BANKING ACADEMY
Commercial
Bank
Lecturer: Vu Ngoc Huong
Through the process of financial intermediation, certain asset or liabilities are
transformed into different assets or liabilities. As such, financial intermediaries
channel funds from people who have extra money or surplus savings (savers) to
those who do not have enough money to carry out a desired activity (borrowers).
They are classified as deposit-type institutions, and non-deposit-type institutions.
Commercial Banks are the largest among all deposit institution in particular and
among all financial intermediaries in general, and are also the most diversified
due to the large range of assets and liabilities they hold.
Group: Ph m Thi u Ng c Anh – 14A7510287ạ ề ọ
Tr n Lan Anh – 14A7510020ầ
Nguy n Th Khánh Ng c – 14A7510171ễ ị ọ
Ph m M Ng c – 14A7510288ạ ỹ ọ
Ph m Th Minh Phạ ị ương – 14A7510189
Nguy n Phễ ương Thanh – 14A7510231
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I. Definition
A commercial bank is a type of bank that engages in banking activities and other financial activities such as accepting deposits, making business loans, and offering basic investment products to earn profits and to contribute to achieve certain economic objectives.
Its liabilities are in the form of checking and savings deposits, and various types of time deposits. Bank deposits are insured by the FDIC up to $100,000. The assets that commercial banks hold are securities of various forms and denominations such as mortgage loans, consumer loans, business loans and loans to state and local governments
Total assets of a commercial bank take the lion’s share in the entire banking system. It is also deposit-taking institution. Furthermore, the principal commercial bank’s loan is in industrial and commercial sectors. In terms of ownership, commercial banks can exist in different types of ownership: state-owned commercial bank, private commercial bank, joint-stock commercial bank, etc. Commercial banks are among the most regulated forms of business due to their vital role in the well-being of the economy.
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II. Main functions of commercial bank
1. Treasurer for the society
Commercial banks accept various types of deposits from public especially from its clients, including saving account deposits, recurring account deposits, and fixed deposits in order to meet the withdrawal and payments demand according to customer requirements. These deposits are payable after a certain time period.
This function has emerged in the early of banking operations, basing on the demand for the safety of assets and the desire to accumulate value of the public and enterprises in the society.
For customers, by depositing money to banks, they not only ensure the safety of their property but also earn an interest from the banks. (However, it does not exclude the possibility that bank lost its liquidity and does not meet the withdrawal demand of customers)
For commercial bank, this function is the basis to perform payment intermediary function, and also create major capital to conduct credit intermediary function.
2. Payment intermediary
Because of the disadvantages of cash payment, commercial bank acts as the treasurer for businesses and individuals. It means that the banks will perform payment requested by customers such as withdrawing money from their deposit accounts to pay for goods and services or collecting money to the customers’ account.
The banks offer their customers more convenient means of payment such as checks, payment order, debit card, credit card... Depending on demand, the customer can choose the appropriate payment.
This function brings advantages to not only the banks and their customers but also the whole economy:
a. For customers: - Safer & faster
- Ensure secure payment b. For commercial banks:
- Earn more money from charging services - Enhance the reputation and role of the banks
c. For the economy:
- Promote the circulation of goods - Accelerate payments
- Capital flows more rapidly
In Vietnam: In the past 3 years, the payment service has seen significant development. Many new payment services launched to meet the needs of customers
At the end of July 2010, there were over 24 million cards with 48 card issuers and over 190 brand name cards, released nearly 11,000 ATMs nationwide.
The utility service comes increasingly diversified as gasoline purchase card, network card purchases, utility bill payment...
The proportion of cash payments decreased , from 20.3 % in 2004 to 14.6 % in 2008 and 14.5 % in 2009 => Non-cash payment is beginning to take shape in Vietnamese’ mind
3. Credit intermediary
Commercial bank is a credit intermediary when it makes the bridge between capital surplus and capital shortage. Through the mobilization of idle funds, commercial bank forms a lending fund and implements lending (mainly short-term loans) to the economy. With this function, commercial bank acts as both the borrower and the lender.
Credit intermediary derives from the characteristics of circulating currency capital in the process of social reproduction.
Through credit intermediary, commercial bank has contributed to the benefit of all the parties in relation to the depositor, the bank and the borrower and ensured the benefits of the economy:
- Depositors gain profits from their temporarily idle capital through interest income. Moreover, bank also ensures the safety of deposits and provides customers with convenient payment services.
- The borrower will satisfy the capital requirements for business spending, payment without spending effort and time on finding convenient and lawful capital supply.
- Commercial bank itself makes a profit from the difference between lending rate and deposit rate or brokerage commission. This profit is the basis for the existence and development of commercial bank.
- For the economy, this function plays an important role in promoting economic growth because it meets the capital demand to ensure the ongoing reproduction process and to expand the production scale. With this function, the bank has made inactive idle capital into active capital, stimulated the circulation of capital and promoted the business.
While sanctioning a loan to a customer, they do not provide cash to the borrower. Instead, they open a deposit account from which the borrower can withdraw. In other words, while sanctioning a loan, they automatically create deposits, known as a credit creation from commercial banks.
Credit intermediary is the most basic function of commercial banks, providing the basis for other functions. Simultaneously, when treasurer and payment intermediary functions are performed well, they will contribute to increase credit capital and expand the scale of banking activities.
Raising capital has become an important content of commercial bank’s activities; enables depositors to get nominal income through interest rate with the level of safety and high liquidity. In addition, this activity provides banks funds to perform other activities such as granting credit and providing banking services to customers. Looking at the balance sheet assets of commercial banks, capital raising is reflected at the liabilities section. Thus, raising capital is also known as professional liabilities.
The commercial bank raises capital by opening the deposit accounts or through the issuance of debentures. Capital mobilization of commercial bank:
- Taking deposits of organizations, individuals and other credit institutions in the form of the time deposit, demand deposit and others.
- Issuing certificates of deposit, bonds and other valuable papers to raise funds from individuals and organizations in the country and abroad.
- Borrowing from other credit institutions operating in Vietnam and foreign credit institutions.
- Taking the short-term loans of the State Bank.
- The other form of raising capital as prescribed by the State Bank.
With the amount of raised capital, banks meet the loan demands of businesses and individuals, in order to expand production and consumption.
Because of the business goals the commercial banks are particularly interested in attracting deposits. Recently, most deposits are made through commercial banking system.
To mobilize idle capital from the public, commercial banks have to develop services to meet the conditions to facilitate the transfer and withdraw money easily as well as have interest rate policy and marketing to mobilize funds to meet the different needs of society.
2. Credit operations
Companies frequently implement a credit facility in conjunction with closing a round of equity financing (raising money by selling shares of its stock). A key consideration for any company is how it will incorporate debt in its capital structure, at the same time it must consider the parameters of its equity financing. The company must look at its capital structure as a whole, determining how much capital it needs immediately and over time, and the combination of equity and debt that it will use to fulfill those requirements.
There are different types of credit facilities available in commercial banks. The types of loans that are permitted are clearly indicated in commercial banks credit policy in line with central bank’s guidelines. Bank financing is the primary capital source for the corporations that are going to start its new investment project. Working capital may also be financed through using bank financing facilities all around the year. Depending upon the nature of financing in respect of purpose, security as well as repayment terms, credit or simply loan facilities in commercial banks have been put under the following broad categories:
a. Micro –Finance Institution’s Loan
It is a short to medium term loan granted to Micro –Finance Institution to alleviate their financial constraints while providing credit to micro-entrepreneurs. The bank may negotiate the lending interest rate on Micro-Finance Institution's loan. A foreign Bank Guarantee that covers 75% of the principal loan shall be accepted as collateral.
b. Cash Credit:
Banks lend money against the security of tangible assets or guarantees in the method. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called “limit” or “credit facility” in excess of the amount deposited in the account. Once a security for repayment has been given, the business that receives the loan can continuously draw from the bank up to that certain specified amount. The purpose of cash credit is to meet working capital need of businesspersons
c. Overdraft
It is a form of credit facility by which customers are allowed to draw cash beyond the deposits of their current accounts for the day to day operational needs of business.
The facility is availed to customers up to a maximum period of one year and it can be renewed every year based on the request of customers.
d. Mortgage
A commercial mortgage is a mortgage loan secured by commercial property, such as an office building, shopping center, industrial warehouse, or apartment complex. The proceeds from a commercial mortgage are typically used to acquire, refinance, or redevelop commercial property.
e. Advancing loans
The loans are granted to the different sector of economy to meet the increasing needs of economic development, the commercial bank after evaluating the prospective borrower’s application precisely and objectively extend credit for a certain period.
- Short term loan
It is a loan granted to customers to finance their working capital needs and /or other short term financial constraints.
A short term loan is granted for a maximum period of three years and the repayment can be in lump sum or in periodic installments i.e. monthly, quarterly or semi-annually.
- Medium and long term loans
These loans are extended to customers to partially finance acquisition or leasing of fixed business assets, establishment of new projects and expansion of an existing business.
A medium –term loan has a maturity period longer than three years and not exceeding a maximum period of seven years. Long –term loan has a maturity period longer than seven years. Long-term loan has a maturity period longer than seven years but not exceeding a maximum period of fifteen years.
Applicants for medium or long term loan must submit detailed project feasibility study or business plan and must contribute at least 30% of the total project cost.
f. Auto and finance activity
Export Finance:
Like import finance DBL advances in export trade at both pre and post shipment stages. In this type of advance, standing of both opener and beneficiary of export L/C as well as standing of the L/C issuing bank are of important consideration. The pre-shipment facilities are usually required to finance the costs to execute export orders, such as: procuring & processing of raw materials, packaging and transportation, payment of various fees and charges including insurance premium. While post-import facilities are directed to finance exporter’s various requirements, which are required to be settled immediately on the backdrop that usually, settlement of export proceeds takes some time to complete.
g. Lease Finance:
It is a short term credit facility extended to customers against merchandise or its documentary evidence. Like Railway Receipts, Warehouse Receipts, Airway Bills.
Merchandise loan facility is extended to customers for a maximum period of one year and its maximum advance rate is 80% of the amount of the merchandise.
3. Payment operations
a. Banks also serve often under-appreciated roles as payment agents within a country and between nations.
The development of retail services for private individuals is one of the priority directions of Bank’s strategic development.
All types of services offered were formed under the needs of clients. Among them are CONTACT - the money transfer and payment system, deposit services for different groups of population and others.
The Bank provides the following services for individuals: - Cash and settlement service
- Money transfers service via CONTACT system - Plastic card and payment document operations - Securities trading
Not only do banks issue debit cards that allow account holders to pay for goods with the swipe of a card, they can also arrange wire transfers with other institutions.
b. Banks essentially underwrite financial transactions by lending their reputation and credibility to the transaction.
Conventional banking uses the term "underwriting" to describe the analysis of a borrower's ability to pay. For a private citizen, this will typically involve a credit report, financial statements, and details regarding employment and salary. This is an example of underwriting that should be familiar to most people. In the case of a real estate transaction, underwriting may
involve the property itself being brought into scrutiny.
amounts of physical currency when merchants will accept the checks, debit cards or credit cards that banks provide.
IV. Commercial bank system in Vietnam
1. Overview
Over the past decade, along with the process of innovation and integration, commercial banking system in Vietnam has many important changes. The appearance of the bank with 100% foreign capital and the gradual removal of restrictions on the operation of bank branches has caused the level of competition becoming increasingly fierce and forced the banks to restructure their organization. Within 2 years, 2 out of 5 state-owned commercial banks have made formal equalization and operated under multi-ownership model. The joint-stock commercial banks are restructured with the participation of the foreign investment’s strategy to increase its chartered capital to a minimum of 3,000 billion VND.
In recent years, commercial banking system in Vietnam has contributed significantly to innovation and promotion of our economy and accelerated the process of industrialization – modernization. Commercial banks not only play an important role in the economy as a channel capital but also help stabilize the purchasing power of money. Along with the reform and innovation, the number of commercial bank has grown rapidly and shifted gradually towards a compatible system of the emerging and developing economy.
The growth of the banking system reflected in the increase in equity , total assets , the level of diversification of supply and services contributing to GDP every year : the total registered capital has increased by 12 times , total assets and deposits rose by 16 times and loans went up by 14 times.
Compared to the end of the month 11/2013, the total assets of the banking system soared more than 240 trillion. In particular, the total assets of the state-owned commercial banking group
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reached 2504.87 trillion, which was more than 110 trillion compared to the end 11/2013; joint-stock commercial bank increased by 100 trillion to reach 2463.44 billion
Until 31/12/2013, the total chartered capital of the banking system reached 423.98 trillion, increasing by 5.285 billion compared with the end of the month 11/2013
In particular, the chartered capital of State-owned commercial banks (Vietcombank, Vietinbank, BID, etc.) reached 128.09 trillion. Total assets of joint-stock commercial banks (ACB, Sacombank, Techcombank, etc.) reached 193.53 trillion, which was more than 5.260 billion compared to that figure at the end of March 11/2013.
All these figures are real evidences of the important of commercial banks to the banking systems as well as the whole economy.
2. The real situation of commercial banks in Vietnam recently
- In the latest news, a lot of commercial banks have reported loss for 2013. The Asia Commercial Bank (ACB), one of the Vietnamese biggest banks, has reported the loss of VND293 billion in the fourth quarter of 2013.
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- Eximbank has for the first time since 2009, when it began listing shares on the bourse, reported the loss of VND222 billion in the fourth quarter of 2013.
- Other banks luckily did not take a loss, but have reported the sharp falls in profits. Vietinbank, for example, saw the profit down by 60 percent in the fourth quarter of 2013, while the Military Bank saw the non-performing loan ratio increasing by 50 percent and the profit decreases in all types of business.
- SHB’s profit in the fourth quarter decreased by 70 percent, while Techcombank has estimated the 13.7 percent decrease in the 2013’s profit in comparison with the year before.
- SBV has the plan to cut down the number of Vietnamese commercial banks to 14-17 in the next three years as stated by some high ranking officials, Governor of the State Bank of Vietnam Nguyen Van Binh said the State Bank believes the number (14-17 banks) fits the Vietnam’s national economy’s scale.
- Economists some years ago raised a question that if Vietnam, a small economy, needed so many commercial banks and if it was necessary for the State Bank to stop licensing more banks.
- The number of commercial banks is not the cause of the commercial banking system restructure. The objective of commercial banking system restructuring is clear, that is to improve service quality. There are objective and subjective causes that lead to these obstacles which include loose management of real estate, ineffective management of state economic groups and local infrastructure projects, high inflation, and high interest rate. In addition, commercial banks’ control of credit quota has resulted in lack of loan for business investment.
3. Some solutions for the situation:
- Commercial banks strengthen administration and operation, review and complete internal stipulations, develop clear and suitable operation and business strategies, refrain from large investment in high-risk areas like security and real estate, enhance internal auditing, ensure independence and improve efficiency of internal control and supervision.
- State regulatory offices promulgate policies on management of commercial banks to control risks and challenges before they occur and strengthen monitoring and supervision. - Bad debts relating to state economic groups in commercial banks should be liquidated.
- Experiences and lessons should be drawn from the first restructure of commercial banks which had several similar causes, namely” financial and monetary crisis, heated development of estate market and particularly management and operation capacity.
V. Conclusion
Commercial banks perform the vital role of bringing together those economic agents with surplus funds who want to lend, with those with a shortage of funds who want to borrow. In the modern word, commercial banks are not merely as financial intermediaries but also the leaders in economic development.
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