Analysis of Foreign Exchange Banking Services of BASIC Bank Limited

RESOURCES AND CAPABILITIES

BASIC Bank Limited is well prepared to and capable  of meeting the demand for a broad range of banking services. It has got adequate resources, both human and physical, to provide the customers with the best possible services.

Physical and technological resources

A great deal of investment for developing the physical resource base of the Bank has been made.  The   Bank has  its  presence  in  all  the  major  industrial  and  commercial  hubs of Bangladesh  in  order  to  cater  to  the  needs  of  industry  and  trade.  At  present,  there are twenty-seven conveniently     located     branches     throughout     Bangladesh.     There are ten branches in the capital city of Dhaka, six in Chittagong and one each in Narayanganj, Narsingdi, Rajshahi, Saidpur, Bogra, Khulna,   Jessore, Sylhet, Moulvibazar, Comilla, and Barisal.

Activities:

A. Industrial Credit

Outstanding at year end

BASIC Bank’s services are directed towards the entrepreneurs in the small industries sector. A small industry, as per Industrial policy 1999 approved by the Cabinet, has been defined as an industrial undertaking whose total fixed investment is less than Tk.100 million.

The industrial loan reflected a significant growth of 23.91 percent over  the  previous  year. Total   outstanding   industrial  loans including  term  and  working  capital  stood  at  Taka

17,226.40 million at the end of 2008 compared to Taka 13,901.40 million of 2007.  Total outstanding   term    loan    stood   at    Taka    6,206.75  million  as  on  December  31,  2008 compared to Taka  5,055.58 million  in  2007  reflecting  a  growth  of  22.77  percent.  The outstanding  working  capital  finance  extended  to  industrial  units stood at Taka 11,784.08 million at the end of the reporting period compared to Taka 9,525.98 million in 2007. Growth rate here was 23.70 percent. BASIC Bank’s services are specially directed towards promotion and development of small industries.  Its exposure to  small  and  medium  industries  sector accounted  for 56.52 percent of the total loans and advances. During the year total of 87 projects were sanctioned term loan. Out of which 26  were new and the rest  were under BMRE of the  existing projects. As on 31 December 2008, 801 projects were in the portfolio of the bank. The textile sector including garments being one of the major contributors to

E. Other Activities:

The Bank provides services for remittance, underwriting, guarantee, public offering of shares etc. Then also provides funds to investment and leasing companies. Then Bank has recently created a venture capital fund for equity support to innovative but risky projects.

Credit Rating

BASIC Bank Limited

Credit Rating Report (Entity Rating)

Credit Rating Information and Services Limited (CRISL) has assigned AA- (pronounced as double A minus) rating in the long term and ST-1 rating in the short term to the Bank for the year 2008

Banks rated AA- in the long term are adjudged to be of high quality, offer higher safety and have high credit quality. This level of rating indicates a corporate entity with a sound credit profile and without significant problems. Risks are modest and may vary slightly from time to time because of economic conditions

Banks rated ST-1 in the short term are considered as the highest certainty of timely payment. Short-term   liquidity  including  internal  fund  generation  is  very  strong  and  access  to alternative sources of funds is outstanding. Safety is almost like risk free Government short-term obligations

GENERAL BANKING

General banking is the starting point of all the banking operations. It is the department, which provides day-to-day services to the customers Main Functions of general banking department are the followings:

1.  Accounts Opening Section

2.  Accounts Section.

3.  Local Remittance Section

4.  Collection And Clearing

5.  Cash Section

ACCOUNTS OPENING SECTION

ACCEPTING DEPOSIT

Bank is a financial intermediary, which mobilizes fund from surplus unit and allocates it to deficit unit. Surplus unit means the people who have surplus money and willingness to save. Deficit unit means the people who need money for industry, trade, business, or for personal use but don’t have sufficient money of their own for such purposes. Bank mobilizes the fund by accepting deposits from depositors and allocates the fund by providing loan to borrower.

Banker-customer  relationship  begins  with  the  opening  of  an  account  by  the  customer. Opening of an  account binds the same into a contractual relationship. But the selection of customer is very crucial. In fact, fraud and forgery of all kinds start by opening of an account by the customer (s). So, the bank takes extra care in its selection. One of the basic functions of commercial banks is to accept deposits. For accepting deposits  both demand and time,

BASIC Bank (Shanti Nagar Branch) offers the following types of accounts-

TYPES OF ACCOUNTS WITH TERMS AND CONDITIONS

This part covers only following types of accounts-

1.  Savings Bank Accoun

2.  Current Account

3.  Short Term Deposit (STD) Account

SAVINGS BANK ACCOUNT

This deposit is primarily for small-scale savers. Hence, there is a restriction on withdrawals in a week. Heavy withdrawals are permitted only against prior notice. Some Important Points are as follows-

GENERAL CHARACTERISTICS

As per BB instruction 90% of SB deposits are treated as time liability and 10% of it as demand liability

a.      Minimum opening deposit of Tk.5000/= is required;

b.      Interest is paid on this account. BASIC offers a reasonable rate of interest for SB A/C.

c.      Generally, banks require a 7-day prior notice if the total amount of one or more withdrawals on any date exceeds 25% of the balance of the account unless is given.

d.      The number of withdrawals over period of time is limited. Only two withdrawals are permitted per week. If there are more than two withdrawals are made in a week, no interest will be paid on rest amount for that month.

e.      Generally householders, individuals and other small-scale savers are the clients of this account

CURRENT ACCOUNT

Current account is purely a demand deposit account. There is no restriction on withdrawing money from the account. It is basically justified when funds are to be collected and money is to be paid at frequent interval. It is most suitable for private individuals, traders, merchants, importers and exporters, mill and factory owners,  limited company’s etc. Some Important Characteristics are as follows-

a.      A minimum balance of TK.5000 has to be maintained.

b.      CD  accounts  are  unproductive  in  nature  as  banks  loanable  fund  is  concerned.

Sufficient fund has to be kept in liquid form, as current deposits are demand liability.

c.      Thus huge portion of this fund become non-performing. For this reason banks do not pay any interest to CD Accountholders.

d.      There is no restriction on the number and the amount of withdrawals from a current account.

STD (SHORT TERM DEPOSIT) ACCOUNT

Normally various big companies, organizations, Government Departments keep money in STD account. Frequent withdrawal is discouraged and requires prior notice. In BASIC, customers usually give an instruction that their  current account will be debited whenever its deposited amount crosses a certain limit and this amount will be transferred to the STD account

COMMON FORMALITIES REQUIRED FOR EVERY ACCOUNT

> Duly filled up Account Opening Form.

> Introducer’s signature on Account Opening Form to be verified by Manager under full signature.

> Two copies of passport size photograph of account opener(s) duly attested by the introducer.

 ACCOUNTS SECTION

# COLLECTION AND CLEARING SECTION

Customers do pay and receives bill from their counter party as a result of transaction. BASIC Bank Limited  collects the bills on behalf of their customers.  Collection mechanisms in BASIC Bank are clearing, Outward Bill For Collection, Inward Bills for Collection.

CLEARING

When the bill is within the range of the clearinghouse it is sent for collection through clearing section. As far  as  safety is concerned customers get crossed cheque for the transaction Crossed check can’t be encashed  from the counter; rather it has to be collected through banking channel i.e., clearing. If a client of BASIC Bank received a check of another bank which is located within the clearing range and deposit the  instrument in his account at BASIC Bank. Then  BASIC Bank will collect the money through clearing  house.  After received the check BASIC Bank will credit client account. However, the amount is credited in the customer a/c but he will not get the money until the check is honored.

CASH SECTION

Cash is the lifeblood of all financial activities. Cash section is a very sensitive point of the branch. This section deals with all types of negotiable instruments and it includes vault, used as the store of cash, instruments. The vault is insured up to Tk.20 lac. Insured amount yet to be enhanced to Tk. 40 lac. Operation  of this section begins when the banking hour starts. Cash officer begins his/her transaction with taking  money from the vault, known as the opening cash balance. Vault is kept in a more secured place. The amount of opening cash balance is entered into a register. After whole days’ transaction, the surplus money remains in the cash counter is put back in the vault and known as the closing balance. If the cash s t o c k  g o e s  b e yo n d  t h i s  l i m i t ,  t h e  e x c e s s  c a s h  i s  t h e n  t r a n s f e r r e d  t o  B A S I C b a n k m a i n b r a n c h . The main functions of this section are-

1.     Cash Receipt

2.     Cash Payment

CASH RECEIPT

Cash receipt procedure is given below-

i.     The depositor first fills up the Deposit-in-Slip.

ii.   Depositor deposits the money.

iii.   Officer receives the money, counts and then enters in the Cash Receipt Register, and finally signs with seal and dates the deposit-in-slip.

CASH PAYMENT

Some important check points for making the payment are as follows-

1 .     E n d o r s e m e n t

Endorsement  is  done  by  putting  signature  of  the  drawer  on  the  back  of  the  negotiable instrument for  the purpose of negotiation. By ‘blank endorsement’, an order instrument is made as ‘bearer’

2.     Crossing

Generally two types of crossing are practiced, namely- General Crossing and Special Crossing. Basically it gives a direction to the paying bank not to pay the check amount over the counter. General  crossing includes ‘A/C payee’ crossing only. Drawing two parallel and transverse lines do it. On the  other hand, special crossing is like general crossing but in addition bank name is also mentioned. This  gives the direction to the same to pay the check only to the banker, whose name appears in the crossing or to his agent.

Foreign Exchange- its meaning and definition:

Import Section :

Imports are foreign goods and services purchased by consumers, firms & Governments in Bangladesh. To  import, a person should be competent to be a ‘importer’. According to Import and Export Control Act, 1950, the Office Of Chief Controller Of Import and Export provides the registration (IRC) to the importer.

BASIC Bank checks the documents. The usual documents are,-

i. Invoice

ii. Bill of lading

iii. Certificate of origin iv. Packing list

v. Weight list

vi. Shipping advice

vii. Non-negotiable copy of bill of lading viii. Bill of exchange

ix. Pre-shipment inspection report

x. Shipment certificate

Import Procedures:

1.  Registration with CCI&E

a.      For engaging in international trade, every trader must be first registered with the

Chief Controller of Import and Export.

b.      By paying  specified  registration  fees  and  submitting  necessary papers  to  the CCI&E. the trader will get IRC  (Import Registration Certificate).After obtaining IRC, the person is eligible to import.

2.  Purchase Contract between importers and exporter:

a.      Now the importer has to contact with the seller outside the country to obtain the proforma invoice / indent which describes goods.

b.      Indent is got through indenters a local agent of the sellers.

c.      After the importer accept the preformed invoice, he makes a purchase contract with the exporter declaring the terms and conditions of the import.

d.      Import procedure differs with different means of payment. In most cases import payment is made by the documentary letter of credit (L/C) in our country.

3.  Collection of LCA form:

Then the importer collects a Letter of Credit Authorization (LCA) form BASIC Bank, Shanti

Nagar Branch

4. Opening a Letter of Credit (L/C)

In international environment, buyers and sellers are often unknown to each other. So seller always seek guarantee for the payment for his goods exported. Here is the role of bank. Bank gives export guarantee that it will pay for the goods on behalf of the buyer. This guarantee is called Letter of Credit. Thus the contract between importer and exporter is given a legal shape by the banker by its ‘Letter of Credit’.

a.  Parties to Letter of Credit

1.  Importer ( Buyer)/ Applicant

2.  The issuing Bank (Opening Bank)

3.  The Advising Bank ( Notifying Bank)

4.  Exporter /Seller ( Beneficiary)

5.  Confirming Bank

6.  Negotiating Bank

7.  The paying/Reimbursing? Accepting/Remitting Bank

Applicant:

The person/Body who requests the bank (opening bank) to issue the letter of credit. As per instruction and on behalf of applicant, the bank opens L/C in line with the terms and condition of the seller contract between the buyer and the seller.

Opening /Issuing Bank:

The Bank which open /issue letter of credit on behalf of the applicant/importer. Issuing bank obligation is to make payment against presentation of documents drawn strictly as per terms of the L/C.

Advising /Notifying Bank:

The Bank through which the L/C is advised / forward to the beneficiary (exporter). The responsibility  of  advising  bank  is  to  communicate  the  L/C  to  the  beneficiary  after checking the authority of the credit. It acts as an agent of the issuing bank without having any engagement on their part.

Beneficiary:

Beneficiary of the L/C is the party in whose favor the letter of credit is issued. Usually they are the seller or exporter.

Confirming Bank:

The Bank  which  under  instruction  the  letter  of  credit  adds  confirmation  of  making payment in addition to the issuing Bank. It is done at the request of the issuing having arrangement with them. This confirmation constitutes a definite undertaking on the part of confirming bank in addition to that of issuing bank.

Negotiating Bank:

Negotiating  Bank  is  the  bank,  which  negotiates  the  bill  and  pays  the  amount  of  the beneficiary. The  advising bank and the negotiating bank may or may not be the same.

Sometimes it can also be confirming bank

Reimbursing/Paying Bank:

The Bank  nominated  in  the  letter  of  credit  by  the  issuing  bank  to  make  payment stipulated in the document, complying with reimbursing bank.

b.      Application For L/C limit:

Before opening L/C, importer applies for L/C limit. To have an import L/C limit, an importer   submits   an  application  to  the  Department  of  BASIC  Bank  Limited furnishing the following information, –

i.      Full  particulars  of bank  account  maintained  with  BASIC  Bank  Shanti  Nagar branch.

ii.      Nature of business

iii.       Required amount of limit

iv.      Payment terms and conditions

v.    Goods to be imported

vi.      Offered security

vii.       Repayment schedule

A credit Officer scrutinizes this application and accordingly prepares a proposal (CLP) and forwards it to  the  Head Office Credit Committee (HOCC). The Committee, if satisfied, sanctions the limit and returns back to the branch. Thus the importer is entitled for the limit.

c.      The L/C Application:

After getting the importer applies to the bank to open a letter of credit on behalf of him with required papers.

i.      Documentary Credit Application Form:

BASIC Bank provides a printed form for opening of L/C to the importer. This form is known as  Credit Application form. A special adhesive stamp is affixed on the form. While opening, the stamp is cancelled. Usually the importer expresses his desire to open the L/C quoting the amount of margin in percentage.

ii.      Proforma Invoice: It states description of the goods including quantity, unit price etc.

Foreign Remittance Section:

The basic function of this department are outward and inward remittance of foreign exchange from one country to another country. In the process of providing this remittance service, it sells and buys foreign currency. The conversion of one currency into another takes place at an agreed rate of exchange, in where  the banker quotes, one for buying and another for selling. In such transactions the foreign currencies are like any other commodities offered for sales and purchase, the cost (convention value) being paid by the buyer in home currency, the legal tender.

Workings of this department:

0      Overall supervision of Foreign Remit. Dept.

0      Foreign TT payment & Purchase of F. Drafts, preparations of F.B.P. (Foreign Bill Purchased).

0      Issuance of outward TT & FDR

0      Issuance of proceed responding certificate (PRC).

0      Foreign Collection, Bangladesh Bank Clearing Check Collection, which comes from all branch of BASIC Bank Limited.

0      Withdrawal from F.C. A/C.

0      Encashment of T.C. & Cash Dollar and Sterling Pound.

0      Deduction of Tax and VAT. On behalf of Bangladesh Bank.

0      Preparation of related statements including convertible Taka Accounts.

0      Preparation  of  IBCA  &  IBDA  and  Balancing  of  Collection  and  other  special assignment as desired by Department in charge.

0      Balancing of Account Statements.

0      Compliance of audit & inspection.

0      Statement of all related works submitted to Bangladesh Bank.

Performance of Foreign Exchange Business of

BASIC Bank Limited

The following table shows year-wise performance of foreign exchange operations consisting item-wised income generating avenues. All the figures show positive growth which generally signals foreign exchange  business as a profitable business in Bangladesh. Within all the income avenues, income from exchange gain shows highest figure in taka value. Growth rate here was 48.92%. Income from Letter of Credit and Letter of Guarantee were the second and the third largest among the income avenues respectively.

Income from foreign exchange business of BASIC Bank limited

 RECOMMENDATIONS

CONCLUSION

This is a well-established statement that practical situations always differ from theoretical explanation.  During my internship period with BASIC Bank Limited almost all the desks have been observed. And I have found theory deviates from the practice more or less though three months are not enough time to find out all the discrepancy between theory and practice.

Among all experiences some noticeable observations are described below:

The officers  were  mostly  courteous,  friendly  in  nature  and  eager  to  help  despite  the tremendous workload.

As a 100% Government owned bank, BASIC Bank is trying it’s best to extend their service to the public.

A very working environment was remaining in the BASIC Bank Ltd., (Shanti Nagar Branch). During my long relationship with (Shanti Nagar Branch), it is found that the (Shanti Nagar Branch)  provides  all  kinds  of  commercial  banking  services  to  its  customers.  Foreign Exchange department rendering all the services related to international trade and remittance.

It is well established that theory without practice is blind. During the practical orientation I have observed the function of General Banking, Foreign Exchange, and Credit department of BASIC Bank which will help me a lot to understand the overall banking.

Out of the above discussion a conclusion can be drawn after saying that, the present customer dealing  procedure  is quite well at this moment. The computerized transaction makes the system efficient and effective.