Commercial banks are in the classic business of accepting deposits and making loans. The business is both retail and wholesale.
Retail banking covers current accounts, check facilities, savings accounts, credit cards and loan facilities like overdrafts, personal loans and mortgages. Increasingly, Internet developments are leading to the spread of home banking. Clearing of payments may involve checks or electronic payment systems. Checks are expensive and banks are trying to reduce their use through Internet banking and the use of debit cards. Key issues in retail banking today are the growing competition, control of costs, sales of non-banking products and the use of information technology. In particular, growing links between banks and insurance companies have led to the word “bancassurance”.
Wholesale banking covers bank lending to larger entities then those met in retail banking and activities-the money markets, foreign exchange and finance for trade. Those may be uncommitted or committed. Uncommitted facilities include overdrafts, lines of credit and banker’s acceptance. Committed facilities include term loans, standby credit, revolving credit and project finance. Syndicated loans are common for large value domestic and cross-border business. There are arranging banks, co-managers, which is paying banks and agent banks.
Various fees are involved — facility or front end fee, underwriting fees, agent fees and commitment fees. Finally, there is the loan margin. The loan agreement covers the amount alone, its purpose, and draw down facilities, interest calculations and provisions. Among the provisions will be covenants. These are designed to protect the bank’s financial position if the borrower financial situation worsens. They include interest cover, networks, total borrowing, gearing and current ratio. Other provisions cover events of default. There will also be a negative pledge-the client undertakes not to offer security against the loan from another party. Falling profit margins on corporate loans have led many commercial banks into riskier lending.
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