Main objective of this report is to analysis Foreign Exchange Activities of Southeast Bank Limited. Other objectives are to observe banker-customer relationship and draw SWOT analysis based on Foreign Exchange Activities. Finally find out some problems and limitations of Southeast Bank and it’s Foreign Exchange mechanism and suggest some possible remedial measures to overcome the problems of Foreign Exchange Division.
Objectives of the Study:
The general objective of the study is to get an on-the-job experience to practical business world and an opportunity for translation of theoretical concept into real life situation. However the specific objectives of the study are as follows:
- To present theoretical aspects of Southeast Bank’s Foreign Exchange mechanism.
- To achieve Practical idea about overall activities of Bank regarding Foreign Exchange, Credit Dept. and General Banking.
- To study the Foreign Exchange mechanism of Southeast Bank Ltd.
- To familiarize with practical job environment.
- To observe banker-customer relationship.
- To find out some problems and limitations of Southeast Bank and it’s Foreign Exchange mechanism.
- To suggest some possible remedial measures to overcome the problems of Foreign Exchange Division.
- To have an exposure on the financial institutions such as banking environment of Bangladesh.
- To relate the theories of banking with the practical in banking.
The internship gathered data from the customers and bankers. When they (customers) came for service to this Bank, The internship provided questionnaire to those customers who were interested in participating in the survey. As well as internship asked questionnaire to the bankers, when they were free.
This internee is prepared on the basis of mixed methodology. Both the primary and secondary data have been used in this internee. So the report was based on both the secondary and primary data.
Sources of Data: The sources of data were of two types-
- Discussion with employees (unstructured questionnaire)
- Keen observation
- Conversation with clients.
Secondary Sources/ External Sources-
- Official papers of Southeast Bank Ltd.
- Web site of Southeast Bank Ltd and other bank’s web site.
- Annual report of Southeast Bank Ltd and other banks.
- Various journals of various Banks.
- Various Internship reports of various Banks.
- Various leaflet of Southeast Bank Ltd.
- The archive of the Southeast Bank Limited
- Bangladesh Bank Report.Newspaper, magazines
Data Analysis Procedure:
After collecting the data, it was analyzed by Microsoft Word & Excel. Then the findings were made. Based on the findings, the present situation was explained and recommendation was made.
Southeast Bank Limited is a scheduled commercial bank in the private sector established under the ambit of Bank Company Act, 1991 and incorporated as a Public Limited Company under Companies Act, 1994 on March 12, 1995. The Bank started commercial banking operations on May 25, 1995. During this short span of time the Bank is successful in positioning itself as a progressive and dynamic financial institution in the country. The bank had been widely acclaimed by the business community, from small entrepreneurs to large traders and industrial conglomerates, including the top-rated corporate borrowers for its forward – looking business outlook and innovative financial solutions. Thus within this very short period of time it has been able to create an image and earn significant reputation in the country’s banking sector as a Bank with Vision.
Southeast Bank Limited has been licensed by the Government of Bangladesh as a Scheduled commercial bank in the private sector in pursuance of the policy of liberalization of banking and financial services and facilities in Bangladesh. In view of the above, the Bank within a period of 14 years of its operation achieved a remarkable success and met up capital adequacy requirement of Bangladesh Bank. It has been growing fast as one of the leaders of the new generation banks in the private sector in respect of business and profitability as it is evident from the financial statements for the last 14 years.
Southeast Bank Limited has 56 branches throughout Bangladesh and its aim is to be the leading bank in the country’s principal markets. The bank by concentrating on the activities in its area of specialization has achieved good market reputation with efficient customer service. The Bank is committed to providing continuous training to its staff to keep them up to date with modern practices in their respective fields of work. The Bank also tries to fulfill its share in community responsibilities. By such measures the Bank intends to grow and increase shareholders’ earning per share. Southeast Bank Limited pledges to maximize customer satisfaction through services and build a trusting relationship with customers, which has stood the test of time for the last fourteen years.
Vision of SEBL:
It is especial!” important for managers and executives in any organization to agree upon the basic vision that the firm strives of achieve in the long term. A clear vision provides the foundation for developing a comprehensive mission statement. So the vision statement should be established first and foremost. Southeast Bank has established their vision statement to achieve their long-term Objectives, Their vision is to stand out as a pioneer banking institution in Bangladesh and contribute significantly to the national economy.
Mission of SEBL
A business mission is the foundation for priorities, strategies, plans and work assignment. Nothing may seem simpler or more oblivious than to know what a company’s business is. Southeast Bank is very much concern about their mission because divergent views among managers can only be revealed and resolved through the mission statement.
- The mission of the hank is stated below:
- High quality financial services with the help of latest technology.
- Fast & accurate customer service.
- Balanced growth strategy.
- High standard business ethics.
- Steady return on shareholders’ equity.
- Innovative banking at a competitive price.
- Deep commitment to the society and the growth of national economy.
- Attract and retain quality human resource.
Core values of SEBL:
Southeast Bank has established their objectives to achieve their strategic and financial targets to have strong competitive advantage in the banking sector. Their core values or the principles are given below:
- Insight and Spirit
- Enthusiasm for Work
- Business Ethics
General Banking Services:
- Accounts Opening
- Account maintaining.
- Account closing
- Issuing Pay order.
- Bank draft.
- Demand draft.
- Opening of Fixed Deposit.
- Clearing of Bank cheques.
Foreign Exchange Business Services:
- Letter of credit
- Parties to Letter of Credit
- Operations of Documentary Letters of Credit
- L/C Application
- Scrutiny of Documents
- Scrutiny of L/C Application
- Investment Scheme for Doctors
- Small Business Investment Scheme
- Housing Investment Scheme
- Small Transport Scheme
- Car Loan Scheme
- Transport Investment scheme.
- Agriculture Implements Investment Scheme Rural Development Scheme
Other Consumer Savings Schemes:
- Pension Savings Scheme (PSS)
- Education Savings scheme (ESS)
- Marriage Savings Scheme (MSS)
- Eight years Protirakha Sanchaypatra ( PSP)
- Five years Bangladesh Sanchaypatra (BSP)
- Sanchaypatra Interest on half yearly rest (SP)
- Sanchaypatra Interest on quarterly rest (SP)
At present, all banking transactions of Southeast Bank are fully automated. Moreover, all activities of trade and operations are being done through computers and other automation tools Such as ATM, SWIFT. The bank is the member of the shared ATM Network provided by Electronic Transaction Network ltd. (ETN). At present 25 ATM booths are available all over Dhaka city and in the cities of Chittagong and Sylhet.
In order to provide round-the-clock and correct information on the bank to the business community all over the world, the bank has a web page which can be accessed under the domain name: www.southeastbank-bangladesh.com. Bank has made an agreement with Square Informatics Ltd to have real time on-line transaction facility. The bank facilitates its clients to deposit, draw or remit funds from their accounts from one branch to another by providing on-line banking services.
Management of SEBL:
For any financial and non-financial organization, management are the most valuable and important resources of any kind of organization. And, a well-organize management provides the organization to reach its ultimate goal. Management means planning, organizing, staffing, directing and controlling of all financial and non- financial recourses of am organization. Different aspects of manage4menat practice in SEBL are discussed below.
SEBL have done its planning within the preview of the corporate plan. The overall planning approach in SEBL is top-down. Each branch can plan according to the goal imposed by the corporate level. It doesn’t plan independently. And, SEBL has a planning division. This is mainly responsible for the overall planning.
SEBL is organized as per the existing business locations. It has fifty three branches, each of which is a separate entity. Each unit is responsible for its performance and each is headed at least by a senior assistant vice president (SAVP) in designation followed by manager (operations). He is directly responsible for the performance of their unit. Within each branch, it is organized functionally.
The recruitment in SEBL is done in two ways. One as a “provisional officer” for the management program and it has a probation period of two years. Another one is non-management level as “trainee officer”. Provisional officers are recruited in officer category and their career path is headed towards different managerial jobs.
The management approach in SEBL is top-down or authoritative. Each information just seeks through lower management layer. Works are designed in such a way that one cannot leave without clearing the task as he is assigned for a day. Sitting arrangement in all office is done in way that the superior can monitor the subordinate all time. Management (HOB) and manager operation all time watch the operation of the bank through CC camera. Security is maintained properly. Budgeting, rewarding, punishing etc are also practice as control program.
SEBL doesn’t believe in the traditional banking. It tries to increase and maintain its market share in the private banking sector through two types of control techniques:
- Feed forward control
- Feedback control
Feedback control technique monitor output of a process and feed into the system to obtain desired outputs. On the other hand feed control technique monitors inputs into a process to ascertain weather these are as planned; if they are not, the inputs are changed in order to get the desired result.
Presently the bank uses bank Ultimus branch banking software developed by leads C Corporation developed on SQL on windows platform. The head office and some branches use the software for book keeping, automatic interest calculation, daily transaction listing and audit trails, auto maturity and auto renewal of FDRs, automatic integration of customers ledger position including balance of subsidiaries, monthly income and expenditure position etc. the bank has joined the shared ATM Network Bangladesh offered by ETN along with eight other member banks. This service is presently available in Dhaka, Chittagong and Sylhet. SBL is member of SWIFT. It has also installed Reuter System at the Head Office to have live access to information from international money market for dealing in Foreign Exchange. But from the viewpoint of ideal requirement for modern bank, competing with international banks, the IT facilities of SBL need further improvement.
Human Resource Department of the Bank:
The Human resource department of Southeast Bank performs many different roles and responsibilities. They take full responsibility for human activities like employment are recruiting, training and development, employee services, employee and community relations, personnel records, rewarding employees etc. The HR officers of this bank are very much concern to design and deliver efficient and effective HRM system, process and practices. They spend a lot of time to ensure employee’s satisfaction. They work on finding creative ways to ensure a positive and encouraging work environment.
The goal of an organizational recruitment program is to ensure that the organization has a number of reasonably qualified applicants to choose from when a vacancy occurs. As Southeast Bank is concern to bring about their long- term objectives so that they accomplish the recruiting process cautiously. The process for the recruitment of Management Trainee and Provision Officer is:
- Circular / Advertisements placed in notice boards of different educational institutions and news dailies.
- Written test
- Checking the test scripts.
- Call for interview
- On the job training
- Outside training (e.g., foundation training at BIBM)
Whole process takes maximum of one to two months. The incumbents are appreciated who have practical experience and knowledge in the relevant fields.
The bank is very much conscious for the training of their employees to make them master in knowledge, skill and behaviors in their day-to-day activities. It the bank retains and motivates employees. Generally, Southeast Bank United arranges training for junior level officers at BIBM, Mirpur, Dhaka to enhance their skill and efficiency. Executive officers are also required for training attending seminars in abroad to develop their managerial and operational proficiency. Every year, officers attended training courses at BIBM whereas this executives or officers were sent abroad for training o” international Trade, Credit management and other areas of banking and financial services.
Job evaluation is very much necessary to measure internal job worth of an organization SEBL follows a performance evaluation strategy to evaluate their employees as well as to make them more effective and efficient in their responsibilities. The branch managers monitor their employees to give performance feedback to the Head Office. They complete a “Performance Appraisal Form” to rate their employees. Generally it is conducted at the end of each year. SEBL encourages the industrious and active employees by giving promotion or bonus to make them more productive.
Rating is mainly done on following factors:
Professional knowledge: Knowledge of assigned, current trends and developments in functional area.
Planning: Ability to plan activities in advance and to accomplish by setting priorities.
Analytical Ability: Ability to analyze, assimilate and present facts clearly and concisely.
Judgment: Ability to take decisions and the quality of the decisions taken.
Attitude: How does he/she look upon his/her job and his/her associates? Can he/she make positive effect on others?
Communication: The force and felicity with which thoughts are expressed /conveyed in writing are to be considered.
Innovation: Extent of imagination and the practicability of the ideas as applicable to the job.
Leadership: Ability to inspire subordinates and to develop them.
Interpersonal relationship: Ability to get along with superiors, equals, subordinates and customers.
Resourcefulness: Reaction towards difficulties and the drive and initiative displayed to overcome them.
The employees are provided the following benefits during their pension:
- Provident fund
SEBL also provides the following facilities to their employees:
- House building -can
- Marriage leave
- Maternity leave
- Festival bonus
- 10 days as core leave
- 24 days as privileged leave
- 14 days of sick leave
- Specially approved leave-without-pay.
SWOT analysis facilitates the organization to make their existing line of performance and also foresee the future to improve their performance in comparison to their competitors. As though this tool, an organization can also study its current position, it can also be considered as an important tool for making changes in the strategic management of the organization.
SEBL has already established a favorable reputation in the banking industry of the country with its significant business growth. Within a period of 14 years, SEBL has already established a firm footing in the banking sector having tremendous growth in the profits and deposits. All these have leaded them to earn a reputation in the banking field.
SEBL is showing upward trend in profitability which can indicate the fact that the bank is growing to its potential year by year and achieving business growth steadily.
SEBL has established fin-n footing comers in the banking industry of Bangladesh. They have already achieved a high growth rate accompanied by an impressive profit growth rate in 2009. The number of deposits and the loans and advances are also increasing rapidly from year to year.
Southeast Bank Limited has strong, financial resources to run the banking business. It is expected that in the near future the banks financial resources will get much stronger.
The greatest irony is that despite claiming to be “A Bank with Vision” which is used as its advertising platform and mission statement, the bank as of today has failed to develop a prescribed set of vision as it embarks in to the cyber age of twenty first century. The bank still could not identify the core area of business and where it should concentrate in its business, as the new millennium is about to start. The bank does not have any long-term strategies of whether it wants to focus on retail banking or become a corporate bank. Till now, the bank is in a nowhere situation. Unofficially, retail banking is discouraged but at the same time the bank is not being able to pull itself away from retail banking. At the same time SEBL has failed to be a full-fledged corporate bank. The path for the future should be determined right now.
Significant shortage in capital adequacy is another major setback that Southeast bank Limited is facing in recent years. Its capital adequacy ratio is just above the requirement of 9.00% set by Bangladesh Bank and this aspect needs to be improved.
This has also become growing problem at SEBL. Currently there are “Too many heads but few hands.” Again this is related to the problem of reference appointment. There are people who are only drawing salaries at the end of the month but making a minimum or no contribution towards the organization. On the other hand there are officers who work hard but are not apprised accordingly.
SEBL can pursue a diversification strategy in expanding its current line of business. The management can consider options of starting client service in its merchant banking division. There are several opportunities for SEBL to expand its product line. In this competitive environment SEBL must expand its product line to enhance its Sustainable Competitive Advantage (SCA). As a part of its product line proliferation, SEBL can concentrate more on SME & Agro based industrial loan because these two sectors have huge potential. If SEBL can grab this opportunity then it will be better for the bank.
SEBL should move towards the real time on line banking operations. It is high time that they should go for this because the foreign banks as well as some local banks are already in to the total on line banking operations.
Multinational Banks: The emergence of the multinational banks and their rapid expansion poses a potential threat to the new PCB’s. Due to the booming energy sector, more foreign banks are expected to arrive in Bangladesh. Moreover, the already existing foreign banks such as Standard Chartered are now pursuing an aggressive branch expansion strategy. These banks are establishing more branches countrywide and are expected to get into for operation soon. Since the foreign banks have tremendous financial strength, it will pose a threat to local banks to a certain extent in terms of grabbing the lucrative clients.
Upcoming Banks: The upcoming private local banks can also pose a threat to the existing PCB’S. It is expected that in the next few years more local private banks may emerge. If that happens the intensity of competition will rise further and banks will have to develop strategies to complete against an on slaught of foreign banks.
Mergers and acquisitions: The worldwide trend of mergers and acquisition in financial institutions is causing concentration in power in the industry and competitors are increasing in power in their respective areas.
Contemporary Banks: The contemporary banks of SEBL such as Dhaka Bank, Prime Bank Eastern Bank and Dutch-Bangla Bank are its major rivals. Prime Bank and others are carrying out aggressive campaign to attract lucrative corporate clients as well as big time depositors. SEBL should remain vigilant about the steps taken by these banks as these will in turn affect SEBL strategies.
The foreign trade department deals with the export and import business of various clients. The clients open L/C for importing and exporting goods from and to abroad through this division. In the case of import, the bank usually works as the issuing bank and in the case of export the bank works as advising bank or negotiating bank or as both. In importing goods from abroad the clients have to give a percentage of total cost of goods, as advance. The clients also have to flay a certain amount of commission to the bank. After receipt of the goods in .ports, the clients have to pay the rest or me money to the banks to clear the goods from the ports. Foreign trade mainly deals with various kinds of documents and papers. These documents and papers work as claim of the credits.
International and Foreign Exchange Business:
One of the major businesses of the International Division is Foreign Exchange dealing. Southeast Bank Limited, Kakrail Branch earned substantial amount from this wing’s operation.
Southeast Bank Limited, kakrail Branch has already established correspondent banking relationship with many important countries of the world to facilitate cross boarder trade and payment.
Import of merchandise involves two things: bringing of goods physically into the country and remittance of foreign exchange towards the cost of merchandise and services. In case of Import, the importers are asked by their exporters to open a letter of credit .So that their payment against goods is ensured. Documentary credit has emerged as a vital system of trade payment. It is a key player of foreign trade. This Department is mainly done two tasks, i.e.
According to Foreign Exchange Regulation Act, 1947, nobody can export by post and otherwise than by post any goods either directly or indirectly to any place outside Bangladesh, unless a declaration is furnished by the exporter to the collector of customs or to such other person as the Bangladesh Bank may specify in this behalf that foreign exchange representing the full Export value of the goods has been or will be disposed of in a manner and within a period specified by Bangladesh Bank. Payment for goods exported from Bangladesh should be received through an Authorized Dealer in freely convertible foreign currency or in Bangladeshi Taka from a Non-Resident Account. The Export section deals with two types of Letter of credit that are as follows-
- Export Letter of Credit
- Back-to-Back Letter of Credit
Remittance means transfer of fund. If we pronunciations of the word “Remittance” we under stand transfer of fund through a Bank from one place to another place which may be executed the country or between two countries. Remittance which is affected within the country is called Local Remittance and which is affected between two countries is called Foreign Remittance. Remittance plays a vital role in the development of the country. Without effect of remittance no country can develop her. Bangladesh is rich enough in respect of human resources. So Inward Remittance has great importance in our country. Below discuss in shortly.
The remittances, which are received from abroad and paid to the beneficiary, are Inward Remittance. In ward remittance are mainly received in US Dollar, pound sterling and Taka Currency. Very few remittances in miscellaneous currencies are also received.
Mode of inward Remittance:
- T.T ———- Telegraphic Transfer.
- M.T ——— Mail Transfer.
- D.D ——— Demand Draft.
- P.O ———- Payment Order.
- I.M.O ——– International Money Order.
- T.C ———- Traveler’s Cheque.
The Remittance in Foreign Currency which are effected from our country to abroad is called outward remittance. Form remitter’s point of view is called outward Remittance and from payee’s point of view is called Inward Remittance.
Mode of outward remittance:
The Remittance may be made by means of T.T, D.D& T.C, etc. Ideation to these the sale of Foreign Currency under letter of credit against retirement of bill is include as outward remittance.
Procedure of payment:
To make payment the points mentioned below are to be observed.
- The D.D must be in original
- The name of bank, name of Branch, Date, name and A/C number of the payee, amount in word and figures must be mentioned.
- The D.D must be as per prescribed format or specimen copy supplied earlier.
- The amount is protecting graphed.
- Payment is not stopped.
- Draft is not reported lost.
- Verification of drawer’s signature.
- Telex confirmation from the issuing Bank, if the amount exceeds the limit as per agreement made earlier.
- The message must be in original.
- It must be authenticated under test, Test must be decoded and found correct.
- T.T. must contain the name of Bank, name of Branch, name and A/C number of the beneficiary.
If the above points are Okay, payment made to the beneficiary as soon as possible.
- Capital Area 24 hours.
- Major Cities 48 hours.
- Other Towns 72 hours
- Remote Areas 120 hours.
Settlement of claims:
As the remittance is received from abroad or remote places, some claim, may occur for non receipts of fund. These claims may arise by the Beneficiary or remittance through issuing/Remitting Bank. As such the claims are to the settled.
If the TT is lost or stolen, remitter will report to the remitting bank. R/B will ask / advise the Beneficiary. Bank to mark stop payment or not to make payment. Beneficiary bank
Will confirm the stop payment to the Remitting. Bank if the DD is not paid earlier. If the DD is paid earlier the mode of payment is to be confirmed to the Remitting, Bank. If necessary a duplicate DD is to be issued to make payment to the beneficiary for settlement of the claim.
If the TT contains any wrong information, Beneficiary. Bank is to contact with the issuing / Remitting Bank for correct information. On getting the correct information payment is to be made accordingly.
Above Remittance Section’s all works were done by General Banking (GB) Section in SEBL; KAKRAIL Branch. The internship doesn’t discuss this section in broadly in another Chapter; so, the internship discusses this section in here shortly, because this Report’s topic is “FORIGEN EXCHANGE PRACTICE OF SEBL”
Letter of Credit:
Letter of credit (L/C) can be defined as a ‘Credit Contract’ whereby the buyer’s bank is committed (on behalf of the buyer) to place an agreed amount of money at the sellers disposal under some agreed conditions since the agreed conditions include amongst other things, the presentation some specified documents the letter of credit is called documentary letter of credit the uniform customs & practices for documentary credit (UCPDC) published by international chamber of commerce (ICC) (193) revision publication No. 500 defines documentary:
Any arrangement, however harmed or described, whereby where by a bank (the “Issuing Bank”), acting at the request and on the instructions (the “Application”) or on its own behalf,
- Is not make a payment to or to the order of third party (the beneficiary) , or is to accept and pay bill of exchange (Drafts) drawn by the Beneficiary, or
- authorizes another bank to effect such payment , or to accept and such bills of exchange (Draft),
- Authorized another bank to negotiate, against stipulated document(S), provided that the terms and conditions are compiled with.
Documentary credits either:
1) Revocable or,
Revocable Letter of Credit:
According to Foreign Exchange Regulation Act, A Revocable Credit is one which can be amended or cancelled by the issuing Bank at any moment and without prior notice to the beneficiary, but the issuing bank is bound to reimburse the negotiating bank for any payment made prior to receipt of notice of cancellation, against shipping documents which are apparently in accordance with the terms of L/C. So this is clear that Revocable L/C can be amended any time without prior notice to the beneficiary.
Irrevocable Letter of Credit:
As per Foreign Exchange Act, an Irrevocable unconfirmed L/C cannot be cancelled or amended without the consent of all the parties, particularly that of the beneficiary. It is a definite and absolute undertaking of the issuing bank to make payment for goods supplied on presentation of stipulated shipping documents, if all the terms and conditions of the credit are complied with. Of any indication, it will be deemed as an irrevocable Letter of Credit.
Sometimes, Letter of credits is marked as either,” With recourse to drawer” or” without recourse to drawer”.
Forms of Documentary Credit:
The Letter of Credit can be either Revocable or Irrevocable. It needs to be clearly indicated whether the L/C is revocable or irrevocable. As per Uniform Customs and Practice for Documentary Credit (UCPDC) ICC Publication No 500, 1993, in the absent.
Types of Letter of credit According to Payment Method:
On the basis of time of payment, Letter of Credit can be of two types-
- Sight L/C: In case of Sight L/C, the bank makes payment against presentation sight Draft and documents drawn strictly as per terms under the letter of credit. Here issuing bank release fund immediately on presentation of stipulated documents.
- Deferred L/C: Deferred Payment means delayed payment against L/C. The amount availed of, is not put at the seller’s disposal immediately on presentation of documents, but only after a specified period. The credit wording always specifies duration of the period and time at which the payment will be effected against presentation of documents drawn under the letter of credit.
Special Documentary credits:
- Revolving credit: The revolving credit is one which provides for restoring the creditor the original amount after it has been utilized. How many times it will be taking place must be specifically mentioned in the credit. The revolving credit may be either cumulative or non-cumulative.
- Transferable credit: A Transferable credit is one that can be transferred by the original beneficiary in full or in part to one or more subsequent beneficiaries are not prohibited.
- Back to Back Credit: The back to back credit is a new credit opened on the basis of an original credit in favor or another beneficiary. Under to back to back concept the seller as the beneficiary of the first credit offer it as “security” to the adducing bank for the issuance of the second credit .The beneficiary of the back to back credit may be located insider or outside the original beneficiary’s country.
- Anticipatory Credits: The anticipatory credits make provision for pre-shipment payment, to the beneficiary in anticipation of his effecting the shipment as per L/C conditions.
- Red Clause: When the clause of the credit authorizing the negotiating bank to provide pre-shipment payment to the advance to the beneficiary is printed/ typed in red, the credit is called ‘Red Clause Letter of Credit’.
Under the above mentioned clause, the opening bank is liable for the pre-shipment advances made by the negotiated bank, in case the beneficiary fails to repay or deliver the documents for negotiation.
Parties to Letter of Credit:
A letter of credit is issued by the bank at the request of an importer in favor of an exporter from whom he has contracted to purchase some commodities or services. Generally the letter of credit is transmitted to the beneficiary through a bank in the beneficiary’s country. Therefore, parties of letter of credit are mainly:
- Importer / Buyer/ Applicant
- Opening Bank / Issuing Bank
- Advising Bank / Notifying Bank
- Exporter /Seller / Beneficiary
Besides, there are one or more than one banks who are involved in various capacities and various stages to play an important role in the total operations of credit which are as follows:
- Negotiating Bank
- Confirming Bank
- Transferring Bank
- Reimbursing / Paying Bank
Importer is the person who requests/instructs the opening bank to open a L/C. He is also called opener of Applicant of the credit.
b) Opening/Issuing Bank
Opening Bank is the bank which opens/issues a L/C on behalf of the importer. It is also called the importer’s/buyer’s bank. Exporter / Seller / Beneficiary is the party in whose favor the L/C is established.
c) Advising / Notifying Bank
Advising Bank is the bank through which the L/C is advised to the exporter. It is a bank situated in the exporting country and it may be a branch of the opening bank or a correspondent bank. It may also assume the role of confirming and/or negotiating bank depending upon the conditions of the credit.
d) Exporter/ Seller/ Beneficiary
Beneficiary of the L/C is the party in whose favor the letter of credit is issued. Usually they are the seller or exporter.
e) Negotiating Bank
A Negotiating Bank is the bank nominated or authorized by the issuing bank to negotiate the documents and to pay the amount to the beneficiary, to incur a deferred payment liability, to accept draft. If the negotiation of the documents is not restricted to a particular bank in the L/C, normally the negotiating bank is the banker of the beneficiary.
f) Confirming Bank
The Bank, which under the instruction in the letter of credit, adds guarantee to the credit, thereby undertaking the responsibility of payment/ negotiation/ acceptance under the credit in addition to that of issuing bank. A confirming bank does so if requested by the issuing bank having arrangement with them.
g) Transferring Bank
Original beneficiary may transfer the L/C to second beneficiary as per clause of the L/C. transfer may be made once only. The bank of the original beneficiary authenticates the transfer and the bank is known as transferring bank. Normally transferring bank authenticate the transfer and keeps record of transfer without any engagement on their part.
h) Reimbursing Bank / Paying Bank
A reimbursing Bank nominated or authorized by the issuing bank to make payment against stipulated documents, complying with the credit terms. Normally issuing bank maintains an account with the reimbursing bank to make the payment.
Details regarding the rights and obligations of the different parties involved in the documentary credit operations may be had from UCPDC (Article Nos. 13 to 19).
Operations of Documentary Letters of Credit:
The following five major steps are involved in the operation of a documentary letter of credit:
- Amendment (if necessary);
- Presentation; and
Issuing a Letter of Credit:
Before issuing a L/C, the buyer and seller located in different concludes a ‘sales contract’ providing for payment by documentary credit. As per requirement of the seller, the buyer then instructs the bank the issuing bank-to issue a credit in favor of the seller (beneficiary). Instruction/Application for issuing a credit should be made by the buyer (importer) in the issuing bank’s standard form. The credit application which contains the full details of the proposed credit, also serves as an agreement between the bank and the buyer. After being convinced about the ‘necessary conditions’ contained in the application form and ‘sufficient conditions’ to be fulfilled by the buyer for opening a credit, the opening bank then proceeds for opening the credit to be addressed to the beneficiary.
Advising a Letter of Credit:
Advising through a bank is a apparent authenticity of the credit to the seller. The process of advising a credit consists of forwarding the original credit to the beneficiary to whom it is addressed. Before forwarding, the advising bank has to verify the signature (s) of the officer (s) of the opening bank and ensure that the terms and conditions of the credit are not in violation of the existing exchange control regulations and other regulations relating to export. In such act of advising, the advising bank does not undertake any liability.
Amendment of Credit:
Parties involved in a L/C, particularly the seller and the buyer, can not always satisfy the terms and conditions in full as expected due to some obvious and genuine reasons. In such a situation, the credit should be amended.
In case of revocable credit, it can be amended or canceled or canceled by the issuing bank at any moment and without prior notice to the beneficiary. But in case of irrevocable credit, it can neither be amended nor canceled without the agreement of the issuing bank, the confirming bank (if any) and the beneficiary.
Presentation of Documents:
The seller being satisfied with the terms and conditions of the credit proceeds to dispatch the buyer and after that, has to present the documents evidencing dispatching of goods to the negotiating bank on or before the stipulated expiry date of the credit. After receiving all the documents, the negotiating bank then checks the documents against the credit. If the documents are found in order, the bank will pay, accept or negotiate to the issuing bank. The issuing bank also checks the documents and if they are found as per credit requirements, either.
- Effects payment, or
- Reimburses in the pre-agreed manner
Settlement means fulfilling the commitment of issuing bank in regard to effecting payment subject to satisfying the credit terms fully. This settlement may be done under three separate arrangements as stipulate in the credit. These are:
- Settlement by Payment: Here the seller presents the documents to the paying bank and the bank then scrutinizes the documents. If satisfied, the paying bank makes payment to the beneficiary and in case this bank is other than the issuing bank, then sends the documents to the issuing bank. If the issuing bank is satisfied with the requirements, payment is obtained by the paying bank from the issuing bank.
- Settlement by Acceptance: Under the arrangement, the seller submits the documents evidencing the shipment to the accepting bank accompanied by the draft drawn on the bank (where credit is available) at the specified tenor. After being satisfied with the documents, the bank accepts the document and the draft and if it is a bank other than the issuing bank, then sends the documents to the issuing bank stating that it has accepted the draft and at maturity the reimbursement will be obtained in the pre-agreed manner.
- Settlement by Negotiation: This settlement procedure starts with the submission of documents by the seller to the negotiating bank accompanied by a draft drawn or the buyer or any other draw, at sight or at a tenor, as specified in the credit. After scrutinizing that the documents meet the credit requirements, the bank may negotiate the draft. This bank, if other than the issuing bank, then sends the documents and the draft to the issuing bank. As usual, reimbursement will be obtained in the pre agreed manner.
According to Foreign Exchange Regulation Act, 1947, nobody can export by post and otherwise than by post any goods either directly or indirectly to any place outside Bangladesh, unless a declaration is furnished by the exporter to the collector of customs or to such other person as the Bangladesh Bank may specify in this behalf that foreign exchange representing the full export value of the goods has been or will be disposed of in a manner and within a period specified by Bangladesh Bank. Payment for goods exported from Bangladesh should be received through an Authorized Dealer in freely convertible foreign currency or in Bangladeshi Taka from a Non-Resident Account. The Export section deals with two types of Letter of credit that are as follows-
A) Export Letter of Credit
B) Back-to-Back Letter of Credit
Export financing can be done by Pre-shipment Credit and Post-shipment credit. In case of pre-shipment financing 90% is financed by the bank. Of the portion 75% is by Back-to-Back L/C and 15% by cash credit. Below the internship stated in broadly those two types of L/C.
Export Letter of Credit:
The other type of L/C facility offered by Southeast Bank Limited Kakrail branch is Export L/C. Bangladesh exports a large quantity of goods and services to foreign households. Readymade textile garments (both knitting and wove) jute, jute-made products, frozen shrimps, tea are the main goods that the Bangladeshi exporters export to foreign countries. Garments sector is the largest sector that exports the lion share of the country’s export. Bangladesh exports most of its readymade garments products to USA and European Community (EC) countries. Bangladesh exports about 40% of its readymade garments products to USA. Most of the exporter who exports through Southeast Bank Limited Kakrail branch is readymade garment exporters. They open L/C in this branch to export their goods, which they open against the import L/C opened by their foreign importers.
Services against Export L/C:
Advising of Export L/C:
The advising bank getting the import L/C sent by the issuing bank located abroad will advise the L/C to the beneficiary without any engagement or responsibility on their part. It will see the following only:
- Authenticity of L/C (Test agreed in case of Telex L/C and signature verified in case (air mail L/C).
- Merchandise specified in the L/C is permissible and clauses incorporated in the L/C are not against country’s regulations.
Add Confirmation of Export L/C:
Bank may add additional confirmation to export L/C where there is specific instruction from the L/ C issuing bank to do so. Additional confirmation of L/C gives the seller a double assurance of payment. Bank’s requirement of adding confirmation:
- Issuing Bank should be a reputed bank.
- Credit line/Arrangement with the L/C issuing bank.
- L/C clause are to be acceptable to confirming bank
- Approval from the competent authority for adding confirmation of export L/C.
Confirmation charges are to be recovered as per rules.
Negotiation of Export Bill:
‘Negotiation means that negotiating banker pays to the drawer the value of the bill on the assurance given by the opening banker. When documents are presented for negotiation under letter of credit, the same is thoroughly examined from the point of view of correctness and completeness in all respect of terms of credit. The exporter submits the documents to bank as per requirement of bank.
Acceptance of Export Bill:
In this case, the exporter presents a bill of exchange payable to him and drawn on a specified future date or event, to the bank that accept it. The bank signs its acceptance on the bill and returns it to the exporter. The exporter then can present it for payment on maturity or he can discount it in order to obtain immediate payment.
Formalities for Export Letter of Credit:
The Export trade of the country is regulated by the Import & Export (Control) Act, 1950. There are a number of formalities that an exporter has to fulfill before and after shipment of goods. These formalities or procedures are enumerated as follows-
Export Registration Certificate (ERC):
The exports from Bangladesh are subject to export trade control exercised by the Ministry of Commerce through Chief Controller of Import & Exports (CCI&E). No exporter is allowed to export any commodity permissible for export from Bangladesh unless he is registered with CCI&E and holds valid ERC. The ERC is required to be renewed every year. The ERC number is to be incorporated on EXP (Export) Forms and other documents related with export.
Back-to-Back Letter of Credit:
Back-to-Back L/C is a secondary L/C opened by the seller’s bank based on the original/ master L/C to purchase the raw materials and accessories for manufacturing of the export products required by the seller.
Under the ‘Back to Back’ concept, the seller as the beneficiary of the master L/C offers it as a security to the advising bank for the issuance of the second L/C. the beneficiary of the Back to Back L/C may be located inside or outside the original beneficiary’s country. In case of Back-to-Back L/C, the bank takes no cash security (margin). Bank liens the Master L/C and the drawn bill is a Time bill.
Readymade garment industries and specialized Textile units have been allowed the facility of importing fabrics and other material/accessories needed for manufacturing garments/specialized textile, free of duty under bonded warehouse system against back-to-back L/C arrangement, without involving cash foreign exchange from Bangladesh Bank. The Bangladesh Bank has therefore allowed the authorized dealer to open Back-to-Back L/C for import of raw materials by the readymade garment industries/ Specialized textile unit to carry out their export orders against export L/C.
In our country, export oriented Garment Industry, operating under bonded warehouse system are availing Back-to-Back facilities. In Southeast Bank Limited, Kakrail branch most of the Back-to-Back L/Cs opened on Garment Industry Account. Therefore the discussion is based on account of Garment Industry in Bangladesh.
Opening of Back-to-Back L/C:
Besides normal formalities and requirements for L/C opening, the following points are considered.
- No Back-to-Back L/C on account of Garment industries should be opened without prior approval from Head Office. Branches are required to obtain prior approval from Head Office Division/ Credit Committee for opening all Back-to-Back L/Cs.
- While opening of Back-to-Back L/C following instruction should be followed-
- Separate L/C number should be used for Back-to-Back L/C and are to be recorded in separate Register.
- L/C opening commission and charges are to be realized as usual.
The following contingent liability voucher is to be passed at the time of opening the L/C.
Customer liability for Back-to-Back L/C…………….Debit
Banker’s liability for Back-to-Back L/C……………..Credit
Documents Required for Opening a Back-to-Back L/C:
In Southeast Bank Limited, kakrail branch, following papers/documents are required for opening a Back-to-Back L/C-
- Master L/C
- Valid Import Registration certificate (IRC) and Export Registration Certificate (ERC).
- L/C Application and LCAF duly filled and signed.
- Performa Invoice
- Indemnity or undertaking
- No objection from previous bank (if any)
- Factory Inspection Certificate
- Insurance cover note with money receipt.
- IMP form duly signed.
- VAT Registration
- In addition to above documents, the following are also required to export oriented garments industries while requesting for opening a Back-to-Back L/C-
- Textile Permission.
- Valid bonded warehouse license.
- Quota Allocation Letter issued by the Export Promotion Bureau (EPB) in favor of applicant for quota items.
- BGMEA Membership
In case the factory premises is a rented one, the Letter of Disclaimer duly executed by the owner of the house / premises to be submitted. A check list to open a Back-to-Back L/C is as follows-
- Applicant is registered with CCI&E and has bonded warehouse license;
- The master L/C has adequate validity period and has no defective clause;
- L/C value shall not exceed the admissible percentage of net FOB value of relative master L/C;
- Usage period is up to 180 days;
Payment of Back-to-Back L/C:
Payment of import bills against Back-to-Back L/Cs are made from relative export proceeds of export oriented Garment Industry operating under bonded warehouse system. Therefore at the time of negotiation of export bills on account of garment factory, bank retains a portion covering to Back-to-Back liability to a separate foreign currency account from the export proceeds. The amount is kept in Deposit Awating for Disposal (DAD) A/C and in Retention Account (Exporter can bear this money without given any answer to customs, if one’s will go aboard.) if customer had given indication. After realization of export proceed, payment against import bills are made from DAD A/C. L/C wise and party wise A/Cs are maintained in DAD A/C ledger.
On 30/60/90/120/180 days of maturity period, deferred payment is made. Payment is given after realizing export proceeds from the L/C Issuing Bank. For garment sector, the duration can be maximum 180 days. In case of export failure or non realization/ short realization of export proceeds forced loan i.e. OAP has to be created in order to settle the Back-to-Back L/C payment.
Vouchers and accounting treatments are the same normal L/C opening except margin.
In this case, no margin is taken by the bank. After lodgment, maturity date of the import bill is intimated to foreign bank as per L/C terms. The documents are delivered to the order of opener duty endorsed for clearance of goods from custom authority. Goods are cleaned through approved clearing and forwarding agent of the bank.
An Importer is required to fulfill some conditions/ criteria to be eligible as an importer as per provisions of Import Policy Order and Guidelines for Foreign Exchange Transaction. An importer is required to submit the following documents along with L/C application to get a license to import goods through Southeast Bank-
- An account with Southeast Bank Limited, Kakrail Branch.
- Import Registration Certificate (IRC)
- Proforma Invoice/ Indent
- Tax paying Identification (TIN) Number
- Membership Certificate from recognized Chamber of Commerce & Industry.
- Letter of Credit Authorization (LCA) Form duly attested.
- L/C Application duly signed by the importer.
- One set of IMP Form
- Insurance Cover note with money receipt
To import, a person should be competent to be an ‘Importer’. According to Import and Export Control Act, 1950, the Office of Chief Controller of Import and Export provides the registration (IRC) to the importer. After obtaining this, the person has to secure a letter of credit authorization (LCA) from Bangladesh Bank and then he becomes a qualified importer. He is the person who requests or instructs the issuing bank to open a letter of credit. He is also called applicant of the credit.
Letter of Credit Authorization Form (LCAF):
The Letter Of Credit Authorization Form is the form prescribed for the authorization of opening letter of credit or payment against import and used in lieu of import license. The authorized dealers are empowered to issue LCA forms to the importers to allow import in Bangladesh. If foreign exchange is intended to be bought from Bangladesh Bank against a LCAF, it has to be registered with Bangladesh Bank’s Registration Unit located in the concerned area office of the CCI&E. the LCA forms available with the authorized dealers are issued in a set of five copies each.
First copy is exchange control copy, which is used for opening of L/C and effecting remittance.
Second copy is the custom purpose copy, which is used for clearance of imported goods from custom authority.
Triplicate and Quadruplicate copy of LCAF are sent to concerned area of CCI&E office by authorized dealer / Registration Unit of Bangladesh Bank.
Quintuplicate copy is kept as office copy by Registration Unit.
Accounting procedure in case of L/C opening:
When the L/C application is found to be in order and the client has sufficient approved credit line for opening an L/C, vouchers are prepared to record the contingent liability for the L/C opened and realized margin, commission, telex charges, postage etc. as per bank’s schedule of charges/ sanction letter. Accounting treatment at the time of L/C opening are as follows-
a) For recording contingent liability –
Customers liability……………………….Debit (In equivalent. BDT)
For realization of margin, commission, telex and other charges –
Customer’s A/C………………………….Debit (In equivalent. BDT)
Margin on L/C…………………………….Credit
Commission on L/C……………………….Credit
After that, L/C number and above entries are given in the L/C register. L/C opening register has following details-
- Date, L/C number, Name of the customer, Foreign currency amount, Exchange rate, Taka equivalent and source of import.
- Goods, country of origin, advising bank, Expiry date, Margin.
- Charges: commission, postage, SWIFT.
Distribution of L/C:
After giving the accounting entries the transmission of L/C is done. Southeast Bank takes the following steps, Through SWIFT to advise the L/C to the beneficiary.
- Send the signed original L/C together with the copy to the Dispatch section for mailing to the L/C Advising Bank and L/C Reimbursement bank respectively by courier/Airmail.
- Send the approved text of L/C and reimbursement authorization to SWIFT service-charge for their onward transmission to advising bank and reimbursing bank respectively.
- Deliver the customer copy of the L/C along with the debit advice to the customer over the counter or send the same to the dispatch section for onward delivery to the customer.
- Send the original accounting vouchers in batches to the Accounts section for capture and updating of the data-base/ records.
- Check the L/C file to ensure that all the related documents i.e. L/C application with supporting documents, approval, L/C copy, reimbursement instruction copy and copy of accounting vouchers are filed properly.
Amendment of L/C:
Parties involved in a letter of credit, particularly the seller and the buyer cannot always satisfy the terms and conditions in full as expected due to some genuine reasons. In such a situation, the letter of credit is amended. In Revocable letter of credit, it can be amended or cancelled by the issuing bank at any moment and without prior notice to the beneficiary. But in case of irrevocable letter of credit, it can never be amended or cancelled without the agreement of the issuing bank, the confirming bank (if any) and the beneficiary. When the customer approaches for amending the terms and conditions of a letter of credit opened at his request, Southeast Bank checks the following:
The type of amendment the customer is asking for-
- Whether it is concerning an increase or decrease in the L/C amount.
- whether it is concerning extension of shipment/ expiry date of the L/C
- Whether it is relating to change in the merchandise/ mode or route of transportation.
Depending on the type of amendments, bank has to review the matter in the same way as applicable while opening a letter of credit in accordance of the provisions.
On receipt of a request letter for amendment of L/C from the customer the bank takes the following steps-
- Record the date and time of receipt of the application.
- Read the request letter for amendment briefly to ensure that concerned L/C number and the instructions mentioned are clear.
- If found in order check the request letter for amendment together with all supporting papers.
- In case the letter of amendment is not complete or required papers are not submitted, the customer should be contacted promptly for rectification of the defects.
- In case the customer does not have approved credit line for increasing/ amending the L/C, the import section has to submit proposal to the Executive Committee of the Board and keep pending of amending the L/C till its approval.
- When the request letter for amendment with all papers is found to be in order, record the particular of amendments with date in appropriate column against the relevant L/C in the L/C register.
- Prepare the letter of amendment either in mail, Swift or telex format.
Finding of the study:
We have found the following things in my study-
- Southeast Bank is very much expert in export import trade handling.
- Southeast Bank is also cautious in export import trade financing to avoid any types of fraud.
- The culture of Southeast Bank is very much suitable.
- Clients are also very pleased on their services.
- All documentary credit is following the UCPDC rules and regulations.
- Most of the years, import and Export Both are positively increased.
- As usually Bank’s branches, employee and also Correspondent’s growth rate is highly increased.
In the light of above studies we have found that banking sector requires to be studied in right perspective and individual bank has mapped out of its own course of action /business strategy to survive and to do good with the nation of survival of the fittest. Here we have attempted to draw some recommendations in the light of my study of Southeast Bank Limited.
- Though the Southeast Bank is very much specialized on export import dealing so it is very much necessary to take care of export import department.
- Few persons are working in export import department. So, more should be recruited.
- One stop care service point should be opened to give better service to the clients.
- Modern technology should be installed to cope up in this competitive era.
- Customer’s waiting room in Foreign Exchange Section is essential.
- More space should be required in Foreign Exchange Section.
- Recording and Filling system should be up dated.
- Banking is a service -oriented marketing .Its business profit depends on its service quality. That’s why the authority always should be aware about their service quality.
- To provide quality service to the customer it is necessary to have a trained team of an organization or an institution .For this reason the bank should recruit more fresh, bright and energetic persons such as MBA, BBA, MBM etc.
- The bank has a provision for internship program, but it is not well organized. Although the officials are very careful and cooperative with the interns, the authority should be more structured .If they can properly make them trained it will be very fruitful to recruit them. Because-they learn overall banking in the internship period, so in the beginning of the job they can work as experienced persons. It is also very important that they should give an honorarium to the intern.
- As soon as possible the bank should start more branches in Dhaka city as well as the other cities of the country.
- One of the business strategies is promotion. Successful business depends how they can promote their products or service to the customer .In this connection to improve the business status bank should introduce more promotional programs.
- The recruitment process of the bank is very lengthy. The bank should reduce the cost and select the employee by restructuring the lengthy process.
- In addition with the present services, they should include more services. It is badly needed to provide more services to the customer in order to compete in the market.
- Sufficient books on banking and financing and other necessary journals are not available in the bank, the bank authority should enrich its collection in order to keep all necessary reference available to the employees as needed. This step will able to make employees knowledgeable on banking different critics and current banking events.
- Southeast Bank limited should give special gifts like key ring, pen, moneybag etc. embossed Southeast Bank’s monogram to be provided to the customer.
Southeast Bank Limited has been a more successful second-generation bank. The Bank has followed a slightly conservative and balanced banking which has enabled it to achieve steady growth in profit and wealth together. Besides these, blended recruitment of new and experienced bankers in all the levels of management level has been very fruitful. The recruits have carried forward their social connections and ultimately contributed to strengthen the asset and liability base of the bank. Although Southeast Bank Limited is good in operation of export import trade handling and financing.
The Bank’s vision has always been to give customer service one step forward from its competitors and ultimately contribute to the national economy. The fact of being successful in its journey of 14 long years speaks for itself and the Bank is hoped to continue its competitive edge in the coming years.
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