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Commercial Banks

An institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, saving and time deposit. These institutions are run to make a profit and owned by a group of individuals, yet some may be members of the Federal Reserve System. While commercial banks offer services to individuals, they are primarily concerned with receiving deposits and lending to business.


A bank is a business firm. Its main aim is to earn profit. In order to achieve this objective it provides services to the customers. It offers a variety of interest bearing obligations to the public. These obligations are the sources of funds for the bank and are shown on the liability side of the balance sheet of a commercial bank. The main sources which supply funds to a bank are as follows: A Banks Own Funds. B Borrowed Funds.

1. Banks own funds

Banks own funds are mainly of three types; (a) Paid up capital, (b) Reserve fund and (C) Portion of undistributed profit (D) Liquid Assets. (A) Banks Own Funds Banks own paid up capital. The amount with which a banking company is registered is called nominal or authorized capital. It is the maximum amount of capital which is mentioned in the capital clause of the memorandum of association of the company. Capital is further divided into (i) paid up capital and (ii) subscribed capital. The banks in Pakistan raise authorized capital by issuing ordinary shares of Rs. 10 each which are fully paid up.

(B) Reserve fund Reserve is another source of fund which is maintained by all commercial banks. At the time of declaring dividend, a certain portion of the profit is transferred to the reserve fund. This reserve belongs to the .shareholders and at the time of liquidation, the Shareholders are entitled to these reserves along with the capital. The main purpose of setting aside part of profit is to meet unforeseen expenses of the bank. The Banking Companies Ordinance has made it obligatory (binding) for every banking company incorporated in Pakistan to create a reserve fund. (C) Profit Profit is another source to a bank for the purpose of business. Profits signify the credit balance of the profit and loss account which has not been distributed. The accumulated profit over the years increases the working capital of the bank and strengthens its financial position. (D) Liquid Assets According to the Section 29 (1) of the Banking Companies Ordinance, 1962, every bank in Pakistan is under legal obligation to maintain liquid assets in Pakistan. This amount should be such percentage of the total demand and time liabilities of the bank as may be notified by the State Bank of Pakistan from time to time. These liquid assets should be maintained in Pakistan in cash-on-hand and balances with the State Bank of Pakistan; money at call and short notice; bills discounted; gold and bullion and unencumbered approve securities, including debentures, securities issued by the semi-government agencies, guaranteed by the Federal or Provincial Governments in Pakistan as also approved foreign exchange.

Since this section prescribes that the liquid assets requirement can be changed from time to time the State Bank of Pakistan has asked to maintain it at 18% presently. Section 29(3) of Banking Companies (Amendment) Ordinance,1995, further prescribes that the position of the liquid assets is to be maintained as of close of business on each Thursday or of Thursday is a public holiday under the Negotiable Instruments Act, 1881, at the close of business on the preceding working day. However the banking companies have to report this position to the State Bank of Pakistan before the close of the month, in the prescribed format of monthly return.

2. Borrowed Funds
The borrowed capital is a major and an important source of fund for any banking business. It mainly comes from deposits which are accepted on varying terms in different accounts. Banks borrowing is mostly in the form of deposits. Bank collects three kinds of deposits from its customers (1) current or demand deposits (2) saving deposits and (3) fixed or time deposits. The larger the deposits of bank, the larger will be its (use) fund for employment and so higher are its profit. 1. Borrowing from central bank. The commercial banks in times of emergency borrow loans from the central bank of the country. The central bank extends help as and when financial help is required by the commercial banks. 2. Other sources. Bank also raise funds by issuing bonds, debentures, cash certificates etc. etc. Though it is not common but is a dependable source of borrowing. 3. Retained Earnings
A lot of commercial banks earn retained earnings or fees to help fund their business. A retained earning can be collected through overdraft fees, loan interest payments, securities and bonds. Banks also charge fees for providing customers

with services such as maintaining an account, offering overdraft protection and also monitoring customers' credit scores.

4. Deposits: THE LIFE-BLOOD OF A BANK In modern times, very few business enterprises are carried out solely with the capital of the owners. Borrowing funds from different sources has become an essential feature of todays business enterprises. In the case of a bank, borrowing funds from outside parties is all the more vital because the entire banning system is based on it. The borrowed capital of bank is much greater than their own capital. Banks borrowing is mostly in the form of deposits. These deposits are lent out to different parties. The larger the difference between the rate at which these deposits are borrowed and the rate at which they are lent out, the greater will be the profit margin of the bank. Furthermore, the larger the deposits the larger will be the funds available for employment; larger the funds lent out the greater will be the profits of the bank. It is because of this inter-related relationship that deposits are referred to as the life blood of a bank. To receive deposits I one of the basic functions of all commercial banks. Commercial banks do not receive these deposits for safe-keeping purpose only, but they accept deposits as debts. When a bank receives a deposit from a customer, the relationship of a debtor and a creditor is established whereby the customer becomes the creditor and the bank a debtor. Whet the bank receives the amount of deposit as a debtor; it becomes the owner of it. It may, therefore, use it as it deems appropriate. But there is an implicit agreement that the amount owned will be paid back by the bank to the depositor on demand or ager a specified time.

Nature of Deposits
Bank Deposits can be broadly classified as Current Deposits, Fixed Deposits or Term Deposits and Savings Deposits. However, a prudent banker would always try to maintain a deposit mix which would keep his average cost of deposits within safe limits so as to maintain the profitability and viability for the bank. This classification is based on the duration and purpose for which the deposits are to be kept at the bank before they can be withdrawn by the depositors.

Uses of Funds
Banks keep a portion of their funds on hand for daily needs such as customer withdrawals and purchases. Commercial banks primarily use funds collected or deposited with them primarily for loans and then collect interest on those loans to pay their own expenses and realize profits. As publicly traded companies, part of their funds also go to pay dividends to shareholders.