objectives by proactively taking steps to make the branch the most helpful financial services provider in the area. Operations managers must have full knowledge of the bank’s policies and procedure and coach their teams to deliver efficient customer service. The following are the traits of an efficient operations manager:  To act as a point of reference and give instructions on technical issues to the staff and guide external customers.  Provide guidance and coaching to staff, customers and relationship managers.  Identify training needs and undertake technical training of staff.  Review new and amended policy directives and guidelines issued by the Central Bank and assess the impact on the existing processes and customer requirements.  Propose policies and adjustments thereto, and/or manage the implementation of process changes as appropriate.  Consider continuous improvement suggestions with regards to technical aspects for approval and implementation.  Ensure all strategy and work undertaken is consistent with and in accordance with the bank’s published policies in order to minimize risk.  Ability to work under pressure. Greeter A greeter welcomes visitors and customers as they arrive at a branch premises. He may also bid people farewell as they exit the premises. His job frequently requires him to provide customers and other visitors with information regarding hours of operation, products being offered by the bank, or public restroom facilities. Banks always remain under pressure to maintain high service levels for a rapidly expanding customer base. Bank Greeter manages customers by quickly connecting them to the service pro provider they need. He also handles routine questions and account inquiries. Branch staff 9  Advantages for the bank  Enhances bank's image  Increases customer satisfaction  Increases productivity by focusing staff on revenue-generating activities  Enables employees to focus on walk-in customers For bank’s customers  Increases satisfaction by providing information quickly  Has the ability to establish immediate contact with the right individual  Aids in eliminating the frustration of long waiting time Chief Teller A chief teller, also called the vault teller, has the keys to the cash safe. He/she manages and handles the cash / cheque transactions at the teller counter and ensures delivery of quality service to the customers while adhering to operational controls and avoiding cash excesses and shortages. The responsibilities of the chief teller entail:  Meeting transaction processing standards and maintaining a high level of customer service standards.  Processing cash transactions (deposits / withdrawals) in both local and foreign currencies and ensuring that the ledger is balanced at the end of the day.  Verifying signature(s) on payment cheques and ensuring that these are approved as per authority levels prior to disbursement.  Monitoring cash deposit amounts / quality of notes in order to detect unusual transactions (money laundering, forgery, etc).  Informing the Branch Manager of any unusual transaction(s) (money laundering / forgery) that may be detected.  Arranging and sorting of cash as issuable, not issuable, soiled / defective notes and depositing these at the cash center for onward delivery to the State Bank of Pakistan. Teller A teller processes cash and other types of transactions (deposits / withdrawals issuance/ payment of different banks’ products) in both local and foreign currencies and ensures that the cash is balanced at the end of the day. The following is expected of a teller: 10 Branch Banking | Reference Book 2   Verifying signature(s) on payment cheques and ensuring that these are approved as per authority levels prior to disbursement.  Accepting and processing all types of clearing / collection cheques.  Issuing pay orders and drafts, cashier cheques.  Monitoring cash deposit amounts / quality of notes in order to detect unusual transactions (money laundering, forgery, etc).  Highlighting security concerns to the Chief Teller and / or the Branch Manager.  Achieving set targets in terms of service standards for customer transactions.  Informing the Chief Teller / Branch Manager of any unusual transaction(s) (money laundering / forgery) that may be detected.  Maintaining consistent service standards.  Managing cash position of the branch / till in order to ensure that sufficient cash is held for customers. Verifying large cash holding of cash or particular denominations.  Sorting out of soiled notes and depositing these at the Central Branch and adhering to all the rules prescribed by the State Bank of Pakistan’s BSC Cash monitoring policy.  Supervisor Supervisor manages staffs and the operations area of a branch office with the assistance of the Operations Manager. He is responsible for all aspects of his departments operations i.e. customer service, new accounts, account servicing & problem resolution. Works with branch's operation manager to ensure branch is in compliance with all operational regulations and guidelines. Primary responsibilities  Supervises transactions with complete care and within allocated limit.  Ensures satisfactory audit results of branch operations. Ensures  compliance with all established policies and procedures. Reconciles and  manages all branch cash accounts  Updates job descriptions of employees who report to him. Trade Officer The Trade Officer should have a working knowledge of Letters of Credit, Collections and Guarantees and works as part of a team to carry out a Branch staff 11  range of Trade Finance transactions and technical support duties in accordance with established policies and procedures and service standards. A Trade Officer is supposed to ensure that trade instruments are correctly processed and that internal/external rules, procedures and regulatory requirements are met. He/ she must have a working knowledge of systems including the Trade Innovation & Common System, to approve and check trade products, within agreed limit thresholds, and to act as a point of reference, as well as directing the staff and external/internal customers on the handling/resolution of any technical problems. Customer Relationship Manager Relationship Manager (RM) is a professional who works to improve bank's relationships with its customers. His goal is to facilitate good relationships with existing customers and maximizes bank's business by attracting more customers, hence converting potential customers into actual customers. Advent of additional players in the banking industry has resulted in increased competition and attrition of existing customers. It has now become imperative for banks to not only focus on attracting new customers but also effectively maintain the existing customer relationships by enhancing customer satisfaction to stay profitable. Relationship managers play important role in achieving the goal of providing adequate, accurate and timely product information to satisfy customer queries and to suggest the right product suiting a certain need. Banks being service providers realize the importance of Customer Relationship Management (CRM) and its potential to help them acquire new customers retain existing ones and maximize their lifetime value. In a bank, the RMs are customer contact points; they assist customers in case he/she requires assistance in terms of product information, financial need evaluation, repayment process, complaint status etc. Relationship management is all about delivering what customers need. A relationship manager must be proactive in foreseeing issues likely to affect the customer and giving relevant professional advice. 12 Branch Banking | Reference Book 2 Part One Introduction to Branch Banking Chapter 3 Historical Background Learning Outcome By the end of this chapter you should be able to: Recall the evolution of branch banking in Pakistan and discuss the difference in the current functions of a branch from those in the past Evolution of banking At the time of partition areas that fell under the reign of Pakistan were industry in Pakistan producing only food grains and agricultural raw materials. There were no industries in these areas and all the raw material that was being produced was being exported. However the region was well equipped with commercial banking facilities. There were 487 offices of scheduled banks in the newly emerged state of Pakistan. Till 30th of September 1948, the Reserve Bank of India continued its operations in Pakistan, along with the Indian currency notes being legal. Following the announcement of partition, the Hindus began to transfer their assets along with registered banks from Pakistan, in an attempt to collapse the newly established state. By 30th June 1948, the number of offices of scheduled banks in Pakistan declined from 487 to only 195. At that time, there were 19 non-Indian foreign banks with very limited branch network and only 2 Pakistani institutions - Habib Bank and Australasia Bank. In an attempt to stabilize the shattered confidence of the general public and to safeguard the interests of both the bankers and the customers, the Government promulgated the Banking Companies Ordinance in 1947. Continuing from there following are the important events that mark the evolution of banking industry in Pakistan: 1. Quaid-e-Aizam Mohammad Ali Jinnah inaugurated the State Bank of Pakistan on July 1st, 1948. 2. First Pakistani notes were issued in October 1948 in the denominations of Rs 5, Rs.10 and Rs.100. 3. The State Bank of Pakistan (SBP) assigned itself the very important task of creating a national bank for the country which would also serve as an agent to the SBP. As a result, The National Bank of Pakistan (NBP) came into being in 1949. 4. The food shortage compelled the Government to embark upon agricultural credit; the Agriculture Development Bank was set up to attend to agricultural finance. All these measures, and the devaluation of Pakistani Rupee has on August1, 1955 had a very favorable effect on commodity market and the balance of payments position in 1955- 56. Historical Background 13  5. The State Bank of Pakistan Act was passed in 1956, conferring the powers of the SBP to increase credit facilities for both agriculture and industry. 6. During the period (1956-57) a new Pakistani bank was registered and scheduled by the name of "Muslim Commercial Bank Limited" (MCB). 7. A new institution in the field of industrial finance, "The Pakistan Industrial Credit and Investment Corporation (PICIC)" was established in October 1957. 8. During the period 1959 - 60, two more Pakistani banks namely Eastern Mercantile Bank Limited and the United Bank Limited were established and scheduled. 9. The appointment of the Credit Enquiry Commission was carried out in 1959, to examine the scope and working of the institutions providing credit facilitates to agriculture, trade, commerce and industry and recommended measures for improvements. 10. More Pakistani scheduled banks continued to be established, including the Commerce Bank Limited and the Standard Bank Limited. 11. The agriculture development Bank (ADBP) came into being in 1961 through the merger of the then Agricultural Development Finance Corporation and Agricultural Bank of Pakistan, to provide credit to agriculture and allied disciplines. 12. By June 1965, the number of scheduled banks stood at 36; the deposits increased to Rs.688.28 crores and credit expansion by the banks to the private sector rose to Rs. 575.87 crores. Nationalization st On 1 of January 1974 banks in Pakistan were nationalized and the Banks Nationalization Act 1974 was promulgated. After nationalization, the formation of new banks in the private sector was stopped completely. Due to increasing political interference in the affairs of the banks, business decisions and appointment of staff were not taken on merit. Office discipline deteriorated to a point of non-existence and some nationalized banks were on the verge of collapse. Denationalization After 16 years of experiencing nationalization it was realized that, rather than being productive, nationalization actually proved to be quite disastrous for the banking industry. In 1991 the government changed its stance and announced a policy of privitization of nationalized banks so as to encourage the formation of new banks in the private sector. 14 Branch Banking | Reference Book 2  Today, the five large network banks-the National bank of Pakistan (NBP), Habib Bank Limited (HBL), United Bank Limited (UBL), Muslim Commercial Bank Limited (MCB) and Allied Bank Limited (ABL) - possess more than 50% of the countys deposit base. Both MCB and ABL were privatized in 1991 and showed significant improvements in profit and deposit growth. Privatization of UBL took place in 2002 and was soon followed by HBL in 2004. possess more than 50 % of the country’s deposit base. The National Bank of Pakistan, however, is still government owned and is currently the largest bank in deposit base and is almost the sole beneficiary of lucrative government deposits. Before privatization the five large network banks used to support certain non-lucrative projects on government demand, which included:  Lending to support projects patronized by influential authorities under government sponsorships.   Extending loans without requisite collateral.  Extending loans below market rate returns.  Utility bill collection below banks cost of management of the bill collection process.  Over-collection of taxes from these institutions to cover Government revenue shortfall.   Over-staffing of these institutions with under-skilled ‘preferred’ people.  Forced branching in unbanked areas. The above mentioned have been reduced substantially as a result of privatization as well as parallel reforms within the sector. Other than the banking industry, Pakistan’s financial sector comprises of the development finance institutions (DFIs), insurance companies, mutual funds, the stock exchange and leasing companies. The future growth of the banking industry depends on overall economic activity but, more specifically, on the expansion of the industrial sector. The ongoing privatization process is providing momentum to the industrial sector which in turn is fueling the growth of the banking industry. Steps toward Turnaround After privatization of the four big banks, the following actions were taken to enhance profitability and reduce costs:  Headcount reduction to eliminate redundancy by almost 50%. Closing  down of loss making business areas.  Merging of close vicinity branches into single units.  Automation at both head office and branch level.  Introduction of new products.  Induction of competitive staff based on merit and emerging requirements.  Streamlining of the internal audit and compliance functions.  Increased focus on developing both corporate and consumer portfolios to enhance profitability.  Historical Background 15   Streamlining international operations to ensure enhanced profitability. The above steps have resulted in improvements in the banking arena both in terms of profitability and service standards. These changes have been recognized both locally and internationally, the impact of which can be seen in the form of improved credit ratings by Moody's Investor Services. 16 Branch Banking | Reference Book 2 Part One Introduction to Branch Banking Chapter 4 Branch Banking in the future Learning Outcome By the end of this chapter you should be able to: Predict the future trends in branch banking in Pakistan given the increase in automation, bank customer vs. branch customer, centralization of operational functions, increase in customer awareness and regulatory requirements geared towards customer protection. Future trends in Trends in the Pakistani banking industry in the next few years are likely to be the Pakistani extraordinarily competitive. After a decade of aggressive progress, the banking industry industry will take some time for consolidation. Due to the rise in inflation, interest rates will increase further and the net income spread of the banks will be reduced. Due to the economic uncertainty, the number of non- performing portfolios will also increase. The future approach of the banks will be to focus on Information Technology (IT). The future success of the banking industry lies in the effective use of information technology, because it benefits the banks and their customers in terms of cost, speed and convenience. At present IT is playing a key role in managing all types of banking operations, product development and improvement of services. It has also helped in defining new customer service standards with the increase in usage of phone banking, IVR (Interactive Voice Response) systems, internet banking, Point of Sale (POS), credit and debit cards. With the increased dependency on the use of information technology, it is imperative that maximum security standards be adopted to ensure the safety, security, and maintenance of e-banking transactions. The number of Automated Teller Machines (ATM) in the country is now well over 7000. Out of 10,300 branches in the country, more than 7,100 branches are offering real time online banking services. Banks must design infallible data security processes to strengthen controls. Information technology and compliance requirements will, over the next few years, continue to be the most significant determinants of productivity. Skills are a mid-ranking factor among the drivers of productivity, although in the wholesale sectors and in investment and fund management, technical skills will be the most important contributors. Use of Core Banking System (CBS) The majority of banks are using the Core Banking System (CBS) as a comprehensive banking solution. It works on a real time basis and the entire banking network resides on one host which leads to efficient reconciliation of head office account entries and maintenance of customers’ Branch Banking in the future 17  account details under one CIF (customer information file) with information on borrowing of all kinds. This system allows an insight of all the relationships a customer maintains with the bank on the basis of a unique ID, generally the CNIC of the customer. In the absence of a core banking system, different departments within banks use different programs for their banking needs. Post implementation of CBS, all functions are centralized at one point of control. All banks in future will move on to implementation of the Core Banking System. Rules for customers’ protection Since 2008, the State Bank of Pakistan has witnessed an unprecedented growth in consumer banking, which has led to an increase in the grievances of consumers about the products and services of banks/DFIs. In order to deal effectively with these increasing consumer grievances and to put in place an appropriate policy and regulatory mechanism for their redress, SBP has created a Consumer Protection Department. In addition to dealing with and deciding on consumers’ public grievances / complaints regarding consumer products and services, the newly created department also handles complaints related to all types of bank products. It serves a dual purpose, i.e. it protects the customers of the bank and on the other hand it also supports the banking industry by suggesting improvements in banks’ policies. In future, principles-based regulations will be modified for banks’ as well as for customers’ protection. Centralization of processes Maximum centralization of processes will be a key factor in future. Account opening, clearing processing inward and outward, collection, Trade and Credit Administration Department (CAD) affairs, etc will all be centralized. A few major banks have already centralized these functions. Outsourcing services Due to unproductive union activities, some banks have started outsourcing various tasks, including security services and hiring of third party staff. In some parts of the world, for example in India, a public sector bank has outsourced work for the installation and maintenance of 1,000 ATMs as part of its plan to scale up alternative channels for business operations. In Pakistan also, instead of setting up a full fledged department and hiring a huge work force, the trend for allocating specialized jobs to third parties is becoming more popular. Branchless Banking It is said that “branchless banking” is the future of Pakistan’s financial sector, as it opens up great opportunities for banks to bring the unbanked segment of society into the financial system. The State Bank of Pakistan, being the central bank of the country, is taking steps to make the branchless banking regulatory framework more flexible to broaden the scope of 18 Branch Banking | Reference Book 2  financial services in line with the other, more traditional banking channels. Branchless banking has huge potential to reach this unbanked and untapped segment of society. This is not only cost effective for the banks but represents an affordable solution for the financially excluded, underprivileged class of society. That is why Pakistan’s financial sector is witnessing a dynamic transition, led by this branchless banking solution. This transition can be witnessed by a comparison of the number of branches versus branchless banking outlets. At present, numbers of branchless banking outlets have reached around 14,000 in around two years, against a total branch network of around 10,300 in 64 years. According to one estimate, the cost of setting up a conventional branch is 76 times higher than using a third party agent to bring the unbanked areas into the financial system. At present the most popular branchless banking products in the market are “Omni” of UBL, “Easy paisa” of Tameer Bank, MCB Mobile, KASB Mobile and HBL Uphone Mobicash, Timepay, HBL Express, U-Micro Phone etc. According to the SBP disclosure, more than 400,000 branchless/ mobile banking accounts were opened collectively by all banks in the last 18 months. In branchless banking billions of rupees have been transferred from one person to another, from one account to another, and from government to the public sector. Priority to the agriculture sector These days an increasing number of resourceful people are setting up agri- based businesses because real farmers are not getting benefits of agricultural reforms. The major land holding is with the “Zameendars/ Waderas”. Since 2008 the government has increased the purchase price of wheat, the cost of cotton is increasing worldwide, rice production is increasing although its price is stable, fruit production and exports are also increasing and all these factors have led to an increasing interest in the agricultural sector. Branch Banking in the future 19 Part Two Services and Products Chapter 1 Conventional Banking Learning Outcome By the end of this chapter you should be able to: List and explain the characteristics of various types of accounts available for customers in commercial banks i.e. current, savings and time deposits Recall the services related to accounts available for the customers List the types of accounts with respect to the ownership of the account such as single, joint, etc and the account opening documents required Describe various requirements for opening a foreign currency account vs. a rupee account List the various types of business entities who can open accounts and describe the documentation required to open their accounts Define remittances Explain the common types of remittances Recall the SBP regulations related to remittances Explain the remittance products offered by banks and their features Explain what type of relationship is created between the bank and licensee when issuing a locker for rental and state some of the common risks associated with this service Introduction Conventional banking is based on the debtor-creditor relationship between the depositors and the bank on one hand and between the borrowers and the bank on the other. Interest is considered to be the price of credit, reflecting the opportunity cost of money. Deposits Deposits are sources of funds which are used by banks for lending and/or investment purposes. The basic function of any bank is accepting deposits. Deposits can be divided into two main categories: Demand and Time/Term deposits/liabilities. Banks use deposits for lending and investing activities in such a way that withdrawals are possible on demand – both for demand and time deposits. Demand deposits/liabilities are accounts, withdrawals from which can be made immediately on demand at any time; whereas in the case of Time/Term deposits/liabilities, funds are available for withdrawal only after a fixed term or determinable period. All deposit products are Liability products and all lending/investment products are Assets products and reported in the balance sheet accordingly. 20 Branch Banking | Reference Book 2  A bank’s profitability depends on its ability to mobilize deposits effectively. Generating expensive deposits and lending or investing at cheaper/lower interest rates can cause profit erosion. ‘Cost of deposit’ is a term used for the rate that the bank pays to its depositors. This rate must be high enough to attract desirable levels of deposits but low enough to ensure profit sustainability. Banks lend at a particular interest rate which is determined by keeping in view the cost of the bank’s deposits and other economical factors. It is the treasurer’s job to maintain the pool of the bank’s money in a profitable and feasible manner. Furthermore, the rate of return on deposits is linked with Treasury bill rates (T-Bills) and rates of Pakistan Investment Bonds (PIBs). Rates for T-Bills are floated by the State Bank to finance short-term gaps between government receipts and expenditure. Rates of Pakistan Investment Bonds (PIBs) are issued to finance the long-term gaps and are used for determining long-term deposit rates. SBP has advised all banks and DFls to prominently disclose all terms and conditions for both depositors and creditors, along with the projected rate of return to the depositors and interest or markup rates for the borrowers. This information must be clearly communicated and disclosed in all forms of communications including in media campaigns. Section 26-A of Banking Companies Ordinance 1962 pertains to Deposits. The salient features of this section are:  Banks may accept deposits on participation in profit and loss (PLS).  Free of interest or return in any other form.  Banks shall make a complete record of the investment made and funds allocated for liquid assets.   Deposits which are received on a PLS basis shall be invested by the banks at their absolute discretion in businesses where return is not fixed (interest). Depositors who have invested money on a PLS basis are entitled to receive periodical profits from a share of profits of banks as may be determined by them and in case of loss shall be liable to bear the proportionate loss.  Types of Accounts An account is a relationship with the customer, operated on a day-to-day basis, into which deposits are received and out of which cheques are paid. A deposit account is usually in credit, but an overdraft facility may be taken by pre-arrangement with the bank. Some deposit accounts are opened for a limited time such as: Conventional Banking 21   Notice Account - repayable after a notice period of seven days, or 29 days, etc.   Term Deposit Account - repayable after a fixed time ranging from one month to 10 years or even longer.  1. Current Account A current account is an account from which any part of the balance may be withdrawn on demand. Withdrawal from the account can be made via cheques, direct debit, standing instructions or ATM. Funds in the account can be debited or credited in the form of cash, cheques and financial instruments. No interest/ profit is paid on the current account. These accounts are generally for business purposes and can be overdrawn on arrangement with the bank. Zakat is not deducted on current accounts. The initial deposit can be as per each bank’s own policy. Before account opening, due diligence should be exercised and all Know Your Customer (KYC) requirements are to be fulfilled (KYC is explained in detail in Part Four – Chapter 1). 2. PLS Savings Account Savings accounts are meant solely for saving purposes. Saving means to set aside money for future use or to retain money to meet future spending needs. Saving accounts have all the features of a current account, except that profit is paid on the balance maintained as per the PLS rules of the bank. Saving accounts are generally opened in the name of individuals but can also be opened in the name of charitable institutions, for provident funds, benevolent funds and pension funds. There is no restriction from SBP on maintaining minimum balance and initial deposit in PLS savings accounts as directed vide BPRD circular 7, dated 27-05-2011. Zakat is deducted on the balance maintained on the valuation date (first day of Ramadan). Exemption from Zakat can be claimed by submitting Zakat declaration from CZ-50 30 days prior to the Zakat valuation date. Different banks have introduced different variation products of saving accounts for individuals and companies where profit is paid bi- annually/monthly. Zakat rules for these accounts are similar to that of the normal saving accounts. SBP vide BPRD Circular No. 01 of 2013 dated March 15, 2013 has directed the return on PLS deposits will be calculated on average monthly balances. Further SBP has linked the profit payment on PLS deposits with SBP Repo rate which is technically called Interest Rate Corridor - Floor as per BPRD Circular No. 7 of 2013 which interalia contained undernoted directives: i. With effect from October 01, 2013, the Minimum Profit Rate to be paid on all Pak Rupee Saving Deposits, as defined in the above mentioned Circulars, will be 50 basis points below the prevailing SBP Repo Rate (Interest Rate Corridor - Floor). 22 Branch Banking | Reference Book 2  ii. Change in the Minimum Profit Rate, following any change in the SBP Repo Rate, will be applicable with effect from 1st day of the subsequent month. iii. It is further clarified that this rate of profit will be applicable on average monthly balances on all existing and new saving deposits including term deposits. iv. Other instructions on the subject shall remain the same. Any violation of the above instructions will render the bank liable for punitive action under the relevant provisions of the Banking Companies Ordinance, 1962. As per SBP BPRD Circular No.07 of May 27, 2011, State Bank of Pakistan has prohibited all the banks from levying any service charges for opening and maintenance of regular savings accounts with effect from July 01, 2011. This means that the services rendered by banks for the opening and maintenance of regular savings accounts shall be free of charge. These instructions are applicable equally on all existing and new accounts. Similarly, no charges would be recovered by banks at the time of closing an account. Banks shall not demand more than Rs. 100 as an initial amount for opening of regular savings accounts. However, no initial deposit would be required for opening of accounts by (i) Mustahkeen of Zakat, (ii) Students (iii) Employees of Government or Semi Government institutions for salary and pension purposes (including widows/children of deceased employees eligible for family pension/benevolent fund grant, etc.) and other similar types of accounts. The banks must also ensure that all terms and conditions for the operation of an account, especially in case of its dormancy, closing and/or subsequent reactivation are brought into the knowledge of the customer at the time of account opening. Key features of the Account Opening Form must be translated into Urdu and a printed copy of such translation shall be acknowledge by the account holders at the time of opening of the account. 3. Basic Banking Accounts (BBA) BBAs were introduced by SBP, with special features; vide BPD circular No. 30 dated 29th November 2005, to facilitate banking for low income people in Pakistan. Prior to the introduction of BBAs banks used to collect service charges from all the customers who failed to maintain a minimum balance in their accounts as per each bank's policy. In order to resolve this issue and to facilitate banking for small depositors, SBP has formulated the BBA scheme with the following features:-  Initial deposit to open a BBA is Rs.1000/- (No initial deposit limit for PLS Savings) for Zakat Murdarba students.   No profit is paid into this account. Conventional Banking 23   No minimum balance is required and no service charges are to be paid by the customer.   If an account remains at Nil for a continuous period of six months, the bank has the right to close it.   Maximum two deposits and two cheque withdrawals are allowed free of charges in a month.   Unlimited free of charge ATM withdrawals are allowed from bank’s own ATMs.   In case of withdrawal from ATMs of any other bank, charges will be recovered from the other bank.   A regular banking account can be converted to a BBA on the customer's request / consent.   There is No bar on opening a joint BBA account. 4. PLS Term Deposits Term deposits are the deposits repayable after a predetermined future date. Such deposit transactions may be for a period ranging from seven days to ten years or even longer.  Profit is paid on the simple interest basis.  Roll-over option can be made available.  Zakat is applicable on the face value, if TDR was outstanding on Zakat valuation date or payment of profit whichever is earlier.   Banks charge penalties on premature encashment of TDR’s as per internal policies.   Tax / withholding tax shall be recovered as per FBR rules on profit disbursed.  Different banks have issued different liability products for RTA (Rupees Transactional Accounts) and Term Deposit Accounts. The applicable rules are within the parameters explained above. 24 Branch Banking | Reference Book 2  BBA PLS SAVINGS ACCOUNT  Initial deposit to open a BBA is No limit for initial deposit Rs.1000/-  No profit is paid into this account Profit is paid to all account holders  No minimum balance is required No minimum balance is required and and no service charges are to be no service charges are to be paid by paid by the customer. the customer.  If an account remains at NIL for a No such condition exist for PLS Savings continuous period of six months, account. the bank has the right to close it.  Maximum two deposits and two There is no restriction on withdrawals cheque withdrawals are allowed in PLS accounts free of charges in a month.  Unlimited free of charge ATM No such condition for PLS savings withdrawals are allowed from account bank's own ATMs.  In case of withdrawal from ATMs No such condition for PLS savings of any other bank, charged will be account recovered from other bank.  A regular account can be converted No such condition for PLS savings to a BBA on the customer's request/ account consent.  There is NO bar on opening a joint No such condition for PLS savings BBA account. account 5. Cash Management Account A Cash Management Account is a banking service provided to high profile business customers through which they can speedily obtain funds from their collection accounts and transfer to their main account through a computer module. The module collects and consolidates data from the customer's bank account in any location in the country. Through cash management, customers can speed up collection of their accounts receivable and utilize their funds to the optimum level. The Facility is being offered by large foreign bank (Duech Bank) through separate sophisticated modules on cash receivable solution & cash payment solution. 6. Collection accounts Collection accounts are opened for collection of funds at the request of business customers, charitable institutions and on the instructions of the government in the case of any disaster. For the scenarios listed above, a main account is opened in any branch of the bank. In lieu of this main account, collection accounts are opened in other branches from where funds are transferred to the main account as per instruction / arrangement. No cheque book is issued for collection accounts opened in different branches. Funds can only be withdrawn from main collection account. Conventional Banking 25  7. Share Subscription account When a public limited company floats its shares for subscription, it has to open accounts in banks that are called "bankers to the issue". These banks authorize their branches to collect share applications from the public against deposits of subscription money in a collection account; this is ultimately transferred to a main account of the bank on the closing date of the subscription. If the number of share applications is more than the shares offered, balloting takes place and refunds to unsuccessful applicants are made through the branches via which the applications were received. No cheque book is issued and collection accounts opened in lieu of main accounts are closed. 8. Dormant Accounts Dormant means sleeping, inactive, and inoperative. If an account which has not been used by the customer for a long time, it is classified as dormant. If an account remains inactive further its status is change from ‘Dormant’ to ‘inactive’ Generally banks follow underlined tenors for dormancy & inactive status. Type of A/c Dormancy Period Inactive Period Current 6 Month 1 Year PLS Savings 1 Year 3 Years Banks are allowed to make their own policy regarding dormant accounts. In most banks the period of dormancy is one year. Profit is paid and charges are recovered as usual. System-generated entries do not change the status of the account. Statute / Law of limitation does not apply to dormant accounts, but Sec. 31 of BCO 1962 (unclaimed deposit accounts) does. As per SBP instructions, before declaring the status of an account to be dormant, a notice should be sent to the customer at his/ her last available address, informing him / her that the account is no longer operative and its status will be changed to dormant if not operated and fulfills all formalities for activation of the account. Record of the notice thus sent must be maintained for an SBP Inspection Account to be activated against a written request and on production of an attested copy of CNIC or Passport or Pakistan Origin Card (POC) or National Identity Card for Overseas Pakistani (NICOP), if already not on record. For conversion of account status from ‘dormant’ to active, a debit transaction is necessary. Mere credit transaction is not sufficient for this purpose. According to the Prudential Regulation M-1 section 8-A: "Customers and clients whose accounts are dormant and an attested copy of account holder’s computerized national identity card (CNIC) is not in Bank’s / DFI record, Bank / DFI shall not allow operation in such accounts until account holder produces an attested photo copy of his / her CNIC. 26 Branch Banking | Reference Book 2  9. Deceased Accounts On the death of an account holder, the account is immediately marked as “deceased”. No further withdrawals are allowed, but credit in accounts can be received. If the balance in the account is small, it can be released against indemnity on production of the death certificate and heir-ship certificate, as per procedure given in the deposit manual of the bank. In the case of a large amount, production of a succession certificate becomes mandatory, along with other related documents, as per the operations manual of the bank. 10. Account of Minor A person below the age of 18 years is classified as a Minor. When the age of 18 years is attained, they become entitled to obtain their CNIC from NADRA and can enter into a valid contract in their own name. Because of his/her inability to offer ‘free will’ to a contract which is a pre-requisite for any valid contract. An account in the name of a minor is generally initiated or operated by the guardian. Example: Salman Aziz (Minor) Muhammad Aziz (Guardian). The account opening form is signed by the guardian only, who continues to operate the account even when the minor attains majority. In practice, a note to this effect is taken and signed by the guardian at the time of account opening. Generally savings accounts are opened of minors. Becauce savings accounts balance cannot be converted into an overdraft (OD) and an OD to a minor account is void. Required documents for such account openings are a photo copy of the CNIC of the guardian and a photo copy of Form B of the minor or birth certificate of minor. Account opening Account opening is the fundamental and most important function of any procedure and bank. This is the foundation on which banks strengthen their relationship documentation with their customers. If an account is not correctly opened or an account of (Regular) any non-existent (benami) person is opened, the bank’s interest will always be at stake and Regulators can penalize the bank for the lapse. An account is opened by completing an Account Opening Form (AOF). This is the basic document to be used, while selling any asset or liability product, apart from some consumer products, requires the maintenance of an operative account. In case of any legal action against the customer, AOF is considered as one of the main documents to be cited in any legal action (filing suit) if required. As per SBP requirement, banks / DFls must obtain a photo copy of CNIC before starting any new customer relationship and continuation of any previous relationship. Procedure  The customer visits the bank in order to open the account.  The bank officer should explain the requirements with respect to account type desired by the customer and should also explain the minimum account balance and documentation required to open the account of the customer.  Conventional Banking 27   The Account Opening Form, Specimen Signature Card (SS Card), should be given to the customer.   The officer should also offer other products of the bank to the customer.  The customer will fill in the Account Opening Form, SS Card and submits other relevant documents as per requirement of the bank.   The AOF and other documents should be signed by the customer in the presence of the bank’s designated officer.   The customer should provide any of the following identification documents, along with the photo copy, for attestation / verification to the designated officer. The original documents will be returned to customer after verification attestation.   i. CNIC / SNIC* ii. Passport iii. Pakistan Origin Card (POC) iv. National Identity Card for Overseas Pakistani (NICOP) v. Alien registrarion Card (ARC) issued by National a lien registration Authority (NARA) * Smart National Identity Card (SNIC) declared as Indentity document for account opening / banking transation note SBP BPRD circular letter no. 3 of 2013 dt: March 12, 2013.  NADRA verification should be completed immediately before opening of account.   The authorized officer shall scrutinize the AOF, other documents and SS card. The customer should sign on SS card before the officer.   Blank spaces on AOF and SS card if any shall be crossed out or marked VOID.  Ensure that the account operating instructions are clearly defined and specified.   The dealing officer should interview the customer to ensure authenticity of the information provided.   The dealing officer should admit the customer's signature after affixing “signature admitted” stamp.   The dealing officer must ensure that the documents are complete in all respect. In case of any missing or incomplete documentation, the same should be referred to the Branch Manager for deferral / approval.   The dealing officer / supervisor can approve the AOF provided everything is in order.   The missing / incomplete documents must be completed by the designated officer as soon as possible.  28 Branch Banking | Reference Book 2   If the branch is computerized, the dealing officer should feed details of the account opening form into the system and all mandatory fields should be correctly fed. To avoid incorrect data entries and subsequent SBP objections, it is suggested that entering dummy information/numbers in mandatory fields should be avoided.   Manual branches should allot the account number from Account Opening / Closing register.   Computerized / manual branches should file the SS card in respective card boxes in sequential order.   The Letter of Thanks should be prepared by the dealing officer and mailed to the customer at the given address.   If the Letter of Thanks is returned undelivered, the dealing officer should call the respective customer and verify the address and then mail the letter again.   The returned Letter of Thanks shall be recorded in the dispatch register and filed in the account holder's AOF folder.  Account-Opening Procedure Conventional Banking 29  Documentation 1. Individual/Joint and Sole Proprietorship  Declaration Form (mandate or authority form) for operating of account by an authorized person.   Illiterate person's account with "thumb Impression" shall be discouraged unless unavoidable; however, proper identification duly supported by two attested passport size photographs must be obtained from the customer and attached to the AOF and SS card besides taking his/her left and right thumb impression on the SS card.   A letter of undertaking should be obtained from illiterate customers to the effect that they should personally come to the bank and place their thumb impressions on the cheque in the presence of the bank officer.   The Sole Proprietor of a trading concern should sign a declaration that he is the proprietor of the firm. Mandate portion of the AOF should be completed if proprietor delegates the account operation authority to any other person to operate on his behalf.   For Joint account, instructions for operation should be "either or survivors" or joint operation.   In the case of a minor’s account, the guardian only should sign the AOF. Although an account in the name of a minor can be opened in the shape of a Current Account, it is recommended that it be opened as a Savings Deposit Account by the guardian to avoid chance of an overdraft to minor’s account. For example: Asghar Ali (Minor) Shaukat Ali (Guardian). Birth certificate / Form B (issued by NADRA) are required in the case of a minor.   In the case of a Pardah Nashin lady, one who keeps her physical identity under a veil, and has a CNIC without her photograph, she needs to submit any other document that has her photograph affixed on it, such as a driver's license, passport, student admit card, etc. If the intending customer does not have any document which bears her photograph, the following procedure shall be adopted.   i. A copy of the photograph duly attested by any gazetted officer/Nazim ii. A copy of CNIC without photograph should also be attested by the same person who has attested the photograph. iii. A certificate to the effect that the intending customer has no proper document bearing a photograph. iv. CNIC verification from NADRA shall be obtained in usual manner. 30 Branch Banking | Reference Book 2  2. Partnership  Partnership declaration / Mandate Form duly signed by each partner under firm's stamp.   Attested photocopies of CNIC or other verification documents of all partners.   CNIC must be duly verified from NADRA.  Attested copy of "Partnership Deed" duly signed by all the partners of the firm.   In case of Registred partnership Attested copy of Registration Certificate issued by Registrar of Firms.   In cases where the partnership is unregistered, this fact should be clearly mentioned on the AOF.   Authority letter, in original, in favor of the person authorized to operate the account of the firm in cases where authority is given.  Conventional Banking 31  3. Joint Stock Companies Account Opening Form completed in all respects and signed under company's stamp. Certified copies of: i. Resolution of Board of Directors for opening of account specifying the person(s} authorized to operate the company account. ii. Memorandum and Articles of Association duly attested by SECP. iii. Certificate of Incorporation duly attested by SECP. iv. Certificate of Commencement of Business (public LTD Co only). Attested photocopy of identity cards of all the Directors, which should be verified from NADRA. List of Directors corresponding to the ones printed in the Memorandum and Articles of Association. All subsequent changes, additions/deletions of directors evidenced by a letter or a certificate issued by Registrar of Companies (Form 29). All documents to be signed under Company's stamp. Distinction b/w Memorandum and Article Difference between a private company and partnership A private company differs from partnership in many ways. Important differences between the two may be observed from the following. PRIVATE COMPANY PARTNERSHIP 1. A private company is a legal person 1. Partnership is a collection of an aggregate of the partners. 2. A private company is registered 2. Partnership is established under the under the companies' ordinance partnership act. 1984. 3. A company is a corporation. 3. Partnership is an unincorporated association of individuals. 4. The members of a company are not 4. Partners are personally liable. personally liable for its debts or for wrongs done by it. 5. The property and rights are vested 5. The property and rights of a in it, so that it is never necessary partnership are vested in its to transfer its assets when there is members, so that on a change in a change in its membership. its membership, its assets must be transferred to the new partners. 32 Branch Banking | Reference Book 2  6. The liability of members of a 6. Partners are liable without any limit company is limited (except an for the partnership's debts. unlimited one). 7. The affairs of a company are 7. Every member of a partnership may managed by its directors and its take part in its management unless members have no right to take part the partnership agreement provides in the management. otherwise. 8. No one member of a company may 8. Unless a partnership is entered into require it to be wound up, and no for a fixed period it may be dissolved personal circumstances affecting a at any time by any partner and every member, such as death, insolvency, partnership will automatically be lunacy will result in it being wound dissolved by the death, insolvency up. or lunacy of a partner. 9. It must be registered with the 9. Registration is not necessary. registrar of joint stock companies. 10. Maximum number of members is 50. 10. Maximum number of members is 20. 11. A member of a company is not an 11. A partner is an agent of the firm. agent of a company. 12. Act of members does not bind the 12. Act of partner binds the firm. company. 13. It enjoys the following privileges: 13. It does not enjoy such privileges. -perpetual succession. -independent identity. -limited liability. 14. Is governed by the Memorandum 14. Is governed by the agreement entered and Articles of Association. into between the parties. Distinction between Memorandum and Articles of Association Memorandum of Association Articles of Association Memorandum is the main Document. Articles are secondary and subordinate documents It contains the aims and objects for Articles are the internal regulations of the which the company is incorporated. company. The members have control over the provisions of the Articles. It can be altered after obtaining A simple special resolution is sufficient to confirmation from the Corporate Law alter the Articles provided due Authority (SECP). consideration is given to the provisions of Memorandum and the Ordinance. It defines the object and sphere within It defines rules for internal management which the company can operate. of the company. 4. Clubs, Associations, Societies, Charitable Organizations Certified copies of Certificate of Registration, By-Laws / Rules and Regulations. Conventional Banking 33  An undertaking signed by all the authorized persons on behalf of the institution, mentioning that when any change takes place in the list of the persons authorized to operate the account on behalf of the club/ association, the bank shall be informed immediately. Certified copy of the resolution passed by the Governing body /Executive Committee / Managing /Working Committee of the Society / Club or Association, authorizing opening of account with the Bank, and nominating authorized person to operate the account. Attested copies of the identity card or other verification documents of the authorized person(s) should be obtained and should be verified from NADRA. List of Members of the Executive / Managing / Working Committee. It is advisable that the accounts of Clubs, Associations, Societies and Charitable Organizations should be opened only after clearance from the Legal Department of the bank. 5. Trust Account An attested copy of Certificate of Registration. Resolution of Board of Trustees for opening of account. Attested copies of CNIC of all the trustees. Certified copies of Instrument of Trust. No trust account should be opened without prior permission from the Legal Department or any other competent authority of the bank. CNIC of Trustees should be verified from NADRA. 6. Executors and Administrators