Overall Banking Activities: Special focus on Foreign Exchange of Bank Asia
Origin of the Report
The global economy, in the 2002, had no respite from the repercussion of the economic slowdown that started in late 2000 with a growth of only 1.7%. The major reason for this has been the structural imbalances in the two leading economics, the US and Japan, with weak recovery in the former and stagnation in the latter. The USA and Japan together account for 4.7% of global GDP and 20% of export and 25% of import. Both the economics are now undergoing almost nil GDP growth, high unemployment and decline in their share of world trade. The situation is further exacerbated by the recession in the EU, another dominant player in the world economy.
The Bangladesh economy marked a GDP growth of 4.8% in FY 2001-02 compared to 5.3% in the previous financial year. Agricultural sector contributed 25% of total GDP with a growth of 2.8% as against 3.1% in 2000-01. Industrial sector saw relatively higher growth in power, energy, water and small enterprise than in large and medium industries reflecting weakening exports. Services sector also registered as satisfactory considering an average global economic growth of 1.7% although upward inflationary pressure implies a lower real growth. In recent months Bangladesh receiving indication for substantial amount of Foreign Direct Investment, and the country received a net amount of US$ 505.45 million as foreign investment during the FY04 registering a 5% annual growth over the previous year.
Objective of the Study
- To know the financial performance of Bank Asia
- To evaluate their strength and weaknesses regarding banking sector.
- To justify their way of banking in our economy.
- To overview the whole operation at a glance.
- To compare the Bank Asia Limited with some private commercial banks.
- To illustrate banks liquidity and capital reservation with special reference to the annual report.
- To clarify the disbursement, advances and classified loans.
- To know the contribution of GDP towards Bangladesh
- To state the major drawbacks and the way of improvement.
- To know the proper utilization of resources those are available in our economy.
Scope of the Study:
Worldwide economic situation continued to pose adverse impact on most developing countries including Bangladesh challenging the possibility of registering a positive growth in the year 2002. A wide variety of business, industries and sectors constitutes the advance portfolio, major sectors where the Bank Asia have entered in particular, Textile and ready made garments, Edible oil, telecom, media and technology, Shipping, ship breaking, steel and engineering etc.
Bank Asia Limited it is a well known private commercial bank in the banking sector and doing formidable job. So far researcher has a very specific scope to overview the whole system. The banking sector continued to make remarkable profit in the 2002. Especially the 31 private banks recorded a profit before tax Tk. 1445.50 corer with a growth of 6.56% over the previous years Tk. 1356.38 corer.
Methodology of the Study
Data Sources and referred are both primary and secondary in nature. The required primary data were collected by personal interviews. The sources of secondary data are published articles and periodical and annual report of Bank Asia, daily newspapers etc.
Collections of facts (underdone facts) generally treated as data. There are two types of data viz.
- Primary Data
- Secondary Data
The primary data are those which are collected a fresh and for the first time and thus happen to be original in character.
Sources of primary data
Conducting survey and personal interview method through questionnaire.
The secondary data, on the other hand, are those which have already been collected by some one else and which have already been passed through the statistical process.
Sources of Secondary data
Secondary data for this particular study was collected from the Administration Department of Bank Asia Limited, Annual report of Bank Asia Limited, Directories and Manuals, Magazines and Periodicals, Bankers Guide and From Web sites.
Objectives of Bank
The broad objectives of the Bank are:
a) To regulate the issue of the currency and the keeping of reserves;
b) To manage the monetary and credit system of Bangladesh with a view to stabilizing domestic monetary value;
c) To preserve the par value of the Bangladesh Taka;
d) To promote and maintain a high level of production, employment and real income in Bangladesh; and to foster growth and development of the country’s productive resources for the national interest.
Wider commercial role
However the commercial role of banks is wider than banking, and includes:
- issue of banknotes (promissory notes issued by a banker and payable to bearer on demand)
- processing of payments by way of telegraphic transfer, EFTPOS, internet banking or other means
- issuing bank drafts and bank cheques
- accepting money on term deposit
- lending money by way of overdraft, installment loan or otherwise
- providing documentary and standby letters of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures
- safekeeping of documents and other items in safe deposit boxes
- currency exchange
Sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a ‘financial supermarket’.
Law of banking
Banking law is based on a contractual analysis of the relationship between the bank and the customer. The definition of bank is given above, and the definition of customer is any person for whom the bank agrees to conduct an account.
The law implies rights and obligations into this relationship as follows:
- The bank account balance is the financial position between the bank and the customer, when the account is in credit, the bank owes the balance to the customer, when the account is overdrawn, and the customer owes the balance to the bank.
- The bank engages to pay the customer’s cheques up to the amount standing to the credit of the customer’s account, plus any agreed overdraft limit.
- The bank may not pay from the customer’s account without a mandate from the customer, e.g. a cheque drawn by the customer.
- The bank engages to promptly collect the cheques deposited to the customer’s account as the customer’s agent, and to credit the proceeds to the customer’s account.
- The bank has a right to combine the customer’s accounts, since each account is just an aspect of the same credit relationship.
- The bank has a lien on cheques deposited to the customer’s account, to the extent that the customer is indebted to the bank.
- The bank must not disclose the details of the transactions going through the customer’s account unless the customer consents, there is a public duty to disclose, the bank’s interests require it, or under compulsion of law.
- The bank must not close a customer’s account without reasonable notice to the customer, because cheques are outstanding in the ordinary course of business for several days.
These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force in the jurisdiction may also modify the above terms and/or create new rights, obligations or limitations relevant to the bank-customer relationship.
Types of banks
Banks’ activities can be divided into retail banking, dealing directly with individuals and small businesses; business banking, providing services to mid-market business; corporate banking, directed at large business entities; private banking, providing wealth management services to High Net Worth Individuals and families; and investment banking, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profits.
Central banks are normally government owned banks, often charged with quasi-regulatory responsibilities, e.g. supervising commercial banks, or controlling the cash interest rate. They generally provide liquidity to the banking system and act as Lender of last resort in event of a crisis.
Types of retail banks
- Commercial bank: the term used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. Since the two no longer have to be under separate ownership, some use the term “commercial bank” to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses.
- Community Banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners
- Community development banks: regulated banks that provide financial services and credit to under-served markets or populations.
- Postal savings banks: savings banks associated with national postal systems.
- Private Banks: manage the assets of high net worth individuals.
- Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.
- Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative, while in others socially committed individuals created foundations to put in place the necessary infrastructure. Nowadays, European savings banks have kept their focus on retail banking: payments, savings products, credits and insurances for individuals or small and medium-sized enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly decentralized distribution network, providing local and regional outreach and by their socially responsible approach to business and society.
- Building societies and Landes banks: conduct retail banking.
- Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially-responsible investments.
- Islamic banks: Banks that transact according to Islamic principle Types of investment banks.
- Investment banks: “underwrite” (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital markets activities such as mergers and acquisitions.
- Merchant banks were traditionally banks which engaged in trade financing. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike venture capital firms, they tend not to invest in new companies.
Overview of Bank Asia Limited
The economy of Bangladesh has been experiencing a rapid growth since the 90’s. Industrial and agricultural development, international trade, inflow of expatriate Bangladeshi workers’ remittance, local and foreign investments in construction, communication, power, food processing and service enterprise ushered in an era of economic activities. Urbanization and lifestyle changes concurrent with the economic development created a demand for banking products and services to support the new initiatives. A group of highly acclaimed businessmen of the country grouped together to respond to this need and established Bank Asia Limited in the year 1999.
The Bank Asia incorporated as a public limited company under the Companies Act. 1994. The bank started its commercial operation on November 1999 with an authorized capital of Tk.800 million and paid up capital of Tk.218 million. The paid up capital of the bank stood at Tk.1116 million as on 31st December 2006.
Within a short span of time Bank Asia has established itself as one of the fast growing local private banks. It has at present a network of 26 branches serving many of the leading corporate houses and is gradually moving towards retail banking. Its other significant delivery channel is the shared ATM Network. Bank Asia has 25 ATMs as a member of ETN along with eleven other banks. Since its humble beginning in 1999, it set milestone by acquiring the business operations of the Bank of Nova Scotia in Dhaka, first in the banking history of Bangladesh. It again repeated the performance by acquiring the Bangladesh operations of Muslim Commercial Bank Ltd. (MCB), a Pakistani bank. Last year the Bank again came to the limelight with over subscription of the Initial Public Offering of the shares of the Bank, which was a record (55 times) in our capital market’s history and its shares commands respectable premium.
The asset and liability growth has been remarkable. By December 2006 the total asset of the Bank grew to Tk. 30,478 million, increase of almost 30% comparing to 2005. As of December 2006 deposits increased to Tk. 25,289 million, an increase of 37% over that of 2005, and Loans & Advances reached Tk. 22,255 million, an increase of 25% over that of the year 2005.
Bank Asia has been actively participating in the local money market as well as foreign currency market without exposing the Bank to vulnerable positions. The Bank’s investment in Treasury Bills and other securities went up noticeably opening up opportunities for enhancing income in the context of a regime of gradual interest rate decline.
Bank Asia is maintaining its competitiveness by leveraging on its Online Banking Software and modern IT infrastructure. It is the pioneer amongst the local banks in introducing innovative products like SMS banking, and under the ATM Network the Stelar Online Banking software enables direct linking of a client’s account, without the requirement for a separate account.
Bank Asia has successfully established a transparent process of recruitment seeking the best talent. In its efforts towards continuous development of the human resources of the Bank, it arranges training programs throughout the year.
Bank Asia’s vision is to have a poverty free Bangladesh in course of a generation in the new millennium, reflecting the national dream. Our vision is to build a society where human dignity and human rights receive the highest consideration along with reduction of poverty.
- To assist in bringing high quality service to our customers and to participate in the growth and expansion of our national economy.
- To set high standards of integrity and bring total satisfaction to our clients, shareholders and employees.
- To become the most sought after bank in the country, rendering technology driven innovative services by our dedicated team of professionals.
Objective of Bank Asia Limited
Bank Asia Limited has objectives as like any other organization in order to run their services. These are as follow:
- To blend in its operations traditional banking with modern international services.
- To facilitate its stakeholders with high standard and quality banking.
- To conduct foreign exchange business such as international money remittance service and so on as well as in national.
- To extent credit facility to the client.
- To provide standard and quick services in to the client.
- To extent custodial services such as locker.
- To extent general banking services to the clients.
- Buying and selling of foreign currencies.
Policy of Bank Asia Limited
Bangladesh is trying hard and soul to make and give effort to be an efficient player in the global market in terms of business. Accordingly, Bank Asia Limited will as a matter of policy, mobilized its financial, non financial and human resource in conformity with international norms, standards and practices.
In the domestic economic field Bank Asia Limited has set its sight on providing its clientele the edge of banking and finance which will enable then to run their enterprises profitability. Bank Asia Limited give a hand the customer with its technology, know how training and specialization, and will provide world class banking system.
Head office and Branch offices in Bangladesh
The head office of Bank Asia Limited is situated in Tea Board Bhaban (Ground Floor) -111-113 Motijheel C/A, Dhaka-1000, Dhaka, Bangladesh. It is currently operating with its twelve branches in Dhaka City, three in Chittagong, one in Sylhet and one in Munshigonj and one in Tarail Kishorgonj. Very soon they are going to expand their branches in other parts of the districts in Bangladesh. In order to point international banking services to their valuable clients, it has established a wide correspondent relationship with a number of local and foreign banks.
Clearing House Section:
In a broader sense we may define clearing house as facilitator to the member banks to settle down their inter bank transaction i.e. checks for collection from other banks. Practically clearing house is a house (Floor) of Bangladesh Bank (BB), central Bank of Bangladesh, where every bank has it’s own desk with own name plate and all the authorized official of all banks come here within working time to settle there inter bank transaction. At present there are 52 desks for 52 banks. Usually Bangladesh Bank provides clearinghouse facilities to its member in different region and where BB branch is not available, Sonali Bank, on behalf of BB, arranges clearing house. Usually the authorized official of every bank attend clearing house floor in opening time with all collection checks in his hand drawn on other banks and settle down their transaction by the arrangement of clearing house. Usually two houses sit for settlement named as follows:
First House: Usually all the collection checks are collected in this clearinghouse except those, who enjoys facility of same day house (described later on). Usually this house takes sit at around 9:00 A.M. and Return house sits at 5:00 P.M or as directed by the House Super. And then we place the checks, collected earlier day, in clearinghouse today for settlement. And at day end i.e. at 5 P.M. after coming back from return house we credit the collected amount to the customer account and the customer can withdraw money form his account on next transaction day or may draw by ATM or through evening banking facility if provided by the Bank. That means the customer gets money on next transaction day.
Same day house or High Value house: There is a special arrangement in BB Dhaka clearinghouse for some preferential area and client, to settle down their transaction within same day of placing the check in clearinghouse. Usually only the branches of member banks located in Motijheel region enjoys this facility. The criteria to enjoy the facilities of “Same Day House” is that the check must be drawn on and placed by the banks where both of the banks are located in Motijheel area and the check values more that Tk 500,000. Usually same day house starts at around 11:00 A.M. and return house for this takes place at around 2 P.M or as per direction of House Super. And then we credit the money in customer account and then the customer can withdraw money from his checking account that means in Same Day House the customer can draw money on the same day of placing the check in the house. Where as in First house it is the next transaction day. And we usually provide this special facility only to the valued customers and that’s why another name of this house is High Value House.
Sequential arrangement of clearing Operation:
- Collect all collection and clearing checks from cash counter and clearing desk.
- Collect collection checks from other branches (9 branches are in Dhaka zone along with principal office branch, Central Clearing Branch of Bank Asia Limited)
- Sorting the checks as in zonal checks and out zonal checks and classify them according to different Banks.
- Give posting in NIKASH for In Zonal checks and for outside zone checks prepare OBC (Out ward Bill for Collection) vouchers and send those to respective Branches for collection. And then the local office of that region, which is authorized for clearing, place theses checks in the clearinghouse that sits in its region, for instance, Agra bad Branch of Bank Asia Limited for Chittagong Zone and collects the checks accordingly and sends the money to the respective branch accordingly vide issuing an IBCA (Inter Branch Collection Advice). Some times it may happen that we received a check on a branch of a bank where we have no branch or there is no clearinghouse. Then we send the check to that branch of the Bank with OBC and request them to make the payment to us by DD (Demand Draft) drawn on any of its branch in our clearing region e.g. Dhaka city clearing house member branch. The bank then debits its customer account and issue DD to us drawn on any of its member branch in Dhaka And then we collect the DD by placing it in Dhaka clearinghouse.
- Perform Sealing formalities:
- Cross Seal: Affix cross seal on the left corner of checks that will be placed on clearinghouse for collection. Bankers imply two types of crossing, i.e. General Crossing and Special Crossing. Usually the crossing means two parallel lines on corner of the checks, given by the customer who is issuing the check; this general type is termed as general crossing. General crossing implies that this check is not eligible for payment over counter and payment must be made by transaction or clearing basis. And bank use special crossing, when it receives the check to clear, on the top left corner by mentioning bank name and branch name. The purpose of special crossing check is that the specific bank’s branch that is marked as ‘crossed’ is only eligible to clear this check.
- Clearing Seal: Affix this seal on all checks to be placed on clearinghouse.
- Take print of NIKASH posting for In Zonal checks. And affix the print copy with the respective bank’s checks accordingly. And now checks are ready to be placed in clearing house.
- Take copy of NIKASH posted entries in Floppy disk.
- Then the authorized officer of Bank go to clearing house in Bangladesh Bank (BB) in early morning next day and give the disk to the computer division and then the officer exchange checks with other banks and receive checks drawn on his bank from other bank’s desk. Here the bank officers check errors with the check amount and NIKASH entry amount and other checks. And in case of any errors take initiatives to correct it with the respective bank’s officer. And then BB representative cross matches the checks by the aid of NIKASH software. And BB representative announces the printing of cross match posting and take print of NIKASH posting and after print no one is allowed to place new checks for clearing or make any correction or change. And then give all the banks representative copy of NIKASH printed statement.
Special Notes on Clearing House:
Costs of Clearing House: Its important to note here that all costs incurred in clearing house are borne by the member banks equally and BB authority debit the respective bank’s account for it’s portion of costs and give advice accordingly.
Minimum Balance of Account to be maintained with Bangladesh Bank: Each and ever bank has to maintain a minimum balance in it’s account with Bangladesh Bank (Cash Liquidity Reserve). At present minimum balance is 4% on total deposit. And this account is maintained by head office. And if the account face any shortage then Treasury Division channel sufficient fund to Bank’s account with BB and in case of any requirement Treasury may draw excess amount from Bank’s account with BB.
A Typical example on clearing Operation:
For Say Mr. X is an A/C holder in Bank Asia Limited, Ashuliya Branch and this branch is not member of clearing house. And he deposited his account by an A/C Payee check amounting Tk. 100,000 drawn on Prime Bank Ltd., Mali Bagh Branch. Now describe how this check will be collected and transaction will be settled?
Here Ashulia Branch will receive the check and send it to Dhaka zone clearing house branch i.e. Principal Office Branch with OBC (Outward Bill for Collection) forwarding and proper endorsement i.e. “Payee’s A/c will be credited after realization”.
Then Principal Office Branch clearing section will make proper arrangement to place the check in clearing house i.e. it will cross the check, give clearing seal and make endorsement as “Our Branch Endorsement confirmed” and then give posting in the IBC register and place this check in house.
And then in the house via Bangladesh Bank this check will be given to Prime Bank Local Office (clearing Branch) and receive payment from Prime Bank vide BB.
And then Prime Bank Local office will send this check to their Mali Bagh Brach and accordingly collect money of the check.
And upon receipt from Prime Bank via BB, Bank Asia Limited, Principal Office Branch will credit the amount in Ashulia Br. A/c and send an IBCA (Inter Branch Collection Advice) to Ashulia Branch and then Ashulia Branch will cr. Customer A/C by the Amount.
And also note here that if the check is returned from Prime Bank, Mali Bagh Branch then it will send the check with return memo to it’s local office. And then local office will back us (Bank Asia Limited, Principal Office Branch) the return check with return memo and debit the amount from our BB A/C vide BB. Then we will return the check to our Ashulia Branch with the return memo and a forwarding letter and debit the check amount in Ashulia Branch Account and then Ashulia Branch will return the check with return memo to it’s respective customer.
Cash management deals with the management of inflow and out flow of cash of the Branch. It forecast cash inflows and outflows and accordingly arranges sufficient cash to meet client’s cash withdrawal demand. But excessive cash holding force a negative impact on the earning potentials of the branch. So that one important task of it is to trade off between this two i.e. cash sufficiency and earning potentialities. Usually this job is assigned to Cash In-charge of the Branch. The Cash In-charge’s responsibilities are stated below sequentially:
- This Principal Office Branch works as feeding branch for other branches in Dhaka Zone. That means, it channels cash in and out to each branch of this zone. If any branch requires cash or deposit surplus cash then the respective branch has to give one-day prior requisition. And then Cash In-charge of Principal Office Branch channel fund accordingly.
- Maintain vault register for in and out flow of cash in the vault by amount and by denomination. Vault is a strong room under joint custodian where all the cash are stored of a Branch. In cash register the Cash In-Charge records each and every transaction of cash and confirms the balance after each transaction. So any one can know the current cash status of the Branch at any time. And here in PO Branch the Vault limit is Max. BDT 25 million that means the cash In-Charge al ways try to maintain cash balance below this limit. But if sometime, cash receive overweighs cash payment heavily then the vault balance exceed this limit and then cash in-charge deposit excess amount to our account in Uttora Bank or in Bangladesh Bank as per the instruction from treasury. And when vault suffers from cash shortage then Cash In-charge as per direction of Treasury, draws cash from Bangladesh Bank A/c or Uttora Bank A/c.
- And at the end of the day Cash In-Charge along with joint custodian will check the vault cash balance with the balance in the Vault register.
- Also Cash In-Charge give opening cash at the beginning of the day to the teller and collect the day end cash in the hand of teller and keep it in vault.
- This section also provides foreign remittance service to its customers. Usually it collects foreign remittance through ITT (International Telegraphic Transfer), and FDD (Foreign Demand Draft). In case of ITT if the amount is below USD 2000 then the bank charges no commission. It just debits Corporate Office Account at Mid Rate and Credit Customer A/c at TT clean Rate. This difference is Bank’s earning under the head of Exchange Gain. And for amount above USD 2000 bank charges commission based on purpose of the remittance received.
This section also renders TC Dollar Endorsement for the visitors to abroad. And as per rules one individual can endorse $ 3000 per annum. And out of this $1500 can carry as cash and remaining by TC (Traveler’s Check) from 3rd party as EURO, AMEX etc as Bank Asia Limited has no TC of its own. Here for endorsement of dollar bank requires necessary papers as Original Passport, Visa duly stamped, Air Ticket, duly filled up T/M Form.
Beside this we purchase cash dollar from foreign visitors with in one month of his/her entry. And we purchase the cash dollar @ cash purchase rate and keep passport copy of the customer at the time of payment.
For this remittance transaction this section prepares various regulatory report daily as well as monthly bases and send those to Corporate Office and Bangladesh Bank through Corporate Office.
Due care and concentration is required to perform all these activities successfully and flawlessly and this is very crucial for smooth continuation of Bank business as cash is treaded the most sensitive asset of any organization. And for bank it is the lifeblood proper circulation of which result on the good health of the bank.
FOREIGN EXCHANGE OF BANK ASIA
This division is comprised with three sections termed as import, export and bill purchase or discounting section. Now we would cast a look into the functions of these sections. This division is more frequently known as “Trade Finance Division”. Earlier “Foreign Exchange Division” used to conduct import and export related all foreign trade related activities. And then the name has been exalted as “Foreign Trade Division” as it has been actually serving the foreign trade. The modern banking system adopted the dimension of “Trade Finance Division” upon the diversity of functional exposure. Basically this division facilitates both the importer and exporter to settle down their transaction and in this process, provides finance to them. In this current days close exposure of globally integrated market, most of the business transactions have been ‘cross border transaction’.
The term ‘foreign trade’ can be well defined through the elaboration of the activities of its various sections. In a global market, a country or economy having surplus production preserves positive index or specifically, upward trend in export and the states import those goods, which they are at the end of deficit. And bank as a ubiquitous financial institution has been rendering financial backup for this foreign business by its foreign trade products. This division comprises with the following three sections:
This section provides services in import business. At this point, we must know how an import transaction takes place and what role a bank plays in this regard.
A country with deficit production usually imports goods from a country with surplus production of any specific item of product. And the importing country gives permission to its business community to import goods from global market. This import business is governed by the country’s import policies under the practice of general business rules and regulations. These rules and regulations actually ensure an open playing ground for all the importers, in a broader aspect, for the whole business community. Usually, import business takes place in the form of government, commercial and industrial import.
Now an importer always intends to build up a business relation with the best-suited suppliers for him for the goods he wants to procure from global market. Upon selecting the right one sales agreement takes place between these two parties. And in sales contract two parties come in agreement on the payment of the transaction. As importer and exporter are from different global location, they want to secure their transaction. And at this point both parties rely on 3rd party institution to secure the transaction and this institution is Bank. The importer may make payment to the exporter in Advance i.e. in Advance TT or in L/C form that is upon shipment of the goods. And generally L/C settles a cross border transaction. Now the question is what is L/C and how it operates.
Letter of Credit (L/C):
L/C is an irrevocable documentary credit, which is an undertaking by the issuing bank on behalf of the applicant – generally importer, to pay a certain sum of money to the beneficiary – generally exporter, if certain terms and conditions are fulfilled as stated in the L/C.
Before going for L/C, relationship develops between importer and exporter. When they agree for a business then the import applies to bank for opening an L/C. Then after fulfillment of all formalities and on submission of necessary document the issuing bank issues the LC and sends it to the advising bank, through SWIFT, Telex or mail. Advising bank then advises the exporter about the LC and exporter then makes shipment of goods and submits the shipping documents to negotiating bank. It should be mentioned here that the advising bank and negotiating bank might be same or different. At this stage the negotiating bank scrutinizes the entire document and if there is no discrepancy then they send these shipping documents to the issuing bank and claim to the reimbursement bank. Reimbursement bank reimburse by dent of reimbursement authority given to them by issuing bank. The process closes with the exporter realizing payment from the reimbursing bank.
So from the above discussion we can identify the parties’ involved in an LC process as follows:
- Importer: Importer requests the opening bank to open an L/C. He is also called applicant of the credit.
- Exporter: L/C is established by favoring to exporter.
- Issuing Bank or LC opening Bank: It is the bank which opens/issues L/C on behalf of the importer after importer file an LC opening application.
- Advising Bank: The bank through which the L/C is advised to the exporter. It is a bank situated in the exporting county and it may be a branch of the opening bank or a correspondent bank. It may also assume the role of confirming and/or a
- Correspondent bank. It may also assume the role of confirming and /or negotiating bank depending upon the conditions of the credit.
- Negotiating Bank: The bank, which negotiates the bill and pays the amount to the Beneficiary. It has to carefully scrutinize the documentary credit before negotiation In order to see whether the documents apparently are in order or not
- Reimbursement Bank: The bank or to whom the bill will be drawn. It is mentioned in the credit to make payments against stipulated documents complying with the terms of the credit. It may or may not be the issuing bank.
- Confirming Bank: The bank that adds its confirmation to the credit and it is done at request of the issuing bank. The confirming bank may or may not be the advising bank.
Proforma Invoice: Of the beneficiary company/ exporter do not have any agent in our country then they themselves send quotation en their company pad. This is called proforma invoice.
Indent: If the beneficiary has agents in Bangladesh then the agent send quotation on behalf of the company then it is called indent.
Credit Report of Supplier: if pro forma invoice is submitted with LC opening application then credit report is mandatory is applied LC amount is TK 2 lac or above it. In case indent credit report of supplier is mandatory if it is equal to taka 5 lac or above.
Amendment of L/C:
In some cases the importer and exporter both or any of then may be unable to satisfy the requirements mentioned in LC within the stipulated time. Then for alteration of actual terms and conditions amendment is required. In a revocable LC it can be cone without any prior to the beneficiary. But in an irrevocable LC it must be done with prior consent of beneficiary, confirming bank and the importer.
A Typical Example on Import L/C: Mr. ‘X’ from Bangladesh wants to purchase 2000 mobile sets from china. And he selected Xiangu Corporation of China as the best suppliers of his required mobile sets. Now the transaction between the two would be as follows.
Now assume that we Bank Asia Limited, is the Bank of Importer, i.e. we are the L/C issuing Bank. So how we will extend our service to Mr. ‘X’, when the request comes from him for opening an L/C. Here Mr. ‘X’ may be one of the existing customers or a new one. Usually banks or financial institutions provide trade services to the client’s familiar in terms of reference or account relationship. But off course, we consider the special consequences. Now we would illustrate the proceedings of ‘Bank Asia’ regarding the opening of the L/C in case of Mr. ‘X’ under the consequences of whether the client is known or known.
In case of new client: For the establishment of a new banking relation with a new client, both the bank and the client must know the details of each other. A very elementary process of knowing about a customer is to open an account and serving him through the transactions of that very account. Then upon receipt of any L/C request, the following steps are initiated:
- Opening a Current Account.
- L/C opening form is duly filled up and submitted along with the following papers:
- Import registration certificate
- Trade license
- Performance Invoice
- Tax identification certificate
- Vat registration certificate
- Association’s membership certificate
- L/C and LCA form
- IMP form
The submission of all these papers gets the proposal to the next step.
- The bank would ask for CIB report. At this step a formatted CIB inquiry form is dully filled and sent to Bangladesh Bank. The term ‘CIB’ refers to Credit Information Bureau. This is the specialized department of Bangladesh bank preserving all the data and credit status of all the customers of all Banks related to ‘advance’. Here we must remember that without having CIB clearance about the credit worthiness of our client, we are not supposed to issue L/C or render any other credit facility to any of our clients. Upon receipt of a clean report from CIB, we proceed to the next step.
- Then the Bank collects the supplier’s credit report to know the credit worthiness of the supplier. Usually supplier’s credit report is asked for in case of indent and if the total L/C value is more than BDT. 5, 00,000.00 and in case of Performa Invoice of BDT. 2, 00,000.00, then more than SCR is required. Usually, beneficiaries Bank provides this report or it may be furnished by any third party institution Named D & B.
- Arrangement of margin and settlement mode. Here we usually negotiate with client for L/C margin and accordingly the client’s deposits the margin amount of money. Another issue at this stage is to negotiate with the customer on the retirement of the L/C, i.e. how the customer will reimburse the L/C amount due. The customer may reimburse the payment in cash or this can be managed by any loan facility to the favor of the client agreed by the bank. Usually the following loan arrangement is made by the commercial banks to facilitate the import trade.
- LTR (Loan against Trust Received): This is a special type of loan arrangement by the commercial banks to facilitate its clients to retire L/C and clean goods. Here the client takes the loan by execution of trust receipt and make the payment on maturity usually from sales proceeds of the imported goods. In this process the goods remain under the possession of the client.
- LIM (Loan against Imported Merchandise): In this process the possession as well as the ownership of the goods belongs to the bank. The client cleans a portion of goods upon the agreement with the bank, sales them and proceeds the payment to the bank for the retirement of the goods and it continues. This process results to less risk exposure for the bank as compared to LTR.
Upon the settlement of the margin as well as the mode of retirement, the L/C moves to the next step, i.e. the preparation and the submission of the proposal to the head office: Based on all the information collected from the client, the import division prepares a formal L/C proposal and send it to the Head office with all the supporting documents. Usually a proposal contains the details of the applicant, the nature & the strength of the business of the client, capital structure, particulars of the proprietor or the directors etc. alongside the following documents in particular:
- CIB status.
- Business relation with the bank and the current liability position, if any.
- Liabilities with other banks or financial institutions.
- Particulars of L/C, i.e. purpose, quality, name of the item, value, country of origin, suppliers credit report, port of shipment, L/C expiry date, landed cost, market price etc..
- Present working capital structure
- Particulars of proposed credit facility.
- Security collateral and control over security.
Now the proposal is supposed to be considered to be ready. Then it must be duly signed and sealed by the respective authorized person of the Branch and submitted for the approval of the Head office and the process concurs with approved proposal gets beck to the branch with proper instruction.
- Open the L/C and transmit the L/C to the advising Bank or ad confirming bank (if ad confirmation is required) to advice the seller and its bank regarding the issuance of this L/C. At the same time the importer receives the copy of L/C. Usually this transmission procedure takes place by SWIFT or TELEX or EMAIL format.
- Then upon receipt of the L/C, the supplier, first, put his vow on all the terms and conditions and if required, undertakes necessary steps to put in the amendments and upon satisfaction, arrange for the necessary shipment as per the agreed conditions of the L/C.
Upon shipment of the goods, the supplier prepares the L/C documents properly as mentioned in L/C and asks his bank to negotiate the documents for payment. These documents are as follows:
- Shipping documents like commercial invoice, bill of lading/AWB/TCR, packing list etc.
- Bill of exchange,
- PSI certificate,
- Certificate of origin,
- Suppliers compliance certificate,
- Other certificates as per the L/C terms and conditions.
Then the supplier’s Bank, negotiate the documents to the ad confirming Bank to proceed the payment. The ad-confirming bank makes the payment of the document (off course, devoid off any discrepancy) to the negotiating bank and sends the documents to the issuing bank for reimbursement. In case of noninvolvement of any a confirming bank, the negotiating Bank negotiates the documents to the issuing bank for further procedure. The issuing bank must inquire off any discrepancy of the documents. Upon satisfaction, the issuing Bank asks its client to make necessary payments and upon receipt of the due amount, the issuing bank reimburse the proceeds to the ad confirming bank as negotiating bank under the concurrent consequences. Here the significant feature is that in case of right L/C, payment may be made by 100% cash or by the arrangement of LTR or LIM. But in case of deferred L/C, acceptance is given duly on maturity and payment is made accordingly.
- PAD (Payment against Documents): At this step, the issuing bank makes payment to the negotiating bank by creating a temporary loan A/C termed as ‘PAD’. When it collects payment from the customer, PAD is washed out. Usually the bank is to wash out PAD within 21 days of its opening. Generally, within 5 to 10 days of negotiation, the client makes the payment and clear documents from the bank and goods from warehouse storage. In case of any discrepancy, the bank asks his client whether it is acceptable or not. The client may ask the supplier to come up with necessary amendment or alternatives.
- Upon the clearance of goods, the client gives a copy of the bill of entry and reports Bangladesh Bank regarding this L/C and closes this file. The bill of entry is mandatory for closing the file.
This section ensures the proper export proceeds to the exporter. Usually the exporter may ask his importer or buyer to make payment by advance TT or L/C. Generally proceeds come by L/C form. Now we would discuss the export activities of a bank under a real life example.
Instance: Assume that Mr. ‘X’ is our client and his business is RMG manufacturing & export. Recently he has received a buying order from one of his foreign buyer of USD 100000 and a purchase agreement took place between those two. We would now illustrate our role as a bank in this dealing.
Illustration: The total procedure of this export can be sequentially discussed as follows,
- Let us assume that Mr. ‘X’ has agreed to accept the payment for export via L/C. Then he would ask his buyer to open L/C for aforesaid amount. Then the buyer would request his bank issue accordingly.
- The buyer’s bank will open L/C upon the purchase agreement and send the L/C copy to advising bank to advise our bank on this L/C.
- The advising bank will advise on this L/C to our bank and also to us. We may also derive a copy of the L/C directly from the buyer.
- Upon receipt of the L/C, we will clarify each and every point of L/C and advise our client regarding this L/C. Then our customer will go through the L/C and arrange for necessary amendment.
- Upon receipt of L/C, Mr. ‘X’ will initiate to start production and for that purpose, definitely he would be in need of raw materials, accessories and other supplies that would put him in necessity of working capital and here comes the bank to facilitate the necessary finance. The bank allows the exporter to open BTB L/C by lien of the master L/C and supply required cash to the supplier. By this BTB L/C, Mr. ‘X’ will purchase required supplies and will start production and on completion of the production, will go for the shipment to the importer.
- Upon shipment of the goods, Mr. ‘X’ will prepare all the L/C documents as per L/C and place all these L/C documents to us to negotiate with the issuing bank for export proceeds. Usually export L/C requires the following documents,
- Forwarding letter by the exporter.
- Bill of exchange.
- Shipping documents (packing list, commercial invoice, weight list, bill of lading/AWB)
- Certificate of origin from DCCI.
- Shipment advice.
- Beneficiary certificate.
- Export form duly filled up.
- Purchase agreement or contract
- Then his bank will check all the papers and send the documents to ad confirming bank and seek the proceeds accordingly. Otherwise the documents would go directly to the issuing bank for L/C proceeds. Then the ad confirming bank or the issuing bank will check all the documents and if there is no discrepancy, it would clear the payment. Otherwise the bank will negotiate with the client and undertake the necessary arrangements for the rectification and then the proceeds will take place.
- When exporter’s bank receives the proceeds, it would be immediately adjusted to the BTB L/C payment or other debit figure of this L/C and then credit the remaining amount to the client’s account.
Back to back L/C:
This is a special L/C arrangement. Usually the RMG sector of our economy avails this facility. Upon receipt of any purchase order, a RMG starts production of that specific consignment. For raw materials and other necessity of production additional working capital is required. Then the exporter requests his bank to issue an L/C to procure all those necessities from home or abroad. Then BTB L/C is produced to the exporter in lien to the master L/C, received from the importer. Then he procures those supplies by giving this L/C to the local or foreign suppliers and go for the production. Then after production, shipment of the goods gets the exporter the proceeds of the master L/C and the bank adjusts the BTB L/C with that.
Usually back-to-back L/C is issued to be retired by the proceeds of the master L/C that is in usance basis. But sometimes BTB L/C may be cash L/C if the exporter enjoys EPS facility provided by Bangladesh Bank. Usually bank permits to open BTB L/C amounting 75% of the master L/C invoice value at maximum.
The issuing bank disburse the master L/C proceeds as follows,
- Collection commission of master L/C 0.2% of the invoice value.
- Acceptance commission of BTB l/C 0.2% on L/C value.
- Handling charge of BDT 1000
- Postage charges for BTB (maximum 2200).
- BTB payment adjustment.
- Buying house commission if any.
- Exchange gain
- Remaining amount is credited to the customer account if any.
Bill purchase and discounting:
This section basically deals with purchase of bills of usually two types – local bills (such as BTB L/C) and foreign bills are purchased or discounted. After shipment of goods exporter comes to the bank with shipments papers, then all these documents, are sent to the opening bank in prescribed form. If everything is in order then the opening bank send us an acceptance, for acceptance verification the acceptance documents are sent to the zonal office of the opening bank. If the exporter needs money immediately then he can offer the bank to purchase the bills. Then proposal of bill purchase goes to the zonal office is achieved then the bill may be purchased up to 90 % of the value @ OD sight rate. Later we get the payment from opening bank and can realize the total amount. By these bills purchased bank can add to its income and can increase it.
FINDINGS OF THE STUDY
Strength of the Organization
- A wide range of business, industries and sectors constitutes the bank’s advance portfolio. Major sectors they have extended credit included textile and readymade garment, edible oil, telecom, media and technology shipping, steel and engineering, energy, chemicals etc. Bank Asia developed smooth relationship with their clients and corporate business holders.
- In case of services offered by all private banks in our country, Bank Asia Limited has maintained high quality and their clients are very much satisfied while banking with the Bank Asia.
- Well organized human resources and profit oriented mindset make them sharper than any other bank.
- Since the govt. has imposed some new rules regarding private banking operation, Bank Asia Limited easily cope up the given rules.
- Adopting Islamic banking concept gives a new dimension in their services.
- Regarding contribution towards country’s GDP they have contributed a handsome amount per year.
- The bank’s correspondents banking business expanded quite well during the year with 406 correspondents across the world enabling easy reach for the bank cross border trade and payments businesses.
- Bank Asia Limited has offered a full array trade finance services, namely, issuing, advising and confirmation of documentary credit.
- All branches of Bank Asia Limited have been networked to provide customer any branch banking; 24 hours of banking services from selected branches have also been introduced for services convenience.
- Experienced and competing workforce who have expertise and knowledge about the bank.
- Some loyal customers who always bring in new customers.
- Management consists of knowledgeable and authoritative personnel.
- Reputation of the management.
- Interaction of the employees with the top management.
- The bank is making profit every year at a steady rate. Its index of earning per share, return on equity, and return on assets is increasing positively in every year. The rate of deposit collection as well as the rate of giving advance every year is increasing a positive rate.
- The corporate culture of Bank Asia Limited is very much interactive. The environment within the organization is very helpful, positive and informal. There are no barrier between superior and subordinates for their free interaction. As the environment is very informal and friendly, it encourages employees to put their best effort and show their best performance.
Weakness of the Organization
Problem with general banking:
To open an account some times people have given incomplete information which will become a very acute when any dispute arises.
Because of good relationship some time branch manager authenticated the account with introducer, sometimes it is very difficult for the employee to avoid such circumstances, which in turn brings questions. There have some error regarding advice. Sometimes title of the account holder differs.
Problems with cash:
- Because of unavailability of notes and coins they cannot give the proper services to the potential customers.
- Big parties or for big amount parties won’t take 100 taka notes but the Bangladesh Bank issues mix notes.
- In cash department because of in frequent promotion the out put decreases.
- In contrast of personal liaison and benefit most private banks getting desire note from the Bangladesh Bank where govt. bank won’t.
Problems with advances:
- In case of advance in different project, the interest rate is too high.
- Maximum parties have no financial strength.
- In terms of law and order situation sometimes it is very difficult for the bank to liquidate the collateral when the party is unable to pay the debt.
- Most of the time parties are creating some sort of pressure to get the loan.
There are some mortgage problem such as acquisition and proprietorship, problem of asset.
In the advance department they have the shortage of skilled manpower.
- Sometimes the process of information transferring to the management in lengthy.
- On the counter service is sometimes unsatisfactory because of not having enough employees for the counter sector.
- No training program for the new employees.
- Their ATM card division is not satisfactory to fulfill their commitment means insufficient to given that service.
CONCLUSION & RECOMMENDATION
People have no way to get loans and advance for high financing, so the operation and way of getting loans and advance need to be very sharpened. The ways can be recommended as:
- Skilled human resource.
- Proper raining and technology minimized risk at the level.
- Minimize risk at the root level.
- Smooth service and less time consumption regarding advance. Avoid force loan as minimum as it can.
- It can be recommended that if all the branches of Bank Asia Limited maintain vivid account manual for the account holder, it will be better for the bank.
- A complaint book for the employees, because each and every complaint from the customer has been received and complaint from the employees overlooked.
- Interpersonal relationship needs to be built among the employees and superiors.
- Improved customer service and consequently get satisfactory operational result.
- Establish own ATM network.
- Incorporate more products for the customers.
After the emergency of Bangladesh the branches that were abandoned by the Pakistanis were group into six Nation Commercial Banks (NCBs) to create the needs of reconstruction work after the liberation war. Like wise the abandoned branches of the agriculture bank, industrial bank and PICIC were grouped respectively into the Bangladesh Krishi Bank (BKB), Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpo Rin Sangstha (BSRS). Along with these banks, a number of foreign banks were also operating in this part of the world for a long time. The banking sector seems to be operating satisfactorily with the induction of an increasing number of banks into the economy. Apart for mobilizing untapped resources, the banks are also creating deposit in the economy. Depending on the value of money multiplier, the advance of one bank generally opens up the prospect of creating additional deposit basis in subsequent generations of bank with the intermediation of funds. We have seen in the part that authorities had to even make public declarations to the effect that they would not allow any bank to fail in the economy in the apprehension that any such action might have adverse effect on the banking system. Problem in the banking sector can be briefly summarized as directed loans in the case of NCBs ended up with a large volume on classified loans due to extension of loans without proper security and without following proper banking norms, reflecting largely the reform measures and consequent improvement in the operation of the bank as a whole, classified loans came down to 32 percent recently. Moreover it is evident that private sector banks are involved with the more resilient portion of the economy while NCBs are primarily financial to sector corporations and other areas of social priority that are less profitable.
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