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    Internship Report on National Bank of Pakistan

    Submitted By

    Muhammad Ahmad

    Submitted by the Partial fulfillment of the requirement for the degree of Master of

    Business administration

    National University of Modern Languages Islamabad

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    DEDICATION

    My

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    B

    eloved Parents

    ACKNOWLEDGEMENT

    First of all I would like to prostrate Himself in front of ALMIGHTY ALLAH the

    Omnipotent, the Omnipresent, the Merciful, the Beneficial who created us among the

    Muslims and also bestowed and blessed us with such a lucid intelligence as we could

    endeavor our services toward this manuscript. Countless salutations are upon the HOLY

    PROPHET MUHAMMAD (May Peace Be upon Him), the fountains of knowledge, who

    has guided his Ummah to seek knowledge for cradle to grave.

    We feel much pleasure to intend our sincerest gratitude, inspiring cooperation and

    appreciation to our teachers, espically Mr. Kashiffor his keen interest, expert guidance and

    invaluable suggestions during the entire study period and preparation of this manuscript.

    We also want to thank ourHonorable Parents for their inspiration and moral support,

    who taught us the value of hard work by their own example and their encouragement and

    motivation that was given to us to carry out our research work. Words are lacking to

    express our humble obligation to our affectionate and extra caring Parents. We are very

    grateful for the love and support of our parents.

    I am indebted to all the employees of National Bank of Pakistan Abdullah branch fsd

    Special thanks to MR. FAiSAL IQBAL Operation Manager of NBP Abdullah Branch

    Fsd.

    & M Shahid (OG III) and all other employees of the branch for their cooperation

    Finally, I would like to thank all those whose direct and indirect support helped us

    completing our thesis in time and attaining this position.

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    EXECUTIVE SUMMERY

    National Bank of Pakistan is the Public sector financial institution. The National Bank of

    Pakistan was established on 1949, to serve as an agent to the SBP. NBP head office is in

    Karachi. It has 1249 regional branches and 18 overseas branches. NBP is 52% shares

    owned by the Government of Pakistan (GOP). NBP's total assets stood at PKR820 billion

    on mid of 2009. This included total earning assets of about PKR268 billion with gross loan

    portfolio of PKR140 billion. The bank also has an investment portfolio of PKR171 billion,

    which comprises treasury securities, corporate bonds, shares and other securities.

    This report is based on internship in National Bank of Pakistan branch name. It is a famous

    and reputed bank of Pakistan. National Bank of Pakistan maintains first position in

    banking sector in Pakistan.

    This report is based on the activities which are performed in this bank. This report contains

    Banking services, competitive analysis, SWOT analysis, bank tariffs and exchange rates of

    National Bank of Pakistan. There are also stated the activities which I performed during

    my internship in the branch. In this report I also discuss the industry analysis of banking

    system in Pakistan. During the internship I was observed the jobs task of the employees

    and at the we find him a lot of problems at the management level.

    So I Have mentioned all the problems from which the branch has been suffered have given

    the suggestion who can they solve branch problems? There are also mentioned the way of

    investment, rates of investment, all types of financing and loans facilities the National

    Bank of Pakistan provides. The problems in this branch are also discussed. This report also

    intimates about the daily reserves which are required by the branch to meet the need of itsdaily transactions.

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    TABLE OF CONTENT

    Chapter No 1 Introduction of Study

    Background of Studies ..........9

    Purpose of Study...........9

    1.3 Scope of Study...

    .........9

    1.4 Research Methodology..........10

    Chapter No 2 Evaluations of Banks

    2.1 Definitions of Banks .......,..13

    2.2 Evaluations of Banks in Pakistan .......14

    2.3 Banking Growth in Pakistan (1948-1970)..15

    2.4 Banking Reforms 1972 .....19

    Chapter No 3 Nationalization of Banks

    3.1 Islamization of Banking.........,...26

    3.2 Disinvestment & Deregulation of Banking 1991 .........27

    3.3 Interest free Banking ....................27

    3.4 History of NBP .....28

    3.5 Network of Branches ....30

    3.6 Branches Network.....30

    3.7 Branches all over the Country...31

    3.8 Types of the Branches ......32

    3.9 Objective of NBP .....33

    3.10 Extension of loan ......33

    3.11 Functions of NBP .....34

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    3.12 Unmatched Banking Facilities .........36

    3.13 Mission Statement ..........37

    3.14 Core values of NBP ......38

    3.15 Objectives & Goals of NBP .....39

    3.16 Board of Directors ....40

    3.17 Senior Management .....41

    3.18 Organization Hierarchy .......42

    Chapter No 4 Services of NBP

    4.1 Demand Draft......,...46

    4.2 Swift System... ...46

    4.3 Letter of Credit. .............47

    4.4 Travreller Cheques..........47

    4.5 Pay Order.. .....47

    4.6 Mail Transfer..47

    4.7 Foreign Remittance........48

    4.8 Short Term Investment..........48

    4.9 National Income Daily Account (NIDA).....49

    4.1 Quality Investment....49

    4.11 Commercial Finance..50

    4.12 Rade Finance and Other Loans.....50

    4.13 International Banking...53

    4.14 Cash and Gold. ...........53

    4.15 Advance Salary ...54

    Chapter No 5 Departmentaion in NBP.

    5.1 Cash Department......,....57

    5.2 Clearance Department....... .......61

    5. 3 Advances Department................62

    5.4 Remittance Department.............68

    5.5 Deposit Department.......70

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    5.6 Foreign Exchange Department...........74

    Chapter No 6 Human Resource Management

    6.1 Human Resource Management...........,...80

    6.2 Human Resource Mission... .......81

    6.3 Human Resource Values.............81

    6.4 HR Forum........81

    6.5 Induction of MTO.......82

    6.6 Job for Life.......82

    6.7 Selection and Recruitment.......83

    6..8 Performance and Appraisal..........84

    Chapter No 7 SWOT Analysis

    7.1 Strength ...,...86

    7.2 Weakness.. ..,...88

    7.3 Opportunities.............89

    7.4 Threats..............90

    7.5 Competitive Analysis.............91

    Chapter No 8 General Observation

    8.1 Branch Problems Analysis....,...94

    8.2 Functional Analysis..... ....,...95

    8.3 Administrative Analysis...........96

    8.4 Personal Management Analysis..........................................................................................................................................98

    Chapter No 9 General Suggestion

    9.1 General Suggestion....,...102

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    CHAPTER 1

    INTRODUCTION OF STUDY

    1.1 Background of Studies

    As part of the academic requirement for completing MBA (Marketing)) Master Business

    Administration of the students are required to under go six months of internship with an

    organization. The internship is to serve the purpose of acquainting the students with the

    practice of knowledge of the discipline of banking administration.

    This report is about National Bank Pakistan. NBP was established in 1949 and since then,

    it has expended its network, becoming the largest commercial Bank of the country. It

    offers different products of services to its customers.

    Purpose of the Studies

    The main of the study in hand is together relevant information to compile internship report

    on National Bank of Pakistan.

    To observe, analyze and interpret the relevant data competently and in a useful manner.

    To work practically in an organization.

    To develop interpersonal communication.

    Scope of Studies

    As an internee in National Bank of Pakistan the main focus of my study research was on

    general banking procedures in one of the branches of NBP. These operations include

    remittances, deposits, advances and foreign exchange. Similarly different aspects of overall

    of NBP are also covered in this report.

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    Research Methodology

    The report is based on my two months internship program in National Bank of Pakistan.

    The methodology reported for collection of data is primary as well as secondary data. The

    biggest source of information is my personal observation while working with staff and

    having discussion with them. Formally arranged interviews and discussions also helped me

    in this regards.

    Primary data:

    Personal observation

    Interviews of staff

    Secondary data:

    Manuals

    Journals

    Magazine

    Annual reports

    Internet

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    CHAPTER # 2

    EVOLUTION OF BANKS IN PAKISTAN

    There are different opinions that how the word Bank originated. Some of the authors

    opinion that this word is derived from the word Bancus or Banque, which means a

    bench. The explanation of this origin is attributed to the fact that the Jews in Lombard

    transacted the business of money exchange on benches in the market place; and when the

    business failed, the people destroyed the bench. Incidentally the word Bankrupts said to

    have evolved from this practice.

    Some of the authors are of opinion that the word Bank is derived from the German word

    back, which means joint stock fund. Later on when the German occupied major part of

    the Italy the word Back was italicized into Back.

    In fact human left the need of bank when it begins to realize the importance of money as a

    Smedium of exchange. Perhaps it where the Babylonian who developed banking system as

    early as 2000 BC. At that time temples were used as banks because of their prevalent

    respect. During the rule of king Hamurabi (1788 1686 BC) the founder of Babylonians

    Empire, loans were started being granted for interest. The borrower has to provide

    guarantee or he had to pledge his goods or valuables. King Hamurabi drew up a code

    wherein he laid down standards rules for procedures for banking operations by temples and

    great landowners. Also in Greece, the temples were used as banks, where the people

    deposited their money and other valuables for safe custody and security. In Europe with

    the revival of civilization (Renaissance) in the middle of twelve century, trade and

    commerce started expanding and this development compelled the business community to

    borrow the money from the Hebrew money lenders on high rates of interest and usury.

    Seeing the great demand, these moneylenders started organizing themselves and bank

    started up at the principle seaports of southern Europe. Soon Venice and Geneva became

    the most important money markets of the time and banking though different from its

    present form, flourished. What we know as modern banking originated in the 14 th century

    in Barcelona.1

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    2.1 Definitions of Bank

    Bank

    "A financial institution, which deals with money and credit. It accepts

    Deposits from individuals, firms and companies at a lower rate of

    Interest and gives at higher rate of interest to those who need them .2

    A financial establishment which uses money deposited by customers for investment, pays

    it out when required, makes loan at interest, exchanges currency, etc.

    J.W Gilbert in his principles and practice banking defines a banker in these words:

    A banker is dealer in capital or more properly, a dealer in money. He is intermediate

    party between the borrower and the lender. He borrows of one and lends to another. 3

    Sir John Paget defines banker in these terms:

    That no person or body, corporate or otherwise, can be a banker who does not

    Take deposits accounts.

    Take current accounts,

    Issue and pay Cheques and

    Collect Cheques crossed and uncrossed for his customers4

    The American defined the term banker in a very broad sense as under:

    By banking, we mean the business of dealing in credits and by a Bank we include

    every person, firm or company having a place of business where credits are opened by

    deposits of collection of money or currency. Subjects to be paid or remitted on Cheques or

    order, money is advanced or loaned on stocks, bonds, bullion, bill of exchange, promissory

    notes are received for discount or sale.5

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    2.2 Evolution of Banking in Pakistan

    The first phase in evolution of banking in Pakistan sees very hard days for the whole

    banking sector. Starting virtually from scratch in 1947, the country today possesses a full

    range of banking and financial institutions to cope with various needs of the economy.

    The area now constituting Pakistan was, relatively speaking, fairly well provided with

    banking facilities in undivided India, in March 1947 there were 3496 offices of Indian

    scheduled banks out of which as many as 487 were situated in territories now constituting

    Pakistan.

    The Reserve bank of India was the central banking authority in India. At the time of

    partition it was decided that in the interest of smooth transition it should continue to

    function in newly emerging state of Pakistan, until 30th Sep.1948.

    In 1947 due to uncertainty and unsuitability the banking sector suffer heavy losses.

    This resulted in a negative effect on baking service in Pakistan. The banks, which had their

    registered offices in Pakistan, transferred them to India. In an effort to bring about the

    collapse of the new state by pushing a deliberate policy of withdrawals the Indian bank

    offices closed quickly. Those banks, which stayed, operated only in name pending the

    winding up of their business. The number of scheduled banks thus declined form 487

    branches before independence to only 195 branches by 30th June1948.5

    2.3 Banking Growth during (1948-1970)

    In this tense situation, a committee was immediately setup to formulate a scheme of central

    banking legislation for Pakistan. Many specialists were of the opinion that in view of the

    acute shortage of trained staff, any idea of establishing a central bank was I impractical and

    the best that could be attempted was the setting up of a currency board until such times as

    sufficient staff could be organize to operate a central bank.

    The questions as to whether the institution should be only a currency board or a full-

    fledged central bank had exercised the mind of the Pakistan government since

    independence. Through, it was realized that the shortage of trained personal to run the

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    central bank would present serious difficulty in view of the tangible advantages that a

    central bank enjoyed over currency board, the government ultimately decided to take the

    bold step of setting up a full fledged central banking authority. Among other factors,

    which led to this decision, there was the fact the banking facilities in the country had been

    totally disrupted and there was an urgent need for their rehabilitation, which a central ban

    alone could meet. As there was hardly any time to pass as Act, an order was drafted,

    known as the state bank of Pakistan order, which was promulgated by the government of

    Pakistan on 12th may 1948. The state bank declared open on July 1 , 1948 by the father of

    the nation.

    One of the first tasks of the state bank was to arrange for the replacement of the Reserve

    bank of India notes, which had continued to circulate in Pakistan during the transitional

    period, by Pakistan currency.

    The first Pakistan notes were issued in October 1948 in the denominations of Rs. 5, 10 &

    100.

    An equally urgent task, which the new central bank had to address itself, was the creation

    of a national banking system. To this end, while extending every help and encouragement

    to Habib Bank to expand its organization, the state bank recommended the setting up of a

    new banking institution to serve both as an agent to the state bank recommended the

    setting up of a new banking institution to serve both as an agent of the state bank as well as

    the spearhead of its credit polices.

    Accordingly the NATIONAL BANK OF PAKITSN was setup under an ordinance in

    November 1949. It started with six offices in the former East Pakistan. In view of the

    special role assigned to the new institution, contrary to traditional practices the Governor

    of the state bank was appointed to head its board of Director in 1950. Under the fostering

    care of the state bank and the support of the government, the new institution developed

    rapidly. By using its special powers, the state bank made liberal advances to the new bank

    to help it expand credit facilities in the country. By 1952, the National bank of India.

    Shortly, afterwards, in November 1952, the governor of the state bank ceased to function

    as the president of National bank of Pakistan.

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    With a view to broadening the institutional framework of the financial system, the state

    bank also sponsored the establishment of specialized credit institutions in the filed of

    agriculture and industry. Banking companies (control) act was passed in December 1948

    specifically empowering the state bank to control the operations of banking companies in

    Pakistan.

    Moreover realizing that the most serious limitation on the expansion of banking services in

    Pakistan was the lack of trained personal, the state bank sponsored a banking training

    scheme, which was repeated after year and turned out a large number of bankers.

    As the Commercial Banking facilities continued to expand, a new Pakistani bank, the

    National Commercial Bank was established and registered as a scheduled bank. In the filed

    of industrial finance a new institution known as the industrial credit and investmentcooperation was set up.

    The year 1958 marked the completion of the first decade of the working of the State Bank

    of Pakistan. When it was established there were only 195 bank offices in existence. At the

    end of June 1958 their number had increased to 307, of which Pakistani banks accounted

    for 232 against 25 in mid 1948. Moreover at the end of June 1958. Pakistani banks held

    60% of the total banks deposits, and were responsible for 65 of total bank credit.

    When the Ayub Government took over in 1958, the banking and monetary scene was

    significantly affected by Developments such as the liberalization of imports, transfer of

    business in food grains to the private sector, and the firming up of commodity markets.

    The demand of funds picked up and there was a substantial expansion of bank credit to the

    private sector. The pace of expansion in the institutional frame work of the countrys

    banking system quickened and a new Pakistani, bank, namely the United Bank Limited

    was established.

    Owning the five years 1960-65, the credit structure in Pakistan made rapid progress. The

    bank extended its network by opening six new offices located at Chitagong, Peshawar,

    Quetta, Khulna, Layallpur and Rawalpindi. The number of scheduled bank offices rose

    from 430 at the end of June 1960 to 1591 in June 1965. Several new banks were added to

    the list of scheduled banks.

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    Two principal additions were the commerce bank, and the standard bank. The number of

    scheduled banks, which stood at 29 in June 1960 rose to 36 by June 1965.

    Under the impact of economic growth and dear scope of private enterprises, bank credit to

    the private sector rose from Rs. 1,458 millions to Rs. 5759 million. Thus the total

    expansion in bank credit to the private sector during this period amounted to Rs. 4300

    million, which gave a annual expansion of Rs. 860 million compared to the annual average

    increase of Rs. 144 million over the preceding five years. Banks deposits increased from

    Rs. 2,493 million to Rs. 6883 million during the five years period ended June 1965

    compared to Rs. 231 million in the proceeding five years. Time deposits during this period

    increased from Rs. 946 million to Rs. 3228 million, where demand deposits rose from Rs.

    1997 million to Rs 3655 million. The increase in time deposits was particularly rapid. The

    ratio of time deposits to total deposits in June 1965 stood at 49.6 percent age as against

    32.01 percent age five years earlier. Another salient feature of banking development during

    this period was that since the rate of increase in bank deposits lagged behind the rate of

    expansion in bank credit, the banked has to depend increasingly on central bank finance.

    They borrowing from the state bank rose from Rs. 11 million in June 1960 to Rs. 1688

    million in June 1965. Owing keen demand for bank credit, banks investments could not

    increase as rapidly as their advances. Their investments totaled to Rs. 1,874 million at the

    end of June 1965 compared to Rs. 1,231 million in June 1960. Investments which werealmost equal to their advances in June 1960 were only about one third of the advances in

    June 1965.

    The third plane period witnessed a further expansion of banking facilities in the country the

    total number of scheduled banked offices increased from 1,591 at the end of June 1965 to

    3133 at the close of June 1970. During the same bank credit to the private sector rose from

    Rs. 5,789 million to Rs. 9492 million. There was also a substantial growth in the bank

    deposits, which increased from Rs. 6883 million June 1965 to Rs. 13147 million at the end

    of June 1970. A remarkable change occurred during this period related to the composition

    of deposits. Time deposit becomes greater than demand deposits forming about 54 percent

    age of the total deposits. As oppose to what happened in the previous period, banks were

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    able to finance a mush higher level of credit expansion without having to increase their

    borrowings from the central bank.7

    2.4 Banking Reforms 1972

    After the assumption of office by a new government in 1971, may 1972 different reforms

    were introduced to make the banks more responsive to the requirements of economics

    growth with social justice. The reforms aimed at bringing about a more purposeful and

    equitable distribution of bank credit, improving the soundness and efficiency of the banks,

    and securing greater social accountability of the banking system as a whole.

    The role of the banking system had been truly spectacular in mobilizing savings of the

    community and meeting the credit needs of the economy. But at the same time, the banks

    had generally neglected their role in promoting social justice and had failed to play an

    effective role in ensuring a wider and more equitable dispersal of the benefits of economic

    growth. In particular the inter locking of ownership with commercial and industrial

    interests had led to the misuse of bank resources. There was a heavy concentration of credit

    in big accounts and in urban area. Credit facilities for agriculture, small business, newly

    emerging exports and housing had remained obviously inadequate while the banks

    indulged in capital financing in few selected business sectors and issued guarantees on

    behalf of favored clients, term clients, term financing facilities for industry were wholly

    absent.

    Under the banking reforms introduced in May 1972 the state bank of Pakistan was

    accorded wider powers. It was authorized to remove directors or managerial personnel, if

    necessary and supersede the board of directors of a banking company and appoint

    administrators during the period of such super session. It was also empowered to nominate

    directors on the board of every bank. As regard bank directors, it was provided that anyone

    defaulting in meeting his obligations to bank would forfeit his directorship. Moreover, it

    was laid down that no person could serve as director of a bank for more than six years

    continuously. Each bank was required to have a paid up capital of not less than 5 percent

    age of its deposits to be progressively build up to 10 percent age over a period of time. The

    banks were also required to transfer 10 percentage of their profit their reserves every years

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    after the reserve became equal to the paid up capital. With a view to diversity the

    ownership of the banks, the banks were required to raise new capital from the market.

    Unsecured loans to directors, their families or firms and companies, were totally

    prohibited.

    The bank reforms also brought about the establishment of new institutions to achieve new

    objectives.

    A national credit consultative was setup under the supervise of the state bank with

    representation form the government and the private sector. It was assigned the task of

    determining of economys annual credit needs within the safe limits of monetary and credit

    expansion with reference to the annual development plan. Such a credit plan was to cover

    the public and private sectors. Alongside the National credit council and AgriculturalAdvisory Committee was formed to allocate agriculture credit for various purposes, to

    coordinate the operation or the agriculture credit agencies and to oversee the flow of credit

    to the designated targets. A standing committee on exports in general and the new

    emerging exports in particular, was also established. With a view to encourage the banks to

    extend credit to small borrowers, a credit guarantee scheme was introduced under which

    the state bank under took to share any bonfire losses incurred by the commercial banks in

    case of small loans of advances to agriculture.

    At the same time two financing institutions were established. The peoples Finance

    Corporation was designed to provide finance to people of small means while the National

    Development Finance Corporation was setup of finance public sector owned and managed

    industries and enterprises.8

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    CAHAPTER # 3

    NATIONALIZATION OF BANKS (1974)

    The banking reforms turned to be transitional and interim step and when they were hardly

    eighteen months old the government nationalized the banking systems, with the following

    main objectives.

    To enable the government to use the capital concentrated in the hands of a few rich bankers

    for the rapid economic development of the country and the more urgent social welfare

    objectives.

    To distribute equitably credit too different classes sectors and regions.

    To coordinate the banking policies in various area of feasible joint activity without

    eliminating healthy competition among banks.

    The act passed for the nationalization of banks is known as the banks Nationalization Act

    1974.

    Thus under this act the state bank of Pakistan and all the commercial banks incorporated in

    Pakistan and carrying business in or outside the country were brought under government

    ownership with effect from Jan 1, 1974. The ownership, management and control of all

    Pakistani banks stood transferred to and vested in the Federal government. The

    shareholders were provided compensation in the form of federal government bonds

    redeemable at par anytime within the period of fifteen years. Under the Nationalization act,

    the Chairman, Directors and Executives of various banks, other than those appointed by

    federal government were removed from their offices and the central boards of the banks

    and all local bodies were dissolved. Pakistan banking council was established to coordinatethe activities of the Nationalized Commercial banks. At the time of Nationalization on

    December31, 1973 there were following 14 Pakistani commercial banks with 3323 offices

    allover Pakistan and 74 offices in foreign countries:

    National banks of Pakistan

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    Habib bank limited

    Habib bank (overseas) limited

    United bank limited

    Muslim commercial bank limited

    Commerce bank limited

    Standard bank limited

    Australia bank limited

    Bank of Bahawalpur limited

    Premium bank limited

    Pak Bank limited

    Sarhad bank limited

    Lahore commercial limited

    Punjab provincial co-operative bank limited

    The Pakistan banking council prepared a scheme for the recognition of banks. The bank

    (amalgamation) scheme 1974 was notified in April, providing for the amalgamation of the

    smaller banks with bigger ones and following the five units in there phases:

    National bank limited

    Habib bank limited

    United bank limited

    Muslim commercial bank limited

    Allied bank of Pakistan limited

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    The first phase was completed on 30 th June. 1974. When the bank Bahawalpur was merged

    with the National Bank of Pakistan. The premier Bank Limited with Muslim Commercial

    Bank limited and Sarhad Bank Limited and Pak bank limited and renamed as Allied Bank

    of Pakistan limited.

    The second phase was completed on 31st Dec.1974, when the commerce bank limited

    merged with the United Bank limited.

    The third and the final phase were completed on 30th June, 1975 when the standard bank

    limited was merged with Habib Bank limited.

    The nationalization was very smooth and gave very positive results.

    The number of branches, which stood at 3397 on Dec31, 1973, reached on 7661 by end

    June 1992. The bank deposits which stood at Rs. 1925 corers at the end 1973 reached the

    highest mark about 323 corers.1

    3.1 Islamization of Banking

    Another major development in the history of Pakistan Banking System was the introduced

    of interest free banking in selected Commercial Banks with effect form Jan1, 1981. This

    followed the effort to eliminated interest from the operation of Nation investment trust, theHouse Building Finance Corporation of Pakistan. Certain amendments were made in

    banking and other laws with the object of ushering in a new system of banking, which

    would confirm of Sharia. A new law Modaraba Companies Ordinance 1980 was

    promulgated. Separate interest free counters began to operate in all the nationalized

    commercial banks free counters began to operate in all the nationalized commercial banks.

    The state bank provides finance against participation term certificate and also against

    promissory notes supported by Modaraba certificate.

    In order to cover interest free transactions certain banking definitions such as creditors,

    debtor, and advances credits and deposits were revised. Stipulations concerning form of

    business in which banking companies may engage may also have been modified schemes

    were introduced to provide interest free loans to formers and deserving students.

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    A private Limited Company named as Bankers Equity limited was incorporated in 1979 to

    provide financial assistance to the industrial sector primarily on interest free basis.

    A scheme to extend interest free productive loans to farmers and fisherman has also been

    introduced. Instead of interest, a system based on mark-up in price, exchange rate

    differential, and profit and loss sharing accounts were introduced.

    Different financial schemes introduced in the Islamization process are: 2

    Musharika Financing.

    Hire Purchase Financing.

    Modaraba Financing.

    Specific Purpose Modaraba.

    3.2 Dis-Investment and Deregulation of Banking 1991

    When it was realized that the role of public sector in the economy is over extended and the

    banking sector has more earning potential in the private sector the process of privatization

    banking sector restarted in 1991 by the Muslim League Government. Muslim Commercial

    Bank was Dis-invested in to two phases while ABL was sold to its employees. Since then

    allot of investment is being made in the banking sector and several new banks were

    established and still the process is going on. Now only NBP is government bank other than

    SBP. The performance of this bank will be analyzed and judged in the following chapters.

    3.3 INTEREST FREE BANKING

    A new concept of interest free banking was introduced in 1981 and by now it has been

    established on sound footing and new trends and techniques are being implemented to

    make this system result oriented. New products and their systematic consumption are

    making Pakistani banking comparable to their several modern counterparts anywhere in

    the developed world.

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    3.4 HISTORY OF NBP:

    The NBP was established vide NBP Ordinance No. XIX of November 9. 1949.

    British Govt. devalued its currency in September 1949, India devalued its rupees but

    Pakistan did not. It led to a crisis in trading between the two countries and India refused to

    lift the Pakistan Jute. To solve this problem i.e. to export jute NBP was established through

    an Ordinance of GOP. National Bank of Pakistan maintains its position as Pakistan's

    premier bank determined to set higher standards of achievements. It is the major business

    partner for the Government of Pakistan with special emphasis on fostering Pakistan's

    economic growth through aggressive and balanced lending policies, technologically

    oriented products and services offered through its large network of branches locally,

    internationally and representative offices.

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    The Bank in 1950 had one subsidiary The Bank of Bahawalpur on December4, 1947 by

    the former Bahawalpur State.

    NBP was undertaking Treasury Operations and Managing Currency Chests or Sub Chests

    at 57 of its offices where the turnover of the business under the head amounted to Rs.2460

    million.

    i) Deposits held by NBP constituted about 3.1% of total deposits of all

    Pakistani Banks in 1949, which rose to 38% in 1952.

    ii) Growth in Deposits was accompanied by increase in Bank portfolio in advances.

    NBP lent out to Textile, Yarn, Iron and Steel and played a pioneer role in support of

    agriculture and commerce.

    iii) NBP advances reached Rs.554.4 million by December 1959, which was one third

    of the total schedule bank credit.3

    \

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    3.5 Net Work of Branches:

    NBP have wide range of branches inside the country and outside the country.

    In Pakistan it has 29 regional offices, 1249 Branches and 6 Subsidiaries.

    In overseas it has 18 overseas branches, 11represative offices and 1 subsidiary branches

    Oversea Branches

    Domestic Branches

    18 Overseas Branches

    11 Represative Offices

    1 Subsidiary

    29 Regional Offices

    1,249 Branches

    6 Subsidiaries

    3.6 Branch Network:

    NBP has an extensive domestic branch network of over 1500 branches located all over

    Pakistan. The Bank also has a presence in 24 international locations including the USA,

    United Kingdom, Europe and the Far East.

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    3.7 Branches all over the Country

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    3.8 Types of branch in NBP

    There are three types of Branches in all over Pakistan of NBP

    1. Online branches:

    The branches, which are directly, link with central computer AS-400, through wide

    area networking through fiber optics. These branches have dumb terminal directly linked

    with central computer. Yet only forty-four branches all over Pakistan are online. Of these

    forty-four, seventeen are located in Karachi, seven in Lahore, two in Islamabad and two inMultan and two each in other regional head offices.

    2. Batch Branches:

    The branches where all transactions are carried out with the computer base system

    but these branches are not connected to the central computer with wide area net working.

    Batch branches are using three type of system, Branch Back Office (BBO) based onFoxPro, Branch Automated System based (BAS) on UNIX, Branch Integrated System

    (BIS) based on FoxPro in Karachi mostly branches are facing this problem. BAS was

    establish in the beginning while BBO is currently implemented now efforts are under way

    to convert all branches into Electronic Banking System (EBS) which is used by online

    branches as this system does not require a person to remain sitting till the branch closed its

    daily operation but the system automatically close it self when the branch timing is over.

    The database in head office is also based on this system.

    3. Manual Branches:

    The branches where all transactions are carried out manually and records are

    maintained on registers usually stored in big wardrobes.

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    All branches in Pakistan report to there regional head office regarding there daily

    transaction. In the RHO through On Line, terminal data goes to head office central

    computer; Except for branches those are On Line as they transfer there daily data directly

    through there own terminal. As day-to-day, activities of all branches are recorded in a

    central computer.

    3.9 Objectives of NBP

    National bank of Pakistan is also a commercial organization and its main objective is profit

    maximization. This is achieved in two ways:

    1. By increasing deposits.

    2. By charging interest on loans provided to the private sector and business

    community.

    3.10 Extension of loans:

    The profitability of a bank largely depends on the amount given to people as loan and the

    type of people to whom credit is given i.e. the credit worthiness of the borrowers. This

    strategy has worked quite well for NBP. Deposits are collected from the people and

    invested in different projects. NBP prefers to give loans to financially sound and reliable

    parties, after securing the collators. NBP has an extremely well organized section. The staff

    is adequately trained, and educated and competent. They carry out extensive financial

    analysis before deciding on the loan. Interest charged on the loans potentially contributes

    to higher profits.

    Some of the other objectives of NBP are:

    i. Improve customer services.

    ii. Quick disposal of credit cases.

    iii. Efficient operation of the branches.

    iv. Better Public Relations.

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    v. Operational and advisory services for foreign exchange accounts activities

    3.11 Functions of NBP

    Since NBP is a commercial bank, it performs a variety of functions.

    Like other commercial banks, NBP is engaged in financing international trade. Its other

    major functions include receiving deposits, advancing loans and discounting of exchange.

    The functions performed by NBP are:

    3.11.1 Accepting Deposits

    This function is important because banks largely depend on the funds deposited with them

    by its customers. Deposits are of many types:

    i. Current deposits

    Current deposits are also called demand liability on current deposits. NBP pays practically

    no interest on current deposits. Businessmen usually open current accounts. In NBP

    current account can be opened with a minimum amount of Rs.500/-.

    ii. PLS saving deposit

    Profit and loss sharing deposits (PLS) are also called checking accounts. One can deposit

    and draw money easily. Profit on PLS is calculated every month but paid after six months.

    PLS account can be opened with a minimum amount of Rs.500/-

    iii PLS term deposits

    Fixed term deposits are deposits with the bank for certain fixed period before the expiry of

    which they cannot be withdrawn unless giving due notice. In this case the rates of profit

    will be different depending upon the time period.

    3.11.2. Discounting bills of exchange

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    Discounting of bill is practically speaking lending for exchange at their market rate i.e. it

    pays to holder of the bill an amount equal to the face value after deducting interest at the

    current market rate for the period. This bill has to be mature. This is the common way used

    for keeping a part of assets of the bank in a liquid form.

    3.11.3. Agency service

    NBP also provides best and unique service to its valued customers. NBP provide the

    following agency services to the customers:

    i. Collection of dividends

    As NBP deals with the purchase and sale of various types of securities, therefore NBP also

    provide dividend or interest earned on share or bonds or invested money.

    ii. Collection of Cheques

    In the collection and payment of Cheques, bills and promissory notes etc. National bank of

    Pakistan acts as an agent for its customers.

    iii. Acting as an agent

    NBP also acts as an agent correspondent or representative for its customer at home or

    abroad.

    iv. General utility services:

    Utilities provided by NBP are as follows:

    a. Clearance of utility bills

    NBP provides the service of clearing the utility bills i.e. electricity, gas and telephone billsof its customers. For this purpose it also provides evening banking services.

    b. Lockers facility

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    National bank of Pakistan also provides locker facilities to its customers to keep their

    valuable assets in it. The charges of different size of lockers are different.

    c. Acts as a referee

    NBP provides useful services to its customers by acting as a referee to their credit

    worthiness.

    d. Supply of information

    NBP provides operational and advisory service for foreign exchange accounts/activities.

    3.12 Unmatched Banking Facilities

    Deposit security, Guaranteed by Government of Pakistan.

    Highest rates of return to attract the savings.

    Lowest rates on exports and other borrowings.

    Largest contribution towards Government and Semi-Government requirements.

    Agents of the SBP handling Treasury Functions, receipts of Taxes & other

    Revenues.

    Handling of salaries & pensions of federal/provincial/defense personnel.

    Utility Bills collections.

    Hajj arrangements.

    Sale and encashment of prize Bonds.

    Sale and encashment of Defense Savings and Special Savings Certificates.

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    Safe Deposit Lockers for customers.

    Rational Human Resource Management.

    The prestigious periodical The Banker UK recognized NBP as the best bank for 2001-

    2002 and NBP is the bank of the year for 2003-2004 of Pakistan.

    i. AAA rating awarded JCR-VIS Credit co. Ltd and affiliated of Japan Credit Rating

    Agency for 2001.

    ii. AAA+1 rating awarded JCR-VIS Credit Co.Ltd and affiliated of Japan Credit

    Rating Agency for 2002

    3.13 NBP at the forefront of Pak-Afghan trade

    i. Booth at dry port Peshawar

    ii. Booth at Pak Afghan border (Torkham) NWFP

    iii. Booth at Pak Afghan border (Chamman).Baluchistan.

    iv. Establishing branch at Kabul in near Future.11

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    MISSION STATEMENT

    To make the Bank complete and competitive with all international

    Standard in performing, quality of, operations, staff, financial strength . And products and

    services to develop a culture of excellence in every spare of activity of the bank4.

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    CORE VALUE

    The bank will develop the highest standards of integrity, institutionalizing

    team work and performance culture, Excellence in serives, advancement of skills for

    tomorrows challenges and provide awareness of social and community responsibility and

    value creation for all stakeholders.

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    GOALS AND OBJECTIVES

    To be the pre-eminent financial institution in Pakistan and achieve market recognition

    both in the quality and delivery of service as well as the range of product offerings.7

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    BOARD OF DIRECTORS

    TABLE 1

    NAME DESIGNATION

    Syed Ali Raza Chairman & President

    Mian Kausar Hameed Director

    Mr. Ibrar A. Mumtaz Director

    Mr. Tariq Kirmani Director

    Mr. Mohammad Ayub Khan Tarin Director

    Mrs. Haniya Shahid Naseem Director

    Mr. Ekhlaq Ahmed Secretary Board of Directors

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    SENIOR MANAGEMENT

    Management is a distinct process consisting of activities of planning, organizing, actuating

    and controlling performed to determine and accomplish stated objectives with the use of

    human being and other resources.8

    The management has two types.

    1- Centralized.

    2 -Decentralized.

    Centralized Management tends to concentrate decision making at the top of the

    Organization.

    Decentralized disperses decision making and authority throughout and further down the

    organizational hierarchy.9

    NBP have a centralized type of management because all the decisions are taken by the top

    management.

    NAME DESIGNATION Qamar Hussain Chief Operating Officer , Credit Management

    Group

    Dr. Asif A. Brohi SEVP & Group Chief, Operations Group and

    Islamic Banking Group

    Masood Karim Shaikh SEVP & Group Chief, Corporate &

    Investment Banking Group

    Ziaullah Khan SEVP , Special Projects

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    Dr. Mirza Abrar Baig SEVP & Group Chief, Human Resources

    Management & Administration Group

    Amer Siddiqui SEVP & Group Chief, Commercial & Retail

    Banking Group

    Shahid Anwar Khan SEVP & Group Chief, Overseas Banking

    Group

    Muhammad Nusrat Vohra SEVP & Group Chief, Treasury Management

    Group

    Khalid Bin Shaheen SEVP & Group Chief, Remittances

    Imam Bakhsh Baloch SEVP & Group Chief, Audit & Inspection

    Group

    N. B. Soomro SEVP , Special Projects

    Agha Fidaullah EVP/Group Chief, Special Assets

    Management GroupEkhlaq Ahmed EVP & Secretary Board of Directors

    Nadeem A. Ilyas EVP & PSO to President , Group Chief (A),

    Compliance Group

    Atif Hassan Khan Group Chief (A), Information Technology

    Group

    Aamir Sattar SVP, Divisional Head, Financial Control

    Division

    Ali Hassan SVP-Head PMO-CBA / Chief Information

    Security Officer

    ORGANIZATION HIERARCHY IN NBP

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    The organization hierarchies in the NBP From top to bottom are as follows

    President

    SEVP

    EVP

    SEVP

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    SVP

    VP

    AVP

    OG-I

    OG-II

    OG-III

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    CHAPTER NO 4

    SERVICES OF NATIONAL BANK OF PAKISTAN

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    SERVICES

    Services are outputs of the firm which are in intangible form.

    NBP offers the following services which are as follows.

    4.1 DEMAND DRAFTS

    If you are looking for a safe, speedy and reliable way to transfer money, you can now

    purchase NBPs Demand Drafts at very reasonable rates. Any person whether an account

    holder of the bank or not, can purchase a Demand Draft from a bank branch.

    4.2 SWIFT SYSTEM

    The SWIFT system (Society for Worldwide Inter bank Financial Telecommunication) has

    been introduced for speedy services in the area of home remittances. The system has built-

    in features of computerized test keys, which eliminates the manual application of tests that

    often cause delay in the payment of home remittances. The SWIFT Center is operational

    at National Bank of Pakistan with a universal access number NBP-APKKA. All NBP

    overseas branches and overseas correspondents (over 450) are drawing remittances through

    SWIFT.

    Using the NBP network of branches, you can safely and speedily transfer money for our

    business and personal needs.

    4.3LETTERS OF CREDIT *

    NBP is committed to offering its business customers the widest range of options in the area

    of money transfer. If you are a commercial enterprise then our Letter of Credit service is

    just what you are looking for. With competitive rates, security, and ease of transaction,

    NBP Letters of Credit are the best way to do your business transactions.

    4.4 TRAVELER'S CHEQUES

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    Travelers cheques are negotiable instruments, and there is no restriction on the period of

    validity of the cheques. Rupee travelers cheque is available at all 700 branches of NBP.

    This can be encashed in all 400 branches of NBP. There is no limit on purchase of this

    cheque. It is one of the safest ways for carrying money.

    4.5 PAY ORDER

    NBP provides another reason to transfer your money using our facilities. NBP pay orders

    are a secure and easy way to move your money from one place to another. And, as usual,

    NBP charges for this service are extremely competitive. The charges of NBP are very low

    all over the Pakistan. It charges Rs 50/- for NBP account holders on issuing one payment

    order. And charges Rs 100/- for NBP non-account holders on issuing one payment order. It

    charges Rs 25/- for students on payment of fees of educational institutions. If some onewant a duplicate of payment order they charges Rs 100/- for NBP account holders and Rs

    150/- for non account holders.

    4.6 MAIL TRANSFERS

    Move your money safely and quickly using NBP Mail Transfer service. And NBP also

    offer the most competitive rates in the market. They charges Rs 50/- exchange rate and RS

    75/- postage charges on issuing mail transfer.

    4.7 FOREIGN REMITTANCES:

    To facilitate its customers in the area of Home Remittances, National Bank of Pakistan has

    taken a number of measures to:

    Increase home remittances through the banking system

    Meet the SBP directives/instructions for timely and prompt delivery of remittancesto the beneficiaries.

    4.7.1 New Features:

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    The existing system of home remittances has been revised/significantly improved and

    well-trained field functionaries are posted to provide efficient and reliable home remittance

    services to nonresident Pakistanis at 15 overseas branches of the Bank besides Pakistan

    International Bank (UK) Ltd., and Bank Al-Jazira, Saudi Arabia.

    Zero Tariffs: NBP is providing home remittance services without any charges.

    Strict monitoring of the system is done to ensure the highest possible security.

    Special courier services are hired for expeditious delivery of home remittances to

    the beneficiaries.

    4.8 SHORT TERM INVESTMENTS

    NBP now offers excellent rates of profit on all its short term investment accounts.

    Whether you are looking to invest for 3 months or 1 year, NBPs rates of profit are

    extremely attractive, along with the security and service only NBP can provide.

    National Income Daily Account (NIDA)

    The scheme was launched in December 1995 to attract corporate customers. It is a current

    account scheme and is part of the profit and loss system of accounts in operationthroughout the country.

    4.9.1 Salient Features:

    Rs 2-million is required to open an account and there is no maximum limit.

    Profit is paid on half yearly basis on monthly balances.

    The rates of profit vary according to the slabs of deposit. On Deposits of Rs.2

    million to 2,000 million, the rate fluctuates from 1.4 to 1.75

    It is a checking account and there is no limit of withdrawals.

    4.9.2 Rates on NIDA

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    From Rs 2/- million to Rs 50/- the rate is 1.4%.

    From Rs50/- million but less than Rs 500/-million, the rate is 1.5%.

    From Rs 500/- million but below Rs 1000/- the rate is 1.6%.

    From Rs 1000/- and above the rate is 1.75%.

    4.9 QUITY INVESTMENTS

    NBP has accelerated its activities in the stock market to improve its economic base and

    restore investor confidence. The bank is now regarded as the most active and dominant

    player in the development of the stock market.

    4.10.1 NBP is involved in the following:

    Investment into the capital market

    Introduction of capital market accounts (under process)

    NBPs involvement in capital markets is expected to increase its earnings, which would

    result in better returns offered to account holders

    4.10COMMERCIAL FINANCE

    NBP dedicated team of professionals truly understands the needs of professionals,

    agriculturists, large and small business and other segments of the economy. They are the

    customers best resource in making NBPs products and services work for them.

    4.11RADE FINANCE OTHER BUSINESS LOANS

    There are two types of trade finance.

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    4.11.1 AGRICULTURAL FINANCE

    NBP provides Agricultural Finance to solidify faith, commitment and pride of farmers who

    produce some of the best agricultural products in the World.

    4.12.1.1 Agricultural Finance Services:

    I Feed the World program, a new product, is introduced by NBP with the aim to help

    farmers maximize the per acre production with minimum of required input. Select farms

    will be made role models for other farms and farmers to follow, thus helping farmers

    across Pakistan to increase production.

    4.12.1.2 Agricultural Credit:

    The agricultural financing strategy of NBP is aimed at three main objectives:-

    Providing reliable infrastructure for agricultural customers

    Help farmers utilize funds efficiently to further develop and achieve better

    production

    Provide farmers an integrated package of credit with supplies of essential inputs,

    technical knowledge, and supervision of farming.

    4.12.1.3 Agricultural Credit (Medium Term):

    Production and development

    Watercourse improvement

    Wells

    Farm power

    Development loans for tea plantation

    Fencing

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    Solar energy

    Equipment for sprinklers

    4.12.1.4 Farm Credit:

    NBP also provides the following subsidized with ranges of 3 months to 1 year on a

    renewal basis.

    Operating loans

    Land improvement loans

    Equipment loans for purchase of tractors, farm implements or any other equipment

    Livestock loans for the purchase, care, and feeding of livestock.

    4.12.1.5 Production Loans:

    Production loans are meant for basic inputs of the farm and are short term in nature.

    Seeds, fertilizers, sprayers, etc are all covered under this scheme.

    4.12.2 CORPORATE FINANCE

    4.12.2.1 Working Capital and Short Term Loans:

    NBP specializes in providing Project Finance Export Refinance to exporters Pre-

    shipment and Post-shipment financing to exporters Running finance Cash Finance

    Small Finance Discounting & Bills Purchased Export Bills Purchased / Pre-shipment /

    Post Shipment Agricultural Production Loans

    4.12.2.2 Medium term loans and Capital Expenditure Financing:

    NBP provides financing for its clients capital expenditure and other long-term investment

    needs. By sharing the risk associated with such long-term investments, NBP expedites

    clients attempt to upgrade and expand their operation thereby making possible the

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    fulfillment of our clients vision. This type of long term financing proves the banks belief

    in its client's capabilities, and its commitment to the country.

    4.12.2.3 Loan Structuring and Syndication:

    National Banks leadership in loan syndicating stems from ability to forge strong

    relationships not only with borrowers but also with bank investors. Because we

    understand our syndicate partners asset criteria, we help borrowers meet substantial

    financing needs by enabling them to reach the banks most interested in lending to their

    particular industry, geographic location and structure through syndicated debt offerings.

    Our syndication capabilities are complemented by our own capital strength and by industry

    teams, who bring specialized knowledge to the structure of a transaction.

    4.12.3.4 Cash Management Services:

    With National Banks Cash Management Services (in process of being set up), the

    customers sales collection will be channeled through vast network of NBP branched

    spread across the country. This will enable the customer to manage their companys total

    financial position right from your desktop computer. They will also be able to take

    advantage of our outstanding range of payment, ejection, liquidity and investment

    services. In fact, with NBP, youll be provided everything, which takes to manage your

    cash flow more accurately

    4.13 INTERNATIONAL BANKING

    National Bank of Pakistan is at the forefront of international banking in Pakistan which is

    proven by the fact that NBP has its branches in all of the major financial capitals of the

    world. Additionally, we have recently set up the Financial Institution Wing, which is

    placed under the Risk Management Group. The role of the Financial Institution Wing is:-

    To effectively manage NBPs exposure to foreign and domestic correspondence

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    Manage the monetary aspect of NBPs relationship with the correspondents to

    support trade, treasury and other key business areas, thereby contributing to the

    banks profitability

    Generation of incremental trade-finance business and revenues

    4.13.1 NBP offers:

    The lowest rates on exports and other international banking products

    Access to different local commercial banks in international banking

    4.14 Cash and Gold Finance.

    Cash and Gold finance means that loan is given against the gold. The gold is mortgaged

    with the bank and loan is taken. It is the area of consumer finance. And borrower can take

    loan for common use.

    4.15 Advance salary loan:

    This loan is given to those people who are govt servants. They can get a loan up to the

    salary of fifteen months.

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    DEPARTMENTALIZATION

    Dividing an organization into different parts according to the functions is called

    departmentalization. So NBP Abdullah Pur Hierarchy of the organization is under asFollows

    Organization Hierarchy in National Bank of Pakistan Abdullah Branch.

    Branch Manager

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    Departments

    Corporate Banking

    Foreign Trade

    I.T

    Agriculture

    Finance

    Credit Sanction Deptt

    Credit Deptt

    Operation Deptt

    Administration Deptt

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    DEPARTMENTATIONS

    NBP have a different department so I am going to expound the performance of the indivual

    departments.

    5.1 CASH DEPARTMENT

    Cash department performs the following functions

    5.1.1) Receipt

    The money, which either comes or goes out from the bank, its record should be kept. Cashdepartment performs this function. The deposits of all customers of the bank are controlled

    by means of ledger accounts. Every customer has its own ledger account and has separate

    ledger cards.

    5.1.2) Payments

    It is a bankers primary contract to repay money received for this customers account

    usually by honoring his cheques.

    5.1.3) Cheques and their Payment

    The Negotiable Instruments. Act, 1881,

    Cheque is a bill of exchange drawn on a specified banker and not expressed to be

    payable otherwise than on demand2.

    Since a Cheque has been declared to be a bill of exchange, it must have all its

    characteristics as mentioned in Section 5 of the Negotiable Instruments Act, 1881.

    Therefore, one can say that a Cheque can be defined as an:

    An unconditional order in writing drawn on a specified banker, signed by the drawer,

    requiring the banker to pay on demand a sum certain in money to, or to the order of, a

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    specified person or to the bearer, and which does not order any act to be done in addition

    to the payment of money3.

    5.1.4) the Requisites of Cheque

    There is no prescribed form of words or design of a Cheque, but in order to fulfill the

    requirements mentioned in Section 6 above the Cheque must have the following.

    a) It should be in writing

    b) The unconditional order

    c) Drawn on specific banker only

    d) Payment on Demand

    e) Sum Certain in money

    f) Payable to a specific person

    g) Signed by the drawer

    5.1.5) Parties to Cheque

    The normal Cheque is one in which there is a drawer, a drawee banker and a payee, or no

    payee but bearer.

    a) The Drawer

    b) The Drawee

    c) The Payee

    5.1.6) Types of Cheques

    Bankers in Pakistan deal with three types of cheques

    a) Bearer Cheques

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    Bearer cheques are cashable at the counter of the bank. These can also be collected through

    clearing.4

    b) Order cheque

    These types of cheques are also cashable on the counter but its holder must satisfy the

    banker that he is the proper man to collect the payment of the cheque and he has to show

    his identification. It can also be collected through clearing.

    c) Crossed Cheque

    These cheques are not payable in cash at the counters of a banker. It can only be credited

    to the payees account. If there are two persons having accounts at the same bank, one of

    the account holder issues a cross-cheque in favor of the other account holder. Then the

    cheque will be credited to the account of the person to whom the cheque was issued and

    debited from the account of the person who has actually issued the cheque.

    5.1.7) Payment of Cheques

    It is a bankers primary contract to repay money received for his customers account

    usually by honoring his cheques. Payment of money deposited by the customer is one of

    the root functions of banking. The acid test of banking is the receipt of money etc. from thedepositors, and repayment to them. This paying function is one, which is the distinguishing

    mark of a banker and differentiates him from other institutions, which receive money from

    the public. However the bankers legal protection is only when payment is in Due

    Course. The payment in due course means payment in accordance with the apparent tenor

    of the instrument, in good faith and without negligence to any person in possession thereof

    under circumstances, which do not afford a reasonable ground of believing that he is not

    entitled to receive payment of the amount therein mentioned. It is a contractual obligation

    of a banker to honor his customers cheques if the following essentials are fulfilled.

    a) Cheques should be in a proper form:

    b) Cheque should not be crossed:

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    c) Cheque should be drawn on the particular bank:

    d) Cheque should not mutilated:

    e) Funds must be sufficient and available:

    f) The Cheque should not be post dated or stale:

    g) Cheque should be presented during banking hours:

    5.2 CLEARANCE DEPARTMENT

    A clearinghouse is an association of commercial banks set up in given locality for the

    purpose of interchange and settlement of credit claims. The function of clearinghouse is

    performed by the central bank of a country by tradition or by law. In Pakistan, the clearing

    system is operated by the SBP. If SBP has no office at a place, then NBP, as a

    representative of SBP act as a clearinghouse.

    After the World War II, a rapid growth in banking institutions has taken place. The use of

    cheques in making payments has also widely increased. The collection as settlement of

    mutual obligations in the form of cheques is now a big task for all the commercial bank.

    When Cheque is drawn on one bank and the holder (payee) deposits the same in his

    account at the bank of the drawer, the mutual obligation are settled by the internal bank

    administration and there arises no inter bank debits from the use of cheques. The total

    assets and total liabilities of the bank remain unchanged.

    In practice, the person receiving a Cheque as rarely a depositor of the cheque at the same

    bank as the drawer. He deposits the cheque with his bank other than of payer for the

    collection of the amount. Now the bank in which the cheque has been deposited becomes a

    creditor of the drawers bank. The depositor bank will pay his amount of the cheque by

    transferring it from cash reserves if there are no offsetting transactions. The banks on

    which the cheques are drawn become in debt to the bank in which the cheques are

    deposited. At the same time, the creditors banks receive large amounts of cheques drawn

    on other banks giving claims of payment by them.

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    5.2.1) In-Word Clearing Books

    The bank uses this book for the purpose of recording all the cheques that are being

    received by the bank in the first clearing The easy, safe and most efficient way is to offset

    the reciprocal claims against the other and receive only the net amount owned by them.

    This facility of net inter bank payment is provided by the clearinghouse.

    The representatives of the local commercial banks meet at a fixed time on all the business

    days of the week. The meeting is held in the office of the bank that officially performs the

    duties of clearinghouse. The representatives of the commercial banks deliver the cheques

    payable at other local banks and receive the cheques drawn on their bank. The cheques are

    then sorted according to the bank on which they are drawn. A summary sheet is prepared

    which shows the names of the banks, the total number of cheques delivered and receivedby them. Totals are also made of all the cheques presented by or to each bank. The

    difference between the total represents the amount to be paid by a particular bank and the

    amount to be received by it. Each bank then receives the net amount due to it or pays the

    net amount owed by it.

    . All details of the cheques are recorded in this book.

    5.2.2) Out-Word Clearing Book:

    The bank uses outward clearing register for the purpose of recording all the details of the

    cheques that the bank has delivered to other banks.

    5.3 ADVANCES DEPARTMENT

    Advances department is one of the most sensitive and important departments of the bank.

    The major portion of the profit is earned through this department. The job of this

    department is to make proposals about the loans. The Credit Management Division of

    Head Office directly controls all the advances. As we known bank is a profit seeking

    institution. It attracts surplus balances from the customers at low rate of interest and makes

    advances at a higher rate of interest to the individuals and business firms. Credit extensions

    are the most important activity of all financial institutions, because it is the main source of

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    earning. However, at the same time, it is a very risky task and the risk cannot be

    completely eliminated but could be minimized largely with certain techniques.

    Any individual or company, who wants loan from NBP, first of all has to undergo the

    filling of a prescribed form, which provides the following information to the banker.

    5.3.1) Name and address of the borrower.

    a) Existing financial position of a borrower at a particular branch.

    b) Accounts details of other banks (if any).

    c) Security against loan.

    d) Exiting financial position of the company. (Balance Sheet & Income Statement).

    e) Signing a promissory note is also a requirement of lending, through this note

    borrower promise that he will be responsible to pay the certain amount of money

    with interest.

    5.3.2) Principles of Advances

    There are five principles, which must be duly observed while advancing money to the

    borrowers.

    Safety

    Liquidity

    Dispersal

    Remuneration

    Suitability

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    a. Safety

    Bankers funds comprise mainly of money borrowed from numerous customers on various

    accounts such as Current Account, Savings Bank Account, Call Deposit Account, Special

    Notice Account and Fixed Deposit Account. It indicates that whatever money the banker

    holds is that of his customers who have entrusted the banker with it only because they have

    full confidence in the expert handling of money by their banker. Therefore, the banker

    must be very careful and ensure that his depositors money is advanced to safe hands

    where the risk of loss does not exist. The elements of character, capacity and capital can

    help a banker in arriving at a conclusion regarding the safety of advances allowed by him.

    b. Character

    It is the most important factor in determining the safety of advance, for there is no

    substitute for character. A borrowers character can indicate his intention to repay the

    advance since his honesty and integrity is of primary importance. If the past record of the

    borrower shows that his integrity has been questionable, the banker should avoid him,

    especially when the securities offered by him are inadequate in covering the full amount of

    advance.

    It is obligation on the banker to ensure that his borrower is a person of character and has

    capacity enough to repay the money borrowed including the interest thereon.

    c. Capacity

    This is the management ability factor, which tells how successful a business has been in

    the past and what the future possibilities are. A businessman may not have vast financial

    resources, but with sound management abilities, including the insight into a specific

    business, he may make his business very profitable. On the other hand if a person has no

    insight into the particular business for which he wants to borrow funds from the banker,

    there are more chances of loss to the banker.

    d. Capital

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    This is the monetary base because the money invested by the proprietors represents their

    faith in the business and its future. The role of commercial banks is to provide short-term

    capital for commerce and industry, yet some borrowers would insist that their bankers

    provide most of the capital required. This makes the banker a partner. As such the banker

    must consider whether the amount requested for is reasonable to the borrowers own

    resources or investment.

    e. Liquidity

    Liquidity means the possibilities of recovering the advances in emergency, because all the

    money borrowed by the customer is repayable in lump sum on demand. Generally the

    borrowers repay their loans steadily, and the funds thus released can be used to allow fresh

    loans to other borrowers. Nevertheless, the banker must ensure that the money he islending is not blocked for an undue long time, and that the borrowers are in such a

    financial position as to pay back the entire amount outstanding against them on a short

    notice. In such a situation, it is very important for a banker to study his borrowers assets to

    liquidity, because he would prefer to lend only for a short period in order to meet the

    shortfalls in the wording capital. If the borrower asks for an advance for the purchase of

    fixed assets the banker should refuse because it shall not be possible for him to repay when

    the banker wants his customer to repay the amount. Hence, the baker must adhere to the

    consideration of the principles of liquidity very careful.

    f. Dispersal

    The dispersal of the amount of advance should be broadly based so that large number of

    borrowing customer may benefit from the bankers funds. The banker must ensure that his

    funds are not invested in specific sectors like textile industry, heavy engineering or

    agriculture. He must see that from his available funds he advances them to a wide range of

    sector like commerce, industry, farming, agriculture, small business, housing projects and

    various other financial concerns in order of priorities.

    Dispersal of advances is very necessary from the point of security as well, because it

    reduces the risk of recovery when something goes wrong in one particular sector or in one

    field.

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    g. Remuneration

    A major portion of the bankers earnings comes form the interest charged on the money

    borrowed by the customers. The banker needs sufficient earnings to meet the following:

    a) Interest payable to the money deposited with him.

    b) Salaries and fringe benefits payable to the staff members.

    c) Overhead expense and depreciation and maintenance of the fixed assets of the

    bank.

    d) An adequate sum to meet possible losses.

    e) Provisions for a reserve fund to meet unforeseen contingencies.

    f) Payment of dividends to the shareholders.

    h. Suitability

    The word suitability is not to be taken in its usual literary sense but in the broader sense

    of purport. It means that advance should be allowed not only to the carefully selected and

    suitable borrowers but also in keeping with the overall national development plans chalked

    out by the authorities concerned. Before accommodating a borrower the banker should

    ensure that the lending is for a purpose in conformity with the current national credit policy

    laid down by the central bank of the country.

    5.3.3 Forms of Loans

    In addition to purchase and discounting of bills, bankers in Pakistan generally lend in the

    form of cash finance, overdrafts and loans. NBP provides advances to different people in

    different ways as the case demand.

    a) Cash Finance

    This is a very common form of borrowing by commercial and industrial concerns and is

    made available either against pledge or hypothecation of goods, produce or merchandise.

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    In cash finance a borrower is allowed to borrow money from the banker up to a certain

    limit, either at once or as and when required. The borrower prefers this form of lending due

    to the facility of paying markup/services charges only on the amount he actually utilizes.

    If the borrower does not utilize the full limit, the banker has to lose return on the un-

    utilized amount. In order to offset this loss, the banker may provide for a suitable clause in

    the cash finance agreement, according to which the borrower has to pay markup/service

    charges on at least on self or one quarter of the amount of cash finance limit allowed to

    him even when he does not utilize that amount.

    b) Overdraft/Running Finance

    This is the most common form of bank lending. When a borrower requires temporary

    accommodation his banker allows withdrawals on his account in excess of the balance

    which the borrowing customer has in credit, and an overdraft thus occurs. This

    accommodation is generally allowed against collateral securities. When it is against

    collateral securities it is called Secured Overdraft and when the borrowing customer

    cannot offer any collateral security except his personal security, the accommodation is

    called a Clean Overdraft. The borrowing customer is in an advantageous position in an

    overdraft, because he has to pay service charges only on the balance outstanding against

    him. The main difference between a cash finance and overdraft lies in the fact that cash

    finance is a bank finance used for long term by commercial and industrial concern on

    regular basis, while an overdraft is a temporary accommodation occasionally resorted to.

    c) Demand Financing/Loans

    When a customer borrows from a banker a fixed amount repayable either in periodic

    installments or in lump sum at a fixed future time, it is called a loan. When bankers

    allow loans to their customers against collateral securities they are called secured loansand when no collateral security is taken they are called clean loans.

    The amount of loan is placed at the borrowers disposal in lump sum for the period agreed

    upon, and the borrowing customer has to pay interest on the entire amount. Thus the

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    borrower gets a fixed amount of money for his use, while the banker feels satisfied in

    lending money in fixed amounts for definite short periods against a satisfactory security

    5.4 REMITTANCE DEPARTMENT

    Remittance means a sum of money sent in payment for something. This department deals

    with either the transfer of money from one bank to other bank or from one branch to

    another branch for their customers. NBP offers the following forms of remittances.

    a) Demand Draft

    b) Telegraphic Transfer

    c) Pay Order

    d) Mail Transfer

    5.4.1) Demand Draft

    Demand draft is a popular mode of transfer. The customer fills the application form.

    Application form includes the beneficiary name, account number and a senders name. The

    customer deposits the amount of DD in the branch. After the payment the DD is prepared

    and given to the customer. NBP officials note the transaction in issuance register on the

    page of that branch of NBP on which DD is drawn and will prepare the advice to send to

    that branch. The account of the customer is credited when the DD advice from originating

    branch comes to the responding branch and the account is debited when DD comes for

    clearance. DD are of two types.

    a) Open DD: Where direct payment is made.

    b) Cross DD: Where payment is made though account.

    NBP CHARGES FOR DD5

    I. Up to Rs. 50,000/- is Rs 50/- only

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    II. Over Rs. 50,000/- is 0.1%

    5.4.2) Pay Order

    Pay order is made for local transfer of money. Pay order is the most convenient, simple

    and secure way of transfer of money. NBP takes fixed commission of Rs. 25 per pay order

    from the account holder and Rs. 100 from a non-account holder.

    5.4.3) Telegraphic Transfer

    Telegraphic transfer or cable transfer is the quickest method of making remittances.

    Telegraphic transfer is an order by telegram to a bank to pay a specified sum of money to

    the specified person. The customer for requesting TT fills an application form. Vouchers

    are prepared and sent by ordinary mail to keep the record. TT charges are taken from the

    customer. No excise duty is charged on TT. The TT charges are:

    Telegram/ Fax Charges on TT = Actual-minimum Rs.125.

    Cable telegram transfer costs more as compared to other title of money. In cable transfer

    the bank uses a secret system of private code, which is known to the person concerned with

    this department and branch manager.

    5.4.4) Mail Transfer

    When the money is not required immediately, the remittances can also be made by mail

    transfer (MT). Here the selling office of the bank sends instructions in writing by mail to

    the paying bank for the payment of a specified amount of money. Debiting to the buyers

    account at the selling office and crediting to the recipients account at the paying bank

    make the payment under this transfer. NBP taxes mail charges from the applicant where no

    excise duty is charged. Postage charges on mail transfer are actual minimum Rs. 40/- if

    sent by registered post locally Rs.40/- if sent by registered post inland on partys request.

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    5.5) DEPOSIT DEPARTMENT: -

    It controls the following activities:

    a) A/C opening.

    b) Issuance of cheque book.

    c) Current a/c

    d) Saving a/c

    e) Cheque cancellation

    f) Cash

    5.5.1 Account opening

    The opening of an account is the establishment of banker customer relationship. Before a

    banker opens a new account, the banker should determine the prospective customers

    integrity, respectability, occupation and the nature of business by the introductory

    references given at the time of account opening. Preliminary investigation is necessary

    because of the following reasons.

    i. Avoiding frauds

    ii. Safe guard against unintended over draft.

    iii. Negligence.

    iv. Inquiries about clients.

    There are certain formalities, which are to be observed for opening an account with a bank.

    Formal Application

    Introduction

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    Specimen Signature

    Minimum Initial Deposit

    Operating the Account

    1. Pay-In-Slip Book

    2. Pass Book

    3. Issuing Cheque Book

    a) Qualification of Customer

    The relation of the banker and the customer is purely a contractual one, however, he must

    have the following basic qualifications.

    He must be of the age of majority.

    He must be of sound mind.

    Law must not disqualify him.

    The agreement should be made for lawful object, which create legal relationship

    Not expressly declared void.

    b) Types of Accounts

    Following are the main types of accounts

    1) Individual Account

    2) Joint Account

    3) Accounts of Special Types

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    Partnership account

    Joint stock company account

    Accounts of clubs, societies and associations

    Agents account

    Trust account

    Executors and administrators accounts

    Pak rupee non-resident accounts

    Foreign currency accounts1

    5.5.2 Issuing of cheque book:

    This deptt issue cheque books to account holders.

    Requirements for issuing cheque book

    a) The account holder must sign the requisition slip

    b) Entry should be made in the cheque book issuing book

    c) three rupees per cheque should be recovered from a/c holder if not then debit his/her

    account.

    5.5.3 Current account

    These are payable to the customer whenever they are demanded. When a banker accepts a

    demand deposit, he incurs the obligation of paying all cheques etc. drawn against him to

    the extent of the balance in the account. Because of their nature, these deposits are treated

    as current liabilities by the banks. Bankers in Pakistan do not allow any profit on these

    deposits, and customers are required to maintain a minimum balance, failing which

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    incidental charges are deducted from such accounts. This is because the depositors may

    withdraw Current Account at any time, and as such the bank is not entirely free to employ

    such deposits.

    Until a few decades back, the proportion of Current Deposits in relation to Fixed Deposits

    was very small. In recent years, however, the position has changed remarkably. Now, the

    Current Deposits have become more important; but still the proportion of Current Deposits

    and Fixed Deposits varies from bank to bank, branch to branch, and from time to time.

    5.5.4 Saving account

    Savings Deposits account can be opened with very small amount of money, and the

    depositor is issued a cheque book for withdrawals. Profit is paid at a flexible rate

    calculated on six-month basis under the Interest-Free Banking System. There is no

    restriction on the withdrawals from the deposit accounts but the amount of money

    withdrawn is deleted from the amount to be taken for calculation of products for

    assessment of profit to be paid to the account holder. It discourages unnecessary

    withdrawals from the deposits.

    In order to popularize this scheme the State Bank of Pakistan has allowed the Savings

    Scheme for school and college students and industrial labor also. The purpose of these

    accounts is to inculcate the habit of savings in the constituents. As such, the initial deposit

    required for opening these accounts is very nominal.

    5.5.5 Cheque cancellation:

    This deptt can cancel a cheque on the basis of;

    a) Post dated cheque

    b) Stale cheque

    c) Warn out cheque

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    d) Wrong sign etc

    5.5.6 Cash

    This deptt also deals with cash. Payment of cheques, deposits of cheques etc.

    5.6 FOREIGN EXCHANGE/DEPARTMENT:

    T