Financial Performance of National Bank Limited
CHAPTER: 1 INTRODUCTION OF THE REPORT 1.0 Origin of the report: Every student of Master of Business Administration (MBA) Program has to undergo a practical orientation (Internship) in any organization for fulfilling the requirements of program. In order to fulfill this requirement of the Internship program I have chosen National Bank Limited. The main purpose of the program is to know the real world situation. The tropic of my report is “Financial Performance of National Bank Limited�. In this regard I have opportunity to make my internship in National Bank Limited (Elephant Road Branch). The National Bank Limited is a scheduled private commercial bank established on 23 rd March, 1983. During this short span of time, the bank has been successful to position itself as a progressive and dynamic financial institution in the country. National bank was born as the first hundred percent Bangladeshi owned bank in Private sector. The then President of the People’s Republic of Bangladesh Justice Ahsanuddin Chowdhury inaugurated the bank formally on March 28, 1983. NBL was first domestic bank to establish agency arrangement with the world famous Western Union in order to facilitate quick and safe remittance of the valuable foreign exchanges earned by the expatriate Bangladeshi nationals. NBL was also the first among domestic banks to introduce Master Card in Bangladesh. Since the very beginning, the bank exerted much emphasis on overseas operation and handled a sizeable quantum of homebound foreign remittances. The Bank established extensive drawing arrangement network with banks and exchange companies located in important countries of the world. The success status of the National Bank Limited is determined by the effectiveness of the Foreign Exchange Operation. Foreign exchange plays an important role in any country. The foreign exchange market has played a vital role in the last decade in guiding the purchase and sale of the goods, service and raw materials globally. The market directly affects each country bond, equities, private property, manufacturing and all assets that are available to foreign investors. In the foreign exchange, I saw that we had to import a lot more than we export. Other than export the remittance by non-resident Bangladeshi and foreign aid is another source of foreign currency. In the foreign exchange business exchange rates has been declared floating and central bank has taken its full control from the market.
1.1 Importance of commercial banking in the economy of Bangladesh: Banking system occupies an important place in a nation’s economy because of its intermediary role; it ensures allocation and reallocation of resources and keeps up the momentum of economic activities. A banking institution is indispensable in a modern society. It plays a pivotal role in the economic development of a country and forms the core at the money market of any country. In a developing country like Bangladesh the banking system as a whole has a vital role to play in the progress of economic development. The overall purpose of banking is to collect money from surplus unit and transfer it to the deficit unit. The subject of my report is “Financial Performance of National Bank Ltd�. So my focus is mainly on financial activities of NBL for contributing to the profit of the bank. Foreign trade plays an important role in economic development of a country. The economic development of a country is comprised with domestic production and foreign trade (especially the balance of export and import). It plays a vital role in the balance of payment (BOP) of a country. Surplus (export-import) is favorable for a country. Although Bangladesh usually has deficit BOP (import-export) it has to continue foreign trade. Because it needs to import the essential goods and services, which are not produced domestically. In this sense, foreign trade is essential for each and every country for its complete economic development Devaluation or exchange rate fluctuation may influence the export import business and inward remittance. To conduct foreign trade of a country, bank plays an important role; usually this duty is played by commercial banks. As a commercial bank, National Bank Limited (NBL) is also engaged in the foreign trade of Bangladesh. Foreign trade operations play a significant role in the overall business of NBL in order to strengthen its position. NBL has further consolidated its relationship with the existing network of international correspondents. Banking sector is one of the fastest growing sectors in our country. There are more than 50 banks operating in BD which includes local and foreign bank. Some new banks are coming in the market. Therefore, the banking industry is very much lucrative and at the same time very competitive too. All banks are offering newer products and facilities to attract the customers and retain them. To get new customers and hold the existing customers depend mostly on satisfying them. If any bank can satisfy its existing customers, they will not leave it, as there is a question of security. Attracting new customers depends on the launching of new products and lucrative offers to them, in the past, theorists emphasized on satisfying the customers but they now are emphasizing on delighting the customers. To delight a customer, a bank will have to give more than its competitors do. Nowadays customer satisfaction has become a very vital issue in business arena. It directly affects the profitability of a firm. Satisfied customers mean the profitable customers. Therefore knowing the customer satisfaction level is very important. From this study, the bank authority will be able to detect their problems in providing and what people are expecting from them. In this study, I tried to find out their financial performance. From the findings of the study, the management would be able to have a real scenario of their present condition and take proper steps to make a better and profitable future.
1.2 Objectives of the Study The result of a study depends upon the proper selection of the objectives. Before starting the fieldwork, it is essential to set up the objectives and then arrange the total procedures according to the objectives. I have some objectives about preparing the report. Some of these are related directly with welfare of the bank and some are related with my program. These can be divided into the following types – • •
Broad Objective Specific Objective
1.2.1 Broad Objective: The broad objective is to evaluate the financial performance of the bank through ratio analysis. 1.2.2 Secondary Objectives: The secondary objectives of the study are to gather practical knowledge regarding banking system and its operations. To fulfill these objectives, some specific areas were studied which include the following: • • • • • • • • • • • • • •
To present an overview of NBL; To know how the services could be made more customers responsive; To apply theoretical knowledge in the banking sector; To find out the position of NBL in the banking industry; To know about the remittance of funds; To know about the general banking performance of the NBL; To know the performance of NBL in foreign exchange aspect. To find out the growth rate of export and import operation of NBL. To examine the rules and regulations of NBL; To find out existing problems of the bank; To know the risk factors and SWOT relating to the bank; To formulate alternative strategies for solving the problems; To formulate a contingency plan as a safeguard for changing situation; To study the existing overall banker customer relationship.
1.3 Scope of the study: My Internship period was about three months. This period is not enough to learn or have practical orientation of every banking activity. I was assigned to the Elephant Road Branch of National Bank Limited. I have had an opportunity to gather experience by working in all departments of the branch. For making this case study survey were conducted on Head Office and Elephant Road Branch of National Bank Limited.
The report will cover the all departmental activities as performed by National Bank Ltd. Analysis of the facts and figures and conclusion will be drawn based on the findings. These will help for the development & in the audited financial statements of the National Bank Ltd. • • • • •
An overview of the National Bank Ltd. General Banking activities of the National Bank Ltd. Foreign Exchange activities and its contribution to total income. Loans and advances of the National Bank Ltd. Main focus of this report is financial performance of the bank on the basis of Annual report data which was funded by the banking activities.
1.4 Methodology: Methods followed to perform a job or conducting activities to complete a task is called methodology. Data collection is very important to prepare a report. The report was written on the basis of information collected from primary as well secondary sources. The primary information was collected by discussions with the customers of bank as well as with some officials of the bank. The Secondary information was collected from the bank’s records, corporate newsletter, branch manuals, various publications of the bank and Bangladesh Bank. Annual report (Income Statement) and made discussion with the officials of Elephant Road Branch, international division and other department about methods and procedures of export-import business, problems related to foreign exchange transactions etc. I also had to talk to the exporters and importers for getting impression about NBL. Sources of data: In this report, I have relied on both primary and secondary sources of data. The sources are as follows: •
Primary Sources: • • • •
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Oral and informal interview of officers and employees in National Bank. Practical work exposure achieved from different desks of the bank. Informal interview with the exporters and importers. Personal observation
Secondary Sources: • • • • • •
Annual report of National Bank Ltd. Printed forms and documents supplier by NBL. Relevant books, journals, Booklets. Booklets of international Division of NBL. Various Web sites related with this topic. Officials records of National Bank Ltd.
For successful completion of the report, I will use the following tools and techniques: •
I will present the report in a descriptive as well as analytical way.
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Various ratios- ROA, ROI, ROE, Leverage Ratio, Profitability Ratios etc. will be used. Various graphs and tables will be used for analyzing the collected data. For analysis I use different types of statistical tools such as Regression Line, Correlation of Coefficient, and Coefficient of variation. These methods help me to finds the true calculation. But as statically methods, we know those methods have some limitation, which also may affect the calculation of this report .
Questionnaire Design: Questionnaire designing is a very tough task as it will be worthless if it does not serve the objective of the survey. In designing the questionnaire, I had to keep in mind all these things. I have used normally 5-point scale. But for the questionnaire in which I wanted to know the satisfaction level directly, there I used 4-point scale, because if I would use the option "neutral" some respondents would use it to avoid giving direct answer. 1.5 Limitations of the report: Every thing has its limitations. My report is not also out of weakness. There were several constrains while preparing this report. I have considered the following causes as the limitations of the study. •
Although I have obtained wholehearted co-operation from employees of NBL, Elephant Road branch but they could not manage enough time to deal with my report.
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The main limitation for me was the fact I was working away from the foreign exchange department for one month for the internship program. Therefore, I have too short time to understand the process of foreign Exchange in NBL, which is not sufficient to have a complete knowledge about the topic.
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The annual reports are the main secondary source of the information but this information was not enough to complete the report.
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The data in some cases may suffer from lack of reliability to some extent.
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The study was not done very successfully due to inexperience.
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National Bank Limited has no regular publication.
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It was very difficult to identify the present situation of the organization in such a small period of time.
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Another limitation of this report is Bank’s policy of not disclosing some data and information for obvious reason, which could be very much useful.
Despite the limitations, I have tried my best to prepare the report in a fruitful manner.
The next chapter deals with the Profile of National Bank Limited.
CHAPTER: 2 PROFILE OF NATIONAL BANK 2.0 Backdrop of the Bank: The banking sector of Bangladesh comprises of three categories of schedule banks. These are nationalized commercial banks (NCBs), private commercial banks (PCBs) and foreign commercial banks (FCBs). Private commercial banks are again divided into three categories- First generation, Second generation and Third generation. National bank falls into the first generation segment and undoubtedly leads its own generation. As an intern from business discipline with major in finance I have got the opportunity to work with this bank and try to put my effort to make a depth study. Banking system occupies an important place in a nation’s economy. Banking institution is indispensable in a modern society and it plays a vital role in the economic development of a country. Against the background of liberalization of economic policies in Bangladesh, National bank Limited emerged as a new commercial bank to provide efficient banking services with a view to improving the socio-economic development of the country. National Bank Limited was born as the first hundred percent Bangladeshi owned Bank in the private sector. From the very inception it is the firm determination of National Bank Limited to play a vital role in the national economy. NBL are determined to bring back the long forgotten taste of banking services and flavors. Want to serve each one promptly and with a sense of dedication and dignity. The then President of the People's Republic of Bangladesh Justice Ahsanuddin Chowdhury inaugurated the bank formally on March 15, 1983 under Companies Act 1913 (Companies Act. 1994) to carry out banking business. And it obtained license from Bangladesh Bank for carrying out banking business on 22 March 1983. But the first branch at 48, Dilkusha Commercial Area, Dhaka started commercial operation on March 23, 1983 with authorized capital TK. 10.00 million and paid up capital of TK. 80 million was subscribed by the sponsors/directors and TK. 4.00 million was subscribed to the government and remaining TK. 36 million has been fully subscribed by the public. The 2nd Branch was opened on 11th May 1983 at Khatungonj, Chittagong. During this short span of time, the Bank has been successful to position itself as a progressive and dynamic financial institution in the country. NBL has its prosperous past, glorious present, prospective future and under processing projects and activities. Established as the first private sector Bank fully owned by Bangladeshi entrepreneurs, NBL has been flourishing as the largest private sector Bank with the passage of time after facing many stress and strain. The member of the board of directors is creative businessman and leading industrialist of the country. To keep pace with time and in harmony with national and international economic activities and for rendering all modern services, NBL, as a financial institution automated all its branches with computer network in accordance with the competitive commercial demand of time. Moreover, considering its forth-coming future the infrastructure of the Bank has been rearranging. The Bank had been widely welcome by the business community, from small entrepreneurs for forward-looking business outlook and innovative financing solutions. Thus, within this very short
period it has been able to create an image for itself and has earned significant reputation in the country’s banking sector as a bank with vision. The company Philosophy –“A Bank for Performance with Potential” has been exactly the essence of success of this Bank. One of the main objectives of the bank is to be a provider of high quality products and services to attract its potential market .The bank also caters to the needs of it corporate clients and provides a comprehensive range of financial services to national and multinational companies. National Bank Limited has been licensed by the Government of Bangladesh as a scheduled Bank in the private sector in the process of the policy of liberalization of banking and financial services or Bangladesh. In view of the above, the Bank has, within a period of twenty five years of its operation, achieved a remarkable success and has always met up capital adequacy requirement set by Bangladesh Bank. There are eighteen Sponsors involved in creating National Bank Limited; the sponsors of the Bank have a long heritage of trade, commerce and industry. They are highly regarded for their entrepreneurial competence. The sponsors happen to be member of different professional groups among whom are also renowned banking professionals having vast range of banking knowledge. There are also members who are associated with other financial institution like companies, leasing company’s etc. The board of directors consists of fourteen members elected from the sponsor of the bank. And the board of directors is the apex body of e bank. All route matters beyond delegated owners of management are decided upon by or routed through the executive committee, subject to ratification by the board of directors. 2.1 Social Responsibility of this Bank: Banking is not only a profit-oriented commercial institution but it has a public base and social commitment. Admitting this true NBL is going on with its diversified banking activities. The bank set up National Bank foundation for extending charitable and beneficial social services to the society. National Bank has been able to manage sound position for it in innovative deposit schemes. NBL has performed well in the foreign trade. The volume of trade is growing in both import and export business. The bank is increasing its level of performance, which is evident in the increase of asset utilization of ratio, net profit, and asset portfolio. We observe that National Bank has a suitable position for its foreign exchange reserve, liquidity positions and relationship with financial institutions. But the bank cannot operate with its full capacity for its conservative nature. Despite the stiff competition in the banking industry, this bank also considers it essential for company to behave in responsible manner towards both the environment and society. This belief exists on two pillars. First, to be successful on a long-term basis, they need to trust their stakeholders-customers, shareholders, employee patrons and well-wishers and society. Behaving responsibility towards society and the environment strengthens this trust. Second, by taking ecological and social risks and reward into account.
This bank commitment has always been to behave ethically and to contribute towards the quality of life of our people, the local community and generally the society. The corporate social responsibility focuses on: •
Sustainable Banking products: These have introduced a number of banking products for people who have traditionally been excluded from the banking services. This National Bank has also offered SME banking products for marginal people. Small and marginal savers are encouraged to use banking services and attractive rates of interest are offered for small savers as well.
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Employment: NBL has been continuously creating new fields of employment every year by way of expansion of its business activities and branch networks. In 2009, the bank created employment for 305 personnel.
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Supporting Education: National Bank Foundation was established in 1989 for fulfilling responsibilities for welfare of the society .It has been running the National Bank public School and collage in Moghbazar, Dhaka. There are 892 students studying in the school section form class 1 to class 10, while there a total of 234 students in the collage section. In 2008, 53 students appeared at the SSC Examination and among them, 25 students
achieved Golden A+ while 32 students appeared at the H.S.C. examination out of which 4 students achieved Golden A+. The bank has been accommodating prospective graduates o recognized universities for completing their internship. NBL also awarded stipends and scholarships to the brilliant children of the employees of the bank.
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Rural Credit Program: Under its Rural Credit Program, NBL, with joint collaboration of the Barendra Bahumukhi Unnayan Katripakkha, has been providing improved technology, irrigation facility, agricultural equipments, etc. through disbursement of small credit to the farmers of three districts (Rajshahi, Naogaon, & Chapai Nawabgonj) of Rajshahi Division. A total of TK.133.70 million has been disbursed among 24,473 farmers under the program up to 31 December 2008. The rate of recovery is 95%. Besides, NBL disbursed TK.144.78 million and TK.32.05 million among small and medium entrepreneurs respectively under the Agro based Industries & Technology Development Project (ATDP) for setting up of agro based industries and extension of agricultural technology.
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Supporting Sports and Culture: National Bank Ltd. has a tradition of patronizing and sponsoring sports and cultural activities of the country. The “National Bank Volleyball league -2007” was arranged under patronization of the Bank. NBL has been arranging annual picnic for gathering and recreation of its executives, officers and staff. Besides, the Bank stands as a friend by the side of helpless people in times of
calamities. Thus, as a token of sincere fellow feeling and sympathy, NBL distributed winter clothes among the cold stricken destitute people in northern region of the country from its own funds and with one day's salary of the Officers and Executives of the Bank.
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Disaster and relief: NBL always extends its helping hands and stands by the suffering and helpless people in times of natural calamities. In 2007, NBL donated TK.40 Lac to help the victims of flood, TK.20 Lac for relief operation for landslide victims and TK50 Lac for Sidr victims to the relief fund of the Chief advisor and the Army Chief. The Bank has also taken a pilot project for post flood agricultural rehabilitation at Sirajgonj.
On 10th March, 2009 a Payment Order for Tk.25.00 Lac has been handed over to the Honorable Prime Minister as a donation/financial assistance to the bereaved family members of the martyred Army Officers killed in the BDR carnage held on 25th February, 2009. On 1st April, 2009, NBL donated Tk. 24.00 Lac to the Hon'ble Prime Minister to hand over the same to the family members of the martyred Army Officer which will be paid to 5 (five) families @ Tk. 40,000/- per month to each family for 1 year which will continue for 10 years. Thus total amount of donation will be Tk. 2.40 Crore.
NBL has always maintained their corporate social responsibility in various ways. NBL always appreciate various kinds of fair, festival and other gatherings organized by different private or public sectors. •
Assisting the rural economy: The bank is well aware of the socio-economic condition of the country. The bank has emphasized to expand its operation in rural areas to help boost the agriculture and rural economy. National Bank opened 11 branches in 2008 of which ten are located in rural areas. The bank provides collateral free loans to marginal farmers. Moreover, the bank has introduced collateral free festival small business loan and NBL small business loan to cater the need of small traders. Beneficiaries of this scheme are mostly from rural areas. The schemes are playing important role in changing the living standard of the small businessmen.
2.2 Divisions of NBL: Name of the divisions of NBL are as follows: •
Human Resource Divisions (HRD): It is one of the important divisions of the Bank. The Division formulates the draft policies of the Bank that is usually placed in the Board meeting to accept. This division controls all the administrative activities of the Banks. It is assigned to the responsibilities of recruitment, posting, transfer, promotion and development of human resources of the bank. They also maintain service record of the employees, take disciplinary action, look for the employee’s welfare, salary reconciliation, specimen signature etc.
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General Banking Divisions: General banking is the staring point of all the banking operations. This department carried out the most important and basic works of the bank. It also provides various instant saves to the customers. Administrative activities are mainly done in general banking division- To control these activities divisions’ issues necessary circulars. NBL other activities regarding general Banking are: • • • • • •
Opening New Branches, Issuance of power of attorney to the officer of the bank, Customer Service’s, Legal Affairs, General Correspondence with Bangladesh Cash affairs of the Bank.
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Internal Control and Compliance Division: The main responsibilities of this division are to maintain inter branch accounts and maintaining everything of all the branches all over the country including Head Office also. At the time of inspection the officers audit the books accounts, observe their performances and takes note on the issues, which they think, are not fit to the originality. In this way each and every branch all over the country comes under H/O's supervision.
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Financial Administration Division (FAD): This Division is responsible for maintaining and enhancing standard of customer service, mobilize deposits for the bank and deals with public relation affairs.
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International Division: International Division of National Bank Limited performs the responsibilities of foreign trade and foreign remittance on behalf of its branches. It plays a middlemen role between a Branch of NBL and Foreign correspondents in the case of Export-Import and other Foreign Exchange activities. Import Department: The import department deals with all the issues regarding opening, lodgment and payment of import letter of credit. Export Department: This department also deals with the matters relating to export such as advising, negotiation export documents etc.
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General Service: This department is maintaining all sorts of accounts of a bank, performs fund management, management information system, expenditure control etc. They procure and supply dead lock such as furniture, machinery, equipment, stationary, and vehicles, render some other common services and control central dispatch service.
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Information Technology Division: This division is assigned to lead the computerization of the bank. As all Branches of NBL expect sandpit become computerized this Division have a lot of activities to maintain all Branches. If any problem is faced by any officer of any Branches he/she can get help by telephone and get guidance from this Department. For significant problem this Division sends their related specialist to this Branch to correct this problem. On the other tins Division always helps by providing latest software of banking sector. They procure and maintain computer hardware, and software, conduct computer training for the employees.
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Card Division: The Bank sets this Division only for implementation purpose of its Credit Card service. This Division controls all activities dealing with operation of Credit Card. The Bank implemented its Credit Card operation on March 20, 1997.
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Marketing Division: It is directly related to the marketing of the Bank's services. It takes all the arrangement in Deposit mobilization, customer service related activities and all other marketing related activities. The main task of this Division is to formulate strategies for achieving the Bank's corporate objectives.
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Credit and Investment Division: This division is one of the most important divisions of a bank because it controls all loans and advances. One of the main objectives of the bank is to take part of the Capital market and Money market in the country. To achieve this objective the bank established investment division in which several departments are working.
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Law and Recovery Division: NBL has a separate Division for recovery of classified stuck up advances and to take lawful actions against these types of defaulters. The main task of this Division is to make proposal to take lawful action against the classified and stuck-up loan holders.
2.3 Network of the Branches: National Bank has 121 existing branches & 10 SME centers, and some other proposed branch all over Bangladesh to provide better services to their valuable customer. The bank has one or more branches in important & lucrative places so that the customer can easily reach to it. Because NBL
knows- speed & convenience of place and time for the customers are becoming important determinants in service delivery strategy. Some important location on NBL can represent their sense of place & timing. The objective of NBL is not only to earn profit but also keep the social commitment and to ensure its co-operation to the persons of all levels, to the businessmen, industrialists-specially who are engaged in establishing large scale industries by consortium and the agro-based export oriented medium and small scale industries by self inspiration. NBL as the largest private bank is committed to continue its endeavor by rapidly increasing the investment of honorable shareholders into asset. NBL has many international branches. Those branches are situated in all over the world. Those branches are in USA, Switzerland, Singapore, Malaysia, Oman, Qatar, UAE, Kuwait and Saudi Arabia.
Figure: Branches of National Bank limited in Bangladesh. 2.4 Management Hierarchy of NBL: Highly qualified and efficient professionals manage this bank. Board of Directors who also decides the composition of each committee determines the responsibilities of each committee. All
routine matters beyond delegated powers of management are decided by or routed through the executive committee, subject to ratification by the Board of Directors. In operating the organization, management plays a vital role. Many things are dependent on the management. So every organization should be very careful about the management structure. It depends on the company's business ethics. From the top to the bottom management body can be divided into four levels: • • • •
Top-level Management Executive level Management Mid level Management Junior level
The management processes are as follows: The strategic planning approach in NBL is top down. Top management formulates strategy at the corporate level and then it transmits through the division to the individual objects. Board of directors usually takes the decisions. Organization of National Bank Limited is based on departmentalization. The organization is divided into twelve departments headed by Executive Vice President or Senior Vice President. In the National Bank Limited the whole operation is centralized and authority is delegated by written guidelines which are as follows: • • • • •
Operation manual approved by head office, where each aspect or banking operation is elaborately defined. Advance manual including advance limit for different management level. Bad and doubtful recovery manual Code of conduct. Foreign banking guidelines, etc.
Different management position holders in departments and branches practice their authorized power in different cases. Employees are promoted to the higher position for their outstanding performance. It is found that the average length of a position held by an employee is around 5 years. Entry level recruitments process of the National Bank Limited is conducted in three ways such as one way is recruitment of probationary officer. Each probationary officer has one year probation period. After completion of probation period of the officer join as grade 3 officer. The career path of probationary officer is headed toward different management position. Second way of recruitment is to recruit non probationary officer, who join as an assistant officer. The career path of an assistant officer is lengthier than probationary officer. Last way is to recruit staff and sub stuff such as typist, driver, guard etc. The bank has strict control over its all organizational activities. Audits and inspection are conducted by different parties to cheek whether the bank implement these control system properly or not. The central bank conducts credit inspection by a team. The National Bank Limited has audit and inspection department to measure the internal operations. Audit team is sent to the
branches now and then and is responsible for preparing report that will be submitted to the chief administration to take necessary actions. Figure: Management Hierarchy of NBL. (Source: HRD, Head Office NBL)
Managing Director (CEO) Additional Managing Director Deputy Managing Director Senior Executive Vice President Executive Vice President Senior Vice President Vice President Senior Assistant Vice President Assistant Vice President Senior Principal Officer Principal Officer Officer Probationary Officer
Figure: Organizational configuration of Elephant Road Branch, National Bank Ltd. BRANCH MANAGER
2nd OFFICER
INVESTMENT SENIOR PRINCIPAL
FOREIGN EXCHANGE
GENERAL BANKING GENERALEXCHANGE BANKING FOREIGN
ASSISTANT VICE PRESIDENT
SENIOR PRINCIPAL OFFICER
OFFICER
SENIOR PRINCIPAL OFFICER
OFFICER
JUNIOR OFFICER
OFFICER
JUNIOR OFFICER
TRAINEE ASSISTANT OFFICER
JUNIOR OFFICER
TRAINEE ASSISTANT OFFICER
OFFICER
2.5 NBL Core Values: NBL's core values consist of 6 key elements. These values bind their people together with an emphasis that their people are essential to everything being done in the bank.
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Integrity: • • •
NBL protects and safeguards all customer information. NBL treats everyone in an equitable and consistent manner. NBL creates an environment which earns and maintains customer trust.
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Open Communication: • • •
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Performance Driven: •
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In NBL, customers and employees are judged in terms of their performance.
Continuous Self Improvement: •
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NBL builds customer relationship based on integrity and respect. NBL offers a full line of products and excellent service. NBL is committed to the prosperity of the customers and shareholders.
Continuous learning, self-challenge and strive make ways for self improvement of workforce at NBL.
Quality: NBL offers hassle free better service timely. NBL builds-up quality assets in the portfolio.
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Teamwork: •
Interaction, open communication and maintaining a positive attitude reflect NBL's commitment to a supportive environment based on teamwork.
With this discussion of the profile of National Bank Limited the next section deals with General Banking operation of National Bank Limited.
CHAPTER: 3 GENERAL BANKING 3.0 Introduction: Bangladesh is one of the least developed Countries. So the economic development of the country depends largely on the activities of commercial Banks. So I need to emphasis whether these commercial Banks are effectively and honestly performing their functions, their assigned duties and responsibilities. In thus respect I need to know about the general banking function of those Banks as well as the NBL. The general banking department does the most important and basic works of the bank. All other departments are linked with this department. It also pays a vital role in deposit mobilization of the branches. NBL provides different types of accounts, locker facilities and special types of saving scheme under general banking. Since bank is confined to provide the services everyday, general banking is also known as ‘retail banking’. For proper functioning and excellent customer service this department is divided into various sections namely as follows:
1) 2) 3) 4) 5) 6)
Account opening section Deposit section Cash section Remittance section Clearing section Accounts section
According to the law and practice, the Banker-Customer relation arises only from contract between these two. And opening of account is the contract that establishes the relationship between a banker and a customer. So this section plays a very important role in attracting customer and therefore should be handled with extra care. According to the international code of conduct banks should maintain the following steps regarding their customers Banks will act fairly and reasonably in all their dealings with their customers. Banks will help customers understand how their accounts operate and seek to give them a good understanding of banking services. Banks should maintain confidence in the security and integrity of banking and payment systems. 3.1 ACCOUNT OPENING SECTION: Account opening is the gateway for clients to enter into business with bank. It is the foundation of banker customer relationship. This is one of the most important sections of a branch, because by opening accounts bank mobilizes funds for investment. Various rules and regulations are maintained and various documents are taken while opening an account. A customer can open different types of accounts through this department. When a customer / organization / company / firm / society / club etc wants to open a bank account he/she has to filled a bank prescribed form and have to attach their organization’s documents are follows: Propr ietors hip Trade License
Partners hip
Private Limited
Trade License
Trade License
Photograph
Photograph
Photograph of Directors
Partnership Deed
Certificate copy of Memorandum and Articles of Association Certificate of Incorporation /Introduction List of Directors as per Return of Joint Stock Company with Signature Resolution for opening account with the bank
After observation of all the formalities/documents mentioned above, an applicant is required to deposit minimum Tk.500 for opening a saving bank account and Tk.1000 for opening a current
account, which is called initial deposit. As soon as this money is deposited, the bank opens an account in the name of the applicant. It should be noted that the permission of the competent authority for opening of an account is necessary. 3.1.1 Savings Account: National Bank Limited offers customers a hassle free and low charges savings account through the branches all over Bangladesh. This deposit is primarily for small-scale savers. There are certain limitations in Savings Account, i.e., customer can draw only twice a week, if they want to get interest on the deposited money. If a customer draws more than twice in a week he will not receive any interest for that month. Heavy withdrawals are permitted only against prior notice. Customer Benefit: • • • • •
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Cheque book facility Opportunity to apply for safe deposit locker Utility payment service Collect foreign remittance Transfer of fund from one branch to another byo Demand draft o Mail transfer o Telegraphic transfer Online banking service.
Saving Accounts Interest Rate is 4.5%. For getting interest: • • • •
Minimum balance must be TK. 2000/= for any circumstances. Frequent of withdrawal not more than twice in a week (week start from day 1 of current month). Maximum withdrawn in a single Cheque is 25% of balance. All Govt. Tax/Duty/ Levy will be applied on interest paid against the deposit.
3.1.2 Current Deposit Account: National Bank Limited offers customers current deposit facility for day-to-day business transaction without any restriction. The Elephant Road branch of National Bank facilitates customers with different types of current account. There are current accounts for individuals, proprietorship firms; partnership firms, Joint Stock Company, school, college, association, trust and N.G.O. Account opening form for these categories are different. Some terms and documents may differ but the overall process of account opening is similar to that of the saving account. Here I like to state what kinds of information to be furnished in the form and which documents customer should provide. Current Account (individual): Elephant Road branch uses the forms distributed by the NBL head office for opening a current personal/ individual account. A customer should meet the following requirements to see an account has been opened in his/ her name: •
Name of the applicant
• • • • • • •
Profession or business of applicant Address of the applicant Photographs of the applicant Introduced by an account holder of the branch Signature on the application form Signature on the specimen signature card Verification of details and signatures by authorized officer.
Current Account (Proprietorship): To open a proprietorship current account photocopy of trade license, attached by the concerned officer, is required along with the procedure mentioned for individual current account. Current Account (Partnership): Opening procedure of a partnership current account is almost same as the opening of individual current account but some additional documents are required which are follows: • • •
Partnership deed Letter of partnership Trade license
Current Account (Joint Stock Company): All the formalities of individual current account opening should be met for the opening of Joint Stock Company; additionally following documents also should be submitted to the bank. These documents are: • • • • • • •
Registration certificate from Register of joint stock companies Certificate incorporation Memorandum of association Articles of association Annual audit report Copy of board Resolution containing Name of the persons authorized to operate the bank account on behalf of the company. • Name of the persons authorized to deal documents with the bank. NBL current account meets the needs of individual and commercial customers through its schedule benefit. Customer Benefits are: • • • •
• •
Cheque book facility Opportunity to apply for safe deposit locker facility Collect foreign remittance in both T.C. and Draft. Transfer of fund from one branch to another by • Telegraphic Transfer • Demand Draft • Mail Transfer Collection of cheque through clearing house. Online banking service.
3.1.3 Transfer of an Account: When an account is transferred from one office to another, the account opening form etc. signed at the time of opening account and any forms or documents which are necessary for its proper conduct at the time of transfer, must be forwarded under cover of form, to the office to which the account is transferred together with the relative mail transfer, specimen signature card (s) and standing instruction if any, no exchange should be charged on such transfer. Attention is also invited in this connection. As per as possible the full information regarding the character, means and standing of the constituents and the way to the account has been conducted must be given to the receiving office. 3.1.4 Closing of an Account: The closing of an account may happen, • • •
If the customer is desirous to close the account, If the NBL finds that the account is inoperative for a long duration. If the court of NBL issues garnishee order.
A customer may close his/her account any time by submitting an application to the branch. The customer should be asked to draw the final check for the amount standing to the credit of his/her account less the amount of closing an other incidental charge and surrender the unused check leaves. The account should be debited for the account closing charge etc. and the authorized officer of the bank should destroy unused check. In case of joint account the application for closing the account should be signed by the joint account holder. The fee for closing of an account is TK.100.00 for SB, CD or STD account. 3.2 DEPOSIT SECTION: Deposit is the lifeblood of a bank. From the history and origin of the banking system we know that deposit collection is the main function of a bank. 3.2.1 Accepting deposits: The deposits that are accepted by National Bank like other banks may be classified in to— a) Demand deposits: These deposits are withdrawn able without notice, e.g. current deposits. National Bank accepts demand deposits through the opening of Current account Savings account b) Time deposits: A deposit which is payable at a fixed date or after a period of notice is a time deposit. National Bank accepts time deposits through Fixed Deposit Receipt (FDR), Short Term Deposit (STD) and Bearer Certificate Deposit (BCD) etc. While accepting these deposits, a contract is done between the bank and the customer. When the banker opens an account in the name of a customer, there arises a contract between the two. This contract will be valid one only when both the parties are competent to enter into contracts. As account opening initiates the fundamental relationship & since the banker has to deal with different kinds of persons with
different legal status, National Bank officials remain very much careful about the competency of the customers. 3.2.2 Deposit Based Scheme: Under deposit scheme, the National Bank Ltd offers different types of products (scheme) to help the fixed income people to save money and meet any future financial obligations. The schemes offer a large amount of money after a certain period of time if the account holders deposit a specific amount on monthly basis. The schemes are•
National Bank Monthly Savings Scheme (NMS): It is a deposit scheme where the depositor gets monthly benefit out of his deposit. The scheme is designed for the benefit of persons who intend to meet the monthly budget of their families from the income out of their deposit. It’s also known as DPS. Any citizen of Bangladesh can open this scheme. The scheme can be opened in the name of an individual only. NMS is perfect for those 18 of age or older. So one can save a fixed amount of money every month and get a lucrative amount of money after three, five or eight years. Effective rate of interest is 9% to 9.25% and 9.50% simultaneously. Some important features: • • • • •
•
Monthly installment to be deposited 10th of the current month and installment of any amount can be deposited in advance. For premature encashment interest at saving rate will be paid. Account will be automatically closed for failure of 3 consecutive installments. Loan for 80% of deposit may be disbursed after 3 years. All Govt. Tax/Duty/ Levy will be applied on interest paid against the deposit.
Double Benefit Deposits Scheme (DBDS): Depositor’s money will be doubled in a seven-year period and the principal amount is refundable on maturity. Size and period of deposit • Tk. 10,000/= and multiple for 6 years • For premature encashment interest at saving rate will be paid. • Loan for 80% of deposit may be disbursed after 3 years. • All Govt. Tax/Duty/ Levy will be applied on interest paid against the deposit. 3.3 CASH SECTION:
Banks, as a financial institution, accept surplus money from the people as deposit and give them opportunity to withdraw the same by cheque, etc. But among the banking activities, cash department play an important role. It does the main function of a commercial bank i.e. receiving the deposit and paying the cash on demand. As this department deals directly with the customers, the reputation of the bank depends much on it. The functions of a cash department are described below: 3.3.1 Function of Cash Department: Cash Payment:
• • •
Cash payment is made only against cheque. This is the unique function of the banking system which is known as “payment on demand”. It makes payment only against its printed valid Cheques.
Cash Receipt: • • •
It receives deposits from the depositors in form of cash So it is the “mobilization unit” of the banking system It collects money only its receipts forms
Cash Packing: After the banking hour cash is packed according to the denomination. Notes are counted and packed in bundles and stamped with initial. 3.4 LOCAL REMITTANCE: Carrying cash money is troublesome and risky. That’s why money can be transferred from one place to another through banking channel. This is called remittance. Remittances of funds are one of the most important aspects of the Commercial Banks in rendering services to its customers. 3.4.1 Types of remittance: • • • • •
Between banks and non banks customer. Between banks in the same country. Between banks in the different centers. Between banks and central bank in the same country. Between central bank of different customers.
The main instruments used by the National Bank of remittance of funds are: • • •
Payment order ( PO) Demand Draft ( DD) Telegraphic Transfer (TT)
Payment Order (PO): Pay Order gives the payee the right to claim payment from the issuing bank. Payment is made from issuing branch only. Generally remit fund within the clearinghouse area of issuing branch. Bank charge only commission for this. However party must have an account with the bank, so that whenever the fund refund they (party) can collect it. But for the student and the pay order for job purpose of any applicant, account with the bank is not mandatory. Because in this case fund are non-refundable. Demand Draft (DD): Demand Draft is an order of issuing bank on another branch of the same bank to pay specified sum of money to payee on demand. Payment is made from ordered branch. Generally remit fund outside the clearinghouse area of issuing branch. Payee can also be the
purchaser. Bank confirm through checking the ‘Test Code’ Bank charge a commission and telex charge for it. Telegraphic Transfer (TT): Issuing branch requests another branch to pay specified money to the specific payee on demand by Telegraph /Telephone. Payment is made from ordered branch. TT can be remit anywhere in the country. Bank charge a commission plus telephone charge. However this service is available only for a limited number of customers. Mail Transfer Advice (MTA): Where the remitter desires the banker to remit the funds to the payee instead of purchasing a draft he, the banker does it though a Mail Transfer Advice. The payee must have an account with paying office as the amount remitted in such a manner, is meant for credit to the payee’s account and not for cash payment. Balancing of remittance account: DD payable, TT payable, PO issued, DD paid without advice accounts should be balanced on monthly basis. The balances are agreed with the figure of concerned subsidiary account. Issuance of duplicate Instruments: In case of losing or not receiving by the beneficiary the instrument issuing bank can issue of duplicate Pay Order or Demand Draft. Cancellation of Instrument: If any reason the issued PO or DD is cancelled the branch cancelled the instrument and kept with the debit voucher for PO and for DD. No draft should be allowed to be cancelled without obtaining prior conformation from the draw branch. 3.4.2 Test – key Arrangement: Test key arrangement is a secret code maintained by the banks for the authentication for their telex messages. It is a systematic procedure by which a test number is and the person to whom this number is given can easily authenticate the same test number by maintaining that same procedure. National Bank has test key arrangement with so many banks for the authentication of LC message and for making payment. 3.4.3 Issuing FIXED DEPOSIT: The Local Remittance section of National Bank Elephant Road Branch also issues FDR. They are also known as time deposit or time liabilities. These are deposits, which are made with the bank for a fixed period, specified in advance. The bank need not maintain cash reserves against these deposits and therefore, the bank offers higher of interest on such deposits. It’s a non-transferable account. •
Opening of fixed Deposit Account: The depositor has to fill an account form where in the mentions the amount of deposit, the period for which deposit is to be made and name/names is which the fixed deposit receipt is to be issued. In case of a Joint name National Bank also takes the instructions regarding payment of money on maturity of the deposit. The banker also takes specimen signatures of the depositors. A fixed deposit account is then issued to the depositor acknowledging receipt of the sum of money mentioned there. It also contains the rate of interest and the date on which the deposit will fall due for payment.
•
Term Deposits: These rates are not negotiable. In this table we can find out the percentage that is given by the bank for specific period of time to the customer.
•
Payment of interest: It is usually paid on maturity of the fixed deposit. National Bank calculates interest at each maturity date and provision is made on that “miscellaneous creditor expenditure payable accounts” is debited for the accrued interest.
•
Encashment of FDR: In case of premature FDR National Bank is not bound to accept surrender of the deposit before its maturity date. In order to deter such a tendency the interest on such a fixed deposit is made cut a certain percentage less the agreed rate. Normally savings bank deposit is allowed.
•
Loss of FDR: In case of lost of FDR the customer is asked to record a GD (general diary) in the nearest police station. After that the customer has to furnish an Indemnity Bond to National Bank a duplicate FDR is then issued to the customer by the bank.
•
Renewal of FDR: In National Bank, the instrument is automatically renewed every day after the date of its maturity if the customer does not come to encash the FDR. The period for renewal is determined as the previous one. Table: Fixed Deposit Receipt (FDR)
Period 01 Month 03 Month 06 Month 12 Month
Present Interest Rate Less than 1Crore 7.00% 7.75% 8.00% 8.50%
1 Crore & above 7.00% 7.75% 8.50% 9.00%
Features: • •
Loan for 80% of deposit may be disbursed. All Govt. Tax/Duty/ Levy will be applied on interest paid against the deposit.
3.4.4 Sundry Deposit: This type of deposit is not directly opened for the public. No application is required to open this type of account. Any amount which cannot be debt or posted under any account head that amount is kept under the head of sundry deposit account. There are some account which are not transacted very frequent and some time the customer encase their money through passbook but they forget to mention their account or and sometime people deposit some amount in an account. 3.4.5 Resident Foreign Currency Deposit (RFCD): Specially designed foreign currency account for resident Bangladeshis offers wonderful opportunity to build a deposit base in foreign currency. Helps make for overseas commitments and dues like credit card bills, traveling, expense, recreation tours etc. This service is offered in currencies like USD, GBP and Yen. The interest that NBL offers is very competitive, but the deposit can only be made in foreign currency. The withdrawals can only be made in local currency. It offers fund remittance in LCY and FCY to any place in and out of the country.
3.4.6 Non-Resident Foreign Currency Deposit (NFCD): National Bank Limited gives opportunity to maintain foreign currency account through its Authorized Dealer Branches. All non-resident Bangladeshi nationals and persons of Bangladesh origin including those having dual nationality and ordinarily residing abroad may maintain interest bearing NFCD Account. NFCD Account can be opened for One month, Three months, Six months and One Year through US Dollar, Pound Starling, Japanese Yen and Euro. Interest is paid on the balance maintain in the Account. This interest is tax free in Bangladesh 3.4.7 Short Term Deposit (STD): National Bank Limited offers interest on customer's short term savings and gives facility to withdraw money any time. • •
Minimum balance Tk. 2000. Standing Instruction Arrangement are available for operating account.
3.5 CLEARING SECTION: Cheques, Pay Order (P.O), Demand Draft (D.D.) Collection of amount of other banks on behalf of its customer are a basic function of a Clearing Department. •
Clearing: Clearing is a system by which a bank can collect customers fund from one bank to another through clearing house.
•
Clearing House: Clearing House is a place where the representatives of different banks get together to receive and deliver Cheques with another banks. Normally, Bangladesh Bank performs the Clearing House in Dhaka, Chittagong, Rajshahi, Khulna & Bogra. Where there is no branch of Bangladesh Bank, Sonali bank arranges this function.
•
Member of Clearing House: National Bank Ltd. is a scheduled Bank. According to the Article 37(2) of Bangladesh Bank Order, 1972, the banks, which are the member of the clearinghouse, are called as Scheduled Banks. The scheduled banks clear the cheque drawn upon one another through the clearinghouse. 3.5.1 Types of Clearing:
a) Outward Clearing: When the Branches of a Bank receive cheque from its customers drawn on the other Banks within the local clearing zone for collection through Clearing House, it is Outward Clearing. b) Inward Clearing: When the Banks receive cheque drawn on them from other Banks in the Clearing House, it is Inward Clearing. 3.5.2 Types of clearing house: a) Normal clearing house:
• •
1st house: 1st house normally stands at 10 a.m. to 11a.m 2nd house: 2nd house normally stands after 3 p.m. and it is known as return house.
b) Same day clearing house: • •
1st House: 1st house normally stands at 11 a.m. to 12 pm 2nd House: 2nd house normally stands after 2 p.m. and it is known as return house.
Who will deposit cheque for Clearing: Only the regular customers i.e. who have Savings, Current, STD & Loan Account in the bank can deposit cheque for collection of fund through Clearing house.
Precaution at the time of cheque receiving for Clearing, Collection of LBC, OBC & Transfer: • • • • • • • • • •
Name of the account holder same in the cheque & deposit slip. Amount in The cheque & deposit slip must be same in words & in figures. Date in the cheque may be on or before (but not more than six months back) clearing house date. Bank & Branch name of the cheque, its number & date in the Deposit slip. Cheque must be signed. Signature for confirmation of date, amount in words / in figure Cutting & Mutilation of cheque. Cheque should be crossed (not for bearer cheque). Account number in the deposit slip must be clear. Depositor’s signature in the deposit slip.
3.5.3 Return house: Return House means 2nd house where the representatives of the Bank meet after 3 p.m. to receive and deliver dishonored cheque, which placed in the 1st Clearing House.
Cheque may be dishonored for any one of the following reasons: • • • • • • • • • •
Insufficient fund. Amount in figure and word differs. Cheque out of date/ post dated / mutilated. Payment stopped by the drawer. Payee’s endorsement irregular / illegible / required. Drawer’s signatures differ / required. Crossed cheque to be presented through a bank. Collection Bank's discharge irregular/ required. Effect not clear in the check. Exceed arrangement in check.
• • •
Clearing stamp required cancellation. Check crossed “Accounts pay only". Other specific reasons not mentioned above.
The dishonor cheque entry in the Return Register & the party is informed about it. Party‘s signature required in the return register to deliver the dishonor cheque. After duration, the return cheque is sent to the party’s mailing address with Return Memo. If the cheque is dishonored due to insufficiency of funds than National Bank charges. 25/=as penalty. Responsibility of the concerned officer for the Clearing Cheque: • • • • • • • • •
Crossing of the cheque. (Computer) posting of the cheque. Clearing seal & proper endorsement of the cheque. Separation of cheque from deposit slip. Sorting of cheque 1st bank wise and then on branch wise. Computer print 1st branch wise & then bank wise. Preparation of 1st Clearing House computer validation sheet. Examine computer validation sheet with the deposit slip to justify the computer posting Copy of computer posting in the floppy disk.
3.5.4 Bills Collection: In modern banking the mechanism has become complex as far as smooth transaction and safety is concerned. Customer does pay and receive bill from their counterpart as a result of transaction. Commercial bank’s duty is to collect bills on behalf of their customer. 3.5.5 Types of Bills for Collection: a) Outward Bills for Collection (OBC): OBC means Outward Bills for Collection. OBC exists with different branches of different banks outside the local clearing house. Normally two types of OBC: • •
OBC with different branches of other banks. OBC with different branches of the same bank.
Procedure of OBC: • • •
•
Entry in the OBC register. Put OBC number in the cheque. “Crossing seal” on the left corner of the cheque & “payees account will be credited on realization “seal on the back of the cheque with signature of the concerned officer. Dispatch the OBC cheque with forwarding.
•
Reserve the photocopy of the cheque, carbon copy of the forwarding and deposit slip of the cheque in the OBC file.
b) Inward bills for collection (IBC): When the banks collect bills as an agent of the collecting branch, the system is known as IBC. In this case the bank will work as an agent of the collection bank. The branch receives a forwarding letter and the bill. Procedure of IBC: •
IBC against OBC: To receive the OBC cheque first we have to give entry in the IBC Register .The IBC number should put on the forwarding of the OBC with date.
•
Deposit of OBC amount: OBC cheque amount is put into the “sundry deposit-sundry Creditors account”, prepare debit & credit voucher of it. If the OBC cheque is honored, send credit advice (IBCA) with signature & advice number of the concern branch for the OBC amount.
•
If the OBC cheque is dishonored, the concerned branch is informed about it.
•
Again place in the clearing house or send the OBC cheque with Return Memo to the issuing branch according to their information.
3.5.6 Inter Branch Credit Advice (IBCA): IBCA means Inter Branch Credit Advice. It's an advice written by originating branch to the responding branch to the responding branch to credit the general account of responding branch for the transactions mentioned. Every IBCA has two copies. One copy remains in the bank as a office copy another is sent IBCA contains the following information• • • • • • • • • •
Originating branch name with its code number. Responding branch name with its code number. Date of issuing IBCA. Transaction Code. Advice number. Instrument number. Particulars. Amount in wards and in figure. Order to debit general account originating Branch. Responding date.
3.7 ACCOUNTS SECTION: Accounts Department is called as the nerve Centre of the bank. In banking business, transactions are done every day and these transactions are to be recorded properly and systematically as the banks deal with the depositors’ money. Improper recording of transactions will lead to the mismatch in the debit side and in the credit side. To avoid these mishaps, the bank provides a
separate department; whose function is to check the mistakes in passing vouchers or wrong entries or fraud or forgery. This department is called as Accounts Department. If any discrepancy arises regarding any transaction this department report to the concerned department. Besides these, the branch has to prepare some internal statements as well as some statutory statements, which are to be submitted to the Central Bank and the Head Office. This department prepares all these statements. Workings of this department: • • • • • • • • • • • • • • •
Recording the transactions in the cash book. Recording the transactions in general and subsidiary ledger. Preparing the daily position of the branch comprising of deposit and cash. Preparing the daily Statement of Affairs showing all the assets and liability of the branch as per General Ledger and Subsidiary Ledger separately. Making payment of all the expenses of the branch. Recording inters branch fund transfer and providing accounting treatment in this regard. Preparing the monthly salary statements for the employees. Preparing the weekly position for the branch which is sent to the Head Office to maintain Cash Reserve Requirement (C.R.R). Preparing the monthly position for the branch which is sent to the Head Office to maintain Statutory Liquidity Requirement (S.L.R). Make charges for different types of duties. Checking of Transaction List. Statement of Affairs. Preparing the budget for the branch by fixing the target regarding profit and deposit so as to take necessary steps to generate and mobilize deposit. Recording of the vouchers in the Voucher Register. Packing of the correct vouchers according to the debit voucher and the credit voucher.
3.8 Card Products of NBL: Card Products: National Bank Limited has not only initiated a new scheme but also brought a new life style concept in Bangladesh. Now the dangers and the worries of carrying cash money are memories of the past. NBL serves Card products to their valuable customers. NBL was the first among domestic banks to introduce Master Card in Bangladesh. In the meantime, NBL has also introduced the Visa Card and Power Card. The Bank has in its use the latest information technology services of SWIFT and REUTERS. Credit Card: NBL Credit Card is accepted in many merchant outlets around the country. Credit Card comes in both local and international forms, giving the client power to buy all over the World. Our wide range of merchants include hotels, restaurants, airlines, & travel agents, shopping malls and departmental stores, hospitals & diagnostic centers, jewelers, electronics & computer shops and many more.
Power Card: NBL Power Card is the first debit card for which you don’t have to maintain any account with our any branch. Now enjoy the conveniences and advantages of Credit Card as you step into the new millennium. • • • • • • • • •
It is a Pre-paid Card. Annual / Renewal Fee Tk. 200/- only. May be issued and refilled from RFCD/FC Account. Accepted at all VISA POS merchants. Cash withdrawal at all ATM booths bearing VISA and Q-cash logo (Except HSBC in Bangladesh). Drawing of Cash: (i) from NBL ATMs - Free of charges (ii) From ATMs under Q-cash network- Tk.10.00 per transaction (iii) From other ATM - Tk. 100.00 per transaction. Cash Withdrawal Fee (aboard)-2.00% on the cash drawn amount or US$2.00, whichever is higher. Only 1% loading fee against both International and Local Power Card at the time of Refilling. Yearly Tk.100 for enrollment of SMS service.
3.8 Western Union: Joining with the world's largest money transfer service "Western Union", NBL has introduced Bangladesh to the faster track of money remittance. NBL was first domestic bank to establish agency arrangement with the world famous Western Union in order to facilitate quick and safe remittance of the valuable foreign exchanges earned by the expatriate Bangladeshi nationals. Now money transfer between Bangladesh and any other part of the globe is safer and faster than ever before. It has a full time arrangement for speedy transfer of money all over the world. This simple transfer system, being on line eliminates the complex process and makes it easy and convenient for both the sender and the receiver. Through NBL - Western Union Money Transfer Service, your money will reach its destination within a few minutes. National Bank Limited signed an agreement with the Western Union Financial Services, USA (or, Western Union in short) in 1993 and became its first agent in Bangladesh. Millions of people from different corners of the world have been sending their money to their near and dear ones with utmost confidence through the Western Union. Western Union has the most modern technology for remitting money within quickest possible time from any part of the world through its more than 2,45,000 representatives in 200 countries and regions spread all over the world. Western Union earns more than 3.5 billion US dollars as revenue every year. With the help of the hi-tech on-line computer system of Western Union, remittances made by Bangladeshis from different countries of the world reaches NBL within minutes, which are urgently delivered to the recipients through its 121 branches spread all over the country. 3.9 ATM Service:
National Bank Limited has introduced ATM service to its Customers. The card will enable to save our valued customers from any kind of predicament in emergency situation and time consuming formalities. NBL ATM Card will give our distinguished Clients the opportunity to withdraw cash at any time, even in holidays, 24 hours a day and 7 days a week. The next chapter discusses the Loans & Advances of National Bank Limited.
CHAPTER: 4 LOANS AND ADVANCES 4.0 Loan & Advances: This is the survival unit of the bank because until and unless the success of this department is attained, the survival is a question to every bank. If this section does not properly work the bank itself may become bankrupt. This is important because this is the earning unit of the bank. Banks are accepting deposits from the depositors on condition of providing profit to them as well as safe keeping their deposit. Now the question may gradually arise how the bank will provide profit to the clients and the simple answer is – Investments & Advance. 4.1 Reason for which Bank provides Investment to the Borrowers: • • • •
To earn profit from the borrowers and give the depositors profit. To accelerate economic development by providing different industrial as well as agricultural Investment. To create employment by providing industrial Investments. To pay the employees as well as meeting the profit groups.
Credit is continuous process. Recovery of one credit gives rise to another credit. In this process of revolving of funds, bank earns income in the form of profit. A bank can invest its fund in many ways. Bank makes Investment to traders, businessmen, and industrialists. Moreover nature of investment may differ in terms of security requirement, disbursement provision, terms and conditions etc. 4.2 Lending principles: The Principle of lending is a collection of certain accepted time tested criteria, National Bank which ensures the proper use of Investment fund in a profitable way and its timely recovery. Different authors describe different principles for sound lending. 1. 2. 3. 4. 5.
Safety Security Liquidity Adequate yield Diversity
1. Safety: Safety should get the prior importance in the time of sanctioning the Investment. At the time of maturity the borrower may not will or may unable to pay the Investment amount. Therefore, in the time of sanctioning the Investment adequate securities should be taken from the borrowers to recover the Investment. Banker should not sacrifice safety for profitability. National Bank Ltd. exercises the lending function only when it is safe and that the risk factor is adequately mitigated and covered. Safety depends upon: • •
The security offered by the borrower; and The repaying capacity and willingness of the debtor to repay the Investment with profit.
2. Security: Banker should be careful in the selection of security to maintain the safety of the Investment. Banker should properly evaluate the proper value of the security. If the estimated value is less than or equal to Investment amount, the Investment should be given against such securities. The more the cash near item the good the security. In the time of valuing the security, the Banker should be more conservative. 3. Liquidity: Banker should consider the liquidity of the Investment in time of sanctioning it. Liquidity is necessary to meet the consumer need. 4. Adequate Yield: As a commercial origination, Banker should consider the profitability. So banker should consider the profit rate when go for lending. Always Banker should fix such an profit rate for its lending which should be higher than its savings deposits profit rate. To ensure this profitability Banker should consider the prospect of the project. 5. Diversity: Banker should minimize the portfolio risk by putting its fund in the different fields. If Bank put its entire Invest able fund in one sector it will increase the risk. Banker should distribute its Investment able fund in different sectors. So if it faces any problem in any sector it can be covered by the profit of another sector. 4.3 Reason for investment defaults: There are many reasons for Investment default. The principal reasons are: •
Sick management: • Integrity • Cooperation • Financial/Marketing knowledge • Technical knowledge/Experience. • Endurance and Judgment
•
Sick Finance: • Working capital • Repayment period • Flexible rate of profit • Assets matching to liabilities • Collateral’s • Capital market
•
Sick Product: • Quality • Competitiveness • Demand • Durability
•
Sick Operation: • Efficient machinery’s • Skilled labor/supervision • Good labor relation • Utilities of raw materials
•
Sick Market:
•
Other Reasons:
Freedom Openness Growth Stability
Reputation Analysis of balance sheet Lending risk analysis
4.4 Process of Investment: Heads Application
Characteristics Applicant applies for the Investment in the prescribed form of the bank describing the types and purpose of Investment.
Sanction
1. Collecting credit information about the applicant to determine the credit worthiness of the borrower. Sources of information 2. Personal Investigation, Confidential Report from other bank, Head Office/Branch/Chamber of Commerce. 3. CIB (Central Information Bureau) report from Central Bank. i. Evaluation of compliance with its lending policy. ii. Evaluating the proposed security. 4. LRA is must for the Investment exceeding one crore – as ordered by Bangladesh Bank. 5. If everything is in accordance the Investment is sanctioned
Documentation
Disbursement
Then bank prepare an Investment proposal which contains terms and conditions of Investment for approval of H.O. or Manager. Takes the necessary papers and signatures from borrower Investment Account is opened. Where customer A/C -------Dr. Respective Investment A/C ----------------------------------------------Cr.
4.5 Services offered by investment department: The different types of Investments and Investment that National Bank offers are as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
Secured Overdraft (SOD) Investment against Imported Merchandise (LIM) Investment against Trust Receipt (LTR) Payment Against Document (PAD) House Building Investment House Building Investment (staff) Term Investment. Investment (general) Bank Guarantee Export Cash Credit Cash Credit (Pledge) Cash Credit (Hypo) Foreign Documentary Bill Purchase (FDBP) Local Documentary Bill Purchase (LDBP)
4.5.1 Secured Overdraft (SOD): It is a continue advance facility. By this agreement, the banker allows his customer to overdraft his current account up to his credit limits sanctioned by the bank. The profit is charged on the amount, which he withdraws, not on the sanctioned amount. National Bank sanctions SOD against different security. •
SOD (general): Advance allowed to individual/ firms against financial obligation (i.e. lien on FDR/PSP/BSP/ insurance policy share etc.) This may or may not be a continuous Credit.
•
SOD (others): Investment allowed against assignment of work order or execution of contractual works falls under this head. This advance is generally allowed for a definite period and specific purpose i.e. it is not a continuous credit. It falls under the category "others".
•
SOD (Export): Advance allowed for purchasing foreign currency for payment against L/Cs (Back to Back) where the exports do not materialize before the import payment. This is also an advance for temporary period, which is known as export finance and under the category “commercial lending".
4.5.2 Investment against Imported Merchandise (LIM): Investment allowed for retirement of shipping documents and release of goods imported through L/C taking effective control over the goods by pledge in go downs under Banks lock & key fall under this type of advance. This is also a temporary advance connected with import, which is known as post-import financing, falls under the category “commercial lending". 4.5.3 Investment against Trust Receipt (LTR): Advance allowed for retirement of shipping documents, release of goods imported through L/C falls under trust with the arrangement that sale proceed should be deposited to liquidate within a given period. This is also a temporary advance connected with import, which is known as post-import financing, falls under the category “commercial lending". 4.5.4 Payment Against Document (PAD): Payment made by the Bank against lodgment of shipping documents of goods imported through L/C falls under this head. It is an interim advance connected with import and is generally liquidated against payments usually made by the party for retirement of the documents for release of imported goods from the customer’s authority. It falls under the category “commercial Bank". 4.5.5 House building Investment (General):
Investments allowed to individual/ enterprise construction of house (residential or commercial) fall under this of advance. The amount is repayable by monthly installment within a specified period, Investment is known as Investment (HBL-GEN). Financing amount extends up to 70% or Tk. 75,00,000 which is highest of total constructions cost. Grace period available up to 9 months in flat purchase or 12 months in construction •
Introduction: House building Investment is one of the common credit policies of banking sector. There was only one institution in our country, which is specified in HBFC, Bangladesh House Building Finance Corporation. Now days, besides this bank many commercial banks and Leasing Company provides house-building Investment to the customers.
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Profit rate: Profit rate may changes from time to time depending on the market profit rate. From the customer point of view this changes have an adverse impact on the customers. Some times if they have to bear a higher profit on the principal amount which causes a great burden on them.
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Disbursement Procedure: The Disbursement Procedure or timing of disbursement depends on the client or the progress of work of the construction. The disbursement can be made two or three stages or more depending on the above conditions.
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Made of repayment: The Investment shall be adjusted by monthly installment basis. The repayment will start from 6 (six) months, of the date of first disbursement (it may change according to the terms and conditions of the agreement).
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Collateral: The land and the construction on the land are normally given as collateral. It may changes.
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The documents to be obtained: • • • • • • • • •
DP note. Letter of disbursement Letter of installment. Letter of guarantee. Letter of under taking. Letter of agreement. Irrevocable general power of attorney. Memorandum of deposit of title deed. Any other documents if considered
4.5.6 House building Investments (staff): Investments allowed to the Bank employees for purchase/construction of house shall be known as Staff Investment (HBFC-STAFF). 4.5.7 Term Investment:
National Bank considers the Investments, which are sanctioned for more than one year as term Investment. Under this facility, an enterprise is financed from the starting to its finishing, i.e. from installation to its production. 4.5.8 Investment (general): Short term and long term Investments allowed to individual/ firms / industries for a specific purpose but a definite period and generally repayable by the installments fall under this head. These types of lending are mainly allowed to accommodate financing under the categories. • •
Large and Medium Scale Industries. Small and Cottage Industries, Very often term financing for agriculture and others are also included here.
4.5.9 Bank Guarantee: The bank is very often requested by his customer to issue guarantees on their behalf to a third party – committing to make an unconditional payment of certain amount of money to the third party, if the customer (on whose behalf it gives guarantee) becomes liable, or creates any loss or damage to the third party. 5.5.10 Export Cash Credit (ECC): Financial accommodation allowed to customer for exports of goods falls under this head is categorized as “Export Credit ". The Investment must be liquidated out of export proceeds within 180 days. 4.5.11 Cash Credit Hypothecation (CCH): The mortgage of movable property for securing Investment is called hypothecation. Hypothecation is a legal transaction whereby goods are made available to the lending banker as security for a debt without transferring either the property in the goods or either possession. The banker has only equitable charge on stocks, which practically means nothing. Since the goods always remain in the physical possession of the borrower, there is much risk to the bank. So, it is granted to parties of undoubted means with the highest integrity. 4.5.12 Cash Credit Pledge (CCP): Bailer in this case is called the “Pawnor” and the bailee is called the “Pawnee”. In a contract of pledge, Pawnor must deliver the goods pledged to the Pawnee either actually or constructively. Transfer of possession in the judicial sense is essential in the valid pledge. In case of pledge, the bank acquire the possession of the goods or a right to hold goods until the repayment for credit with a special right to sell after due notice to the borrower in the event of non-repayment. The formalities for Opening cash credit:
The intending cash credit holder should submit the following documents and being fulfill properly: • • • • • • • • • • •
Stock report, Rent receipt. Trade license. Up to date income tax clearing certificate. Charge documents Letter of continuity Letter of arrangement DP (Demand promissory) note. Letter of guarantee. Letter lien. Limit sanctions advice. Non-encumbrance certificate.
Observing the documents the bank authority prepares a CC proposal that contains the following information: • • • • • • •
Nature of business. Banking with National. Transaction with CD account by the client. Allied deposit with SB/STD account. Number of adjustment(S)(applicable only for renewal of CC) Recycling: It is the ratio of total credit summation to the limit. If the ratio is higher it is better from banker’s point of view. Turn over in the account.
Based on the above-mentioned information the dealing officer of the Investments and Investment department prepares recommendation about the prospect of granting the CC Investment to the client. 4.5.13 Foreign Documentary Bill Purchased (FDBP): Payment made to a customer through purchase/ negotiation of a foreign documentary bills falls under this head. This temporary advance is adjustable from the proceeds of the shipping/export documents. Its falls under the category “Export Credit" 4.5.14 Local Documentary Bill Purchased (LDBP): Payment made against documents representing sell of goods to local export oriented industries, which are deemed as exports, and which are denominated in Local currency/ foreign currency falls under this head. The bill of exchange is held as the primary security. The client submits the usance bill and the bank discounts it. This temporary liability is adjustable from the proceeds of the bills.
4.5.15 Consumer Finance: NBL offers consumer credit facility for retail customers, such as electronics consumer products, computer or computer accessories etc. • • • • 01 02 03 04 05 07
Fast processing. Competitive interest rate. No application or processing fee. Easy monthly installment. Category of Advances Agriculture Loan Term loan for large & medium industries Term loan for small & cottage industries Export credit Trade finance a) Import finance b) Cash credit a) House building loan (Commercial) NBL Lease finance
Interest Rate 11.00% 13.00% 13.00% 7.00% 13.00% 13.00% 14.00% 14.00%
Table: Interest rates charged at different Credit Schemes 4.6 Lending authority As sure proper and orderly conduct of the business of the Bank, the Board of Directors' will empower the Managing Director and other Executives of the Bank to lend up certain amount under certain terms and conditions at their discretion. The lending officer is broadly categorized as follows: • • • • • • •
Managing Director Deputy Managing Director Executive vice President Asst. Senior vice President Vice President Senior Asst. Vice President Asst. vice President.
The amount and scope of each Officer lending authority is a function of the amount and extent of authority required by the officer to carry out his/her responsibilities to the Bank and its clients may prudent, effective manner. It must be emphasized that an Officer will not be delegated lending authority only on the basis of his position. In other words, an officer does not automatically get lending authority by virtue of his corporate and/ or functional title. Specified lending authority will be delegated by the Managing Director to various Executives after taking into consideration his proven credit judgment, knowledge and experience. The amount of lending authority approved by the Board for various Executives form the upper limits of the authority that may be delegated to an officer holding corporate title. Each individual lending authority will be
delegated to him in writing. The managing Director with the Executive Committee/ Board will review all lending authorities periodically. Credit Information Bureau (CIB): Bangladesh Bank has established within itself a Credit Information Bureau (CIB), which collects credit information from the banks. Banks are required to furnish such information in respect of credit limit of Tk. 50000 and over. They mention the Name of facility, security and charge along with outstanding balance. After consolidating such information in respect of each customer, the central bank supplies to the total limits sanctioned to and the number of banks dealing with a party. Thus the banks can find out if any of their customers is having excessive borrowings from the banking system at any particular time. 4.7 Investment classification: Investment classification is a process by which the risk or loss potential associated with the Investment accounts of a bank on a particular date is identified and quantified to measure accurately the level of reserves to be maintained by the bank to provide for the probable loss on account those risky Investment. Like other banks, all types of Investments of National Bank fall into following four scales: • • • •
Unclassified: Repayment is regular. Sub National: Repayment is stopped or irregular but has reasonable prospect of improvement. Doubtful debt: Unlikely to be repaid but special collection efforts may result in partial recovery. Bad/ Loss: Very little chance of recovery.
4.8 Creation of charges for securing investment: For the safety of Investment, bank requires security from the Investment so that it can recover the Investment by selling security if borrower fails to repay. Creation of a charge means making it available as a cover for an advance. The method of charging should be legal, perfect, and complete. Importance of charging security: • • • •
Protection of profit Ensuring the recovery of the money lent Provision against unexpected change Commitment of the borrower
4.9 Securities: To make the Investment secured, charging sufficient security on the credit facilities is very important. The banker cannot afford to take the risk of non-recovery of the money lent. National Bank charges the following two types of security:
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Primary security: These are the security taken by the ownership of the items for which bank provides the facility.
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Collateral security: Collateral securities refer to the securities deposited by the third party to secure the advance for the borrower in narrow sense. In wider sense, it denotes any type of security on which the bank has a personal right of action on the debtor in respect of the advance.
4.10 Modes of charging security: There are different modes of charging the bank exercises security: •
Pledge: Pledge is the bailment of the goods as security for payment of a debt or performance of a promise. A pledge may be in respect of goods including stocks and share as well as documents of title to goods such as railway receipt, bills of lading, dock warrants etc. duly endorsed in bank’s favor.
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Hypothecation: In case of hypothecation the possession and the ownership of the goods both rest with the borrower. The borrower to the banker creates an equitable charge on the security. The borrower does this by executing a document known as Agreement of Hypothecation in favor of the lending bank.
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Lien: Lien is the right of the banker to retain the goods of the borrower until the Investment is repaid. The bankers’ lien is general lien. A banker can retain all securities in his possession till all claims against the concern person are satisfied.
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Mortgage: According to section (58) of the Transfer of Property Act,1882 mortgage is the ‘’transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of Investment, existing or future debt or the performance of an engagement which may give rise to a pecuniary liability”. In this case the mortgagor dose not transfer the ownership of the specific immovable property to the mortgagee only transfers some of his rights as an owner. The banker exercises the equitable mortgage.
4.11 Documentation: Documentation can be described as the process or technique of obtaining the relevant documents. In spite of the fact that banker lends credit to a borrower after inquiring about the character, capacity and capital of the borrower, he must obtain proper documents executed from the borrower to protect him against willful defaults. Moreover, when money is lent against some security of some assets, the document must be executed in order to give the banker a legal and binding charge against those assets. Documents contain the precise terms of granting Investments and they serve as important evidence in the law courts if the circumstances so desire. That’s why all approval procedure and proper documentation shall be completed prior to the disbursement of the facilities.
4.12 Credit disbursement: Having completely and accurately prepared the necessary Investment documents, the Investment officer ready to disburse the Investment to the borrower’s Investment account. After disbursement, the Investment needs to be monitored to ensure whether the terms and conditions of the Investment fulfilled by both bank and client or not. 4.13 Administration / Monitoring: The administration of the Investment process shall ensure. Compliance with all laws and regulations at both local and global levels including bank policy as set out in this document and the Banks credit manual/ circulars. Proper analysis of credit proposal is complex and requires a high level of numerical as well as analytical ability and common sense to ensure effective understanding of the concepts and thus common sense. To ensure effective understanding of the concepts and thus to make the overall credit portfolio of the Bank healthy proper staffing of the credit departments shall be done through placement of qualified officials who have got the right aptitude, formal training in finance, credit risk analysis, Bank credit procedures as well its required experience. Where repayment and profit servicing performance of a credit deteriorates shall be identifies at an early state and closely monitored to avoid low losses. 4.14 Loan Portfolio Guarantee Scheme (LPGS): Under the Loan Portfolio Guarantee Scheme (LPGS) of the USAID, NBL has been providing loans for setting up of small and medium scale industries. Under this scheme, the USAID has approved 1 million dollar equivalent to TK.69.15 million which will remain effective as risk guarantee for loans disbursed by NBL. NBL will be able to provide credit facilities up to 2 million dollar equivalent to TK. 138.30 million under the Scheme. The next chapter narrates the Foreign Exchange Business of National Bank Limited.
CHAPTER: 5 FOREIGN EXCHANGE 5.0 Introduction: The foreign exchange has played a vital role in the last decade or so in guiding the purchase and sale of goods, services and raw materials globally. Every country has certain natural advantages and disadvantages in producing certain commodities while they have some natural disadvantages as well in other areas. As a result, we find that some countries need to import certain commodities while others need to export their surpluses. Foreign trade brings the fruits of the earth to the
homes of the humblest among the countries. These transactions are the basis upon which international trade is made. Foreign Exchange Act 1972 defines, “foreign exchange as foreign currency and includes deposits, credits, and balance payable in foreign currency as well as drafts, traveler’s cheques letter of credit, bills of exchange drawn in a local currency but payable in foreign currency”. According to Dr. Paul Enzig, “Foreign Exchange is a system or process of converting one national currency into another and transferring money from the country to another”. It always deals with Foreign Trade and Foreign Currency. As more than one currency is involved in foreign trade, it gives rise to exchange of currencies, which is known as Foreign Exchange. The term ‘Foreign Exchange’ has three principal meanings. Firstly, it is a term used referring to the currencies of other countries in terms of any single one currency. To a Bangladeshi, Dollar, Pound Sterling, etc. are foreign currencies and as such foreign exchanges. Secondly, the term also commonly refers to some instruments used in international trade, such as bill of exchange, drafts, travelers’ cheque and other means of international remittance. Thirdly, the term foreign exchange is also quite often referred to the balance is foreign currencies held by a country. In the fiscal year 2006 Bangladesh economy was confronted with serious challenge, among others, the impact of divesting floods, the excessive price hike of oil and some other importable in the international market, in addition to the termination of the multi fiber arrangement. To cope with these challenges, the government and the Bangladesh Bank adopted a series of policies to enhance the resilience of the economy, while maintaining macroeconomic stability. These polices significantly contributed toward maintaining real GDP growth at a satisfactory level of 5.4 percent in the fiscal year 2006 as against 6.3 percent in 2005. The reduction in growth of agriculture sector of the economy. Economic growth was aided by continuing rebounded exports, import and remittance. In U.S dollar terms exports earning recorded a growth of 14.7 percent while imports payments surged by 21.4 percent. At the same time, remittance from by 11.8 percent non-residence Bangladeshi nationals increased in the fiscal year 2006. Although the country’s external current account balance swung from surplus to deficit, the overall balance of payments continued to maintain a surplus that LD to further accretion to foreign exchange reserves, foreign exchange reserves stood at USD at 2.96 billion at the end of fiscal year 2006. 5.1 Foreign / International Trade: No country is self-sufficient in all goods. Some countries have special advantage to produce some items. Bangladesh can manufacture readymade garments easily due to lower cost of labor. So Bangladesh is exporting garments to USA where as USA is exporting machinery to Bangladesh due to their favorable transaction to that item. These kinds of cross border transaction or exchange of goods are called foreign trade. Foreign trade involves a flow of goods from seller to buyer in accordance with a contract of scale. It is the exchange of goods and services between peoples of different countries.
For conducting these foreign dealings the respective banks need authorization of the central bank. The respective Banks need” Authorized Dealer License” for conducting this foreign correspondence. The bank which holds this license is called authorized dealer. Bangladesh Bank issues this license by seeing the Banks performance and also the parties that deals with. Authorized Dealers: Authorized dealer means- a Bank Authorized by Bangladesh Bank to deal in foreign exchange under the Foreign Exchange Regulation (FER) Act 1947. But there are some persons or firms Authorized by Bangladesh Bank to deal in foreign Exchange with Limited scope are called Authorized Money Changes. To get a license for authorization a bank will apply the general manager, foreign exchange policy department, Bangladesh Bank, Head Office, and Dhaka, complying the subsequent conditions: • • • •
The Bank must have adequate manpower trained in Foreign Exchange. Prospect to attract reasonable volume of foreign exchange business in the desired location. The bank meticulously complies with the instruction of Bangladesh Bank. The bank will commit to deal in Foreign Exchange within the and will submit periodical returns as instructed by Bangladesh Bank. Presently National Bank has 35 AD Branches through out the country and the Elephant Road branch is an AD branch.
Authorized Dealership License: License to deal in foreign exchange are normally granted only to schedule banks that have offices in Bangladesh, after being satisfied that they have adequate number of staff/officers properly trained in handling foreign exchange transactions and will be able to comply with the requirements of the administration of exchange control. Authorized Dealership License can at any time be withdrawn by Bangladesh Bank if the bank in whose favor it is issued fails to conduct its business to the satisfaction of the Bangladesh Bank. National Bank Elephant Road Branch Have its Authorized dealer ship license in 9th May 1985. Functions of Authorized Dealer: Authorized dealer can handle all kinds of Foreign Exchange transactions as per Foreign Exchange Regulation (FER) Act 1947 under the instruction of Bangladesh Bank. Following are the main functions of an Authorized Dealer: • • • • • • • •
Exchange of Foreign Currencies. To make arrangement with Foreign Correspondent. Buying and Selling Foreign currencies. Handling of Inward and Outward Remittance. Opening of L/C and Settlement of payment. Opening and Maintenance of Accounts with Banks Under intimation to Bangladesh Bank. Investment in foreign Trade. Export Documents handling.
5.1.1 Guideline of Foreign Exchange Transaction: National Bank follows three guidelines in foreign exchange transaction. These are as below: • • •
GUIDELINE FOR FOREIGN EXCHANGE TRANSACTION, Voll.1, 2. Commerce and Finance Ministry jointly made the rules and procedures of Import Policy. Uniform Custom Practice of Documentary Credit (U.C.P.D.C)
National Bank mainly deals with import L/C. Mainly readymade garments, knitwear, frozen food, fish, tanned leather, handicraft, tea etc. were the major export finance sectors. Import L/C given to the company that import capital machinery, half finished goods to prepare finished goods, import Fabrics for garments purpose. 5.1.2 Reason for international trade: •
Uneven resources distribution: different countries have different amounts of natural resources, while other might have not. Therefore counties need to exchange goods to satisfy mutual needs and wants.
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The lack of self-sufficiency: Each country can obtain those goods that each alone can not produce or obtain the resources to run them into finished products.
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Specialization: the need for trade will arise because a country cannot survive with only one kind of goods (specialization goods).
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Economic principal of comparative advantage: it is mutually beneficial if each country specializes on producing the goods which is has greater advantage and obtains those goods from other countries that it cannot produce cheaply at home.
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Difference in the demand of goods among countries: Some countries, which are producers of certain goods, still have to import the same goods from abroad. This may due to the insufficient supply locally to meet the strong demand for the goods.
5.1.3 Benefits of international trade: •
A gain in output for the participating countries: International trade enables a country to specialize in the production of goods and services in which it has comparative advantages.
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Better living Standard: Specialization in production makes goods cheaper, so the Standard of living is improved.
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Economics of scale: As countries specialize in the production of goods and services, they are able to operate on a large scale, and thus enjoy the benefits arising from the economics of scale.
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Transfer of technology: The transfer of technology automatically accompanies an exchange of goods because nation can learn from the products of other nations (computer software).
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Improving international relationship: With more trade activities and closer contact, there comes an exchange of culture and ideas resulting in better understanding among the nation.
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Marinating price stability: With international trade, shortage of resources and goods can be solved by imports. Demand and supply can be brought closer together. Price fluctuation can be minimized.
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International trade encourages competitions: Competition s may help to prevent the growth of domestics’ monopolies. Efficiency in production can be achieved.
5.1.4 Problems in international trade: Risks of goods, credit risk of foreign exchange, differences in legal systems among countries, differences in political systems among countries, economic divergence. The political and economic condition in one country may deteriorate etc. 5.1.5 The role of banks in enhancing international trade: •
Provision of advances: The provision of finance to importer (e.g. trust receipt facility, documentary credit facilities) and exporters (e.g. negotiation of export bills, purchase of bills for collection) encourages enterprise to engage in trade and enhance their liquidity position.
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Provision of alternation payment methods: Importers may not accept the payment of cash in advance, which gives exporters the greatest protections. On the other hand, the exporters may not accept open account, which gives Importers the best payment methods. A letter of credit, through bank channels overcomes the disadvantages of these two settlement methods and satisfies to a great extent, both the importer and exporters. So with help of banks volumes can be enlarged.
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Medium of fund transfer: A bank system allows payment to be made safely and quickly by one part to another, e. g. telegraphic transfer.
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Export advance form banks: In case of any quarries as to the trading terms especially those related to documentary credit (D/C) transaction, traders can ask for their banker’s advice.
5.1.6 Payment Method for International Trade: In any international transaction, credit is proved by the supplier (exporter), the buyer (importer), one or more financial institutions, or any combination of these. The supplier may have sufficient cash flow to finance the entire trade cycle, beginning with the production of the product until the buyer eventually makes payment. This form of credit is known as supplier credit. In some cases, the exporter may require bank financing to augment its cash flow. On the other hand, the supplier
may not desire to provide financing, in which case the buyer will have to finance the transaction itself, either internally or externally, through its bank. Bank on both sides of the transaction can thus play integral role in trade financing. In general five basic methods of payment are used to settle international transaction, each with a different degree of risk to the exporter and importer. These are: 1. Prepayment: Under the prepayment method, the exporter will not ship the goods until the buyer has remitted payment to the exporter. Payment is usually made in the form of an international wire transfer to the exporter’s bank account or foreign bank draft. 2. Letter of Credit: A letter of credit (L/C) is an instrument issued by a bank on behalf of the importers (buyer) promising to pay the exporter (beneficiary) upon presentation of shipping documents in compliance with the terms stipulated therein. 3. Draft (bill of exchange): A draft (bill of exchange) is an unconditional promise drawn by one party, usually the exporter, instructing the buyer to pay the face amount of the draft upon presentation. The draft represents the exporter’s formal demand for payment from the buyer. A draft affords the exporter less protection than an L/C, since the banks are not obligated to honor payment on the buyer’s behalf. 4. Consignment: under a consignment arrangement, the exporters ship the goods to the importer whole still retaining actual title to the merchandise. The importer has access to the inventory but does not have to pay for goods until they have been sold to a third party. 5. Open Account: The opposite of prepayment is the open account transaction in which the exporters ships the merchandise and expect the buyer to remit payment according to the agreed upon terms. The exporters are relying fully upon the financial creditworthiness, integrity, and reputation of the buyer. 5.1.7 Sources of Fund to settle Import Payment: • • • •
Bangladesh Banks own foreign exchange resources. Foreign currency account of overseas Bangladeshi’s. Foreign aid (commodity aid, credit, grant), and Special Trade Agreement (STA).
5.2 Letter of credit (L/C): Letter of credit can be defined as a credit contact where by the buyers 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 condition include among other things, the presentation of some specified documents, the letter of credit is called. Importer/ seller who apply for opening an L/C and Bank opens/ issues a L/C on behalf of the importer. Bank adds its confirmation to the credit and it is done at request of issuing bank may or may not be the advising bank. Advising/notifying bank through which the L/C is advised to the exporters. This bank is actually situated in exports country. It may also assume the role of confirming and/or negotiating bank depending upon the condition of the credit.
5.2.1 Documentary letter of credit: Letter of Credit (L/C) can be defined as “Credit Contract” whereby the buyer’s Bank is committed (on behalf of the buyer) to pay an agreed amount of money at the seller’s disposal under some agreed condition. Since the agreed conditions include, amongst other things, the presentation of some specified documents, the Letter of Credit is called Documentary Letter of Credit. The Uniform Customs & Practice for Documentary Credits (UCPDC) published by the international Chamber of Commerce (2007 Revision, Publication no. 600) defines Documentary Letter of Credit as: Credit means any arrangement, however named or described that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation. Almost all commercial letters of credit are documentary credits. Therefore, the UCPDC deals only with documentary credits. Documentary credit may be either revocable credit or irrevocable credit. •
Revocable credit: A revocable credit is a credit , which can be amended are cancelled by the issuing bank at any time without prior notice to the seller. I.e. a revocable letter of credit can be cancelled or revoked at any time without prior notification to the beneficiary, and it is seldom used. In case of seller (beneficiary), revocable credit involves risk, as the credit may be amended or cancelled while the goods are in transit and before the documents are presented, or although presented before payments has been made. The seller would then face the problem of obtaining payment on the other hand revocable credit gives the buyer maximum flexibility, as it can be amended or cancelled without prior notice to the seller up to the moment of payment buy the issuing bank at which the issuing bank has made the credit available. In the modern banking the use of revocable credit is not widespread.
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Irrevocable credit: The Irrevocable Credit is a commonly used type of documentary credit. An irrevocable letter of credit can not be cancelled or amended without the beneficiary consent. The bank issuing the L/C is known as the ‘issuing’ bank. The correspondent bank in the beneficiary country to which the issuing bank sends the L/C as commonly referred to as the ‘advising’ bank. An irrevocable L/C obligates the issuing bank to honor all drawings presented in conformity with the terms of the L/C. L/C are normally issued in accordance with the provision contained in ‘Uniform Customs and Practice for Documentary Credit’ published by the international chamber of commerce. NBL followed irrevocable L/C’s. The bank issuing the L/C makes payment once the required documentation has been presented in accordance with the payment terms. The importer must pay the issuing bank the amount of the L/C plus accrued fees associated with obtaining the L/C. The importer usually has an account established at the issuing bank to be drawn upon the payment, so that the issuing bank does not tie up its own funds. However, if the importer does not have sufficient funds its account, the issuing bank is still obligated to honor all valid drawings against L/C. This is why the banks decision to issue an L/C on behalf of an importer involves an analysis of the importers creditworthiness and is analogous to the decision to make a loan.
The bank issuing the L/C makes payment to the beneficiary (exporter) upon presentation of documents that meet the conditions stipulated in the L/C. L/C is payable either at sight (upon presentation of documents) or at the specified future date. 5.2.2 Back-To-Back letter of credit: A Back-To-Back letter of credit is a new credit, it is different from the original credit based on which the bank undertakes the risk under the back-to-back letter of credit. In this case, the banks main security is the original credit (master L/C). the original credit (selling credit ) and the backto-back credit (buying credit) are separate instruments independent of each other and in no way legally connected, although they both from part of the same business operation. The suppliers (beneficiary of the back-to-back credit) ships goods to the importer or suppliers goods to the exporter and present documents to the bank as is specified in the credit. It is intendment that the exporter would substitute his own documents for negotiation under the original credit, his liability under the back-to-back credit would be adjusted out of these proceeds. The exporter L/C is marked lien and no margin is taken. So we can say that back-to-back credit term given to an ancillary credit which arises where the seller used the credit granted to him by the issuing bank to his suppliers. Duly assessed the export L/C FOB value to be calculated and BTB L/C to be opened 75% or 80% (as per export policy) keeping lien of export L/C as per request of applicant (exporter) should submit proforma invoice + L/C application + IMP form + LCA form + Insurance cover note when opening of BTB L/C. NBL decided the conversion rate using daily rate sheet which was delivered by the Head Office through SWIFT. Three types of BTB L/C may be open against Export L/C. •
BTB (Foreign) ⇒ LC app + LCAF + IMP + PI + insurance cover note + credit report of supplier (if necessary).
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BTB (Local) ⇒ L/C app + PI
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EPZ ⇒ Treated as foreign.
After receiving all paper’s to opening L/C a office note will be prepared to ensure fund is available against respected export L/C. and to be transmitted through swift, telex or postage. L/C serial number to be given in the L/C register and necessary voucher to be passed for liability and other charges. The tenor of the L/C is normally open at 90 days (local) and 120 days sight (foreign). For Example $ 1,000 L/C opened conversion with BC selling rate: $1,000 x 69.45 = Tk 69450 x .5% = Tk. 347, minimum com: Tk. 500, tax: 5% = Tk. 25. The Authorized Dealer may open Back to Back import L/Cs against export L/Cs received by export oriented garments industry operating under the bonded warehouse system, subject to observance of domestic value addition requirement prescribed by the Ministry of commerce from time to time. While opening to Back to Back L/Cs the following instruction should be complied
with in addition to the observance of the formalities necessary for opening of other than Back to Back L/Cs: •
The Garments industry should possess valid registration with the CCI& E and valid bonded warehouse license.
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The Master L/C or Export L/c should have validity period adequate to cover the time needed for importation for inputs, manufacture of merchandise and shipment to consignee. In NBL the RMG policy entails that the validity of Back to Back L/C (Foreign) should expire at least 60 days heading of the expiry of the export L/C.
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The Back to Back L/C should not exceed the admissible percentage of net FOB value of the relative master export L/C. For computation of net FOB value of a master exports L/C, the freight charge, insurance cost and commission if payable by the exporter shall be deducted from the L/C value. If the freight element is not shown separately certificate from the shipping company or the shipping agent should be asked for. •
The Back to Back import L/C shall be opened on to 120 days usance (DA) basis against Export Development Fund F) administered by Bangladesh Bank. Inland/ local Back to Back L/Cs may be opened in favor of local manufacturers/suppliers of inputs, against master export L/Cs within the entitlement of net FOB value, payment against such L/Cs may be affected either in local currency or in the foreign currency as per terms of L/Cs out of export proceeds.
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Back to Back L/C (foreign / local) may in tern be opened for import of necessary inputs, against inland/local back to back L/Cs in favor of local manufacturer cum supplier operating under the bonded warehouse.
Payment settlement against Back-to-Back L/C: Payment in settlement of usance bill against the Back to Back import L/C shall be made at maturity out of export precedes repatriated in foreign exchange. The required foreign exchange for payment of back to back L/C (equivalent to bill amount will be set a side), out of the export proceeds, in a separate foreign currency account in the subsidiary ledger of the authorized dealers. Clients give the payment of the BTB L/C after receiving the payment from the importers. But in some cases, client sells the bills to the NBL. But if there is discrepancy the NBL sends it for collection. In case of BTB L/C, NBL gives the payment to the beneficiary after receiving the payment from the UC of the finished product (i.e. exporter). Bank gives the payment from DFC (Deposit Foreign Currency) Account where dollar is deposited in national rate. For BTB L/C, opener has to pay interest at LIBOR rate (London Inter Bank Rate). Generally LIBOR rate fluctuates from 5% to 7%. A scheduled named Payment Order; Forwarding Schedule is prepared while making the payment. This schedule is prepared when the payment of UC is made. This schedule contains the followings: •
Reference number of beneficiary’s bank and date.
• • •
Beneficiary’s name. Bill value. Payment Order number and date.
5.2.3 Parties involved in a Letter of Credit: The parties are: • • •
Issuing/Opening Bank Confirming Bank if any Beneficiary (the seller).
Other parties who facilitate the documentary Credit Operation are as follows: • • • • •
Applicant Advising Bank Reimbursing Bank Negotiating Bank Transferring Bank if any.
Steps that takes place in the Documentary L/C: • • • • •
Issuing Advising Amendment if required Presentation of shipping document, and Settlement-either By Payment or By Acceptance.
The parties to the letter of credit: •
Importer: purchaser/buyer is the person who applies/requests/instructs the opening bank to open a L/C. He is also called opener or applicant of the credit.
•
Issuing bank: The issuing bank or the opening bank is one which issues the credit i.e. undertakes, independent of the undertaking of the applicant, to make payment provided the terms and conditions of the credit have been complied with the payment may be at sight if the credit provides for deferred payment. Especially the issuing bank should satisfy himself on the credit worthiness of the applicant. The credit application must be in accordance with the Uniform customs and practices for Documentary Credit (UCPDC) – ICC publication no. –500 editions of 1993.
•
Confirming bank: it is the bank, which adds its confirmation to the credit and it is done at request of issuing bank. Confirming bank may not be the advising bank. Or we can say, a Confirming Bank is one which adds its guarantee to the credit opened by another bank, thereby, Undertaking the responsibility of payment/negotiating/acceptance under the credit in addition to that of the issuing bank. A confirming bank normally does so if requested by the issuing bank. When the credit worthiness of the issuing bank is in doubt
beneficiary's bank may request the issuing bank to give additional confirmation by another bank. It is said “Add Confirmation" in practice. •
Advising/notifying bank: it is the bank through which the L/C is advised to the exporters. This bank is actually situated in exporter’s country. It may also assume the role of confirming and /or negotiating bank depending upon the condition of the credit i.e. the Advising Bank advises the credit to the beneficiary authenticating the genuineness of the credit. The advising bank is generally situated in the country/place of the beneficiary.
•
Negotiating bank: A Negotiation Bank is the bank nominated or authorized by the issuing bank to pay, to incur a deferred payment liability, to accept drafts or to negotiate the credit. The advising bank and the negotiating bank may or may not be the same. Sometimes it can be confirming bank.
•
Paying /accepting bank: it is the bank on which the bill will be drawn (as per condition of the credit). Usually it is the issuing bank.
•
Reimbursing bank: it is the bank that would reimburse the negotiating bank after getting payment instruction from issuing bank. Or it is the bank authorized to honor the reimbursement claims in settlement of negotiation or accepting bank. It is normally the bank with which the issuing bank has account from which payment is to be made. Reimbursement claims in foreign exchange business is settled by the Uniform Rules for Reimbursement (URR) – ICC publication no. 525.
•
Exporter: Exporter/Sellers/Beneficiary is the party, whose favors the L/C is established.
5.2.4 The stages of the L/C: •
Buyer & seller agree terms, including means of transport, period of credit offered (if any), latest date of shipment, INCOTERMS to be used.
•
Buyer applies to bank for issue of L/C. Bank will evaluate buyer’s credit standing, and may require cash cover and/or reduction of other lending limits.
•
Issuing bank issues L/C, sending it to the Advising bank by airmail or (more commonly) electronic means such as telex or SWIFT.
•
Advising bank establishes authenticity of the L/C using signature books or test codes, then informs seller (beneficiary) Advising bank may confirm L/C, i.e. add its own payment undertaking.
•
Seller should now check that L/C matches commercial agreement, and that all its terms and conditions can be satisfied, (e.g. all documents can be obtained in good time). If there is anything that may cause a problem, an amendment must be requested.
•
Seller ships the goods, and then assembles the documents called for the L/C (invoice, transport document etc.). Before presenting the documents to the bank, the seller should check them for discrepancies with the L/C, and correct the documents where necessary.
•
The documents are presented to a bank, often the Advising bank. The Advising bank checks the documents against the L/C. If the documents are compliant, the bank pays the seller and forwards the documents to the Issuing bank.
•
The Issuing bank now checks the documents itself. If they are in order (and it is a sight L/C), it reimburses the seller’s bank immediately.
•
The Issuing bank debits the buyer and releases the documents (including transport document), so that the buyer can claim the gods from the carrier.
Important features of L/C: • • • • • • • • • • • • • • • • • • •
L/C Number and Date Suppliers Name and Address Applicant Name and Address Advising Banks Name and Address Amount in Figure and Word Shipment Date Expiry Date and Place of Expiry Trade Term(INCOTERMS) Description of Goods Shipment Clause Delivery Clause Country of Origin Clause Insurance Clause Bill Negotiation Clause Payment Clause B.L Clause PSI Clause Reimbursement Clause Others clause as required as per import policy order and as per contract executed in between buyer and seller.
5.2.5 Some important Documents of L/C: As foreign trade involves transactions in between the countries, the formalities attached herewith are complicate and multifarious. Quite naturally a large number of document are used in it, which is on the increase due to the growing complications introduced into the trade because of the impositions of different types of checks and controls in different countries. The documents used by NBL in foreign trade may be classified into following categories: •
Forwarding: Forwarding is the letter given by the advising bank to the issuing bank. Several copies are sent to the issuing bank. All copies are including original should be kept in the bank.
•
Bill of Exchange: According to the section 05, Negotiable Instrument (NI) Act-1881, a Bill of Exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay (on demand or at fixed or determinable future time) a certain sum of money only to or to the order of a certain person or to the bearer of the instrument. It may be either at sight or certain day sight. At sight means making
payment whenever documents will reach in the issuing bank. The bill of exchange/draft is particular instrument through which payment is effected in trade deals both internal and international. •
Bill of Landing (B/L): It is the document issued by the shipping company or it’s agent acknowledging the goods mentioned therein on board, the carrying vessel in apparent good order and condition unless otherwise indicated therein, for shipment to the consignee on terms and conditions as agreed upon as to their carriage Only one copy of bill of landing should be given to the client and the remaining copy should be kept in the bank.
•
Certificate of Origin: Certificate of origin is a document describing the producing country of the goods. It may be issued by the chamber of commerce & Industry of exporter's locality or by the supplier as stipulated in the L/C. the goods must be originated from the country as per indication given in the L/C. One copy of the certificate of origin should be given to the client and the remaining copy should be kept in the bank. But if there is only one copy, then the photocopy should be kept in the bank and the original should be given to the client.
•
Commercial invoice: It is the seller’s bill for the merchandise. It contains a description of the goods the price per unit at a particular location, total value of the goods packing specifications terms of sale L/C, bill of lading number etc. i.e. invoice is the price list along with quantities. Several copies of invoice are given. Two copies should be given to the client and the other copies should be kept in the bank. If there is only one copy, then its photocopy should b e kept in the bank and the original copy should be given to the client. If any original invoice contains the custom’s seal, then it cannot be given to the client.
•
Packing List: Packing list is the letter describing the number of packets and there size. If there are several copies, then two copies should be given to the client and the remaining should be kept in the bank. But if there is only one copy, then the photocopy should be kept in the bank and the original copy should be given to the client.
•
Shipment Advice: The copy mentioning the name of the insurance company should be given to the client and the remaining copies should be kept in the bank. But if only one copy it given, then the photocopy should be kept in the bank and the original copy should be given to the bank.
•
Bill Lodgment: After getting the shipping documents in order i.e. clean documents lodgment of documents to be made with in three working days. Following steps to be taken for proper lodgment: Bank and branch name seal to be affixed on the forwarding schedule, B/E seal on all shipping documents and banks crossing seal in bill of exchange and bill of lading to protect fraudulent use of the same. To put B/E serial number on all shipping documents.
•
Black List Certificate: A country at war with or having a signed strained political relationship with other countries may require a certificate that: The goods are not of the origin of the particular country, or The parties involved in the transaction are not blacklisted, or The transport vessel will not touch the other country.
•
Marine Insurance Policy: In the international trade marine insurance policy is an essential policy. It covers the risk of loss on consignments while they are on seas. The marine insurance is the responsibility of the buyers (consignee) under FAS, FOB and C F R contracts and the seller (consignor/shipper) under CIF contract. The policy must be of the type as specified in the relative contract/credit.
•
Indent: The indent is an order placed by import to his overseas exporter. It should convey in full detail, and every particular the exporter should know, so that he can satisfy buyer’s requirement. The essential particulars may include the quantity of goods and prices, the modes of making up and packing of goods, the instruction for shipping, insurance, number of bill of lading and invoice required, whether a consular invoice and certificate of origin to be included.
•
Proforma Invoice: At the negotiating stage of a deal the buyer may require the seller the quota the prices of the goods showing their details particulars of order to enable him examine the competitive position. It is an offer by the seller to sell the goods and exactly similar to customary invoice except that it is marked “Proforma”. Sometime it serves the purpose of indent when there is no indenting agent as middle man in between the seller and the buyer. L/C is opened on the basic of “Proforma Invoice”. However it may note that “Proforma Invoice” is accepted while opening L/C only special circumstance and allowed under import policy.
•
Dock Warrant: A document issued by the authorities to importers acknowledges the details of the goods deliverable to him or his nominee. It is transferable by endorsement and is a document to title to goods but not negotiable.
•
Ware House: House normally within the port area providing storage facility for imported goods under the control of the custom are called the bounded ware house. Because of the fact that bounded goods are not immediately released for consumption, duty is not collected on such goods.
•
Delivery Order: This is order by the owner of goods to the warehouse keepers to delivery the goods specified in the order to named person or his order or to bearer. It is a transferable but not negotiable instrument.
•
Trust Receipt: At times, the documents of title to goods (not the bills) are by the banker to importer against trust receipt. This is done in exceptional cases to valued customers. By signing the receipt, the importer undertakes to hold the goods and the proceeded of any sale of them as a trust for the banker who holds lien over them until the dues are paid by him. If the importer fails to hand over to the banker the proceeds of the goods sold, the former is liable for criminal breach of trust. In Bangladesh such practice of trust receipts is normally allowed for the imports sector in case of packing cash credit and to clearing and forwarding to clear the goods from the port.
5.2.6 Opening of Letter of Credit: Opening of Letter of Credit means, at the request of the Applicant (importer) issuance of a L/C in favor of the Beneficiary (exporter) by a bank. The bank, which open or issue L/C is called L/C opening bank or Issuing Bank.
First see whether the intending importer is… • • •
A customer of the bank and maintains a current account Holds a valid IRC commercial/Industrial. Made a prayer for supplying LCAF for importing a particular item.
If satisfied-obtain the following basic documents and papers… • • •
L/C application Indent/Proforma Invoice Insurance Cover Note
Also obtain the following additional documents… • • • •
Copy of valid Trade License. Membership Certificate from a Recognized Trade Association. Income Tax Declaration in Triplicate/TIN certificate. Any other documents/permits as the specific import deal required.
Check up the country of origin / country of supply / as per import policy order… • •
Permissibility of the item and H.S. CODE number Credit Report of the supplier, if needed.
If satisfied, Issue LCAF get is signed in sets by the importer. Check up the source of finance, • • •
Cash Loan, credit, special trade agreement Barter.
Get it registered with the Bangladesh Bank registration unit of the respective Exchange Control Area as per source of finance. LCAF remain valid for 12 months for Commercial item and 18 month for Industrial items for remittance of fund after registration of L/C/LCAF and for shipment 9 months and 17 months respectively. Now supply on set of IMP from to the concerned importer and get is signed with full address and IRC Number of importer. Incorporate the particulars of Importer, Supplier, Merchandise price value of L/C, mode of carrier, port of shipment, date of shipment, date of negotiation in the application FORM. Before opening a L/C, the Issuing Bank must check the following: Before opening an L/C the importer needs to submit the different required documents. These are as follows: •
Prescribed application and agreement for L/C duly stamped and signed.
•
A set of LCAF (Letter of Credit Authorization Form from Issuing Bank) duly filled in and signed.
•
IMP form in duplicate duly signed.
•
Performa Invoice (PI) / indent duly signed by the Importer and Indenter/Supplier.
•
Ensure that the relevant particulars of L/C application correspond with those stipulated in Indent/ Proforma Invoice.
•
Marine insurance cover note along with original money receipt incase import under CFR/FOB.
•
Valid membership certificate from a registered local chamber of commerce and industries or any registered association where the respective importer belongs.
•
Validity of LCA entitlement of goods, amount etc. conforms to the L/C application.
•
IRC evidencing payment of fee for current year that is duly renewed.
•
Tax identification number (TIN) certificate.
•
Valid trade license
•
Bank solvency certificate.
•
Memorandum and Articles of Association and Certificate Incorporation.
•
PSI (Pre-Shipment Inspection) related papers (where PSI required).
•
Papers / documents for import of any special items as required as per import policy.
•
Insurance Cover Note – In the name of Issuing Bank –A/C Importer covering required risks and voyage route.
•
Letter of authority to recovers bank charges and margins from importers account.
•
Conversion and rate of exchange correctly applied.
•
Charges like commission, F.C.C., postage, telex charge, if any, recovered.
•
Reimbursement instructions for Reimbursing Bank.
•
The country of origin must be clearly written on the packages or containers. A certificate from the importer / approved authority must be submitted to the Custom authority along with other documents for clearance of the goods.
•
If foreign bank’s confirmation is required, necessary permission should be obtained and accordingly advising bank is advised as per bank’s existing arrangement.
•
If add confirmation is required on account of the applicant- charges should be recovered from the applicant. Other regulation to be followed to open an L/C: •
Import from Israel as well as goods produced in Israel even carried by Israel flag vessels are prohibited. Import from Serbia and Montenegro are also prohibited.
•
Using of eight digit H.S code (Harmonized System of Coding & Commodity Description) is compulsory in issuing L/C Authorization form to importers or opening L/C by banks according to Import Control Schedule, 1988.
•
Unless otherwise stated pre-shipment inspection of goods imported in the private sector is compulsory.
•
Goods must be imported through Bangladesh flag carrying ships. Goods weighing up to 20 MT for import by individual importers and up to 100 MT import by group importers can be shipped on a non-Bangladeshi vessel, otherwise general waiver from the Director General, Shipping Directorate to be obtained.
•
In case of export orientated industries, shipment is permitted through ships of other countries.
•
Import must be made at higher competitive price.
•
Importers are bound to submit import related documents at any time to Chief Controller of import and export if required.
•
Import on CFR or FOB basis can be done by road, sea and airways, Under FOB Bangladesh Bank circular should be followed. Import on C.I.F basis is not permitted without prior approval of Ministry of Commerce. Import under foreign aid CIF can be used.
•
The country of origin must be clearly written on the packages or containers. A certificate from the importer / approved authority must be submitted to the Custom authority along with other documents for clearance of the goods. However this condition with regard to country of origin will not apply for import of Coal and those goods, which are required for export, oriented industries.
5.2.7 Preliminary steps for opening L/C: Before opening the L/C Bank will take the subsequent steps. Applicant to be Bank’s Air Holder Bank will open the L/C on behalf of a person who has an account with the bank. Unknown person will not be allowed to open L/C. •
Registered importer: Before opening the L/C bank must confirm that the L/C applicant is a registered importer or personal user, and the IRC of the importer has been renewed for the current year.
•
Permissible item: The item to be 1in1ported must is permissible and not banned item. If the item is from conditional list, the condition must fulfill to import the same.
•
Market report: Bank will verify the marketability of the item and market price of the goods. Some times the importer may misappropriate the Bank’s money through over invoicing.
•
Sufficient security or margin: Price of same items are frequently. In case of those items the Bank will be more careful to take sufficient cash margin or other security.
•
Business establishment: Bank should not open an L/C on behalf of floating businessman. The importer must have business establishment, particularly he must have business network for marketing the item to be imported.
•
Restricted country: Goods not to be imported from Israel.
Credit report of the beneficiary: If the amount of L/C in one item exceeds TK 5 lack, supplier’s credit report is mandatory. Bank will collect credit report of the beneficiary through its correspondent in abroad. 5.2.8 Procedure to open an L/C at NBL: To open an L/C, the requirements of an importer are: • • • • • •
S/he must have an account in NBL. S/he must have Importers Registration Certificate (IRC). Report on past performance with other bank. NBL collects this report from Bangladesh Bank. CIB (Credit Information Bureau) report from Bangladesh Bank. A proposal approved by the meeting of executive committee of the bank. It is necessary only when the L/C amount is small or there is no limit. If the L/C amount is large or there is a limit, then an approval from Bangladesh Bank is needed. Usually this approval is needed for amount more than one core.
5.2.9 Application for opening L/C: Import section deals with L/C opening and post import financing i.e. LIM & LTR. Now the procedure from opening L/C to disbursement against L/C is given below: At first, an Importer or Exporter will request banker open L/C along with the following documents. • • • • • • •
An application. Indent or PRO forma invoice. Import Registration Certificate (IRC). Taxpayer’s Identification Number (TIN). Insurance cover note with money receipt. A bank account in NBL, Main branch. Membership of chamber of commerce.
THE FORMS ARE: If this bank management are satisfied then the authority are permitted for opening the letter of credit (L/C). When the importer or exporters are opening L/C then some of the procedures are also maintain, these reasons Bank provides some of the form. These forms are discussed in given below: L/C application form: L/C application form is a sort of an agreement between customer and bank based on which letter of credit is opened. NBL, Main branch provides a printed form for opening L/C to the importer. Special adhesive stamp of value tk.150.00 is affixed on the form in accordance with stamp act. While opening, the stamp is canceled. Usually the importer expresses his decision to open the L/C quoting the amount of margin in percentage. Usually the importer gives the following information; •
Full name and address of the importer
• • • • • • • • • • • • • • • • • • • • •
Full name and address of the beneficiary Draft amount Availability of the credit by sight payment/acceptance/negotiation/differed payment Time bar within which the documents should be presented Sales type (CIF/FOB/C&F) Brief specification of commodities, price, quantity, indent no. Etc Country of origin Bangladesh bank registration number Import license/LCAF number IRC number Account number Document number Insurance cover note / policy number, date, amount Name and address of insurance company Whether the partial shipment is allowed is allowed or not Whether the transshipment is allowed or not Last date of shipment Last date of negotiation Other terms and conditions (if any) Whether the application must be completed/filed in properly and signed by The authorized person of the importer before I is submitted to the issuing book.
FORM IMP (Import Permits Form): This form is prepared for maintaining account of the money, which goes out side the country for the purpose of payment. This form is required by Bangladesh Bank. It is an application for permission under 4/5 of the Foreign Exchange Regulation Act, 1947 to purchase foreign currency for the payment of import. IMP- FORM has four copies: • • • •
Original copy of Bangladesh Bank, Duplicate copy for authorized dealers. It is issued for processing Exchange Control Copy of bill of entry or certified invoice, Triplicate copy for authorized dealers’ record, and Quadruplicate copy for submission to the bank in case of imports where documents are retired.
Following documents are sent with FORM-IMP: • • •
Letter of credit authorization form, One copy of invoice, and Indent copy / Proforma invoice.
The following information is included in the FORM-IMP: • • • • • •
Name and Address of the authorized dealer, Amount of foreign currency in words and figures, Names and Address of the beneficiary, Letter of credit Authorization Form Number and Date, Registration number of L/C Authorization Form with Bangladesh Bank, and Description of the goods.
Disposal of Letter of Credit: • • • •
Original copy along with duplicate Copy to Advising Bank (original for supplier and duplicate for advising bank). Triplicate copy for Reimbursing bank. Quadruplicate Copy for Applicant. Rest other Letter of Credit Issuing bank.
L/C authorization form (LCAF): The Letter of Credit Authorization form (LCAF) is the form prescribed for the authorization of opening letter of credit/payment against import and used in lieu of the import license. The authorized dealers are empowered to issue LCA Forms to the importers as per basis of licensing of the Import Policy Order in force to allow import into Bangladesh. If foreign exchange is intended to be bought from the Bangladesh bank against an 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 authorized dealers are issued in set of five (05) copies each. First copy is exchange control copy, which is used for opening L/C and effecting remittance. Second copy is the custom copy, which is used for clearance of imported goods from custom authority. Triplicate and Quadruplicate copy of LCAF are to be sent to concerned area of CCI&E office by authorized dealers/Registration unit of Bangladesh. Quadruplicate copy is kept as office copy by authorized dealer/registration unit. The letter of credit Authorization Form (LCAF) contains the following• • • • • • •
Name and Address of the importer. IRC number and year of renewal Amount of L/C applied for (both in figure and in word) Description of items to be imported HS code number Signature of the importer with seal List of goods to be imported
Bank’s officer prepares L/C when above-mentioned forms are to be submitted by customer or importer. And the next procedures are:
Forwarding Documentary Credit by Advising or Confirming Bank: There are usually two banks involved in a documentary credit operation. The issuing bank and the advising bank which is usually a bank in the seller’s country. The issuing bank asks another bank to advise or confirm the credit. If the 2nd bank is simply “advising the credit”, it will mention that when it forwards the credit to seller, such a bank is under no commitment or obligation to pay the seller. If the advising bank is also “confirming the credit”, this mention that the confirming bank, regardless of any other consideration, must pay accept or negotiate without resource to seller. Then the bank is called confirming bank also. 5.2.10 Accounting Treatment in case of L/C Opening: Now if the officer thinks fit the application to open an L/C, the following entries are given to realize the L/C commission, charges, postage, L/C margin etc. Clients account ---------------------------------------------------------------- Dr. Sundry deposit on L/C ------------------------------------------------------Cr. Income a/c commission -----------------------------------------------------Cr. Sundry deposit margin foreign currency clearing (F.C.C.) A/C--------- Cr. Vat (15% of commission) on L/C -------------------------------------------- Cr. After that L/C number and the above entries are given in the L/C register, the contra entries stating the liability of the bank and the client are as follow. Customers’ liability ----------------------------------------------------------- Dr. Bankers’ liability -------------------------------------------------------------- Cr. 5.3 Category of the Foreign Exchange Business: In terms of section 2(d) of the Foreign Exchange Regulations –1947, as adopted in Bangladesh Foreign Exchange –means foreign currency and includes any instrument drawn, accepted, made or issued under clause 13 of article 16 of the Bangladesh Bank Order, 1972, all deposits, credits and balances payable in any foreign currency and draft, travelers cheque., letter of credit and bill of exchange expressed or drawn in Bangladesh currency but payable in any foreign currencies. In exercise of the powers conferred by sec. 3 of the Foreign Exchange Regulation –1947, Bangladesh Bank issues license to scheduled banks to deal with foreign exchange. These banks are known as Authorized Dealers (AD). Bangladesh Bank also issues licenses to persons or firms to exchange foreign currency instruments such as Currency notes and coins. Foreign exchange department of NBL is divided into three sections: 1. Import Finance (L/C Operation): •
Pre Import Finance: Letter of Credit
•
Post Import Finance: • • • •
PAD LIM Forced LIM LTR
2. Export Finance (L/C Operation): •
Pre-Shipment Credit: • • •
•
Pre-shipment cash credit (PCC/ECC) Back to Back L/C (B2B) DP/DA
Post-Shipment Credit: • •
Negotiations of Bill Collections of Bill
3. Foreign Remittance: • •
Inward Foreign Remittance Outward Foreign Remittance
5.4 Import Business: Import means purchase of goods and services from the foreign countries into Bangladesh Normally consumers, firms industries and Government of Bangladesh import foreign goods /materials to meet their various necessities. So, in brief, it can say that import in the flow of goods and services purchased by economic agent staying in the country from economic agent staying abroad. The Ministry of Commerce in terms of the import and Export Control Act (IEC) -1950 regulates import of goods into Bangladesh with Import Policy Order issued periodically and public notices issued time to time by the office of the Chief Controller of Import and Export (CCI & E). A present, it is regulated by the Import Policy (1997-2006), which was come into effect on June 14, 1998. And Import Policy directs certain Import Procedure, which administers the whole activity. Bills (import) deals with L/C and the issuance of L/Cs for import purposes. The letter of credit serves as a vehicle for the importer and exporter to ensure that their goods and money are coming. It is important to remember that the bank deals with documents and not goods. There are various steps towards the issuance of a L/C; these steps will also include NBL, as well as various serving as negotiating, confirming etc., banks. This department deals with different types of L/Cs and with the payment of L/Cs. There is a clear line as to the role of the bank as an advising bank and as a guarantor. L/Cs are used for the sale and purchased of goods.
A buyer, importer or applicant goes to their bank and applies for a letter of credit. This letter of credit is given and the bank then sends this L/C to another bank in another country. They may send this L/C to a sister bank or to an advising, negotiating or confirming bank. Either way these other bank is treated as an intermediary beneficiary and the seller or exporters. The L/C is given to certify that upon the receipt of goods, the importer will immediately send the money. Negotiating banks are also sometimes used, where there is a different bank, and they are given the L/Cs; and they will deal with the payments. Some advising banks are negotiating banks can be one and the same. In case the bank in the other country is not know to the importers bank, a sister bank known by both parties can be used as a guarantor of funds. L/Cs is used mainly in trade. They usually include the mode of shipment of a specific good, and what the port of destination is. The expiry of the shipment, the documents all need to be submitted to the issuing bank. Certificates of origin , of where the goods ids produced , inspection certificates as to quantity and quality are general things importing countries will ask for pertaining to the shipment. Individual countries may have their own set of demands they want to ask. There are two criteria for importing goods. One is commercial and another one is industrial. There are also two types of L/C: • •
sight L/Cs and usance L/Cs
Sight L/C has to be paid immediately though advanced payments can be allowed. Usance L/C has to be at a fixed maturity date. For example: payment upon the receipt of goods. Beneficiaries that want to apply for a L/C need to have proper credit facilities. After calculating the outstanding and there is still room, then the L/C is issued. Calculations of margin and charges are also done. Upon the receipt of goods, proper documentation is certified and then payment is done. The reimbursement of funds can be made in through negotiating. They can be negotiated to the bank of choice in the relevant currency. Essentially, an import letter of credit does not differ from an export letter of credit except from the point of view if the user. An importer has different considerations from those of the exporter, and a well-structured letter of credit will adequately serve the needs of both. Import plays an important role in earning profit of this branch. The employees can overall work in this division and they can manage the routine work. Actually, this bank main slogan is “efficiency is our strength” this is true in the present banking operation in NBL in this branch. It is obviously says that day by day its goodwill also increases for their performance, ass these result new party or client are also come to open their L/. C. In my practical experience, I see that more than 150 (one hundred fifty) L/C open in this division average in per month. In the branch of this Bank Import division are handled three type of L/C. The application process: When a buyer determines that he will need a letter of credit in order to purchase or finance an order, an application must be completed. A letter of credit constitutes a contingent liabilities of
the applicant (buyer) and, therefore, the bank, which issues it, hence each letter of credit issued, becomes an extension of commercial credit. For that reason, it is necessary to apply for an import letter of credit just as one would apply for a loan. Once the credit approval is in place, the actual process of requesting the issuance of the letter of credit can be a relatively simple one. Requesting an amendment: If, after the letter of credit has been received, the seller finds that some of its terms or conditions are unacceptable, he may contract the buyer to arrange for an amendment. The buyer then requests the issuing bank to issue an amendment. If the terms of the amendment restrict, contract, or alter the value of the letter of credit in any way, the seller must grant his approval before the amendment can be considered. 5.4.1 Procedure of import: The procedure, which follows at the time of import, is as follows: •
The buyer and the seller conclude a sale contract provided for payment by documentary credit.
•
The buyer instructs his bank (the issuing bank) to issue a credit in favor of the seller/exporter/ beneficiary.
•
The issuing bank then sends message to another bank (advising /confirming bank), usually situated in the country of seller then advice or confirms the credit issue.
•
The advising / confirming bank then informs the seller through his bank that the credit has been issued.
•
As soon as seller receives the credit, if the credit satisfy him or her then he or she can reply that, he or she can meet its terms and conditions, he or she is in the position to load the goods and dispatch them.
•
The seller /exporter then send the documents evidencing the shipment to the bank where the credit is available (the nominated bank). This can be the issuing bank of advising /confirming bank; bank named in the credit as the paying, accepting and negotiating bank.
•
The bank then checks the documents against the credit. If the documents meet the requirements if the credit, the bank pay, accept or negotiate according to the terms of credit. In the case if credit available by negotiation, issuing bank will negotiate the resources.
•
The bank if other than the issuing bank sends the documents to the bank.
•
The issuing bank checks the documents and if they find that the documents has meet the credit requirements, than they realize to the buyer upon payment of the amount due or other terms agreed between him and the issuing bank.
•
The buyer sends transports documents to the carrier will then proceed to deliver the goods.
5.4.2 Financing features: Besides serving as a vehicle for payment, a letter of credit can serve as financing instruments if the seller and issuing bank agree to the arrangement. The most common methods are described below: •
Time Draft: As with a deferred payment letter of credit, the buyer will be able to obtain the merchandise without making immediate payment as long as the letter of credit stipulates that the draft be drawn at a specified number of days after sight or after shipment. The bank on which the draft is drawn accepts the draft, thereby creating a bankers acceptance, and undertakes to pay it at its maturity. The seller then has the option of holding the draft to its maturity and collecting its face value, or discounting the draft before it maturities. Discount rates are usually more receivables with this instruments is attractive, especially in a high interest rate environment.
•
Cash L/C: Cash L/C are those type of L/C, when the documents come from the exporter Bank or any negotiation Bank or Negotiation correspondence Bank then Importer Bank must be paid this Bank within 7 (seven) banking days exception any default meanswrong L/C number, wrong H.S code, wrong amount etc… And full value must be paid at this type of L/C as this reason this L/C is also called sight L/C. And signing in this L/C number is firstly branch code-then Year-then L/C code-then L/C number, for example1741 –06-01-000.Generally; cash L/C are open for 15,30,40 or 50 days. Amount charged must be cut of one or two quarter (three months is equal one quarter). If the L/ C count days exceeds one day of 3 months then charged cut off another quarter.
•
Differed L/C: Are those type of L/C that its full value is not payment in only one time means if products come one forth of the L/C opening value then importer bank must be paid one forth value of these type L/C With this arrangement, payment is not required until a specified number of days after shipment of the merchandise .they buyer will have access to the documents so that he can claim his goods from the carrier, but payment is deferred until the stipulated future date.. Differed L/C are open for 6 or 9 or 12 months. Actually no restricted time to open this L/C.
•
Local L/C: This type of L/C is same as the Cash or Differed L/C. This type of L/C generally use in our domestic purpose.
5.4.3 Payment procedure of the import document: •
Date of payment: Usually is made within 7 day after the documents have been received if the payment is become differed, the negotiating bank claim interest for making delay.
•
Preparing sale memo: a sale memo is made at B.C. rate to the customer. As the T.T. & O.D. rate is paid to the ID, the difference between these two rates is exchange trading. Finally, an inter branch exchange trading credit advice is sent to ID.
•
Requesting for currency: for arranging necessary fund for payment, a requisition is sent to the international department.
•
Transmission of message: Message is transmitted to the correspondent bank ensuring that payment is being made.
•
Payment of the import bills: Incase of Bank to back issuance bills payment to be made on or before maturity date of the bill out of the realization export proceeds. In case of cash sight import bills, bank will make payment from its FC deposit account and will resized, the value of foreign currency from the client account.
5.4.4 Present Situation of the Import Business of NBL: Form the very beginning; NBL has embarked on extensive foreign exchange business with a view to facility international trade transactions of the country. If we see this chart then we see the import situation in the last five years. In this chart we see that in the year 2008 the foreign remittance BDT 39877.80 million stood by this bank as against 2009 it had 44381.50 million that means the import business increases 11.29%. So it will show that the import business of this bank increases day by day. Year Import
2005 31648.20
2006 42458.50
2007 62759.00
2008 78226.32
2009 77539.77
Table: Existing Import Business in NBL (Amount in Million)
Amount
90000 80000 70000 60000 50000 40000 30000 20000 10000 0
Import
2005
2006
2007
2008
2009
Ye ar
Figure: Import Business in NBL (Source: Annual Report of NBL). 5.4.5 Lodgment and Retirement of Shipping Documents: After scrutinized the import-negotiating document, if no discrepancy are found then it is treated to be accepted after the end of seven banking days following the day of receipts of the documents. If any discrepancy is found then the banker inform it to the importer that whether he accept the bills with discrepancies or not. If the importer does not accept, the banker (NBL) informs it to the negotiating bank within seven banking days from the date receipt of the documents, otherwise it is treated to be accepted and the opening bank (NBL) must bound to pay against the bill and no complain against the bill will be accepted more than 4 banking days following the date of receipt of the documents. Shipping documents:
The following four types of document drawn under a documentary credit along with an import bill are collectively known as shipping documents: •
Transport Documents: This is an evidence of contract for carriage of goods from port of loading to port of destination (place of discharge). It bears the title of goods.
•
Commercial Invoice: Commercial invoice is the sellers bill for the National down in favor of the buyer (importer). It described the goods as per contract of sell executed between buyer and seller.
•
Insurance Documents: As the international trade is very much risky, it is essential to insure undertakes to indemnity the assured in agreed manner against the risk of loss or damage. By this document, the insurer undertakes to indemnity the assured in agreed manner against future losses if any. That means insurance is a contract of indemnity.
•
Others Documents: The documents which are required to accompany on the basis of the terms of the credit along with import bill other than aforesaid, three documents are termed as other documents. Other documents are:
Packing list Certificate of origin Freight certificate Inspection certificate Health certificate.
Lodgment of Documents: Lodgment is a set of activities, which are done to effect ultimate payment of the bill drawn under documentary credit by the issuing bank. After receiving the documents from the exporters, at first PBL write it in the PAD register. Pad Register contains date, Pad number, L/C number, and name of the drawer, name of the drawer, amount, and number of copies of various documents, name of the imported items. This written procedure is called Lodgment. Retirement of Documents: The process of collecting documents from bank by the importer is called retirement of the documents. The importer gives necessary instructions to the bank for retirement of the import bills or for the disposal of the shipping documents to clear the imported goods from the customs authority. The importer may instruct the bank to retire the document by debating his current account. Post-Import Financing: If there is no available cash in importer’s hand, he can request the bank to grant loan against the documents for the purpose of post import finance. There is one form of post import finance available in NBL. LTR (Loan against Trust Receipts):
On the arrival of goods and lodgment of import documents, importer may request the bank for clearance of goods from the port (custom). Proper sanction from the component authority is to be obtained before clearance of consignment. For giving these types of loan, officer makes loan proposal and sends it to H/O for approval. After getting approval from H/O, bank grants loan in the form of LTR. It is needless to say that bank only deals with the documents, not with goods & services in case of Foreign Exchange Business.
5.4.6 The import procedure can be shown by the following flow chart (operational mechanism): Registration with CCI & E, Import Registration Certificate (IRC) Purchase contract with foreign supplier directly or through agent Registration of Letter of Credit Authorization (LCA) Form Opening/ Issuance of L/C by the Importers Bank Dr. Importers (Opener) A/C, Cr. Sundry Deposit A/C-Margin on L/C Dispatch/ Transmit the L/C to the Beneficiary by Issuing Bank’s Correspondence in the beneficiaries’ country Receipt of the import Documents from Negotiating or Collecting Bank Scrutiny of Import Documents
Instruct Reimbursing Bank not to honor claim Inform Negotiating Bank about Discrepancies
Are the Documents discrepant?
Inform Opener about Discrepancies
YES NO Lodgment of Import Bills Dr. PAD (Payment against Document). Cr. HO A/C Foreign Bank (Negotiating Bank).
Do they agree to accept documents despite discrepancies?
NO Ask Negotiating Bank for Disposal Instruction Do they Accept Documents on collection basis
Delivery the Documents to the Importers for Release of Goods
YES Request the Opener to Request the Opener to Delivery of Import Delivery of Import Documents for Release of Documents for Release of Goods Goods Collect Proceeds from Importers NO Dr. Sundry Deposit A/C Margin on L/C, Dr. Importers A/C, Send Banks Documents Cr. HO A/C Foreign Bank Dr. SD A/C Margin on L/C (collecting bank) Cr. Importers A/C
Have they responded?
NO
YES Retire the Import Bills and Documents to the Opener for Release of Goods YES Have they approached for post import finance?
NO Retire the Import Bill Dr. Opener A/C Dr. S.D A/C Margin on L/C Cr. PAD Deliver the Documents to the opener for release of goods.
Retire the Bill through certain of Forced LIM with HO approval Dr. Sundry Deposit A/C Margin on L/C Dr. Forced LIM Cr. PAD (Payment against Document) Clear the Goods through the Banks approved Clearing Agent and Store the same under Bank’s effective control. All relevant Expenses in Connection with Clearing of Goods to If you Agree, Recover further margin from the Opener and Retire the Documents by creation of LIM Dr. Opener Account Dr. LIM Dr. S.D A/C Margin on L/C Cr. PAD Clear the Goods through the Bank’s approved Clearing agent and Store the same under Bank’s effective control relevant expenses in connection with clearing of goods to be debited to LIM account
5.5 Export Business: Creation of wealth in ay country depends on the expansion of production and increasing participation in international trade. By increasing production in the export sector this bank can improve the employment level. Bangladesh exports a large quantity of goods and services to foreign households. Readymade textile garments both knitted and woven), Jute, Jute-made products, frozen shrimps, tea are the main goods that Bangladeshi exporters export in 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 U.S.A and European Community (EC) countries. Bangladesh exports about 40% of its readymade garments products to U.S.A. Most of the exporters who export through NBL are readymade garments exporters. They open export L/Cs here to export their goods, which they open against the import L/Cs opened by their foreign importers. Export L/C operation is just reverse of the import L/C operation. For exporting goods by the local exporter, bank may act as advising bank and collecting bank (negotiable bank) for the exporter. There is profit to be made in exports. The international market is much larger than the local market. Growth rates in many overseas markets far outpace domestic market growth. And meeting and beating innovative competitors abroad can help companies keep the edge they need at home. There are also real costs and risks associated with exporting. It is up to each company to weight the necessary commitment against the potential benefit. Ten important recommendations for successful exporting should be kept in mind: •
Obtain qualified export counseling and develop a master international marketing plan before starting an export business. The plan should clearly define goals, objectives, and problems encountered.
•
Secure a commitment from top management to overcome the initial difficulties and financial requirements of exporting. Although the delays and costs involved in exporting may seem difficult to justify in comparison with established domestic sales, the exporter should take a long-range view of this process and carefully monitor international marketing efforts.
•
Take sufficient care in selecting overseas distributors. The complications involved in overseas communications and transportation require international distributors to act more independently than their domestic counterparts.
•
Establish a basis for profitable operations and orderly growth. Although no overseas inquiry should be ignored, the firm that acts mainly in response to unsolicited trade leads is trusting success to the element of chance.
•
Devote continuing attention to export business when the local market booms. Too many companies turn to exporting when business falls off in the domestic market. When domestic business starts to boom again, they neglect their export trade or relegate it to a secondary position.
•
Treat international distributors on an equal basis with domestic counterparts. Companies often carry out institutional advertising campaigns, special discount offers, sales incentive programs, special credit term programs, warranty offers, and so on in the domestic market but fail to make similar offers to their international distributors.
•
Do not assume that a given market technique and product will automatically be successful in all countries. What works in Japan may fall in Saudi Arabia. Each market has to be treated separately to ensure maximum success.
•
Be willing to modify products to meet regulations or cultural preferences of other countries. Local safety and security codes as well as import restrictions cannot be ignored by foreign distributors.
•
Provide readily available servicing for the product. A product without the necessary service support can acquire a bad reputation quickly.
5.5.1 Functions of the Export Department: The following are the main functions performed by the export department: • • • • • • • • • • • • • • • • • •
Scouting of Export shopping Document. Follow-up for realization of Export proceed. All Correspondence relating Export Department. Compliance of Audit and Inspiration. Advising of Export E/Cs to the beneficiary. Authorization of L/C and Amendment from other Correspondent Bank. Transfer of Export L/C to the 2nd Beneficiary and Issuance of notice of transfer to L/C Issuing Bank. Recording of Export L/C particulars in Export E/C transfer Register. Realization of transfer changes. Issuance of proceeds realization certificates. And other work as / when directed by the manager and sun-manager. Certificate of EXP Forms. Posting of Tickets. Lodgment of Export Bills. Preparation of tickets relating to Negotiation of Documents. Maintenance of all records related to FBP, FDBC and Inland Bills. Balancing of FBP, FDBC, IPB and A/ K Export accounts. Preparation of settlement and all returns to Bangladesh Bank and Head Office (weekly/monthly/quarterly).
5.5.2 Export L/C process: The other type of L/C facility offered by authorized branches is Export L/C. The letter of credit is a highly Standardized instrument, which has evolved over many years into a reliable method of effecting payment for commercial transactions throughout the world. To ensure a seamless transaction when relying on an export letter of credit for payment, it is important to understand the responsibilities of the parties. Bangladesh exports a large quantity of goods and services to foreign households. Readymade textile garments (both knitted & wove), jute, jute made products, frozen shrimps, tea are the main goods that Bangladeshi exporters exports to foreign countries. Garments Sector is the largest sector that exports the lion share of the countries export. Bangladesh exports most of its readymade garments products to USA and European Community (EC) countries.
Elements of letter of credit: Every letter of credit should be scrutinized as soon as it is received special attention should be paid to the following key elements: •
Key dates: These include the latest date for shipment, the number of days for presentation of documents, payment (in the case of deferred payment or time letters of credit), and the expiration date. These dates should be realistic and acceptable.
•
Amount: A letter of credit which says “about $x” means the exporter may draw 10% more or less. If the merchandise description calls for “about x” amount of product, then the exporter may ship 10%more or less.
•
Documentary requirements: Documents should be obtainable in time to meet the latest date for presentation. Special consideration must be given requirements for consularized invoices, inspection certificates and evidence of prior notification.
•
Negotiability: The letter of credit can be freely negotiable or restricted to the counters of a named bank.
5.5.3 Export financing: To meet up the gods to be exported, the exporter may require Bank finance. Besides, s/he may require finance for go down rent, electricity bill, freight etc. Even after shipment of the goods, exporter may require Bank finance to meet up her/ his current expenditure up to repatriation of the export proceeds. Export financing can be two types: 1. pre-shipment credit 2. post-shipment credit •
Pre-shipment credit: Pre-shipment credit, as the name suggest, is given to finance the activities of an exporter prior to the actual shipment of goods. Pre shipment credit is essentially a short-term credit and liquidated by negotiation or purchase of export bills covering the merchandise generally. The bank grants pre-shipment credit against irrevocable, confirmed, unrestricted letter of credit received by an exporter from an overseas buyer. Before extending pre shipment credit, the bank takes into consideration the credit worthiness, export performance of the exporter and other documents and information which are otherwise required for sanction of loan as per the existing rules and regulation in force. • • • • • •
export cash credit (hypothecation) export cash credit (pledge) export cash credit against trust receipt packing credit back to back letter of credit Credit against red-clause letter of credit.
•
Post-shipment credit: There is a fine gap between export of the goods and realization of the proceeds. So exporter may require finance in that period to continue his business. So bank may finance against export documents ensuring the following:
Export documents comply with the credit terms. Buyer is bonafide. Party’s past performance is satisfactory. Any other security in case of export under contract.
Export Cash Credit (Hypothecation): Under this arrangement, a credit is sanction against hypothecation of the raw materials or finished goods for export. Such facility is allowed only to major exporters. As the bank has got no security in this case, except charge documents and lien of export L/C or contract, the bank normally insist in the exporter finishing collateral security. The letter of hypothecation creates a charge against the merchandise in favor of the bank but neither the ownership nor the possession is passes to it. Export Cash Credit (Pledge): This credit facility is allowed against a pledge of exportable goods or materials .In this case ,cash credit facilities are extend ed against the pledge of goods to be stored in the go down under banks control by singing a letter of pledge and other pledge documents .the exporter surrenders the physical possession of the goods to the banks effective control as security for payment of bank dues .In the event of failure of the exporter to honor his commitment, the bank can sell the pledge merchandise for recovery of the advance. Export Credit Against Trust Receipt: In this case, credit limit is sanctioned against trust receipt; (TR) here also, unlike the pledge, the exportable goods remain in the custody of the exporter. He is required to execute a stamped export trust receipt in favor of the bank, wherein a declaration is made that goods purchased with financial assistances of bank are held by him in trust for the bank .trust type of credit is granted when the exporter wants to utilize the credit for processing, packing and rendering the goods in exportable condition and when it seems that exportable goods cannot be taken into banks custody. This facility is allowed only ton the major party and collateral security is generally obtained in this case. Packing Credit: In this case, credit facilities are extended against security of Railway /steamer Receipt /barge Receipt /Truck Receipt evidencing transportation of goods to the port for shipment of the goods in addition to the usual charge documents and line. Of export letter of credit .This type of credit is sanctioned for the transitional period from dispatch of the goods till negotiation of the export documents .the drawings under export cash credit (hypothecation/pledge)limit are generally adjusted by drawings in packing credit limit which is in turn liquidated by negotiation of export documents. Settlement of Export Claims: In terms of export policy order of exchange control Manual Bangladesh Bank., produces of export bills must be repatriated within a maximum period of four months, fins is period may be extended by Bangladesh Bank on reasonable grounds, it has already been pointed out that side by emphasis has also been given on settlement of the foreign buyers claims arising out exports, its quick settlement of export claims is an indirect incentive to the overseas buyer for our products. If the
buyer becomes reluctant 1% accept discrepant documents without document like may allow discount on the request of the exporter, if discount is less than 10% of the export value, subject to the post fact approval from export promotion Bureau. If the discount is more than 10% prior approval is required. Foreign commission, brokerage or other trade charges related to export may be allowed up to 5% without Bangladesh Bank permission, but for more than 5% permission is required. In case of export of books, journals, and magazines, 33% discount is allowable. Export claim may be deducted from the bill value or may be remitted against claim after full realization of the export proceeds. 5.5.4 Present Situation of the Export Business in NBL: Every country has certain natural advantages and disadvantages in producing certain commodities while they have some natural disadvantages as well in other areas. As a result, we find that some countries need to import certain commodities while others need to export their surpluses. Foreign trade brings the fruits of the earth to the homes of the humblest among the countries. These transactions are the basis upon which international trade is made. As more than one currency is involved in foreign trade, it gives rise to exchange of currencies, which is known as Foreign Exchange. The term ‘Foreign Exchange’ has three principal meanings. Firstly, it is a term used referring to the currencies of other countries in terms of any single one currency. To a Bangladeshi, Dollar, Pound sterling, etc. are foreign currencies and as such foreign exchanges. Secondly, the term also commonly refer to some instruments used in international trade, such as bill of exchange, drafts, traveler’s cheque and other means of international remittance. Thirdly, the term foreign exchange is also quite often referred to the balance in foreign currencies held by a country. This is the graphical representation of the Export business in National Bank limited. Year Export
2005 21344.10
2006 28019.20
2007 31824.00
2008 36284.44
2009 38398.85
Table: Existing Export Business in NBL (Amount in Million) 50000 40000 30000
Amount
20000
Export
10000 0 2005
2006
2007
2008
2009
Year Figure: Graphical Presentation of Export Business (Source: Annual Report of NBL). Analysis of the data it is obviously says that the total export business handled by this bank amounted to BDT 38398.85 million as of December 31, 2009 as compared to BDT 36284.44 million in 2008. It indicates that this bank export is increased for this bank for their efficient and effective services.
5.6 Calculations for Foreign Exchange growth: Calculations of Foreign Exchange growth: (Current Year – Previous Year) ÷ Previous Year. Calculations of Coefficient of variation (Export) = Standard Deviation ÷ Total Value of Export business. Calculations of Coefficient of variation (Import) = Standard Deviation ÷ Total Value of Import business. Year
Import
Export
Total Foreign Exchange Business
(Figure in million) Growth Rate
2005 2006
21344.10 28019.20
31648.20 42458.50
52992.30 70477.70
28.33% 33%
2007 2008 2009
31824.00 36284.44 38398.85
62759.00 78226.32 77539.77
94583.00 114510.76 115938.62
34.20% 21.07% 1.25%
Sum
155870.59
292631.79
448502.38
Average
31174.12
58526.36
Median
31824
62759
SD
24677.25568 = 2467726
CV of Export
8.43286906 = 8.43%
CV of Import
15.831887 = 15.83%
80000 70000 60000 50000 40000 BDT in million 30000 20000 10000 0
Import Export
2005
5006
2007 Year
2008
2009
Figure: Total Foreign Exchange Business from 2005-2009 The Graph Shows Total Foreign Exchange Business from 2005-2009 of NBL. Here we see that the import business of NBL is less stable than the export business. Because import shows a high degree of variation. 5.7 Remittance Business: Foreign remittance section of NBL is an integral part of Foreign Exchange Department. And this section of Foreign Exchange Department deals with incoming and outgoing foreign currencies. Therefore based on its function, foreign remittances are divided into two types: 1. Inward Foreign Remittance and 2. Outward Foreign Remittance. •
Inward Foreign Remittance: Inward remittance covers purchase of foreign currency in the form of foreign TT, DD and bills etc. sent from abroad favoring a beneficiary in Bangladesh. Purchase of foreign exchange is to be reported to Exchange control Department of Bangladesh Bar-ken From-C.
•
Outward Foreign Remittance: Outward remittance covers sales of foreign currency through issuing foreign TT, Drafts, Travelers Cheque etc. as well as sell of foreign exchange under L/C and against import bills retired. Sale of foreign exchange is reported to Exchange Control Department of Bangladesh Bank on form 1/M.
Instruments of Foreign Remittance Department: The instruments are as follows: • • •
Travelers Cheques (TC). Foreign Demand Draft (FDD). Endorsement of USS in passport.
5.7.1 Present Situation of Remittance Business in NBL: The bank has established drawing arrangement with United Commercial Bank Limited and Arab Bangladesh Bank Limited for the prompt delivery services of remittances to the beneficiaries located any corner of Bangladesh. When this bank was established this time it had few foreign correspondence now in 2009 it has 29 foreign correspondence all over the world are to ready for the prompt delivery services of remittances. Year Remittance
2005 13618.20
2006 21353.90
2007 27560.80
2008 39877.80
2009 44381.50
Table: Current Remittance Business in NBL (Amount in Million)
50000 40000 30000
Amount
20000
Remittance
10000 0 2005
2006
2007
2008
Year
2009
Figure: Graphical Presentation of Remittance Business (Source: Annual Report of NBL). In this chart we see that foreign remittance handled by the bank stood at BDT 44381.50 million as of December 31, 2009 as against BDT 39877.80 million in 2008, that means the remittance business increases 11.29%. These are the present situation of the foreign exchange business of the National Bank Limited. 5.7.2 Scenario of the Foreign Exchange Business in NBL (Import, Export & Remittance): We know that every country expect and Government realize that Export is better than Import. For these reason this bank also given some incentives for expand these business. If we see the chart which is showed in below that is the scenario of Foreign Exchange Business in the National Bank Limited.
Scenerio of the Foreign Exchange Business in NBL
Amount
80000 70000 60000 50000 40000 30000 20000 10000 0
Import Export Remittance 2005 2006
2007 2008
Year
2009
Figure: Compare to Export &Import & Remittance Business
The sixth chapter is the core chapter which narrates the overall performance of NBL through horizontal and ratio analysis.
CHAPTER: 6 FINANCIAL PERFORMANCE OF NBL 6.0. Five Years Performance of NBL: 6.1. Capital:
2007
2846.5
2006
2450 1872.7 4253.6
2005
2450 1208.2 3360.2
2450 805.47 2468.8
Reserve funds & surplus
1000 619.59 2115
Paid up capital
6070.2
Capital (Tk in million) Authorised capital
7450
NBL. has a consistent dividend policy. In line with that Stock Dividend of 52 percent was declared for the year 2008 which strengthened paid-up capital base and it stood at Tk.2,846.53 million 2009 against authorized capital of 7,450.00 million. The statutory reserve enhanced by 35.95 percent to Tk.2,418.37 million in 2009 after transferring 20 percent on pre-tax profit while it was Tk.1,778.87 million in 2008. At the end of 2009 shareholders' equity increased by 45.55 percent to Tk.8,916.76 million from Tk.6,126.27 million of 2008.
2008
2009
6.2. Capital Adequacy Ratio Capital adequacy ratio is measured by the ratio of a bank's capital to risk weighted asset both on balance sheet and off balance sheet transactions. Capital Management of the Bank is to maintain an adequate capital base to support the projected business and regulatory requirement. NBL always maintain a prudent balance between Tier- 1 and Tier-2 capital. The Bank has maintained overall capital adequacy at 13.56 percent in 2009 of which 10.89 percent and 2.67 percent as Tier1 and Tier-2 capital respectively against Bangladesh Bank's requirement of 10 percent.
2005
2006
2007
2008
13.56%
10%
13.42%
10%
13.11%
Held
10%
10.10%
Requird
9%
9%
10.45%
CAR
2009
6.3. Deposit The deposit base of the bank registered a growth of 27.66 percent in the reporting year over the last year and stood at Tk.76,838.64 million. Expanded branch network, innovative deposit products including NMS and NDS attracted a huge number of customers, which contributed to the growth of deposit. The main customers include individuals, corporations, financial institutions, government & autonomous bodies, etc. Deposits
76838.64
(Tk in m illion) 60187.89 47961.22 32984.05
2005
40350.87
2006
2007
2008
2009
6.4. Import and Export NBL opened a total number of 24,385 LCs amounting to USD 1,117.61 million in import trade in 2009. The main commodities were scrap vessels, rice, wheat, edible oil, capital machinery, petroleum products, fabrics & accessories and other consumer items. The Bank has been nursing the export finance with special emphasis since its inception. In 2009 it handled 18,761 export documents valuing USD 559.78 million with a growth of 5.41 percent over the last year. Readymade garments, knitwear, frozen food and fish, tanned leather, handicraft, tea etc. were the major export finance sectors
Im port & (Tk in m illion)
Export 78226.32
77539.77
62759 42458.5 31648.2
21344.1 2005
28019.2
31824
2006
2007
36284.44
2008
38398.85
2009
6.5. Investment The daily average investment of the treasury in local currency was Tk 10,629.10 million in the from of Call Lending, Term Lending, Reverse Repo, Debentures and Govt. Securities. The yield was 1.17 percent higher than previous year. Like previous year, inflow of foreign currency of the current year was higher than the previous year. Treasury was actively participated in interbank market, both in local and foreign currency. It mostly invested in high yielding long-term government securities to cover the increased statutory liquidity (SLR) requirement arising from the growth of deposit liabilities. Investment (Tk in m illion)
12315.2 9156.61
7760.38 6239.83 3564.82
2005
2006
2007
2008
2009
6.6. Net profit National Bank Limited generated profit before provision of Tk.3,397.70 million in 2009 which was Tk.3,123.82 million in 2008 registering a growth of 8.77 percent. Net Profit after tax grew by 36.45 percent to Tk.2,070.47 million in 2009 after making provision for loan loss and income tax for Tk.200.00 million and Tk.1,150.00 million respectively. Interest income increased by 17.88 percent to Tk.6,821.39 million in 2009 from Tk.5,786.71 million in 2008 due to growth of advances. It accounted 61.98 percent of the total operating income.The income from investment increased sharply by 89.51 per cent to Tk.1,779.32 million in 2009 from Tk.938.92 million in 2008. Commission and exchange earning decreased by 3.20 percent to Tk.1,463.70 million in 2009 from Tk.1,512.13 million of 2008. Overall increase of deposits pushed up the interest expenses by 24.91 percent from Tk.3,594.84 million in 2008 to
Tk.4,490.34 million in 2009. Salary & allowances increased by 26.89 percent, Rent & taxes, insurance premium, utility charges etc increased by 23.36 percent. Total operating expenses was Tk.3,118.11 million in 2009 in comparison to Tk. 2,174.40 million in 2008. Net profit after Tax (Tk in m illion)
2070.47
1517.43 1238.11
507.49 271.67
2005
2006
2007
2008
2009
6.7. Loans and Advances NBL has been able to increase its loans and advance despite adverse conditions in the domestic as well as in the global economy. The bank recorded a growth of 28.55 percent with a total loans and advances portfolio of Tk. 50665.07 million at the end of December 2008 compared to Tk. 65129.29 million at the end of December 2009. The growth was due to parking of established business enterprises, new venture of Syndication loan, Project loan, Housing loan, Lease finance, SME, Agriculture loan etc. 65129.29
Loans & Advances (Tk in m illion)
27020.21
2005
50665.07
36475.74 32709.68
2006
2007
2008
2009
6.8. Remittance As a contributor of national economy, NBL is relentlessly working to ease the flow of inward foreign remittance. National Bank has remittance arrangements with different bank and exchange houses in various countries throughout the world. The bank has earned the confidence and reputation as a reliable organization of paying hard-earned money of the expatriate Bangladeshis to their beneficiaries in the country safely and quickly. The bank introduced different products and technology including SWIFT, (Tk. 620.69 crore) higher than that of 2006 achieving a growth rate of 29.07 percent. Introduction of products like Home Delivery Scheme , Electronic Fund Transfer(EFT) and different instant payment system and modern technologies like SWIFT and online services have strengthen the position of the bank. devices for more speedy payments.
Further, NBL entered into a deal with ASA, a leading NGO having 3,000 outlets and also with Social Islamic Bank to expand bank's domestic network. With the passage of time, NBL earned the confidence and trust of the wage earners and successfully handling a sizeable volume of remittances, which is depicting a gradual increasing trend. In 2009, foreign remittance brought through NBL was USD 645.97 million showing an increase of USD 63.50 million over the previous year, which registered an attractive growth of 11 percent. Remittance (Tk in million)
39877.8
44381.5
27560.8 21353.9 13618.2
2005
2006
2007
2008
2009
6.9. Financial Performance of NBL on the basis of Ratio Analysis: The performance of the bank can be measured through various ratio analyses. With the help of 5 years balance sheet and income statement managed from the Annual Reports of National Bank Limited I have done the following ratio analysis. 6.9.1 Return on Equity (ROE): Calculations for ROE: Net Profit After Tax á Total Equity Capital Equity Capital = Paid-up Capital + Reserve & Surplus + Undistributed Net Profit ROE is a measure of the rate of return flowing to the bank’s shareholders. Here the table indicates that the ROE of the bank is increasing trend from 2005-2007 but it is declining from 2008 onwards. Year ROE (%)
2005 9.93
2006 15.50
2007 27.10
2008 24.77
The graphical presentation of the ratio has been shown in the following way30.00% 25.00% 20.00% 15.00%
RO E
10.00% 5.00% 0.00% 2005
2006
2007
2008
2009
2009 23.22
Figure- Return on Equity Interpretation: The graph implies that the bank has more or less a consistent return on its equity. The ROE was 9.93% in 2005 which increased to 24.77% in year 2008, but in year 2009 decrease to 23.22%. It indicates the bank’s ROE shows declining trend. 6.9.2 Return on Assets (ROA): Calculations for ROA: Net Profit After Tax ÷ Total Assets ROA is primarily an indicator of managerial efficiency. It indicates how capably the management of the bank has been utilizing the institution assets to generate net earnings. Calculation indicates that the bank has an increasing pattern of return on its assets. It started improving gradually. Year ROA (%)
2005 0.71
2006 1.08
2007 2.19
2008 2.10
2009 2.25
The graphical presentation of the ratio has been shown in the following way2.50% 2.00% 1.50% ROA
1.00% 0.50% 0.00% 2005 2006 2007 2008 2009
Figure- Return on Assets Interpretation: The graph represents that the bank has increasing trend of return on its assets with a minor fall in 2008. 6.9.3 Return On Investment (ROI): Calculations for ROI: Net Profit after Tax ÷ Investment The calculation of ROI indicates that the bank has an increasing pattern of return on its investment. Year ROI (%)
2005 7.62
2006 8.13
2007 15.95
2008 16.57
The graphical presentation of the ratio has been shown in the following way.
2009 16.81
18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00%
RO I
2005
2006
2007
2008
2009
Figure- Return on Investment Interpretation: Diagram implies that the bank has an increasing trend in respect of the return on investment. The return on investment was 7.62% in 2005 and increased the following years and reached to 16.81% in year 2009. And this result indicates the ratio is increasing significantly. So over all it can be said that the ROI of the Bank is satisfactory. 6.9.4 Investment to Asset Ratio: Calculations for Investment to Asset ratio: Investment รท Assets Results indicate that the bank has more assets against its investment. The ratio is inconsistent throughout the years. Year Ratio (%)
2005 9.28
2006 13.33
2007 13.73
2008 12.68
2009 13.37
The graphical presentation of the ratio can be shown through the following way16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00%
Ratio
2005
2006
2007
2008
2009
Figure -Investment to Asset ratio Interpretation: The graph shows that the bank has significantly less investment in comparison with its asset. It increased significantly. 6.9.5 Investment to Deposit Ratio: Calculations for investment to deposit ratio: Investment รท Deposit
Results indicate that the bank has more deposits against its investment. The ratio is inconsistent throughout the years. Year Ratio (%)
2005 10.81
2006 15.46
2007 16.18
2008 15.21
2009 16.03
The graphical presentation of the ratio can be shown from the following presentation20.00% 15.00% 10.00%
Ratio
5.00% 0.00% 2005
2006
2007
2008
2009
Figure -Investment to Deposit ratio Interpretation: The graph depicts that the bank has significantly less investment against its deposit. Calculation indicates that the bank has an increasing pattern of Deposit on its Investments. It started improving gradually. 6.9.6 Leverage Ratio: Calculations for Leverage Ratio: Total Liabilities รท Total Assets Leverage ratios show the proportions of debt and equity in financing the institutions assets. A high debt institution is called highly leveraged and a low debt institution is called a institution with low leverage. The leverage ratio of the bank is much higher. The ratio indicates in 2005 it was 5.46% which increased in the following year and reached to 90.13% in year 2008. But it shows a declining pattern, which is good for the bank. Year Ratio (Times)
2005 05.46
2006 93.00
2007 91.92
2008 91.52
2009 90.13
The graphical presentation of the ratio can be shown in the following way100 90 80 70 60 50 40 30 20 10 0
Ratio
2005
2006
2007
2008
2009
FigureLeverage Ratio
Interpretation: Diagram indicates that National Bank has a high leverage ratio. 6.9.7 Operating Efficiency Ratio: Calculations for Operating Efficiency Ratio: Total Expense ÷ Total Income Creditors and owners take keen interest in the profitability of the institution. Creditors want to get interest regularly and return of principal at maturity. Owners also want to get a reasonable return on their investment. This is possible only when the institution earns enough profits. The Operating Efficiency ratio is inconsistent throughout the years. Year Ratio (%)
2005 23.66
2006 65.03
2007 49.07
2008 41.03
2009 47.97
The graphical presentation of the ratio can be shown from the following presentation-
70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%
Ratio
2005
2006
2007
2008
2009
Figure- Operating Efficiency Ratio Interpretation: The graph implies that the banks Operating Efficiency was 23.66% in 2005 and then it has an increasing trend. But in 2007 it again fell. And in 2009 the ratio increased significantly and reached 47.97%. 6.9.8 Net interest margin: Calculations of Net interest margin: (Interest Income – Interest Expense) ÷ Total Assets The net interest margin measures how large a spread between interest revenues and interest cost management has been able to achieve by close control over the earning assets and pursuit of the cheapest sources of funding. Year Ratio (%)
2005 1.60
2006 2.62
2007 2.57
2008 3.04
2009 2.53
The graphical presentation of the ratio can be shown from the following way3.50% 3.00% 2.50% 2.00%
Ratio
1.50% 1.00% 0.50% 0.00% 2005
2006
2007
2008
2009
Figure- Net Interest Ratio Interpretation: The graph depicts that the Net interest margin is more or less same during years 2006, 2007 and 2009. In 2008 it increased and than again fell in year 2007 and 2009. 6.9.9 Earning base in assets: Calculations of Earning base in assets: Total Earning Assets ÷Total Assets Total Earning Assets = Total Assets – Non Earning Assets Non-Earning Assets = Cash + Fixed Assets + Intangibles. The table implies that the banks Earning base in assets was 8.52% in 2005 and then it has an increasing trend. In 2009 the ratio increased and reached 21.59%. Year
2005
2006
2007
2008
2009
Ratio (%)
8.52
17.94
17.21
21.71
21.59
The graphical presentation of the ratio can be shown from the following way 25.00% 20.00% 15.00% Ratio
10.00% 5.00% 0.00% 2005
2006
2007
2008
2009
FigureEarning Base in Assets Ratio Interpretation: Almost increasing and shows good position. 6.9.10 Deposit per branch: Calculations of Deposit per branch: Total Deposits ÷ No. of Branches. Deposit per branch measures that a bank branch’s has how much deposits. Here we see that the deposit per branch is increasing which is a good sign for the bank.
Year Ratio (Tk in million)
2005 434.00
2006 443.42
2007 474.86
2008 567.81
2009 586.55
The graphical presentation of the ratio can be shown in the following way 700.00 600.00 500.00 400.00
Ratio
300.00 200.00 100.00 0.00 2005
2006
2007
2008
2009
Figure- Deposit per Branch Ratio Interpretation: The calculation indicates that the banks Deposit per branch were Tk 434 million in 2005 and then it has an increasing trend and reached Tk 586.55 million in 2009. 6.9.11 Deposit per employee: Calculations of Deposit per employee: Total Deposits รท No. of Employee. Deposit per employee measures that a bank employees has how much deposits. Here we see that the deposit per branch is increasing which is a good sign for the bank. Year Ratio (Tk in million)
2005 15.11
2006 17.78
2007 19.72
2008 21.99
2009 25.96
The graphical presentation of the ratio can be shown from the following presentation30.00% 25.00% 20.00% 15.00%
Ratio
10.00% 5.00% 0.00% 2005
2006
2007
2008
2009
Figure- Deposit per Employee Ratio Interpretation: This calculation shows that the deposit per employee is increasing significantly. In 2005 the ratio was Tk 15.11 million. And it increased year by year and it reached Tk 25.96 million in 2009.
6.9.12 Advance per branch: Calculations of Advance per branch: Total Amount of Advances ÷ Total No. of Branches. It indicated that a bank branch’s has how much advances. The above table shows that Advance per branch is increasing from year to year. Year Ratio (Tk in million)
2005 355.53
2006 359.45
2007 361.15
2008 477.97
2009 497.17
The graphical presentation of the ratio can be shown in the following way-
600.00 500.00 400.00 300.00
Ratio
200.00 100.00 0.00 2005
2006
2007
2008
2009
Figure- Advance Per Branch Ratio Interpretation: The graph implies that the bank has continuously increasing trend in respect of Advance per branch. The Advance per branch was Tk 355.53 million in 2005 increased in the following years and reached to Tk 497.17 million in year 2009. And this result indicates the ratio is increasing significantly. Highest was in 2009. It’s a good performance for the bank. 6.9.13 Advance per employee: Calculations of Advance per employee: Total Advances ÷ Total No. of Employee. The table implies that the bank Advance per employee was Tk 12.38million in 2005 and then it has an increasing trend. In 2009 the ratio increased and reached Tk 22 million. Year Ratio (Tk in million)
2005 12.38
2006 14.41
2007 15.00
2008 18.51
The graphical presentation of the ratio can be shown through the following way-
2009 22.00
25.00% 20.00% 15.00% Ratio 10.00% 5.00% 0.00% 2005
2006
2007
2008
2009
Figure- Advance per Employee Ratio Interpretation: So the calculation indicates the bank has an excellent sum of Advance per employee. 6.9.14 Net profit per branch: Calculations of Net profit per branch: Net Profit After Tax รท No. of Branch. Net profit per branch indicates that how much profit a bank branch earns in a year. Year Ratio (Tk in million)
2005 3.57
2006 5.58
2007 12.26
2008 14.32
2009 15.81
The graphical presentation of the ratio can be shown through the following way18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00%
Ratio
2005
2006
2007
2008
2009
Figure- Net Profit per Branch Ratio Interpretation: After initial loss profit is increasing every year. Highest per branch profit was in 2009. 6.9.15 Net profit per employee: Calculations of Net profit per employee: Net Profit After Tax รท No. of Employees.
Net profit per employee measures that how much profit a bank employee earns in a year. Year Ratio (Tk in million)
2005 12.44
2006 22.36
2007 50.91
2008 55.44
2009 69.95
The graphical presentation of the ratio can be shown through the following way80.00% 70.00% 60.00% 50.00% 40.00%
Ratio
30.00% 20.00% 10.00% 0.00% 2005
2006
2007
2008
2009
Figure- Net Profit per Employee Ratio Interpretation: The calculation indicates the bank’s net profit per employee is gradually increasing every year. 6.9.16 Earning Per Share: Calculations of Earning Per Share: Earnings ÷ No. of Shares. EPS is the portion of an institution’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of institution’s profitability. Year
2005
2006
2007
2008
2009
EPS (BDT)
43.85
63.01
102.48
81.03
72.74
The graphical presentation of the ratio can be shown in the following way120 100 80 60
Ratio
40 20 0 2005
2006
2007
2008
2009
Figure- Earning Per Share Ratio
Interpretation: The above figure demonstrates that the earning per share of the bank was positive. Since the bank generated net losses from 2005 to 2006. Earning per share (EPS) in Taka of the year 2007 is higher than other years. 6.9.17 Price Earning Ratio: Calculations of Price Earning Ratio: Market Price Per Share ÷ Earning Per Share. Price Earning Ratio shows the relationship between earning of the company and the market price of its stock. This ratio reflects investors’ assessments of an institution’s future earnings. Year P/E (Times)
2005 17.02
2006 12.07
2007 14.58
2008 12.52
2009 8.88
The graphical presentation of the ratio is shown below-
18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00
Figure- Price Earning Ratio Ratio
Interpretation: The above figure demonstrates that the price 2005 2006 2007 2008 2009 earning ratio of the bank was positive. The price earning ratio of 2009 is lower than other years. So it is a good sign for the bank. 6.9.18 Total interest expense to earning assets: Calculations of Total interest expense to earning assets: Total Interest Expense ÷ Earning Assets Total interest expense to earning assets indicates the total interest expense to earning assets. Year
2005
2006
2007
2008
2009
Ratio (%)
57.98
29.18
29.12
22.93
22.59
The graphical presentation of the ratio can be shown through the following way70.00% 60.00% 50.00% 40.00% Ratio
30.00% 20.00% 10.00% 0.00% 2005
2006
2007
2008
2009
Figure- Total Interest Expense to Earning Assets Ratio Interpretation: Here we see that the Banks total interest expense to earning assets is in good shape. It is decreasing every year. 6.9.19 Total non-interest expense to earning assets: Calculations of total non-interest expense to earning assets: Total Non-Interest Expense ÷ Earning Assets Calculations of non-interest expense: Expenses – Interest Expenses The total non-interest expense to earning assets measures the ratio of expenses excluding expenses to earning assets. Year Ratio (%)
2005 44.40
2006 25.40
2007 21.93
2008 13.87
2009 15.69
The graphical presentation of the ratio is shown below50.00% 40.00% 30.00% Ratio
20.00% 10.00%
Interpretation: Here we see that the ratio
0.00% 2005
2006
2007
2008
Figure- Total Non-Interest Expense to Earning Assets Ratio
2009
decreasing over the years. It means it’s a good sign for the bank. 6.9.20 Debt Equity Ratio: Calculations of Debt Equity Ratio: Total Debt (Current & Long-term Liabilities) ÷ Shareholders Equity. The debt equity ratio shows the amount of shareholders equity in total debt. The debt equity ratio of the year 2009 is less than 2008. Year
2005
2006
2007
2008
2009
Ratio (Times)
0.77
13.29
11.37
10.79
9.31
The graphical presentation of the ratio can be shown in the following way14.00 12.00 10.00 8.00
Ratio
6.00 4.00 2.00 0.00 2005
2006
2007
2008
2009
Figure- Debt Equity Ratio Interpretation: Whatever way the debt equity ratio is calculated it shows the extent to which debt financing has been used in the business. A high debt equity ratio shows that the claims of creditors are greater than those of owners whereas a low ratio implies a greater claim of owners than creditors. Thus there is a need to strike a proper balance between the use of debt and equity. The most appropriate debt equity combination would involve a trade-off between return and risk. 6.9.21 Debt to total Assets Ratio: Calculations of Debt to total Assets: Total Debt (Current & Long-term Liabilities) ÷ Total Assets. The Debt to total assets ratio measures the percentage of the total assets provided by creditors. This ratio indicates firm’s degree of leverage. It also provides some indication of the firm’s ability to withstand losses without impairing the interests of creditors. Year
2005
2006
2007
2008
2009
Ratio
5.46
93.00
91.92
91.51
90.13
The graphical presentation of the ratio can be shown through the following way100.00 80.00 60.00 Ratio
40.00 20.00 0.00 2005
2006
2007
2008
2009
Figure- Debt to Total Assets Ratio
Interpretation: It measures the percentage of a firm’s total assets financed by debt. The higher the debt ratio, the more of a firm’s assets are provided by creditors relative to owners. 6.9.22 Fixed Assets Turnover Ratio: Calculations of Fixed Assets Turnover Ratio: Turnover (Loans & Advances) ÷ Net Fixed Assets. This ratio measures how efficiently the management is using its fixed assets to generate sales. This high ratio indicates efficient utilization of fixed assets in generating sales turnover.
Year Ratio
2005 18.88
2006 20.10
2007 19.80
2008 25.57
2009 29.60
The graphical presentation of the ratio can be shown in the following way35.00 30.00 25.00 20.00 Ratio
15.00 10.00 5.00 0.00 2005
2006
2007
2008
Figure- Fixed Assets
2009
Turnover Ratio Interpretation: Here we see that the fixed assets turnover ratio increases year by year. It measures that management is using its fixed assets to generate sale efficiently. 6.9.23 Total Assets Turnover Ratio: Calculations of Total Assets Turnover Ratio: Turnover (Loans & Advances) รท Total Assets. The total assets turnover ratio indicates how many dollars of sales are supported by one dollar of total tangible assets. It is a measure of the institutions total assets management. Year
2005
2006
2007
2008
2009
Ratio
70.36
69.90
64.53
70.17
70.73
The graphical presentation of the ratio can be shown through the following way72.00 70.00 68.00 66.00
Ratio
Figure- Total Assets Turnover Ratio
Interpretation: This ratio shows 62.00 the institutions 60.00 ability of 2005 2006 2007 2008 2009 generating sales from all the financial resources committed to the bank. The ratio is inconsistent throughout the years. The Asset Turnover of the year 2009 is better than previous years because Assets utilization is less but turnover is higher. So the year is good to the other year. 64.00
6.9.24 Net Profit Margin Ratio:
Calculations of Net Profit Margin Ratio: Net Profit รท Turnover (Loans & Advances). Net profit margin ratio shows that what percentage to earn net profit in a year is. Year
2005
2006
2007
2008
2009
Ratio (%)
1.01
1.55
3.39
3.00
3.18
The graphical presentation of the ratio can be shown through the following way4.00%
Figure- Net Profit Margin
3.50% 3.00% 2.50% 2.00%
Ratio
1.50% 1.00% 0.50% 0.00% 2005
2006
2007
2008
2009
Interpretation: If net profit margin ratio of a bank is increase, it is good sign for that bank. Here in 2007 the net
profit margin ratio of National bank is high than other banks. 6.9.25 Current Ratio: Calculations of Current Ratio: Current Assets รท Current Liabilities. As a conventional rule, a current ratio of 2:1 or more is considered to be satisfactory. However, an arbitrary standard of 2:1 current ratio cannot be blindly followed. Institutions with less than 2:1 may be doing well, while firms with 2:1 or even more may be in great difficulties in paying their bills. This is so because the current ratio is a test of quantity, but not quality. Year
2005
2006
2007
2008
2009
Ratio(Times)
1.02
1.02
1.03
1.05
1.06
The graphical presentation of the ratio can be shown in the following way1.07 1.06 1.05 1.04 Ratio
1.03 1.02 1.01 1.00 2005
2006
2007
2008
2009
higher than 2005. So the year 2009 is better to the other years.
FigureCurrent Ratio Interpretation: The current ratio of the year 2009 is better than previous years because the current asset is
6.9.26 Quick Ratio/ Acid Test Ratio: Calculations of Quick Ratio/ Acid Test Ratio: (Current Assets – Inventories) ÷ Current Liabilities. Generally, a quick ratio of 1:1 is considered to represent a satisfactory current financial condition. A quick ratio of 1:1 or more does not however necessarily imply sound liquidity position. Similarly, a low quick ratio does not necessarily imply bad liquidity position. The quality of liquid assets should be given due consideration to draw a more meaningful conclusion. To get an idea regarding the institutions relative current financial condition, its current ratio and quick ratio should be compared with industry average. Year
2005
2006
2007
2008
2009
Ratio
0.2614
0.3100
0.3317
0.2852
0.2772
The graphical presentation of the ratio can be shown from the following presentation35.00
Figure- Quick or Acid Test Ratio
30.00 25.00 20.00 15.00
Ratio
Interpretation: NBL has the 5.00 ability to meet 0.00 short-term 2005 2006 2007 2008 2009 obligations. We can say that from the analyzing the Liquidity ratios. A bank should ensure that it does not suffer from lack of liquidity and also that it is not too much highly liquid in future. The ratios, which indicate the extent of liquidity (reserve) is good. 10.00
Remarks: The evaluation of bank performance is a complex process that involves assessing interactions between the environment, internal operations and external activities. After analyzing the financial ratios, National Bank Limited (NBL) has paramount financial condition to fulfill the objectives of shareholders. Planning should be encompassing both internal and external performance dimensions. The primary method of evaluating internal performance is by analyzing accounting statements. Financial ratios of accounting items permit a historical sketch of bank returns and risks. NBL has excellent financial condition to meet the short-term & long-term obligations. External performance is best measured by evaluating by bank’s market share, regulatory compliance, and public confidence. NBL is providing up-to-date services for their customers’. Through which NBL builds the good reputation in the Banking Sector as well as in the public mind. Because of increasing innovation and deregulation in the financial services industry, internal and external competition is becoming a critical factor in performance.
From the above ratio analyses and last five years’ performance we see that after 2005 the ratios were fluctuating and not in a gradual change. But still the bank’s performance was quite better and did not fall too much. In 2008 almost in every case the performance exceeded last three years’ achievement. If the bank can maintain it and go for more profitable uses of funds, the bank could be one of the leading financial institutions. The seventh chapter attempts to make a SWOT analysis of National Bank Limited.
CHAPTER: 7 SWOT ANALYSIS SWOT Analysis: SWOT Analysis is an important tool for evaluating the company’s Strengths, Weaknesses, Opportunities and Threats. It helps the organization to identify how to evaluate its performance and scan the macro environment, which in turn would help the organization to navigate in the turbulent ocean of competition. The acronym for SWOT stands for…
Strength
Opportunity Weakness
Threat
STRENGTHS: •
Company Reputation: NBL has already established a favorable reputation in the banking industry of the country particularly among the new comers. With in a period of twenty six years, NBL has already established a firm footing in the banking sector having tremendous growth in the profits and deposits. All these have led it to earn a reputation in the banking field.
•
Sponsors: NBL has been founded by a group of eminent entrepreneurs of the country having adequate financial strength. The sponsor directors belong to large industrial conglomerates of the country. Directors are eminent in their respective business area. Therefore, NBL has a strong financial strength and is built upon a strong foundation.
•
Top management: Like the CEO and DMD the top management of the bank is also a major strength for the NBL and has contributed heavily towards the growth and development of the bank. The top management officials have all worked in reputed banks and their years of banking experience, skill, and expertise will continue to contribute towards further expansion of the bank. At NBL, the top management is the driving force
and the think tank of the organization where policies are crafted and often cascaded down. •
Market share profitability: As already mentioned earlier, NBL is an established bank 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.
•
Facilities and Equipment: NBL has adequate physical facilities and equipments to provide better services to the customers. The bank has computerized banking operations under the software. Counting machines in the teller counters have been installed for speedy service at the cash counters. Computerized statements for the customers as well as for the internal use of the banks are also available. All the branches of NBL are equipped with telex, SWIFT and fax facilities.
•
Impressive Branches: NBL has earned a reputation in the banking sector for establishing impressive branches. The Gulshan Branch, Elephant Branch, Uttara Branch, Agrabad Branch and the Jubilee Road Branch are the most lavish and impressive branches of NBL. This creates a positive image in the minds of the potential customers and many people get attracted to the bank. This is also an indirect marketing campaign for the bank for attracting customers. The other branches of the bank are also impressive and are compatible to foreign banks.
•
Interactive Corporate Culture: NBL has an interactive corporate culture. Unlike other local organization, NBL’s working environment is very friendly, interactive and informal. There are no hidden barriers or boundaries while interactive among the superior or the subordinate. The environment is also lively and since the nature of the banking job itself is monotonous and routine, NBL’s lively work environment boosts up the sprit and motivation of the employees at the same time.
•
Team work at mid level and lower level: At NBL mid level and lower level management, there are often team works. Many jobs are performed in-groups of two or three in order to reduce the burden of the workload and enhance the process of completion of the job. People are eager to help each other and people in general are devoted to works.
•
Credit Cards and Tele banking: These are the new retail banking services provided by the foreign banks. NBL was the first scheduled bank who introduced and evaluates the option of launching credit cards and telebanking system. There are the recent developments in the banking sector and NBL should also evaluate the option of doing it.
WEAKNESSES: •
Advertising and Promotion: This is a major set back for NBL and one of its weakest areas. NBL does not pursue an aggressive marketing campaign. It does not expose itself to the general public and is not in the lime light unlike other banks. As a result people are not aware of the existence of this bank. Moreover there make ambiguity in most of the people between the existence of National bank and Standard Chartered Bank.
•
Poor Recruitment: During its inception, NBL has not recruited competent people in filling up its mid level positions. Other than the recruitment of the Probationary Officers people who were recruited from banks for the lower management are not competent enough to provide the best output. As a result the services of the bank are being jeopardized. The external search of the bank in attracting people from other banks had flaws in it and the right people were not taken from the right bank.
•
Reference appointment: This is one of the set backs of NBL and will have a long-term repercussion on the quality of Human Resource. Many people have been recruited under the reference of the recommendation of the Board of Directors, which has become a chronic disease in the NBL. As a result, people having inadequate qualifications and experience have been recruited only because of their ties with the sponsors. The practice must be stopped considering the future of the bank and it is very important to have a component workforce.
•
Low remuneration package: The remuneration package for the entry and the mid-level management is considerably low. The compensation package for NBL entry level positions is even lower than the contemporary banks. Under the existing low pay structure, it will be very difficult to attract and retain MBA’s at NBL. Since foreign banks pay double then that of NBL, it will be very difficult to attract competent MBA’s in future for NBL. Therefore NBL will fail to attract competent MBA’s and retain them if they do not revise their pay structure.
•
Human Resources Department: The HR department is another weak area of NBL. The HR department is very small relative to the size of the bank and other than the Head of HR wing; the staffs in this wing are incompetent to be an official in the HR department. Most of the HR practices and policies are not being followed or implemented here. The annual performance appraisal reports of the employees are not evaluated properly and employees are not getting the required feedback. There is also no prescribed set of promotion policies. The bank is still practicing the traditional method where solely the experience or length of service is considered as the criteria for promotion. On the other hand, criteria for work output or productivity are not considered. Moreover, the HR department is only confined in the Head Office and does not have any role in the branch level activities.
•
Problem In Delivery: Few of the products that National bank are offered to its clients as if “personal Credit (PC)” is lying idle due to proper marketing initiative from the management these products can easily be made available in attractive ways to increase its client base as well as its deposit status.
•
Centralized Decision-Making: At NBL, corporate decisions, the CEO, DMD and other top management officials craft policies and strategies and then they are cascaded down. At times the Board of Directors is also engaged in making corporate decisions. As a result of this practice there is only a top down flow of communication at NBL. The scope for bottom up communication is very limited and many bright ideas or opinions are not being able to climb up the ladder to the top management. Ideas remain their forever. The Branches of the bank have to depend on its Head office for any minor decisions.
•
Agency Problem: The front desk employees are often found not to be too keen on taking care of their customers. Though they have a long employee line in some branches, their
loyalty to the company and their ethics level are not very satisfactory. Most of the employees always think about their own interest, which proves that agency problem is there. •
Noise Pollution: This has become another major problem NBL. Since there are no cubical shaped offices, there is a tremendous noise in each department of the Bank. The noise greatly hampers the work activity and the level of concentration. This is the problem of having an open space office where everyone is communicating with each other and creates noise.
•
Lack of qualified system operators and computer operators: Currently at NBL’s Head office and in the Branches, there are computer operators who do not have any background academic knowledge on computer applications.
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Few staff meetings: It has been observed that there are very few staff meetings and departmental meetings at the branch level. This is not a good management practice.
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Small Market Share: It is revealed from the industry analysis that market share of National Bank in terms of deposits and advances are relatively low.
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High Concentration on Fixed Deposits: High concentration on fixed deposits has negative effect on Bank’s profitability.
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Limited ATM Booths: NBL often has problem with market share as ATM machines. Customers often complain that the ATMs are out of order. NBL has few ATM booths which is not sufficient for their customers.
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Lack of Modern Tools: Most of the private banks of Bangladesh use latest technology for banking purpose, NBL as the first private bank can use the opportunities to increase the profit. They still not modern like the other banks like Dhaka Bank, One Bank, BRAC Bank, Prime Bank.
•
Market Image: NBL does not promote marketing activities itself for catering its services to the public or to the business persons. NBL has a higher book value per share but market value per share is very low corresponding to its book value.
OPPORTUNITIES: •
Diversification: NBL can pursue a diversification strategy in expanding its current line of business. The management can consider options of starting merchant banking of diversify in to leasing and insurance. By expanding their business portfolio, NBL can reduce their business risk.
•
Product line proliferation: There are several opportunities for NBL to expand its product line. In this competitive environment NBL must expand its product line to enhance its Sustainable Competitive Advantage (SCA). As a part of its product line proliferation, NBL can introduce the following products.
•
ATM: This is the fastest growing modern banking concept. NBL should grab this opportunity and they have few ATM Booths. Since NBL is a local bank, they can form an alliance with other contemporary banks in launching the ATM. Few local private commercial Banks have already successfully launched the ATM.
•
On-line banking: NBL should move towards the 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 on line banking operations.
•
Introduction of corporate scheme: This is an innovative way of attracting corporate clients to the bank. In stead of providing executives of various companies, NBL can introduce a special scheme for corporate officers for the purchase of consumer durable at an attractive interest rate. In this way, the bank will be able to attract a lot of corporate clients and in the long run the bank would be benefited by getting business for the bank from the corporate clients in terms of L/C, Loans and advances etc.
•
Mobile telephone bill collection: As telecommunication industry is expanding with an alarming rate recently, so NBL could maintain good business relation with those telecommunication companies. They can look forward to make some mutual agreement of responsibility of bill collections. This will give them more liquid money, which will boost up their cash requirement.
•
Separate schemes for service holders: The bank as a part of expanding its loan portfolio can assistance in terms of giving loans to service holders under various professions under a separate scheme. The bank can provide assistance to Engineers, Doctors, Lawyers and other professions under a separate scheme.
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Reduces Charges & Grow up Customers: Bangladesh has a huge consumer base for maintaining several accounts. So NBL has the opportunity to keep these customers by reducing its current fees and charges.
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Invest Opportunity: there is a great opportunity to take new dimension of banking such as Islamic banking, specialized banking. Because a large portion of our population is Muslims and they prefer Islami Banking to Conventional Banking. Otherwise, there are many sectors where this can give special privileges.
•
Globalize the Business: As the bank has a strong business brand image, it holds a great opportunity to globalize their business more extensively. They can arrange more foreign correspondent banks or by establishing more foreign branches as the foreign braches have better and big business opportunities.
THREATS: •
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, CITI N.A are now pursuing an aggressive branch expansion strategy. This bank is establishing more branches countrywide and is 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 NBL’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 slaughter of foreign banks. •
Contemporary Banks: The contemporary banks of NBL such as Dhaka Bank, Prime Bank, Standard Bank, Bank Asia, National Bank and Southeast Bank are its major rivals. National Bank and others are carrying out aggressive campaign to attract lucrative corporate clients as well as big time depositors. NBL should remain vigilant about the steps take by these banks as these will in turn affect NBL strategies.
•
No new deposit creation: This is a problem and a threat faced by the whole banking sector of Bangladesh. Due to the current economic slowdown, there is hardly any new deposit creation as there few investments and savings accompanied by a galloping inflation. As a result the new banks are not being able to attract absolutely new depositors but rather they have to hunt or snatch away depositors from other banks.
•
Default culture: This is a major problem in Bangladesh. NBL facing the problem of nonperforming loans is very minimum or insignificant. However, as the bank becomes older this problem arises and the whole community suffers from this chronic disease. NBL has to remain vigilant about this problem so that proactive strategies are taken to minimize this problem if not elimination.
•
Merger and Acquisition: The worldwide trend of merging and acquisition in financial institution is causing concentration. The industry and competitors are increasing in power in their respective areas.
•
The Central Bank changing the interest rates: In Bangladesh the Central Bank decides the interest rates. They give a range and with in that range the banks have to maintain the interest rates they offer. So the result is that all the banks end up having very similar interest rates. It is not up to the banks to decide what interest rate they will offer on the deposits. In fact it is the Central Government that makes that decision for them whether the banks like it or not. Also if the Central Government comes up with additional regulations that will mean more costs for the banks to maintain them.
•
Poor Telecommunication Infrastructure: As previously mentioned, the world is advancing E Technology very rapidly. Though National Bank Limited has taken effort to join the stream of information technology; it is not possible to complete the mission due to poor technological infrastructure of our country.
Initiatives taken to achieve objectives & overcome weaknesses & threats: •
Emphasis on high cost deposits, i.e. increasing the ratio of time to transaction deposits to achieve a higher cost of fund.
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Stopped Deposit Pension Scheme to reduce cost of fund & excess liquidity.
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Implement segregation of duties between credit approval, sales & process.
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A Debt Recovery Cell to be formed.
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Closely monitor problem portfolio.
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Survey customer opinions on services & compare with industry benchmark.
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Unless for any strategic reason no business should be booked where, margin is less than 3%.
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Follow 80/20 (advance/reserve ratio) Shed unprofitable advances.
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Rationalize communication cost. Use e-mail for eternal communication.
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Eliminate unnecessary processes, registers. recycle paper, re-use envelops.
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Organize weekly/fortnightly group discussions with all staff on product sales & services in branches for better performance.
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Define Delivery Standards & monitor performance.
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National Bank Ltd. tries to provide the products & services best in quality & price in order to achieve in branches for better performance.
Problem in Foreign Exchange Division: •
The major problem in international trade is exchange rate problem. In our country we have floating rate. The dollar value depends on supply and demand basis.
•
Sometimes the payment that would come from foreign country that made delay just because of careless. Foreign bank do not pay much attention regarding this.
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Sometimes foreign country bank cannot rely upon local bank, in that connection local bank have to collaborate with foreign bank, locally situated. In that circumstances local bank have to pay a certain amount of money. That is another problem that local bank are facing in international transaction.
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Sometimes importer does not agree to accept goods just because of minor problem of goods. In that connection local bank sells those goods on discount basis to the importer or other parties.
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Sometimes importer do not want to take goods because when importer apply for import goods that time s/he has been settle down the total costing of the imported goods or raw materials but when the goods will come to the importer that time due to unavoidable circumstances price of the goods goes down and importer can not make any profit, on the other hand s/he had to make loss. In that connection s/he will not connect with her or his bank to release the goods. Bank has to pay the penalty for buyer unexpected behavior, that’s why bank use documentary L/C.
•
Since international chamber of commerce has set the rules and regulation regarding L/C, so banks cannot do anything beyond the rules and regulation.
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Uniform Customs and Practice for Documentary Credit published by the international chamber of commerce, every ten years it has amended so it is very long time for amendment.
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Banks are the followers of the standard rules and regulation.
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Form the desk point of view; since the numbers of employees are limited they sometimes cannot pay attention to their prospective clients. In that case banks are loosing its potential clients. Sometimes the client cannot have scope to open an L/C.
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Political Disturbances is not favorable for bank business in Bangladesh. It is the main problem of NBL. It is also a problem of all banking system in Bangladesh.
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Practically, the government securities like bond, security, saving certificates, etc give high rate of interest than the commercial banks. So most of the investors are invested purchase the government securities due to high rate to utilize their idle fund.
•
Now a day, businessmen maximize their profit by enhancing credit sales, so they need working capitals. That’s why they are not capable to deposit the extra money in banks.
The next chapter puts forward findings, recommendation and conclusions of the study.
CHAPTER: 8 FINDINGS, RECOMMENDATION AND CONCLUSION 8.1 FINDINGS: As the first private bank, NBL must ensure faster services by removing the problems. From my study on the overall performance and activities of National Bank I have got some major findings, which are given below: •
The financial performance of the bank is satisfactory.
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In 2009 NBL total assets was BDT 92084.79 million and in 2008 it was BDT 72205.50 million. So the growth increase in total asset is BDT 19879.29 million.
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Less use of capital budgeting tools and techniques especially the risk measurement tools such as standard deviation and coefficient of variation.
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Bank has a good amount of no cost fund in its deposits breakdown.
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Foreign exchange contribution is appreciable to total income.
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Modern technical equipment such as computer is not sufficient in foreign exchange department. As a result the exchange process makes delay and it’s also complicated.
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The loans and advance department takes a long time to process a loan because the process of sanctioning loan is done manually.
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Avoidance of providing small loan facilities in Elephant Road branch, help the bank in giving loan to strong parties and earn more by handling limited customer.
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CIB report is not readily available from Bangladesh Bank.
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Sometimes the employees unlawfully help the client deliberately overvalue the securities taken against the loan. As a result if the client fails to repay the loan, the bank authority cannot collect even the principal money invested by the selling those assets. It is also a very important factor that leads to loan default.
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The organization is divided into departments, then into units and sub units and thus the total flow of work has become very systematic.
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People especially on general banking are cooperative enough to communicate with customers.
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The cash counter I think is congested and the procedure is also traditional.
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Implication of computer facility is comparatively low as a bank of first generation.
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The company has started to diversity its business into different areas of the country.
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NBL has a very good pool of human resource i.e. Foreign Exchange Officers.
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There is only one person with computer in Accounts Opening Section. That’s why the service is not as prompt as the customer’s demand.
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According to some clients opinion introducer is one of the problems to open an account. If a person who is new of the city wants to open account, it is a problem for him/her to arrange an introducer of SB or CD accounts holder.
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Most of the employees usually think about their own interest, which proves that Agency Problem is there.
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National Bank Limited maintains an equal opportunity in recruitment, training and promotion of all employees regardless of gender or ethnic origin. But it is found that the employee turnover is high just because of its low pay structure and promotion system compare to other similar banks.
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Like other private banks in Bangladesh branches of this bank are located in few metropolitan and urban cities neglecting the vast and potential rural areas. The rural people are almost outside the credit network of National Bank Limited.
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National Bank Limited currently don’t have any strong marketing activities through mass media e.g. Television. TV ads play a vital role in awareness building.
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NBL does not promote marketing activities itself for catering its services to the public or to the business persons. NBL has a higher book value per share but market value per share is very low corresponding to its book value.
•
There is no Reengineering Department for quicker customer service and implementation of newer products; moreover they have no customer care which helps the customer in case of any product or services.
8.2 RECOMMENDATIONS: We live in an asymmetric world marked by wealth and poverty. The digital divide has widened the development gap. Our expectation from third generation bank is therefore high. We expect
from National Bank as a first generation bank to widen there services on micro credit, broader there services with more online facilities to customer, computerized each and every activities of the bank, use more sophisticated capital budgeting tools and techniques in investment department. However, increasing more the quality of services can overcome these difficulties and focusing on the recommended area will lead the bank in number one position among all other commercial bank. The recommendations given below are not decisions; rather they are only suggestions to improve the customer’s service in order to fulfill the customer’s satisfaction so that customers give more preference to NBL. The recommendations are given below: •
Before accepting a project, management should implement sophisticated capital budgeting tools specially risk measurement tools like standard deviation, correlation and so on.
•
More skilled and self motivated people especially business graduates will skills of financial management and investment analysis should be recruited.
•
In CC (Hypo) loan NBL takes 100% security as collateral of desired loan. I think it should be less. I should 70% security as collateral of desired loan. In my point of view 80% security is enough. 100% security is hard enough to give as a security by a person who takes CC (Hypo) loan. Banks get its security by taking 100% security as collateral.
•
In terms of loan SOD (General) the security is also 100% as collateral. It also should be 80% as CC (Hypo) loan.
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In case of SOD (FO) NBL provide lone 80% of the deposited money. NBL takes 100% security as collateral. So they can easily give 90% loan of the deposited money.
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In terms of Lease Finance, the disbursement charge of 2% interest rate should be omitted. Because the person is giving almost 13% interests in his desired loan. So it is not justify taking another 1% interest of the whole loan amount after he adjusted the whole lone.
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Investment/credit policy of NBL should be easy, and flexible.
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National Bank Ltd. should train up their officers about all sort of information regarding SWIFT and its services.
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National Bank Ltd. should always monitor the performance of its competition in the field of Foreign Trade and General banking Service.
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NBL should conduct strong Marketing Innovation activities to increase business in & outside Bangladesh.
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NBL can introduce education loan for the students who are interested in higher education in home and abroad. Because in our country there are so many meritorious students who don’t have enough money for the continuation of higher education.
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NBL can also introduce agricultural loan for farmer and for those people who wants to build there carrier in agriculture sector. Agriculture is now a growing sector in our country. Many people want to come in this sector but sometimes they don’t have enough capital to start the business. NBL can help them by provide loan.
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NBL has also introduced fully online banking facility for staying in the competitive market and they also need to use high technology for online system.
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They have to introduce ATM both in some important places of country.
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They have to increase the number of branches in different important places.
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For smoothly executing the foreign trade transaction no. of employees in foreign exchange department should be increase. Since the employees are limited they cannot pay much attention to all of its prospective clients.
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Especially the foreign department people should get training facilities regarding their assign jobs.
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Every fifteen days or thirty days after every desk especially foreign desk must be monitor by specialist people for either their having any problem or not. Or their must be a discussion session for every department. There must be an interactive discussion period for every month.
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Each branch of NBL can arrange exclusive customer month for all its loyal and old customers. NBL can generate views from those customers regarding the service and ask for suggestions. Also this week can also have a festival mood and can offer special rates fro the existing customers. On the basis of transaction history NBL offer awards to its most loyal customer and can generate more attachment the existing customers. This must give the feeling that bank cares for its customer.
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National Bank Limited is introduced VISA Card. These are two popular credit card brands in the world. NBL has strong credit card client base throughout the country and they are getting payment services in home and abroad including payment of roaming mobile phone bill.
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Their must be a better corporation among the employees.
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Maintain an effective communication with the foreign importer banks so the matter of payment delay might not happen.
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The more the local bank communicates with the foreign bank the more reliable ness; trustiness would grow up between the local and foreign banks. In that connection matter of payment will not delay.
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Human resources, in branch, are not equipped with adequate banking knowledge. Majority of the human resources is the lack of basic knowledge regarding money, banking finance and accounting. Without proper knowledge in these subjects, efficiency can not be optimized.
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Technological Skills should be developed. NBL should establish its own networking system between its branches so that they can exchange their information faster and efficiently.
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Bank must monitor the exporter time to time either they are preparing goods according to the importer requirements. If it is found that goods are not making according to the importer demand bank should force the exporter to make the goods right manner.
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Bank should encourage in small entrepreneur to increase industrialization that is good sign for social well being.
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To attract the foreign buyers we have to be very careful regarding the quality of the goods, we have to set an international standard and the bank can do that more fruitfully. Bank must assure the importer that goods must be international standard.
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Need to take AD license for all the branches. Then the branches can do easily their entire processing for the L/C.
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TV Ads and other advertisement on several services like Billboards, Brochures & booklets, broadcast ads etc of National Bank Limited should be increased. NBL should sponsor seminar and symposium for the purpose increase awareness about the services of NBL.
8.3 CONCLUSION: Banking is the backbone of national economy. Banking sector no more depends on only on a traditional method of banking. Banking industry has been treated as a prospective financial sector in Bangladesh. More and more banks and non-bank financial companies are entering the industry. In this competitive world banking sector has stretched its wings wide enough to cover any kind of financial services. Not only from the local banks but also from the foreign banks, the banks of today face a tough competition. The industry became so attractive that many multinational banks have entered the market and wants to lead the market. To survive in the related sector, the organization need competitive people and has to take some effective policy. The major tasks of banks are to survive in this competitive environment by managing its assets and liabilities in an efficient way. To make the assets especially loan and advances, banks must have to be more cautious and otherwise these assets will become a burden for the bank. To have fruitful investment bank must have to do the credit appraisal properly. Otherwise loan default culture will never end. Success in the banking business largely depends on
Effective lending, Good customer service, A good management, A good training program, Effective implementation of plans and policies and programs.
I have seen that National bank Limited is not much different from other commercial banks of Bangladesh. It follows the same practice and procedure which is followed by others. The performance of National Bank Limited has been satisfactory since its inception in respect of all the measurement parameters over the years. National Bank Limited is unique in its objectives. It is a blend of development and commercial banks. Besides general banking activities, National bank also provides industrial credit, commercial credit and micro credit. It serves both Consumer and Wholesale Banking customers. Consumer Banking provides credit cards, personal loans, mortgages, deposit taking and wealth management services to individuals and small to medium
sized enterprises. Wholesale Banking provides corporate and institutional clients with services in trade finance, cash management, lending, securities services, foreign exchange, debt capital markets and corporate finance. The Bank is trusted across its network for its standard of governance and corporate responsibility as well as its commitment to making a difference in the communities in which it operates. National Bank Limited is well prepared to and capable of meeting the demand for a broad range of banking services. It has got adequate resources, both human and physical, to provide the customers with the best possible services. National Bank has already developed goodwill among its client by offering its excellent services. This success has resulted from the dedication, commitment and dynamic leadership of its management over the periods. But they must concentrate more on customer oriented services and provide better technological advancement relating to banking activities.