COMMERCIAL BANKING

Banking
 Mankind has always been seeking security and protection.
This need has led him to scientific and technological
development on one hand, and banking development on the
other.

 If excluded from any economic system the whole business
and economic world will collapse like house of cards.
 History
 In the days gone by when man started saving money
 he felt himself unsecured. First he buried his savings
 underground.
 But this practice did not last long for its shortcomings.
 Consequently, he restarted to deposit his savings
 with the strong and robust persons for safekeeping
 who hired armed guards on wages.
 These trustees charges fee from depositors to earn live hood and
finance expenditure on armed guards
 This practice turned into widely accepted business, which gave rise to
the idea to lend the deposited money. Thus, the innovator trustees
earned income from two ends, from depositors and from borrowers
the reinforced business in turn attracted severe competition
 that led to idea to drop the receiving of fee from depositors.
The new scheme proved a blessing in disguise because it,
then, attracted even more business and brought the trustee
new dimensions of profits and thus modern banking started.
 COMMERCIAL BANKING

 Commercial banking receives deposits and advance loans to

promote business and commerce .They help business men in
promoting their business. They work for traders, manufacturers,
wholesalers, retailers, importers and exporters.
 FUNCTIONS OF COMMERCIAL BANKING

Primary Functions Secondary Functions

 Primary Functions

Receiving Deposits Advancing Loans

 Secondary Functions

Public Utility Services Agency Services

Accepting Cheques and bills Dealing in shares and bonds

 Public utility services

Accepting and Lockers Credit and

Discounting Bills
Transfer Creation of Issuing letter
Debit ,ATM
of Exchange of money credit money of credit services Cards
LENDINGTO BUSINESS
 LENDINGTO BUSINESS :Lending to Business Adverse
selection when some one makes a decision with out all of the
information which can result in an undesired able result when
one party has access to better or more.

 information than the other party during a transaction, it is

said that one has asymmetric information ,Therefore, when
one party has asymmetric information they make an adverse
selection.
 LENDING to Business: Adverse Selection for example you are
interested in buying a new car .while you think you have found fit
and best .you are unaware ,that the seller has some information about
problems with the car that he is not telling you, because you are
unaware of this information or asymmetric information ,you decide to
buy the car ,what has just happened is you were not aware of this
information or asymmetric information you decide to buy the car.
 what has just happened is you were not aware of true quality of the
car you were buying ,so having asymmetric information the seller
was able to sell you a bad product.
 Lending to Business :Moral Hazard ;Moral Hazard
exists in loan market because borrowers may have
incentives to engage in activities un desire able
from the lenders point of view. In such situations ,it
is more likely that the lender will be subjected to
hazard of default. Once borrowers have obtained a
loan ,they are more likely to invest in high risk
investment projects , Projects that pay high returns
to borrower if successful.
 Lending to Business
 lending policies, who are target customer is ?
 Usually bank ,Prefer to give loans to businesses because of the
profitability, Although there are high risks associated with business
lending therefore banks go for credit Analysis

 CREDIT ANALYSIS
 Quantitative and Qualitative analysis of company .which help to
determine the company debt service capacity or how capable it is to
payback its principal payments to the bank or other creditors.
Credit Analysis: The Five Cs’

Character
Capacity
Capital
Collateral
Conditions
 Credit Analysis: Main Steps ;Identify the Risk, Document all
the possible risks from company’s aspect.
 Evaluate the Risks ,To what extent the risk might, effect
business operations
 Mitigate the Risks; Minimize those risks
Credit Analysis Process

 Who is Customer?
 How much capital do they need?
 How will the capital be allocated for what specific
purpose?
 What protection can be borrower provide the bank?
Credit Analysis Process
 Summary of Request, History of company ,the amount of capital
needed, the proposed repayments terms and the collateral available
to secure loan.
 Borrower’s History; A brief background of your company, its
capital structure, its founders ,list of customers, suppliers, service
providers.
 Market Data ;Trends in Industry ,the size of
market ,market share
 competition, competitive advantage etc
 Credit Analysis; Negotiating the Loan
Documents
 Interest Rates; Monthly market rates
 Collateral valuation and marketability of assets
 eCIB
 A credit information Bureau is an organization that collects credit
data on borrowers from its member financial institutions .The
financial data is then aggregated in system and the resulting
information in the form of credit reports is made available on
request to contributing member financial institutions for the
purposes of credit assessment, credit scoring and credit risk
management .
 The major purpose of this data base is to enable the financial
institutions to know the credit history of their prospective
customers this enabling them to make a more prudent decision.