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Bankers’ Core*1 Business — Deposits
Money is the raw material for a bank. The bigger the stock of money, the more the business that a bank can conduct and the higher the profits it can make. Deposits are rightly said to be the life blood for a bank.

The Bank as Depository
We have discussed earlier the definitions of ‘bank’ / ‘banking’. One of the basic services rendered by the bank to the public is that of depository, both an essence and an important component of ‘banking’ business.
(*1 The most important or central part of something)

Importance of Deposits - The key to all growth and development of the banking system lies in the mobilization of resources and their judicious utilization. The Section 5(b) of the Banking Companies Ordinance, 1962 defines banking particularly highlighting these aspects:
“Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise”.

As such the first pre-requisite of banking is the ‘acceptance of deposits’ from the public and then its utilization by way of lending or investment in such a manner that the depositors may also withdraw their funds on demand or otherwise. Impliedly, it further envisages that the investment of funds should be judiciously made so as to be able to generate earnings for paying a reasonable return to depositors of money, besides meeting operational expenses of the bank and providing for reserves and contingencies and paying dividend to shareholders. It implies that deposits are effectively the ‘working capital’ of the banking business. Unless there are resources, neither these can be invested in profit making avenues and ventures nor would it be possible to pay reasonable return to the depositors.

Mobilization of Deposits —
Some banks / DFIs were in the past publicizing their deposit mobilization schemes without disclosing the correct & complete terms and conditions with regard to the rate of return on such deposits. The use of ambiguous terms, like “conditions apply” etc., in advertisements were the cause of complaints to SBP from aggrieved depositors. All the banks/DFls have been directed to ensure that all advertisements in media (print, electronic or in any other form) soliciting deposits from the general public should explicitly indicate the annualized rate of expected return. The words “conditions apply” or other similar wordings should not be used. The schemes on which profit is paid on monthly/quarterly/half yearly or any other regular interval, the expected rate of profit to be paid on such intervals should be clearly indicated in the account opening form or advertising material in bold letters. What is the annualized rate of return?

Core Earning of a bank is the “Spread” of Interest or Profit
Resource mobilization of deposits needs to be done carefully so as to ensure that in the ultimate end, it does not become counter-productive for the bank. In mobilizing deposits, therefore, two basic points viz., average cost of deposits and average return on the investment of deposits, should be kept in view. 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. A question that could arise here is as to what should be the average cost of deposits up to which it may be feasible to go in for mobilization of deposits. State Bank statutory requirement lays down a percentage of total demand and time liabilities to be held in cash (Cash Reserve) with the State Bank of Pakistan free of any return, while another given percentage is required to be held in unencumbered securities, usually this part is held in “approved securities”(approved for investment in statutory liquidity requirement) e.g. treasury bills, etc. The average cost of deposits up to which deposit mobilization could be feasible would have, therefore, to be considered with reference to the average return on the lending or investment of these deposits after meeting statutory (legal) obligations.
{ unencumbered securities= those shares and bonds etc which are NOT placed under lien to somebody. Free of any lien or charge}
In the above paragraph which type of average is envisaged? Simple average or weighted average. What is weighted average?

In mobilizing deposits, there are two factors which are of prime importance. One is the rate of return to the depositors. This should necessarily be competitive with a view to attract deposits in a competitive market. Another important aspect in deposit mobilization is the quantum of efforts that are put in on this behalf. To this end the following guidelines could be of assistance.

i. Identify target market for deposit mobilization. As a first priority potential sources/areas of deposits and the persons, if any, to be contacted in this behalf should be identified. The next step would be to develop contacts and support, as may be considered necessary, for mobilizing these deposits.

ii. In the case of the bank extending letter of credit or guarantee facilities, which either as per SBP’s guidelines or the bank’s own policies, require an amount of margin to be deposited with the bank, it also helps to increase bank’s deposit though in lesser volume.

iii. Branches falling in home remittance areas could do well to contact persons receiving larger foreign inward remittances for opening accounts with their bank and arranging remittances through direct deposit in accounts which would provide quicker credits to their accounts by avoiding delays involved in receipt of funds through instruments of remittance like cheques or drafts. The remitters abroad could also be likewise approached for arranging remittances through their bank for credit to the beneficiary’s account on the same lines with assurances of efficiency of service.

iv. Issuing drafts, pay orders and other forms of remittances are also sources of funds as the float lying with the bank can be large in case of increased volumes of such businesses.

v. Branch deposits should be periodically compared with those of other banks operating in the same areas and the available deposit potential. This would enable the branch officials to make a comparative assessment of their performances and plan their future strategies and line of action in respect of advertising and hiring/training of deposit promotion officers.

Customer’s Bank Accounts - The most basic account is the savings account which cannot be overdrawn. Then there are current accounts which are payable on demand either by withdrawal or by the customer instructing the bank to make payment to a third party. They can be overdrawn by way of overdraft. Then there are foreign currency accounts and a number of other deposit accounts with different features and services. Account holders vary as well, from individuals through multinational enterprises and government agencies. There are special rules relating to account-holding by unincorporated associations, partnerships, executors, minors, mentally ill and so on. Banks themselves hold accounts with other banks as a result of correspondent banking relationship.

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. In other words the bank uses the deposits in keeping cash in the bank tills, cash in State Bank account, investments in Treasury Bills, in long term loans to government. The skill of the banker lies in deciding the avenues of investment and lending their volumes in such a manner that the withdrawal needs of the customers are met in an admirable manner and the bank also earns reasonable profit. Please remember that high earning and high liquidity are opposing goals and a challenge for the banker.

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.

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 factors. It is the treasurer’s job to maintain the pool of the bank’s money in a profitable and feasible manner.
The deposit rates are influenced by the Discount Rate announced by State Bank at the time of announcing monetary police which is done every quarter.
Furthermore, the rate of return on deposits is also linked with Treasury bill rates (T-Bills) and rates of Pakistan Investment Bonds (PIBs). T- Bills are floated by the State Bank to finance short-term gaps between government receipts and expenditure. Pakistan Investment Bonds (PIBs) are issued by the government to borrow in the long-term. The rates of PIBs 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 debtors, along with the projected rate of return to the depositors and interest or mark-up rates for the debtors. 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:

1)Notice Account - repayable after a notice period of seven days, or 29 days, etc. Such account is repayable in the future. The condition is that the customer has to give a written notice to the bank seven days or 29 days before the date the customer needs the money depending upon whether the deposit is on 7 days’ notice or 29 days’ notice.

2)Term Deposit Account - repayable after a fixed time ranging from one month to 10 years or even longer. Profit on such deposits is payable either at maturity or yearly, half yearly, quarterly or monthly as per contract.

3.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 other hand outs).

4.PLS Savings Account (PLS means Profit and Loss Sharing Basis)
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. Initial deposit and minimum balance requirement features can be decided by each bank as per their own policies. 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 30 days prior to the Zakat valuation date.

Different banks have introduced different variation products of saving accounts for individuals and eligible institutions where profit is paid bi-annually. Zakat rules for these accounts are similar to that of the normal saving accounts.

In the past Banks used to pay a very small percentage as profit/interest on Savings Accounts. As per BPRD circular no 7 dated 30th May 2008, SBP has instructed all banks to pay a minimum of mandatory 5% profit to their saving account holders. Please note when rate is quoted without mentioning the period for example per month or per quarter, it means the rate of profit per year.

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. There shall be no condition of maintaining a minimum balance for these accounts. 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 of 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 shared with the account holders at the time of opening of the account.

5)Basic Banking Accounts (BBA)
Government of Pakistan has been keen on the documentation of the economy so that the economic data available from the financial institutions helps the state in formulating policies and increasing the tax base of the country. This can be achieved if all the people have bank accounts and instead of cash transactions, everybody uses the banks for their buying and selling and other monetary transactions.

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 profit is paid on the balance in this account.
• 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.

6)PLS Term Deposits
Term deposits are the deposits repayable after a predetermined future date. Such deposit transactions may be for a period ranging from one month 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.
• Tax / withholding tax shall be recovered as per law of the land on profit disbursed.(Withholding tax is applicable on all types of accounts where the bank pays profit including savings accounts. Tax rate is 10% on profit.)
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.

7)Cash Management Account

There are three types

A) Simple 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 which is usually in overdraft. The remittances are effected 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. Example PSO cash management account for Petrol pumps proceeds. PSO has an overdraft facility in a Karachi The petrol pumps get proceeds of PSO petrol from vehicle users. Petrol pumps all over Pakistan deposit proceeds in branches geographically close to them. The computer module remits all the amounts to the overdraft facility account at Karachi with advices to all concerned. In this way PSO saves on interest costs as the proceeds of collections are efficiently pooled to reduce the overdraft.

B) Non Discretionary Wealth/Cash Management Account
Through such accounts banks provide the following services.
The customer opens account and enters into an agreement with the bank where the customer deposits funds in the account. Customer makes decision and instructs the bank to invest designated sums in bank deposit schemes, in equity shares, in mutual funds, in bonds issued by private institutions, and/or in securities issued by the government like Treasury Bills, Pakistan Investment Bonds. In return for a fee the bank does all the paper work, invests the funds as desired on behalf of the customer, collects profit, sells the investments when requested. The bank does all the donkey work in the process. The bank handles all the periodical profit and capital gains the Customer earns for the customers account.

C) Discretionary Wealth/Cash Management Account.
The bank and customer enter into an agreement whereby the customer deposits his amount and gives discretionary authority to the bank to invest the amount in securities / avenues as chosen by the investment experts of the bank. The bank hires capable security analysts who invest the amount in shares, bonds or other investments in their best judgement. The bank performs all the sales, purchases, collections for the customer. All profits and capital gains/losses are passed to the customer.

8)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 addition to this main account, “collection accounts” are opened in other branches from where funds are transferred to the main account as per instruction / arrangement. For example in order to assist the public to donate for the rehabilitation of people displaced by the powerful earthquake in Baluchistan, Prime Ministers Relief Fund has been instituted and collection accounts have been opened in all the commercial bank branches in Pakistan. Amounts credited to these collection accounts are remitted to the Central Relief Fund Account at the disposal of the Central Government.

9)Share Subscription account
When a public limited company floats its shares for subscription, it has to open accounts in banks which are nominated as "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 where the applications were received. The subscription amount relating to the successful share applications remains available at the disposal of the share issuing Company. Once the funds are transferred to the main company account the subscription account is closed.

Cheque Books and Loose Cheques
Issuance of Cheque Book - Opening of an account like current or savings account would necessarily require issuance of a cheque book to enable the account holder to issue payment instructions. The first cheque book should only be issued once all the formalities have been completed for opening of the account and not before that. Subsequent cheque book should be issued on receipt of proper Requisition Slip (from the cheque book issued) duly signed and the signatures verified. The receipt of cheque book should be acknowledged by the account holder.

Issuance of Loose cheques — Though most banks discourage issuance of loose cheques, on some occasions a customer requests for issuance of a loose cheque leaf.

The following precautions should be taken:

i. A loose cheque should only be issued to an account holder, who calls personally and who is intimately known to the Manager or a Senior Officer of the branch for the purpose of drawing money in cash only. Loose cheque cannot be used for third party payments.

ii. Loose cheques should be issued to customers from a new and full cheque book and not from ‘unused cheques’ which are returned by other account holder.

iii. A record of loose cheques issued should be maintained in the cheque Book Issued Register by allocating last few pages of the register for the purpose separately for Current and Savings Deposit Accounts.

iv. Loose cheque should be issued after completion of the following formalities:
a) The party requiring a loose cheque should sign the loose cheque requisition slip which is attested by an officer, who preferably knows him personally and the signature of the account holder is verified by the Officer In-charge, Deposits Department or the Manager after very carefully examining specimen signature of the account holder available on the bank’s record.

b) A stamp bearing the words “Loose Cheque” is affixed on the face of the cheque at the top. Close to the “Loose Cheque” stamp, words “Not more than Rs so and so may be written as a precautionary measure.