Knowing the banking business

Banking is a global phenomenon, and most of the major banking institutions have their presence globally or if not present physically, they have banking arrangements with other institutions.
The business of banking, as defined by law and custom, consists in the issue of notes payable on demand intended to circulate as money when the banks are banks of issue; in receiving deposits payable on demand, in discounting commercial papers; making loans of money on collateral security; buying and selling bills of exchange; negotiating loans, and dealing in negotiable securities issued by the government.
A banking deal for an ordinary person means that who wishes to consummate a deal of loan of money on a collateral for consideration, which may consist of interest, a fee or a part of the securities or property involved in the deal.
So far so good, the banking institution is a useful tool for expanding the state services to individuals and for maintaining a harmonious environment in the monetary sector. The banking institution provides many useful services in addition to its normal function as a depository institution. It helps individuals take loans. It also helps in buying and selling of bills of exchange, negotiating letters of credits and providing finance to major projects.
These services require professional teams for managing the banking affairs psychology, and law knowing people are required because the banking work encompasses imports and exports, dealing with financial markets, studying financial statements/reports (1) of their client institutions and knowing their financial responsibility. This responsibility is provided through state laws and has to be comprehended in its relevant field.
A bank, finance company or other persons, who in the ordinary course of business make, advances against goods or documents of title or who, by arrangement with either the seller or the buyer intervene in ordinary course to make or collect payment due or claimed under the contract for sale, or by purchasing or paying the seller's draft or making advances against it or by merely taking it for collection whether or not documents of title accompany the draft are peculiar functions of the banking and financial institutions. These are the kinds of acts which bank does in its capacity as financing agency. "Financing Agency" includes also a bank or other person who similarly intervenes between person, who are in the position of seller and buyer in respect goods.
A bank thus is a public institution and is confronted with a lot of practical difficulties while performing its multi/facet functions. Some of the problems faced include frauds, non-compliance, shirking of responsibility and mistrust. From this perspective, a liability arises on the bank management to prepare its employees for unforeseen crisis and difficulties, which may arise in dealing with the bank clients. For example, a common problem is non-payment of loans or bad debts.
It may be noted that client dealing is a complex issue. With the growing terrorism activities and money-laundering phenomena, the responsibility of an ordinary bank official have increased manifold and the concept of know your client or KYC has been introduced emphasising on the officials to probe their client or to prima facie confirm his antecedents. But it depends on the general outlook and understanding of an official how he comprehends his clients and their actual means of funds being deposited in the bank. How people can defraud? An example I remember an incident where a Saudi company asked us to form a recruitment company in Pakistan on their behalf. And as we asked them to give their identity for security check, they never turned up. This incident indicates that how complex is the world.
Another important area, important for banking, is loans and financial arrangements with corporate clients of the institution. While proposing grant of loan or financing arrangements, the basic requirement is to study financial documents submitted by the clients, risk analysis, and building up a proposal to the senior management, and thereafter drafting of agreements. This stage of the banking functions is crucial one as all subsequent events are dependents on proposal and related documentation in the form of agreements.
A common perspective is that banks are hesitant to advance loans to SMEs and salaried persons. This is a fact. Bankers argue that there are problems and such types of loans are fraught with risks. I will say that all banking transactions are fraught with risk. How much money is being presented for deposit? Whether monetary notes are genuine? Whether withdrawals are being made by a bonafide person? All these transactions confront challenges to the banker. But a properly trained and groomed banker knows how to tackle such issues. Similarly, the issue related to advances or loans to SMEs and small creditors is to be looked into objectively. Where documentation and analysis are perfect, there is no problem and recovery is automatic. But where there is weakness in creating a proper liability, all kinds of problems may creep up.
As regards the legal structure, it is perfect. Recovery of loans issue was considered and analysed by international financial institution and on their recommendation, Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act, 1997 was enacted whereby for the recovery of loans a summary procedure has been adopted, and the same has been provided in the law, and for a defaulter there is no escape. However, the delays took place due to errors and mistakes committed by bank officials, for example, the documentation presented before the Banking Tribunal is often not in conformity with Bankers' Books Evidence Act (XVIII of 1891) or a banker does not know about the Commercial Documents Evidence Act, 1939. If the banker is not aware about these important legislative enactments, it is very difficult to pursue a meaningful legal battle.
Furthermore, mortgage in a Port Town is simple one. It is known as 'English Mortgage' or 'Mortgage by Deposit of Title Deeds'. This form of mortgage is a perfect mortgage and the mortgagor does not have any risk.
Unfortunately, the banking companies have not been able to develop a perfect workforce, which possesses professional knowledge, techniques and awareness how to deal with clients and how to tackle the ensuing problems. This area therefore needs consideration and action.
By denying financing and loans to SMEs and salaried individuals, the banking institutions have left a wide gape to fill for the available banking business. These hurdles can only be overcome by a knowledgeable, efficient and willing workforce, and for that banks will have to invest on their available human talents.
1. A document setting out a secured party's security interest in goods. A document designed to notify third parties, generally prospective buyers or lenders, that there may be an enforceable security interest in the property of the debtor. It is merely evidence of the creation of security interest, and usually is not itself a security agreement.
Under the Uniform Commercial Code, a financing statement is used under Article 9 to reflect a public record that there is a security interest or claim to the goods in question to secure a debt.
(The writer is an advocate and is currently working as an associate with Azim ud Din Law Associates Karachi)