CHAPTER 1: LITERATURE REVIEW 1.1: Overview of commercial bank 1.1.

1 Definition of commercial bank Banking occupies one of the most important positions in the modern economic world. It is necessary for trade and industry. Bank is one of the results of the Industrial Revolution and the child of economic necessity. Its presence is very helpful to the economic activity and industrial progress of a country. The definition of commercial banks is various. In Vietnam, Banking Ordinance issued on May 23rd 1990 by State Committee stated: „„Commercial banks are money dealing organizations whose main and usual activities are accepting deposits from customers with the responsibility of repaying and using them for lending activities or performing discounts, making as means of payment‟‟. As it is revealed by Basel Accord, commercial banks are defined as financial institutions that provide a list of various financial services, especially credit, savings, payment services and perform financial functions. In U.S, commercial banks are considered as money dealing enterprises that specialize in supplying financial services and operate in financial service industry. 1 In France,commercial banks as enterprises whose usual functions are accepting money through different forms and using those resources for their own sake in discount, credit and financial activities.2 According to Vietnam Law on Banking promulgated in 1997, commercial bank is a form of oriented profit- seeking business institution entitled to carry out all banking activities and other related activities. In general, commercial bank is a

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American Commercial Law French Banking Law in 1941

2 Functions of commercial banks Banks play an important role in a nation‟s economy. For example.profit-seeking business firm. This is done mainly . 1. Therefore. there are three types of deposits which are as follows: current deposits. fixed and low income group people deposit their savings in small amounts from the points of view of security. keeping the needs and interests of various sections of society. -Giving loans: The second important function of commercial banks is to advance loans to its customers. banks formulate various deposit schemes. fixed deposits. In other way. They charge interest from the borrowers and this is the main source of bank‟s income. and saving deposits. The amount of deposits depends on the variety sections of society. However. Modern banks give mostly secured loans for productive purposes. The main functions of commercial banks consists of accepting of deposits and granting of loans to other banks and businesses and receiving a return on their investments through interest rates charged to these clients. the value of security or collateral is equal to the amount of loan. dealing in money and credit. Banks advance loans not only on the basis of the deposits of the public but also advance loans on the basis of depositing the money in the accounts of borrowers. according to the demand and economic condition. Generally. Generally. This is called as credit creation by commercial banks. All these functions are under the following heads: -Accepting deposits: is the most important function of commercial banks. On the other hand. It is a financial institution dealing in money in the sense that it accepts deposits of money from the public to keep them in its custody for safety. they create loans out of deposits and deposits out of loans. income and saving promotion. besides these functions there are many other functions which these banks perform. traders and businessmen deposit their savings in the banks for the convenience of payment.

They are government securities. and other securities. . traders get loans on the basis of their bills of exchange before the deadline. and short-term loan. such as treasury bills. banks advance loans to the traders and business firms by discounting their bills. silver. if there are no deposits in the current account. collect necessary and useful data relating to trade and industry. -Discounting of Bills of Exchange: is the most popular and important way of advancing loans to the traders of commercial banks for short-term purposes. -Agency Services: Banks function in the form of agents and representatives of their customers. sell and buy foreign exchange. Government securities include both central and state govern-ments. drafts. demand loans. bills of exchange and dividends of the shares for their customers. -Investment of Funds: The banks invest their surplus funds in three types of securities. other approved securities. -Miscellaneous Functions: Banks perform many other functions of general utility which are as follows: protect valuable assets of their custom-ers such as gold. Banks generally give following types of loans and advances such as cash credit.with a view to recover the loan money by selling the security in the event of nonrefund of the loan. In this way. They often collect cheques. national savings certificate. purchase and sell securities. advise their clients relating to investment decisions. shares and bonds on behalf of their customers. According to this function. legal documents. make payment for their clients. pay insurance premium of their customers. This type of loan requires a security from the customers and charge very high rate of interest. -Overdraft: Banks advance a certain loans to its customer through over-drafts. issue letters of credit.

In other words. Capital plays an important role in the formation of Commercial Banks For any business. As the basis for commercial banks and business organizations. distribution and consumption. At the same time. our owners send to the Bank for the purpose of payment. It mainly reflects the capacity to determine their sources of business.Other services through their subsidiaries: merchant banking services.3 2: Efficiency of deposit mobilization in commercial banks 2. the Bank returns to them an income. housing finance. The Bank has taken the role of fund pooling and redistribution of capital in the form of currency. In essence. 2. insurance services. the capital of the Bank is a division of national income temporarily idle during the production. Retrieved from: http://www. leasing.1. UPADHYAYA. factoring services.1. saving or investment. the capital decides the existence and development of business activities of the Bank. invest or perform other business services. they are entitled to attend the transfer of capital to the Bank. For banks.html 4 .Labor stimulating all economic development activities.preservearticles. used to lend. business activities must have: Technology . which is an important factor. banks cannot carry out business activities without the funds. 3 K. 7 main functions of a Commercial bank. accelerating the flow of capital.1 The roles of capital in banking activity According to the book “Professional modern banking in VietNam” (2012). capital of commercial banks4 is the monetary value created by the Bank or raised. capital is an indispensable factor in the business of banking.

banks must constantly seek ways and measures to increase capital in the business process. to survive and increasingly expand operation requires banks to have greater credibility in the market. the bank must regularly care to the growth in capital during its operation. With the potential large .2. with small-scale lending it will lead to loss of ability to pay. for example sufficient statutory capital. they do not reserve enough liquidity to satisfy the demand for loans in the economy. Meanwhile. thereby create higher and higher prestige. Capital decides solvency and ability of the Bank In market economy. we can say which is the first point in the cycle of banking business. Thus. Bank is a business organization especially on commodity money market (short-term capital market) and stock market (long-term capital market).Capital not only means business but also the business object's major commercial banks. The bank has many advantages in the business. On the other hand.1. 2. in addition to initial capital requirements established by law. which is both a means of business. with a capital market sectors. Therefore. just as business objects. loan demand in the market is very large. The typical business of the Bank. So in addition to the initial capital needed.the currency on the money market (short-term capital market) and stock market (long-term capital market). On the one hand banks fail to meet loan demand. the majority of the bank's capital as deposits and borrowed funds. the solvency of banks is in proportion to the bank's overall capital and the liquidity of banks in particular. We already know. The bank made the business of "special goods" . That reputation must be shown first in availability payments. With a bank with small capital size. So if you exclude other factors. Solvency of the bank is higher than the liquidity of the larger banks. so banks have to pay to customers when they request a withdrawal.

1.3. they enhance reputation and increase competitiveness in the market. Bank capital also helps large businesses with many different types such as: joint ventures. banks can operate the business with expanding scale. At the same time. capital plays decisive role in the business of the bank.. 2. financial leasing services. 2. If it is a big bank with abundant capital..1. They will lose customers and not take advantage of business opportunities. even cannot meet the loan need of businesses.4 Capital decides competitiveness of the bank .capital. Therefore it affects the ability to attract capital from organizations and economic sectors. Therefore. securities trading . while improving the position of the bank. The conduct of activities aimed at effective competition prestige. Capital determines levels of credit activity and other business activities of the Bank Capital of a bank decides to expand or contract the volume of credit. it will meet the needs of capital to extend conditional credit relations with many companies and credit markets. the form of this business can diversify risks and create more bank capital.

ensuring the balance of money . Simultaneously.goods in the economy. contributing to a stable currency circulation. professionalism. not just loans but also the form of joint ventures. The sale activities of the bank will increase rapidly and the bank will have more advantages in business. leasing and business services (leasing ) and trading liabilities. The forms of business will contribute to multi-distribute risks in business and generate more capital for banks and increase the competitiveness of banks in the market. This is supplemented with the conditions for the bank's own capital. Starting from the role of capital in the business of banking and the economy in general and capital should be mobilized in particular.2. At the same time the capital of big banks will create favorable conditions for the use of synchronization. active time. which respond to the economy. trading on the stock market. the credit volume. improve efficiency funding is needed in the operation of commercial banks in all countries. the bank's capital abundance will enable banks to ensure performance of monetary policy. the bank will have sufficient financial ability to multi-business market. Thus. capital must be preserved and continuously expanded. Owner equity .1. strengthening material and technical basis and scope of banking activities in all areas. 2. On that case. Improving efficiency is vital in determining the existence and development of banking activities. Moreover.2 Types of bank capital 2. large capital is likely favorable conditions for banks to expand credit relationship with the economic sectors including issues of scale.Practice has proved that the size. technical facilities of the bank are a prerequisite to attract capital. That will attract more customers. The time limits for loan decisions even moderate interest rates for customers.

Authorized capital (chartered capital or statutory capital).Bank‟s own capital is all of the bank owner‟s equity or all the amount of money created by banks. According to Decree 146/2005/ND. paid up capital is that part of the subscribed capital which the subscribers are actually called upon to pay. According to Douglas. it is the amount with which a bank is registered. the Bank is required to make the following allocations before distribution of profits. . the shareholders are entitled to these reserves along with the capital. Finally. This reserve belongs to the shareholders and at the time of liquidation. Bank capital consists of authorized capital (statutory capital).Reserve funds It is the accumulated undistributed profits of the bank.It is the maximum capital up to which the bank is empowered to raise capital. In other word. In general. Elliott. J. Subscribed capital represents that part of issued capital. the entire statutory capital is not raised from the public.CP dated 23 November 2005 issued by the Government of Vietnam. reserve funds and portion of undistributed profits. At the time of declaring dividend. . The bank maintains reserve fund by setting aside part of profits to meet unforeseen expense and to tide over any crisis. which is actually subscribed by the public. a certain portion of the profit is transferred to the reserve fund. That part of authorized capital which is issued in the form of shares for the public subscription is called the issued capital. bank equity represents the portion of a bank‟s assets which have no associated contractual commitment for repayment. Annual allocation Reserve to supplement 5% of profit after tax Maximum balance 100% share capital .

share capital Financial reserve 10% of remaining profit after tax Other equity funds are allocated from profit after tax. payment and other businesses. The funds are not required by law and are fully distributable. . Funds mobilized continuously increase to all economic sectors in society. and to reserve a reasonable rate to ensure solvency. 2. Capital mobilized includes: capital deposits and valuable papers. Mobilized deposit Mobilized deposit of the bank is monetary value that the bank raised from the economic organizations and individuals in society. through the implementation of the credit operation. However. Profits signify the credit balance of the profit and loss account which has not been distributed. Bank capital accounts for a small portion in the capital structure of commercial bank but it is a compulsory condition enabling its foundation. Banks may not have the right to use property and is responsible for timely repayment of principal and interest. Funds mobilized are the property of different owners. The allocation from profit after tax and the utilization of the other equity funds are approved by the shareholders in the Annual General Meeting. mobilized deposit plays very important role for all business activities of commercial banks. this fund is used only for business purposes. Portion of undistributed profit 25% share capital Profit is another source to a bank for the purpose of business.2. The accumulated profits increase the working capital of the bank and strengthen its financial position. Thus.2.

Capital deposits: Cash deposits: The deposits that customers send to the bank but can withdraw at any time (send money to use checks. The current account is the account balanced at that excess. This form of . It features a manageable interest rate policy in the short term. Demand deposit account: is the account that the withdrawal and payment made by check or bank transfer. including demand deposits and term deposits. Current accounts (money market): Bank made the payment demands of businesses and individuals within the allowed balance. However. the Bank always differs between the input and output on each deposit account payments. or service LC collection). depending on the purpose with the approval of the central bank. Certificates of deposits: The valuable papers issued by the Bank in waves. debit cards or use to make a money transfer service. The cash receipt from the businesses and individuals can be entered into the payment of deposits on demand. Cash deposits are low-interest or no interest paid. Bills: are bank‟s debentures with a term less than 12 months. It features a manageable interest rate policy in the long term. banks also issue certificates of deposit. Cash deposits are not only for individuals but also for a very stable business. Valuable papers: Issuance of valuable papers: Apart from the methods above. it creates a temporarily idle fund and can use for a business. essentially raising capital by issuing valuable papers. bonds and promissory notes. Bonds: is the bank's debentures with a term greater than 12 months. From there. with this type of deposit interest rate is very small.

When a bank needs to bring up the commercial paper. It includes sources of trust. This fund is from a small proportion of the bank. . it mostly depends on the monetary policy of central banks.4.2. 2. they would be willing to lend other banks to find borrowers higher interest rates. The central bank rediscount only for quality commercial paper as short maturities.2. high solvency and compliance with the objectives of the central bank in each period. If the central bank tightens monetary policy: higher interest rates. Loan is from the Bank to address the urgent needs of the commercial bank payment. If the central bank expands monetary policy: lower interest rates. it will rediscount at the central bank. With banks have excess reserves required by the outstanding results of the unexpected increase or decrease amount of money raised. mobilizing capital is important and major part in business activities of commercial banks. This type of principal loan is the central bank rediscount (refinancing).The banks have to respect the level of capital raised under the provisions of law. It is the largest proportion of total capital (80%). Through the presentation. This is the primary source to combat liquidity risk of banks.commercial banks is to raise capital to pay higher interest rates than normal interest rate. Borrowed capital Borrowed capital: is borrowing more money to meet payments when the ability to raise capital is limited. Bank loans aim to protect the safety of the banking system and implement policies. Other equity Other equity is total value of the currency that the bank raised through the provision of payment services and offered investment trust. 2. power and other sources of payment.3.

The effect of raising capital in the bank must be evaluated through the following aspects: Raising capital must come from the business needs of the bank. Tasks of each bank is to focus and attract large capital to invest in production and business activities. the bank stability will be assured to use a majority stake in the high-income activities. However. infrastructure. The amount of idle capital in this area is also very large. it does not mean that if . banks need a large amount of capital raised from domestic sources. Mobilization of deposit must have stable growth in quantity to satisfy the demand for loans. To achieve that. Capital in most countries are in the household savings as a backup. This fund usually has a very low cost.Funding source is the trust that the bank has been made possible thanks to customer services.3 Efficiency of deposit mobilization and evaluation standard 2. If the bank raises a large amount of capital. However. Furthermore the capital of the social and economic institutions is not always used by the crop. If banks raise capital. it often has a large cash flow to draw the amount of capital for lending. 2. The proportion of capital is higher or lower depends on service quality and reputation of our customers. etc… For the bank: To be able to conduct business efficiently and diverse forms of business to improve competitiveness and profitability. especially services for loans and payment services. the bank must have the appropriate and effective funding. it needs a huge amount of capital as prerequisite materials and capital to build technical facilities.3. The investment will not be so efficient and the bank will not have to regularly deal with capital for liquidity. Importance of deposit mobilization For the society: To achieve industrialization and modernization of the country. payments and other business activities of the bank. raising capital should be stable in time.1.

. 2.term capital So. money detector machines Guide) Keeping bank solvency is a thorny problem with all of banks. it requires them to meet the needs of bank reserve requirements. office rent.term capital such as reforming administration or enhancing the role of service activities. not expand. treasury without any offset account. If it does not raise more capital.3. money counting machine equipment. the bank's funding must come from the actual needs of the bank's Funding costs including the payable interest.. To reach that goal. bank solvency is regarded as the first criterion to be mentioned. not diversify the business. About. accounting. . administrative costs . it still have to pay interest and additional costs such as expenses for maintenance.2. In short. In particular. the payable interest is primarily part of the funding costs. This requires all of banks to find the ways to reduce funding cost in process of mobilizing short. other things such as staff salaries.banks have stable funding mobilized vice versa. the bank will not meet customer needs. If mobilization is low. To ensure the solvency of any banks. if we want to evaluate the efficiency of short. raising deposit is effective and stable funding to meet the needs of the banking business. A bank which mobilizes deposit capital effectively means that bank can raise more and more money with lowest funding cost. not be competitive and lose customers. Evaluation standard of the efficiency of deposit mobilization a) Bank solvency: it is the ability of bank to have enough assets to cover its liability (Jean Murray. b) Funding cost: These costs are charges which any banks pay to the lender for taking the loan for its business and workings (BA Accounting & Finance Dur. banks have to mobilize as much money as possible.

3. Stable source of funds helps banks to conduct their business activities smoothly and uninterruptedly. If there is reasonable policy. Political. Banks always have diversified forms of funding to attract customers.1 Objective factors 3. If banks have the ability to mobilize a stable short-term funds.2. which showed that: no movement of downward trend in attracting customers activities of the bank. Increasing the quality of credit Increasing the number of transaction Increasing other forms of mobilization with competitive interest rates.economic and social situation A national economic development and stability is also facilitating the development of banking system.1. Since then.1. stable inflation rate increases the likelihood of trust when investors invest in the market. it would promote the banking system. funding may not increase too much. 3: Factors affecting deposit mobilization 3. This proves that the bank has kept its loyal customers. Stable economy. 3.c) Stable growth rate of short. The competitiveness of banks in the market The impact of market economy has directly affected the operation of the banking system. First requirement for short-term funds of banks are not the number. Representative in the banking system was the State Bank of Vietnam. but it is necessary for funds to be stable in each period.term capital: This is an important criterion to evaluate the performance of short-term capital mobilized by the bank.1. especially the commercial bank system.2 Subjective factors . the Bank has increased the ability to raise capital efficiency as well as diverse forms of mobilization to meet the needs of the economy.

open bar locations. equipment ordered at the counter. Information. analysis and synthesis of the basic areas related to the banking market. The diversification of distribution channels. Thus. Interest rates Interest rates have direct impact in regulating the activities of credit. Interest rate factor is also sensitive and frequently change. research and survey policy To implement this policy... loans and raising capital of banks.2..2. associated with changes in supply-demand relations of capital. expanding the trading desk (the number of counters.2. With these information obtained. In that case.4. it will have adverse effects on credit activity of banks. 1. the bank will offer general business policies to mobilize capital in particular in line with customer needs and demand for capital markets. commercial banks should be monitored closely to fluctuations in operation process to find solutions to stabilize its business situation. the other banks have to raise interest rates to keep customers. it affects the profit when considering the business results.3.) have a strong influence to the capital mobilization of banks. Distribution policy Distribution policy is a collection of all the material means that giving products and banking services to customers. we need to mobilize all the necessary material means to carry out observation.1.). unfair competitive factors. calculate the interest rate differential between output and input.3. levels of staff .. 1. the economic phenomenon often changes rapidly.3. In market economy. Development and promotion policy . bank has to search the suitable interest rate. When interest rates changes. In the case of fluctuations of interest rate because of the non-physical factors (psychological factors.3.

. advertising is also an important mean to enhance the position of the bank and to attract more customers to the bank. creating the trust of customers for banks.The bank must consider the communication policy and promotion policy. Besides. because the interaction of employees to customers will create the good image of the bank. Good communication will protect the interests of the bank.