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1. v
CHAPTER 2
Commercial banks main activities and services
Banking Business Department
Banking Faculty-Banking Academy

2. Expected learning outcomes
Upon completing this chapter, the student should be able to:
-Describe different sources of bank deposits and borrowings
as well as calculate interest expenses relating to those
sources of funds
-Classify different types of retail and corporate lending
-Describedifferent types of bank trading activities
-Identify the main off-balance sheet items and key financial
services of a commercial bank

3. Content
2.1. Bank deposits and other sources of liabilities
2.2. Bank lending
2.3. Bank trading activities
2.4. Off-balance sheet activities
2.5. Bank servicies

4. 2.1 Bank depositsandothermainfunding
2.1.1. Deposits from customers
2.1.2 Deposits and borrowing from CBs and other Fis
2.1.3. Issue of valuable papers

5. 2.1.1 Deposit fromcustomers
•Deposit from customers constitutes the highest proportion of bank
liabilities
•Two main types of deposit
•Current (checking) deposit account
•Time (saving) accounts

6. Amounts of bank deposit by customers
Amount of bank deposits by customers

7. 2.1.2 Depositsandborrowingfromcommercialbanksand
otherfinancial intermediaries
•Other sources of funds for the bank:
•Money deposited by other banks
•Money borrows from other banks and the Central Bank
Some related terms:
•Interbank offer rates (LIBOR, SIBOR, VNIBOR)
•Discount rates/Fed Fund Rates

8. 2.1.3 Valuable papers/ Certificate of deposits
§CDsandothershort-termpaperissued:certificatesofdepositsare
certificatesgiventodepositorsinreturnfora(wholesale)deposit.
§CDsareshort-termsecuritiesandarere-saleableinthemarket.
§Foreignbanks:Theitemmaycontainpromissorynotesissuedbythe
bank,andsomeshortterminstruments(i.eunsubordinatedcapital
marketinstrumentsofanymaturityandsubordinatedloanstockswith
maturityoffiveyearsorless).

9. 2.2. LENDING
2.2.1 The lending process
2.2.2. Retail lending
2.2.3 Corporate lending

10. 2.2.1 The lending process
•“Lending”referstoaformofextensionofalineofcreditunder
whichacreditinstitutionoffersorundertakestoofferacustomera
sumofmoneyforspecificuseswithinanagreedtimeperiod
providedthatthatcustomeradherestotheprinciplethatboth
principalandinterestarisingmustberepaid.
(AccordingtoCircular39/2016/TT-NHNN)

11. 2.2.1 The lending process
Thelendingprocessinvolvesaseriesofactivitiessetbythebankto
accessabankloanapplication.Theloandepartmentofabankemploys
differentcreditprofessionalswithuniquerolesandresponsibilitiesthat
complementeachothertomakethelendingprocesscompleteand
ensurethesuccessfulrepaymentoftheloan

12. PROCESS
1
4
2
3Loan
monitoring
Loan Origination
Credit Analysis
Loan disbursement
Decisioning and
Approvals
6
Debt collection
and loan closing
The lending process illustration

13. 2.2.2 Retail lending
Retail lending refers to a credit institution's granting a loan to an individual or
household to pay for their consumpsion, living expenses or their family business.

14. LOANS TO
BUSINESS
HOUSEHOLDS
LOANS TO
PRODUCTION
HOUSEHOLDS
Types of retail lending (Vietnam)
CONSUMER
LOANS

15. Consumer lending –Calculating interest
Thereareseveralmethodstocomputeinterest(theextramoneythe
borrowerhastopayfortheusageofthemoneyasprincipal):compounding
interestmethod,effectiveinterestmethod,orsimplemethod.Herewelook
atthemostcommonway–thesimplemethod,inwhich:
-Theloanispaidupwithinnperiods(oneperiodcanbe1month,6months,
12months,theborrowerpaysupinnrepaymentperiods)
-Eachperiod,theborrowerpaysanequallumpsumoftheprincipleamount
andinterest,whichiscalculatedontheremainingbalance.
-ak:Totalprincipalandinteresttobepaidbythecustomerfortheperiod
Ik:interesttobepaidfortheperiod
v:principaldebttobepaidfortheperiod
V:loanamount(theprincipal)
n:numberofrepaymentperiods
ak=
v +Ik
v =
V / n
Ikis
calculated
on the
remaining
balance

16. Example
MrBrownplanistobuyaVND1bncarandhasrequestedaloanfromhis
bank.Thebankagreestofinanceupto75%ofthevalueofthecar,hecan
usesthecarascollateral.Theloanhasthefollowingterms:
Loanduration:5years
Interestrate:9%/year,interestiscalculatedfollowingthesimplemethod
Repaymentperiod:semi-annual
PrepareaspreadsheettoshowMr.Browntheinformationontheprincipal
andinterestpaidforeachperiod.

17. 2.2.3 Corporate lending
-Corporate lending refers to the credit service that provides to a company.
-Some banks may categorize firms into certain groups depending on the
firm’s size -normally based on the firm turnover -to provide adequate
services

18. Lending to small firms
Main types of credit extension to small firms:
Traditional loan
Overdraft
Asset based finance
Factoring and invoice discounting

19. Lending to mid-market and large firms
Short-term loans
Traditional loans
Overdrafts
Standby lines of credit
Asset-based finance (leasing and hire purchase)
Factoring and invoice discounting
Long term loans
Syndicated lending

20. 2.3 Bank trading activities
Abankbuysandholdsfinancialassetsasasourceofincomeand
liquidity.
-Whatistheexpectedincomeforabankfromthetrading
activities?
-Whatarethemainobjectivesforthebanktoperformtrading
activities?

21. Types of financial assets
Capital market
securities
Treasury bonds
Corporate bonds
Shares
Money market
securities
Treasury Bills
Certificates of deposit
Acceptance of a bill of
exchange

22. 2.4 Off balance sheet activities
Off-balancesheet-OBSreferstoanactivity,suchasabank
guarantee,commitment,orunderwriting,thatgenerates
incomeforthebank,butisnotrecordedasanassetorliability
itemaccordingtocommonaccountingstandards.

23. Example
Defer payment
Bank
customer
Beneficiary
The bank will pay if its
customer defaults
A bank payment guarantee

24. •MAIN FEATURES OF OBSs
It is a contingent liability for the bank. If the contingent event occurs, the item or activity will be written in the asset (or liability side) of the bank’s balance sheet
OBS exposures are converted onto the bank on-balance sheet as asset equivalent values and classified in the appropriate categories
Generating income for the bank as fees and/or commissions

25. -
200
400
600
800
1,000
1,200
1,400
1,600
Vietinbank
BIDV
Vietcombank
VPBank
Techcombank
MbbankTpbank
Saigonbank
Lienvietpostbank
On and off balance sheet exposures as of 30/9/2020
Tổng TS nội bảngTổng TS ngoại bảng

26. Others
Financial guarantee
Loan sale
MAIN CONCEPTS
Most popular OBS
Loan commitment

27. A loan commitment is a written agreement, signed by the borrower and
bank, detailing the terms and conditions under which the bank will fund
a loan. The commitment will specify a funding limit and have an
expiration date.
We can say the bank promises to lend up to a pre-specified amount to a
pre-specified customer at pre-specified terms.
For example: ACB avails 500 bnVND to HaiHa Kotobuki over a
period of two years for building a brand new factory to manufacture a
new type of sugar free cookies. Over the set period HaiHa may decide
to use only part (or even none) of the loan commitment.
MOST POPULAR OBS
(1) LOAN COMMITMENTS

28. Often for business
purposes
Are contingent liability
for the bank
Loan commitment
values are
often very high
MOST POPULAR OBS
(1) LOAN COMMITMENTS
Customers can use
part or even none
of the loan
commitment

29. MOST POPULAR OBS(1) LOAN COMMITMENTS
•Income for banks
SERVICING
FEECOMPENSATIN
G BALANCES
COMMITMENT FEEUSAGE FEE
a commitment fee:
expressed as a
percentage of the
total commitment
and paid up front by
the borrower
a usage fee: levied
on the unused
portion of the credit
line
servicing fees: on the
borrowed amount to
cover the bank’s
transactions costs
deposit balances the borrower
must keep at the bank during
the commitment, computed as
a fraction of the total
commitment and on which the
bank pays below market
interest rates

30. Financial guarantees are instruments used to enhance the credit
standing of a borrower to help ensure a lender against default and lower
the cost of borrowing.
With a financial guarantee a bank underwrites the obligations for a
third party, thus relieving the counterparty from having to assess the
ability of the customer to meet the terms of the contract.
Common examples of financial guarantees are commercial letters of
credit and banker’s acceptances/guarantees
MOST POPULAR OBS
(2) FINANCIAL GUARANTEES

31. FINANCIAL GUARANTEES
(1) LETTER OF CREDIT–L/C
Aletterofcreditisadocumentissuedbya
bankstatingitscommitmenttopaysomeone
aspecificamountofmoneyonbehalfofa
buyeraslongasthesellermeetscertainterms
andconditions.

32. A SIMPLE EXAMPLE OF L/C
It should be noted that with a commercial LC the importer’s bank usually
advances the payment and is repaid by its customer.

33. FINANCIAL GUARANTEES
(1) LETTER OF CREDIT–L/C
Dependingupontheimporter’screditworthiness,thebankmayaskthis
partytodepositassecure
Inthecasewhentheimporterdeposits100%oftheL/Cvalue,thenL/C
issimplyamethodofpayment,asthebankbearsnorisk
ThecasewhentheimporterdepositslessthantheL/Cvalue,thenL/Cis
bothamethodofpaymentandanoffbalancesheetitem,thebankincurs
delinquentobligations.

34. FINANCIAL GUARANTEES
(2) BANK GUARANTEES
-A financial guarantee is a bank promise to take the obligations for a third
party (its customer), if this party cannot fulfill his obligations written in
the underlying contract.
-Bank guarantees relieve the counterparty from having to assess the
ability of the customer to meet the terms of the underlying contract
-“Abankguaranteeisatypeofcredit,inwhichtheguarantorpromisesto
abeneficiarytotaketheobligationsforathirdpartyifthelattergoes
bankruptorcannotperformacontractualobligation.Ifthiseventoccurs,
thethirdpartyhastorepaytheguarantor”(Circular07/2015/TT-NHNN)

35. A bank guarantee diagram as illustration
The bank (Guarantor)
BeneficiaryGuarantee
Underlying contract
Bank guarantee
contract
Bank’s letter of guarantee

36. Abankcreditguaranteeisabankpromisetorepayonbehalfofitscustomerifthe
customerdefaults.
The bank (VCB)
Japanese Import
Export Bank
(Beneficiary)
Bỉm sơn
Construction
(Guarantee)
39
MOST POPULAR BANK GUARANTEES
CREDIT GUARANTEE

37. Abankpaymentguaranteeisabankpromisetothebeneficiary(theseller)torepay
onbehalfofitscustomer(thebuyer)ifthebuyerfailstorepayuptotheobligations
writtenintheunderlyingcontract.
40
MOST POPULAR BANK GUARANTEES
PAYMENT GUARANTEE
The bank (VCB)
Toyota –The
exporter
(Beneficiary)
MP –The importer
(Guarantee)

38. Abankcontractorguaranteeisabankpromisetothebeneficiary(theprocuringparty)
thatacontractoriseligibleforenteringatender.Inthecasethecontractorviolatesthe
termsandcannothandle,thebankwilltaketheobligation.
41
MOST POPULAR BANK GUARANTEES
CONTRACTOR/TENDERER/BIDER GUARANTEE
The bank (VCB)
Banking Academy-
Procuring party
(Beneficiary)
Vinaconex-
Constructor
(Guarantee)

39. MOST POPULAR OBS
(3) LOAN SALES
Aloansaleoccurswhenabankoriginatesaloanandthendecidesto
sellittoanotherlegalentity,usuallyafinancialintermediary.
Wherethebankissellingonlypartoftheloantheoperationiscalled
loanparticipationorloansyndication.
Astheloanissoldortransferred,itisremovedfromthebank’sbalance
sheet.However,theriskmaystaywiththeoriginalbankiftheloanis
soldwithrecourse.
Question: can you say the reason why banks wish to sell their loans?

40. Example: Simplified bank balance sheet before and after
loan sales (in £mil)

41. 3.5 Bank services
Bankservicesareservicesoutsidetraditionalbankfunctionssuchas
depositsandcredit.
Thatmeanswefollowa“narrow”definition—thoseactivitiesthatfall
intothebank’sintermediaryfunctionwouldnotbeconsideredas
services.
Let’stalkaboutsomebankservicesthatyoubecametoknoworhave
used?

42. Characteristics of bank services
A source of income
for the bank and
with increasing
proportion over total
bank income
Very diversified,
some are tailor-
made
Services are
provided upon
process, people, and
technology

43. SOME BASIC BANK SERVICES
(1) Payment
-Paymentservicesareservicesenablingcashdepositsand
withdrawals,executionofpaymenttransactions,issuingoracquisition
ofpaymentinstruments,theprovisionofmoneytransferservicesorany
otherservicefunctionaltothetransferofmoney.
Thebankprovidespaymentmethodsandmakepaymentsonbehalfofits
customers
Thebankearnsfeesfromprovidingpaymentservices
Listbenefitsofpaymentservices?

44. BASIC DOMESTIC PAYMENT SERVCIES
01
03
02
04
Money transfer
via accounts
Cash
deposits and
withdrawals
Payment order,
collection
authorization
Domestic
cards

45. List of payment services by BIDV

46. INTERNATIONAL PAYMENT SERVICES
-Internationalpaymentmeanstheprovisionofconductingpayments
andcollectionsdrivenfrominternationaltransactionsbetween
organizations,individualsofonecountrytothoseinanothercountry,by
anetworkofbanksaroundtheworld.
-Internationalpaymentaretransactionsthatinvolvemorethanjust
banks.Theyconnectcompanies,individuals,banks,andsettlement
institutionsoperatinginatleasttwodifferentcountrieswithdifferent
currenciesthatneedtobepaid.
Discuss the differences between domestic and international
payment

47. PAYMENT SERVICES PROVIDED BY BANKS
1
2
3
COLLECTION
L/C
REMITTANCES

48. Collection
Collectionofpaymentisaformofinternationalpaymentinwhichan
exporterispaidforitsgoodsbyanimporterafterthetwoparties'banks
exchangetherequireddocuments.Theexporter'sbankcollectsfunds
fromtheimporter'sbankinexchangefordocumentsreleasingtitletothe
shippedmerchandise,usuallyafterthegoodsarriveattheimporter's
location.

49. The collection process illustration

50. The process
(1) Signing the contract
(2) The exporter makes the shipment
(3) The exporter prepare the documents of shipments and settlements
(4) The exporter requests the exporter bank to inform the bank of the
importer
(5) The importer bank inform the importer regarding the
shipment/documents
(6) The importer makes the payment
(7) The importer is sent the documents
(7) Payment
(8) Payment

51. Letter of credit (L/C)
A letter of credit, or "credit letter" is a letter from a bank guaranteeing
that a buyer's payment to a seller will be received on time and for the
correct amount. In the event that the buyer is unable to make a payment
on the purchase, the bank will be required to cover the full or remaining
amount of the purchase.
The bank makes the payment to the exporter only upon certain
conditions
There are different types of L/C
Can you list some types of L/C?

52. Illustration of the process of L/C

53. The process of L/C
(1) The importer asks the importer bank to issue a L/C
(2) The importer bank issues a L/C, if the request approved
(3) The advising bank informs the exporter
(4) The exporter makes the shipment
(5) The exporter prepare the documents of shipments and settlements,
sends them to the nominated bank
(6) The nominated bank verifies and discount the bill
(7) The nominated bank asks repayment from the issuing bank
(8) The issuing bank verifies the documents and repay the the
nominated bank
(9) The issuing bank sends the documents and requests repayment from
the importer
(10) The importer checks the documents and repay the issuing bank

54. Remittances
-Remittancesaremoneysentthroughthebankingnetwork,inwhichthe
senderasksthebanktosendanamountofmoneytoabeneficiary(often
inaforeigncountry).Thebankearnssomefeesfromprovidingthis
service.
-Oftenthebankjoinaninternationalnetwork/ortobeparticipateinan
organizationtosend/receivemoneyinternationally.Forexample,VCB
cooperateswithBPRemitLimited—alicensedmoneytransfercompany
intheUK,foritscustomerstosendmoneyoverseastoVietnam

55. (3)E -BANKING
E-banking (electronic –banking)is now regarded as part of an overall
distribution strategy, particularly in retail banking, and it is offered by
all major banks.
Some e-banking services:
Traditional’ remote banking services (ATMs and telephone banking),
online PC banking, internet banking services
Banks operate without branches exclusively via remote banking
channels
Mobile banking

56. E –BANKING SPECTRUM
Virtual bank
services
Internet bankingMobile banking

57. BANCASSURANCE
-Bancassuranceis an arrangement between a bank and an insurance
company allowing the insurance company to sell its products to the
bank's client base.
-This partnership arrangement can be profitable for both companies.
Work in groups:
-Discuss the benefit for the bank and the insurance
company for this cooperation
-Do you know the value of the bancasssurancemarket?
-Do you think the bank should provide insurance own its
own?