Internship ReportPage 7
Bank Alfalah LimitedIt was learnt in Financial Institutions course that banks provide its customers with Letters ofCredit for trade purposes. Commercial letters of credit are contingent guarantees sold by an FIto underwrite the trade or commercial performance of the buyers of the guarantees. For example, a Pakistani businessman wants to import machinery from US and promises to payfor the machinery within 3 months but the US exporter is skeptical because of the low creditrating the Pakistani businessman has. The Pakistani businessman turns to Bank Alfalah who thenissues a contingent payment guarantee to the US exporter on behalf of the Pakistanibusinessman. Thus, the credit risk of the Pakistani businessman is replaced by the Bank Alfalah’scredit risk guarantee. If the Pakistani businessman defaults on his payment, Bank Alfalah wouldpay the US exporter on his behalf and then show the amount paid on its on balance sheet aspart of advances and seek legal recourse against the Pakistani businessman.2.3.New Concepts Learned2.3.01.Nostro AccountsNostro account is a bank account of a domestic bank held in a foreign bank denominated in thecurrency of the country of foreign bank. For example, if Bank Alfalah has a bank account in anyforeign bank denominated in foreign currency that bank account shall be a Nostro account forBank Alfalah. These accounts are used for facilitating trade related transactions and settlementof foreign exchange. These accounts also have overdraft facility available. On the other hand, accounts of a foreign bank that are held in a local bank are called Vostroaccounts.These Nostro accounts are reported in the liability section under the head “Borrowings” oncethey are overdrawn and they are classified as an unsecured form of borrowing. 2.3.02.Interest Suspense AccountInterest Suspense Account is similar to a loan loss reserve account where provision is made forany interest which cannot be recovered. This account is created keeping in view that whensome of the loans go into default the interest on such loans shall also be non-recoverable. Sothe principal amount of those loans shall be deducted from the loan loss reserves while theinterest receivable on such loans shall be deducted from Interest Suspense Account.The Interest Suspense Account is reported in the Balance Sheet under the head “Other Assets”where it is subtracted from the gross amount of Other Assets.2.3.03.Branch Adjustment AccountBranch adjustment account is created because of the non-settlement of payments among thebranches and lag in recording the entries.Internship ReportPage 8
Bank Alfalah LimitedIf a customer withdraws cash from his account from the branch of Bank Alfalah where hisaccount is, then only one entry would be made debiting the customer and account andcrediting the cash by the amount of the cash withdrawn.
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