CHAPTER-11.1 Introduction:

Financial institutions are investment intermediaries linking the savers and users of fund. These intermediaries are interposed between the ultimate borrowers and lenders permitting them efficient transfer of funds. Individuals having surplus funds can lend them for reasonable return to entrepreneurs who need funds to take the advantage of economically and financially viable investment opportunities. The existence of financial institutions facilitates such exchange of resources. As a result, both the borrowers and lenders are better off than they would have been without financial institutions and market intermediaries. Thus, these financial institutions, such as banks, have a positive role in financing and investment which is a multidimensional process involving the complexity of many interrelated and interdependent factors of diversified nature. It is difficult to assess the contribution of each factor independently.

The key to successful banking lays in the ability of balance many activities simultaneously. The bank must maintain a healthy growth rate, while at the same time it must take action to minimize the risks it faces. The bank must also maintain enough cash on hand to meet obligations. All of these are related to sound performance of a bank. Evaluating Bank Performance, examines the basic risk and return features of commercial banks. The financial performance evaluation demonstrates the strengths and weaknesses of bank performance over time. The Trust Bank Ltd. has a responsibility to ensure efficient and effective banking operation in a sound manner. The study will look at the amount of liquidity that TBL has available to meet any reasonable demands that might have to meet, how it manages asset/liability, Foreign exchange Operation, what is the position in terms of profitability and how the bank manages its capital so that it has sufficient funds to remain solvent. This study is an attempt to the in-depth analysis of the Foreign Exchange performance of The Trust Bank Ltd.

1.2 Origin of the report:Now a day, education is not just limited to books and classrooms. In todays world, education is the tool to understand the real world and apply knowledge for the betterment of the society as well as business. From education the theoretical knowledge is obtained from courses of study, which is only the half way of the subject matter. Practical knowledge has no alternative. The perfect coordination between theory and practice is of paramount importance in the context of the modern business world in order to resolve the dichotomy between these two areas. Therefore, an opportunity is offered by North South University, for its potential business graduates to get three months practical experience, which is known is as Internship Program. For the competition of this internship program, the author of the study was placed in a bank namely, The Trust Bank Limited. Internship Program brings a student closer to the real life situation and thereby helps to launch a career with some prior experience.

This paper is titled Foreign Exchange Operations and Performance Evaluation of the Trust Bank Limited originated from the fulfillment of the BBA program. For the internship program, each student is attached with an organization. My internship was at The Trust Bank Ltd., Principal Branch, Dhaka. During my internship, I had to prepare a report under the supervision of Dr. Golam Mohammad, Director, MBA & EMBA Program, North South University.

1.3 Objectives of the Study:The main objectives of this study is to familiarize with overall activities of the Foreign Exchange division & Transaction procedures maintained by TBL, to analyze the Foreign Exchange Transaction procedures and observe & evaluate Foreign Exchange activities & performance, identify problems & recommend suggestions for the successful Foreign Exchange Operations of the Trust Bank Ltd and lastly to present an over view of The Trust Bank Ltd.1.4 Methodology:For preparing this paper, I used both Secondary and Primary data.

Collection of Primary Data:Many of the data and information were collected from my practical experience and queries from the executives while doing my internship at The Trust Bank Ltd. Information and data regarding Overview of the TBL, interest rates & charges, Foreign Exchange operations, performance measurement in Import & export, SWOT Analysis, Foreign Exchange policies etc. were collected from this sources.

Collection of Secondary Data:

Data regarding the Foreign exchange operations and Performance Evaluation of The Trust Bank Ltd. were collected from secondary sources like: Annual Reports, Brochures, Manuals and Publication of The Trust Bank Ltd., Bangladesh Bank Library, BIBM Library, DSE Library, News paper etc. were the major sources of secondary date.

1.5 Scope of the Study:My decision and analysis are done based on the practices applied at Trust Bank Limited. The study was wide spread and has greater scope to focus on different aspect of foreign exchange on banking sector but my study probably will not reflect the practices in the overall banking sector. Moreover, it does not include the foreign exchange practices done by the non-banking financial organizations.1.6 Limitation of the study:The main problem faced in preparing the paper was the inadequacy and lack of availability of required data. This report is an overall view of Foreign Exchange Operations of The Trust Bank Ltd. But there is some limitation for preparing this report. These barriers, which hinder my work, are as follows:

Difficulty in accessing latest data of internal operations.

Non-availability of some preceding and latest data.

Some information was withheld to retain the confidentiality of the bank.

I was placed to this department for only 3 months of time and working like a regular employee hindered the opportunity to put the better effort for the study.

With all of this limitation I tried my best to make this report as best as possible. So readers are requested to consider these limitations while reading and justifying any part of my study.

1.7 THE BANKING SYSTEM OF BANGLADESH

This chapter provides an overview of the banking system in Bangladesh and developments & performance of the banking sector. Bangladesh has a mixed banking system comprising nationalized, private and foreign commercial banks. Bangladesh Bank (BB) has been working as the central bank since the country's independence. Its prime jobs include issuing of currency, maintaining foreign exchange reserve and providing transaction facilities of all public monetary matters. BB is also responsible for planning the government's monetary policy and implementing it thereby. Types of BanksThe banking sector in Bangladesh comprises of four types of scheduled banks, namely, state-owned commercial banks (SCBs), government owned development finance institutions (DFIs), private commercial banks (PCBs) and foreign commercial banks (FCBs). At present there are four state-owned commercial banks (SCBs) operating in Bangladesh. The second type-development finance institutions that derive their funds mainly from the government, other financial institutions and supranational organizations. Development banks have taken a variety of specific forms, but most of them are oriented toward specific economic activity or toward a region. There are five development finance institution s (DFIs) in Bangladesh. The third category, i.e. private banks financed the development of the currently industrialized countries. Frequently they were instrumental in identifying investment possibilities: arranging for the importation of skilled managers, workers and raw materials; and taking initial steps toward assuring markets for output. None of this was done, needless to say, for eleemosynary purposes. The profit motive stimulated lending to enterprises to promising sectors. In this category there are thirty local Private Commercial Banks (PCBs) and nine Foreign Commercial Banks.

Banking system of BangladeshBank TypesNo. of BanksNo. of Branches

SCBs43384

DFIs51354

PCBs301776

FCBs0948

Total526562

Source: Bangladesh Bank database

Framework for Analysis

The major data sources for this study are Bangladesh Bank Annual Report. In this regard banks are categorized broadly into four categories: State-owned commercial banks (SCBs), government owned Development Finance Institutions (DFIs), Private Commercial Banks (PCBs) and Foreign Commercial Banks (FCBs). The time period covered is basically from 2006 to 2007.

Assets and Deposits of Banking Sector in Bangladesh(billion Taka)

Bank types20062007

Number of banksNumber of branchesTotal assets% of industry assetsDeposits% of depositsNumber of banksNumber of branchesTotal assets% of industry assetsDeposits% of deposits

SCBs43384786.732.7654.135.243383917.933.1699.732.6DFIs51354187.27.8100.25.451359201.77.3115.65.4PCBs3017761147.847.7955.551.33019221426.651.4 1150.253.5FCBs0948284.911.8150.88.10953227.78.2183.48.5Total4865622406.7100.01860.6100.04867172773.9100.0 2148.9100.0

Source: Bangladesh Bank Annual ReportBanking Sector Performance, Regulation and Bank Supervision:

In 2007, the state-owned commercial banks (SCBs) held 33.1 percent of the total industry assets as against 32.7 percent in 2006. PCBs share rose to 51.4 percent in 2007 as against 47.7 percent in 2006. The foreign commercial banks held 8.2 percent of the industry assets in 2007, showing a declining trend by 3.6 percentage point over the previous year. The DFIs' share of assets was 7.3 percent in 2007 against 7.8 percent in 2006Total deposits of the banks in 2007 increased by 15.5 percent to Taka 2148.9 billion from Taka 1860.6 billion in 2006. The SCBs' (comprising largest 4 banks) share in deposits decreased from 35.2 percent in 2006 to 32.6 percent in 2007. On the other hand, PCBs deposits in 2007 amounted to Taka 1150.2 billion or 53.5 percent of the total industry deposit against Taka 955.5 billion or 51.3 percent in 2006. FCBs' deposits in 2007 rose by Taka 32.6 billion or 21.6 percent over the previous year. The DFIs' deposits in 2007 were Taka 115.6 billion against Taka 100.2 billion in 2006 showing an increase of 15.4 percent over the year.Aggregate Balance Sheet

Assets: Aggregate industry assets in 2007 registered an overall increase by 15.3 percent over 2006. During this period, SCBs' assets increased by 16.7 percent and those of the PCBs rose by 24.3 percent. Loans and advances played a major role on the uses of fund. Loans and advances amounting to Taka 1724.3 billion out of aggregate assets of Taka 2773.9 billion constituted significant portion (62.2 percent). Cash in tills were Taka 29.7billion (1.1 percent); deposits with Bangladesh Bank were Taka 159.4 billion or 5.7 percent; other assets were Taka 479.6 billion or 17.3 percent and investment in Government bills and bonds accounted for 13.7 percent (Taka 381.0 billion) of the assets.Liabilities: The aggregate liability portfolio of the banking industry in 2007 was Taka 2773.9 billion of which deposits constituted Taka 2148.9 billion or 77.5 percent and continued to be the main sources of fund of banking industry. Capital and reserves of the banks were Taka 180.0 billion or 6.5 percent of aggregate liabilities in 2007, as against Taka 122.9 billion or 5.1 percent in 2006

Performance and Rating of BanksPerformance of the banking sector has been discussed in this chapter under CAMEL rating of banking. The five indicators used in the rating system are (i) Capital adequacy, (ii) Asset quality (iii) Management soundness (iv)Earnings and (v) Liquidity.

Capital Adequacy

Capital adequacy focuses on the total risk weighted capital intended to protect the depositors from the potential shocks of losses that a bank might incur. It helps absorbing major financial risks (like credit risk, foreign exchange risk, interest rate risk and risk involved in off-balance sheet operations). Banks in Bangladesh have to maintain a minimum Capital Adequacy Ratio (CAR) of not less than 10.0 percent of their risk-weighted assets (with at least 5.0 percent in core capital) or Taka 2.0 billion, whichever is higher.Capital Adequacy Ratio (CAR)

Bank Type20002001200220032004200520062007

SCBs4.44.24.14.34.1-0.41.17.9

DFIs3.23.96.97.79.1-7.5-6.7-5.5

PCBs10.99.99.710.510.39.19.810.6

FCBs18.416.821.422.924.726.722.722.7

Total6.76.77.58.48.75.66.79.6

Source: Bangladesh Bank Annual ReportTable shows that as on 31 December 2007, the SCBs, DFIs, PCBs & FCBs maintained CAR of 7.9, -5.5, 10.6 and 22.7 percent respectively. The CAR of SCBs showed 7.9 percent in 2007 after transferring the cumulative loss for Taka 87.9 billion by creating goodwill (valuation adjustments account) at the time of corporatization of 3 SCBs. The valuation adjustment account will be amortized within 10 years. Meanwhile, the CAR of DFIs stood at-5.5 percent in 2007 after adjusting the cumulative losses of Taka 24.8 billion of BKB and RAKUB. The adjusted CAR of DFIs in 2005 and 2006 also stood at -7.5 percent and -6.7 percent considering their cumulative losses of Taka 21.9 billion and Taka 24.4 billion respectively. 5 PCBs (including 2 problem banks) also could not maintain required CAR in 2007. FCBs maintained 22.7 percent CAR in2007 though 6 FCBs out of 9 FCBs could not maintain minimum capital for Taka 2.0 billion but they were permitted to adjust those shortfall within 30 June 2009. The CAR of the banking industry was 9.6 percent in 2007 as against 6.7 percent in 2006. The CAR of the industry showed downturn in 2005 due to the adjustment of cumulative losses by the DFIs and thereafter it has increased further positively. Asset QualityThe asset composition of all scheduled banks shows the concentration of loans and advances (62.2 percent as of December 2007). The high concentration of loans and advances indicates vulnerability of assets to credit risk, especially since the portion of non-performing assets is significant. A huge non-performing loan portfolio has been the major predicament of banks particularly of the state-owned banks. In the total assets the share of loans and advances is followed by the investment in Government securities covering 13.7 percent.The most important indicator intended to identify problems with asset quality in the loan portfolio is the percentage of gross and net non-performing loans (NPLs) to total advances. FCBs have the lowest and SCBs have the highest ratio of NPLs. SCBs have gross NPLs to total Loans of 29.9 percent whereas in case of PCBs, FCBs and DFIs, the ratios are 5.0, 1.4 and 28.6 percent respectively. Similarly NPLs net of provisions and interest suspense to the total loans is 12.9, 1.4 and 19.0 percent for SCBs, PCBs and DFIs respectively. FCBs are having excess provision for loan losses.Ratio of gross NPL to total loans

Bank Type20002001200220032004200520062007

NCBs38.637.033.729.025.321.422.929.9

DFIs62.661.856.247.442.934.933.728.6

PCBs22.017.016.412.48.55.65.55.0

FCBs3.43.32.62.71.51.30.81.4

Total34.931.528.022.117.613.613.213.2

Source: Bangladesh Bank Annual ReportThe ratio of NPL to total loans of all the banks shows an encouraging trend since its decline from the peak (41.1 percent) in 1999, although the aggregate ratio was still as high as 13.2 percent in December 2007. The reason is being very high NPL of the SCBs and the DFIs. The SCBs and DFIs continue to have very high NPLs mainly due to substantial loans provided by them on considerations other than commercial and under directedcredit programmes during the 70s and 80s. Poor appraisal and inadequate follow-up and weak supervision of the loans disbursed by the SCBs and DFIs in the past eventually resulted in large amount of poor quality assets which still continue to remain significant in the portfolio of these banks. Furthermore, the banks were reluctant to write off the historically bad loans because of poor quality of underlying collaterals. Recovery of NPLs however witnessed some signs of improvement; mainly because of the steps taken with regard to internal restructuring of these banks to strengthen their loan recovery mechanism and recovery drive and write off measures initiated in recent years.

The net non performing loans to total loans after adjustment of actual provision and interest suspense stands at 12.9 percent (SCBs), 19.0 percent (DFIs), 1.4 percent (PCBs) and 5.1 percent (banking sector) in 2007. SCBs' and DFIs' non- performing portfolio were still high after adjusted of actual provision and interest suspense, whereas FCBs have excess provision on their classified loan. Loan Loss Provisioning of the BanksThe Table shows the aggregate amounts of NPLs of all banks from 2000 to 2007, amounts of provision required to be maintained and the amounts actually provided by the banks.

Required provision and provision maintained

(billion taka)All Banks20002001200220032004200520062007

Amount of NPLs228.5236.0238.6203.2187.3175.1200.1226.2

Required Provision98.4101.6106.892.587.888.3106.1127.2

Provision maintained58.161.459.637.335.942.652.997.1

Excess (+)

Shortfall (-)-40.3-40.2-47.2-55.3-51.9-45.7-53.2-30.1

Provision maintenance ratio59.1%60.5%55.8%40.3%40.9%48.2%49.9%76.3%

Source: Bangladesh Bank Annual ReportThe banks have been continuously failing to maintain the required level of provisions against their NPLs. During the years provision maintenance ratio reached a high of 60.5 percent in 2001; which increased thereafter to 76.3 percent by 2007. The main reasons for the continuous shortfall in provision adequacy is the inability of the NCBs and some of the PCBs including those in problem bank category to make sufficient provisions due to inadequate profits and also failure to make transfer provision for write-off. As expected the FCBs are much better in that they have been able to make adequate provisions in the recent years. A comparative position as of end 2006 and 2007 is shown in the next Table. Although some individual PCBs could make adequate provisions, the aggregate position did not improve mainly because of the huge provision shortfall of the banks in "Problem Bank" category.

Comparative position of provision adequacy

(billion taka)YearItemsSCBsDFIsPCBsFCBs

2006Required Provision61.614.827.52.2

Provision maintained18.29.122.63.1

Provision maintenance ratio29.5%61.5%82.2%140.9%

2007Required Provision71.417.334.93.5

Provision maintained56.58.728.23.8

Provision maintenance ratio79.1%50.3%80.8%108.6%

Source: Bangladesh Bank Annual Report Management SoundnessSound management is a key most prerequisite for the strength profitability and growth of any financial institution. Since indicators of management quality are primarily specific to individual institution, these cannot be easily aggregated across the sector. In addition, it is difficult to draw any conclusion regarding management soundness on the basis of monetary indicators, as characteristics of good management are generally qualitative in nature. Nevertheless, ratios such as total expenditure to total income, operating expenses to total expenses, earnings and operating expenses per employee, and interest rate spread are generally used to gauge management soundness. In particular, a high and increasing expenditure to income ratio indicates the operating inefficiency that could be due to weaknesses in management.Expenditure - income ratio by type of banks

(Percentage)Bank Type20002001200220032004200520062007

NCBs99.499.098.598.8102.3101.9100.0100.7

DFIs175.389.195.9101.1104.0103.9103.5107.7

PCBs90.888.191.993.187.189.390.288.8

FCBs77.775.778.380.376.370.871.172.9

Total99.991.293.393.990.992.191.490.4

Source: Bangladesh Bank Annual ReportIt indicates from table that expenditure-income (EI) ratio of the DFIs was very high at 175.3 percent in 2000. This was mainly because the DFIs made loan loss provisions by debiting 'loss' in their books. The position however improved after 2000 and the ratio came down to 89.1 percent and 95.9 percent in 2001 and 2002 respectively but again rose to 101.1 percent in 2003 and later on 107.7 in 2007 due to operating loss incurred by BKB & RAKUB. The EI ratio of the SCBs exceeded 100.0 percent in 2004; the ratio stood at 100.0 percent in 2007. Very high EI ratio of SCBs was mainly attributable to high administrative and overhead expenses; suspension of income against NPLs. EI ratio of PCBs is substantially high due to deduction of provision for loans, other assets and corporate tax from current income.

Earnings and ProfitabilityStrong earnings and profitability profile of a bank reflect Good health and banks its ability to support present and future operations. More specifically, this determines the capacity to absorb losses by building an adequate capital base, finance its expansion and pay adequate dividends to its shareholders. Although there are various measures of earning and profitability, the best and widely used indicator is returns on assets (ROA), which is supplemented by return on equity (ROE) and net interest margin (NIM).Profitability ratios by type of banks

(percentage)Bank TypesReturn on Assets (ROA)Return on Equity (ROE)

2003200420052006200720032004200520062007

NCBs0.1-0.1-0.10.00.03.0-5.3-6.90.00.0

DFIs0.0-0.2-0.1-0.2-0.3-0.6-2.1-2.0-2.0-3.4

PCBs0.71.21.11.11.311.419.518.115.216.7

FCBs2.63.23.12.23.120.422.518.421.520.4

Total0.50.70.60.80.99.813.012.414.113.8

Source: Bangladesh Bank Annual Report

Earnings as measured by return on assets (ROA) and return on equity (ROE) vary largely within the industry. Table shows ROA and ROE by types of banks for all banks. Analysis of these indicators reveals that the ROA of the SCBs have been almost zero percent considering huge provision shortfall and that of the DFIs even worse. PCBs had an inconsistent trend but satisfactory and FCBs return on assets ratio has been consistently strong during last 8 years.

SCBs return on equity ratio was 3.0 percent in 2003 but have been shown almost zero percent in 2007 considering provision shortfall. In case of DFIs, the ROE position remained worse (-3.4 percent) in 2007. The ROE of PCBs and FCBs were satisfactory in 2007. BKB, RAKUB and Bangladesh Commerce Bank Ltd. incurred loss only due to their huge operating expenses. Net Interest IncomeAggregate net interest income (NII) of the industry has been positive and consistently increased from Taka 8.4 billion in 2000 to Taka 54.8 billion in 2007. However, the NII of the SCBs sharply declined to a negative amount of Taka 1.2 billion in 2000. The trend continued and the SCBs' NII was -1.8 billion (2001), -1.5billion (2002), -0.3 billion (2003), -1.1 billion (2004) but in 2005 their positive NII was Taka 7.7 billion and it was Taka 7.4 billion in 2007. The DFIs had a consistent positive trend since 2000 and it was Taka 1.4 billion in 2007.Net interest income by type of banksBank Type20002001200220032004200520062007

NCBs-1.2-1.8-1.5-0.3-1.17.79.07.4

DFIs1.02.71.41.31.81.01.71.4

PCBs6.19.210.212.013.721.025.436.1

FCBs2.53.33.43.64.25.68.29.9

Total8.413.413.516.618.335.344.354.8

Source: Bangladesh Bank Annual ReportSince 2005, SCBs have been able to increase their net interest income (NII) by reducing their cost of fund. The NII of the PCBs and FCBs has been very high over the period from 2000 through 2007. Overall industry NII shows a consistently upward trend. The trend of NII indicates that the PCBs and the FCBs are charging interests at very high rates on their lending as compared to the interest they are paying to the depositors.

LiquidityAt present commercial banks deposits are present subject to a statutory liquidity requirement (SLR) of 18 percent inclusive of average 5 percent (at least 4 percent in any day) cash reserve requirement (CRR). The CRR is to be kept with the Bangladesh Bank and the remainder as qualifying secure assets under the SLR, either in cash or in government securities. SLR for the banks operating under the Islamic Shariah is 10 percent and the specialized banks are exempt from maintaining the SLR. Liquidity indicators measured as percentage of demand and time liabilities (excluding inter-bank items) of the banks indicate that all the banks had excess liquidity. Reforms in the Legal Framework

The Artha Rin Adalat Ain (Money Loan Court Act 2003) was enacted in 2003 with a view to improving the legal framework for recovery of overdue loans and advances by the banks and financial institutions. By making further amendments in the law, the limit for filing of certificate cases under the Public Demand Recovery Act, 1913 by the Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank and other government-owned financial institutions was raised from Taka fifty thousand to Taka five hundred thousand. Provisions have been made in this Act enabling the banks to realize overdue loans by selling the properties held as securities, without prior order of the Court. Corporate Governance

Several measures have been taken by the Bangladesh Bank to put in place good corporate governance in the banks. These include regulation limiting the tenure of Board of Directors; appointment of two independent directors in the boards of the banks by the Bangladesh Bank; limiting the number of Directors to 13 in the boards; fit and proper test for appointment of Board Members and Chief Executive Officer of the PCBs; constitution of audit committee of the Board and disclosure requirements. The role and functions of the Board of Directors and the Management of the banks have been redefined specifying the powers of the Management and the Board. Guidelines on Managing Core Risks in Banking

Due to deregulation and globalization of banking business, banks are now exposed to diversified and complex nature of risks. As a result, effective management of such risks has been core aspects of establishing good governance in banking business in order to ensure good performance. In recognition of the importance of an effective risk management system, Bangladesh Bank has issued guidelines on Managing Core Risks in Banking in October 2003. The five core risks that have been advised to manage in these guidelines are, Credit Risks, Asset and Liability/Balance Sheet Risks, Foreign Exchange Risks, Internal Control and Compliance Risks and Money Laundering Risks. Banks have been advised to put in place an effective risk management system based on the above guidelines by June 2004. Bangladesh Bank also arranges program was to train the trainers of the banks on each of these risk management manuals. Besides, the progress of implementation of these guidelines is regularly monitored by the Bangladesh Bank. Writing off Bad Loans

To impede unnecessarily and artificially inflated size of balance sheet, a uniform guideline for write-off was introduced in 2003. According to the policy banks may at any time, write off loans classified as bad/loss. Loans, which have been classified as bad/loss for 5 years or more against which full provisions have been kept, are to be written off by the banks to clean their books. banks have been able to write off an amount of Taka 10.2 billion during 1 July 2007 to 30 June 2008 Credit RatingAs per Credit Rating Companies Rules, 1996 issued by the Securities and Exchange Commission, any company-issuing share at premium, right share and other debt instruments is required to incorporate/include credit rating in right offer document/prospectus, which is also applicable for bank companies. In order to bring transparency in investment in the banking sector equities and safeguarding the interest of the investors, it has been made mandatory for the banks to incorporate credit rating report in their prospectus for floating of ordinary shares through Initial Public offering (IPO) or issuing right shares. Interest Rate Policy

Banks are now free to charge/fix their deposit and lending rate other than export credit. At present, loans at reduced rates (7 percent) are provided for all sorts of export credit since January 2004. Moreover, with a view to controlling the price hike and ensuring adequate supply of essential commodities, the rate of interest on loan for import financing of rice, wheat, sugar, edible oil (crude and refined), chickpeas, beans, lentils, onions, spices , dates and powder milk has been temporarily fixed to a maximum of 12 percent.

At present, banks can differentiate interest rate up to 3 percent considering comparative risk elements involved among borrowers in same lending category. With progressive deregulation of interest rates, banks have been advised to announce the mid-rate of the limit (if any) for different sectors and the banks may change interest 1.5 percent more or less than the announced mid-rate on the basis of the comparative credit risk.CHAPTER-2

2.1 An over view of The Trust Bank Limited

The Trust Bank limited (TBL), a private commercial bank sponsored by the Bangladesh Army Welfare Trust, started its operations in November 29, 1999. They gained success from the very beginning of their operation and were capable enough to hold the success year after year. They gained success very early because they have a very strong backup to provide them financial support and they are the Army Welfare Trust. This bank is very much popular within the army community because all the financial activities of the army done by this bank. In a recent days the Trust Bank Ltd also gaining popularity in the general people and also for the business people.

In addition to ensuring quality customer services related to general banking the bank also deals in Foreign Exchange transactions. In the mean time the bank has extended credit facilities to almost all the sector of the countrys economy. The bank has plans to invest extensively in the countrys industrial and agricultural sectors in the coming days.

It has also plans to promote the agro-based industries of the country. The bank has already participated in syndicated loan agreement with other banks to promote textile sectors of the country. Such participation would continue in the future for greater interest of the overall economy. Keeping in mind the clients financial and banking needs the bank is engaged in constantly improving its services to the clients and launching new and innovative products to provide better services towards fulfillment of growing demands of its customers.

The authorized capital of the bank is Tk. 2000 million. The Army Welfare Trust (AWT) is the major shareholder bearing 51% share. Total shareholders equity at the end of December 2007 stood at Tk. 2,154.29 million, where Paid-up capital is Tk. 1,166.67 million, statutory reserve is Tk 330.63 million and Retained Earnings is Tk. 362.25 million. The Paid- up capital is indicative of the face value of 5, 00,000 ordinary shares of Tk. 1,000/-each fully subscribed by the shareholders.

2.2 Philosophy of the TBLAt present the bank has as many as 36 branches across the country and it is committed to become equal service providers compatible with the norms of commercial schedule bank. It renders all types of personal, commercial and corporate banking services to its customers within the purview of the Bank Companies Act, 1991 and in line with the directives and policy guidelines lay down by Bangladesh bank.2.3 Objective of the Bank The Trust Bank Limited has been established with the objective of providing efficient and innovative banking services to the people of all sections of our society. One of the notable strengths of this bank is that it is backed by the disciplined and strongest Institution of Bangladesh i.e. Bangladesh Army and there is a synergy of welfare and profits in the dynamics of this institution. Bank is service-oriented industry and we on our part are committed to ensure customized Qualitative and hassle free services in our banking operations along with the focus to broaden the clientele base. The bank has extensively in the countrys industrial and agricultural sectors in the coming days. The bank is committed to contribute as such as possible within its limitations for the economic growth and for ensuring value of its available resources.

2.4 Corporate Information of TBL

The following Table Shows the Corporate Information of TBL:

Banking License received onJuly 15, 1999

Certificate of Commencement of business received onJune 17,1999

Certificate of Incorporation Received onJune 17,1999

First Branch License received onAugust 9,1999

Formal inauguration onNovember 29,1999

Sponsor shareholdersArmy Welfare Trust

Number of branch36

2.5 Performance of the TBL

TBL a blend of expertise and technological excellence is in place to meet varied needs of modern customers. The bank aims at mobilizing untapped money of the country and prudent deployment for productive activities in the form of lending at a competitive interest rates/loan pricing. Towards attainment of its goals and objectives, the bank pursues diversified credit policies and strategic planning in credit management. To name a few, the bank has extended micro credit, consumers durable scheme loans, house building loans etc. to cater to the needs of the individuals, which in turn has helped thousands of families. The bank also extends loan in the form of trade finance, industrial finance, and project finance, export & import finance etc. The banks credit polices aimed at balanced growth and harmonious development of all the sectors of the countrys economy with top most priority to ensure quality of lending by averting growth of non-performing assets.

2.5.1. Capital:

The authorized capital of the bank is Taka 2000 million. Total shareholders equity at the end of the December 2007 stood at Tk. 2,154.29 million. Out of Taka 2,154.29 million, paid-up capital is Taka 1,166.67 million, Statutory Reserve is Taka 330.63 million and Retained Earnings is Taka 362.25 million. The paid-up capital is indicative of the face value of 11,666,700 ordinary shares of Taka 100/= each fully subscribed by the shareholders. As at the close of business on December 2007 the capital adequacy ratio was 12.37% against the standard of 8%. The core capital ratio was 12.99% against the standard of 4%.

2.5.2. Reserve:The bank raised Statutory from Taka 10.98 million in the year 2001 to Taka 330.63 million in the year 2007. The following table shows year-wise reserve:

YearStatutory Reserve

200110.98

200210.98

200324.60

200467.88

2005112

2006214.67

2007330.63

2.5.3. Profit and operating results

The Profit and operating result are shown in the following table: (Figures are in million of taka)YearTotal incomeTotal expensesOperating profitNet profit (after tax)

2001235.03164.2970.7425.96

2002347.10469.03(121.93)(140.16)

2003535.49447.0688.4368.14

20041046.36782.09264.27216.38

20051444.601148.33264.27114

2006844.18297.28546.89263.15

20071328.03474.31853.71239.02

2.5.4. Deposits

In FY 2007, the deposits of TBL shot up to Tk. 27,101.58 million from Tk. 18,958.95 million as recorded in FY 2006. During this period, the deposit base was increased by 42% compared to the preceding year. The combination of competitive interest rates, depositors trust in the bank and mobilization efforts of the bank resulted in this growth of deposits. Efforts are a foot being made to further increase deposit base of the bank through promotion of business and exploring of potential scope.

2.5.5. Loans & Advances

Total loans & advances of the bank as on December 31, 2001 was Tk. 1,603.95 million as against Tk. 18,682.16 million in FY2007, showing an increase by 1064.75% over the last 7 years. In FY 2006, the Total loans & advances of the bank as on December 31 was 13188.09 million and it increased to 18,682.16 million in FY2007 that is about 41.65% increase from previous year. The credit portfolio of the bank is a mix of scheme loans, namely Micro credit, Consumers durable scheme loan (CDS), Marriage Loan, Car Loan, HBF Loan and Commercial Loans. Commercial Loans comprise Trade financing in the form of working Capital and industrial loans (both large and medium scale industries) in the form of Term loans and other funded & non-funded credit facilities.

Term financing indicates the Banks participation in the industrial development of our country while by extending small loans the TBL has fulfilled the borrowing needs of the low and medium income groups of our society. The bank as a matter of priority in its policy wants to ensure quality of its Loan Portfolio by strengthening post disbursement recovery measures as well as by prioritizing on Early Warning System (EWS) to check the growth of non-performing assets.

2.6 Human Resources Development:The banks work force is composed of personnel having rich academic background with vast experience in banking. The human resources development means to create an environment by dynamic, enthusiastic and vigorous participation of all individuals. We would like to be consistent and transparent in their decisions and actions. The total number of executives and officers of the bank stood at 1200 and others number of employees are 110 as on December 2008. To make their personnel knowledgeable and truly professional they arrange training for them at Head office of the bank, BIBM and other institutions. The management of the bank sits with the branch managers and departmental heads in regular meetings. The meetings provide scope for open discussion, which help in formulating new strategies for achieving targets of the bank.

2.7 Social Commitment and Future Prospect:

It has been all most nine years since the stepped in to the banking arena. They are not yet past of their formative stage. It would be only a matter of time for them to testify that they are equally committed to the social up liftmen of the country. They would stand by the people through philanthropic activities whenever any crisis and disaster confront them. They will not keep their social welfare activities restricted to one area only. It will be diversified in the days ahead of us as they are planning to award students of exceptional academic performance with scholarship in different educational institutions. They expect to launch soon school banking by extending their services, which would encourage parsimony in the students. It would also help in the creation of savings, which could be utilized for pursuing higher studies in future. Keeping in mind their social commitment would soon launch Educational and Hajj loans. Agriculture, being the only means of subsistence for innumerable people in rural areas of the country, needs more attention. They have plans to manufacturing agricultural equipments in the Bangladesh Machine Tools Factory Ltd., which would be distributed among their farmers at an affordable price.

2.8 SWIFT:

The bank is a member of SWIFT Alliance Access, a sophisticated, fraud proof secured financial messaging system provided by the Society for Worldwide Inter-bank Financial Telecommunication (SWIFT), Belgium. With the installation of the SWIFT system the bank would ensure and reliable transmission of L/C, funds transfers, outgoing and incoming massages and other financial services.2.9 Web Page:

The introduction of Internet has change the traditional concept of world trade and commerce. As the time is progressing its necessity is being felt more in the prevailing competitive since no organization can afford to remain in isolation with the rest of the world for its survival. In order to provide up-to-date information on the bank at fingertips to the trade and business communities of the world, their own IT team has developed a web page for the bank. It can be accessed to under the domain:http://www.trustbank.com.bd/2.10 Branch Expansion The TBL has taken up a program to expand its branches. The bank has already 36 branches in many different places in Bangladesh; most of them are inside the different cantonments. The management is filling that they need more branches all over the Bangladesh. As per Bangladesh Bank circular that if any bank opens a branch in Dhaka then they have to be open a branch in out side Dhaka.

Branches of TBL:Sl#Branch

1Head Office

2Principal Branch

3SKB Branch

4Bogra Cantt. Branch

5Comilla Cantt. Branch

6Chittagong Cantt. Branch

7Rangpur Cantt. Branch

8Jessore Cantt. Branch

9Mymensing Cantt. Branch

10Savar Cantt. Branch

11Jalalabad Cantt. Branch

12Agrabad Branch

13Shaheed Salahuddin Cantt. Branch

14Dhanmondi Branch

15Khatunganj Branch

16Gulshan Corporate Branch

17Dilkusha Corporate Branch

18Radision Water Garden Hotel Branch

19Khawja yunus Ali Medical College & hospital Branch

20CDA avenue Branch

21Sylhet Corporate Branch

22Uttara Branch

23Millennium Corporate Branch

24Mirpur Branch

25Naval Base Branch

26Kawran Bazar Branch

27Hali Shahor Branch

28Beani Bazar Branch

29Moulvibazar Branch

30Goala Bazar Branch

31Feni Branch

32Joypara Branch

33Joydebpur Branch

34Narsingdi Branch

35Narayangong Branch

36Jubilee Road Branch

2.11 Principal Activities:

A Banks main activity is to collect deposit, because this deposit will use as loan money. So deposit is very much important for the bank. Generally a banks principal activity is to serve the customer or give service. There are different types of deposit and they are:

Current Deposits Account (CDA)

Savings Deposit Account (SBA)

Fixed Deposit Account (FDR)

Special Notice Time Deposit Account (STD)

Trust Maxima Savings Account

Lockers Service

Trust Tele-BankingHere each account has different restriction and requirement. They are:

1. Current Deposit Account & STD Account:

The characteristics of the current account are different from the savings account but same as STD account. In current account there is no interest on the current deposit account, but in STD account there is interest on deposit amount and there is no restriction on withdrawal. The depositor can withdraw the money from any time when he needs money, but withdrawal must be in transaction hour. The minimum limit of opening a current account & STD account in The Trust Bank is Tk.5000. There are different types of current & STD account. They are and their requirements are:

( Individual Current Account/STD A/C:

A/C Opening Form

Signature Card

Photograph of Account Holder

( Proprietorship Current A/C /STD A/C:

A/C Opening Form

Signature Card

Agreement Form/Proprietorship

Trade License

Mandate Agreement Form

Photograph of Account Holder

( Partnership Current A/C /STD A/C:

A/C Opening Form

Signature Card

Partnership Agreement Form

Partnership Deed

Photograph of Account Holder

(Private LTD Co. / Current A/C/STD/A/C:

A/C Opening Form

Signature Card

Corporate Agreement Form

Memorandum & Articles of ASSON

Certificate of Incorporation

Resolution

Photograph of Account Holder

(Public LTD Co. / A/C STD/ A/C:

A/C Opening Form

Signature Card

Corporate Agreement Form

Memorandum & Articles of ASSON

Certificate of Incorporation

Certificate of CommencementResolution

Photograph of Account Holder

(Club/Societies Current A/C/STD A/C:

A/C Opening Form

Signature Card

Account Agreement Form

Copies of Constitution/Bye Law

Photograph of Account Holder

2. Savings Deposit Account:Savings account is specially designed for the middle and low-income groups who are generating limited income and have the tendency to save. A minimum initial deposit of Tk. 500 shall be required for opening savings account. There are different types of savings account and their opening requirements are also change. They are:

( Individual Savings Account:

A/C Opening Form

Signature Card

Photograph of Account Holder

( Club/ Societies/Asso. Savings A/C:

A/C Opening Form

Signature Card

Resolution

Account Agreement Form

Copies of Constitution/Bye Law

Photograph of Account Holder

3. Fixed Deposit Account (FDR):

There are various fixed deposit schemes in The Trust Bank. The interest rate of the deposited amount depends on duration and volume of the amount. If duration is long the interest rate is high, and at the same time if the volume of amount is large the interest rate is also high and vice-versa. Depositors have to withdraw the interest after the maturity date. If the depositors intend to withdraw the interest earning before expiring the maturity date then the bank is not bound to pay the interest. But some times it depends on the party like if the party is big then the bank will consider to that party for getting the interest amount. The requirements for the FDR are:(Signature Card

(Application for Fixed Deposit4. Trust Maxima Savings Account:

Trust Maxima Savings Account that gives an extra facility to normal savings account. Under this new option of savings account one can get higher rate of interest than the prevailing normal rate. Present rate in Savings A/C is 7.50%, but in Trust Maxima Savings Account the additional interest rate are:

Minimum DepositAdditional Interest

01 lac to 02 lac0.50%

02 lac to 03 lac0.75%

03 lac and above1.00%

General Banking:

Cash Department

Remittance Department

Cash Department:All sorts of transaction considering the cash are taken into the care in the cash department. Cash is deposit in the name of concern bank and disbursed to the client by his/her department.

Remittance Department:Remittance is another significant part of the general banking. The bank provides services and various types of bills through the remittance within the country. Obviously, the bank charges commission on the basics of bills account. Types of remittance are as follow:

Pay Order:

A Pay-Order is issued only with in the members of Bangladesh Bank clearing house. It can be issued in favor of a customer holding account by debiting his/her account and crediting bills payable account. In case of non-customer, cash equivalent of payment plus pay order charges is received in cash and held in daily expanses account until the payment is made through clearing.

Pay Slip:

Pay Slip is issued when bank created expanses for his own purpose.

Demand Draft (DD)

Demand Draft is as same as Pay Order, but it can be drawn on other branches of The Trust Bank and Bangladesh Bank. A DD is drawn on the banks other branches when payment has to b made outside of Dhaka. The bank has to have a branch over there and prayer should have an account with the bank

Telegraph Transfer (TT):TT is one of the quickest methods for remittance. All incoming telexes are kept in the telex room and test agreed. One copy of telex is kept in the file and other is worked on. Payments of incoming TTs are made either issuing DD or Po depending upon the requirement of the customer.

Credit Services: Credit:

Credit it is a very similar word for the bank. It contents a huge meaning. A banks main earning source is credit. If banks credit management is not good then the bank will never ever achieve its proper goals. Question may arise what are the proper goals for the bank? The proper goals for the banks are profit maximization and shareholders wealth maximization. The fundamental nature of credit is that an element of trust exists between buyer and seller whether of good or money. The main use of bank fund is to collect money from surplus unit and lend it to deficit economic unit. Types of Credit:Modern banking operation touches almost every sphere of economic activity. The extension of bank credit is necessary for expansion of business operations. Bank credit is a catalyst bringing about economic about economic development. Without adequate finance there can be no growth or maintenance of a stable output. Bank lending is important to the economy, for it makes possible the financing of commercial and industrial activities of a nation. The credit facilities are generally allowed by the bank may be in two broad categories. They are as follows:

A. Funded Facilities:Funded facilities can also be divided into the following categories( Term Loans:The term of loan is determined on the basis of gestation period of a project generation of income by the use of the loan. Such loans are provided for Farm Machinery, Dairy, Poultry, etc. It is categorized in three segments:

Types of Term LoanTime (Period)

Short Term1 to 3 years

Medium Term3 to 5 tears

Long TermAbove 5 years

( Over Draft (OD):OD is some kind of advance. In this case, the customer can over draw from his/her current account. There is a limit of overdraw, which is set by the bank. A customer can with draw that much amount of money from their account. For this there is a interest charge on the over draw amount. This facility does not provide for every one, the bank will provide only those who will fulfill the requirement. It means that only real customer can get this kind of facility.

( Cash Credit (Hypo):It allows to individuals or firm for trading as well as whole-sale purpose or to industries to meet up the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is a continuous credit. It allowed under two categories:

Commercial Lending

Working Capital( Cash Credit (Pledge):Financial accommodation to individual/firm for trading as well as whole sale purpose or to industries as working capital against pledge of goods primary security falls under this head of advance. It also a continuous credit and like the above allowed under the categories:

Commercial Lending

Working Capital

( SOD (General):Advance allowed to individual/firm against financial obligation (i.e. lien of FDR/PS/BSP etc.) and against assignment of work order for execution of contract works fall under this head. This advance is generally allowed for allowed for definite period and specific purpose. It is not a continuous credit.

( SOD (Imports):Advances allowed for purchasing foreign currency for opening L/C for imports of goods fall under this type of leading. This is also an advance for a temporary period, which is known as preemptor finance and falls under the category Commercial Lending.

( PAD:Payment made by the bank against lodgment of shipping documents of goods imported through L/C falls under this type head. It is an interim type of advance connected with import and is generally liquidated shortly against payments usually made by the party for retirements of documents for release of import goods from the customer authority. It falls under the category Commercial Lending.( LTR:Advances allowed for retirement of shipping documents and release of goods imported through L/C without effective control over the goods delivered to the customer fall under this head. The goods are handed over the importer under trust with arrangement that sales proceed should be deposited to liquidate the advances within a given period. This is also temporary advance connected with import that is known post-import finance under category Commercial lending.( IBP:Payment made through purchase of inlands bill to meet urgent requirements of customer fall under this type of credit facility. This temporary advance is adjusted from the proceeds of bills purchased for collection. It falls under the category Commercial Lending.( FDBP:Payment made to a party through purchase of foreign documentary bills fall under this head. This temporary advance is adjustable from the proceeds of negotiable shipping/export documents. It falls under category Export Credit.( LDBP:Payment made to a party through purchase of local documentary bills fall under this head. This temporary liability is adjustable from proceeds of the bill.( Bank Guarantee:The exporters pay of the imported goods on behalf of the importer through bank guarantee. If the exporter fails to make the fulfill payment at the moment the bank will take the liability and pay to the exporter. This type of guarantee is also needed to attend in any tender.B. Non Funded Facilities:Non funded facilities are divided into the following categories:( Guarantee: Credit facilities in contingent liabilities from extended by the banks to their clients for participation in development work, like supplies goods and services.( Letter of Credit:A credit facility in contingent liabilities from provided to the clients by the banks for import/procurement of goods and services.2.12 Rate of Interest of the Trust Banks for LendingFor all types of loans there is a fixed rate, which is given by Bangladesh Bank, base on that rate bank set their own interest rate. Most of the time banks interest rate varies from party to party.ParticularsRate of Interest

House Building Loan (Res)14%

House Building Loan (Com.)14.50%

Car Loan15%

Marriage Loan14%

Staff Loan (Car)6%

Consumer Durable Loan14.50%

Over Draft14%

ParticularsRate of Interest

SOD13.50%

Micro Credit (TLR)13%

Term Loan (Industrial)14.50%

Term Loan (Commercial)14%

PAD14%

LTR13.50%

Cash Credit14%

Cash Collateral (FDR/SP/WEDB)13%

Other Loan14%

Bills Discounted & Purchased:

IBP14%

FBP14%

FDBP14%

2.13 Technology (IT) & Automation Information All the branches of the TBL are fully computerized. New software is now in use to provide faster, accurate and efficient service to the clients. The bank is continuously striving for better services through extensive automation of its branches. Trust bank has launched One Branch Banking through on-line connectivity. The bank has set up a full-fledged IT division to keep abreast of the latest development of IT for better service in the days to come. 2.14 Foreign Correspondents Foreign correspondent relationship facilities, foreign trade operation of the bank, mainly in respect of export, import and foreign remittance. The number of foreign correspondents and agents of the bank in the year 2005 stood at which covers important business and trade centers of the world. The bank maintains excellent relationship with the leading international banks, for handling all foreign correspondent and maintaining all foreign business there is an International Division, which is called ID.

2.15 Organizational Hierarchy of the Trust Bank Ltd. The Organizational hierarchy of the Trust Bank Ltd. can be shown by the following diagram:

CHAPTER 3

Foreign Exchange Operations: 3.1 Foreign Exchange- its meaning and definition:

Foreign exchange refers to the process or mechanism by which the currency of one country is converted into the currency of another country. Foreign exchange is the means and methods by which rights to wealth in a countrys currency are converted into rights to wealth in another countrys currency. In banks when we talk of foreign exchange, we refer to the general mechanism by which a bank converts currency of one country into that of another. Foreign trade gives rise to foreign exchange. Modern banks facilitate trade and commerce by rendering valuable services to the business community. Apart from providing appropriate mechanism for making payments arising out of trade transactions, the banks gear the machinery of commerce, specially in case of international commerce, by acting as a useful link between the buyer and the seller, who are often too far away from and too unfamiliar with each other. According to foreign exchange regulation act 1947, Any thing that conveys the right to wealth in another country is foreign exchange. Foreign exchange department plays significant roles through providing different services for the customers. Opening or issuing letters of credit is one or the important services provided by the banks.

3.2 Activities Related to foreign exchange: There are three kind of foreign exchange transaction:

a) Import

b) Export

c) Foreign Remittance3.3 Regulations for foreign exchange

Local regulations: Our foreign exchange transactions are being controlled by the following local regulations:

Foreign Exchange Regulation Act: Foreign Exchange Regulation (FERA) Act. 1947 enacted on 11th March 1947 in the then British India, provides the legal basis for regulation the foreign exchange. This act was adapted in Pakistan and lastly in Bangladesh.

Guidelines for Foreign Exchange Transaction: This publication issued by Bangladesh Bank in the year 1996 in two volumes. This is a compilation of the instructions to be followed by the Authorized Dealers in transactions relating to foreign exchange.

F.E. Circular: Bangladesh Bank issues F.E. circular from time to time to control the export import business and remittance that is to control the foreign exchange.

Export-Import Policy: Ministry of commerce issues Export Policy and Import Policy giving basic formalities for Import and Export Business.

Public Notice: Some times CCI &E issues public notice for any kind of change in Foreign Exchange Transaction.

Instructions from different ministry: Different ministries of the Govt. sometimes instruct the authorized dealer directly or through Bangladesh Bank to follow something required for the government.

International Regulations: There are also some international organizations influencing our Foreign Exchange transactions. Few of them are discussed bellow: ICC: International Chamber of Commerce is a world wide Non-Governmental Organization of thousands of companies. It was founded in 1919. ICC National committees throughout the world present ICC views to their Governments and alert Paris Headquarters about national business concerns. ICC has issued some publications like UCPDC, URC and URR etc., which are being followed by all the member countries. There is also an international Court of Arbitration to solve the international business disputes.W.T.O.: World Trade Organization is another International Trade Organization established on 1st January 1995. GATT (General Agreement on Tariff & Trade) was established on 1st January 1948. After completion of its 8th round, the organization has been abolished and replaced by WTO. This organization has vital role in international trade through its 124 member countries.

3.4 Letter of credit

A letter of credit is a letter issued by a bank (know as the opening or the issuing bank) at the instance of its customer (known as the opener) addressed to a person (beneficiary) undertaking that the bills drawn by the beneficiary will be duly honored by it (opening bank) provided certain conditions mentioned in the letter gave been complied with. The following diagram brings out clearly the operation of letter of credit:

Flowchart of Letter of Credit Operation

Classification of Letter of Credit:

In different considerations there are many kinds of L/Cs. Some of them are discussed bellow:

Irrevocable L/C: Irrevocable L/C cannot be amended or cancelled without the consent of the beneficiary or any other interested parties. Banks commonly open this type of L/c.

Revocable L/C: This kind of L/C 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.

Add-confirmed L/C: When a third bank provide guarantee to the beneficiary to make payment, if Issuing Bank fail to make payment, the L/C is called Add-Confirmed L/C. In case of a confirmed 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: It is a normal clause L/C without third banks confirmation.

Revolving L/C: 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 the L/C. For example, an L/C opened for USD 1000 and shipment effected for USD 500, now the L/C restored for full value i.e. there is scope to effect further shipment of USD 1000 revolving L/C may be opened to avoid difficulties of opening new L/C. This L/C is not allowed in our present import policy.

Transferable L/c: If the word Transferable incorporated in an L/C, then the L/C is transferable. The 1st beneficiary can transfer transferable L/C 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.

Restricted L/C: If advising and/or negotiation of an L/C are restricted to a particular bank, the L/C is called a restricted L/C.

Red Clause L/C: A red clause L/C is an L/C, where a special clause is incorporated into it that authorizes the confirming or any other nominated bank to make advances to the beneficiary, before presentation of the documents. In other words this is an L/C, where the Issuing Bank authorizes the negotiating bank to provide pre-shipment finance to the beneficiary. The L/C is called red-clause because, the special clause was originally written in red-ink to draw attention to the unique nature of this documentary credit. Red clause L/C is not allowed in our present import policy.

Green Clause L/C: It is an L/C, where the Issuing Bank authorizes the Negotiating Bank to grant storage facilities to the beneficiary. The special clause was originally written in Green-ink, so the L/C is called Green Clause. In both the case of Red Clause and Green Clause L/C, if the exporter fails to ship the goods the financing bank has the right to demand repayment from the Issuing Bank and that bank would have a similar right of recourse against the applicant.

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.

Straight Documentary Credit: Under the irrevocable straight documentary credit, the obligation of the Issuing Bank is extended only to the beneficiary, in honoring draft(s)/ documents and usually expires at the counter of the Issuing bank. This L/C. does not authorize any body to negotiate, purchase the documents. This L/C. is available for payment only at the Issuing Banks counter, not available for negotiation.

Irrevocable Negotiation Documentary Credit: This L/C. is available for negotiation by a nominated bank/any bank and expiring for presentation of document at the offices of Negotiating bank. The Issuing Bank is bound to reimburse the Negotiating Bank, if it negotiates the documents complying with the credit terms.

With Recourse and Without Recourse to Drawers: These terms are related with bill of exchange. If the L/C allows a bill of exchange with recourse to the drawer, that means the Negotiating Bank has the right to claim the amount back, from the drawer, if the B/E is dishonored by the drawee. And in case of without recourse, the Negotiating Bank has no right to claim the amount back. From the drawer, if the B/E is dishonored by the drawee. So in case of without recourse the negotiating Bank would be care-full to negotiate the document.

L/C can be classified according to source of fund:

Back-to-Back L/C: Back to Back import L/C is backed by another export L/C. where import of the goods to be made to execute the export L/C and payment of Back to Back bills to be made normally from related export process, the import L/C is called Back to Back L/C.

A Back-to-Back L/C is opened against an irrevocable L/C. The L/C is lien marked with the back-to-back L/C issuing branch. Back to Back L/C may be opened up to 75% of export L/C, (FOB value) and up to 80% where export price is more than USD 60/- per dozen in case of garments industries.

Cash L/C: Where payment of import bills under L/C is being made from (i) Foreign Currency reserve in Bangladesh Bank or (ii) F.C. account with authorized Dealer, the L/C is called Cash L/C.

Barter L/C: Where final settlements are being made through commodity exchange between the nations, the L/C is called Barter L/C.

3.5 Different parties involved Foreign exchange transaction:

Normally the following parties are involved to a documentary credit:

Importer:

The buyer or the importer is he who initiates the credit. He applies to bank for issue foreign a documentary credit. The obligations between the importer and the issuing bank are governed by the application-cum-agreement submitted by the importer to the bank. He is bound to reimburse the bank, which effects payment or incurred a deferred payment undertaking or has accepted or negotiated under the credit as per terms, and to take up the documents.

Opening Bank:

The issuing or opening bank is the importers bank and it issues a letter of credit normally pursuant to the terms of sales contract as set out in the application for the credit by the importer. The issuing bank should nominate the bank, which is authorized to pay or to accept drafts or to negotiate, unless the credit allows negotiation by any bank.

Exporter:

The seller or exporter is the beneficiary of the credit. The letter of credit is opened in his favor and addressed to him. The beneficiary has the obligation to make export as per the contract and produce the documents as required by the credit.

The Advising Bank:

It is the bank in the exporters country (normally the exporters bank), which is usually the foreign correspondent of importers bank through which the L/C is advised to the supplier. If the intermediary bank simply advises/notifies the L/C to the exporter part, it is called Advising Bank.

The Confirming Bank:

If the advising bank also adds its own undertaking to honor the credit while advising the same to the beneficiary, he becomes the confirming bank. In addition, becomes liable to pay for documents in conformity with the L/Cs terms and conditions. The liability of the confirming bank is the primary liability and it is not contingent on the fulfillment of the obligation by the issuing bank.

The Accepting Bank: Accepting bank is the bank nominated in the letter of credit to accept bills drawn under the credit. If the bank so nominated accepts the nomination, its responsibility to the beneficiary is not only to accept the drafts drawn but also to make payment on their due dates.

The Paying Bank: Paying bank is a bank in the beneficiarys country nominated in the letter of credit to make payment against documents to be tendered under the credit. Paying Bank must examine all documents with reasonable care to ascertain that these are drawn in accordance with the terms and conditions of the credit.

Reimbursing Bank: The issuing bank may indicate in the credit the name of a bank. From whom the paying/negotiating bank can obtain reimbursement. The documents are sent to the issuing bank. The negotiating/paying bank simultaneously makes a claim with the reimbursing bank for the payment effected. Normally the reimbursing bank would be the bank with which the issuing bank maintains an account.

The Transferring Bank:

If the L/C is transferable, then the 1st beneficiary of the L/C may transfer the L/C to the 2nd beneficiary, through a bank nominated by the Issuing Bank. This bank is called the Transferring Bank.

3.6 Document required for Foreign Exchange Transactions:Export-Import transactions ask for the following documents:

Transport Documents

Insurance Documents

Commercial Invoice

Other Documents Transport Documents:

Transport documents comprises of Bill of Lading, Airway Bills, Truck Receipts, Railway Receipts and Inland Waterway Receipts.

Checking points of this document are:

The Bill of Lading is issued/endorsed to the order of Negotiating Bank.

Bill of Lading is clean, showing Shipped on Board notation, marked Freight

Prepaid [For CFR Basis] and Freight Collect [For FOB Basis], not short form, Blank back or pre dated.

The Bill of Lading appears the merchandise covers in Commercial Invoice.

The port of Shipment, Destination, Shipment Date, Name of consignee,

Shipping Mark [if any] appears on the Bill of Lading are as per LC term.

Bill of Lading is signed by the carrier company or his agent.

Commercial Invoice:

Checking points of this document are: The invoice dated and signed by the beneficiary.

The invoice is issued to the party concerned as stated in the LC.

Description of goods is as stated in the LC.

Unit price mentioned as stated in the LC.

Proper Trade-Term is mentioned. Insurance Documents:Checking points of this document are (in case of CIF basis):

The Insurance Policy is valid.

The policy is issued in the name of LC Issuing bank a/c: importer.

The policy is signed by the authorized official of the Insurance Company.

The policy is in negotiable form, duly stamped and dated prior the BL date.

Description of goods, name of carrying vessel shown in Insurance Policy are same as shown in BL.

The policy covers Transshipment [if allowed in LC] clause.

Policy covers 10% above the value of consignment.

Policy indicates where and in which currency the claim [if any] will be settled.

Other Documents:

As per UCP 500, other documents comprises of all other documents other than Transport Documents, Insurance Documents and Commercial Invoice.

Certificate of Origin: Checking points of this document are:

The Certificate is issued by the concerned authority of exporting country as stated in the LC [usually such Certificates are issued by the Chamber of Commerce & Industry of exporting country].

Beneficiarys Certificate: Checking points of this document are:

The certificate issued by the beneficiary stating the particulars as stated in the LC.

Packing List: Checking points of this document are:

The Certificate is issued and prepared by the beneficiary as per instruction given in the LC.

Inspection Certificate: Checking points of this document are:

The Certificate is issued by the competent authority as approved for that country.

The Inspection Certificate can also be issued by the beneficiary/manufacturer if allowed in the LC.

The Certificate is signed-sealed certificate the contents as required and issued prior to shipment of the goods.

Bill of exchange: Checking points of this document are:

The bill of exchange is drawn by the beneficiary as mentioned in the LC duly signed and dated.

The amount is identical with the amount of Commercial Invoice.

The amount mentioned in figure and words are consistent.

The bill of exchange is in order and/or endorsed properly.

3.7 Import:

Import trade in Bangladesh is controlled under the Import and Export control Act 1950. Authorized Dealer Banks will import the goods into Bangladesh following the import policy, public notice, F.E. circular and other instructions from competent authorities from time to time. The whole import functions of the branch as far I have understood are discussed bellow:

Procedure of importImport of merchandise essentially involves two things:

1. Bringing of goods physically into the country

2. Remittance of foreign exchange towards the cost of the merchandise

The Ministry of Commerce through the Chief Controller of Import regulates physical import and Exports being office at the important trade center while Bangladesh Bank regulates the payment for the imports through its various departments. The following are the steps involved in import of merchandise into Bangladesh.

Registration of importer: In terms of the Importers, Exporters and Indentors (Registration) Order 1981, no person can import goods into Bangladesh unless he is registered with the Chief Controller of Import and Export or exempted from the provisions of the said order. So the following documents are required to be submitted to the licensing authority for registration as importers:

i. Questionnaire form duly filled in and signed

ii. Income tax registration certificate

iii. Trade License from the Municipal or Local Authority

iv. Bank certificate

v. Nationality certificate

vi. Partnership Deed where applicable

vii. Certificate of Registration with the Registrar of Joint Stock Companies and Memorandum and Articles of Association in case of Private and Public Ltd. Co.

viii. Certificate from the Chamber of Commerce/Registered Trade Association

ix. Ownership documents or rent receipts of the place of business

x. Any other documents required under the relevant import policy.

After submission of the above documents and payment of requisite fees, if the documents are found in order and the C.C.I & E is satisfied, the Import Registration Certificate (IRC) is issued to the applicant-importer.

Import Policy: The Chief Controller of Imports and Exports announces the Import Policy concerning various aspects of imports. The main points covered by the import policy are the following:

i. Items eligible for imports during the shipping period.

ii. Procedure for formation of groups.

iii. The dates for opening of L/C and shipment.

iv. The rules for re-validation of the Licence/LCA and the L/C.

Licensing for Imports:Most imports into Bangladesh require a license from the Licensing Authority. In recent years, the task of licensing has been delegated to the commercial banks. It is done by LCA (Letter of Credit Authorization Form). Blank LCA forms can be obtained by the importer from their banker. The following documents are required to be submitted by the import to his banker.i. LCA Form property filled-in and signed.

ii. LC Application.

iii. Purchase Contract in the shape of an Indent or Proforma Invoice.

iv. Insurance Cover Note.

v. Membership Certificate from a chamber of Commerce and Industry or Registered Trade Association.

vi. Import Registration Certificate (IRC).

On receipt of LCA Form and the required documents, the bank should carefully scrutinize the documents.

An Opening of Letter of Credit: Importer applies to the bank to open L/c in favor of foreign supplier. The bank has its printed application form and the importer should carefully fill in this form. On receiving this application, the bank scrutinizes it to ensure that: Whether the customer fulfils all the required conditions/criteria to be eligible as an importer as per provisions of the Import Policy Order and Guidelines for Foreign exchange Transactions in force and the supporting documents/papers required are submitted.

Whether the items for import of which the documentary credit need to be opened is permissible i.e. not included in the negative/restrictive list as per Import Policy order in force.

Whether there is any legal/technical defects/restrictions in opening the Letter of Credit under the various sources as intended by the customer.

Whether we are holding satisfactory credit report on the beneficiary to satisfy the relevant provisions of the guidelines for Foreign Exchange transactions.

Whether credit facility has already been approved by the Executive Committee of the Board of Directors.

On receipt of the L/C application over the counter or through dispatch/mail section, the receiving date and time to be recorded on the L/C application.

Signature of the customer on the L/C application to be verified by authorized/ designated officer.

L/C application with all supporting papers to be checked to ensure that the required papers are as per requirement of Guidelines for Foreign Exchange Transactions and are consistent to each other.

L/C application must show the following clearly:

-Full name & address of the beneficiary.

-The amount of the credit.

-The Credit whether to be irrevocable or confirmed irrevocable.

-Whether the credit is available by payment, acceptance or negotiation.

-On which party the drafts are to be drawn and the tenure of such drafts.

-A brief description of the goods, including details of quantity and unit price.

-Whether freight is to be prepaid or not.

-The port of shipment and the destination.

-Whether the transfer of the goods from one vessel to another, or from one mode of transport to another, route, is prohibited.

-The last date for shipment.

-The date and place of expiry of the credit.

-Negotiation period.

-Details of the documents required and how those are to be dispatched to the issuing bank i.e. by ordinary mail/courier.

-Whether the credit is to be a transferable one.

-How the credit is to be advised i.e. by mail/telex.

Letter of Credit authorization form duly filled in and signed.

Indent or Proforma Invoice issued by Seller or his agent (Indenter) duly counter signed by the customer.

Insurance certificate or policy (Marine/Air/Mail/Truck) covering the goods at 10% above L/C value for the whole journey/shipment together with unconditional premium paid receipt.

Prior permission/registered LCA form, No objection/any other certificates from the concerned authority as required as per provision of the Import Policy Order.

I.M.P. form duly filled in and signed.

In case the L/C application is not complete or in consistence or the required papers are not submitted, the customer should be promptly contacted for rectification of the defects.

When the L/C application is found to be in order and the client has sufficient approved credit line for opening L/C a L/C number is to be allotted by journalizing/the particulars of the entry i.e. L/C and expiry date, advising/confirming bank etc. in the L/C register/data base.

In case the client does not have approved credit line for opening L/C the Manager of the Branch shall take necessary arrangement to submit proposal to the Credit committee/Executive Committee of the Board and keep pending of opening the L/C till its approval. On receipt of approval the Manager shall issue a sanction letter to the client providing copies of the same to Credit Division.

If Foreign Exchange is intended to be bought from Bangladesh Bank against LCAF, it has to be registered with Bangladesh Banks Registration Unit located in the concerned area office of the CCI&E.

To avoid loss due to fluctuation of exchange rates, hold a declaration of the client that exchange fluctuations would be on account of the importer.

To set-up a file for the L/C.

To prepare the Letter of Credit either in mail or telex format with all material particulars including the other terms and conditions in accordance with the customers instruction together with the related reimbursement instruction in standard format (Mail/Telex as the case may be) for sight L/C unless condition is given in the L/C that remittance will be effected by the bank directly on receipt of shipping documents.

To prepare the vouchers to record the contingent liability for the L/C opened and realize margin, commission, telex charges, postages etc. as per banks schedule of charges/sanction letter.

To furnish all the L/C related papers including copy of the prepared letter of credit and copy of vouchers in the L/C file.

Before Dispatching/ Transmitting the L/C:

Check whether the opening of the Letter of Credit is approved by the competent authority.

Review all documents including the Letter of Credit and vouchers.

If found in order, sign the letter of credit including the accounting vouchers.

The original L/C must be signed jointly by two authorized signatories.

Amendment to L/C :

Not frequently the letter of credit opened by a Bank, needs amendment either because the term and condition incorporated in the L/c conflict with those of the underlying contract between the buyer and the seller or the buyer and seller agree, at a later date. The bank would need a written request from the importer who generally makes the request after obtaining consent of the supplier. Such amendments will of course be effective if all the parties to the L/c, namely the L/C Opening Bank, the advising bank and the beneficiary agree to it.

Scrutiny and Lodgment of Documents: Once beneficiary sets about the task of collecting and preparing the documents stipulated in the L/C. He collects Bill of Lading from the carrier company, prepares the invoice, obtain certificate of origin, packing list, bill of exchange and so on and presents these to his banker. After that, the negotiating bank forwards the supping documents to the opening bank.

Verification and Lodgment of Documents by the L/C Opening Bank :On receipt of the shipping documents from the negotiati8ng bank, the L/c Opening Bank should carefully examine these to ensure that they confirm to the term of the credit:

a. The documents have been negotiated within the stipulated date.

b. The amount drawn does not exceed the amount authorised in to credit.

c. The merchandise is properly invoiced.

d. The bill of Lading is clean, shipped on board, showing freight prepared and endorsed to the order of the issuing bank shows the port of shipment, the port of destination, the name of the consignee and the date of shipment are in keeping with the term of the credit.

e. Is properly signed by the shipping company.

f. The Certificate of Origin.

g. Other documents like weight list, packing list, pre-shipment Inspection Certificate etc.

If thereby any discrepancy in the documents, the bank should immediately advise the importer to seek his acceptance of the document. If the importer refuses to accept the documents the bank should advise the negotiating bank by telex or SWIFT within 7 working days for instruction with regard to disposal of the goods and the documents.

On being satisfied that the documents are in order or in the event of discrepancies, these are acceptable to the importer, the bank lodge the bill in PAD. After passing necessary accounting entries in the book of accounts, necessary endorsement is made in the L/CA indicating the amount of the remittances.

After the lodgment, the bank asks the importer to retire the bill. After retirement the amount of remittance towards cost of the merchandise is reported to Bangladesh Bank on Form IMP.

Shipping Guarantee:Shipping guarantee is a Letter of Guarantee/Indemnity issued jointly by importer (consignee) together with a bank (L/C opening Bank) in favor of a commercial carrier or their agent whereby they are authorized to release imported merchandise (title being in favor of the co-issuer Bank) to a consignee in the absence of original shipping bill i.e. bill of Lading/airway bill while the co-issuer furnish an assurance/undertaking to submit the original Bill of Lading/airway Bill to the carrier as soon as the same is in their possession. However against the issuance of a letter of indemnity, the bank should obtain a counter indemnity signed by the importer in favor of the issuing bank whereby they assume full responsibility for any obligation the bank assume in issuing the shipping guarantee and also undertake acceptance/payment of documents/draft under the related Letter of Credit irrespective of whether those are discrepant or not.

Before Issuing the Shipping Guarantee:

I. Head Office approval is essential in cash where the customer has not adjusted the related import liabilities or do not have approved LIM/LTR facility limit.

II. The Branch shall obtain counter indemnity from the customer in favor of the Bank.III. The customer shall submit an unconditional undertaking to accept the related shipping documents even with any discrepancies.

IV. The Shipping Guarantee/Letter of indemnity must be signed jointly by two authorized signatories.

Procedure:On receipt of application from a customer to issue a shipping guarantee the following procedure will be followed:

i.Signature of the customer on the counter Indemnity/undertaking to be verified by the authorized officer.

ii.Verity the contents of the Customers Indemnity as regard L/C No., name of drawee, merchandise description, amount, Bill of Lading/Airway Bill No. shipping mark etc. with the copies of Invoice and bill of lading against the terms of the L/C to ascertain that those are identical and in line with L/C terms.

iii.Check whether the Letter of guarantee is properly stamped.

iv.If found alright journalize/capture the particulars of the letter of indemnity in the shipping guarantee register/data-base after alloying an indemnity number serially in numerical order.

v. Verify signature of the customer on the letter of Indemnity submitted for counter signature by the bank officers with their official seal.

Important points to prepare an L/C:

To prepare an L/C the branch takes care on the following points:

L/C number: The branch will put a number for each L/C., which is the serial number of the L/C for a particular year. First L/C of MBL Elephant Road branch in 2002 may be numbered likeMBL/Elephant Road/1742010401.

Place and date of issue: L/C must indicate the place and date of issue.

Date and place of expiry: L/C must have an expiry date. This is the last date of presentation of document under the L/C. Place of expiry of the L/C also to be mentioned in the L/C. Normally it should be the counter of the Negotiating Bank.

Shipment date: There should be a last shipment date after which shipment is not allowed. Bank may also fix-up a first shipment date before which shipment will not be allowed.

Presentation period: Issuing bank will allow a period within which exporter must present the export documents to the negotiating bank or to any other nominated bank. This may be 15 days from the date of shipment. Maximum may be allowed one month, but within the expiry date of the credit.

Applicant: Name of the applicant with business address to be put in the L/C.

Beneficiary: Name of the beneficiary with address also to the indicated in the L/C.

Advising Bank: Name of the advising bank with address to be mentioned in the L/C.

Amount: Every L/C must show the amount of the L/C. The word About may be used with amount, which means 10% more or less of the said amount.

Part-shipment and Trans shipment: Issuing bank also clearly indicate in the L/C whether part-shipment and trans shipment are allowed or not.

Availability: L/C must indicate whether the credit is available by payment, by negotiation or by acceptance.

Port of shipment and port of destination: L/C will also indicate from where shipment to be made and where goods to be delivered.Tenure of the draft: Whether the draft to be drawn at sight or usance, also to be cleared in the L/C.

Documents required: Bank will give the list of required documents and data content therein. Each and every term must be supported by the documents, because any term without asking document is valueless.

Payment: When, where and by whom payment is to be made, also to be indicated in the L/C.