recommended solutions to enhancing the efficiency of capital mobilization at maritime bank in the context of global economic crisis

MINISTRY OF FINANCE
ACADEMY OF FINANCE
FACULTY OF FOREIGN LANGUAGES
-----*****-----

GRADUATION THESIS
RECOMMENDED SOLUTIONS TO ENHANCING
THE EFFICIENCY OF CAPITAL MOBILIZATION
AT MARITIME BANK IN THE CONTEXT OF
GLOBAL ECONOMIC CRISIS

ĐỖ THỊ QUỲNH MAI
CQ47/51.03
Hanoi - 2013


MINISTRY OF FINANCE
ACADEMY OF FINANCE
FACULTY OF FOREIGN LANGUAGES
-----*****-----

RECOMMENDED SOLUTIONS TO ENHANCING
THE EFFICIENCY OF CAPITAL MOBILIZATION
AT MARITIME BANK IN THE CONTEXT OF
GLOBAL ECONOMIC CRISIS
SUMMITED IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE DEGREE OF BACHELOR OF ART IN
ENGLISH FOR FINANCE AND ACCOUNTING

Student
: Đỗ Thị Quỳnh Mai

Class
: CQ47/51.03
Supervisor : Ms. Cao Phương Thảo
Hanoi – 2013


i

DECLARATION
I declare that this thesis and the work reported herein was composed by and
originated entirely from me. Information derived from the published and
unpublished sources has been acknowledged in the text by means of complete
references.

Hanoi, dated 6th May 2013
Student’s signature

Do Thi Quynh Mai


ii

ACKOWLEDGEMENT
First and foremost, I would like to express my sincere gratitude to my advisor, Ms
Cao Phuong Thao- lecturerof English Linguistic Theories and Translation, in
English for Finance and Accounting Faculty in Academy of Finance for her
continuous support of my graduation thesis, for her patience, motivation,
enthusiasm and immense knowledge. This thesis would not have been possible
without the help and advice of Ms Cao Phuong Thao. The good advice, support her
has been invaluable on both academic and personal level, for which I am extremely

grateful. I owe my deepest gratitude to my supervisor for her constant and
invaluable guidance during my graduation thesis. Her attention, moral support and
timely suggestions were precious in the preparation of my thesis.

I am very

thankful to my supervisor for putting me in the track of this research.
Beside my advisor, I would like to express my deep appreciation to Ms Le Thai
Ha- a financial analyst at Financial Management Centre of Maritime Bank and also
my mentor for her generous help and useful advice in particular issues related to
capital mobilization. She is always willing to give me the necessary data for my
research. With her profound knowledge, experience and professional working
manner in banking sector, she helped me a lot in analyzing data, gave me many
constructive comments and valuable suggestions. Additionally, I would like to
thank other people at Financial Management Centre of Maritime Bank for sharing
the lunch table very often with me and the discussion during the lunch time is a
nice memory.
I am very much grateful to Maritime Bank board of director for offering me
opportunities to participate in the “Potential Internship Trainee Program”. I am


iii

thankful to Maritime Bank leaders for providing the nice and friendly working
environment and creating favorable conditions for me to accomplish my thesis.
Moreover, it is a pleasure to thank all members of my thesis reading committee at
Academy of Finance for spending their time on careful reading of my thesis as
well as for their valuable comments
I met some very kind peers who made me stay enjoyable at Maritime Bank. I am
thankful to all of my colleagues in the Internship Group at Maritime Bank during

my Internship process for sharing me useful experience and knowledge.
Last but not least, these acknowledgements would not be completed without
expressing my sincere thanks to my family and friends for their unconditional love
and support. It is their frequent encouragement during my process of implementing
this dissertation that has played as the spiritual foundation and given me strength to
fulfill this challenging task and make it such a success


iv

ABSTRACT

Capital is one of the most significant input factor for any enterprises not just
banks- a special financial intermediation in the economy. Mobilizing capital is a
basic activity of commercial bank.

Capital is not only the mean of banking

business activities but also the subject of commercial banks’ business operations.
Mobilizing capital is the primary objective of commercial banks’ business strategy.
In the context of global economic downturn, capital mobilization has become an
urgent requirement to commercial bank. The research studies the theories of capital
mobilization applied by the system of Vietnam commercial bank system. It focuses
on the actual mobilization of Maritime Bank by analysing the figures and
information reflecting the bank’s financial situation. It also examines difficulties in
mobilizing capital facing commercial bank and mentions some achievements and
shortcomings in capital mobilization activities existing in this bank. More
importantly, the dissertation proposes measures and recommendations to help
commercial bank diversify its methods of raising capital and improve the
efficiency and quality of capital mobilization in the context of global economic

downturn.


v

LIST OF CONTENT
INTRODUCTION......................................................................................................................... 1
CHAPTER 1: LITERAL REVIEW............................................................................................... 5
COMMERCIAL BANK AND CAPITAL MOBILIZATION OF................................................. 5
COMMERCIAL BANK ................................................................................................................. 5
1.1.

General overview of commercial bank. .......................................................................... 5

1.1.1.

Definition of commercial bank. ............................................................................5

1.1.2.

Function of commercial bank...............................................................................6

1.1.2.1.

Act as financial intermediation.............................................................................6

1.1.2.2.

Act as agent of payment ........................................................................................7

1.1.2.3.

Creation of money .................................................................................................7

1.1.3.

Role of commercial bank in the economy ............................................................8

1.1.3.1.

Accelerating the rate of capital formation............................................................9

1.1.3.2.

Provision of Finance and Credit ..........................................................................9

1.1.3.3.

Monetization of Economy .....................................................................................9

1.1.3.4.

Implementation of Monetary Policy ...................................................................10

1.1.3.5.

Encouragement to the investment in new enterprises .......................................10

1.1.3.6.

Balanced development of different regions........................................................10

1.1.3.7.

Fulfillment of Socio- economic objectives. ........................................................11

1.1.4.

Banking operations. ............................................................................................11

1.1.4.1.

Capital mobilization ............................................................................................11

1.1.4.2.

Capital utilization ................................................................................................11

1.1.4.3.

Agent services ......................................................................................................13

1.2. Capital and capital mobilization of commercial bank ..................................................... 15
1.2.1

Definition of capital.............................................................................................15


vi

1.2.2.

Capital structure of commercial bank. ...............................................................15

1.2.2.1.

Bank owner’s equity............................................................................................15

1.2.2.2.

Mobilized capital..................................................................................................16

1.2.3.

Role of capital of commercial bank ....................................................................17

1.2.3.1.

Capital is the prerequisite for business operations of commercial bank. .........17

1.2.3.2.

Capital determinesthe credit scale and the business scale of commercial bank18

1.2.3.3.

Capital ensures solvency and enhance prestige of commercial bank ...............18

1.2.3.4.

Capital enhances the competitiveness of commercial bank. .............................18

1.3.

Capital mobilization of commercial bank..................................................................... 19

1.3.1

Methods of mobilizing capital of commercial bank. ..........................................19

1.3.2.

Factors affecting capital mobilization of commercial banks ............................20

1.3.2.1.

Objective factors ..................................................................................................20

1.3.2.2.

Subjective factors.................................................................................................21

CHAPTER 2: THE STUDY ........................................................................................................ 24
THE PRACTICAL SITUATION OF CAPITAL MOBILIZATION AT MARITIME BANK.. 24
2.1.

Introduction to Maritime Bank (MSB) ........................................................................ 24

2.1.1.

History and development of Maritime Bank ......................................................24

2.1.2.

Business philosophy of Maritime Bank..............................................................26

2.1.2.1.

Vision ...................................................................................................................26

2.1.2.2.

Mission.................................................................................................................26

2.1.2.3.

Core vale ..............................................................................................................26

2.1.2.4.

Declarations of action .........................................................................................26

2.1.3.

Products and services provided by Maritime Bank............................................27

2.1.3.1.

Personal banking products .................................................................................27

2.1.3.2.

Corporate and business banking products .........................................................28


vii

2.1.4.

Organizational structure of MSB .......................................................................28

2.1.5.

Business result of MSB .......................................................................................32

2.2.

The real situation of capital mobilization of MSB.............................................34

2.2.1.

Capital scale and capital growth rate of MSB ...................................................34

2.2.2.

Mobilized capital structure of Maritime Bank ...................................................35

2.2.3.

Result of capital mobilization at Maritime Bank. ..............................................39

2.2.3.1.

Borrowing from the Government and State Bank of Vietnam (SBV)...............39

2.2.3.2.

Deposits and borrowings from other credit institutions. ..................................41

2.2.3.3.

Deposits from customers. ....................................................................................47

2.2.4.

Expense of capital mobilization activities of Maritime Bank ............................56

2.2.4.1.

Interest rate of mobilized deposits. .....................................................................57

2.2.4.2.

Capital mobilization expenses.............................................................................58

2.3.

Assessment of practical capital mobilization situation of MSB. ................................. 60

2.3.1.

Achievements .......................................................................................................60

2.3.2.

Shortcomings .......................................................................................................62

2.3.3.

Causes of shortcomings ......................................................................................63

2.3.3.1.

External causes....................................................................................................63

2.3.3.2.

Internal causes ....................................................................................................65

CHAPTER 3: RECOMMENDATIONS ..................................................................................... 66
RECOMMENDED SOLUTIONS TO ENHANCING EFFICIENCY OF CAPITAL
MOBILIZATION AT MARITIME BANK ................................................................................. 66
3.1.

Business orientation of Maritime Bank ....................................................................... 66

3.2.

Recommended solutions to enhancing the efficiency of capital mobilization of

Maritime Bank.......................................................................................................................... 68
3.2.1.

Diversifying capital mobilization products.........................................................68


viii

3.2.1.1.

Diversifying types of products.............................................................................69

3.2.1.2.

Diversifying terms of deposits .............................................................................71

3.2.2.

Adopting flexible interest rate policy. .................................................................71

3.2.3.

Enhancing service quality...................................................................................72

3.2.4.

Promoting good will of Maritime Bank..............................................................73

3.2.5.

Investing in modernizing banking technology and improving banking

infrastructure.

..............................................................................................................................73

3.2.6.

Strengthening marketing activities to stimulate mobilized capital....................74

3.2.7.

Harmonizing capital mobilization and capital utilization .................................75

3.2.8.

Improving human resources. ..............................................................................76

3.3.

Proposals to enhance the efficiency of capital mobilization of Maritime Bank. ........ 76

3.3.1.

Proposals to the Government ..............................................................................76

3.3.2.

Proposals to the State Bank of Vietnam .............................................................78

CONCLUSION ........................................................................................................................... 81
REFERENCES............................................................................................................................ 83


ix

LIST OF ABBREVIATIONS
1. ADB: Asian Development Bank
2. ALCO: Assets and Liabilities Committee
3. BIDV: Bank for Investment and Development of Vietnam
4. CDs: Certificate of Deposits
5. FS: Financial Statement
6. HR: Human Resources
7. M&A: Merge and Acquisition
8. ODA: Official Development Assistance
9. SVB: State Bank of Vietnam
10.VDB: Vietnam Development Bank
11.WB: World Bank


x

LIST OF TABLES
Title

Page

Figure 2.1: Organizational chart of MSB

31

Figure 2.2: Business results of MSB during the period from 2010 to 2012

33

Figure 2.3: Capital scale of MSB over the period from 2010 to 2012

35

Figure 2.4: Structure of mobilized capital according to methods of mobilizing

37

Figure 2.5: Borrowings from the Government and SBV

40

Figure 2.6: The growth rate in the borrowings from SBV

41

Figure 2.7: Structure of deposits and borrowings from other credit institutions

42

Figure 2.8: Structure of deposits of other credit institutions

45

Figure 2.9: Structure of borrowings from credit institutions

47

Figure 2.10: Deposits from customers by terms

49

Figure 2.11: Deposits from customers by types of money

50

Figure 2.12: Deposits from customers by types of customers

52

Figure 2.13: Proportion of saving deposits out of total deposits

54

Figure 2.14: Structure of saving deposits from customers according to maturity

56

Figure 2.15: Effective year end- annual interest rate of mobilized capital

58

Figure 2.16: The growth rate of mobilized capital and mobilized capital expenses

59

Figure 2.17: Expenses for capital mobilization of MSB

60


1

INTRODUCTION
Global economic crisis has become a matter of considerable public concern
recently. It has become widespread and caused so many negative consequences on
the world economy. Of course, the global economic crisis is no longer a new
phenomenon. It is considered the inevitable movement of the economic revolution.
The global financial crisis, brewing for a while, really started in the America and
rapidly expanded to other world economies. According to economic integration
and global entanglement in recent decades, the global economic crisis has
dramatically impacted on every aspects of the world economy. Around the world,
stock markets have fallen, many corporations went bankruptcy and large financial
institutions have collapsed or been bought out. In even the wealthiest nations, the
government has had to come up with rescue packages to bail out their financial
system. Many economists forecast a somber picture and pessimistic outlook of the
future of the world economy.
Fundamental to the survival of any organizations is its ability to mobilize
necessary financial resources to forward its own purposes. It goes without saying
that capital is the prerequisite to any business activities in the economy especially
in the banking sector. The Banking Sector has for centuries formed one of the
pillars of economic prosperity. Banking operations play a great significance to the
stability and the development of national economy. It is difficult to establish a
prosperous economy without a sound banking system, which is able to effectively
mobilize and utilize capital. Indeed history provides us with some starting

information regarding how banks provided finance for imperialist ventures in
newly acquired colonies. Over time banks have formed an important part in
providing an avenue for both savings and investments. Commercial banks play role


2

as a special financial intermediary serving the general public in the economy. The
bank’s financial position maintains the financial structure and motivates operations
on the financial market. Banks facilitate growth and development of national
economy.
As a result of global financial meltdown, banking sector has experienced a period
of volatility. Commercial banks, make no exception, cannot avoid the general rule
of the economy. They have been under pressure of the economic downturn and
have coped with many difficulties. Many of them have been merged or taken over.
One of the challenges facing commercial banks nowadays is the capital
mobilization and many of them have found difficulties in raising capital. As an
important financial intermediary in the economy, capital is not only a necessary
condition for business but it is also a bank’s business object. Moreover, raising
capital is one of the most vital demands for commercial banks to avoid negative
impact of global economic crisis. Therefore, enhancing the capital mobilization
efficiency has aroused as a matter of considerable concern among commercial
banks. As a member in Vietnam banking system, Maritime bank has also
participated in performing the task of the entire banking industry: Mobilizing
capital to overcome difficulties in the period of economic downturn.
From the above reasons, along with the experience obtained during the internship
trainee program at Maritime Bank, which is a prestigious financial institution with
more than 20 years of operating in financial sector and has taken many challenges
on the market, I decide to focus on the recommendations aiming at enhancing the
capital mobilization efficiency for the Maritime Bank in the context of global

economic crisis. It is an urgent and debated topic not only to the experts in
banking, finance, and economics but also to the public.
2. Aims of the study


3

The thesis aims at summarizing basic theoretical issues and emphasizing the
importance of capital mobilization activities of commercial banks especially in the
context of global financial crisis.
Furthermore, it provides a general overview of the practical financial situation of
Maritime Bank. It especially focuses on analyzing and assessing the real financial
operations of Maritime bank in general and the field of capital mobilization in
particular.
And more importantly, the dissertation will propose some typical options to
improve the efficiency of capital mobilization of Maritime Bank so that it can
overcome difficulties in the context of widespread financial meltdown and suggest
some orientation to the Bank’s future development as well.
It is expected that this research would become a helpful reference, at least in
respect of theory for the experts in finance and banking sector as well as the
student in need of researching this finance and banking sector.
3. Methodologies of the study
So as to perform this study, I decide to combine various methods such as methods
of collecting data, qualitative and quantitative analyzing, summarizing, assessing,
synthesizing and comparing to interpret the content of the thesis.
4. Scope of the study
This paper is intended, as title suggests “Recommended solutions to enhancing the
efficiency of capital mobilization of Maritime Bank in the context of global
economic crisis” to touch on the following issues:
Analyze the real situation of capital mobilization activities at Maritime Bank in the

context of global economic crisis, and assess these achievements and shortcomings
in capital mobilization.


4

5. Organization of the study
The thesis includes three main parts
The first part is the introduction, which provides a theoretical background and
deals with rationale, purposes, methods, scope and organization of the study
The second part is the main part of the dissertation with three chapters
Chapter 1 is a literature review, which give a general overview and background
knowledge of Commercial Bank and its capital mobilization activities.
Chapter 2 focuses on reflecting the practical situation of capital mobilization of
Maritime Bank in the context of economic downturn.
Chapter 3 discusses the solutions to enhance the efficiency of capital mobilization
activities for Maritime Bank in the future.


5

CHAPTER 1: LITERAL REVIEW
COMMERCIAL BANK AND CAPITAL MOBILIZATION OF
COMMERCIAL BANK
1.1.

General overview of commercial bank.
1.1.1. Definition of commercial bank.

Banking occupies one of the most important positions in the modern economic

world. It is necessary for trade and industry. Bank is one of the results of the
Industrial Revolution and the child of economic necessity. Its presence is very
helpful to the economic activity and industrial progress of a country.
The term “Bank” has been defined in various ways by different economists.
Horace White defined a bank, “as a manufacture of credit and a machine for
facilitating exchange”.
Prof Kinley says “Bank is an establishment which makes to individuals such as
advances of money or other means of payments as may be required and safely
made for use.
According to the World Bank, “Banks are financial institutions that accept funds
in form of deposits repayable on demand or in short notice”
According to Vietnam Law on Banking promulgated in 1997, commercial bank is
a form of oriented profit- seeking business institution entitled to carry out all
banking activities and other related activities. In general, commercial bank is a
profit-seeking business firm, dealing in money and credit. It is a financial
institution dealing in money in the sense that it accepts deposits of money from the
public to keep them in its custody for safety.


6

1.1.2. Function of commercial bank.
Commercial bank is the financial institution performing diverse types of function
in the economy. It satisfies the financial needs of variety of sectors in the process
of economic social needs. These are some basic functions of commercial bank.
1.1.2.1. Act as financial intermediation
Commercial banks play an important role in the financial system and the economy.
As a key component of the financial system, banks allocate funds from savers to
borrowers in an efficient manner. They provide specialized financial services,
which reduce the cost of obtaining information about both savings and borrowing

opportunities. A commercial bank accepts deposits from customers and in turn
makes loans even in excess of the deposits. The most important function of
commercial banks is to accept deposits from the public. Various sections of
society, according to their needs and economic condition, deposit their savings
with the banks. For example, fixed and low income group people deposit their
savings in small amounts from the points of view of security, income and saving
promotion. On the other hand, traders and businessmen deposit their savings in the
banks for the convenience of payment. It thus, functions as a mobiliser of saving in
the economy.
Commercial banks are not only borrowers of money from the public but also are
providers of credit. Banks lend money in several ways but they all cost the
customers who borrow. They must pay back the loan with interest and it is in this
manner that banks make profit. Banks charge interest from the borrowers and this
is the main source of their income. Banks grant loans not only on the basis of the
deposits of the public rather they also advance loans on the basis of depositing the
money in the accounts of borrowers.


7

A bank is, therefore like a reservoir into which flow the savings, the idle surplus
money of households and from which loans are given on interest to businessmen
and others who need them for investment or productive uses
1.1.2.2. Act as agent of payment
An important function of banks is the provision of mechanism of payment and
transfer of funds. Transferring balances among accounts is an activity that banks
perform, upon receipt of checks issued by deposits holders. Bank provides a
payments and collection mechanism primarily to attract deposits.
1.1.2.3. Creation of money
Banks are not merely traders in money but also important sense manufacturers of

money. Commercial banks play a crucial role in the expansion and contraction of
the supply of money and credit in our economy. Through their lending activities,
banks increase or decrease the checking deposit component of the money supply.
Checking deposits make up the largest portion of our money supply. Economists
have defined numerous measures of the money supply to pinpoint the impact of
money supply changes on our economy's health. M1 is the basic measure of our
money supply. M1 includes coins and currency in people's hands plus the funds
available in checking accounts. M1 functions as the primary medium of exchange
in our economy. M2 is a broader definition of the money supply and includes M1
plus savings accounts, certificates of deposit, and money market funds. Banks
operate under a fractional reserve system which means they are required by law to
set aside a fraction of their customers' deposits as required reserves. Banks may
lend an amount equal to their remaining reserves which are called excess reserves.
Banks earn revenue and profits through lending and charging interest on loans.
They also increase or decrease the checking deposit component of the money
supply through lending. The process whereby banks make loans equal to the


8

amount of their excess reserves and create new checkbook money is known as
multiple deposit creation. Each time a bank receives a deposit, it sets aside some of
it to meet reserve requirements and may lend an amount equal to the remaining
excess reserves. These loans take the form of new checking accounts for the
borrower which increases the checkbook portion of the money supply. When the
borrowers spend the loan, they write a check on the new checking account. The
recipient of the check, in turn, deposits his or her funds into another bank. After
this second bank sets aside its required reserves against the new deposit, it may
lend an amount equal to its remaining excess reserves. These loans also take the
form of new checking accounts for the borrowers, and each successive cycle of

lending generates an increase in the money supply in the form of these new
checkbook dollars. Additionally, with each round of new deposit creation, there are
fewer excess reserves. The deposit creation process is multiplied throughout the
entire banking system until all excess reserves have been absorbed into required
reserves.
1.1.3. Role of commercial bank in the economy
Commercial banks are considered not merely as dealers in money but also the
leaders in economic development. They are the store houses of the country’s
wealth and the reservoir necessary for economic development. A well- developed
banking system is essential for the economic growth of a country. The activities in
the economy may be difficult to smoothly happen without a sound system of
commercial banking. In case of developing countries like Vietnam, the commercial
banks are considered the backbone of the economy. They contribute toeconomic
development in the following roles


9

1.1.3.1. Accelerating the rate of capital formation
Capital formation is the most important determinant of economic development.
The basic problem of a developing economy is slow rate of capital formation.
Banks promote capital formation and they encourage the habit of saving among
people. They mobilize idle resources for production purposes. Economic
development depends upon the diversion of economic resources from consumption
to capital formation. Banks help in this direction by encouraging saving and
mobilizing them for productive uses. They accept deposits from individuals and
businesses, these deposits are then made available to the businesses, which make
use of them for productive purposes. Banks are, therefore, not only the store
houses of the country’s wealth, but also provide financial resources necessary for
economic development.

1.1.3.2. Provision of Finance and Credit
Commercial banks are a very important source of finance and credit for industry
and trade. Credit is a pillar of development. Credit lubricates all commerce and
trade. Banks become the nerve center of all commerce and they are instruments for
developing internal as well as external trade.
1.1.3.3. Monetization of Economy
An underdeveloped economy is characterized by the existence of a large nonmonetized sector. The existence of this non-monetized sector is a hindrance in the
economic development of the country. The banks, by opening branches in rural
and backward areas can reduce the exchange of goods through barter and promote
the process of monetization (conversion of debt into money) in the economy.
Thanks to increasing use of money in business transaction, the volume of
production of goods sharply rises.


10

1.1.3.4. Implementation of Monetary Policy
Economic development needs an appropriate monetary policy. A well-developed
banking is a necessary pre-condition for the effective implementation of the
monetary policy. Control and regulation of credit by the monetary authority is not
possible without the active co-operation of the banking system in the country. The
central bank of the country controls and regulates volume of credit through the
active co-operation of the banking system. It helps in bringing price stability and
promotes economic growth within the shortest possible period of time.
1.1.3.5. Encouragement to the investment in new enterprises
Innovations are an essential prerequisite for economic development. These
innovations are mostly financed by bank credit in the developed countries. But in
underdeveloped countries, entrepreneurs hesitate to invest in new ventures and
undertake innovations largely due to lack of funds. Facilities of bank loans enable
the entrepreneurs to step up their investment on innovational activities, adopt new

methods of production and increase productive capacity of the economy. The
provision of timely credit increases the productive capacity of the economy.
1.1.3.6. Balanced development of different regions
Banks can also play an important role in achieving balanced development in
different regions of the country. They transfer surplus capital from the developed
regions to the less developed regions, where it is scarce and most needed. Thanks
to this transfer, the less developed regions are able to get adequate capital to meet
their business demand. This reallocation of funds between regions will promote
economic growth in the country.


11

1.1.3.7. Fulfillment of Socio- economic objectives.
In recent years, commercial banks, particularly in developing countries, have been
called upon to help achieve certain socio-economic objectives laid down by the
state. Banking is thus used to achieve the national policy objectives of reducing
inequalities of income and wealth, removal of poverty and elimination of
unemployment in the country.
1.1.4. Banking operations.
There are two main typical operations of commercial banks: capital mobilization
and capital utilization.
1.1.4.1. Capital mobilization
Capital mobilization is a traditional business activity of commercial banks.
Commercial banks mobilize idle capital from different sources in the economy
including individuals, organizations, and enterprises. Capital mobilization is vital
to both the commercial banks and the entire economy. Commercial banks are
allowed to use legal tools and methods to mobilize idle financial sources in society
for the purpose of providing credits and making loans.
1.1.4.2. Capital utilization

Capital utilization is a primary banking operations reflecting the process of using
funds to ensure business safety, avoid risks and seek profits. Capital utilization
includes the particular operations
a) Reserves
Credit creation of commercial banks aims at seeking profit but these activities need
to provide safety in order to preserve the public confidence in banking system. In
case customers want to withdraw money, banks should set aside a portion of


12

money to meet their cash demands and ensure the solvency. This portion of unused
capital is known as reserves.
b) Credit creation
Banks supply money to traders and manufacturers. They also create or
manufacture money. Bank deposits are regarded as money. They are as good as
cash. The rest of capital after being reserved can be supplied to individuals and
organizations. The credit creation includes the basic activities:
v Advance loans
Banks charge interest from the borrowers and this is the main source of their
income. Banks advance loans not only on the basis of the deposits from the public
but also on the basis of mobilized fund from current accounts of borrowers. In
other words, they create loans out of deposits and deposits out of loans. This is
called as credit creation by commercial banks. Modern banks give mostly secured
loans for productive purposes. In other words, at the time of advancing loans, they
demand proper security or collateral. Generally, the value of security or collateral
is equal to the amount of loan. This is done mainly with a view to recover the loan
money by selling the security in the event of non-refund of the loan. At limes,
banks give loan on the basis of personal security also. Therefore, such loans are
called as unsecured loan.

v Discounting Bills of Exchange
This is another type of lending which is very popular with the modern banks. The
holder of a bill can get it discounted by the bank, when he is in need of money.
After deducting its commission, the bank pays the present price of the bill to the
holder. Such bills form good investment for a bank. They provide a very liquid
asset which can be quickly turned into cash. The commercial banks can rediscount
the discounted bills with the central banks when they are in need of money. These


13

bills are safe and secured bills. When the bill matures the bank can secure its
payment from the party which had accepted the bill.
v Financial lease
This is a type of medium or long term credit, in which commercial banks purchase
assets, and then lease that asset to a client or lessee for a specific amount of time.
At that point, clients take possession of the asset and it is free to utilize the asset
for the duration of the lease agreement. Once the client has fulfilled the terms of
the lease, including paying any applicable interest, the client are allowed to
continue the leasing contracts or have options to return the leasing asset to the
lesser or to purchase it at the low price.
v Bank guarantee
Sometimes banks acts as representatives or correspondents of their clients so that
they can borrow from other banks or perform the signed economic contracts.
c) Investment
Investment play a significant role in the business activities of commercial banks
and it brings great revenue for banks. Banks purchase and sell various types of
securities such as shares, stocks, bonds, bills. Investment not only helps banks gain
profit but also diversifies risks.
1.1.4.3. Agent services

Banks also perform certain agency business activities for and on behalf of their
customers. The agency services are of immense value to the people at large. The
various agency services rendered by banks are as follows:
v Collection and Payment of credit instrument
Banks collect and pay various credit instruments like cheques, bills of exchange,
promissory notes on behalf of their customers.