What is commercial bank and what are the functions of a commercial bank?

As per Negotiable Instrument Act 1881 and Bank Company Act 1991, “Banker means the accepting, for the purpose of lending or investment, of deposit of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, and order or otherwise”. A commercial bank is a type of financial institution and intermediary. It is a bank that lends money and provides transactional, savings and money market accounts and that accepts time deposits.

Prof. Rozer “the bank which deals with money and money’s worth with a view to earning profit is known as commercial bank”

Prof. Nath, “commercial bank is an intermediary profit making institution”.

The traditional functions of a Commercial bank are to receive deposit from the surplus unit with a condition to repay on demand or otherwise and allowing loans/advances/investment to the

deficit unit. But now-a-days the functions of a commercial bank diversified and acting as a

superstore. So, the functions may be divided into five categories, such as (1) General functions, (2) Functions related to foreign trade and foreign exchange, (3) Agency functions, (4) Welfare functions and (5) Other functions

 

General functions are:

a) Maintain account of the clients,

b) To receive deposits of various types,

c) To make advance/investment against with or without securities, d) To create deposits,

e) To create medium of exchange through cheque, Draft, Pay – order etc. f) To issue guarantees (local)

g) To discount Bills.

 

Functions related to Foreign trade & Foreign exchange:

a) To make correspondent banking with overseas banks,

b) To place foreign currency funds with correspondents abroad, c) To issue Letter of Credit (LC),

d) To issue Back to Back Letter of Credit (BTB L/C),

e) To amend L/Cs,

f) To extend investment/credit facilities to the importers through creating PAD/MIB, MTR/LTR, LIM/LAM/MP etc,

g) To extend credit/investment facilities to the exporters through the modes of Musharaka Pre-

shipment/PC/ECC, LDBP, FDBP etc,

h) Acceptance of Bill of Exchange and make payment,

i) Make forward booking of foreign exchange on behalf of importer for preventing them from exchange loss,

j) Sale and purchase of Foreign currency, TC, Credit Cards, k) Maintaining Foreign Currency accounts,

l) Outward foreign remittance for import, foreign tour, travel, education, treatment, pilgrims, training etc.,

m) Inward foreign remittance – export proceeds, wage earners remittance etc., n) Issuing guarantees (foreign).

 Agency functions:

a) To transfer money,

b) To collect funds and makes payment for the clients, c) To maintain confidentiality of customers,

d) To sale and purchase of shares and securities,

e) To make payments for utility charges and insurance premium on behalf of the client, f) To receive rent, dividend, premium etc.

g) To work as trustee,

h) To work as representative of Central Bank.

 

Welfare functions:

a) Social welfare functions/Corporate Social Responsibility,

b) Functions related to the welfare of the employees/retired employees such as

• Establishment of institution,

• Establishment of Trust,

• Pensions and allowance.

 Other functions:

a) Underwriting,

b) Work as safe custody through Locker service, c) Advices the clients on business matters,

d) Repo,

e) Customer financing, f) Leasing,

g) Income sharing,

Securitization

 Securitization means the conversion of a pool of assets into marketable debt securities. The deal starts with an originator selling a part of his assets portfolio to a body (or a trust) called the Special Purpose Vehicle (SPV) and in effect converting the assets into cash. The special purpose vehicle in turn raises money by floating a debt instrument on the strength of cash flows and the underlying assets, and using the proceeds to pay off the originator. To this extent, the SPV is

only a pass through vehicle and a manager of the asset and cash flow pool. The proceeds collected by the originator on account of the outstanding loans made by him is then passed on

the SPV who in turn pays off the principal and interest to the final investor, typically the wholesale investor, like the mutual funds, insurance companies and pension funds.

Benefits of Securitization:

1. For the issuer, securitization provides an additional source of funds, reduces funding costs, besides resulting in economy in the use of capital, greater recycling of funds which lends to

higher turnover and profitability.

2. It also improves the capital adequacy norm by removing loan assets from the balance sheet,

or by substituting them with less risk weighted assets. Moreover, funds can be managed without impairing its borrowing ability.

3. Securitized assets gives the issuer, the ability to pass on or eliminate credit, interest rate and

lending risks associated with balance sheet funding and hence is an effective means of diversifying credit risk.

4. For the investor, it improves the diversity of investment avenues. It also makes it possible for investing in high yielding assets like housing and consumer finance which are untouchable by banks. Moreover, the investor benefits from the purchase of securitized debt with higher quality

debt with higher yields and good liquidity. Impediments to Assets Securitization in Bangladesh:

1. Lack of Awareness

2. Non Uniformity in Stamp Duty

3. Absence of Effective Foreclosure norms

4. Less demand for long term Debt Papers

5. Investments Restrictions

Discuss the principles of sound lending.

 

a. Safety- security and repaying capacity,

b. Liquidity- ability of an asset to convert in to cash without loss, c. Profitability- brings adequate return for the bank,

d. Purpose- should be productive,

e. Spread- Diversification of advance.

Define loan sale and explain different types of loan sales

 A loan sale is a sale, often by a bank, under contract of all or part of the cash stream from a specific loan, thereby removing the loan from the bank's balance sheet.

Types of Loan Sale:

1. Participation Loans

2. Assignments

3. Loan Strip

1) Participation Loans: a loan that is shared by a group of banks that join to make a loan too big for any one of them alone.

2) Assignments: A sale of loan by bank of rights against the borrower and the benefits of the loan, to the assignee bank.

3) Loan Strip: Loan Strips are short-dated pieces of a longer-term loan and often mature in a few days or weeks. The buyer of a strip is entitled to a fraction of the expected income from a loan.

Liquidity of bank, liquidity crisis

 The ability of a bank to meet its current obligations, the quality that makes an assets quickly and readily convertible into cash. The most liquid item is cash itself, since it does not need to be converted. Money market funds which can be immediately sold for cash. The time and demand can also turned into cash quickly. Every banking company shall maintain in Bangladesh in cash or gold or unencumbered approved securities, valued at current market price, the value of which shall not at the close of business on any day be less than the such percentage of its total time and demand liabilities as the Bangladesh bank determines from time to time.   liquidity crisis Banks cannot afford to fail in payment to its customers anytime. If it happens, banks may face the risk of liquidation, such failure is called liquidity crisis. It occurs when bank is out of enough cash needed to meet its financial obligation.   causes for liquidity crisis of a Bank Liquidity crisis is a dangerous & risky problem of Bank. Because of liquidity crisis bank lost its main strength. The reasons behind liquidity crisis are: o  When banks give out a great portion of long-term loan compare to cash deposit. Though long-term loan is profitable but bank have to pay back the money when customer call for it. o  When bank’s significant portion of loans has the chance for classification and besides this bank again give out new loan then there can be liquidity crisis. o  When depositors of the bank lost their faith against bank & withdraw their money, then bank may fall in huge liquidity crisis. o  If interest rate in deposit is less compare to different bank in the country & outside the country, so there is a huge possibility of liquidity crisis as because most of customer can be switch to other bank also money can be transferred from one country to another country. o  different kinds of social conflict  like war, internal crush, inflation, economic disaster may  discourage customer from savings in the bank, which cause liquidity crisis.  

What are the different type of financial institutions

 Different types of FIs are: 1.    Depository Institutions: These are the FIs, those accepts deposits. These deposits represent the liabilities of the deposit-accepting institution. Their income is derived from two sources: a) the income generated from the loans they make and the securities they purchase, and b) fee income. The various types of depository institutions are: a.    Commercial Banks: It provides numerous services in financial system. The services can classify into i) individual banking, ii) institutional banking, and iii) global banking.   b.    Credit unions: They are commonly known as cooperative societies. The purpose of credit union is to service their members’ saving and borrowing needs.   2.    Insurance companies: it provides insurance policies, which are legally binding contracts for which the policy holder pays insurance premium and the company promise to pay to policy holder on the occurrence of future events.   3.    Mutual Funds: These are the portfolios of securities, mainly stocks, bonds, and money market instruments. The investment manager actively manages the portfolio i.e. buy and sell securities.   4.    Pension funds: It is a fund that is established for eventual payment of retirement benefits financed by contribution by the employer. A pension is a form of employee remuneration for which the employee is not taxed until funds are withdrawn.

Number Systems

 Based on the base value and the number of allowed digits, number systems are of many types. The four common types of Number System are: 

1. Decimal Number System
2. Binary Number System
3. Octal Number System
4. Hexadecimal Number System

1. Decimal Number System

Number system with base value 10 is termed as Decimal number system. It uses 10 digits i.e. 0-9 for the creation of numbers. Here, each digit in the number is at a specific place with place value a product of different powers of 10. Here, the place value is termed from right to left as first place value called units, second to the left as Tens, so on Hundreds, Thousands, etc. Here, units has the place value as 100, tens has the place value as 101, hundreds as 102, thousands as 103, and so on. 

For example: 10285 has place values as

(1 × 104) + (0 × 103) + (2 × 102) + (8 × 101) + (5 × 100)

1 × 10000 + 0 × 1000 + 2 × 100 + 8 × 10 + 5 × 1

10000 + 0 + 200 + 80 + 5

10285

2. Binary Number System

Number System with base value 2 is termed as Binary number system. It uses 2 digits i.e. 0 and 1 for the creation of numbers. The numbers formed using these two digits are termed as Binary Numbers. Binary number system is very useful in electronic devices and computer systems because it can be easily performed using just two states ON and OFF i.e. 0 and 1. 

Decimal Numbers 0-9 are represented in binary as: 0, 1, 10, 11, 100, 101, 110, 111, 1000, and 1001

Examples:

14 can be written as 1110

19 can be written as 10011

50 can be written as 110010

3. Octal Number System

Octal Number System is one in which the base value is 8. It uses 8 digits i.e. 0-7 for creation of Octal Numbers. Octal Numbers can be converted to Decimal value by multiplying each digit with the place value and then adding the result. Here the place values are 80, 81, and 82. Octal Numbers are useful for the representation of UTF8 Numbers. 

Example: 

(135)10 can be written as (207)8

(215)10 can be written as (327)8

4. Hexadecimal Number System

Number System with base value 16 is termed as Hexadecimal Number System. It uses 16 digits for the creation of its numbers. Digits from 0-9 are taken like the digits in the decimal number system but the digits from 10-15 are represented as A-F i.e. 10 is represented as A, 11 as B, 12 as C, 13 as D, 14 as E, and 15 as F. Hexadecimal Numbers are useful for handling memory address locations. 

Examples: 

(255)10 can be written as (FF)16

(1096)10 can be written as (448)16

(4090)10 can be written as (FFA)16

Functions of the CPU, How to test the performance of the CPU, Multi core processor

 The Four Primary Functions of the CPU

The CPU processes instructions it receives in the process of decoding data. In processing this data, the CPU performs four basic steps:

1. Fetch: Each instruction is stored in memory and has its own address. The processor takes this address number from the program counter, which is responsible for tracking which instructions the CPU should execute next.
2. Decode: All programs to be executed are translated into Assembly instructions. Assembly code must be decoded into binary instructions, which are understandable to your CPU. This step is called decoding.
3. Execute: While executing instructions, the CPU can do one of three things: Do calculations with its ALU, move data from one memory location to another, or jump to a different address.
4. Store: The CPU must give feedback after executing an instruction, and the output data is written to the memory. After executing an instruction, the CPU must provide feedback and write the output data into the memory. The number of operations that the CPU can perform depends on its speed (in GHz Hz), and 1 Hz is the speed at which an operation can be performed in one second. Generally, the speed of a computer is measured in gigahertz. 1 GHz is the speed required by the CPU to perform one million simple tasks. “Simple tasks” include the smallest steps that the processor can perform. Generally, the processor understands and executes assembly instructions that last four cycles. The faster the CPU, the more instructions it can execute in one second, but don’t let this number fool you. CPU speed is not the only indicator that affects computer performance. In order to obtain independent results, many other factors must be evaluated, such as CPU architecture, cache size, and bus speed. When buying a processor, don’t simply pursue the highest speed. Evaluate all factors.

Multi-core processor

Multi-core processors are actually CPUs with two or more independent cores, which are similar to ordinary processors. They execute program instructions. The main advantage of a multi-core processor is that it can run multiple instructions at the same time. This function greatly improves the performance speed, and all programs with parallel computing functions can run on multi-core processors.

How to test the performance of the CPU?

Various benchmarks and tools can be used to test CPU performance. These tools bring heavy workload to the CPU. However, since the overall performance of the computer involves multiple components (CPU, RAM, video processor, etc.), simultaneous evaluation is used Benchmarks for all these components are important.

Features of Microprocessor

    Low Cost - Due to integrated circuit technology microprocessors are available at very low cost. It will reduce the cost of a computer system.

• High Speed - Due to the technology involved in it, the microprocessor can work at very high speed. It can execute millions of instructions per second.
• Small Size - A microprocessor is fabricated in a very less footprint due to very large scale and ultra large scale integration technology. Because of this, the size of the computer system is reduced.
• Versatile - The same chip can be used for several applications, therefore, microprocessors are versatile.
• Low Power Consumption - Microprocessors are using metal oxide semiconductor technology, which consumes less power.
• Less Heat Generation - Microprocessors uses semiconductor technology which will not emit much heat as compared to vacuum tube devices.
• Reliable - Since microprocessors use semiconductor technology, therefore, the failure rate is very less. Hence it is very reliable.
• Portable - Due to the small size and low power consumption microprocessors are portable