The main objective of this report is to analysis Credit Policy of Dutch Bangla Bank Limited. Other objectives are to know more about General Banking policy, the credit sanctioning policy and Foreign Exchange activities of DBBL. Finally furnish the possibilities that the commercial banks can extend their expertise consultation services to control risk exposures of a loan is related inside Bangladesh and outside Bangladesh. Also discuss SWOT analysis and find out problems related on credit policy and recommend some solution.
The basic objective of this paper is to be acquainted with how a bank as a financial institution evaluate individual and corporate potential client to serve them general banking services, to sanction different types of loan and advance of different limit to different customer and charges different interest rate to different borrower as well as helping in transaction. That is what factors determines these decision.
The specific objectives are:
- To fulfill the partial requirement of BBA program.
- To be acquainted with the background of the bank, Dutch-Bangla Limited (DBBL).
- To know more about General Banking policy, the credit sanctioning policy and Foreign Exchange activities of DBBL.
- To have an adequate knowledge about which factors mostly affects the loan sanctioning decisions, what amount of loan should be sanctioned to a particular loan applicant depending on his credit worthiness. The basic objective of this paper is to be acquainted with how a banking financial institution evaluate individual potential borrower – based on which sanction different of credit limit to different customer and charges different interest rate to different borrower. That is what factors determine this decision.
- To furnish the possibilities that the commercial banks can extend their expertise consultation services to control risk exposures of a loan is related inside Bangladesh and outside Bangladesh.
Dutch-Bangla Bank Limited
Dutch-Bangla Bank Limited (the Bank) is a scheduled commercial bank set up as a joint venture between Bangladesh and The Netherlands. The Bank was established under the Bank Companies Act 1991 and incorporated as a public limited company under the Companies Act 1994 in Bangladesh with the primary objective to carry on all kinds of banking business in Bangladesh. The Bank is listed with Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited.
Dutch-Bangla Bank Limited is a Bangladeshi-European joint venture banking company incorporated in Bangladesh on the 4th July, 1995. Presently the bank has 28 branch spreading over the country. It conducts all types of commercial banking activities and renders all types of personal and corporate banking services to the customers of all strata of the society within the framework of bank companies Act 1991 and rules and regulations laid down by Bangladesh Bank from time to time.
The core business of the bank is trade financing. DBBL is rendering customer services related to local & foreign remittances such as issuance and encashment of travelers Cheque, Demand Draft, Telegraphic Transfer etc. It also extend short and medium term loans to the industrial undertakings. As per charter DBBL can also go for- Lease financing, Merchant banking, Offshore banking, Retail banking etc. The bank participates in fund syndication with other banks. DBBL, as a part of its increasing customer service benefit allowed commission free TT, DD and PO facilities.
DBBL engineers enterprise and creativity in business and industry with a commitment to responsibility “Profits alone” do not hold a central focus in the Bank’s operation because “man does not live by bread & butter alone”.
DBBL dreams of better Bangladesh where arts & letters, sports and athletics, music and entertainment, science and education, health and hygiene, clean and pollution free environment and above all a society based on morality and ethics male all our lives worth living. DBBL’s essence and ethos rest on creativity and the marvel-magic of a charmed life that abounds with spirit of life and adventures that contributes towards human development.
Dutch-Bangla Bank believes in its uncompromising commitment to fulfill its customer needs and satisfaction and to become their first choice in banking. Taking cue from its pool esteemed clientele, Dutch-Bangla Bank intends to pave the way for a new era in banking that upholds and epitomizes its vaunted marques “Your Trusted Partner”.
- To establish relationship banking and improve services quality through development of strategic marketing plans.
- To remain on of the best bank in Bangladesh in terms of profitability and asset quality.
- To introduce fully automated systems through integration of information technology.
- To ensure an adequate rate of return on investment.
- To keep risk position at an acceptable range (including any off-balance sheet risk)
- To maintain adequate liquidity to meet maturing obligations and commitments.
- To maintain adequate control system and transparency in procedures.
- To maintain a healthy growth of business.
There are different divisions for targeting different type of customers. Mainly consist of two divisions, that is Consumer Banking Division (C B) and other is Corporate Banking Division named Corporate and Institutional Banking (C & I).
- Consumer banking division meets the needs of individual customers with various products like Current Deposit Account, Savings Account, Short term Deposit Account, Fixed Deposits, Resident Foreign Currency Deposit, Foreign Currency Deposit, Consumer Credit Scheme, Personal Loans, Cash Line, Installment loans, etc.
- Corporate and institutional banking meets the needs of companies, banks and other financial institutions. DBBL provides a full range deposit and loan products to its corporate clients. Rapid decision-making is an important feature of DBBL’s services to international and domestic companies doing business in Bangladesh. All accounts are assigned to a Manager to look after client needs. Each manager keeps close contact with the client obtaining in-depth knowledge of the client’s business and providing timely advice.
This division’s products include network banking and borrowing services like working capital loan, long term loans, short term loans, margin account, commercial large loans, real estate apartment loans, heavy transport buying loans, real estate mortgage loans, construction loans, restaurant loans, and above all it includes all international trade related services like L/C issuing, L/C amendment, L/C Transfer, L/C Confirmation, Negotiation, Bank Guarantees, etc. These products are only served to the corporate clients of the bank, and those are mostly local corporate, large and local corporations, multinational national companies. List of some of them are given in the appendix section.
The Divisions of Dutch-Bangla Bank
The bank is divided into several divisions which are also further sub-divided. The divisions are mainly based on some services line designed for and provided to targeted customer as well as some divisions and units are to support the business activities of the major service based division. The following is the list of the divisions of Dutch-Bangla Bank Limited.
- Credit Division (Foreign Trade)
Principle services of this division are to the people are Import Letter of Credits(L/C), Import Bills for Collection, Back to Back Letter of Credit, Direct Export Bills for Collection, Bulk Letter of Credit Collection, Bonds and Guarantees.
- General Service Division
Superior retail banking services comprising a wide range of deposit and cash transaction, clearing are offered by the Dutch-Bangla Bank to its individual customers. The General Service division constantly faces challenges and meets them by developing new products and services to fulfill the specific requirements of local and foreign customers. Bank offers a 24-hour service in Bangladesh through its ATM network and Phone-link Phone Banking services.
- International Division (Treasury Back Office)
In the past the activities of Treasury Back office and Front office were performed by the same department but there was lack of transparency and the possibility of illegal activities also so high. For this the Treasury Division divided into two unique division. One is Treasury Back Office and other is Front Office. Treasury Back Office does what is assigned or started from the Front office. That means at the ending of the front office task start the back office work. After taking any decision related with treasury like- fixing currency rate for buying or selling, giving any buying or selling order of local or foreign currency, reserve any deposit in hand or other bank etc. gives a note of the decision to the back office and then the back office prepares a formal document and takes the end result of the task that, is the work done properly or not.
- Treasury Division (Front Office)
The activities of front office are already discussed. But an important point is, any mismatch or weak decision of front office able to destroy a bank at any moment. So the job of the Front Office is very hard, Critical and risky.
- Internal Control & Compliance Division
This department deals with internal audit and always tries controlling any type of illegal and false financial information including or disclosing in or from the financial record. So that, this department always verifying all the record time to time and has to submitted the end result and their recommendation to the management. If the committee gets any mistake or wrong information in the record the department takes quick action against the employee or employees who are engage with the task.
- Human Resource Division
This department manages recruitment, training and career progression plan. DBBL highlight the importance of developing its people to create a culture of customer service, innovation, teamwork and professional excellence. DBBL mainly recruits people by two ways. One is as Management trainee or probationary officer and other is experienced person as regular basis.
DBBL pays attention to recruit high quality staff through proper evaluation and improving their skills through structure training, reward and punishment base on strict performance evaluation and opportunities of promotion is given after every two years as the feature of the personnel policy of DBBL. Every year all employees are gotten physical ful check up facility by the bank’s own financing. Every employee gets yearly earn leave facility. The employees are given different types of training time to time to progress their professional efficiency.
- Marketing & Development Division
Marketing & Development Division’s task is to modify their products, introducing new and unique product, survey the market, research with the consumer demand and want etc. Though DBBL mainly deals with the corporate banking but also going to introduce more new consumer products with the old products like- credit card, all saving account holder are given debit cart facility by the ATM card. This division also research about prospect of the introducing product.
- Credit Administration Division
This department always concerns about the loan amount those are given by the bank it may be small or medium or large in size. Every member of the division are assigned to concern about the sanctioned loan and advance- for what purpose it is given, in which sector it is given, what is the transaction performance of the loan etc.
- Credit Monitoring & Recovery Division
After the sanctioned the loan the Credit Monitoring & Recovery Division time to time monitors the loan and the transaction of the loan. After giving the loan if there is occurred no transaction then the authority becomes award about the loan and takes it seriously to monitor the credit. If the credit crosses the time limit without any transaction or repayment then the monitoring division becomes hard with the client and for recovering the division may take any legal action against the client.
- Corporate Banking Division
Corporate Banking meets the needs of companies, banks and other financial institutions. DBBL provides a full range deposit and loan products to its corporate clients. Rapid decision taking is an important feature of DBBL’s services to international and domestic companies doing business in Bangladesh. All a/c are assigned to the head of the branch manager to look after the clients need. Each manager keeps close contact with the client obtaining in-debt knowledge of the client’s business and providing timely advice.
All kinds of supervision and monitoring of the corporate banking services are done by the direct handling of the Corporate Banking Division. The large portion of the income of DBBL is come from the corporate banking. So the liability of this division is very high to run the banking service smooth and well.
- Card Division
Card Division deals with the card facility of the DBBL. DBBL provides debit card to all the deposit holders. There are many debit card booths in Dhaka city and out side the Dhaka city. By this card the card holder is gotten 24 hours banking facility from the booth. And there are some shops and clinics are given extra facilities to the card holder. There is only one time the bank takes 200 TK charge for the facility where other banks like SCB take charge for every transaction of the debit card.
- IT Division
IT Division deals with all IT program of the Bank. The bank uses flex cube which is used by Dhaka Bank, Estarn bank. All information of the bank is store in 3 steps. First it is stored in the branch, secondly in the Head office or IT department and lastly for final backup it is stored in main storage in Uttara.
Operational process & Products of Dutch-Bangla Bank Limited
As a financial institution, Dutch-Bangla Bank Limited serves General Banking facilities, Credit & Advance facilities as well as Foreign Exchange facilities. By this way we can say that the banking services of the DBBL is served by the three Departments. Those are:
- General Banking Department
- Loan and Advance Department
- Foreign Exchange Department
Credit Policy of Dutch-Bangla Bank Limited
A credit policy includes all rules relating to loans and advances made by the bank to the borrowers. It includes types of credit extended by banks, method of judging the credit worthiness of borrowers, the collateral or securities that are accepted by the banks and so on. This policy guidelines refer to all credit facilities extended to customers including placement of funds on the inter bank market or other transactions with financial institutions. DBBL Credit policy contains the views of total macro-economic development of the country as a whole by way of providing financial support to the Trade, Commerce and Industry. Throughout its credit operation DBBL goes to every possible corner corners of the society but the bank give more emphases on corporate sector than consumer loan. They are financing large and medium scale business house and industry. At the same time, they also takes care entrepreneur through its operation of Lease Finance and some Small Loan Scheme etc. As a part of its Credit Policy DBBL through its credit operation maintains commitment for social welfare.
- Creating healthy loan assets to ensure good interest earnings for the bank.
- Ensuring safety of invested fund through judicious selection of borrowers
- Improving discipline and skill on use of resources.
Principles of lending
The principles of lending can be considered under the following heads:
All credit facilities granted to the Bank’s customers must produce profit, either directly or indirectly. Spreads are normally associated with the element of risk undertaken and the period and nature of the facilities. When judging a credit proposal, concerned officer should take a comprehensive view of other allied business that will be received by the branches.
Generally, the Head office will advise the rates of interest to be charged on various types of credit facilities. The branch managers would ascertain market conditions and keep the Head Office informed. Cases for charging interest lower than the stipulated rate should be supported by sound business considerations.
Source of repayment
After satisfying that the transaction will be profitable, next attention to be given to the cash flow situation of the borrower. The Bank’s advances can be classified into three main categories, as follows:
- a very short-term advance which will be liquidated by funds received in the very near future: examples are advances against foreign or local bills or bridge financing where evidence of credit sanction from another financial institution is available;
- provision for current assets: this type of facility is needed for trading and /or manufacturing activities: the capacity and the potential for adjustment of the facility will depend on the nature of the borrower’s trade and the market in which he operates;
- term advance/ lending over 1 (one) year: examples of such facilities are investment in plant and machinery, building, a farm or a shop: generally, a long-term loan is repaid out of future earnings generated by the business.
Before granting a facility, it should be ensured that a reliable source of repayment exists and that the advance will be paid within the agreed period. When considering the period of repayments, required margin should be provided for unforeseen circumstances such as downward market trend, or the general economic condition of the country. Besides payment of interest and installments and other charges, the funds generated by the business should preferably leave adequate margin for meeting needs for future expansion or other business contingencies. Where the facilities are secured by fixed assets, the sale proceeds of such security should not be considered as a prime source of adjustment of the facility.
In order to ascertain the capacity of the business to meet the obligations, the cash flow projections should be examined. If such examination calls for a revision of the repayment schedule, the credit facilities should be re-examined and their viability should be determined.
Character and ability of the borrower
The branch manager should know his customer well and should be able to judge his intentions and ability to use the credit facilities to his advantage. Advance should be granted only to those borrowers in whom the branch manager has full confidence. Integrity of the borrower and his ability to conduct business are of paramount importance and take precedence over the value of the securities offered. The directors or partners of limited companies or partnerships should be men of integrity, experience and drive. Assessment of the company’s operations and information about the directors can be gained by studying the past year’s financial statements of the company, its general reputation in business circles, and by reference to the company’s bankers.
When recommending a review or extension of a limit, branch managers should verify the past performance from the branch records. The levels of maximum and minimum balances, turnover, the average debit balance, and timely receipt of the installments provide an adequate basis on which to judge the health of the account.
The borrower should possess good trade experience, business acumen, initiative and drive. He must have ability to control the finances of his business. Lack of financial control may ruin an otherwise successful business, particularly when the business faces adverse economic conditions. It is imperative that the branch manager should be able to form a favorable impression about the integrity and business ability of his prospective borrower before initiating the loan application.
Purpose of the facility
The purpose of advance should be studied with a view to understanding whether it is within the policy of the Bank. (If it is outside the Bank’s policy, the proposal should not be given further consideration).
Each proposal should be considered on its merits. Consideration should of course be given to the nature of business and certainty with which the business or the project will yield results. Branch managers should exercise their judgment and should avoid granting advances for speculative projects. The general test, which should be applied by the branch manager, is whether the Bank is called upon to finance a reasonable business project or whether the borrower will utilize the finance for speculative purposes.
In the case of corporate borrowers, the purpose of borrowing must be consistent with the objectives of the company. The objectives laid down in the Memorandum and Article of Association or by-laws of the company must be carefully examined before considering any credit facility for limited companies.
Terms of the facility
Credit facilities are broadly divided under the following categories:
- facilities needed for very short term requirements;
- facilities needed for current assets requirements;
- facilities needed for long-term/investment requirements.
Facilities covered under category (a) above are generally required for a short period of up to three to six months. Such facilities include packing credits, advances against salaries, advances against purchase/discount of bills and bridging finance facilities. Facilities covered under category (b) are generally for a slightly longer period, say up to one year. When considering a facility of this nature, a feasibility study of the project should be made and a repayment schedule should be agreed.
Having agreed the period of repayment, the branch manager must ensure that repayment is received within stipulated period. It is prudent to take corrective action when the first default is made. Caution at an early stage prevents accumulating heavy debit balances and possible bad debts.
To safeguard Bank’s interest over the entire period of the advance a comprehensive view of the capital, capacity and integrity of the borrower adequacy and nature of security compliance with all legal formalities, completion of all documentation and finally a constant watch on the account are called for all advances will be against adequate security., Where advances are granted against the guarantee of a third party, that party must be subject to the same credit assessment as made for the principal borrower.
The basis of security valuations will be expert third party assessments at two levels; current market price and forced sale value. In the case of property, valuations should be done by enlisted surveyor of the Bank. Inventory valuations may be taken at the balance sheet values shown in unqualified audited accounts after the branch manager has carried out his own investigation into the composition of the inventory. Specialist valuers may be requested by the branch to provide other assets valuation (if required) such as machinery and equipment. The value of the debtor may be taken from the balance sheet. The cost of the valuation (if any) will be born by the borrower.
To satisfy the majority, if not all, of the principles of lending detailed above, the branch should collect information on the following questions, before considering whether credit facilities should be granted to the borrower:
Who is the borrower? Whether any special characteristics of the borrower need particular attention. For example, if the borrower is a trust, this calls for examination of the trust deed.
Is the branch satisfied about the character, ability, integrity and experience of the borrower? Is the branch confident about the borrower?
Is the purpose of borrowing consistent with the objectives of the company?
Is the purpose legal? Does it contravene any law? Advances should not be considered for illegal purposes.
What is the amount required? Is it sufficient for the purpose mentioned?
Is the security offered acceptable and adequate? Has sufficient margin been maintained? Can a valid charge be obtained on the security?
What is the period of advance? What are the sources of repayment? Is there reasonable certainty that the stipulated installment will be recovered?
What is the rate of interest charged? Will it be profitable to the Bank? In assessing the profitability of the account, allowance must be made for any ancillary business like foreign exchange, business of group accounts, contingent business etc. which may be available to the Bank from the borrower. Branches should also consider whether there is any onerous or difficult work involved in maintaining the account.
Types / Nature of Advances & Loan
The credit facilities granted by the bank are classified under different account heads as under :
- Loan (like short/ mid/ long term in nature)
- Overdrafts (allowing frequent debit/credit transactions within an agreed limit)
- Trade related credit facilities (like bills port folio)
- Short Term Advances (like continuing facilities)
- Contingent facilities (like Letters of Credit, Letters of Guarantee etc.)
- Others, if any.
Generally all facilities, except term loans are repayable on demand. Trade related credit facilities are self-liquidating in nature. Cash Credit /Overdrafts are reviewed annually or at regular intervals in case a closer monitoring of the accounts is necessary. Contingent liabilities are also self-liquidating in a broader sense. The credit worthiness of the client on whose behalf the liability is assured is very important.
Brief particulars of Loans & Advances :
|Secured /Collateralized Overdraft (SOD/OD)||Facility is allowed against easily marketable /Govt. approved instruments (like FDRs, BSPs/PSPs, Unit certificates etc.) or against security of land /property acceptable to the bank.||a)Pledge of instruments duly discharged|
b)Equitable/ registered mortgage of land/ property.
| Cash Credit|
|Facility is allowed for financing inventory may be either hypothecated or pledged to the bank as primary security.||Letter of hypothecation/ pledge of Goods.|
|Loan against Trust Receipt||Facility is allowed to facilitate delivery of goods against retirement of documents of Title to Goods. The client is under delegation to pay the outstandings out of the sale proceeds of the goods.||A standard form called “Trust Receipt”.|
|Loan against Imported Merchandise (LIM)||Facility is allowed against documents received against L/C released to an approved clearing agent at the request of the client. Goods must be stored in a secured area of the godown under effective control if they are kept on the borrower’s premises.||Letter of pledge of Goods.|
|Export Cash Credit (ECC)||Facility is allowed to exporters to facilitate purchase of raw materials for the purpose of manufacturing and exporting finished goods.||Letter of pledge of Goods. (under bonded facility)|
|Loan (secured, mortgages, bonds and shares, other marketable securities)||Facility is allowed for various purposes for acquisition of fixed assets and granted for short, mid or long term purposes.||Equitable /registered mortgage of tangible fixed assets.|
|Demand Loan||a) Documents of Title to Goods.|
b) Accepted documentary bills.
|Letter of Credit|
|Letters of Credit for importation of capital machinery or commodity are called sight L/C as the draft to be drawn at sight. Drafts drawn under usance are for a tenure specified in the L/C and payable by the client in due dates.||Cash margin.|
|Letter of Credit|
(Back to Back)
|This type of Letters of Credit is backed by master export L/C for export of garments to overseas market.||Lien over master L/C of 1st class of banks acceptable to DBBL.|
|Letters of Guarantee|
(Bid, PG, APG)
|Usually guarantees can be classified under two heads. (a) Financial Guarantees towards fulfillment of financial commitment on behalf of the client, (b) Performance Guarantee when the bank guarantees the performance of the client as specified in the guarantee.||Margin in the form of cash and /or FDR.|
|Letters of Guarantee|
|Bank issues guarantees in favour of the shipping company to enable the importer to obtain delivery of the goods without producing the Bill of Lading.||100% built-in margin.|
Renewal of limits
While sanctioning limits, the expiry date is fixed by the Sanctioning Authority. Therefore, branch required reviewing the limit for renewal at least 60 days before expiry of the period. If the Sanctioning Authority is satisfied with the recommendation made by the branch manager, the limit shall be renewed. Otherwise, it will be renewed for adjustment purposes only, farther drawings in the accounts of the customers should not be allowed.
Recovery of Advances
Advances granted in any form are repayable either on demand or on the expiry of the validity period, or through agreed installments. When repayment is not forth coming in accordance with the repayment terms, recovery efforts should be launched.
When the repayment pattern of the advance is such that continuance of the facility is not worthwhile or while the advance allowed on installment has been defaulted or the advance allowed confronts with the following circumstance advance should be recalled:
- Borrower or the grantor dies.
- Borrower or the grantor has become insolvent.
- Borrowing Company has been liquidated.
- Partnership has been dissolved.
- Borrower does not come forward to renew the documents much before the expiry of the expiry of the period of limitation.
- Value of the security has been deteriorated.
- Financial position of the borrower has deteriorated alarmingly which is beyond restoration.
- The party commits fraud of any sort.
- Policy of the bank has under gone change in relation to certain types of advances.
- Bangladesh Bank has imposed restriction on certain type of advance and desires its adjustment etc.
For the recovery of the advances, branch should take the under mentioned steps:
- Make formal demand for repayment in writing.
- Put pressure on the borrower by utilizing the most effective and meaningful media, which can exert adequate influence on the borrower.
- Intimate the borrower about bank’s ultimate resorting to file suit in the event of non-repayment.
- Advice the guarantor if any to adjust the advance or have it adjusted by the principal debtor.
- If the borrower and his guarantor (if any) comes forward and proposes repayment arrangement and the same is considered to be an acceptable proposal, the branch should seek controlling decision in this regard and act in accordance with the instruction.
Limitation refers to a period within which existing rights can be enforced in the court of Law. In other words, limitation prescribes the time Limit within which the credit shall file suit against the defaulting debtor for the realization of advance made to the latter. Limitation period cannot be extended through any agreement made by the debtor and creditor. But the period can be extended by performance of some acts by the parties. If the borrower executes fresh promissory notes or a new bond etc. even after the expiry of the limitation period, the same is extended from the date of execution of fresh documents as per section 25/3 of the contract act 1872. The documents shall however be taken much before the limitation expires because the may not be available to execute the documents immediately after the limitation period expired.
If the recovery of the credit becomes uncertain resulting from change of circumstances under which credit was extended or the borrower sustains loss of capital or the value of security decreases or any adverse situation arises then the credit will be classified on the basis of Qualitative Judgment. Besides, if the credit is extended without any logical basis or the credit is frequently rescheduled or the rules of rescheduling are violated or the trends of exceeding credit limit observed frequently or a suit is filed for recovery of the credit is extended without the approval of the competent authority, then the loan will be classified on the basis of Qualitative judgment. Under this judgment the loans will be classified as under:
Substandard: Due to reasons stated above or for any other reason if in spite of possible loss of any credit, there is any probability of changing the present situation through taking proper steps.
Doubtful: Even after taking proper steps, if the full recovery is not ensured.
Bad/Loss: If the probability of recovery becomes totally nil.
If any improvement achieved in the accounts classified it will again be declassified. However, the credit once classified by inspection team of Bangladesh Bank, that will be treated as final classification and before any subsequent inspection is conducted by Bangladesh Bank or without prior approval of Bangladesh Bank the credit will not attain any merit of declassification.
Accounting Procedure of Interest of Classified Loan
Sub-standard or Doubtful: Interest will be imposed on that credit account but such interest will not be transferred to the Income Account. Instead the interest will be kept in Interest Suspense.
Bad/Loss: Imposition of interest on Bad/Loss account will be suspended. If any suit is required to recover such credit, the suit will be filed on total amount of principal included interest calculated upto the period before the suit is filed. Such interest will be kept on interest suspense. In case of any special reason if interest is imposed on Bad/Loss account then such interest will be reserved on suspense account.
If any classified loan or part thereof is recovered i.e. actual deposit on account of recovery is
Made in the credit account, then recovery of non-imposed as well as imposed interest will be made first from such deposit. Then original loan will be adjusted.
Reservation of Provision
Provision for reserve will be kept at the following scale:
Sub-Standard : 20%
Doubtful : 50%
Bad/Loss : 100%
After adjustment of Interest Suspense and value of Eligible Securities from outstanding balance of classified credit-the reservation of provisions will be kept on the calculated balance. General provision will be kept at the rate of 1% on unclassified loans.
Eligible Securities as stated above will include the following securities:
Security in respect of lien against loan: 100%
Security in respect of gold or gold ornaments kept in the bank as per present market value: 100%
Security against value of Govt. Bond/Sanchaya patra under lien: 100%
Guarantee made by the Govt. or Bangladesh Bank: 100%
Market value of easily marketable goods preserved under the custody of Bank: 50%
Market value of the Mortgaged Land & Buildings: Maximum 50%
In respect of Short Term Agricultural Loan and Micro-Credit, the Reservation of provision will be made as under:
Credits other than Bad Loan (i.e. Doubtful, Sub-Standard, Irregular and Regular)=5%
And in case of Bad Loan = 100%
Foreign Exchange Department
Providing International Trade & Communicating with the world.
Definition of Foreign Exchange:
Foreign Exchange means foreign currency and it includes any instrument
drawn, accepted, made or issued under clause (13), Article 16 of the Bangladesh Bank Order, 1972. All deposits, credits and balances payable in any foreign currency and draft, travelers cheque, letter of credit and bill of exchange expressed or drawn in Bangladeshi currency but payable in any foreign currencies.
Foreign Exchange Act. 1947 defines foreign exchange as “foreign currency and includes deposits, credits, and balances payable in foreign currency as well as drafts, travelers cheques, letter of credit, bills of exchange drawn in local currency but, payable in foreign currency”.
According to Dr. Paul Einzig, “Foreign exchange is the system or process of converting one national currency into another and transferring money from the country to another.” Foreign exchange deals with foreign trade and foreign currency.
Definition of Foreign Trade
No country is self-sufficient in all the goods. Some countries have special advantage to produce some items. Bangladesh can manufacture readymade garments easily due to lower cost of labor. So Bangladesh is exporting readymade garments to USA where as USA is exporting machinery to Bangladesh due to their favorable transaction to that item. These kinds of cross border transaction or exchange of goods are called foreign trade.
For conducting these foreign dealings the respective banks need authorization of the central bank. The respective Banks need “Authorized Dealer License” for conducting this foreign correspondence. The bank which hold this license is called authorized dealer. Bangladesh Bank issues this license by seeing the bank’s performance and also the parties that deals with.
Authorised Dealer means a Bank, Authorised by Bangladesh Bank to deal in Foreign Exchange under the Foreign Exchange Regulation (FER) Act 1947. But there are some persons or firms, authorized by Bangladesh Bank to deal in Foreign Exchange with limited scope are called Authorised Money Changers. To get a license for authorization a bank will apply the General Manager, Foreign Exchange Policy Department, Bangladesh Bank, Head Office, Dhaka complying the subsequent conditions:
- The Bank must have adequate manpower trained in Foreign Exchange.
- Prospect to attract reasonable volume of Foreign Exchange business in the desired location.
- The bank meticulously complies with the instruction of Bangladesh Bank.
The bank will commit to deal in Foreign Exchange within the limit & will submit periodical returns as instructed by Bangladesh Bank.
Functions of Authorised Dealer:
Authorised Dealer can handle all kinds of Foreign Exchange transaction as per Foreign Exchange Regulation (FER) Act 1947 under the instruction of Bangladesh Bank. Following are the main function of an Authorized Dealer:
- Exchange of Foreign Currencies.
- To make arrangement with Foreign Correspondent.
- Buying & Selling Foreign currencies.
- Handling of Inward & Outward Remittance
- Opening of L/C & Settlement of Payment.
- Investment in Foreign Trade.
- Opening & Maintenance of Accounts with Foreign Banks under intimation to Bangladesh Bank
- Export Documents handling.
Wings of Foreign Exchange:
A Bank’s Foreign exchange department has three definite wings through which foreign exchange transactions are conducted.
Import Section Export Section Remittance Section
The key products of Financial Institution Department are divided into two categories:
1 Risk Products
- L/C Confirmation
- Inter and intra Bank Guarantee
- Local Bill Discounting
2 Non-Risk Products
- L/C Advising
- L/C Transfer
- L/C amendment advising
- Reimbursement Undertaking and Authorities
- Fund Transfers
- Export proceeds
- BDT Draft Drawing
- International Payments (T T’s)
- Account Services (Vostro Account Management)
Import trade of Bangladesh is controlled under the import & Export control Act (IEC) 1950. Authorized Dealer Banks will import the goods into Bangladesh following import policy, public notice, F, E circular & other instructions from competent authorities from time to time.
Definition on Import:
Buying of goods & services form foreign countries for sales is considered as import. The person or organization who import the goods & services form foreign countries is known Importer and from which goods & services are imported is known as Exporter. In case of Import, the importers are asked by their Exporters to open a Letter of Credit (L/C). So that there payment against goods & services is ensured.
General Provision for Import:
Regulation of Import – Import of goods under this order shall be regulated as under:
Banned goods are not allowed to import through the foreign exchange transaction. Such as Live Swine, Eggs of shrimps and prawns etc.
Restricted list: Any item, which is restricted by the “Import Policy Order 1997-2002” in Annexure –1(b) shall be importable only on fulfillment of the conditions (b) specified therein against the item.
Free Importable Items:
The items which are not included either in the Banned list or Restricted list shall be freely importable:
In addition to the conditions mentioned in the Restricted and Banned Lists the conditions restrictions and procedures for import of various items mentioned in the test portion of this Order, shall as usual apply in case of import of those items.
General conditions of Import Goods:
Import Trade Control Schedule Numbers- For import purpose use of new ITC Numbers with at least six digits corresponding to the classification of goods as given in the Import Trade Control Schedule 1998, based on the Harmonized Commodity Description and Coding System shall be mandatory.
NOC on the basis of ROR (Right of Refusal):
No objection Certificate on the basis of right of Refusal form any authority shall not be required for import of any freely importable item by any Public Sector Agency. However, in cases where a public sector agency is required to import banned or restricted items included in the control list prior permission of the Ministry of Commerce shall have to be obtained on the basis of ROR issued by the ministry of Industries or by the Sponsoring Ministry/Division or by both as the case may be.
Restriction regarding source of procurement of goods:
(a) Goods from Israel or goods originating form that country shall not be importable. Goods shall also not be importable in the flag vessels of that country.
(b) All kinds of import from and export to Serbia and Montenegro, fragments of former Socialist Republic of Yugoslavia shall be banned.
Pre- Shipment Inspection:
Unless otherwise specified pre-shipment inspection of imported goods shall not be obligatory in case of import be the private sector importers.
Shipment of Bangladesh Flag Vessels:
Subject to waiver specified below shipment of goods shall normally be made on Bangladesh flag vessels.
Types of Importer:
Goods are imported for personal use, commercial or industrial purpose. So there are three kinds of importer such as:
- Personal Importer.
- Commercial Importer.
- Industrial Importer.
Letter of Credit (L/C):
Letter of Credit (L/C) is a payment guarantee to the seller by the issuing bank on be half of the importer. In other words, it is a letter of the Issuing Bank to the beneficiary undertaking to effect payment under some agreed conditions. L/C is called documentary Letter of Credit, because the undertaking of the Issuing Bank is subject to presentation of some specified documents. Through the L/C Buyers & Sellers enter into a contract for buying and selling goods/ services and the buyer instructs his bank to issue L/C in favour of the seller. Here bank assumes fiduciary function between the buyer and seller.
Mechanism of L/C:
The subsequent diagram brings out clearly the operation of L/C:
Classification of L/C:
There are many kinds of L/C. Few of them are briefly discussed below:
Irrevocable L/C cannot be amended or cancelled without the consent of the beneficiary or any other interested parties.
It can be amended or cancelled by the Issuing Bank, without the consent of the Beneficiary or any other interested parties. If it is not indicated in the L/C whether it is Revocable or Irrevocable then the L/C to be treated as Irrevocable.
When a third Bank provide guarantee to the beneficiary to make payment, if Issuing Bank fail to make payment, the L/C a third Bank adds their confirmation to the beneficiary, to make payment, in addition to that of Issuing Bank. Confirmed L/C gives the beneficiary a double assurance of payment.
Clean Clause L/C:
It is a Normal Caused L/C without third Bank’s confirmation.
It is an L\C, where the original amount restores after it has been utilized. How many times and how long, the amount will restore must be specified in L\C.
For example, an L\C opened for USD 10,000,000 and shipment effected for USD 5,000,000, now the L\C restored for full value i.e. there is scope to effect full value i.e. there is scope to effect further shipment of USD 10,000,000. Revolving L/C may be opened to avoid difficulties of opining new L/C. This L/C is not allowed in our present import policy.
If the word “Transferable” incorporated in an L/C, then the L/C is transferable. Transferable L/C can be transferred by the 1st beneficiary to the 2nd beneficiary. But 2nd beneficiary cannot transfer it further to another beneficiary. Transfer may be done to more than one beneficiary partially, if not prohibited in the L/C
Clean Letter of Credit:
This is a commercial letter of credit wherein the Issuing Bank does not ask any documents as evidence of execution of the deal under the L/C. Under the said L/C only Bill of Exchange may be negotiated or may be paid without any supporting documents. Clean letter of Credit is not permissible in our import policy.
Documentary Letter of Credit:
All the commercial letter of credits, where export related documents such as invoice, B/L etc are required to present with the bill of exchange, is called Documentary Credit. Under this L/C, bill of exchange will not be honored without other required documents.
Other Classification of L/C:
On the basis of fund L/C may be classified as follows:
Back to Back L/C:
Back to Back L/C is backed by another Export L/C. Where Import of the goods to be made to execute the export L/C & payment of Back to Back bills to be made normally from related export proceeds, the import L/C is called Back to Back L/C.
Where payment of import bill under L/C is being made form (i) Foreign Currency reserve in Bangladesh Bank or (ii) F.C account with Authorised Dealer the L/C is called Cash L/C.
Where final settlement is being made through commodity Exchange between the nations, the L/C is called Barter L/C.
L\C Under Commodity Aid, Loan, Credit or Grant: Where final settlement of import payment are made through Commodity Aid, Loan, Credit or Grant.
Different Parties to a Documentary Credit:
Normally the subsequent parties are related to a documentary credit. Such as
The Issuing Bank:
This is the bank who issues Documentary credit on account of it’s client.
The advising Bank:
This is a Bank acting as Agent of the Issuing Bank, to advise the L/C to the beneficiary.
The confirming Bank:
This Bank gives the beneficiary a double assurance of payment. This is a third Bank undertake to make payment, to the beneficiary, if the Issuing Bank fail to make Payment.
This Bank provides value to the beneficiary against presentation of documents complying credit terms. Usually this is exporter’s Bank who purchase the export documents.
This is a Bank acting as Agent of the Issuing Bank Authorized to make payment or to honour reimbursing claim of the Negotiating Bank.
The Transferring Bank:
If the L/C is transferable then the 1st beneficiary through a bank nominated by the Issuing Bank this bank is called the Transferring Bank.
The Applicant: Importer or buyer is the applicant of a Letter of Credit. Applicant must be the client of the Issuing Bank.
Exporter or Seller of the goods is the Beneficiary of a Letter of Credit.
The Party / Bank to whom the arrival of shipment has to be notified or to be informed is called notify party.
Financial information are much more sophisticated and sensitive than any other information. Because from the financial information only, we can grasp the core theme of any topic, particularly the financial position of a particular institution. So, to know about many important issues like capital, reserve fund, deposits, advances, investment, foreign exchange, operating profit, profit before tax, profit after tax, total assets, total liabilities, net assets per value, Earning per share etc. we normally use to make focus on financial highlights. Here also I use this Financial Highlights of DBBL to know the above-mentioned important issues.
|Taka in million|
|Balance Sheet (As at 31 December)||2001||2002||2003||2004||2005|
|Paid-up share capital||202.14||202.14||202.14||202.14||202.14|
|Loans & advances||‘ 8,044.43||9,391.64||11,431.32||14,976.06||20,134.74|
|Total earning assets||12,387.63||16,457.32||18,342.87||22,161.76||28,705.58|
|Total non-earning assets||1,075.60||1,408.35||1,622.73||2,398.79||3,633.97|
|Total contingent liabilities||3.640.22||3,583.34||6,786.52||11.588.25||15,890.15|
|/Total operating income||1,299.27||1,897.40||2,115.49||2,366.92||3,434.73|
|Total operating expense||902.01||1,473.84||1,661.70||1,734.51||2,495.15|
|Total income from investment||58.17||102.33||224.32||126.62||183.57|
|Profit before provisions||397.26||423.56||453.79||632.41||939.58|
|Profit before tax||274.54||296.00||382.10||499.02||687.82|
|Provision for tax||111.74||118.40||171.95||262.67||320.00|
|Net profit (after tax)||162.80||177.60||210.16||236.35||367.82|
|Ratios & Statistic|
|Return on equity (ROE%)||37.85||31.50||29.63||26.03||31.01|
|Capital adequacy ratio (%)||8.20||10.09||10.23||10.45||10.16|
|Loan deposit ratio (%)||70.00||59.00||66.72||71.09||73.91|
|Amount of classified Advances (Taka)||41.19||56.41||41.58||23.24||357.35|
|Provision kept against classified Advances (Taka) 6.94||19.04||19.04||19.04||123.77|
|Provision surplus/(deficit) (Taka)||–||1.75||10.38||13.70||–|
|Classified loans to total loans (%)||0.51||0.60||0.36||0.16||1.77|
|Return on assets (ROA%)||1.59||1.13||1.11||1.06||1.29|
|Return of Investment (R01%)||7.74||3.11||8.84||6.22||5.25|
|Earning Per Share (Taka)||80.54||87.86||103.97||116.93||181.97|
|Dividend Per Share (Taka)||17.50||20.00||20.00||22.50||25.00*|
|Price Earnings (P/E) Ratio (Times)||5.30||4.64||4.15||15.84||12.02|
|Net Asset Value (NAV) per share (Taka)||248.01||309.88||391.85||506.53||667.18|
|Market price per share (Taka)||427.00||407.00||431.50||1852.50||2,187.50|
|Number of shareholders||588||471||451||403||583|
|Number of employees||309||401||436||431||548|
|Number of branches||11||17||17||19||28|
|Loan & Advances:||2005||2004|
|(Amount in TK.)||(Amount in TK.)|
|Loans, Cash credit, Overdrufts etc.||17,989,510,326||13,387,699,162|
|Bills Purchased & Discounted||2,145,228,197||1,588,357,457|
|Payable in Bangladesh||2,118,883,002||1,544,636,624|
|Payable outside Bangladesh||26,345,195||15,732,321|
Financial Analysis of DBBL
The acronym for SWOT stands for
The SWOT analysis comprises of the organization’s internal strength and weaknesses and external opportunities and threats. SWOT analysis gives an organization an insight of what they can do in future and how they can compete with their existing competitors. This tool is very important to identify the current position of the organization relative to others, who are playing in the same field and also used in the strategic analysis of the organization.
- DBBL’s Banking Experience for more than 10 years provides DBBL the strength of being the reliability in the foreign banking sector. This strength of DBBL is founded in very few bank of its generation in Bangladesh, as the long term success of a bank heavily depends on its reputation while dealing with every sensitive commodity like money.
- DBBL is one of the bank in Bangladesh to issue ATM card. As a market Competitor, they showed the most substantial corporate strength among the JOINT-VENTUR banks.
- In Bangladesh DBBL has wide range of customer base and is operating efficiently in this country Which is increasing day by day.
- DBBL has a bulk of qualified, experienced and dedicated human resources.
- DBBL has the reputation of being the provider of good quality services to its potential customers
- DBBL has fewer branches than their competitors. Such as DBBL have only 39 branches whereas Uttara Bank Limited has 198 branches and 12 regional offices.
- DBBL often has problem with market share as ATM machines. Customers often complain that the ATMs are out of order.
- DBBL hasn’t that much good market share as other bank. It’s as because DBBL’s marketing strategy is not aggressive they always follow defensive/ conservative strategy. This may be considered as weakness.
- The activity in the secondary financial market has direct impact on the primary financial market. Investment is a national socio economic activity. And activity in the national economy controls the bank.
- Bangladesh have a huge consumer base for maintaining several accounts. So DBBL has the opportunity to keep these customers by reducing its current fees and charges and introducing more new products.
- In today’s economy, substantial amount is remaining idle and currently the investment in the secondary market by foreign is relatively low. These economic situations of the country indicate political threats.
- Increased competition by other foreign banks is also another threat to DBBL. At present SCB,HSBC and CITI Corp are posing significant threats to DBBl regarding retail and business banking respectively. Furthermore, the new comers in private sector Prime Bank, EXIM Bank, BRAC Bank, Southeast Bank, Mercantile Bank, Social Investment Bank, Islami Bank are also coming up with very competitive force.
Ratio analysis is an analytical tool that can be applied to a bank’s financial statements so that management and the public can identify the most critical problems inside each bank and develop ways to deal with those problems. Some selected ratios are analyzed here to give an insight about Dutch-Bangla Bank Limited. For limited information some are analyzed very briefly.
Return on Equity:
ROE (in %) = Net income / Shareholders equity.
The figure shows that the growth rate was positive and high than other next years in 2001 and after 2001, in 2002,2003 and2004 the ROE rate was declined. The rate also goes up in 2005 that shows good position of the bank.
Return on Assets:
ROA (in %) = Net income / Total asset.
Declining trend in 2001, 2002, 2003 and 2004. High growth in assets in 2005 than previous three years as compared to gradually increasing growth in net profit. High growth in net profit can be justified by DBBL’s credit policy in choosing productive and better sectors for investing their fund as loan.
Capital adequacy ratio(%):
The ratio increases time to time. From 2001 to 2004 the rate increased but in 2005 the rate has gone downward. Though the rate is declined but the difference is not so high.
Loan Deposit ratio(%):
Loan Deposit ratio(%)= ———————- x 100
The rate was higher in 2001 than 2002 but it again goes up gradually in 2003, 2004 and 2005. The ratio shows that the given loan amount is increased time to time that ultimately mean the capacity to given loan is increased day by day. The more loan is given the more income will be earned.
Classified loans to total loans(%):
Total Classified loan
Classified loans to total loans(%)=—————————– x 100
The table shows that the ratio is not so high from year to year. The rate of increasing loan to deposit ratio is positively changed from year to year in a healthy range but the ratio of classified loan to total loan ratio is not change in so high rate. That means the classified loan which are shown are included alarming loan also those are may delay to recover.
Return on Investment(ROI%)
Total income from investment
Return on investment(ROI %)= ———————————————- x100
The table shows that the rate was high in 2001 then went downward in 2002 than went so high in2003 but could not hold the increasing slop because of unstable situation of foreign currency rate mainly dollar rate and other economical and political reasons.
Cost of Fund(%):
The table shows the rate of cost of fund is not change in high rate from year to year where the deposit collection rate is increased year to year in very high rang.
Interest cost to Interest income(%):
Total interest paid
————————- x 100
Total interest income
The rate goes up from 2004 to 2005 because of the given interest rate on deposit is changed from 2004 to 2005. For FDR the rate was changed 10.00% to 11.50% for 12 months.
Staff cost to total cost(%):
Total salary and allowances
Staff cost to total cost(%)= ————————————– x100
Though in 2005 the bank recruited a huge numbers of officers but for high income and for low expenditure the staff cost goes down from 2004 to 2005. That presents the good position of the bank from past year to 2005.
Net Profit Margin:
Net Profit Margin (%) = Net income after taxes / Total operating revenue.
This ratio reflects effectiveness of expense management, cost control and service pricing policies. We find it relatively positive growth in 2004 and 2005. The effect of operating expenses and taxes is obvious for this trend.
Net Interest Margin:
Net Interest Margin (in %) = (Interest income – Interest expense) / Total assets.
Net interest margin was relatively upward trend over the years. The key reason was the growth rate of the spread between interest income and interest expense was satisfactory as compared to the growth rate of total assets. From this DBBL can maximize their spread between interest income and interest expense by using the same assets and boost their net interest margin ratio.
To sustain in a competitive market, every company needs to create some innovative products that can attract customers. DBBL requires to fulfill the need at least it should develop some consumer products like Residential Real Estate loans, Vehicle loans, Personal Loan, Festival loans, Pension Scheme, Marriage loan, Health care loan etc.
As a FI DBBL’s motto should be that we could meet up every financial needs of customer so that the customer can not leave us for any reason.
I have already mentioned that DBBL does not offer competitive interest rates for fixed deposit so, if it fails to be competitive it fails to get huge deposit from FDR as well as it could loose some customers who could do any other transaction.
DBBL can segment its target market for filing loans. Now a days different commercial banks offer SME (Small & Medium Enterprise) banking, DBBL can also provide special loan for specific customers. It can follow SME banking or it can introduce different types of short term loans like monthly loan, weekly loan etc.
In retrospect of the marvelous growth of FI revenue over the previous years and contemplating the intensity of competition yet to come, it is crucial for DBBl to rethink its strategies and marketing plan to sustain the growth of FI revenue. Corporate banking service providers domiciled in Bangladesh are expected to be fighting for a bigger pie, as the growth prospect of the country’s corporate banking business is limited. One of the ways to achieve that objective is to maximize FI revenue generated from local clients and introduces more local products. Because, there is a huge potentials for inbound revenue.
However, export growth dropped while import soared in 2004/2005, putting pressure on trade deficit. Although special incentives were extended to the garment, jute, and leather sectors in the national budget, export income has been affected due to flood damage, which has disrupted transport and communications and lowered industrial output and distribution. Increase in import payments was due to drastic surge in imports of food grains and capital machinery. Foreign exchange reserve position will remain stable.