WEST UNIVERSITY OF TIMISOARA
THE FACULTY OF ECONOMY AND
SPECIALIZATION: FINANCE & BANKING
Scientific coordinator: Student:
NÃÂ£chescu Miruna, Lecturer PhD Sicoe Dorian-Vlad
WEST UNIVERSITY OF TIMISOARA
THE FACULTY OF ECONOMY
AND BUSINESS ADMINISTRATION
SPECIALIZATION: FINANCE & BANKING
The services offered by BRD to individuals
Scientific coordinator: Student:
NÃÂ£chescu Miruna, Lecturer PhD Sicoe Dorian-Vlad
TABLE OF CONTENTS
CHAPTER 1: THE IMPORTANCE OF BANKING.
THE TRADITIONAL THEORY OF BANKING
Short history of bankingÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦..7
Banking and financial intermediaryÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦....9
The organizational structure of banksÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦..........11
Classification of banksÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦13
CHAPTER 2: BANKING SERVICES
2.1 Banking accounts. The opening and closing of accountÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦....22
2.1.1 Opening the accountsÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦.24
2.1.2 Closing the accountsÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦...27
2.2 Passive operationsÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦..29
2.3 Determining the medium balance of resources from the bank, related to clients' availabilities accountÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦....30
2.4 Active operationsÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦..31
2.5 Crediting operations. Principles and general conditions of the crediting operationÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦.33
2.6 The cost of creditÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦..38
2.7 Currency lendingÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦.39
2.8 Crediting a trade company as one of the main banking servicesÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦41
2.9 Crediting an individualÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦...42
CHAPTER 3: BRD'S POSITION ON THE ROMANIAN MARKET
3.1 BRD's historyÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦.44
3.2 Organization and management of the bankÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦45
3.3 BRD's performanceÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦47
3.4 The banking offered to individualsÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦49
3.4.1 Savings productsÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦..50
3.4.2 Crediting productsÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦51
3.4.3 Remote banking servicesÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦...53
3.4.4 Packages of products and servicesÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦55
CHAPTER 4: GRANTING A PERSONAL LOANÃ¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦Ã¢ÂÂ¦.57
This paper aims to present the banking services that BRD - Groupe Societe Generale offers its clients.
The bank offers a wide range of services, each one specific to a type of need. The clients' needs are changing over time, so banks constantly change their offer of products and services, in order for the clients to be satisfied.
The paper is divided into four chapters, each one of them having several subchapters.
The first chapter presents some general aspects of banks, their functions, a classification, and also a brief history of the banking system.
The second chapter talks about the various services offered by banks, as well as the various operations banks perform for their customers. Each one of them is describes thoroughly.
The third chapter talks about BRD: a short history, its performance on the market and the various services it offers to its clients, mainly individuals.
The fourth and final chapter is a particular case, and it presents the situation of a client who came to the bank in order to obtain a personal loan.
Given the role and the importance that banks have to the smooth functioning of the economic entities and of the economy per ensemble, the existence of a modern system that is capable of managing crisis situations and to offer a wide range of banking products and services is needed. The services have a high level of quality and they satisfy the demands of all categories of economic agents from the market economy.
The banking system is at the heart of each market economy, because it ensures the framework that offers the possibility of mobilizing all monetary funds from the economy and using them in order to have a normal social-economic activity.
The banking sector is organized on two levels according to the 58/1998 Law, the credit institutions and the central bank, respectively. The credit institutions are established as joint stock companies and whose activity includes attracting funds from the population and from the economic agents, granting credits and performing a wide range of banking services. The central bank includes the National Bank of Romania.
The central bank is an institution located at the forefront of the banking system, and has both the roles of supervising and organizing of the monetary-financial relations of a state, both internally and in relation with other monetary systems.
Because an efficient banking system requires decentralization and competition, the National Bank sought to stimulate the formation of a system of universal central banks, which has the right to perform a wide range of banking operations and to operate within a country, in compliance with the banking supervision framework imposed by the central bank.
Although the legislation favors the competition for the financial system and has founded banking systems oriented towards the markets' demands, the position held by commercial banks continues to be the dominant one.
Although old banks have been obliged to restructure and to modernize their activity in order to correspond to the new demands, they have the existing advantage of subunits networks, distributed across the country.
Improving banking performances, as a result of the banking management optimization involves making an optimum report between assets and liabilities, by joining two factors. On one hand, there is the optimization of the report between active interests and passive interests, and on the other hand, there is the optimization of the structure of investments and resources.
BRD's strategy is integrated in Societe Generale's global strategy: maintaining the equilibrium between the service portfolio and the risk portfolio, for ensuring the development and long term profitability in parallel with maintaining efforts for an operational efficiency.
BRD wishes to be Romania's reference bank through professionalism, innovation, the quality of development and profitability. In this sense, BRD will follow the investment policy sustained in order to adapt its commercial device to the Romanian market's specific, and to diversify its range of products and services. The bank has over 2, 6 million customers (individuals) and over 2, 3 million cards, its market share varies between 15% and 20% depending on the products. BRD is a reference bank in the Romanian private sector, with over
65% of its credits being granted for small and medium enterprises and microenterprises.
BRD plays an important part in the relation with multinational societies, benefitting from Societe Generale's support.
THE IMPORTANCE OF BANKING.THE TRADITIONAL THEORY OF BANKING
1.1 SHORT HISTORY OF BANKING
In order to answer the question "Why do banks exist?", it is useful to begin with a definition of a bank, using a very simple model of the traditional role that banks have played in the economy, acting as intermediaries between depositors and borrowers.
A bank is defined by the Oxford dictionary as "an establishment for the custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds."
Banks are normally distinguished from other types of financial firms in that they provide deposit and loan products. The deposit products pay out money on demand, or after some notice. Thus, banks are in the business of managing liabilities, and, in the process, bank also lend money, thereby creating bank assets. Alternatively, one can argue that banks are in the business of managing assets, which are funded by deposits or other liabilities.
The banking system finds its origins in the distant past; there are evidence attesting the existence of banking practices. The first bankers were those that were performing exchange of money. This was the moment when metallic coin first appeared and circulated.
The first proofs of banking activity are found in the Middle East and in Ancient Egypt. The temples were both places of worship and places where money and treasures were kept. By borrowing these riches, priests had a double purpose: they obtained gratitude and a little profit. The first proofs could be the accounting tablets discovered by archeologists in Mesopotamia, under the ruins of the Uruc temple. This temple dates back from 3400-3200 B.C and it is the oldest known bank headquarters. There are written testimonies regarding activities of loans and deposits performed by temples. The Code of Hammurabi (1728-1686 B.C), discovered in Susa, back in 1901 has details referring to deposits, loans the charged interest and the loan reimbursement.
At the beginning of the 6th century B.C, each commercial town starts issuing its own currency, which gave birth to various exchanges. Because each state had its own currency, the need of exchanging one currency with another one appeared. This operation was known as currency exchange.
During the early development of the Roman Empire, the Romans didn't show any interest regarding specific banking activities. As they conquered Greek cities, they began to understand the importance of banks, and so banks began developing on Roman territory (both state and private banks). These banks charged fees for the operations they performed, but they couldn't charge any interest.
In the 6th century, in the Byzantine Empire, the emperor Justinian modifies the Roman practice regarding the banking activity, by introducing the requirement for fixed interests.
During the Middle Ages, monasteries play an important part in performing specific banking activities. Although the practice of granting loans with interest was condemned by both the church and the society, pawn shops played a positive social role. This role was materialized in the functions that they had: transporting coins, conversion of various currencies and collecting taxes. In the 12th century, the Genovese were handling insurances and performed currency exchanges, while also receiving deposits from particular individuals, prepared trade bills and borrowed funds from the performed deposits. Terms like bank, banker and bankruptcy date back from that period.
The 14th-16th centuries were marked by important historical events that also influenced the banking activity. The most significant phenomenon in this field was the reappearance of Spanish (Taula de Cambi, from Barcelona) and Italian public banks (Casa di San Giorgio, Genoa).
In parallel, private banks spread in Europe, a prominent place, occupied by Italians (the Medici, Strozzi and Chigi families), French (the Coeur family), English (the Gresham family) and Germans (the Fugger family).
The trade developments of banks lead to the existence of permanent business centers. So, in 1531, in Anvers the first financial market known as the stock exchange opened and immediately after, the London Stock Exchange opened. Thus, the distinction between financial markets and banks is stated.
The first transfer bank was the Bank of Venice, established in 1171, and officially recognized as Banca di Rialto in 1637. In the following centuries, similar banks and other commercial centers appeared: Geneva (1407), Amsterdam (1609), Hamburg (1619) and Rotterdam (1635).
During the 17th-18th centuries, the banking activity developed in all state formations, and also, during this period, the first banknotes were issued. The Bank of Amsterdam (1609) and the Bank of England (1694) became the models on which future banking structures were based. Also, during this period, banks that fulfilled the same functions as modern central banks appeared.
The establishment the Bank of England represents an important moment in banking history, because it was considered the first ever central bank.
Unlike other European countries, France didn't have a significant development of the banking institution. Nevertheless, in France, the most modern monetary experience took place: the issue of credit currency, performed by J. Law.
In 1791, the First Bank of the United States was established. It combined the role of a central bank with central banks' specific operations. In 1800, the Bank of France was also established.
Until the 19th century, the banking system concentrated on three specific areas:
Banks of issue, which owned the monopoly of issuing national banknotes;
Commercial banks, which operated as intermediary institutions for operations of public subscriptions
Specific financial institutions: savings banks, building societies, and credit cooperatives, destined to satisfy the public's needs.
In modern banking systems, there are a whole range of specialist banks, which focus on niche markets, and generalist banks, which offer a wide range of banking and other financial products, as diverse as deposit accounts, loan products, real estate services and life assurance. For example, there are firms which act as "private bankers", accepting deposits from high net worth individuals, and investing in a broad range of financial assets.
All modern banks act as intermediaries between borrowers and lenders, but they may do so in a variety of different ways, from the traditional function of taking deposits and lending a percentage of these deposits, to fee-based financial services.
BANKS AND THE FINANCIAL INTERMEDIATION
Why is it that we can't observe profit-maximizing firms offering the intermediary function? Why can't borrowers and lenders come together, without an intermediary? The answer is twofold. First, the presence of information costs undermines the ability of a potential lender to find the most appropriate borrower, in the absence of intermediation. Second, borrowers and lenders have different liquidity preferences.
There are four types of information costs.
Search costs will exist whenever there is a contract between two parties. Transactors and transactees have to search out, obtain information about, select, meet and negotiate with other parties to a contract. When it comes to bringing borrowers and lenders together, the individual parties concerned would have to incur these costs if a bank did not.
Verification costs also exist because before money is loaned out, lenders must verify the accuracy of the information being provided by the borrower. Asymmetry of information between borrower and lender will give rise to a problem of adverse selection, which will cause inefficient allocation in markets.
Monitoring costs are also created because once a loan is negotiated, the activities of the borrower must be monitored, to ensure it is possible to distinguish between legitimate and unsound reasons for a borrower missing, say, a payment date.
In any contract, either of the parties to the contract may breach its conditions, and the injured party has to take action to either enforce the contract or seek compensation in the event of breach of contract. Thus, contracts carry enforcement costs. When money is loaned by one party to another, it is typically the borrower who is unable to meet the commitments as promised.
These four types of information costs will be incurred by any lender. If a bank can, through its intermediary function, allow lenders (depositors) to offer loans with lower associated information costs than they would incur if they tried to negotiate with a borrower directly, then individuals will choose to make deposits at a bank. Borrowers will seek out banks if the search (and possibly enforcement) costs associated with negotiating a loan are lower than if the borrower sought out an individual.
Unlike an individual lender, the bank may enjoy informational economies of scope.
Economies of scope are said to exist when two or more products can be jointly produced at a lower cost than if the same products are produced individually. Informational economies of scope in lending mean banks can pool a portfolio of assets which have a lower default risk but the same expected return than what would be possible if depositors had tried to lend funds directly. Banks may be able to gain informational economies of scope in lending decisions, because they have access to privileged information when making a lending decision; banks can also obtain information on future borrowers because they hold accounts at the bank. It is often not possible to bundle up and sell this information, so banks use it internally, to increase the size of their loan portfolio.
Banks design and implement loan contracts to improve the prospects of the loan being repaid. For example, a bank might write restrictive covenants into the loan contract to give it some control over the firm's management. In addition, it will demand collateral as insurance for unforeseen developments after the loan contract is agreed.
Differences in liquidity preferences also explain why banks exist. Banks transform illiquid assets into liquid liabilities. Firms in the business sector typically want to borrow funds and either repay them in line with the expected returns of an investment project, which may not be realized for several years after the investment. By lending funds, savers are actually agreeing to forgo present consumption in favor of consumption at some date in the future. Either the borrowing or the lending (depositors) parties may change their minds because of unexpected events. If banks are able to pool a large number of borrowers and savers, it is likely that both parties are going to be satisfied because the banks have the necessary liquidity. Thus liquidity is an important service a bank offers to its customers, and if it can offer this service at a lower cost than what would be incurred in the absence of bank intermediation, borrowers and lenders alike will demand the services of the bank.
There is a link between the payments (more generally, liquidity) service a bank offers and its lending, even though the latter activity means banks are holding what are largely illiquid assets in their portfolios. Depositors earn a rate of return on their deposits, but have access to liquidity. Loans give borrowers more liquidity. Most customers will hold deposits in surplus (unless offered full overdraft facilities) because the cost of maintaining the balance which just matches payments demands is too high. These transaction costs mean most customers will only demand a fraction of their deposits at a given point in time. For the bank, which pools these surplus funds, there is an opportunity for profit through fractional reserve lending, that is, lending out money at an interest rate, which is higher than what the bank pays on the deposit, after allowing for the riskiness of the loan and the cost of intermediation. Therefore, bank intermediation and payments services are inextricably linked. Banks can profit by combining payment and intermediation services to their customers, since the payment function of money overlaps with the store of value function of money. Additionally, banks achieve a reduction in the riskiness of a loan portfolio through risk pooling.
Even potential borrowers are likely to keep deposits at a bank if they think they are less likely to be credit-rationed when they ask for a loan. Firms may also be attracted to bank debt finance over other types of finance because it signals to the market that the customer is creditworthy, enabling the firm to gain cheap sources of funds from other sources (Fama, 1985). Another contribution was made by Stiglitz and Weiss (1988), who argued that a loan made to a firm by a reputable bank was a signal to others that the firm is likely to stay in business, encouraging customers and suppliers to enter into long-term relationships with the firm.
Lewis (1991) argued that in financial markets, information and liquidity problems are overcome either by organized markets which are created by or exist within financial firms. For example, stockbroking firms operate in organized markets by making markets in certain stocks; banks as lenders operate in informal markets, because the loan decision-making process is internal to the bank organization.
Thus, one may also think of bank products as a collection of contracts. Traditionally, banks offered contracts which differ from those which would be exchanged on organized markets. For example, because banks "borrow short and lend long", firms can negotiate loans for longer periods while savers can lend for shorter periods than would be available on organized markets. However, most modern banks are also active in organized markets, through, for example, off-balance sheet activity, or because they own a stockbroking subsidiary.
THE ORGANIZATIONAL STRUCTURE OF A BANK
Another question one needs to address is why a bank exhibits the organizational structure it does? Any profit-maximizing bank shares the same objective as any other firm; so this question is best answered by drawing on the traditional models which explain firms' existence. Coase (1937), in his classic analysis, argued that the firm acted as an alternative to market transactions, as a way of organizing economic activity, because some procedures are more efficiently organized by "command" (for example, assigning tasks to workers and coordinating the work) than reliance on market price. In these situations, it is more profitable to use a firm structure than to rely on market forces.
The existence of the "traditional bank", which intermediates between borrower and lender, and, which offers a payments service to its customers, fits in well with the Coase theory. The intermediary and liquidity functions of a bank are more efficiently carried out by a command organizational structure, because loans and deposits are internal to a bank. Such a structure is also efficient if banks are participating in organized markets. These ideas were developed and extended by Alchian and Demsetz (1972), who emphasized the monitoring role of the firm and its creation of incentive structures. Williamson (1980) argued that under conditions of uncertainty, a firm could economize in the costs of outside contracts.
A principal-agent problem exists within any firm, because both internally and externally, its activities are a collection of contracts between principals and agents. The principal-agent problem arises if the principal (for example, the depositor) delegates some authority to the agent (for example, the bank) to act on his/her behalf. But the agent has some more information about his/her own characteristics than the principal. So the principal may not get exactly what he/she wants because the task has been delegated to the bank. For depositors, customers purchasing fee-based services from the bank, and a bank's shareholders, there is the question of who monitors the bank. This is a classic problem between principal and agent; customers delegate some control over their financial affairs to an agent, who may lack the incentives to act in the customers' best interests, and can plead bad luck when outcomes are poor. The principal-agent theory also explains the nature of contracts between the shareholders of a bank (principal) and its management (agent), the bank (principal) and its officers (agent) and the bank (principal) and its debtors (agent). Incentive problems are created because the principle cannot observe the agent's actions (for example, bank shareholders and management) or the principal has inferior information compared to the agent (for example, the bank manager and the borrower).
Differences in information held by the principal and the agent can give rise to adverse selection, if an agent, the firm, borrows money from a bank, the principal. Moral hazard is another potential problem if the principal, the depositor, invests money in the agent, a bank. Moral hazard arises whenever, as a result of entering into a contract, the incentives of the two parties change, such that the riskiness of the contract is altered. There are several reasons why depositors do not monitor bank activities closely enough. First, the depositor's cost of monitoring the bank becomes very small, the larger and more diversified is the portfolio of loans. Though there will always be loan losses (they are inherent in the nature of the contract), the pooling of loans will mean the variability of losses approaches zero. Second, deposit insurance schemes reduce the incentives of depositors to monitor the bank. If a bank can be reasonably certain, a depositor either cannot or chooses not to monitor the bank's activities once the deposit is made, then the nature of the contract is altered, and the bank may undertake to invest in more risky assets than it would in the presence of close monitoring. Shareholders do have an incentive to monitor the bank's behavior, to ensure an acceptable rate of return on the investment. Depositors may benefit from this monitoring. But shareholders also face agency problems if managerial utility functions are such that managerial action conflicts with shareholder interest.
Relationship banking can help to minimize the principal-agent and adverse selection problems arising between a lending bank and borrowers. Lender and borrower have a relational contract: an understanding between both parties that it might be some time before certain characteristics related to the contract can be observed. The customer establishes a relationship with a bank whereby, over an extended period of time, the customer uses the bank for its financial needs. For example, a corporate borrower may come up with a brand new production technique, the fruits of which may not be realized until some years later. The bank has to decide whether the plan is worth the credit risk. If the two have had a long-standing relationship where the individual or the firm has never defaulted or run into serious financial difficulties, the bank is better able to assess the riskiness of the new venture, and therefore, more likely to enter into a loan agreement. Even though a clause in the loan agreement will mean the bank can recall the loan at any time, the borrower knows that would be highly unlikely, because of the nature of the relationship. A relational contract improves information flows between the parties, and allows the lender to gain specific knowledge about the borrower. It also allows for flexibility of response, should there be any unforeseen events.
An arm's-length transactional or classical contract is at the other extreme, and gives rise to transactional banking, where many banks compete for the customer's business, and the customer shops around for several banks. Little in the way of relationship exists between the two parties; both sides stick to the terms of the contract. In banking, there is more scope for borrower opportunism in a relational contract, because of the information advantage the borrower normally has.
Relationship banking is more evident in countries such as Japan and Germany, where there are cross-shareholdings between banks and non-financial corporations. In other countries, such as the United States and the United Kingdom, classical contracts are more evident, though there is a high variance in the degree of relationship banking depending on whether it is in or out of vogue. In Japan and Germany, the close bank-corporate relationships were, in the '70s and the '80s, praised as one of the key reasons for the success of these economies. But in the '90s, global financial deregulation has undermined relationship banking, because it has increased the number of methods for raising corporate finance, and the number of players in the market. In Japan, the close relationship enjoyed by groups of firms (including a bank) is being undermined because Japanese banks suffered a drastic reduction in the market value of their equity portfolios due to the prolonged decline in the stock market after 1990.
CLASSIFICATION OF BANKS
From the point of view of the banking management, it's important to take into consideration the criteria which influence the way of organizing, the informational system, the decisional process as well as the appointment of the senior staff.
Among the coordinates outlining the four criteria, the following must be taken into consideration:
The role they have in the national banking system
Depending on their ownership , banks can be classified into the following categories:
Private Banks are characterized by the fact that their capital belongs to a person or a group of persons. Private Banks are mainly stock companies, whose capital is divided in a large number of shares with a certain nominal value. Influence over the bank's management is manifested in the meeting of shareholders and it depends on the number and the value of the own shares. The distribution of the profit is made depending on the number of shares each shareholder owns. The decisions regarding the election of the administrators and auditors, the approval or disapproval of the balance, fixing the dividends, the size of the capital and capital increase are taken by the ordinary and extraordinary general meetings of shareholders.
State banks' main feature is the fact that their whole capital is owned by the state in which they operate. In most cases, they are known as specialized banks and their profitability is more reduced compared to the private banks' profitability. The state has to interfere when they prove they are not reliable.
Joint banks function as stock companies, in which the state is one of the main shareholders.
Depending on their national membership , banks can be classified into the following categories:
National banks whose main characteristic is the fact that their capital is owned by individuals and juridical persons residing in the state, where the bank operates. These banks are part of the national banking system, functioning under the supervision of the respective state's Central Bank
In the category of multinational banks we can find the International Monetary and Financial Organisms. Their capital is constituted by subscribing Central Banks from member states. Their management is ensured by the governors of the member states. They also grant credits to member states. And finally, they supervise the functioning of the international financial-banking markets.
Joint banks are constituted through the capital contribution of two or more partners from different states, and they are subject to the legislation of the state in which they operate. The bank's incomes are divided amongst partners, depending on each one's contribution in constituting the bank's capital. The bank's activity is supervised by the Central Bank of the country in which it operates; They function as stock companies.
Depending on their role in the national banking system, banks can be classified into the following categories:
Central banks are governmental institutions which ensure the functioning and supervision of the banking system at national level, through the responsibilities acquired through their establishment
Commercial banks perform operations of granting credits, payments and transactions with and without cash in RON or foreign currency, portfolio investments, consultancy activities. They also manage the clients' financial titles.
At their turn, commercial banks can be classified as:
Universal banks perform all the operations done by commercial banks. They also perform security operations, regarding their issue, subscription, placement and negotiation. These banks make integration between the commercial activity and the business bank, by promoting their efficiency. They also allow obtaining savings costs and they stimulate the financial activity, through the banking operators' entering in other financial areas.
Business banks are financial intermediaries which ensure specialized professional services in mobilizing financial resources other than banking credits. Unlike commercial banks, which grant loans, business banks offer professional services for mobilizing funds from various resources.
Deposit banks are similar to commercial banks, in the sense that they constitute demand or term deposits and they grant loans with deadlines differentiated by sectors.
Mortgage banks grant long term loans for housings guaranteed by mortgages
Trusty banks ensure the collection of debts and their recovery, ensuring the liquidity anticipated by creditors.
Specialized banks which grant medium and long term loans in sectors, in which they are specialized, by purchasing resources with long term deposits.
Correspondent banks are those banks who own accounts of other banks, from the outside borders, based on reciprocity.
Off-shore banks function in certain free zones. They perform operations only with non-residents, ensuring the anonymity of their identity. Off-shore areas offer to economic subjects fiscal facilities, wide freedom (absence of exchange control), the possibility to perform operations with residents in any foreign currency and anonymity of financial operations. In the same time, the domestic loan capital market is isolated from the residents' accounts. The classical version of off-shore areas does not involve financial and administrating activities in the off-shore area of non-residents. In terms of fiscal facilities, there are many versions. In off-shore areas in Ireland and Liberia, taxes are not collected, while in Switzerland, taxes are collected, but in small amounts. In off-shore areas in Lichtenstein, Antilles Island and Panama, when the firm is registered, a unique fee is charged.
In order to fully understand their functions and main characteristics, the central banks and the commercial banks will be fully described below.
The monetary policy can be categorized only in the conjuncture of free market economy, because, only within that category do the premises of the two level banking system's well-functioning are met.
This structure involves the existence of a bank, which in the course of its historical evolution, or due to some political and economical conjunctures existent at some moment, assumed the state's attributions regarding the monetary policy. This bank has detached from other banks, because it has acquired a leading position among them, and also because it leads the monetary policy at the state level. Through this evolution, the central bank has become the monetary authority in the state. From this position, the central bank has dominated and then monopolized the monetary issue. This privilege has determined a secondary characteristic of the central bank: it has kept the national gold reserve and the deposits of other banks, by concentrating a big part of the liquid reserves in the economy.
The other banks form the second level of the banking system and depending on their specialization; they can be commercial banks, business banks, investment banks and so on.
In some cases, the central bank was initially private, pursuing the making of profit. The privileges and the dominant position of the central bank within the system involved taking responsibilities, which determined the reorientation of its activity from the field of profit maximization.
Due to the modification of their objectives, central banks reoriented towards specific activities: crediting banks from the system, influencing the currency, the credit and the interest rate, maintaining the official course of the national currency, controlling inflation, promoting the production and increase of the workforce.
The central bank must be independent, taking into consideration its position of monetary authority. From this position, the central bank must exercise its control right over the monetary policy in a democratic society. The motivation of this affirmation is the fact that the democratic institutional system must allow the government to exercise its attributions in the monetary field, without benefiting from an absolute power and without allowing the use of these attributions for political purposes.
The monetary evolution of developed countries has brought into mainstream some modalities of realizing the banking system, in which the monetary authority is represented by the central bank:
The transition to a monetary system based on a standard (gold or purchasing power) involved defining the standard and its management by an authority. Since the privilege of coining the money was owned by the state, the control over the monetary circulation belonged to the government. The temptation was that these monetary elements based on a standard without any real value would be issued over the limits allowed under the pressure of consumption needs. In such conditions, the state's privileges in monetary terms and its authority were given to a distinct entity, whose only activity concerned administrating the monetary mass.
The establishing an independent monetary authority, following the need to control the monetary policy and to separate it from political pressures. In this situation, there are two distinct modalities of functioning the central bank's autonomy: relative independence, which supposes the control of the central bank's activity towards a separate organism of the central state administration subordinated directly to the Prime Minister or other central institution and the absolute independence, which supposes that the central bank should function separately by the government and in coordination with the legislative, executive and judiciary powers, in which case the only control of the activity is made by a legal entity, for example a judiciary authority.
The establishment on the basis of legal regulations, regarding the central bank's activity firstly involves the explicit formulation of the objectives of the monetary policy. Generally, the main task attributed to central banks is ensuring a stable price index or maintaining a constant purchasing power. These elements are not directly influenced by the banking activity, but they can be controlled by the restriction of the monetary offer by the central bank. Generally, the legislative package, which regulates the banking activity, must prevent the rapid accumulation of the pressures in a single way, thus producing disequilibrium. So, in order to keep a positive monetary status based on a relative equilibrium, the central bank must establish a monetary discipline.
The central bank's independence of the government has advantages and disadvantages:
In favor of a big autonomy of the central bank, the following arguments are presented: the need of isolating the monetary policy from the political process, because the monetary policy is tributary to national interests of economic stability, while the objectives of a government are set for a brief period of time, in which rapid results must be obtained capable of perpetuating the political leadership; the practical impossibility of attributing to an executive branch a strong responsibility, because of the endless discussions generated from such a situation; ensuring real and correct information, which is hard to anticipate, if it would be presented by a party involved with political responsibility.
In the detriment of a big autonomy of the central bank, the following arguments are presented: the need of correlating the leading banking institution with the monetary policy that the executive wishes, taking into account the fact that it represents a major responsibility of the government; the need of correlating the monetary policy with the other governmental policies in order to ensure social welfare; the difficulty of coordinating measures in the monetary field with the other political measures; the danger of the monetary policy's subjectivism due to this activity's close connection with a small number of individuals.
The autonomy of central banks in Romania is among the highest, taking into consideration the fact that the mandate of the senior staff is the longest existent in democratic countries.
Also, there is a strong connection with the government, because it has no members in the bank's management, it is not involved in naming the managers and the information between the two power centers (executive and monetary) is purely informational. In the case of our country, the government is not involved in any of the central bank's decisions, which demonstrates once again the independent character of the monetary authority.
In Romania, the central bank grants short term loans to the state's treasury and, unlike most democratic states, it doesn't participate at the subscription of debt securities. Like most central banks from free market economies, doesn't establish ceilings on interest rates at deposits and credits.
We can say that a new financial legislation creates the premises for ensuring the National Bank of Romania, a maximum autonomy comparable with that of central banks considered to be the most independent worldwide (The Federal Reserve System, The National Bank of Switzerland, The Central Bank of Germany).
The central banks fulfill a set of specific functions.
Firstly, the central bank must fulfill the function of influencing the behavior of the banking system in order for the economic purposes to be fulfilled. This influence is made by using specific work instruments of the central bank. There are two types of such instruments:
The central bank has the following functions: monetary policy center, issue of money, crediting the national economy, bankers' bank, exchange center, state's bank and state's representative in international financial relations.
The monetary policy center function is very important because it represents the definitive activity for a central bank's profit. This function has appeared as a result of the need to finance the state treasury, maintaining money's purchasing power, a non-inflationist economic growth and the financial equilibrium characteristic to orderly financial markets. In order for these purposes to be achieved, it's essential that the monetary policy be implemented through specific instruments by the central bank.
The monetary policy must be integrated within the field of economic policy, along with the other elements of economic policy (fiscal policy, commercial policy, price policy and currency policy). It must lead to the integration of economic actions, in order to achieve strategic objectives.
The privilege of issuing money was given by the state to the central bank, in exchange of an agreement that the bank subscribe each loan requested by the state. In the 19th century, this privilege turned into a monopoly, the central banks becoming the sole issuers of banknotes with discharge payment power. In Great Britain, the central bank has organized a distinct department for issuing money, while the rest of the activities are done in the banking department.
The function crediting the national economy is done by commercial banks, which refinance from the central bank in various ways: rediscount, Lombard advances, repurchase contracts, short term credit lines and so on.
So, the central bank plays the role of lender of last resort of the national economy, by supervising the economy's liquidity. Depending on the country, this role is viewed differently. For example, in the United States, this function is manifested only when all the alternatives of purchasing supplementary resources have been exhausted.
The function of bankers' bank is connected with the national economy's crediting function, but in this case there is a direct involvement of the central bank's activity in the activity of commercial banks on several levels:
The central bank regulates the functioning of commercial banks, banks that operate only with the central banks' approval and according to the functioning norms it imposes
The central bank regulates and manages the liquid availabilities of commercial banks from national banking system, which are held in an account opened at the central bank.
The central bank ensures the normal performance of payments between commercial banks within the economy by regulating the circulation of payment instruments and by ensuring the institutional framework of running the monetary transactions and the provision of services referring to the circulation of payment documents.
Sustaining and establishing the foreign currency purchase represents another intervention possibility of the central bank, both internally and externally. This is made through the active participation at transactions on the exchange market, thus determining the influence of currency demand/offer on this market with the purpose of ensuring the relative stability of the exchange rate.
Another objective to follow through this function is the dynamic equilibration of the balance of receipts and external payments.
A significant aspect of the exchange policy refers to exercising the exchange control. There are at least three ways of ensuring this control:
By establishing a special department at the central bank level (the case of Romania and Germany)
By establishing an independent organism (the case of Belgium and the Netherlands)
By cooperating with governmental structures (case of Switzerland, France and Italy)
Historically speaking, the function of state's bank is the first appeared and it actually is the reason why the first central banks were established, with the purpose of ensuring the financing of public expenditures. In time, the need for ensuring a financing that will not affect the national currency's future purchasing power, has appeared. Because of this, in many countries, the cover-up of budgetary expenses through the use of monetary issue is forbidden by law. In Romania, according to the financing law, the indirect financing of the state by banks is also forbidden.
The most common method of practical financing in developed countries is the opening of credit lines in order to ensure flexibility to the current budgetary management. This way of financing represents a direct way of financing, of borrowing of the Treasury.
Also as a way of direct financing of the Treasury, the central bank could also interfere by buying public debt titles from the primary market, just like in Italy or Great Britain. Indirectly, most central banks operate on the secondary market, influencing the offer or title demand of the public debt depending on the moment's conjuncture and the objectives of the monetary policy.
In countries in which the state didn't manage to consolidate a separate Treasury service, the central bank took over the attributions of cashier of the state, becoming the institution responsible for the execution of cashing operations of the state. However, the central bank administrates the Treasury's current account. In most states (the United States, Belgium, Romania, Germany), the central bank does not calculate the interest for the Treasury's account availabilities; in Italy, the interest is of 1%, in France, the interest is calculated at the minimum level of the latest interventions on the monetary market, in Great Britain, at market level, and in Switzerland at the official tax level. For the services targeted towards the Treasury, the central banks do not charge any fees.
Because of its position within public institutions, the central bank is able to represent the state in international financial relations and in international financial organisms.
In law number 101/1998 regarding the National Bank of Romania's status, it is stipulated that "the National Bank of Romania participates in the name of the state in external negotiations regarding monetary financial problems. The National Bank of Romania can negotiate and close agreements regarding short term loans and performing swap operations with central banks, commercial banks and international monetary institutions, with the condition that they are reimbursed after one year and that they are registered in the National Bank of Romania's annual report." The National Bank of Romania can close in its own name or in the name of the state the clearing and payment agreements and it can close any other contracts with the same purpose as central clearing, public and private institutions, which are located abroad.
The term "bank" comes from the Italian "banca". "Banca" was used to describe the place where bankers used to develop their activities. If the banker didn't respect his obligations and assumed duties, he would have lost his reputation and thus lost his right to operate.
The large difference between limited operations, performed by bankers at the beginning of the banking system and the wide range of services offered by modern banks is quite obvious. As banks developed, many experts tried to define the concept of "bank", but they couldn't reach an accepted definition.
A bank is an institution that is granted the permission (generally as an authorization or license) to perform transactions with money. In other words, a company is known as a bank if it is officially recognized as a bank. Although this is a "closed" definition, it is generally accepted.
According to the norms regulating the banking activity in our country, "banking societies are juridical persons, whose main activity objective is attracting funds from individuals and legal persons in the form of deposits and negotiable instruments payable on demand or on term, as well as granting credits." (Law number 58/1998).
The three main functions of commercial banks are:
Attracting cash deposits from clients, individuals and legal persons (attracting funds)
Allowing clients to withdraw cash and to transfer them in another accounts
Grant loans to clients that request loans, using the attracted deposits (placement of funds)
The role of banks is not limited only to the functions mentioned above. The banking activity is intertwined with the economic activity, also having the role of serving the decisional process and taking measures regarding the state's financial-monetary policy.
Some authors (Dedu V. in "Management Bancar", Editura Sildan, Bucuresti, 1996, pages 3 and 4) distinguish another function of commercial banks, that of economic creation which is manifested financially and technically. Financially, the function of economic creation is expressed in the following forms:
Intermediation in investment securities and offering services connected to it;
Administrating clients' portfolios in their name and at their risk;
Custody and administration of securities;
Depository for the purpose of collective investment securities
Renting safe deposit boxes
The most important function of a commercial bank is to accept deposits from the public. Generally, there are three types of deposits, current deposits, fixed deposits and savings deposits.
In the case of current deposits, their depositors can withdraw and deposit money whenever they desire; because of this feature they're also called Demand Deposits.
Fixed deposits, however, are deposits which are deposited for a definite period of time, which is generally not less than a year, so these are called long term deposits. This kind of deposits has a high interest rate, because banks can use them for a definite time period, without having the fear of them being withdrawn.
In the case of savings deposits, a certain amount of money can be withdrawn once or twice a week. On such a deposit, the interest rate is very low. As their name suggests, their main goal is to mobilize savings in the form of deposits.
The second function of commercial banks is to advance loans to its clients. Banks charge interest for this, which is their main source of income. A bank pays out at a lower interest rate on deposits and receives a higher interest rate on loans. The difference between these rates represents the bank's net income. Commercial banks also generate non-interest income from service fees for Retail and Business banking products, transactional fees, or other non-traditional services such as Trust and Wealth Management consulting, Insurance, Cash Management services, Mortgage loan closing costs and points. They create loans out of deposits, and deposits out of loans; they advance loans not only on the basis of the deposits of the public, but also on the basis of depositing money in the borrowers' accounts. There are three types of loans, cash loan, demand loan and short term loan.
In the case of cash loans, banks advance loans to clients on the basis of bonds, inventories and other approved securities, while in the case of demand loans they can be recalled on demand by banks. Short term loans, however are made against some security and the entire loan is transferred in the borrower's account.
If there are no deposits in the current account, banks advance loans to their clients through an overdraft. They charge a very high interest rate and also they demand a security from the clients.
The most prevalent and important method of advancing loans to the traders for short term purposes is the discounting of the bills of exchange. Banks advance loans to traders and firms by discounting their bills. So, businessmen get loans based on their bills of exchange before the time of their maturity.
Within the global financial markets, these institutions connect market participants with capital deficits (borrowers) to market participants with capital surpluses (investors and lenders) by transferring funds from those parties who have surplus funds to invest in financial assets to those parties who borrow funds to invest in real assets.
Banks also act as financial intermediaries. Financial intermediation is an important function in banking and it means accepting funds from one source and using the money to make loans and investments. In this way they encourage savings by providing the means of attracting and collecting funds through various types of accounts they offer and their extensive branch network. At the same time they put such funds to effective use.
While banks play a key role in the financial intermediation and in the creation of money, their primary focus is the satisfaction of customers' financial needs. To be successful, banking must meet the financial needs of customers. Many customers are not aware of all the different services available and may not have a good understanding of whether a particular service would be useful to them. Often customers are overwhelmed at the vast array of products and services. Banking professionals are the link between these products, services, and customers. Bankers act as interpreters between the banking products and services and help customers evaluate their financial needs. Bankers suggest services that meet those needs. An important part of the job of a banker is to promote banking products to customers in a sales consultant capacity, not as a cashier. In other words, bankers help customers select the right services for them rather than simply ringing up the sale.
Commercial banks play the most critical role in the "creation" of money, not by cranking up the presses and printing money, because they do not print currency. The financial system "creates money" by expanding the supply of money through deposit and loan transactions. Lending to personal customers stimulates the demand for goods, which helps to increase production. The banks create money by granting loans or overdraft facilities to a customer to buy goods, since paying for these goods effectively produces new money as soon as the borrower's check is paid into the seller's bank account.
According to Law nr. 58/1998, commercial banks that operate in Romania, cannot perform the following operations:
Performing transactions involving movable property and real estate; except transactions with such assets necessary to develop the activity and for employees' use as well as transactions with such assets acquired following the execution of bank debt.
Acquiring own stocks or pledging them into the bank's debt account; except for the redemption of own stocks in order to decrease the social capital, which is the object of a prior approval from the National Bank of Romania.
Granting loans or providing other services to clients, conditioned by the selling or purchase of the bank's stocks
Granting loans guaranteed by stocks issued by the bank
Receiving deposits, titles or other values, when the bank is in insolvency
Accepting deposits, if the majority of deposits come from the bank's employees; except the placement funds operations and other financial operations based on the principle of mutuality.
As it can be seen here, central banks and commercial banks are the most known types of banks and there are several differences between their main characteristics.
The following chapter will talk about the main services that banks offer their clients.
New banking products have been innovated, beside the known traditional ones. Along with the modification of banking regulations, new banking services have been introduced in the system. The main characteristics of banking services are the fact that they are not subject to physical and moral wear and that they bear interest. Besides, pure banking services for which clients pay different commissions and charges are distinguished through some characteristics. Banking incomes are completed, based on banking products. These have a capital support, and their price is equal to the percentage rate applied in each particular case. Banking products are intangible and are conditioned by fiscal and banking regulations.
Operational units of banking societies deliver products directly to clients and there is no possibility of dealerships, redistributions or reselling of these intangible assets, only their reimbursement. Their beneficiary must prepare a special own documentation, according to banking procedures. So, a design collaboration of monetary creation controlled by the creditor is realized. The bankers' decision to diversify their range of banking products is linked and oriented towards the clients' needs. New mutations compared to traditional products will appear because of the usage of expert systems and because of the explosion informational revolution within the banking system.
2.1 BANKING ACCOUNTS. THE OPENING, FUNCTIONING
AND CLOSING OF ACCOUNTS
The main accounts available to all categories of customers are classified in three groups:
Current accounts or liquidities
Besides these accounts, the following are also used:
Current accounts are the most used accounts and are often named demand deposits, and their owners can be individuals or juridical persons. These accounts can be opened in RON or foreign currency, and are used for current deposits and withdrawals, for paying the checks issued by their owners, or for other payments ordered by their owners.
Based on the available funds in the account, banks offer their customers checkbooks, according to certain rules, that may vary from one bank to the other.
Some banks condition the opening of current account by the existence of a minimal initial amount, and the account withdrawals are made within the limit of this sum, which remains permanently in the account; most banks don't impose this condition. In our country, as a general practice, payments in current accounts are not made only within the limit of existing availabilities in the account. Some banks began practicing payments in overdrafts for trusting clients.
For the different operations made by the bank in the client's account, a fee is charged directly from the account. This operation varies from one bank to the other, depending on the services and the offered banking operations.
For the existing availabilities in current accounts, the bank grants an interest, which is calculated and then passed in the account at regular intervals, usually on a monthly or annual basis.
Opening and using current accounts offers a series of advantages to clients, like:
Permanent access to money
Usage of the checkbook
The possibility of receiving salaries or other incomes in the account
Payments for different services
The account statement may be received by demand or after each operation.
The banks' advantage is that they have resources with the smallest interest and a regular income from charged fees and commissions.
Deposit accounts (term deposits) may be opened in RON or foreign currency by individuals and juridical persons, in most banks. The deposits are made within pre-established time periods: 1, 2, 3, 6 or 12 months. Each bank establishes a limit sum for lodging a deposit (minimum threshold).
In order for the account to be opened, an application must be completed, a fee must be paid, and finally a receipt is released for the deposited amount. Also, the client receives an account statement, which contains the account number and the amount initially deposited.
The interest for the deposit account depends on the time period for which the deposit has been established and it varies from one bank to the other. The interest rates can be modified depending on the inflation level and on the evolution of the interest on the market.
The interest is calculated on a monthly basis (month is considered to be 30 days long, and the year being considered to be 365 days long), and it is paid at the end of the month in the current account.
If the client withdraws his capital before the term for which the deposit has been established, the interest will be recalculated at the interest's level for the current account. In the case of deposit accounts, the interest rate is higher than the current account's interest rate, which encourages clients (individuals and juridical persons) to keep their money as term deposits.
The client's advantages include:
A higher interest rate
Monthly access to the interest
Loans that he can take from the bank, using the deposit as guarantee
For the bank, there is the advantage of the existence of funds for a certain time period, taking into consideration the fact that most clients don't resort to affecting deposited funds.
Loan accounts can be opened by both individuals and juridical persons.
Loans for juridical persons may be granted for:
Current activity (sustaining circulating capital)
Loans for individuals may be granted for:
Buying long term assets
Starting a business
In order to obtain a loan, clients fill an application in which they specify the purpose of the loan, for which guarantees are needed.
Loans may be granted for long, medium or short term. The interest rates may be fixed or variable and they vary from one bank to the other. The interest is calculated on a monthly basis at the existing credit in the account and it is taken directly from the client's availabilities account.
Passant accounts are used for isolated operations: issuing a letter of credit in favor of a third party, which will operate refunds from this account, buying or selling gold, subscribing stocks or bonds.
Collective accounts have as owners several individuals and it may be presented in the following forms:
Conjunct account - with no pre-established rates
Indivisible account - with pre-established rates
Contentious accounts have as a main characteristic the fact that their functioning is subordinated to the bank's approval (for example, the title deposit accounts entrusted to the bank as collateral for the guarantee of a credit reimbursement).
Nostro accounts are accounts opened by the bank at other banks.
Vostro accounts are accounts opened by another bank.
Number accounts are accounts, whose owner is known by a small number of persons in the bank. The owner's name isn't mentioned.
2.1.1. OPENING THE ACCOUNTS
The opening of an account is the beginning of a relationship between the bank and its client. It's important that this relationship proceeds correctly, from the point of view of both the client and the bank, by respecting the legislative framework.
According to the Law nr. 58/1998 regarding the banking activity and according to the National Bank of Romania Regulation, regarding foreign operations, banks are authorized to open accounts to Romanian individuals and juridical persons. This right is found within the functioning authorization issued by the National Bank of Romania and within the organization and operation status of each commercial bank.
When it comes to opening accounts in RON, the previously mentioned regulations don't impose any restrictions. Certain restrictions may appear in opening accounts in foreign currency. Individuals may open accounts in foreign currency in Romania, and use the availabilities with no restrictions. Also, juridical persons may open accounts at banks within our country, and use the availabilities according to certain regulations, by justifying through corresponding documents both the source of the foreign currency and the payments that have to be performed in the account.
When a client wants to open an account, it is important that the bank obtain more information about him. Practice shows that it is prudent that the bank forms a complete image regarding its potential customer, especially in the case when he is interested in the bank's crediting possibilities.
A bank is not obligated to accept anyone as its client and it is not prudent for the bank to open an account for someone, if he/she does not meet the requirements established by the bank.
When opening an account, individuals must present an identity card and, of course, an application for opening the account.
If they wish to open an account, resident juridical persons, who perform commercial activities, must present, beside the application the following documents:
The society contract, stamped and authenticated at the Notary (if that's the case)
A certificate of registration (new model) from the Trade Register
The society's registration at the General Directorate of Public Finances
The court decision (definitive) regarding the authorization of the society's functioning and its legal constitution, according to Law 31/1990
An extract from the official report of the General Meeting of Shareholders regarding the nominal approval of the society's management and of the authorized persons with signature rights in the bank (in the case of joint stock companies)
The fiscal code and the stamp
The proof of existence of the space in which he/she operates
A chart with the signatures of the persons with signature rights in the bank and of the persons authorized to legally represent the society
According to their own norms, some banks request in the case of stock companies other documents regarding the company's activity, like: the society's business plan, last year's balance sheet and the report regarding the budgetary and financial exercise.
When opening an account, the bank submits to the client a certificate of banking identity, which contains:
The name of the client (the account holder)
The persons authorized by the owner
The account number (in RON and/or foreign currency)
In order to obtain as much information about the new customer and in order to avoid a direct interview with too much questions, banks prefer to use application forms; these will not only provide information regarding the client's situation, but they will also standardize the received information, by avoiding the possibility of omitting relevant information about the client.
The banks can use the information from the application form for marketing analysis, because it will indirectly provide itself information about the bank's products and services that might be of interest to the clients.
Personal accounts can only be opened in the name of a single person, but, generally, the account holder may have two persons with signature rights for the account. The account holder can use the account anytime.
Commercial accounts (for juridical persons) require two signatures. One will be from the society's leader, and the other one will belong to the chief accountant or the financial manager. Each of the two signatories may have up to two persons with signature rights in their name. In order for it to be valid, the empowerment will have to have the society's stamp. In the case of foreign companies that operate in Romania, a signature will suffice. The limit of responsibilities of the different parties involved in transactions (commercial or non-commercial) is very important for both the bank and the client.
We will further analyze the reasons for which these procedures of opening accounts are so important to banks.
In the past, banks from the entire world have been involved, without being aware of it, in money laundering by people of bad faith, who wanted to hide the real source of their funds. Money laundering operations were realized by opening fictive business accounts, or by "transferring" money legally, the result being that the amounts entered in the account were much larger than the expected ones.
The National Bank of Romania has introduced measures of preventing frauds. For example, all payment instruments are printed by the NBR. In this context, shorter periods of compensation for checks were established, which permitted the balances be more easily calculated.
Before opening an account, the bank will try to obtain as much information as possible about the client. The bank also needs to supervise the account's evolution.
By supervising the account, the bank obtains information like:
The possibility of offering to the client new banking products and services
The accuracy of the operations developed in the account
The correspondent use of the credits, according to their destination.
Following a careful supervision, the bank may discover warning signals regarding the damage of the client's financial situation. The bank may use as source of information: checks, current account services, the account crediting, and so on.
By following the clients' check payment, the bank may see how they spend their funds. Also, by knowing details regarding the services used by clients and operated through the current account, the bank may have an image over the client's regular obligations.
Payments towards various beneficiaries or towards other banks may mean that that client has numerous contractual obligations. Crediting the account represents cashing it and it reflects cash inflows or other amounts from different sources. Any change of the rhythm or of the amounts may indicate difficulties or even potential problems of the flow of funds.
In case of a juridical person, the most important information source of the bank is: the accounting balance, the profit and loss account, flow of funds (cash flow), as well as the operations through the client's availabilities account.
At the end of the operative day, the bank's computerized system produces a synthetic document called "balance", where all the operations that took place in the account that day have been registered. The bank will have to check the balance carefully each day, in order to ensure that all accounts are correctly operated.
Some West-European banks register the client's details and information on a separate sheet of paper (called the information sheet). This is kept in a separate file at the bank.
The practice of overdraft payments, oblige banks to permanently know the daily situation. At the end of each working day, a computer automatically realizes a report in which all daily balances and account operations that have not functioned properly are presented.
According to the practice adopted in banking, overdraft payments are authorized by banks where they are allowed, with the condition of reimbursing the credited amounts, at demand. Crediting fidelities always constitute a subject of the annual banking revision, with the possibility that the bank may demand the credit reimbursement at any time, in case any of the conditions of the overdraft contract has not been respected.
Like any other company, the bank develops an activity that generates profit from selling its services to clients. From his point of view, the client wants services corresponding to his demands and that can be obtained at a reasonable price.
Generally, for the wanted banking services the client will come straight to the bank and will demand them. However, in some cases may not know that he needs a certain service or that certain services may be obtained through the respective bank.
In Great Britain, for example, a client becomes profitable for the bank, if he uses between two or three banking products and services. In Romania, current accounts, deposit accounts give the bank the possibility to obtain a certain profit.
By taking into consideration the fact that the banking system evolves and that the competition grows, other facilities will have to be given to clients, along with the different types of accounts.
Clients may be provided with more types of information, like:
Account statements, which will present the transactions performed in the account
Checkbooks, in order for them to keep track of their payments and to honor them
Promotional banking prospects, that include information regarding new banking products and services they could choose from.
These sources of information will help clients keep track of their accounts, to control them and to ensure that the banking products and services they use correspond to their current needs.
The account statement offers to clients details regarding the performed payments (the value of the amounts transferred to the payments' beneficiaries), the amounts entered in the account (the value of the entries, the source, justifying documents), and the daily balance. So, clients can verify their transactions, can know on the basis of the account statement which funds are available, and if the bank authorizes overdraft operations.
By offering clients prompt and complete information regarding new banking products and services, the possibility of them using these products and services increases.
Evaluating the level of the banking products and services by the client includes the quality of the bank staff performance. Their low quality may determine the client to try to find elsewhere better services and to close his accounts at the respective bank. As the competition increases, the quality of the provided services will become more and more important and it will be one of the main elements to determine the clients' option for a certain bank.
2.1.2. CLOSING THE ACCOUNTS
There is a series of reasons for which an account could be closed. The account could simply become inactive, and it would be more convenient for the bank to close it. An account could be considered inactive if no operations have been registered for a certain period of time (this period varies from one bank to the other).
In such circumstances, the client requests in writing the closing of his account, and the bank will request in turn the balance withdrawal and the transfer of the deposit to another bank. The sum may also be withdrawn by issuing a check for the account balance. In case of account liquidation, the client may be asked to return the checkbook. So, the bank will establish whether or not there are checkbooks in circulation and if there are enough resources in the account to allow the payment of undelivered checks on time.
The closing of an account can also be done by the transfer of the client's balance at another bank. When such a request is received, it's always useful that the transfer's reason is established. The financial market is extremely competitive and establishing the reasons why a client transfers his account may help the bank to reconsider its range and the quality of the products and services it offers. It may also help convince the client to reconsider.
In case the account has become inactive, and the bank isn't capable of finding the client and of ensuring the balance increase, it must transfer the account balance in an internal account, with inactive accounts or unrequested balances.
This doesn't mean that the bank will endorse its resources. It only means that the account is closed, and the balance will always be available to the client, in the case he wants to use it.
If an account is not used in a way that satisfies the bank, it will be closed.
The careful check of the account's turnover, especially from the point of view of future payments, is a very important aspect. There's the danger that the bank will transmit to its client the credit balance and to also approve the closing of the account. Another possibility is that checks can be presented for payment after the account has been closed. In this case, the risk is that these checks will remain undelivered.
The correct procedure is that when the bank notifies in writing the client and warns him of the intention of closing the account. The client will be requested to issue a check for the balance withdrawal of the account which will be closed.
Once the client has been notified, the bank may refuse to accept any supplementary entries of funds in the account. In case the client ignores the notice, the bank will wait until the checks for the balancing of the balance will be issued, and then it can return the un-paid checks. In other words, the bank will honor the checks in the cash limit, and the checks received later will be refused.
The bank has to communicate in writing to the client its intention of closing the account and to request the return of all checkbooks. Also, the client must be informed that all account entries will be used for reducing unpaid debts. A large enough period of time has to be established in order for the checks to be paid, without exceeding the limit of payments in unauthorized overdrafts. The client, at his turn, must notify the bank the fund entries in the account are destined to be covered up by a check, which has just been issued. In this case, if he won't honor such a check, the bank could be in a very delicate position, because the respective client could argument that he made special provisions, in order to pay the check, and, so the bank is guilty for the fact that it is unpaid.
In most cases, it is desired that the bank and the client reach an agreement, thus solving the problem amicably. In the case of trade companies, the closing of an account could be due to the insolvability situation, in which the respective society is. If a bank follows closely the operations performed in the clients' accounts, then unsatisfying functioning of the account could point out the problem warning the bank of a certain situation.
When a bank receives notice about the liquidity of a company's activity, the account operating empowerment must be annulled. No payments have to be made and no checks have to be honored, without the person liquidating the company announcing it. In case the company is insolvent, the bankruptcy law is applied. All accounts must be correlated in order to identify if there is an unpaid amount, which the bank owes to the client. If there is a credit balance, this must not be retained for the payment of any receipt or bill that has been issued but not presented for payment yet. The liquidation of the company is mandatory as soon as the document referring to the bankruptcy is presented to the judge. When the bank finds out about this step, the bank must paying third parties. The banking practice in this field varies from one bank to the other, because there are no uniform regulations regarding the cashing of a company's checks, after forwarding a liquidation application in Court.
If a person is declared psychically irresponsible, his bank account must be immediately frozen. An application must be sent to Court for authorizing another person to be in charge of that account, in the person's place.
The bank has the duty to honor its clients' checks and to allow performing payments from their accounts in terms of the obtained mandate. In case of a client's death, any mandate is cancelled, and the bank is no longer authorized to pay the checks having a connection with that account. The account will be closed.
News of a client's death may reach the bank in various ways. In most banks, a person checks the death section of local newspapers. The death must be checked and certified before the bank takes charge. So, the bank requests the death certificate in order to confirm the information.
The death of a client can be communicated to the bank through a relative or another person. If the bank has doubts regarding the truthfulness of the news, it's mandatory it verifies the information before taking charge.
The bank's obligation to pay the client's checks stops as soon as it receives the news about his death. If the checks are presented for payment, after the announcement, the bank will have to return the unpaid checks, with the mention "Death client".
When a client opens a bank account, in the application there is a clause regarding the death. This clause establishes the name of the person who will inherit the account after the client's death. It's necessary that this clause be completed and signed by the account holder. This means that after the client's death, all rights will belong to the nominated person. He will have to present the death certificates and legal heritage documents.
2.2 PASSIVE OPERATIONS
The passive operations represent for the bank the ways of establishing resources.
Establishing the deposits
Discount and rediscount
Own capital and reserve funds
Establishing and using banking deposits represents one of the main functions of the bank. These have a double role
Banking deposits represent on one hand for the depositors, debts for the bank, in fact means of payment that they can use at any time for performing payments for operating the account
On the other hand, deposits are the bank's obligations towards the depositors, deriving from mobilizing the clients' temporary available capital.
Sight deposits are characterized by a great degree of elasticity, because the availabilities' evolution permanently registers a balance evolution. Nevertheless, using sums derived from sight deposits can be done prudently, within the limits of the permanent minimal balance, which expresses real fructification possibilities by using the respective sums as crediting resources.
The certificates of deposit are credit titles issued by the bank, which attest the deposit of a certain sum of money towards an individual or juridical person, an amount which can be cashed at the deadline, with a related interest.
Discount and rediscount represent ways of procuring new resources by the disposal of the trade effect portfolio. The discount represents the interest's percentage size, perceived by the bank over the nominal value of the trade effects: bill, promissory note, check, mandate, cashed before the deadline.
The operation through which the bank acquires from one of its clients a term debt, by offering the amount in the trade effect, without the commission and the interest is called the discount operation. The percentage size depends on the following elements:
The trade title value
The time period until the deadline
The rediscount's fee/rate
The discount may be fixed by the National Bank of Romania and it represents a leverage of the credit policy, being the reference point in establishing the interest rate for various credit operations and an instrument of influencing the general economic activity, because the discount decrease makes credits more accessible and stimulates businesses, by favoring the capital migration, with negative effects over the balance of payments and over the national currency's exchange rate. The increase of the discounts slows down the credit demand, favors the attraction of foreign capitals and the increase of the national currency's exchange rate.
The rediscount represents the percentage size of the interest retained by the National Bank of Romania, as central bank, in the operations coming between it and the commercial banks requesting credits based on trade effects that have not reached the deadline, and that are in their own portfolio.
The operation of transmitting these credit titles between the two institutions is called rediscount operation.
Similar to the rediscount are Lombard operations, which are operations through which the deposit bank obtains from the issuing bank short term resources, valuing its securities portfolio.
The own capital and reserve funds (established, by taking into account the profit) have a relatively low intake in procuring the banks' crediting resources, because the bank, being a stock company, forms its own capital by issuing and subscribing shares.
2.3 DETERMINING THE MEDIUM BALANCE OF AVAILABLE RESOURCES FOR THE BANK, RELATED TO THE CLIENTS' AVAILABILITIES ACCOUNTS
The clients 'availabilities accounts represent an important and cheap resource for the bank, but they have a high degree of volatility. In order to fructify these resources, without having liquidity problems, each banking unit has to determine its permanent medium balance and stable sums related to each of the availabilities account it manages.
Determining the permanent medium balance is possible for big and old clients of the unit, based on turnovers realized in previous years.
The incomes obtained after these resources have been fructified by the bank are decreased with the discounted interest rate for the availabilities account.
In order to determine the established sums, which the bank can fructify, we will take the example of a check. So, we consider that a client issues a check to its provider for payment. The provider presents the client's check to the bank, in order to cash the respective sum. In the same day, let's call it day "x", the bank registers the operation (debits the client's account); the effective payment will be done after (in one or two days).
In the period between day "x" and day "x+n" (the day when the check is cashed), the respective sum stays at the bank's disposal. The bank can fructify it, without charging interest to the client (the sum was paid in day "x").
These sums have large short term stability for the bank. In order to determine the medium daily volume of the stable sums resulted from payment operations from the clients' accounts, several methods will be used, which will be presented briefly:
Determining stable sums when registering the operation in the clients' accounts: this method consists in summing up all the debited sums, divided at the number of days until the definitive payment. This method is not so accurate, because the period between moment of registering and the moment of actual payment cannot be calculated.
Determining the available sums at the deadline: As in the case of the previous method, the resulted sum at the deadline is divided at the number of days of the period. Like the previous method, this one isn't fully accurate, because the deadlines are not established based on the clients.
Determining the sums at the date of payment: This is the only method which allows the exact calculation of the stable sums for the bank. Like the previous methods, the total sum cashed by the bank is divided at the number of days between the registration date and the payment date.
Choosing a calculating method of the stable sums is important for the bank's unit, because it can influence the calculation of the profitability per unit or per client.
The fructification of these resources related to the clients' availabilities accounts is generally done at the level of interests practiced on the interbank market and it brings substantial profit to the company.
The distribution of the incomes resulted from the fructification of these resources is made by the headquarters of the bank to each unit, through a distribution key, depending on each unit's contribution at the creation of this type of resource.
2.4 ACTIVE OPERATIONS
The active operations generally represent the process of placing the resources in different interest carrying assets to optimize the profit and to reduce the risk margin, their main objective being the decrease of losses. Placements in financial instruments on the interbank market have as an objective the protection of the bank against credit risk, by distributing resources in other placement fields, less risky than the credit and more liquid in the sense of the assets' capacity to be transformed in cash. The active operations must fulfill conditions regarding liquidity, profitability, credit and interest risk, deadline and capital reserves. The investment portfolio must ensure the equilibrium between short term placed funds on the monetary market and those invested in medium and long term financial instruments on the capital market. The risks involved by short term placements, with big gains must be reduced as much as possible through various guarantee methods.
In Romania, according to the banking Law 58/1998, banking societies can perform placement, subscription, management and trade operations with financial instruments, they can buy, sell, administrate monetary assets, they can receive financial instruments as collateral. On the other hand, the immobilization of banking assets in financial instruments reduces the economy's crediting possibilities. That's why a bank has to decide how much to invest in the instrument, when to invest in the instrument and in what instrument should they invest at all, in such a way as to obtain the most advantageous conditions and gain rates.
The monetary market operations including placing and attracting funds on short term, by running operations on the discount market, the interbank market, the certificate of deposit market, and the trade effect market.
The placements on the interbank market have as an objective the short term placement of the surplus of resources, having the following components: availability at the National Bank of Romania, placements in interbank deposits and loans granted to banks on short term.
The placements on the capital market have as objective investments in medium and long term financial instruments. They have the following components: government stocks, stocks and bonds and quasi-governmental financial instruments.
Government stocks are safe investments, due to their reduced risk, to their liquidity and the varied palette in which they are presented
Quasi-governmental financial instruments are issued by certain institutions whose payment obligations are guaranteed by one or several governments, or by the European National Bank of Investments, the World Bank, etc (stocks on the international market)
Stocks and bonds are issued by stock companies or by public institutions
In developing the banking management regarding the bank's active operations, three theories have resulted:
The trade credit theory
The transferability theory
The anticipated incomes theory
The trade credit theory starts from the need to satisfy each specific demand of the bank: liquidity or profit, by taking into account the inverse relation of proportionality between the two terms. In this theory's vision, the bank needs to promote the credits used on the basis of real guarantees (bills guaranteed at their turn with material values in the process of production or in stock as finished products). The principle of prudence is essential in granting credits, like the need to perform a careful control over the nature, quality and opportunity of the credited production.
The transferability theory (doctrine) consists in modifying the crediting structures of the bank, by transforming them from savings into deposits into financial economies, under the form of securities (stocks, treasury bills, shares). Owning stocks, for example, makes obtaining liquidities by selling them at the stock exchange possible at any time. This will lead to an increase in the liquidity and at the same time, to a decrease in the possibility of obtaining profit. A negative aspect of this doctrine is the fact that there are fewer resources for the crediting of the economic agents.
The anticipated incomes theory encourages the bank to consider the long term credits as a potential liquidity resource, this meaning that the short term resources may be engaged in long term credits, because these ensure an intake at the bank's liquidity, through the fact that the debtors reimburse the credit in installments, ensuring a continuous flow of the payments towards the creditor.
These three theories, synthetically exposed, can be considered at any time as alternatives and the management of the bank's assets can use each of these theories or can apply them in parallel depending on the conjuncture.
2.5 CREDITING OPERATIONS. PRINCIPLES AND GENERAL CONDITIONS
OF THE CREDITING OPERATION
The fundamental principle of banking policy that characterizes the whole crediting activity is that of banking prudence. The other more general principles are:
Analyzing the financial potential of economic agents
Credibility is the moral support and the essential psychological element. It refers to:
The moral and professional qualities of the societies' leaders and of the main collaborators and associates
The reputation regarded through the quality of products and services and of the relations with the partners
The financial patrimonial situation
Analyzing the financial potential of economic agents is very important, because it helps minimize the banking risk and it is done by analyzing the data from the accounting balance and the trial balance. It involves the following steps:
The research and highlight of all favorable and unfavorable elements in the financial situation
Identifying the causes that led or that can lead to difficulties in activity
Conclusions and the presentation of the perspectives
Proposals for recovery.
This analysis is also determined by conjuncture factors:
The economic-social and monetary conditions
The evolution of the bank's products
The evolution of the sales market
The profitability represents the economic agents' capacity of fulfilling their obligations towards third parties. It is the most important diagnosis indicator that reflects the degree to which the society's own capital ensures the cover up of stocks on short and long term.
Other conditions :
The credits have a precise destination, mandatory for borrowers
The credit granted to a debtor cannot surpass 20% from the bank's own funds (according to Law 58/1998)
Credits can be granted to autonomous administrations
After the approval of a credit, the bank can reduce the amount of credit in justified cases: failing to respect the contractual conditions or providing un-real data
For the granting of credits, the bank charges interests and fees, depending on the market.
Depending on the term on which they are granted, credits are divided into 3 categories:
Short term credits (up to 1 year)
Medium term credits (1-5 years)
Long term credits (5-10 years)
Short term credits, depending on their destination are used for:
Supplies in order to establish stocks - necessary for realizing and finalizing the production of merchandise and provisions of services, trade which have an ensured sale
Credits for stocks and seasonal expenditures are granted to economic agents who establish such stocks
Credits for the production of exports and export of products are granted from the bank's source in the following conditions: firm export contracts and guaranteed payment. The credit for the export of products is given based on the documents which attest their delivery at exports
Special credits based on governmental decisions are based on the conventions closed by the bank with the National Bank of Romania, and are given according to the methodological norms they have issued
Ceiling-based credits are granted to economic agents for completing working capital
The letter of banking guarantee is the document through which bank confirms to the payer at his demand, that for certain cases, it will ensure for a limited period of time and within the limit of a determined sum, that the payments described in the letter will be performed from banking credits, or from the applicant's availabilities.
Depending on the destination, the letter of banking guarantee is classified as follows:
Letters of banking guarantee issued or received for: internal trade companies, external trade companies or operations of providing services
The letters of banking guarantee's objective could be:
The guarantee of a good technical-qualitative execution and within the period stipulated in the construction contract
The guarantee of payment installments within a given credit
The guarantee of building a productive unit "at key"
The guarantee of paying the commissions to a foreign representative (or Romanian broker) through which the trade company realizes the contracting of export deliveries
The guarantee of opening a documentary credit until a certain date
The guarantee of paying an import realized based on a documentary collection
The bank's unit will keep track of the letters of banking guarantee issued with the help of a "track register", where in the moment the letter becomes objectless, it will have the mention "solved".
At demand, the letters of banking guarantee may be prolonged.
In case the main debtor didn't fulfill his obligations guaranteed through the letter of banking guarantee, the beneficiary will make a claim to the bank, and the term he will use will be "the execution of the banking guarantee".
After receiving the letter of requesting the sum, the guaranteed bank, before paying, notifies its guaranteed client if it has any legal reason to not fulfill its obligations.
The letters of banking guarantee are issued on a commission basis.
In case of executing the letters of banking guarantee, the credit on hold becomes operative and it is transferred in current credits.
Medium and long term credits are granted for realizing investment objectives, like:
Arranging, transforming and reusing production capacities, commercial spaces, provisions of services, as well as for own buildings or rented buildings
Purchasing machineries, and agriculture, trade, industrial tools
Purchasing production, breeding and traction animals
Purchasing stocks by the salaries' associations
Purchasing top technologies, complex fabrication lines, etc
Building complete production capacities (factories, shopping centers, etc)
Purchasing and building personal properties by individuals
These credits are as follows:
Medium term: 1-5 years
Long term: 5-10 years
These credits also have some mandatory conditions:
At least 30% of the investments' value must be covered by own financing sources
The profit which will be realized and the amortization which will be included in the costs will allow the full reimbursement of the credits and the related interests
They have to present guarantee insurers
They also have some supplementary conditions:
The expenses estimate and the rescheduling graph of the works
The verification of the existence of the own financing sources
The verification of the data presented in the investment's technical-economic documentation
In order to rule on the necessity, opportunity, and economic efficiency of the investment, as well as on the respecting of the legislation, regarding the placement and the realization of the project, the bank will examine the feasibility study, by taking into account:
The project's efficiency, which will be analyzed by comparing the proposed indicators, with the obtained indicators at similar activities, within the same sector
The situation of the production capacities similar to those for which the credit is requested (their multitude or absence)
Conditions of ensuring the raw material, the materials from imports and exports, the existence of the sales market for the products, services and merchandise, that will be valued
If the technical-economical documentation was realized or analyzed by specialized societies, authorized in this sense.
For medium and long term credits, at the debtor's request, the granting of a grace period regarding the credits' reimbursement can be negotiated as follows:
Up to 1 year after the granting of medium term credits
Up to 2 years after the granting of long term credits
During the grace period, rates from the credits are not established and reimbursed, and also interests are not calculated or reimbursed.
Crediting for investments is done as a credit line. A credit line, which a client of the bank engages, is established. The investment credit is granted in phases, according to the graphic of the investment realization.
Home loans present the following characteristics:
Contracting a home construction company
Purchasing the establishment from economic agents or individuals
They also have some conditions:
The proof of purchase of 30% from the establishment's cost
The sources from which the applicant realizes incomes, for the credit's reimbursement and the related interests
There have to be at least two guarantors
There are a few steps to be taken in order to obtain a credit.
First, the economic agent requests a credit. The bank manager has a discussion with the economic agent, regarding:
The identification of the economic agent (name, address, juridical information, regarding the organization form, registration number at the Trade Register, fiscal code, social capital)
Information regarding the management (identification, professional activity, incomes, owned properties)
Identifying the activity object
Group relations of the economic agents (a list of all related companies will be requested, in order to observe the economic agent's participation at other companies' social capital)
Data regarding the updated economic-financial and patrimonial situation (turnover, production capacity, financial situation, data regarding the contracted credits)
Second, a technical-economical documentation must be gathered:
The credit application
The society constitution documentation
Registration certificate at the Trade Register
Accounting balance and the profit/loss account
The income situation and the expenses that will be realized in the current year and accrued in the period during each the credit is requested
Feasibility study (in the case of investment credits)
The list of material assets and of values constituting guarantee insurers
Buying/selling contracts for the assets purchased through credits
Individual agricultural producers and their associates will present material status certificates, issued by the City Hall (titles of property certificates)
Sales contracts of internal or external products
Proposals regarding the credit's reimbursement graph
Any other necessary documents requested by the bank
When granting a credit, guarantees are requested. They can be offered by both debtors and guarantors (individuals or juridical persons). The insurance guarantees are of two categories: real and personals.
The real guarantees - movable or immovable assets (debtor or guarantor)
Assets purchased with credits
The mortgage will be observed in an estate security contract, which will be authenticated at the notary in which the following will be recorded: the credit's value, the exact determination of the mortgaged asset and the value pledged as collateral.
The bank's accepting the mortgage imposes the realization of some conditions:
The duration of the mortgaged asset must be certain until the moment of complete extinction of the obligation of the one who generated the mortgage
The asset must be ensured at an insurance society against risks, and on the insurance policy
Mortgage securities cannot be obtained for:
Unpaid establishments bought from the state
Unincorporated lands obtained according to Law 18/1991, or lands belonging to public domain
The pledge is observed through a mortgage security contract, and it is an accessory to the credit contract, through which the debtor (borrower) or the guarantor delivers to the bank a movable asset for the credit's guarantee. The pledge is instituted for movable assets and can be classified into 2 categories.
The pledge with dispossession, also known as "pawn", supposes the deposit of the respective asset to the bank - for small movable assets with a great value (metals, precious stones, paintings, sculptures, stocks or other valuables).
The pledge without dispossession is used for large assets.
For the pledged movable assets, the following operations will be performed:
The person who performs the pledge is the asset's owner
The asset which is object to the pledge has to be liquid and to have a market value
The pledge will be observed in a pledge contract in which the credit's value will be recorded along with the nature of the pledged assets and it will also be registered in Court
The creditor may ask the court to retain the pledged asset in the unpaid claims' account
The creditor may request the selling of the pledged assets
The assets bought from credits are taken into guarantee even if the other elements (the mortgage or pledge) cover the value of the credit and of the owed interests. All assets must be ensured at an Insurance Society.
The debts' transfer is a written convention, through which a creditor transfers his debt to another person. The debt's parts are:
The transferor - the one who transfers his debt
The transferee - the person at whom the debt is transmitted
The transferred debtor - the debtor of the transmitted debt
The debt's effect is that from the moment of transfer, the debt enters the transferee's patrimony, with all rights offered by the transferor.
The personal guarantee is the juridical way of guaranteeing the stocks, through which one (or more) individual(s) engage(s) through a contract closed with the creditor to pay his debt, in case he won't be able to pay it himself. These include:
Surety-ship, which represents a unilateral ancillary agreement, through which a person is obliged by the bank to assume the obligation assumed by the bank's debtor.
A banking guarantee is the document through which another bank is unconditionally engaged, in case the debtor won't execute his obligation to pay at the established date a determined sum in favor of the beneficiary bank. The following will be followed:
The name and authorized signatures of the persons engaging the bank
The guarantee's object
The guarantee's value=credit +interest +taxes +commissions +fees
Time availability - which will have to cover the whole crediting period
The banking deposit is a material guarantee presented as a sum of money deposited by the debtor or a guarantor at the bank.
2.6 THE COST OF CREDIT.
THE CREDITS' SCHEDULINNG, SUPPLEMENATION,
RESCHEDULING AND REIMBURSEMENT
The interests charged by the bank are established by the bank's Administrative Counsel and can be modified during the credit's run depending on the interest's evolution on the bank market. However, for credits based on HG, the established interest is applied and the subsidies are recovered.
The commissions are cashed depending on the services performed for the bank's clients and are also established the bank's Administrative Counsel. When granting credits, the bank charges risk commissions which are negotiated with the clients
Calculating and cashing interests
The interests for the credits granted in RON are calculated and cashed on a monthly basis from the existing availabilities in the credit beneficiaries' accounts
Overdue interests and commissions will be first cashed
For the credits that are not reimbursed at the deadline, the bank will cash from clients penalizing interests to which the current interest is added
The credits' scheduling:
For all credit categories which are granted by the bank, are established certain deadlines, which are registered in the credit contracts closed with the beneficiaries
The deadlines are established though a negotiation between the client and the bank, based on the incomes' evolution
Credits for expenditures and other assets temporarily constituted are scheduled depending on the delivery times and the cashing of the respective stocks' counter value
The credits for the production of imports and exports are scheduled depending on the cashing terms on the external delivery contracts and on the used payment methods
The credits' supplementation can be done in the following situations:
The incomes which will be used by the borrower allow the reimbursement of the whole credit, including the requested supplementation
The guarantees which are already constituted or those constituted plus those offered with the new request cover 120% the credit plus the supplementary one, with the related interest
An additional document will be prepared
At the economic agents' request, in justifiable cases, the bank could reschedule the credit rates, in the sense that their reimbursement term is prolonged, without surpassing the reimbursement term of a rate or the whole credit.
A credit can be rescheduled at least 2 times until the whole reimbursement, at the borrower's request, and it can be deposited at least 10 days before the deadline, I, in conditions, in which:
The impossibility of the rate's payment is due to objectives justified economically accepted by the bank
The new term is within the maximum credit duration, for the respective credit category
The rescheduled rates and terms will be registered in an additional document at the credit contract.
The credits' reimbursement is done from the cashing realized by the economic agents, existent in the availabilities' account, based on the accounting note, prepared by the crediting compartment, or automatically through the computer.
In case the current account balance isn't sufficient to reimburse the scheduled rate, the outstanding difference is passed in the outstanding account.
In case the economic agents who register the outstanding debts from credits and interests, the bank will proceed to declare them as insolvents and will execute them according to the law.
2.7 CURRENCY LENDING
Banks can grant to economic agents currency lending with the purpose of realizing imports, buying components, subsystems, etc in order for them to be incorporated in the exports of other currency obligations.
Their financing can be done from the bank's own resources or from attracted resources.
In currency lending, beside the own crediting norms in RON, the following will be also considered:
The current regulations regarding the organization and functioning of the bank currency market
External contracts closed, imports and exports licenses, situations regarding the performed or possible exports, cashing other previous stocks, as well as the experience in the field of the economic agent's exterior trade
Loans financed from own sources (external programs) will be granted according to the special loan procedures
Beside the documentation prepared for credits in RON, the following specific documents will also be transmitted, as applicable:
External import contracts
External export contracts, accompanied by the certain cashing modalities: banking guarantees, letters, etc
Cash flows in RON or foreign currency from which the possibility of the loan's reimbursement could result
The guarantee granted by a third party
Realizing exports in the last three years, or if it is newly financed, from the establishment
Banking guarantees in foreign currency destined to the reimbursement's guarantee by the economic agents of some credits they have taken directly are subject to the same guarantee principles and analysis and approval methodologies as credits in foreign currency, because they represent similar engagements of the bank that are irrevocable.
The interest for credits in foreign currency, as well as the reimbursement terms is negotiated between the bank and the credit beneficiary.
The current and outstanding interest rates will be calculated and cashed on a monthly, quarterly, semester or annual basis, as established in the credit contract.
In the credit contract, a LIBOR (The London Inter Bank Market Interest), or a FIBOR (The Frankfurt Inter Bank Market Interest), or a PIBOR (Paris Inter Bank Market Interest) interest can be foreseen.
The commissions foreseen in the credit contract are of four categories:
Negotiation commissions, which cover the expenses performed by the bank during treaties, in order to close the respective contract. It may be a fixed, or percentage sum applicable one time to the value of the approved credit.
Management commissions, which cover the expenses of preparing and running the credit contract and are established in percentages or in a fixed sum, depending on the credit's level
Non-usage commissions are presented as percentages and are charged during the period, when the credit is not used, as established in the contract. It is calculated by applying the interest's formula to the un-used sum in the approved credit, beginning with the moment when the credit came into force, until the full use of the credit
Risk commissions are charged depending on the risk category imposed by the operation.
The credits' reimbursement is done according to the norms foreseen in the credit contract. It is done from the economic agents' own exchange receivables or from the funds procured from the interbank foreign exchange market.
2.8 CREDITING A TRADE COMPANY AS ONE OF
THE MAIN BANKING ACTIVITIES
One of the main functions of banks in the economy is crediting, which is a function that gives them major responsibilities, regarding the economy's evolution based on the efficiency and profitability criterion. That's why in the crediting process, banks must filter the businesses and promote the most efficient, the most reliable and the most legal, thus boosting the unfolding of efficient activities by economic agents, who turn to the banking credit.
Promoting efficient businesses and implicitly, the quality of the credits depend on the quality of the investigation realized by the bank, regarding the applicant's credit base.
Banks must evaluate the risks related to the crediting of a business, investigate the loan's reason and identify the reimbursement sources, which depend in a great measure on the business which they are crediting. The credit's reimbursement by the debtor depends on both his financial situation and on a series of exogenous and endogenous factors, which the bank must identify and correctly evaluate.
In the current Romanian banking practice, three categories of credits are usually used: exploiting credits, investment credits and leasing operations credits.
Exploiting credits are those credits that finance the circulating assets of the trade company. When these circulating assets cannot be covered by cash from clients and debtors, and the working capital is not sufficient, the trade company will turn to a short term banking credit.
Exploiting credits can be classified into several categories, depending on their duration or their objective, as follows:
Credits based on cash flows are granted for a period of 12 months for: supplies with raw materials, fuel, energy, exchange pieces, merchandise, as well as performing expenses that are necessary for the production, execution, performance of services that have their disposal insured by contracts and firm orders. The credit requirements are determined, depending on the cash low size. The cash flow reflects the situation of the cashing and payments related to the period, for which the credit is requested. The effective granting of credits by banks is done through: payments to suppliers, or by issuing checkbooks, with a sum limit, and in some situations through cash.
Current account credits are granted in order to develop activities of supply, production and unfolding. The credit's volume is established at the beginning of the period, as the difference between certain current assets and current liabilities, according to the treasury budget of the trade company. The credit needs has to be justified through supply contacts. These will justify the volume of expenditures and incomes established on a quarterly and monthly basis. The treasury deficit represents the new credits' level from which the trade company could benefit during the next period, and the surplus represents the credit volume which will be reimbursed during the next 90 days. The credit lines function according to the revolving system. This means that reimbursement could be performed during the reimbursement period, with the condition that the bank's daily balance won't surpass the established credit line volume. The bank charges interest only for the credit's net balance.
Discount credits are characterized by the fact that the beneficiary of a trade effect could transform his debt to a third party in a liquid amount, without waiting for the deadline. For the discount operation, which is a crediting operation, the bank charges an interest (the discount tax).
Forfeiting represents a financing modality in international trade, on medium and long term, and it supposes the bank buying debts resulted from export operations, in exchange for a sum of money. The bank will recover the amount from the importer debtor. This technique won't give the bank an appeal right over the debt's seller, in case the debtor has a payment problem.
Factoring is a short term financing method (at most 180 days), which supposes the bank assuming the bills from their beneficiary, in exchange for an amount called agio.
Investment credits are granted for medium term (1-5 years) or for long term (5-20 years). The bank finances 80% of the investment's value and the rest of 20% must be ensured by the investor's own sources. For investment credits, the bank grants grace periods, no longer than 12 months. During this period, the credit beneficiary cashes only the related interests and commissions.
Leasing credits are granted by banks for short and medium terms to leasing societies for assets which are the object of a closed contract with the beneficiary. In the category of credited assets, there are machineries; tools destined to production, at most 3 years old, brought in the country by Romanian juridical persons.
For trade companies, leasing can be the best financing method as it allows the equipment of trade companies with tools, with an initially small financial effort, it offers access to a technical-financial assistance offered by leasing societies and also gives a triple option at the closing of the rent period.
2.9 CREDITING AN INDIVIDUAL
Banks grant short, medium and long term credits to individuals.
Short term credits are requested for financing the purchase of long usage assets: automobiles, furniture, electronics, etc.
Medium and long term credits are requested for the renovation or the purchase of establishments. The share of credits granted to individuals by bank is still very low. When determining the credit's value, the bank will take into consideration the applicant's incomes. As a general rule, the monthly reimbursement rate cannot surpass 25% of the applicant's monthly income. In order to grant a credit, the bank requests collateral securities and real estate. The purchased asset becomes the guarantee when the credit is granted.
The client's capacity to reimburse the credit is analyzed by the bank based on some information, regarding the following aspects:
The patrimonial situation and social status (age, family, reputation, morality)
The incomes and their stability
The credit's object
As in the case of credits granted to economic agents, banks must evaluate the risks to which individuals are exposed through the granting of credits.
The credit file analysis is expensive for the bank, and the incurring expenses for the clients are often discouraging for them. Besides, the process of investigation is slow; it requires time, which leads to a decrease in the number of credits promoted by the bank.
In order to overcome these inconveniences, the banks have the possibility of selecting the credit applications through a method of evaluating the credit application from the credit scoring.
This method allows the bank to decide whether to accept or not the applicant's file, based on some preliminary information, provided by the client to the bank.
The method is based on statistical techniques of treating information referring to the credit applicants' behavior, which allows the bank to identify the default risk, through a note. The key problem is that of discovering information from which the client's profitability results.
The scoring method of evaluating the credit is applied especially to short term credits, to credits destined to purchasing establishments, because these credits are addressed to applicants, presenting a homogenous behavior.
So the credit's object is identifiable from the point of view of the value and duration, in order for the assumed risks to be comparable.
Applying this method will lead to the decrease in the expenses and in the time related to the credit file investigation.
So, all banks offer their clients a wide range of services, each one specific to one type of need. These services are one of the bank's main sources of income, because their characteristics make them more appealing to clients, thus making them chose the respective bank.
BRD'S POSITION ON THE ROMANIAN MARKET
3.1 BRD'S HISTORY
BRD is a traditional bank in the Romanian banking system. It's a descendant of the National Industrial Credit Society, created in 1923 with the purpose of encouraging Romania's economic development and especially the Romanian industry.BRD was established on December 1, 1990 by taking the Investments Bank's assets and liabilities. It was not only a company change, but also shaped the new guidelines in the bank's functioning and management. BRD managed to adapt to the actual economy's demands acting on flexible strategies and policies, concomitant with its permanent development under organizational, patrimonial and financial aspects. In 1992, BRD became an operational member of the international financial communication system, ensuring rapid and efficient links with member banks worldwide. Until 1998, BRD continued its policy of orienting credits towards the support of the private sector of the economy, which represented 65% of the total credit portfolio. BRD made a large variety of products and services available to clients, some of them being for the first time ever on the Romanian market: international factoring, payment cards, forfeiting, discounting bills, feasibility studies, assets evaluation and services destined to capital markets operators. BRD is the first bank in Romania which was granted custodian license. Together with its subsidiary, BRD participated at the privatization program initiated by the State Property Fund. Thus, it ensured consulting, evaluation and intermediation services of selling stocks. By participating at the establishment of insurance-reinsurance Company, BRD broadened its service variety by offering its clients intermediations of insurance policies. In 1997, after finalizing the legislative framework, the bank entered into the process of evaluation for privatization. Groupe Societe Generale acquired the majority stake, through a contract signed in December 1998, through which Groupe Societe Generale initially bought 41% of BRD's stocks for $135 million. In 1999, the State Property Fund sells to the European Development Bank 4.99% of BRD's social capital. In 2001, BRD is listed in the Bucharest Stock Exchange in the first category, rapidly becoming one of the most traded companies. Following a rebranding campaign, which took place in 2003, the Romanian Development Bank becomes BRD - Groupe Societe Generale.
The bank's new identity aimed at strengthening its position and identity awareness to the parent company. In 2004, Societe Generale purchases a residual package of shares owned the Romanian state in BRD's capital. Its participation rises from 51% to 58, 32%. From a juridical standpoint, BRD SG can be defined as follows: BRD - Groupe Societe Generale is a public company established in Romania.
The bank is registered with the Trade Register under J40/608/19.12.1991 with the fiscal registration code 361579/10.12.1992 and a social capital of 696901518 lei.
The bank functions under the Company Law no. 31/1990 (with the subsequent amendments) and under the Company Law no. 58/1998 (with the subsequent amendments). According to chapters 5 and 6, second chapter from the Constitutive Act, the Bank's main activity is the development of banking activities.
3.2 ORGANIZATION AND MANAGEMENT OF THE BANK
The organization function is characterized in the management process by activities which target the bank's ensemble and also its different domains seen in a close interdependence. The banking system is governed by specific legislations, but it also has the same objective as other activity areas, that being organizing its resources in such a way that its stocks could make profit. The bank's organization as a commercial company that realizes specific activities is focused in its formation as a decision unit, through a systematic approach of its component elements defined through functional and decisional variables within a structure ensuring the convergence activity of the component elements.
Like in the general case of banks, BRD is organized on two levels, national level and regional level. The national level consists of the BRD headquarters, and the regional level consists of the agencies and the workstations that the bank has across the country.
The central BRD has its headquarters in the BRD Tower, in Bucharest and it functions through its subsidiaries, the first being BRD Sogelease, whose main activity is lease financing of a wide range of goods. Another subsidiary, BRD Securities is a financial investments service society authorized to develop a whole range of operations provided by the Romanian law.
BRD Corporate Finance is a society specialized in financial advisory services in the field of mergers and acquisitions, privatizations, evaluations and strategic consulting.
BRD Pension Fund is administrating the private mandatory pension fund BRD Fond de Pensii Administrat Privat.
BRD Finance handles consumer credits at selling point, BRD Asset Management is administrating 2 investment funds, Simfonia 1, which is a monetary investment fund and Concerto, which is a diversified investment fund. Finally, ALD Automotive is an operational lease with a complete range of services for managing the vehicle fleet. The Headquarters functions in county capitals, its activity concerning the guidance and control of banking activities. The headquarters work by the rule of specialized and functional services. The Agency functions in important cities, from an economic standpoint, and it exclusively has operational activities. From a hierarchical standpoint, the main elements of a bank's organization are the Board of Directors, the Steering Committee, the Risk Committee, the Relations with Shareholders and Investors and the General Meeting. Since December 2006, the Board of Directors is composed of 11 directors chosen by the General Meeting of Shareholders, 7 of which represent the majority shareholders of Societe Generale and the other 4, the rest of the shareholders. The Board of Directors establishes the direction of the bank's activities and monitors their realization. According to the Bank's Constitutive Act, the Board examines the strategic orientation of the bank, the investment plan and decides the modifications to the management structure, which can significantly affect the institution's results, the balance structure or the risk profit. The Board of Directors meets at least once a month. The Steering Committee ensures the strategic management of the bank under the authority of the General Manager, Patrick Gelin. The steering committee meets once a week. Its members have management warrant and coordination of the bank's daily activities, except those specific to the Board of Directors. According to the law, its members have the authority to employ the Bank's responsibility. The weekly meetings of the Risk Committee are run by the Deputy General Director, who coordinates this activity and refers to loans (both for individuals and legal persons) that exceed the executive directors' competences. The proposed loans which aren't approved at these meetings are subjects to approval by the Steering Committee. Members of this committee are chosen by the Steering Committee. This committee meets monthly or even more frequently, if imposed by circumstances. The meetings are run by the General Manager. BRD offers its shareholders and financial analysts rigorous, regulated, and homogeneous information regarding the market's best practices and regarding the stock authorities' recommendation. A dedicated team informs the institutional investors and the financial analysts (both Romanians, and foreigners) about the bank's strategies, significant evolutions and financial results. Thus, those responsible with shareholders' relations are totally at the disposal of the approximately 16.000 individual and institutional shareholders of the bank. The General Meeting is an opportunity for shareholders to be directly informed about the bank's activity, to participate at debates, to direct their opinions on decisions submitted for their approval. A press release is published at the end of the General Meeting, which approves the results. Each year, the bank organizes a meeting for a sample of investors, financial analysts and journalists in order to present the results.
BRD's human resources policy aims at increasing the competence and motivating its teams, maintaining at the same time a sustained social dialogue. The career's chain management, created in 2004, ensures the connection between employees, executives and the bank's management through a network of human resources supervisors.
3.3 BRD'S PERFORMANCE AND ITS PLACE ON THE MARKET
The objective of the bank's management is that of maximizing the of the shareholders' investments in the bank. Banks operate with borrowed resources which are a substantial multiplier of their own capitals. This requires achieving great profitability for maintaining the shareholders, who are directly interested with what happens with their investments. Analyzing the efficiency of the bank's investments is a complex process that takes into account both the multitude of the factors (that determine the increase of efforts and effects) and other aspects which can surprise through the use of risk and profitability indicators system. The calculation of banking performance indicators is necessary, because, firstly, it permits the comparison of the realized indicators related to the mentioned to period with those planed by the bank's management team, as well as establishing deviations (whether they're positive or negative), causes they generated and measures taken for future references. Secondly, it helps the bank's management to establish the objectives by taking into account the size of the relationship between risk and profit, at which the bank could be profitable. And finally, by comparing the bank's results with those of other banks, helps to establish the bank's weak and strong points.
Below, are presented some of the indicators and numbers presented by BRD at the end of 2009, 2010 and 2011 respectively.
553 mills. RON
656 mills. RON
917 mills. RON
Net banking income
1.331 mills RON
1.656 mills. RON
2.392 mills. RON
Liquidity according to NBA's norms
Table: The evolution of BRD's indicators from 2009 to 2011, source: 2011 Annual BRD report
The net banking income represents for credit institutions the equivalent of a turnover and it includes incomes and expenses from interests and assimilated incomes, incomes and expenses from commissions, net profit from exchange operations, and incomes and expenses regarding other operating incomes.
With a 6 billion EURO capitalization, at the end of July, 2011, BRD - Groupe Societe Generale holds the first position according to this indicator between the societies of the financial domain, listed on the Bucharest Stock Exchange and the second position at the same level of market capitalization, if we take into consideration all the companies listed on the Bucharest Stock Exchange, no matter their area of expertise.
The basic philosophy which guides these activities is the promotion of marketing and selling policies closest to the client. This poll concentrates on the marketing activity (analyzing the behavior and expectations of clients, observing the market and competition and creating new products) and the commercial aspect (defining the commercial policy, fixing and accomplishing the objectives). This team's main objectives are adapting and enriching the offer (with products like internal leasing and factoring) and also developing the alternative distribution channels in terms of creating a Multichannel bank.
Operations and post-selling services: This team has 2 important missions, coordination of the projects made by the back-office and the guidance and tracking of daily production. The purpose is to reach a homogeneous processing of the files, falling in standard conditions in the network's ensemble.
Strategy, development and network: BRD has into practice an unparallel investment program for modernizing its network. It strengthens and renews its commercial force by recruiting young collaborators. Moreover, reorganizing the market launched 2 years ago aims at increasing the number of agencies with commercial functions, by creating groups.
Concerning the corporate clients' bank, BRD includes strategies dedicated to corporate Romanian clients, branches of multinational companies and microenterprises. These offer personalized services and are backed by the support of peer services and those of the international network of Groupe Societe Generale. The commercial action is based on a network of over 600 agencies, which offer a comprehensive geographical coverage and a complete range of services for current operations (cash management, internal and international financial operations and so on), treasury and exchange services. BRD is able to provide a complete range of traditional banking services and those offered by an investment bank. It builds its developing policy based on a long-term partnership with its clients.
When it comes to investment banking, three sectors come to mind, those being corporate finance, financial market and the currency market.
The sector of corporate finance was regularly associated with major privatizations, whether they're at a counseling level in mergers/acquisitions or market operations' structure. The BRD Corporate Finance team includes 10 professionals with financial experience and recognized sectorial competencies. They are able to offer original solutions incorporated to small enterprises, international institutions and the public sector. Concerning the financial market sector, BRD offers its clients advice from analysts for their investment decisions and execute their orders. It also distributes the titles of the operations on the primary market and directs the mandatory emissions. The currency market does not offer to its investors and issuers only information about the markets' evolution. It also ensures the necessary liquidity for optimizing their financial situation and managing their risks.
BRD has a large and vast activity axis. BRD's strategy integrates in Societe Generale's global strategy of maintaining the equilibrium between the service portfolio and the risk portfolio, thus ensuring the long-term development and profitability parallel with maintaining the efforts for ensuring an operational effectiveness. The success of this developing strategy is based on BRD collaborators' efforts, who share the values of Groupe Societe Generale. BRD wishes to be Romania's reference bank through professionalism, innovation and the development's and rentability's quality. In this sense, BRD will follow its investment policy sustained for adapting its commercial device at the Romanian market's specific, for achieving widespread processing and the diversification of its range of products and services. The bank has over 2, 2 million clients and over 2 million cards. Its market share varies between 15% and 20%, depending on the product. BRD is among the leaders of the bank card and consumer credit market. The consumer credit activity at the selling point is developed through the specialized branch, BRD - Finance. BRD is the reference bank of the Romanian private sector, over 65% of the total loans are being granted to this sector, both for small enterprises and for bigger corporations. It's involved in all branches of the economy and within local communities. Besides the classic financing, BRD's range of products and services covers all cash flow management, leasing services (through its BRD - Sogelease branch), internal and external factoring and complete solutions of externalizing fleets of vehicles through its ALD - Automotive branch. Benefiting from the support of Groupe Societe Generale, BRD plays an important part in its relation with multinational societies.
BRD is involved in structured financing and offers complex solutions to the public sector and to a large number of companies. With the support of Societe Generale's specialized entities, BRD continues its tradition as being the bank of big developing projects. Through a common branch with Societe Generale, BRD offers the whole range of consulting services in the field of privatization, mergers and acquisition. The brokerage firm, BRD Securities, is one of the 2 active banks on the bond market.
BRD's financial and commercial performances in the first three months of 2012 were good, the net result for this period being 259 million RON, increasing with 54% (in nominal terms), comparing with 2011's situation. In the first 3 months of the year, the main modifications of the macroeconomic factors were: The national currency has depreciated against the EURO, comparing with the end of 2011, with about 3.3%, and with 11.1% comparing with March 31, 2011. The monetary policy rate of the National Bank of Romania has increased from 7.5% in December, 2011, to 9.50% at the end of March in 2012. At the end of March, the consumer price indexes have increased with 2.25% comparing with December 2011 and with 8.63% comparing with March, 2011.
BRD continued to develop its product offerings, depending on the identified needs of its clients, by releasing new products. Furthermore, the bank continued to expand its network.
Active clients (millions)
Loans (mill. RON)
Deposits (mill. RON)
Table: Evolution of BRD's commercial performances from March, 2011 through March 2012,
Source: BRD 2012 Annual Report (done up to May)
The value of the loans given to individuals has increased with 6% comparing with December, 2011, and with 47% comparing with March, 2011, respectively. This increase has been sustained by both the consumer credits' evolution and by the increase of mortgages. The value of the deposits from individuals has increased by 1%, comparing with December, 2011 and with 48%, comparing with March, 2011.
Loans (mill. RON)
Deposits (mill. RON)
Table: Evolution of BRD's commercial performances from March, 2011 through March 2012,
source: BRD 2012 Annual Report (done up to May)
The total volume of loans given to corporate clients was, in March 2012, increasing with 12% comparing with December 2011 and with 41% comparing with March 2011. The value of corporate clients' deposits in March 2012 was increasing with 23% comparing with March 2011 and decreased with 1% comparing with December 2011.
Beginning with March 15 2005, BRD's stocks were included the Vienna Stock Exchange. Beginning with September 27, 2005, BRD's stocks were part of The New Europe Blue Chip Index, released by Erste Bank and the Vienna Stock Exchange. This index synthesizes the evolutions of the stock markets in Central and Eastern European Countries, through the most important 30 companies listed in national stock exchanges. This is recognition of the importance of the role that BRD plays on the Romanian capital market, which is now regionally important.
3.4 THE BANKING SERVICES OFFERED BY BRD TO INDIVIDUALS
Besides the companies, individuals represent the second most important segment of target clients targeted by banks in their operations of placing the funds raised during the general intermediation activity. This banking activity involving individuals is also known as "retail banking".
The fundamental role of commercial banks is that of ensuring the banking intermediation, establishing a connection between the individuals and legal entities looking for funds with those looking to place their temporary available monetary funds. The banking law no. 58/1998 defines the commercial bank as being "the legal entity authorized to develop activities of taking deposits and granting loans."
BRD offers its clients a wide range of services. The most important classes of services are savings products, crediting products, remote banking services and also packages of products and services. All these will be discussed in detail on the following pages.
3.4.1 SAVINGS PRODUCTS
BRD wishes to diversify the savings alternatives offered to individuals and to retain customers by creating products destined to each member of the family, no matter the age. Both adults and children can be account holders. Parents can keep their children's savings in an account opened in their name, and teenagers can also manage their own accounts.
By changing the structure of investments made Ã¢ÂÂÃ¢ÂÂby customers through their orientation to greater time horizons, BRD wishes to attract resources in RON and foreign currency.
Currently, BRD's offer includes the following types of savings accounts:
From the category of products destined to minors, there's ATUSTART (for children with ages between 0 and 14 years) and ATUSPRINT (for teenagers with ages between 14 and 18 years old). And then there is ATUCONT, which is destined to clients aged 18 and upwards.
Savings accounts are flexible savings instruments in RON or foreign currency. Through its wide range of savings accounts, BRD responds to its clients' expectations and also proposes a different approach, adapted to each age group separately.
Savings accounts have several specific characteristics, a remuneration comparable to that of term deposits, total and immediate availability, with no influence on the applied interest rate and operations allowed anytime (deposit, withdraw cash, get receipts and interbank transfers in the current account). The savings account destined to underage clients also have specific characteristics, low threshold access, adapted to this segment of customers, deposits / withdrawals in the account (up to a maximum amount), a higher interest compared with other savings products and account opening bonus. In this case, the account holders are the children, with the condition that their legal guardian agrees, by signing the documents related to the savings account.
So, in the case of ATUCONT, the account holders can be both adults and children, aged at least 14. The required minimal balance is 500 RON (or 400 EUR or 700 USD), and there is no account opening bonus or maximum balance. The interest is fixed and established per calendar quarter. There are several allowed operations in the case of ATUCONT (if the client respects the minimal/maximum account balance), and these are: cash deposits and withdrawals, inter banking and inter banking receipts (including exchange between accounts), transfers in the current account opened at BRD (including exchange between accounts), transfer the balance to another account holder's name (he must be the maximum age allowed) and collecting credit rates (savings account can be set as an alternative account).
There are also several operations which are not allowed in the case of ATUCONT: cash deposits/withdrawals which are not rounded to 10 RON/EUR/USD (except for the closing of the account), direct debits (leases, bill payments), other than the credit rates, other payments than those in the holder's current account opened at BRD and transfers from the savings account (if the holder is underage).
In the case of ATUSTART, unlike in the case of ATUCONT the account holder is an underage client (aged between 0 and 14) and the minimal accepted balance is smaller, of 300 RON (minimal deposit at opening is 280), 100 EUR (minimal deposit at opening is 95) and 100 USD (minimal deposit at opening is 95). The maximum balance is of 40.000 RON (or 10.000 EUR or 10.000 USD). As in the case of ATUCONT, the interest is fixed and established per calendar quarter. ATUSTART does however feature an account opening bonus of 20 RON (or 5 EUR or 5 USD).
The allowed operations in the case of ATUSTART are cash deposits and withdrawals, intra banking and inter banking receipts (including exchange between accounts), but there is no case of transfers in the current account opened at BRD, and the balance is transferred in ATUSPRINT or ATUCONT.
The operations that are not allowed in the case of ATUSTART are: cash deposits/withdrawals which are not rounded to 10 RON/USD/EUR (except for the closing and the opening of the account), direct debits (leases, bill payments) and transfers from the savings account (if the account holder is underage).
In the case of ATUSPRINT, the account holder must be aged between 14 and 18. While the minimal accepted balance is the same as in ATUSTART, 300 RON (or 100 EUR or 100 USD), the maximum accepted balance is higher, of 60.000 RON (15.000 EUR or 15.000 USD). There is no account opening bonus and the interest is fixed and established per calendar quarter.
In the case of ATUSPRINT, like in the case of ATUCONT, the following operations are allowed: cash deposit and withdrawal, inter banking and intra banking receipts (including exchange between accounts), but there is no case of transfers in the current accounts opened at BRD, and the balance is transferred to ATUCONT or another current account.
As in the previous case, in the case of ATUSPRINT, the following operations are not allowed: cash deposits/withdrawals, which are not rounded to 10 RON/USD/EUR (except for the closing of the account), direct debits (leases, bill payments) and transfers from the saving account, if the account holder is underage.
3.4.2 CREDITING PRODUCTS
Financing individuals was and will always be an important banking activity. The crediting products represent tools of attraction and loyalty for the clients, keeping in account the fact that banks want to be in a medium or long term relationship with the client.
Nowadays, factor like the clients' expectations regarding the offer of financing solutions adapted to their needs and an increasing level of financial-banking education lead to the diversification of the bank's crediting offer and to the adoption of a proactive approach in the relationship with the bank's clients and prospects. BRD's crediting offer is destined to all categories of clients, mass customers and niche customers, respectively. The account holders can be: residents and non-resident Romanian citizens from the point of view of the Currency Regulation, resident foreign citizens from the point of view of the Currency Regulation, and nonresident foreign citizens from the point of view of the Currency Regulation. In some cases, the account holder may be different from the beneficiary of the respective financing (for example, credits granted for performing studies, or credits granted for medical purposes). So, the bank fulfills its clients' needs by offering solutions adapted to different projects or events that could take place during their lives. In order to obtain a credit, the applicant can present up to 3 co-borrowers, who participate with incomes to the analysis. The husband/wife are considered co-borrowers, whether they participate or not with incomes to the file, the only exception being the case where the 2 spouses didn't chose the separation matrimonial regime. Granting a credit involves building a long term relationship with the client. Throughout this relationship, the sales force approach must be a pro-active one, centered on the following objectives: attracting the client, multi-equipment and retention and loyalty.
When granting a credit, the following steps must be taken into consideration:
Identifying the client's current need (the current financing plan)
Using all available information of the client (owned products, future projects), so that the bank could anticipate his future needs.
Throughout the credit development, modifications regarding the contractual conditions can intervene. The most frequent situations refer to:
Requests for the credit line increase that are treated as a new request, to which a new value of the credit line is requested (existing line and requested increase)
Recharging the personal credit guaranteed by a mortgage that can be done at a deadline related to the initial credit and can be granted only after performing a new reliability analysis of the client in the Transact PF application
The recharged credit that will be granted in the initial credit's currency at the date of the recharging, and its value cannot be higher than the capital reimbursed until the date of performing the recharging request
The monthly payment sum must not increase, and the initial period of finalizing the credit must not be exceeded.
The client has the right to request the anticipated reimbursement at any date, for any sum
The credit is tracked throughout its development period, in order to avoid the risk of it being irredeemable. It's mandatory that the client respect the credit's destination established at the credit's approval. The client also has to extend the insurance policies and to pay them on time. There are 3 crediting products available at BRD, EXPRESSO, Habitat and Prima Casa.
The EXPRESSO credit is characterized by the fact that its currency is in RON or EURO; it's an unnamed personal credit. The account holders in this case could be resident individuals and clients and prospects, and the credit beneficiary is the account holder. In the case of EXPRESSO, clients must fulfill certain possible preferential tariffs conditions:
The clients must have incomes residing in BRD and they must be employers of a society that signed a benefits convention
The retired clients must have their pension residing in BRD within some conventions for transferring pensions
The student clients are within the convention of scholarships payment.
The client must be at least 18 years old in order to obtain an EXPRESSO credit, and at most, 70 years. In the case of EXPRESSO, the minimum income is 500 RON/month (for credits in RON) and 500 EUR/month (for credits in EUR) and the maximum crediting period is of 60 months; the interest is fixed and index able. In the case of EXPRESSO, the bank charges the following fees: file analysis fee, anticipated reimbursement fee, monthly credit administration fee, and a unique fee for supplementary services provided at the client's request. The Habitat credit is a housing credit and its currency is in RON and EUR, but unlike the EXPRESSO credit it also has currency in USD. The credit can be used for real estate investments in Romania (buying the real estate property, modernizing the real estate property, and so on). The client can obtain a supplementary credit of up to 20% of the standard credit's value for covering expenditures related to real estate investment (notary expenses, evaluating, modernizing the real estate property acquired from the credit, furniture). But he must present some supportive documents, which confirm the level of the respective expenses. The account holders, who are also the credit beneficiaries, are resident or nonresident Romanian citizens from the point of view of the Currency Regulation, resident foreign citizens, from the point of view of the Currency Regulation and nonresident foreign citizens, from the point of view of the Currency Regulation. As in the case of EXPRESSO, the clients have incomes residing in BRD, and must be employers of a society that signed a benefits convention. The client must be at least 20 years old and at most 60 years old in order for him to obtain the credit. The minimum incomes for credits in RON are also 500 RON/month, but are lower for credits in EUR (400 EUR/month). For credits in USD the minimum incomes are 300 USD/month. While EXPRESSO's maximum crediting period is of 60 months, the Habitat's is of 360 months. (with a minimum of 120 months). The interest is also fixed and indexable.
In the case of Habitat, as in the case of EXPRESSO, the bank charges a file analysis fee, a monthly credit administration fee, and a unique fee for supplementary services provided at the client's request. There's also the Habitat Extra credit, which is identical to the Habitat credit, the only difference being that it can be obtained by Romanian citizens abroad.
And finally "Prima Casa" is a credit for real estate investments and its currency, unlike the two others previously presented, is in EURO. The account holders are residents or nonresident individuals, from the point of view of the Currency Regulation. Like the EXPRESSO credit, the client's minimum accepted age is 20 years and the maximum accepted age is 60 years. Compared with EXPRESSO, "Prima Casa's minimum incomes are of 400 EUR/month (except for clients who develop activities of liberal professions: lawyers, doctors, pharmacists, notaries, accounting experts) and 300 RON/month (for the same customers). As in the case of EXPRESSO, the crediting period is at least 120 months and at most 360 months and the interest is fixed and index able. The "Prima Casa" differs from the other two services in the sense that the bank charges the following fees for this service: annual management fee and unique fee for analysis (in case of issuing a guarantee promise, which is available for unfinished houses, in different phases of building, which are to be acquired after being finished).
This service also offers some guarantees: real estate mortgage over banking accounts and debts, and a mortgage over the blocked sum of money in the account.
3.4.3 REMOTE BANKING SERVICES
The bank aims to satisfy the clients' needs by putting at their disposal a simple way of accessing its products and services. It also aims to reduce the number of simple operations (overdrafts, transfers, payments) and its costs by automating banking operations. This kind of banking service is destined to individuals who have, as account holders an opened account at BRD, and who use and have access to the bank's new technologies.
These services create a new communication connection with a segment of demanding customers who are less available from the view point of their mobility and time.
There are two services from this category that BRD provides: BRD-Net and VOCALIS.
BRD-Net is a banking distribution channel that offers the possibility of accessing the accounts at BRD through the Internet, at any time. In order to be able to use the BRD-Net service, the client must use a username (8 digits), which is given to the client when he subscribes to the service and the password (6 digits), which is also given to the client when he subscribes to the service and it is also sent to him by e-mail
BRD-Net offers consultative functionalities regarding the clients 'accounts, since it provides the consulting of account balances and account statements containing information, with a history of 45 days (clients can also consult deposit balances), contracted credits, The beneficiaries to whom payments can be made and so on.
BRD-Net also offers transactional functionalities, such as transfers between own accounts (for which the client is the holder), which the client has selected in a contract previously closed with the bank, payments towards beneficiaries defined by the client in the moment of subscribing, transfers to accounts opened in the same (or different) currency, payments towards treasury accounts.
In this case, the account statements are free of charge, and the bank charges a small fee for the transfers the client makes. Basically, BRD-Net is a service that provides useful information to the client about the products and services that BRD offers and about the branch network.
Like BRD-Net, VOCALIS is a banking service that offers clients the possibility of obtaining general and personalized information to perform remote banking operations and to subscribe to certain products and service through the help of phone distribution channels.
VOCALIS has different functionalities offered to individuals, among them being the possibility of finding out information regarding the offer of the bank's products and services (like BRD Net) and the possibility of consulting personalized information regarding the own products and services. In case the client loses his card, he can use VOCALIS to block it.
VOCALIS also has different functionalities offered to juridical persons.
Clients have the possibility of scheduling a meeting with a clientele adviser and also have the possibility of finding out information regarding the offer of the bank's products and services. They also have access to operations of blocking or unblocking cards. VOCALIS is used by clients in order to reset the PIN code for the BRD SMS Banking service.
When making a request for the membership to the BRD VOCALIS service, clients have access to a lot of operations, one them being intra banking transfers. Money can be transferred from one current account to another current account in the same currency, no matter who the account holder is and the institution managing it. Money can also be transferred from one current account to another in different currencies, having the same conditions. Transfers from current accounts to revolving accounts in the same currency, no matter who the account holder is can also be made. And finally, transfers from a savings account to a current account in the same currency and vice versa can be made.
And finally, VOCALIS offers the possibility of forming deposits in RON or foreign currency with a fixed, variable and progressive interest.
Basically, VOCALIS is a service that the client uses by phone in order to check his account balance, make transfers or receive detailed information related to other BRD products and services.
Both VOCALIS and BRD-Net are accessible services provided by the bank for clients to find it as easy as possible to keep up-to-date. The only difference between VOCALIS and BRD-Net is that BRD-Net can be used by Internet and VOCALIS, by phone.
3.4.4 PACKAGES OF PRODUCTS AND SERVICES
The packages of products and services are addressed to individuals and imply the grouped acquisition of banking and extra banking products and services at preferential tariffs; they are based on a current account or a remunerated current account (with an attached card)
The packages of products and services is a selling concept of products and services that condition the granting of preferential commissions, discounts and free services, as well as extra banking benefits and the grouped acquisition of products from the bank's offer.
BRD offers seven different packages of products and services and each one of them is specific to a certain segment.
The first packages are: the SPRINT package (destined to teenagers, aged between 14 and 18) , the STUDENT package (aimed at students, aged between 18 and 25) and the CLASIC package (destined to clients aged 25 and up). The purpose for which the bank provides these services is the acquiring of niche customers.
The SELECT package is destined to the so-called Bonne Gamme public (rich persons). By issuing this package, the bank's objectives include multi-equipment, the clients' loyalty and allocating a client adviser.
The PREMIUM package is destined to the so-called Haut de Gamme sector (the richest persons). By issuing this package, the bank has the same objectives as in the case of the SELECT package.
The DRUM BUN package is destined to Romanian citizens abroad, and as in the first three cases, the bank hopes to acquire niche customers.
Finally, the e-CLICK package is destined to all categories of public the other services were destined to and the bank has the same objectives as in the other cases.
A package has a main structure: the included products and services, the discounts and an optional section. The included products and services are mandatory for the opening of an account, and the discounts include discounts in making operations (a number of free operations per month), and discounts in acquiring a product or service other than the ones included in the package. The optional section includes optional products and services (offered FREELY or in preferential conditions in the package and granted to the package holder).
Each package that BRD offers has a specific structure.
The products and services included in the SPRINT package are the current account, BRD-Net, VOCALIS and the client can also chose a card, from a wide range offered by the bank. The discounts offered by the SPRINT package include two free withdrawals at a BRD ATM per month and two balance queries at a BRD ATM per month. There is no fee for the analysis of the credit file and the fee of the annual management of the card is the standard 20%. The optional services included in the SPRINT package include the BRD SMS Banking service (offered freely in the package) and ATUSPRINT in RON, with a preferential interest.
In the case of the STUDENT package, like in the previous case, the products and services included are the current account, BRD-Net, VOCALIS, and the client can also chose a card from a wide range offered by the bank . The discounts offered by the STUDENT package are exactly the same as in the previous case, but this one adds a 20% fee for the analysis of the credit file.
The optional services are the BRD SMS Banking service (also offered freely in the package) and ATUCONT in RON, with a preferential interest.
In the CLASSIC package, the products and services include, like in the previous two cases, the current account, the BRD-Net and the VOCALIS services and add insurance in case of hospitalization and death. Unlike the previous packages which offered 2 withdrawals from BRD ATMs per month, this one provides only one, as in the case of balance queries at BRD ATMs per month. Both the fees for analyzing the credit file and for the card's annual administration are of 20%. BRD SMS Banking is also offered freely in the package.
Unlike the previously mentioned packages, the SELECT package doesn't feature a current account, but it does have the BRD-Net, the VOCALIS services, and also adds the insurance in case of hospitalization and death. Unlike previous packages, SELECT has 3 withdrawals from BRD ATMs per month and 3 balance queries at BRD ATMs per month. Both fees for analyzing the credit file and for the card's annual administration are of 20%. Just like in the case of the other packages, BRD SMS Banking is offered for free in the package.
Like the SELECT package, the PREMIUM package doesn't include a current account, but it includes the BRD Net and VOCALIS services and the client can chose from a wide range of cards. It also includes the insurance in case of hospitalization and death. It's different from all the other packages, because it offers 5 withdrawals from BRD ATMs per month and 5 balance queries at BRD ATMs per month, but it has the same fees for analyzing the credit file and annual administration of 20%. BRD SMS Banking, like in the other cases, is included for free in the package.
The DRUM BUN package has a current account, the BRD Net and VOCALIS services, but, unlike CLASIC and SELECT it doesn't have the insurance in case of hospitalization and death. It has 2 withdrawals at BRD ATMs per month and 2 balance queries at BRD ATMs per month (just like the first packages provided), and it has the same fees for analyzing the credit file and annual administration fee of 20%. Like in the other cases, BRD SMS Banking is offered for free in the package, but DRUM BUN also has the ATUCONT in EURO with a preferential interest.
Finally, the e-CLICK package has the same services like the other packages. It differs from the other ones, because it provides only 1 withdrawal from BRD ATMs per month and 1 balance query from BRD ATMs per month. It has the same fees for analyzing the credit file and annual administration fee of 20%, but adds a fee for transfers made through BRD-Net of 75%.
GRANTING A PERSONAL LOAN
This chapter will focus on a particular case, the granting of a personal loan to an individual, in this case, the EXPRESSO loan. In the case of the EXPRESSO loan, its currency can be in either RON or EURO, and it has as an objective, unnamed personal needs.
Its owner can be an individual in the following situations:
Resident and non-resident Romanian citizens, from the foreign currency regulations' point of view
Resident foreign citizens, from the foreign currency regulations' point of view
Non-resident foreign citizens, from the foreign currency regulations' point of view, who own a certificate of temporary stay, issued by the Romanian state
In some cases, the credit owner may be different from the beneficiary of the respective financing (for example, credits granted for performing studies or credits granted for medical purposes). So, the bank helps its customers by offering solutions adapted to different projects and events that could occur during their lifetimes.
In order to obtain a loan, the applicant can have up to 3 co-borrowers, who participate with incomes at the analysis. A husband and his wife are considered co-borrowers, whether or not they participate with incomes at the analysis. There are 2 exceptions from this rule, when the couple chose the matrimonial separation regime, and in the case of credit lines, overdrafts or credit cards, if the applicant is granted the loan in his name. When presenting a co-borrower (not the spouse), it is best if he/she is related to the applicant.
Generally, when a client wants to be granted a loan, he must present to the bank the following documents:
The income statement (for the husband or the wife), or the last pension coupon for pensioners, as well as the definitive retirement decision
A copy of the work contract plus additional documents (if necessary), signed and stamped for compliance or the last 3 pay slips, signed and stamped
The husbands' and wife's' ID - both the original and a copy
A copy of the marriage certificate or a copy of the divorce sentence or a copy of the death certificate
The last utility bill (landline phone, mobile phone, electricity, water, gas, TV) - the address on the bill has to be the same as the address in the ID
Tax file from the previous year.
All these documents have to be presented in a file at the bank. This file is then analyzed, using an application in which all these data is introduced. For each one of the data introduced in the application, there is a score. After all the data are introduced, the final score is calculated, and then, depending on the score, the bank grants the loan.
The client has the duty to inform the bank about the period during which the loan will be granted, and also about the maximum price he is willing to pay.
After this procedure is finished, the credit file is then sent to the back-office staff, which will check the documents. And then, finally, the client will come to the agency to sign the credit contract.
The clients, who cash their salaries through BRD, have certain advantages. For instance, they have a much smaller interest for the credit, as well as smaller commissions for operations done through their accounts. They also have smaller commissions for their cards (management, issue, etc). For example, a client has to pay the annual commission of 14 RON for managing his card. If the client cashes his salary through BRD, there is the possibility of the commission to be reduced by half.
There are some general conditions established in the credit contract, which will be briefly presented below.
The bank grants the applicant a credit according to the terms established in the general and particular conditions and the payment graph. Through "credit", we understand the amounts available to the client in one or more installments, beginning with the date established in the Particular Conditions and ending with the established deadline, including the amounts made available based on Charger requests.
The credit is granted for a period established in the Particular Conditions, which includes:
A total grace period, during which the capital, the interest and the commissions are not paid. During this period, only the insurance premiums are paid
A partial grace period, during which the credit's interest, commissions, and (if necessary) the insurance premiums mentioned in the Particular Conditions
If necessary, the total or partial grace period is mentioned in the Particular Conditions.
The client will pay according to the Particular Conditions the following commissions to the bank:
A file analysis fee (fixed amount) - it has to be paid when the credit is granted
Monthly credit administration fee (fixed amount, or calculated as a percentage from the credit's balance) - it can be paid during the period established in the Particular Conditions
For the contracts with a fixed interest, a partial or full reimbursement credit fee, calculated as a percentage of the reimbursed sum. It has to be paid at the date of the credit's partial or full reimbursement.
The bank will also charge a fee for the services the client has requested during the credit file development period. The value of this commission is unique and it will be established for every service the client has used.
After it has been approved, the credit will be transferred in the client's current account.
The client will use the credit for the purposes mentioned in the Particular Conditions.
The client has 14 days from when he signed the credit contract to withdraw from the contract with no justification, by sending to the bank a notification to that effect.
The credit's reimbursement can be done through equal rates or through decreasing rates, according to the client's choice. The credit's reimbursement and the payment of the interests, the credit administration fees and the insurance premiums will be done on a monthly basis in the credit's currency and according to the reimbursement chart in force when the payment is done.
In case the deadline is a non-working day, the borrower/co-borrower has the obligation to pay the sum necessary to the reimbursement to the previous day.
There are also some Particular Conditions, established in the credit contract. They will be discussed very briefly below:
The current credit is being granted for personal needs, and it will be fully registered in a separate account, and finally it will be transferred in the client's current account. The currency in which the credit is granted is RON, and in this case the credit's value is of 10800 RON. The credit is being granted for a period of 60 months (from 26th April 2012 until 26th April 2017). The credit is granted with a fixed interest of 5.50% per year, and the penalty interest is of 2 percentage points, while the Annual Percentage Rate is of 11, 92%. The reimbursement is done in equal rates, as chosen by the client.
Mr. Surugiu Ioan came to BRD - Lisabona Agency in Timisioara in order to obtain an Expresso personal loan. From the documents he has brought to the bank, the following is known about him:
He is unmarried and he currently lives in rent
His monthly salary is of 1243 RON
All the documents that Mr. Surugiu Ioan presented to the agency were sent to the back-office staff for analysis. After the analysis was completed, Mr. Surugiu came to the agency to sign the credit contract (presented as the first Appendix).
The client has requested a credit worth 10800 RON (the credit is a personal loan and it's an Expresso in RON), and he has a reimbursement period of 60 days (5 years); his reimbursement is constant. The client also has 3 co-borrowers, but no information has been provided for them.
The client has presented an insurance application and he has insurance for credits without mortgages and auto credits. He also presented a health declaration, in which he declares that his health good enough that it doesn't need any treatment or medical supervision and that he doesn't have any handicap.
The bank has prepared a reimbursement chart for Mr. Surugiu Ioan (presented as the second Appendix), in which the following are presented (for his 60-day reimbursement period): the amount he has to pay, a sum (between the rate, the interest and the deferred interest), the interest, the deferred interest, the rate, the commission, the insurance premium, the final balance and the annual interest percentage.
So, the credit's value is of 10.800 RON and it has a reimbursement period of 60 months (5 years). That means that Mr. Surugiu's payments will last until 2017. The first column, the amount that has to be paid by the client is decreasing during the period of 60 months, and it is calculated as the sum between the interest, the rate, the commission and the insurance premium.
The second column, which represents the sum between the rate, the interest and the deferred interest decreases from the first period to the second period, and then remains constant from the second period until the last two periods.
The third column, the interest decreases during the 60-day period, while the fourth column, the deferred interest has the same value during the whole period, which is 0.
The fifth column, the rate is increasing during the period, and the commission is decreasing, because the interest is decreasing. The final balance, which is calculated as the difference between the final balance from the previous month and the rate, also decreases, while the last column, the annual interest percentage has the same value during the period.
After the credit contract has been signed, the client has the duty to reimburse the amount at the dates established in the reimbursement graph. If he fails to do so, the bank will charge a penalty interest, as well as a 10 RON commission for his payment overcome.
But, in this case, until now, Mr. Surugiu made all his payments at their established dates.
Viewed as a whole, the offer that BRD currently has, is one of the most attractive, compared to the offers of other competitive banks. This statement is strengthened by the position BRD currently has (the second best bank in Romania).
Nevertheless, BRD could improve in the following sectors:
Decreasing the fees the bank charges its clients
Improving the informational system, thus leading to the clients' better understanding of the phenomena that occurs with the instruments and services that the bank offers
Making new packages of products and services.
Generally speaking, banks are very important, because they ensure a swift economic activity, both on national and international levels. As seen in the first chapter of this paper, the economic system functioned based on the barter system.
Banking services represent a main source of income of a bank, because by offering them to clients, banks generate profit. The services are flexible, they change overtime, in order to satisfy the clients' needs and thus, making them chose the bank producing them.
Services are important to the population, because each one of them is targeted at a particular segment, having different characteristics and features that make them more appealing. The example provided in this paper illustrates the usefulness of such a service.
Basically, each service has a purpose helping the clients in certain situations, because they offer practical solutions to their everyday problems.
To conclude, banks are at the base of the economy. Their main purpose is adjusting the monetary mass maintaining it at a level which allows the circulation of merchandise, performing payments and so on.
Also, they have to ensure the legal conditions through which money circulate.
While the National Bank is unique and has right to issue currency, the commercial banks have as a main purpose the intermediation of the transactions of the economic agents. Also, the services offered are modeled after the clients' needs.
The importance of banking services is felt from the case of the ordinary man (like the example presented in the paper), to the cases of small companies, and thus, regarded as a whole to the national economy and then, the international economy.
Technology is one of the factors that contribute to the economic progress. Thus, it follows its final purpose, that of making profit, so the bank is constantly modernizing making services more and more accessible, modeling after the clients' needs.
As a conclusion, banks have become necessary, an economy segment without which the economic growth cannot follow its course.
Vasile Dedu - "Management Bancar", Editura Sildan, Bucuresti, 1996
Xavier Freixas & Jean-Charles Rochet - "Microeconomics of Banking", 2nd edition, The MIT Press, London, 2008
Jagdish Handa - "Monetary Economics", 2nd edition, Pontledge, New York, 2009
Shelagh Hefferman - "Modern Banking in Theory and Practice", John Wiley & Sons, New York, 1996
Iosif Hetes Gavra - "Organizarea si operatiunile bancilor", Editura Orizonturi Universitare, Timisoara, 1996
The Concise Oxfor English Dictionary, 11th edition, Oxford University Press, 2007
2011 BRD Annual Report
2012 BRD Annual Report (done up to May)
Michael Bordo - "A Brief History of Central Banks", 2007 model