internship report foreign exchange

8/17/2019 Internship Report Foreign Exchange

1/130

Udayshankar Sarkar

Internship Report BASIC Bank Limited

November 05, 2012

JAGANNAT

UNIVERSIT

Department of Fi


2/130

I

Internship ReportOn

Foreign Exchange Operations: A Study on BASIC

Bank Limited

Submitted to:Department of Finance

Jagannath University

Submitted By :Udayshankar Sarkar

Id: 06651367

Reg No: 024346Session: 2006-2007

BBA (Finance 2nd Batch) Jagannath University

Under the Supervision of:Md.Omar Faruque

Assistant ProfessorDepartment of Finance

Jagannath University

.

On The Job Experience AtBASIC Bank Limited

Babubazar BranchHajee Yousuf Mansion (1st Floor)

56, Mitford Road Babubazar, Dhaka-1100

Date of Submission: 05 November 2012


3/130

Dedicated To

My Honorable Teachers

II


4/130

III

LETTER OF TRANSMITTAL

November 5, 2012

Md. Omar Faruque

Assistant ProfessorDepartment of Finance

Jagannath UniversityDhaka.

Subject: Submission of Internship Report.

Sir,

Bank Limited” as a prerequisite for the completion of my BBA program. I am lucky enough that I

have got an experienced & efficient professional team at different to learn banking process and

procedure efficiently.

I believe that it was a fascinating experience to work live in the banking sector and it has enriched

with both my knowledge and experience. I tried my best to show my skills, which is achieved

through this report. Finally I am very grateful to you for your continuous supervision and guidancein preparing the report.

Udayshankar Sarkar

Student ID: 06651367

It is, indeed, an honor to deliver my internship report on “Foreign Exchange Operations: BASIC

Sincerely yours,

Department of Finance

Jagannth University


5/130

IV

BANK CERTIFICATE


6/130

V

ACKNOWLEDGEMENT

The report entitled “Foreign Exchange operation: BASIC Bank Limited is scheduled for me. At

First, my sincere gratitude also goes to my supervisor Mr. Md. Omar Faruque, Assistant

Professor, Department of Finance, Jagannath University, who has guided me from the very

work in an institution practically before they enter in the ‘Job Market’ Mohammed Ali, Deputy

Bank. August 14, 2012 is a day-of-difference for me because; at this day I joined in my

internship program at BASIC Bank Limited, Babubazar Branch. Here again I have to mention

some names Mr. Subrata Saha, Manager and 2nd

Officer, who received me as a member of their

Banking family and introduced me with whom I worked last three months. I would like to

express my deep sense of gratitude and thanks to Md. Nazmus Sakeeb, Deputy Mananger, Mr.

Md. Nazrul Islam Chowdhury, Assistant Manager, Mr. Md. Khandokar Abul Hasnat,

Assistant Managar, Mr. Md. Khalequzzaman, Assistant Officer for their continuous guidance,

valuable knowledge and suggestions during my Internship program. All the times their cordial

support helped me a lot to learn a completely different topic ‘“Foreign Exchange Transactions”. I

did not learn only professional insights, but I learned how to work in pressure, how to have

patience in hurdles, how to behave with the seniors and how to help the juniors. I would like to

convey my best regards to all officials of the BASIC Bank Limited, Babubazar Branch.

beginning of my internship program. Internship Program is such a program in which students

General Manager (DGM) of Babubazar Branch to provide me helps to work such a reputed


7/130

VI

Supervisor’s ertificate

This is to certify that the Internship Report on “Foreign Exchange Operation: A study on BASIC

Bank Limited” in the bonafide record at the report is done by Udayshankar Sarkar as a partial fulfillment

of the requirement of Bachelor of Business Administration, (B.B.A) degree from the Department of

Finance, Jagananth University.

The report has been prepared under my guidance & is a record of the bonafide work carried out

successfully.

Md. Omar Faruque

Assistant Professor

Department of FinanceJagannath University

Date:


8/130

VII

Student’s Declaration

I do hereby solemnly declare that the work presented in this Internship report has been carried out

by me & has not been previously submitted to any other University/College/Organization for an

academic qualification/certificate/diploma or degree.

The work I have presented does not breach any existing copyright & no portion of this report is

copied from any work done earlier for a degree or otherwise.

I further undertake to indemnify the Department against any loss or damage arising from breach of

the forgoing obligation.

Udayshankar Sarkar

Student ID: 06651367

Batch: 2nd

Date: 05.11.2012


9/130

VIII

Executive Summary

This report aims toward providing an overview on the Foreign Exchange Banking system in BASIC

Bank Limited. The report is prepared within the broader framework of Internship Program of the

Department of Finance, Jagannath University (While preparing this report it has been tried to reveal

the insights of the foreign exchange banking system of the bank a few recommendations and

suggestions were also prescribed based on the observation and findings).

While discussing the different aspects and functions of the bank, priority has been given to depict

the real situation as far as appraisal and management system in BASIC Bank Ltd. are concerned by

employing the experience gathered during the internship program. Analysis on the findings is

basically done to sort out the major aspects of the Foreign Exchange Banking system and to draw

some significant inferences. At the same time for easier understanding of the report, supporting

topics and terms are explained in light of textbooks and regulatory guidelines.

To examine the efficiency of the Export management system, Letter of credit has been taken as the

prime factor. Simultaneously analysis on the foreign exchange, foreign LC advising has also been

done. Utmost care has been given to explain all necessary aspects related to the subject matter for

easier and quick understanding of the report. For reflecting the actual performance of the bank

different analytical tools is used i.e. regression analysis, analysis of risk index and probability of

insolvency, ration analysis etc.


10/130

Table of Contents

Descriptions Page No:

Chapter One: Introduction of the Study1.1 What is BASIC Bank 2

1.2 Why BASIC Bank is Specialized Bank 2

1.3 Origin of the Report 3

1.4 Background of the Report 3

1.5 Rationale of the Report 4

1.6 Objectives and Philosophy of the Study 4

1.7 Scope of the Report 5

1.8 Limitations of the Study 5

1.9 Sources and Methodology of the Report 6

1.10 Importance of the study 7

1.11 Time Schedule of the Report 7

1.12 Literature Review 81.13 Rules and Regulations under Foreign Exchange 9

1.14 Inco terms 10

1.15 Import Trade Control Act and Authorities 11

1.16 Main Guidelines of Foreign Exchange Operation 11

Chapter Two: Profile of the Organization2.1 History of BASIC Bank Limited 13

2.2 A Bird’s Eye View 13

2.3 BASIC Bank Limited: At a Glance 14

2.4 Business Philosophy of BASIC Bank Limited 15

2.5 Mission of BASIC Bank Limited 152.6 Objective Of BASIC bank Limited 16

2.7 Organizational Goals 16

2.8 Strategy of BASIC Bank Ltd 17

2.9 Function of the BASIC Bank Ltd 17

2.10 Capital Structure and ratios 18

2.11 Organism of BASIC Bank Ltd 19

2.12 Branches of BASIC Bank LTD 20

2.13 Performance of BASIC Bank Ltd 21

2.14 Summary of Financial Performance: 21

2.15 Products and Services of BASIC Bank Limited26

2.16 Brief Profile of Babubazar Branch 27

2.17 Departments of Babubazar Branch 27

2.18 Performance of the Branch

Chapter Three: Foreign Trade Operation- An Overview 3.1 Foreign Trade 31

3.2 Foreign Exchange Department 31


11/130

3.3 Foreign Exchange Accounts 31

3.4 Necessity of Foreign Exchange 32

3.5 Functions of Foreign Exchange 33

3.6 Activities of Foreign Exchange 33

3.7 Mechanism of Foreign Exchange 34

3.8 Applicable Rules and Laws of Foreign Exchange 35Chapter Four: An Overview of Letter of Credit (L/C)

4.1 Definition of Letter of Credit 37

4.2 Documentary Letter of Credit 37

4.3 Types of Letter of Credit 38

4.4 Parties Involved with L/C Operation 41

4.5 Documents Required to Open L/C 43

4.6 Proposal of L/C 44

4.7 L/C Operation of BASIC Bank 45

Chapter Five: Foreign Exchange Operation of BASIC Bank: A Discussion

5.1 Import 495.2 Import Procedures 58

5.3 Security and Lodgment of Letter of Credit 51

5.4 Preparatory Steps for Opening L/C 52

5.5 Importer Points to Prepare L/C 54

5.6 Scrutiny of Import documents 54

5.7 Lodgment of Import Documents 56

5.8 Issuance and Disposal of LCAF 57

5.9 Back to Back L/Cs 58

5.11 Procedure of Obtaining ERC 60

5.12 Export procedure in flow chart62

5.13 Verification of L/C 63

5.14 Others 64-80

Chapter Six: Analysis and Findings 6.1 Regression Analysis 82

6.2 Risk Index and Probability of Insolvency 85

6.3 SWOT Analysis 98

6.4 Comparison 99

6.5 Findings 100

Chapter Seven: My Internship Duties Recommendation and Conclusion

7.1 My internship Duties103

7.2 Learning Points 103

7.3 SWOT Analysis 104

7.4 Strength 104

7.5 Weakness 104

7.6 Opportunities 104

7.7 Threats 105

7.8 Recommendation 105


12/130

7.9 Conclusion 107

Chapter Seven: Appendices 8.1 Abbreviations 109

8.2 Local LC Format 111

8.3 Foreign LC Format 113

8.4 Regression Tables 117


13/130

C

H PTER

O

NE

Introduction of the Report

Segment Objectives

This Section will focus on:

What is BASIC Bank

Why BASIC Bank is Specialized Bank

Origin of the Report Background of the Report

Rationale of the Report

Objectives and Philosophy of the Study Scope of the Report Limitations of the Study

Sources and Methodology of the Report Importance of the study Time Schedule of the Report

Literature Review Rules and Regulations Under Foreign Exchange

Inco terms Import Trade Control Act and Authorities

Main Guidelines of Foreign Exchange Operation


14/130

Foreign Exchange Operation: BASIC Bank Limited Pa

1.1. What is the BASIC Bank Limited?

BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited) registered under

the Companies Act 1913 on the 2nd of August, 1988, started its operations from the 21st of January,

1989. It is governed by the Banking Companies Act 1991. The Bank was established as the policy

makers of the country felt the urgency for a bank in the private sector for financing small scaleIndustries (SSIs). At the outset, the Bank started as a joint venture enterprise of the BCC

Foundation with 70 percent shares and the Government of Bangladesh (GOB) with the remaining

30 percent shares. The BCC Foundation being nonfunctional following the closure of the BCCI, the

Government of Bangladesh took over 100 percent ownership of the bank on 4th June 1992. Thus

the Bank is state-owned. However, the Bank is not nationalized; it operates like a private bank as

before.

Mainly Specialized Banks refers to Developed or designed for a special activity or function.

Specialized banks are foreign exchange banks, industrial banks, development banks, export-import

banks catering to specific needs of these unique activities. These banks provide financial aid to

industries, heavy turnkey projects and foreign trade.

BASIC Bank Limited is unique in its objectives. It is a blend of development and commercial banks.

The Memorandum and Articles of Association of the Bank stipulate that 50 percent of loan able

funds shall be invested in small and cottage industries sector.

Functions as a Specialized Bank

Term loans to industries especially to small-scale enterprises. Full-fledged commercial banking service including collection of deposit, short term

trade finance, working capital finance in processing and manufacturing units andfinancing and facilitating international trade.

Technical support to Small Scale Industries (SSls) in order to enable them to runtheir enterprises successfully.

Micro credit to the urban poor through linkage with Non- GovernmentOrganizations (NGOs) with a view to facilitating their access to the formal financialmarket for the mobilization of resources.

In order to perform the above tasks, BASIC Bank works closely with its clients, the regulatoryauthorities, the shareholders (GOB), banks and other financial institutions.

1.2. Why BASIC Bank Limited is Specialized Bank ?


15/130


1.3. Origin of the report:

Foreign trade means the cross border transactions for goods and services. It plays a very importantrole for the growth and development of the country. Foreign trade takes within its fold purchase(import), sale of goods (exports) and services across the borders. Bilateral relationships as well as

diplomatic relationships with foreign countries are set up or rearranged through the exposure offoreign trade.

In the operation of foreign trade and its financing, there are some rules and regulations in thenational and international levels like the Uniform Customs of practices and Documentary Credit(UCPDC), International Chamber Of Commerce (ICC) Publication, International Standard OfBanking Practice (ISBP), Foreign Exchange Regulation Act-1947, Foreign Exchange Guidelines andall the rules and Foreign exchange Circulars Of Bangladesh Bank, Commercial Policy of theGovernment.

In the time of globalization, countries tend to export the items in which they have competitiveadvantage and import those items where they lack the advantage. Import meets the need of theconsumer goods, industrial inputs and other essentials causing outflow of foreign currency whileexport business takes the roles of minimizing the gap in balance of trade through inflow of foreigncurrency by remittance business.

Traditionally, import business of a country surpassed export business in terms of value. The sceneryis same for the individual bank also. BASIC Bank Bangladesh Limited being the leading privatesector bank in respect of foreign trade has grown tremendously in the past decades. Theinvolvement of the bank in the industrial sector as well as in the commercial sector has raised theimport business of the bank inexplicably with that export business. Foreign trade financingprocedure involves many activities that create employment that reduce the poverty from the society.

For the growth and development of our economy, export and remittance earnings should begroomed up and import also should be enriched. Foreign trade helps to optimize the growth anddevelopment of a country. That will ultimately develop the professionalism of our banking industry. According to the economic cycle, the more export finance, the more employment, the more income,the more savings and the investment again. BASIC Bank Bangladesh Limited is doing the needfulaccording to the earlier mentioned economic cycle.

1.4. Background of the report:

A bank is a financial institution whose main objective is the mobilization of fund from surplus unitto deficit unit. In the process of acceptance & provision of loan, banks create money. This

characteristics feature sets Bank apart from other financial institution. A bank can influence the

money supply through lending & investment. A Bank is also an economic institution whose

objective is to earn profit through exchange of money & credit instruments.


16/130


Commercial bank is one , which is concerned with accepting deposits of money from the public ,

repaying on demand or otherwise & withdrawal on demand or otherwise & employing the deposits

in the form of loan & investment to meet the financial needs of business & other classes of society .

Bank is very old institution that is contributing toward the development of economy & an important

service provider in the modern world. In the globalization & free market economy, banks providetheir service worldwide & compete with other all over the world.

The banking sector is one of the major sectors in Bangladesh economy & can be divided mainly in

to four categories – Nationalized bank, Local private bank, specialized financial institution & foreign

banks. In Bangladesh, the journey of private commercial banks is not older. The banking in

Bangladesh has passed three decades through different policy environment & comprises central

bank at the apex.

The country’s central bank, Bangladesh Bank, controls & monitors the banking industry. At present,

there are 4 nationalized, 5 are specialized, 30 are local private commercial banks, 7 are foreign

commercial banks. BASIC Bank Ltd. is one of the banks in the banking sector.

1.5. Rationale of the report:

BASIC Bank is a specialized bank of Bangladesh. At present BASIC Bank has discovered a new

horizon in the field of banking arena, which offers different General Banking, Investments and

Foreign Exchange Banking System. I have decided to study on the topic “Foreign Exchange

Operations of BASIC Bank Limited”, because the Internship Report of the University is an

integral part of the BBA program. So, it is obligatory to undertake such task by the students who

desirous to complete and successfully end-up their BBA program. This also provides an opportunity

to the students to minimize the gap between the theoretical knowledge and practical knowledge. That’s why I have prepared this report.

1.6. Objectives and Philosophy of the Study:

The primary objective of this report is to partial fulfillment of BBA degree & achievement of the

knowledge about how banks mobilize their surplus fund to the deficient units of BASIC Bank Ltd

.There are some other important objectives of this report are as follows :

To fulfill academic requirement.

To gain practical knowledge in banking sector of our economy.

To acquire experience for future working life.

To describe the customer service process of BASIC Bank Ltd.

To analysis the bank position of deposits mobilization.

To get knowledge about the products & services offered by BASIC Bank Ltd.


17/130


To analyze how well BASIC manages a customer.

To evaluate the various loans programs of BASIC Bank which includes Industrial, Trade

and Commerce.

To explain the procedures, system of credit operation of BASIC Bank.

To inspection the recovery of loans by BASIC Bank.

To measure the actual position in classified loans and provision maintained by the

BASIC Bank Limited.

To get acquired with the loan structure, size, profile of sector wise outstanding position

of loans and system of loan classified of BASIC.

To identify major strength and weakness of BASIC Bank Limited in respect to other

Banks.

To recommend ways and means to solve problems regarding Banking.

1.7. Scope of the study:

According to the course requirement of BBA program of Jagannath University, each student has to

prepare an Internship Report. A topic has been selected as discussed with the honorable course

supervisor. I took this topic as I have a great desire to work on Banking and as I am a practical

internee in the foreign trade desk, so, I have a great opportunity to enjoy making a quality report on

the topic “Foreign Exchange Operations of BASIC Bank Limited”. On Basis of my practical

experience on the foreign trade desk as well as theoretical knowledge, I have completed the report.

The report is based on the operational functions of BASIC, Babubazar Branch Office, Foreign

Exchange Division and how they works to regenerate the Foreign Currency and Foreign Revenue

from other countries and help to established corporate level of industry and also the managerial

technique to solve the sensitive operation of the bank’s performance.

1.8. Limitation of the Study:

There are some limitations in my study. I faced the following problems during the study:

Lack of time: The time period for this study was very short. I had only 90 days in my hand to

complete this report, which was not enough. So, I could not go in depth analysis. Sometimes theofficials were busy & were not able to give much time.

Insufficient data: Some essentials information could not be collected due to confidentiality of

business.

Lack of Experience: Lack of my experience and efficiency to prepare such report. This is the first

time for BBA students.


18/130


Lack of Supervision: Few officials sometimes felt disturbed, when they were busy with their tasks.

Sometimes, they didn’t want to supervise due to pressure of work load.

Other limitations: Though I have given outmost effort to prepare this paper but there are some

other limitations of the study. They are as follows-

i. Frequent strike and recent political instability of the country were some of the limitations

ii. This paper has focused on the most sensitive part of the organization i.e. Foreign

Exchange Department. So the bank authority hesitated to disclose important

information to maintain business secrecy.

iii. Only 3 months time is not enough to complete such a study in a lucid manner.

iv. The whole report was prepared on the Babubazar Branch of BASIC Bank Ltd. and so it

doesn’t focus the true picture of the Credit operating system scenario of the whole

banking sector in the country.

v. Lack of opportunity to work in the entire department for a longer time.

vi. Non-cooperative behavior of some officials of the Bank.

vii. Lack of opportunity to visit more than one Branch.

viii. Up to date data are not available.

1.9. Sources and Methodology of the Report:

Sources of data :

To make the report more meaningful and presentable, two sources of data and information have

been used widely. For the organization part, much information will be collected from different

published articles, journals, brochures and web sites. All the information incorporated in this report

will be collected both from the primary sources and as well as from the secondary sources.

1.9.1. Primary Sources:

i. Practical deskwork.

ii. Face to face conversation with the officers, managers & others.

iii. Face to face conversation with the clients.

iv. Discussion with officials of commercials and industrial credit department of

BASIC Bank, Babubazar Branch.


19/130


1.9.2. Secondary Sources:

i. Annual Reports of BASIC Bank

ii. Brochures of BASIC Bank

iii. Prospectus of BASIC Bank

iv. Published or unpublished or personally collected data from officers,

Babubazar Branch and Head office of BASIC Bank Ltd.

v. Training institutions papers those are supplied to the trainee.

vi. Various files and documents of credit division of BASIC Bank Ltd.

vii. Articles related to credit management in different journals and magazines.

viii. Other published documents of Bangladesh Bank.

1.10. Importance of the study: To gather knowledge about BASIC Bank’s Banking System.

To collect data for report preparation.

To identify the problems of BASIC Bank at Babubazar Branch.

To achieve practical knowledge of banking side of BASIC Bank Limited.

To observe interrelated activities of general banking of BASIC Bank Limited.

To gain practical knowledge about overall banking system & especially general banking,investment and foreign exchange.

1.11. Time Schedule of the Report:

Work Schedule Days Required

Topic Selection 2

Pilot Survey 8

Data Collection 20

Drafting 5

Review 5

Final Submission 5

Total Days Required 45


20/130


1.12. Literature Review:

Foreign Exchange means Foreign Currency. If we consider Foreign Exchange as a subject then itmeans all kinds of transactions related to Foreign Currency, as well as currency instruments such asDraft, MT, TT, TC, Payment Order & Foreign Trade. In other words Foreign Exchange deals with

Foreign Financial Transactions.Foreign Exchange refers to the process or mechanism by which the currency of one country isconverted into the currency of another currency and, thereby, involves the international transfer ofmoney. It is the means of method by which to wealth in a country’s currency are converted into therights to wealth in another currency. In banks where we talk Foreign Exchange, we refer to thegeneral mechanism by which a bank converts currency of one country into that of another’s.

Dr. Paul Einzig (Chowdhury L.R., A Text Book of Foreign Exchange, 2nd edition, Dhaka: 2006 pageno.-03) defines Foreign Exchange as the system or process of converting one national currency intoanother and of transferring the ownership of money from one country to another.

In the words of Mr. H. E. Evitt, (Chowdhury L. R., A Text Book on Foreign Exchange, 2 nd edition,Dhaka: 2006 page no. - 03) defines, “Foreign Exchange is that section of Economic Science whichdeals with the means and methods by which rights to the wealth of one country’s currency areconverted into the rights to the wealth in terms of another country’s currency.In terms of Foreign Exchange regulations Act-1947, as adapted in Bangladesh, Foreign Exchangemeans Foreign Currency and it includes all deposits, credits and balances payable in ForeignCurrency as well as all Foreign Currency instruments such as Drafts, Travelers Cheque, bill ofexchange, Hundi, and Promissory Notes payable in any foreign country.

Islam, M. Mujahidul, Islami Banking in Bangladesh: Success, Problems and Potentialities (in Bengla),(2004) in the summary he said environment of Islami Banking System in Bangladesh is mostfavorable the people as well as the employee of the bank does not know how to operate it.

So, we should try heart and soul to understand among the people as well as employee the welfare ofthe Islamic Economy and its operating system. Employee and investment clients should be trainedup.

Hamud, Sami Hasan, Progress of Banking: The aspiration and the realities, Islamic EconomicStudies,vol.2, No.1, Rajab 1415 (December 1994),Islamic Research and Training Institute, IslamicDevelopment Bank, Jeddah, K.S.A. he has said extension of Mudarakbad to collective investment. According to banks right to profit cannot be justified without having been like to loss. Profit injustified for supplying capital or for performing the work.

Huq, M.Azizul, Islami Banking in Bangladesh with a brief overview of operational problem, A paperpresented at the seminar held at BIBM on June 24, 1996 therefore it is clear that interest freebanking system provides better service to the customer and contribute to the economy as a whole with high esteem of moral values then that of traditional banking system operating in our country.

Ahmed, Dr. Mahmood , Scope for Micro Enterprise Development in Bangladesh under Finance”, Journal of Banking & Finance, vol.-15, No. 01, The Association of International Islamic Banks,Karachi (Asian Region), (January-March, 1998) in the article he has said if we want to alleviate the


21/130


poverty from the country micro enterprise to be spread over the country and Islamic Banking isessentially a normative concept and could be defined as conduct of banking in consonance with theethos of the value.

Hanan, Shah, Abdul, (History, Methodology, problems and Prospects of Islamic Banking in

Bangladesh in 2004) In the book he has said a Central Shariah Board is to be formed to conductIslami Banking under the Shariah Principle and many books and journals should be translate inBangla so that every man and woman may understand the main concepts of Islamic Banking.

Khan A.R., Towards Identification of the Problems of Shariah Based Commercial Banking,University of Dhaka, Journal of Business Studies, vol.-12, No.-02, December 1991 introduced- Without introducing Shariah Law the commercial banks can not complying Shariah properly. SoSahiah law is to be introduced in the whole country. In our academic curriculum in every stageIslamic Banking & Law is needed to be included.

1.13. Rules and Regulations of Foreign Exchange:

Foreign Exchange transactions as well as business are controlled by both local and internationalrules and regulations.

Local Rules and Regulations:Our Foreign Exchange transactions are being controlled by the following local regulations:

Foreign Exchange Regulations Act: Foreign Exchange Regulations (FER) Act 1947 enacted on11th March 1947 in the British India, provides the local basis for regulating the foreign exchange. This Act was adapted in Pakistan and lastly in Bangladesh.

Guidelines for Foreign Exchange Transactions: The publication issued by Bangladesh Bank in

the year 1996 is in two volumes. This is compilations of the instructions to be followed by the Authorized Dealers in transactions relating to the Foreign Exchange.

Foreign Exchange Circular: Bangladesh Bank issues Foreign Exchange circular from time to timeto control the export import business and remittance to control the foreign exchange. It has onekind of supplementary and complementary action to the guideline for Foreign Exchange Transactions.

Import –Export Policy: Ministry of Commerce issue Export Policy and Import Policy giving basicformalities and instructions for Import and Export Business.

Public Notice: Sometimes Chief Controller of Import & Export issues public notice for any kindof change in Foreign Exchange Transactions.

Instructions from Different Ministry: Different Ministry of the Govt. sometimes instructs theauthorized Dealer directly or through Bangladesh Bank to follow something required for thegovernment.


22/130


1

Shariah Principle: Along with the above and international rules and regulations Islami Bank isbound to follow the principle of Islamic Shariah in the foreign exchange.

International Rules and Regulations for Foreign Exchange: There are some internationalorganizations influencing the foreign exchange transactions. Few of them are discussed below:

International Chamber of Commerce (ICC): ICC is a worldwide non-governmental organizationof thousands of companies. It was founded in 1919. Its Headquarters is in Paris. For managing andcontrolling the international trade ICC issues some publications which were being followed by allthe member countries. It has also an International Court of Arbitration to solve the internationalbusiness dispute. The major Publications of ICC are:

Uniform Customs and Practices for Documentary Credit. Uniform Rules for Collection. Uniform Rules for Reimbursement. International Standard for Banking Practice.

World Trade Organization (WTO): WTO is another international trade organization establishedin 1995. This organization has vital role in international trade through its 124 member’s countries.

1.14. Inco terms:Inco terms mean International Commercial Terms, Trade Terms, and Delivery Terms. These termshave been prepared and named by the ICC Paris. First it is published in 1936 and latest in 2000. Atpresent there are 13 Inco terms.1. EXW i.e. Ex Works2. FAS i.e. free Alongside Ship3. FOB i.e. Free on Board4. CFR i.e. Cost and Freight

5. CIF i.e. Cost Insurance and Freight6. CPT i.e. Carriage Paid To7. CIP i.e. Carriage & Insurance Paid To8. DAF i.e. Delivered At Frontier9. DES i.e. Delivered Ex Ship10. DEQ i.e. Delivered Ex Quay11. DDU i.e. Delivered Duty Unpaid12. DDP i.e. Delivered Duty Paid13. FCA i.e. Free Carrier

Uses of Inco terms:

A sale contract determines quantity and quality of the goods as well as the price, which should bepaid for them. But there remain the following questions unsettled.

Who should clear the goods for import and export? Who should pay the cost of loading and discharging the goods? How should the risks of loss or damage of the goods be divided between them?

Who should take out insurance as a protection against these risks? To settle these question arise the necessity of Trade terms or Inco terms. So, Inco terms will:


23/130


1

Fix up the risk and responsibility of the buyer and the seller/Provide a uniform Trade Terms.

1.15. Import Trade Control Act and Authorities:

A. Foreign Exchange Regulation Act-1947B.Import Export control Act, 1950C. Importer, Exporter, Indenter Registration Order-1981D. Chief Controller of Imports and Exports (CCI & E)E. Bangladesh Bank.

1.16. Main Guidelines of Foreign Exchange OperationGuidelines for Foreign Exchange Transactions (Published by Bangladesh Bank)1. Import Policy Order –IPO (Published by Ministry of Commerce)2. Uniform Customs & Practices for Documentary Credits (UCPDC), ICC Publication No. 600.3. Uniform Rules for Collection (URC), ICC Publication No. 522.

4. Uniform Rules for Bank- to – Bank Reimbursement (URR), ICC Publication No. 525.5. Inco terms-2000.6. International Standby Practice- (ISP-98).7. International Standard Banking practice- (ISBP-2008). ICC Publication No. 645.8. EUCP - Supplement to UCP-600 for Electronic Presentation.9. Foreign Exchange (FE) Circulars (issued by Bangladesh Bank).10. Public Notice Issued by CCI & E.11. SRO- issued by Ministry of Finance or NRB.12. Circulars/Letters issued by IBBL, Head Office from time to time.

**********End of Chapter 1***********


24/130

C

H PTER

T

WO

Profile of the Organization

Segment Objectives


History of BASIC Bank Limited

A Bird’s Eye View

BASIC Bank Limited

Business Philosophy of BASIC Bank Limited

Mission of BASIC Bank Limited

Objective Of BASIC bank Limited

Organizational Goals

Strategy of BASIC Bank Ltd

Function of the BASIC Bank Ltd

Capital Structure and ratios

Organism of BASIC Bank Ltd

Branches of BASIC Bank LTD

Performance of BASIC Bank Ltd

Summary of Financial Performance:

Products and Services of BASIC Bank Limited

Brief Profile of Babubazar Branch

Departments of Babubazar Branch


25/130


1

2.1. History of BASIC Bank Limited:

BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited) registered underthe Companies Act 1913 on the 2nd of August, 1988, started its operations from the 21st of January,1989. It is governed by the Banking Companies Act 1991. The Bank was established as the policy

makers of the country felt the urgency for a bank in the private sector for financing small scaleIndustries (SSIs). At the outset, the Bank started as a joint venture enterprise of the BCCFoundation with 70 percent shares and the Government of Bangladesh (GOB) with the remaining30 percent shares. The BCC Foundation being nonfunctional following the closure of the BCCI, theGovernment of Bangladesh took over 100 percent ownership of the bank on 4th June 1992. Thusthe Bank is state-owned. However, the Bank is not nationalized; it operates like a private bank asbefore.

BASIC Bank Limited is unique in its objectives. It is a blend of development and commercial banks. The Memorandum and Articles of Association of the Bank stipulate that 50 percent of loan able funds shall be invested insmall and cottage industries sector.

Steady growth in client base and their high retention rate since Bank’s inceptions testify to theimmense confidence they repose on its services. Diversified products both liability and assets sidesparticularly a wide range of lending products related to development of small industries and microenterprises, and commercial and training activities attract entrepreneurs from varied economic fields. Along with promotion of products special importance is given to individual clients throughproviding personalized services. In fact individuals matter in this Bank. This motto has beenfollowed for development of clientele as well as human resources of the Bank.Coping with the competitive and rapidly changing financial market of the country, BASIC BankLimited maintains close connection with its clients, the regulatory, the shareholders (Government ofBangladesh), other banks and financial institutions.

2.2. A Bird’s Eye View:

Year 2011 was a fairly good year for the Bank in the face of severe competition in the Banking

industries and changing global and national economic scenario. The Board of Directors were happy

with the overall performance of the Bank, particularly for maintaining quality of assets and

improving shareholders position, stability and capital position.

Capital Position

Authorized capital Tk. 5000.00 million

Paid up capital Tk. 2357.59 million

Total Reserve and Surplus up to 31.12.2011 Tk. 3124.17 million

The Bank is required to transfer 20 percent of its net profit before Tax to Capital

Fund as per the Banking Companies Act 1991.


26/130


1

2.3. BASIC Bank Limited: at a glance:

Name : BASIC Bank Limited

Legal form : A State Owned Scheduled Bank in Bangladesh established as a banking

company under the Companies Act 1913 its operation in 1989. It is governed by the Banking

Companies Act 1993.

73, Motijheel Commercial AreaDhaka-1000, Bangladesh.

Head Office: Sena Kalyan Bhaban (6th floor)195, Motijheel Commercial AreaDhaka-1000, Bangladesh.

Phone: Head Office:- +88 02 9564830, +88 02 9568190, +88 02 +88 029556616, +88 02 7175691, +88 02 7175692.IT Division & Training Cell:- +88 02 9562960,+88 02 9555087.

Fax: 880-2-9564829.

SWIFT Code: BKSIBDDH

E-Mail: [email protected]

Web-Site: www.basicbanklimited.com

ATM Network

: 5 booths

Registered office: Bana Shilpa Bhaban

Commercial Operation : January 21, 1989.

Date of Incorporation : August 2, 1988.

Present No of Branches : 55 (Update: October 2012)


27/130


1

2.4.Business Philosophy of BASIC Bank Limited:

The statement of a company’s philosophy, often called the company creed , reflects or specifies the

basic beliefs, values, aspirations, and philosophical priorities to which strategic decision makers are

committed in managing the company.

The philosophy of BASIC Bank is to develop an ideal, excellent and unique financial institution in

the banking industry. The sponsors’ perceptions were since inception and till now that BASIC Bank

should be distinguished from other private owned and commercial banks operating in Bangladesh.

Another philosophy is to provide best customer service so that BASIC Bank Ltd. can be grown as a

leader in the banking industry rather than a follower. BASIC Bank Ltd. is tirelessly striving to

achieve this philosophy. It is therefore evident that BASIC Bank Ltd. would seek fair return on

owner’s equity as of its one prime goal. The profit earning goal is sought to be achieved by rendering

maximum possible satisfaction to clients through quick and efficient services. Therefore, quality

service to the clients is another important goal of BASIC Bank Ltd.

2.5. Mission of BASIC Bank Limited:

The mission of any company is the unique purpose that sets it apart from other companies of its

type and identifies the scope of its operations. In short, the mission describes the company’s

product, market, and technological areas of emphasis in a way that reflects the values and priorities

of the strategic decision makers.

The mission of BASIC Bank is to become one of the leading Banks in Bangladesh by its prudence.

BASIC Bank’s business mission lies with the slogan “A Bank with international connection is to

assist the business development of private sector institutions, industries and household”. It also

emphasizes on a reasonable return from its investments to satisfy the shareholders. The mission of

BASIC Bank can be summarized in the following points:

BASIC Bank intends to provide better benefits and good returns to its customers and

shareholders.

It intends to meet the needs of its clients and enhance its profitability by creating corporate

culture.

BASIC Bank aims to ensure its competitive advantage by upgrading banking technology and

information system.

It provides high financial services to strengthen the well-being and success of individual,

industries and business communities.

BASIC Bank believes in strong capitalization.

It maintains congenial atmosphere for which people are proud and eager to work with

BASIC Bank Ltd.

It believes in disciplined growth strategy.

BASIC Bank encourages investors to boost up share market.


28/130


1

It intends to play more important role in the economic development of Bangladesh and its

financial relations with the rest of the world by interlining both domestic and international

operations.

2.6. Objective Of BASIC bank Limited:

BASIC Bank is unique in its objective. It maintains both operational objectives and organizationalobjectives. Operational objective of BASIC Bank Limited are as follows:

As mentioned earlier, BASIC’s main priority is promoting and financing development of

small and cottage industries.

The Bank is to provide full range of commercial banking services including collection ofdeposits, such as current, savings, STD, and FDR; short term trade finance, handling ofimport and export business.

BASIC offers Micro credit to the urban poor through linkage with NGO’s with a view tofacilitating their access to the formal financial market.

BASIC Bank is attempting to introduce online banking to keep pace with other commercial

banks.

2.7. Organizational Goals:

BASIC Bank Ltd always ready to maintain the highest quality of services by up grading bankingtechnology prudence in manage & by applying high standard of business ethics through itsestablished commitment and heritage. Objectives of a private institution like BASIC Bank Ltd. is tomaximize profit though optimum utilization of resources by providing best customers services.Other objectives are as follows:

To employ funds for profitable purposes in various fields with special emphasis on smallindustries.

To undertake project promotion to identify profitable areas of investment.

To established linkage with other institutions which are engaged in financing microenterprises.

To co-operate and collaborate with institutions entrusted with the responsibility ofpromoting and adding SSI sector.

BASIC Bank Ltd. is committed to ensure its contribution to national economy by increasingits profitability through professional disciplined growth strategy for its customer and bycreating corporate culture in international banking area.


29/130


1

The objective of BASIC Bank Ltd. is not only to earn profit but also to keep the socialcommitment and to endure its co-operative to the person of all level to the businessman,industrialist especially who are establishing large scale industry by consortium and the agro-based export oriented medium & small scale industries by self inspiration.

BASIC Bank Ltd. as the first and largest private bank in committed continues its endeavorby rapidly increasing the investment of honorable shareholders into assets.

BASIC Bank Ltd. believes in building up strong-based capitalization of the country.

BASIC Bank Ltd. is playing a vital role in Socio-Economic development of Bangladesh by way of linkage with rest of the world by developing world wide network in domestic andinternational operations.

2.8. Strategy of BASIC Bank Ltd:

Financing establishment of small units of industries and business and facilities their growth. Small Balance Sheet size compared of quality assets. Steady and sustainable growth. Investment in a cautious way. Adoption of new banking technology. Adoption of online service.

2.9. Function of the BASIC Bank Ltd:

The Bank Offers:

Term loans to industries especially to small scale enterprises.

Full-fledged commercial banking service including collection of deposit, short term tradefinance, working capital finance in processing and manufacturing units and financing andfacilitating international trade.

Technical support to Small Scale Industries (SSI) in order to enable them to run theirenterprises successfully.

Micro credit to the urban poor through linkage with Non-Government Organization(NGOs) with a view to facilitating their access to the formal financial market for themobilization of resources.

In order to perform the above tasks, BASIC Bank Ltd. works closely with its clients, theregulatory authorities, the shareholders (GOB), banks and other financial institutions.

Very soon introducing online banking to its clients.


30/130


1

2.10. Capital Structure and ratios:

At the end of the year 2011 bank’s capitalization stood at 11.30% for tier 1 and 13.48% for totalcapital against total risk weighted assets exceeding the required minimum levels of 5% and 8%respectively. Thus the bank was able to maintain the confidence of investors and depositors while

providing lucrative return to the government, the sole shareholder of the bank. Details of the capitalstructure were as follows:

Core Capital( Tier 1) Year 2011 2010

(Amount in Million Taka)

Paid up capital 1455.3 1309.77

Statutory reserve 1559.66 1295.26

Other reserve and surplus 583.44 51

Total of Tier 1 Capital 3598.4 2949.54

Supplementary Capital(Tier 2)

1% general provision on unclassified loans 525.46 0

Asset Revaluation reserve and exchange equalization 169.7 18.08

Total of Tier 2 Capital 695.16 425.37

Total Capital 4293.56 2947.86

Risk Weighted Assets 31850.69 22841.32

Capital Ratios to Risk Weighted Assets

Tier 1 Capital 11.30% 10.51%

Tier 2 Capital 2.18% 1.51%

Total Capital 13.48% 12.02%


31/130


1

2.11. Organism of BASIC Bank Ltd.:

Chairperson

Board of Directors

Managing Director

GM GM

(Administration)

GM(Audit andInspection)

Development Central

Accounts

Personal

DivisionEstablishment

and Branch

Control

Industrial Credit and

Micro Credit

International

Division

Deputy General Manager

Assistant General Manager

Manager

Deputy Manager

Assistant Manager

Officer

Assistant Officer

Non Clerical Staff:

Messenger Staff

Clerical Staff:

Banking Staff


32/130


2

2.12. Branches of BASIC Bank LTD:

As a state owned development bank BASIC Bank is rich in its branch network. At present it has 55

branches all over the country. Among these 11 branches are in the Dhaka City including the main

branch of Bana Shilpa Bhaban. The growth rate of Braches of BASIC Bank Ltd is as follows:

TABLE: 1 Growth Rate of Branches of BASIC Bank Limited:

Year Number Of Branches Growth Rate

2003 26

2004 27 3.85%

2005 27 0%

2006 28 3.85%

2007 31 10.71%

2008 31 0%

2009 32 3.85%

2010 34 7.7%

2011 48 53.9%

Sources: BASIC Bank Annual Report 2011

Till October 2012 total No of Branches: 55

Graph: Growth Rate of Branches of BASIC Bank Limited

0

0.1

0.2

0.3

0.4

0.5

0.6

2003 2004 2005 2006 2007 2008 2009 2010 2011

Growth Rate of Branches

Growth Rate


33/130


2

2.13. Performance of BASIC Bank Ltd.:

Table: 2 - Performance of the Bank at a Glance for the last Seven years.

Particulars 2006 2007 2008 2009 2010 2011

Authorized Capital 2000 2000 2000 2000 2000 2000

Paid up capital 675 810 945 1247.40 1309.77 1455.30

Reserve and Surplus 816.23 916.14 1294.00 1349.17 1672.82 2468.65Equity Fund 1491.23 1726.14 2239.00 2596.58 2982.59 3923.95

Deposits 15509.18 22325.58 24084.65 31947.98 38368.23 34501.69

Loans & Advances 12000.15 15339.35 19000.00 22263.35 27269.13 29261.53

Placement &Investments

6098.51 10236.82 8212.23 13560.92 15659.03 12244.91

Import Business 12507.80 14094.96 17804.27 21266.57 27359.77 33976.6

Export Business 7908.00 11097.23 15463.74 16794.96 22270.87 19887.7

Gross Income 1768.85 2228.21 2870.32 3549.51 5060.29 5162.30Gross Expenditure 1241.63 1599.77 1858.69 2458.41 3526.35 3593.96

Profit Before Tax 527.22 628.44 1011.62 1091.10 1533.94 1568.34

Profit After Tax 291.48 285.49 554.14 282.96 549.86 648.85Fixed Assets 101.41 135.78 154.52 196.11 228.36 232.65

Total Assets 19436.57 27136.37 29417.09 38773.98 46660.03 45699.56

Number of Employees 578 601 651 721 735 776Number of Branches 27 27 28 31 31 32

SSI/SMI Loan and Microcredit to Total Loan

62.21 50.66 53.43 56.73 59.32 56.93

Capital Adequacy Ratio 12.49 11.77 11.98 12.91 12.04 13.48

Return on Assets 1.70 1.23 1.96 0.83 1.30 1.41Loans as % of totalDeposits

77.37 69.74 78.89 69.69 71.07 84.81

Return on Equity 21.27 17.75 27.82 11.70 19.68 18.79

Source: BASIC Bank Annual Report 2011

2.14. Summary of Financial Performance:

Table 3: Capital Adequacy Ratio: Year 2007 2008 2009 2010 2011

Capital Adequacy Ratio 12.91 12.04 13.48 12.49 10.13


34/130


2

Graph 1: Capital Adequacy Ratio

Table 4: Liquid Asset to Deposit Liabilities:

Year 2005 2006 2007 2008 2009 2010 2011

Liquid Asset to Deposit Liabilities 50.56 51.05 58.01 40.42 49.10 47.70 52.15

Graph 2: liquid asset to deposit liabilities

Bank has to maintain enough liquid assets against deposits to meet up sudden withdrawal

requirement of a customer. A bank has to maintain certain percentage (5.5%) of liquid asset

directed by Bangladesh Bank. For maintaining liquid asset banks normally purchase government

securities which are risk free. But bank should be very careful about this because too much liquid

asset is harmful for the bank’s profitability. Because income from liquid asset is lower. In the

first three years the bank’s liquid asset was too high. From 2008 to 2010 it had decreased to

some extent. But in 2011 it has decreased to a large amount and it became 24.67%.

0

5

10

15

2007 2008 2009 2010 2011

Capital Adequacy Rate

CAR

0

2040

60

80

2005 2006 2007 2008 2009 2010 2011

Liquid Asset to Deposit Liabilities

Liquid Asset to Deposit Liabilities


35/130


2

Table 5: Loan to Deposit Liabilities:

Year 2005 2006 2007 2008 2009 2010 2011

Loan to Deposit Liabilities 82.39 77.37 69.74 78.89 75.58 69.69 71.07

Graph 3: Loan to Deposit Liabilities

Bank has to maintain enough loan deposit ratio for maintaining its sustainability. According to

Bangladesh Bank’s guidance Loan to Deposit Ratio Should be maximum 82%. From the data we

see that the bank maintains the loan deposit ratio from the year 2003 to 2010, although it had

exceeded to some extent in the year 2003. But in the year 2010 the bank becomes aggressive indisbursing loan. It becomes 84.81% in the year 2011.

60

65

70

75

80

85

2005 2006 2007 2008 2009 2010 2011

Loan to Deposit Liabilities

Loan to Deposit Liabilities


36/130


2

Table: 6 Return on Assets (ROA):

Year 2006 2007 2008 2009 2010 2011

Return on Assets 1.70 1.70 1.23 1.96 1.83 1.30

Graph 4: Return on Asset

Return on assets indicates the productivity of a bank’s assets. The return on asset of the bank is

satisfactory except the year 2007 when the ROA was decreased to a great extent and it was

0.83%.

Table 7: Return on Equity (ROE):

Year 2005 2006 2007 2008 2009 2010 2011

Return on Equity 20.90 21.27 17.75 27.82 11.70 19.68 18.79

Graph 5: Return on Equity (ROE)

0

1

2

3

2006 2007 2008 2009 2010 2011

Return On Asset

ROA

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011

Return on Equity


37/130


2

As the BASIC Banks 100% shareholder is government so the return on its equity belongs to government.

The ROE is fluctuating over the year 2003 to 2009. In the year 2006 it was highest and in the year 2009 it

was lowest. In the year 2011 it becomes 18.79%.

Table 8: SMI/SSI Loan and Micro Credit to Total Loan:

Year 2006 2007 2008 2009 2010 2011

SMI/SSI Loan and Micro Credit to Total Loan 59.16 62.21 50.66 53.43 56.73 59.32

Graph 6: SMI/SSI Loan and Micro Credit to Total Loan

As a developmental bank most of the credit is disbursed to small medium industries, small scale

industries and micro credit sector. It disbursed over 50% of its loan portfolio to the

developmental sector. In 2004 it disbursed highest amount of credit to this sector and in 2003 it

disbursed the least amount.

0

20

40

60

80

2006 2007 2008 2009 2010 2011

SMI/SSI Loan and Micro Credit to Total Loan

SMI/SSI Loan and Micro Credit to

Total Loan


38/130


2

Table 9: Earning Per Share:

Year 2006 2007 2008 2009 2010 2011

Earnings Per Share 35.02 43.18 35.21 58.64 21.6 41.99

As the hundred percent shareholder of the BASIC Bank is government so the earning per share of

the bank belongs to government. Earnings per share are in increasing trend in the last 7 years except

the year 2006 and 2008. The highest EPS was in the year 2009.

2.15Products and Services of BASIC Bank Limited:

For the purpose of the report, the products of the bank can be broadly classified into four

categories:

1. Deposit Service

Savings Bank Account

Current Account

Short Term Deposit Account

Fixed Deposit Receipt Account

2. Loans and Advances

Overdraft (OD)

Cash Credit (CC)

Loan General

0

10

20

30

40

50

60

70

2006 2007 2008 2009 2010 2011

Earning Per Share

Earning Per Share


39/130


2

Staff Loan

Bills Portfolio

Term Loan

Bank Guarantee

3. Foreign Trade

Import

Export

Post import Credit facility

Export Credit facility

4. Ancillary products

Remittance Service

Pay Order (PO)

Sanchaya patra

Locker Service

Wage Earners Bonds

2.16. Brief Profile of Babubazar Branch:

Number of Employees Cash- 3

Deputy General Manager Md. Mohammed Alind

Credit in charge Md. Sabbir Hossain

Foreign Exchange in charge Md. Nazmus Sakeeb

2.17. Departments of Babubazar Branch:

1. Credit Division

2. Foreign Exchange Division

3. General Banking Division

General Banking in charge Mr. Subrata Saha

Assistant General Manager & 2 Officer Mr.Subrata Saha

Credit-6

Foreign Exchange-6

General Banking-6

Opening of the Branch 1998


40/130


2

2.18. Performance of the Branch:

Table 10: Deposit

YEAR 2006 2007 2008 2009 2010 2011DEPOSIT 1368975 1764644 1836618 2441128 2510042 2541759

Deposit: The branch’s performance In case of deposit is satisfactory. The amount of deposit has increased

from 2005 to 2010(up to June). The amount of deposit has increased 53.86%in the year 2011 than

the year 2006. This becomes possible because the bank’s overall performance is satisfactory and

employees are well trained in handling customers and the branch’s overall environment is customer

friendly.

Table 11: Advances:

YEAR 2005 2006 2007 2008 2009 2010 2011

ADVANCES 2129759 2890960 3309138 3694006 3218860 2690537 2618118

Advances:

The amount of advance has also increased in 2011 than the year 2005. But the amount of loans has

decreased in the year 2010 than the previous year. And the first half of the year 2011 is not

satisfactory for the credit performance of the branch. The branch has to maintain proper credit

policy for the proper performance in this sector. So that it can achieve the loan target at the end.

Table 13: Export:

YEAR 2005 2006 2007 2008 2009 2010 2011

EXPORT 2854312 3653001 3898308 3893380 3479914 3620118 3740154

The amount of export has also decreased in the year 2010 and the reason of this is also the global

economic slowdown. The branch has to take the best effort so that it can recover this situation in

the year 2011.

(Interest Paid on the Deposits till Oct, 2012 : 29672614.74)

(Net Profit till October 2012: 6500497.49 Taka)


41/130


2

Table 14: Profit

Year 2005 2006 2007 2008 2009 2010 2011

Profit 101470 140589 205755 193509 145433 55112 205489

Profit:

If we draw a curve on the bar chart then it will become bell shaped. The profit has increased from

the year 2005 to 2011 and then this has again decreased. All the departments of this branch have to

be run properly for the satisfactory condition of profit.

**********END OF CHAPTE R 2*********


42/130

C

H PTER

T

HREE

Foreign Trade Operation: An Overview

Segment Objectives


Foreign Trade

Foreign Exchange Department

Foreign Exchange Accounts

Necessity of Foreign Exchange

Functions of Foreign Exchange Activities of Foreign Exchange

Mechanism of Foreign Exchange

Applicable Rules and Laws of Foreign Exchange


43/130


3

3.1 Foreign Trade:

No country can produce all kinds of goods and another country, from this sense, mainly this is the

origin of foreign trade. When two countries exchange goods or services between them we can called

it foreign trade. Many writers define it in many ways. Some of them are given below-

“International trade is the transaction of goods and services between two or more countries”

- Prot. C.P. Kridleberger

According to prof. O.M. Amos - “International trade is the exchange of goods across nation trade is the

exchange of goods across nation al boundaries”.

“International trade is a trade among different countries or trade across political frontiers”.

- V.M. Mittari.

3.2 Foreign Exchange Department:

Foreign Exchange refers to the process or mechanism by which the currency of’ one country is

converted into the currency of another country. Foreign exchange IS the means and methods by

which rights to wealth in a country’s currency are converted into rights to wealth in another

country’s currency. ‘Foreign Exchange’ as a subject, then it means all kind of transaction related to

Foreign Currency, as well as currency instruments, such as Draft, MT, TT, TC, and Payment Order

& Foreign Trade.

3.3 Foreign Exchange Accounts:

Nostro Account:

Nostro account means “our account with you”. A Nostro account is a foreign currency account of a

bank maintained its foreign correspondents abroad. For example, US Dollar Account of BASIC

Bank Limited maintained with Citibank. New York. USA is a Nostro account of BASIC Bank

Limited i.e. from the point of view of BASIC Bank Limited, it is their Nostro Account.


44/130


3

Vostro Account:

Vostro account means “your account with us”. The account maintained with foreign correspondent

in a bank of a particular country is known as Vostro account. For example. State o India’s Taka

account maintained with BASIC Bank Limited Dhaka is the vostro a/c i.e. from the point of view

of’ BASIC Bank Limited. It’s a vostro account held for state bank of India. What is the nostro

account for a bank in a particular country is a vostro account for the bank abroad maintaining the

account thus the account of BASIC bank Limited with Citi Bank N.A New York is regarded as its

nostro account held with Citi Bank, while Citi Bank N.A. New York regards it as a it’s vostro

account held for BASIC Bank Limited.

Loro Account:

Loro account means “their account with you”. Account maintained by third part is known as Loro

account: suppose BASIC Bank Limited is maintaining an account with Citi Bank N.A New York

and at the same time Janata Bank is also maintaining a nostro account with City Bank N.A New

York. From the point of view of BASIC Bank Limited Janata Bank’s account maintained with Citi

Bank N.A New York is the loro account.

3.4 Necessity of Foreign Exchange:

No country is self-sufficient in this world. Everyone is more or less dependent on another, for

goods or services. Say, Bangladesh has cheap manpower whereas Saudi Arabia has cheap petroleum.

So Bangladesh is dependent on Saudi Arabia for petroleum and Saudi Arabia is dependent on

Bangladesh for cheap manpower. People of one country are going to another country for

Education, Medical Service etc. One-country export Agricultural commodities, another country

exports Industrial products, all these transactions needs Foreign Currency & are related to Foreign

Exchange.


45/130


3

3.5 Functions of Foreign Exchange:

The Bank acts as a media for the system of foreign exchange policy. For this reason, the employee

who is related of the bank to foreign exchange, especially foreign business should have knowledge

of these following functions:

Rate of exchange works.

How the rate of exchange works.

Forward and spot rate.

Methods of quoting exchange rate.

Premium and discount.

Risk of exchange rate.

Causes of exchange rate.

Exchange control.

Convertibility.

Exchange position.

Intervention money.

Foreign exchange transaction.

Foreign exchange trading.

Export and import letter of credit.

Non-commercial letter of credit.

Financing of foreign trade.

Exchange Arithmetic.

3.6 Activities of Foreign Exchange:

There are three kinds of Foreign Exchange transaction

Import

Export

Remittance


46/130


3

3.7 Mechanism of Foreign Exchange:

Or

In international trade the seller wants to make sure that the buyer is able to pay in time once the

goods have been shipped and that risk to non-payment is minimized. He therefore, wants to find

out how a third party, i.e. the bank can help him in the practical arrangements for this transaction.

Similarly, the buyer is interested that he gets possession of goods before he pays for them and he is

able to make sure that the goods exactly that he ordered.

It is important to decide in advance how seller is going to get payment before handing over

possession of goods and how the buyer is going to get constructive possession of the goods before

making payment. This is more so because the parties are located in two different countries separated

by distance, with different political, legal, monetary and trading system and possibly without

knowing each other well. The two trading partners wish to reconcile the conflicting interests and

Indenter

Buyer/Importer SellerExporterBeneficiary

M a k e P a y m e n t A g a i n s t

A p p l i c a t i o n f o r

O

e n i n L / C

A d v i c e / C o n f i r m s

S u b m i t d o c u m e n t s

P r e s e n t d o c u m e n t

M a k e p a y m e n t

Issue L/C

Issuing BankAdvising BankForward Document

Make Payment

P a

s o r r e m i t t a n c e

I n s t r u c t i o n t o P a y

Reimbursing Bank


47/130


3

converging them into one acceptable solution. This object led to research for a system which is

mutually convenient, reliable and safe, taking into account their own individual problems,

apprehensions and requirements.

The solution resulted in the evolution of Documentary Credit method where a bank acts as afiduciary agent to safeguard the interest of both the parties, namely, ensuring constructive delivery of

goods by the seller to the buyer and payment being made by the buyer on presentation of

documents complying with the terms and conditions of the credit.

3.8 Applicable Rules and Laws of Foreign Exchange Operation:

Foreign Exchange Act 1946 Foreign Exchange Guidelines 2009

Export Policy Import Policy UCPDC 600

***********END OF CHAPTER# 3**********


48/130

C

H PTER

F

our

An Overview of Letter of Credit (L/C )

Segment Objectives


Definition of Letter of Credit Documentary Letter of Credit Types of Letter of Credit Parties Involved with L/C Operation

Documents Required to Open L/C

Proposal of L/C L/C Operation of BASIC Bank


49/130


3

44..11 DDeef f iinniittiioonn oof f LLeetttteerr oof f CCrreeddiitt ((LL//CC))::

A Letter of Credit is a definite undertaking of the Issuing Banks, to make the payment for the

import, on behalf of the importer; in other words, it is a letter of the issuing Bank to the beneficiary,

undertaking to effect payment under some agreed conditions. It is an undertaking of the Issuing

Bank to the Beneficiary to make payment or to accept bill of exchange. It is also an authorization of

the Issuing Bank to effect payment or to negotiate bill of exchange, against stipulated documents,

complying investment terms. L/C is called documentary Letter of Credit. Because the undertaking

of the Issuing Bank is subject to presentation of some specified documents. The Uniform Customs

and Practice of Documentary Credit (UCPDC), 500, govern International Letter of Credit.

4.2 Documentary Letter of Credit:

In simple terms, a documentary credit is a conditional bank undertaking of payment. Expressed

more fully it is a conditional Undertaking given by a bank ( Issuing Bank) at the request of a

customer (Applicant) of on its own behalf to pay a seller (Beneficiary) against stipulated documents

provided all the terms and conditions of the Credit is complied with.

These stipulated documents are likely to include those required for commercial, regulatory,

insurance or transport purposes, such as commercial invoice, certificate of origin, insurance policy

or certificate and a transport document of a type appropriate to the mode(s) of transport used.

Documentary credits offer both parties to transactions a degree of security, combined with

possibility, for creditworthy party, of securing financial assistance more easily.

Documentary credits there of …………

Are arrangements by banks for settling international commercial transactions

Provide a form of security for the parties involved

Ensure payment provided that the terms and condition of the credit have been fulfilled.

Mean that payment by such means is based on documents only, and not on merchandise or

services involved.


50/130


3

4.3 Types of Documentary Letter of Credit:

Documentary Credits are basically two types. It may be either

(i) Revocable

(ii) Irrevocable

i) Revocable Letter of Credit:

This type of credit can be revoked or cancel at any time without the consent of, or notice of the

beneficiary. “A revocable Credit may e amended or cancelled by the Issuing Bank at any moment

and without prior notice to the Beneficiary” (8)

In case of seller (Beneficiary), Revocable Credit involves risk, as the Credit may be amended of

cancelled while the goods are in transit and before the documents are presented, or, although

presented, before payment has been made. The seller would then face the problem of obtaining

payment. On the other hand, Revocable Credit gives the seller up to them moment of payment by

the issuing bank at which the issuing bank has made the Credit available. In modern banking, the use

of revocable credit is not widely spread.

ii) Irrevocable Letter of Credit:

Irrevocable Credit is a commonly used type of documentary credit. The Credit which can not be

revoked varied or changed/amended without the consent of all parties- buyer, seller, Issuing Bank

and Confirming Bank (in case of confirmed LC). An Irrevocable Credit constitutes a definite

undertaking of the Issuing Bank and that the terms and conditions of the Credit are complied

with.(9) Irrevocable Credit gives the seller greater assurance of payments, but he remains dependent

on an undertaking of a foreign bank. Irrevocable may be confirmed and or unconfirmed.

Confirmed Irrevocable Letter of Credit:

It is a Credit of issuing bank, which is opened at the request of buyer/Importer upon an

exporter/seller abroad through an advising bank, the agent/correspondent of issuing bank add their

confirmation under credit line arrangement of the issuing bank the advising bank makes its own,

independent payment commitment when it add its confirmation Confirmed Credit gives the seller a

double assurance of payment. Under confirmed credit, the seller has not only got the undertaking of


51/130


3

issuing bank, but also enjoys the payment and acceptance. Confirmed irrevocable credit represent

additional requirements, hence it is more costly. However, the confirmation charges is payable either

by buyer or seller as per agreed arrangement between them.

Special Types of Documentary Credit:

1. Revolving Letter of Credit:

A Revolving Credit is one where, under the terms and conditions thereof, the amount of the Credit

is renewed or reinstated without specific amendment to the credit being needed. Revolving credit

may be revocable or if revocable. It can revolve in relation to time or value. But Credit that revolves

in relation to value is not in common use.

In case of a credit that revolves in relation to time, e.g. which is available for up to $15000 per

month during a fixed period of time, say, six months, the Credit is automatically available for $15000

each month irrespective of whether any sum was drawn during the previous month. A credit of this

nature can be cumulative or non-cumulative. If the credit is stated to be “cumulative”, any cum not

utilized during the first period carries over and may be utilized during a subsequent period. If the

credit is “non-cumulative”, any sum not utilized in period eases to be available, i.e. it is not carried

over to subsequent period.

2. Back to Back Letter of Credit:

One credit backs another. It may so happen that the beneficiary of an L/X is unable to supply the

goods direct as specified in the credit as a result of which he needs to purchase the same and make

payment to another supplied by opening a second letter of credit, in this case, the second credit

called a ”Back to Back Credit”. This concept involve opening of second credit on the strength of

first credit, i.e. mother L/C opened foreign importers.

Under Back To Back Letter of Credit concept, the mother L/C stands as security for opening of

second credit, i.e. Back to Back Letter of Credit. Back to Back Letter of Credits are opened in

conformity to the terms and conditions s stipulated in mother credit except the price of he goods,

shipment period and validity of L/C. in Back to Back Letter of Credit the negotiated price is quoted.

The shipment period and validity of Back to Back Letter of Credits are given earlier than the original


52/130


4

validity as stipulated in the mother L/C which helps the seller of the first credit to substitute his

drafts, commercial invoices and other documents, if any, with that drawn by the seller of Back to

Back Letter of Credit.

3. Transferable & Nontransferable Letter of Credit:

A Transferable Credit is one, which can be transferred by the original beneficiary to one or more

parties. In transferable credit, the original beneficiary becomes the middleman and transferee

becomes the actual supplied of the goods. It is normally used when the used when the first

beneficiary does not supply the merchandise himself, but is a middleman and thus wishes to transfer

part, of all of his right and obligations to the actual supplier (s) as second beneficiary(s). These types

of credit can only be transferred once, i.e. the second beneficiary(s) cannot transfer to a third

beneficiary. (11).

3. Red clause Letter of Credit.

A Red clause Credit is a credit with a special clause in corporate into it that authorizes the advising

bank or confirming bank to make advances to the beneficiary before presentation of documents, the

clause is incorporated at to specific request of the applicant, and the wording is dependent upon his

requirements, it is so called because the clause was originally written in red ink to draw attention to

the unique nature of this credit.

A red clause credit is used, for example, by a wool importer in England to enable a wool shipper in

Australia to obtain funds to pay the actual suppliers by direct purchase by obtaining a loan from the

Australian bank. This bank would get repayment of the loan, plus interest, from the proceeds due to

the Australian beneficiary when the wool was shipped and documents presented in accordance with

the terms of the credit, if , however, the beneficiary failed to ship the wool and so repay the loan by

presenting documents called for by the credit, the Australian bank would have the right to demand

repayments with interest, form the issuing bank and that bank would have a similar right of recourseagainst the applicant for the credit.


53/130


4

5. Green Clause Letter of Credit:

A Green Clause Letter of Credit is a credit with a special clause incorporated into it that which not

only authorized the advising bank to grand pre-shipment advances but also storage cost for storing

the goods prior to shipment. It is useful in situations where shipping space is not readily available,

i.e. some African countries. It is so called because the clause was original written in green ink to

draw attention to unique nature of this Credit. At present this type of credit is not in use.

6. Standby Letter of Credit:

The Standby Letter of Credit is very similar in nature to a grantee. The beneficiary can claim

payment in the event that the principal does not comply with its obligations to the beneficiary.

Payment can usually be realized against presentation of a sight draft and written statement that theprincipal has failed to fulfill his obligations.

With this instrument the following payments and performances, among others, can be supported:

Repay funds borrowed of advanced.

Fulfill subcontracts

Undertake payment of invoices made on open account

Standby letter of credits are subject to UCPDC 600. This types of credits are issued by the banks

where the issuance of bank guarantees are prohibited by the law e.g. some North American

countries mainly in U.S.A.

4.4 Parties involved with L/C operation

A letter of Credit is issued by a bank at the request of an importer in favor of an exporter from

whom he has contracted to purchases some commodity or commodities. The importer, the exporterand issuing bank are parties to the letter of credit. There are however, one or more than one banks

that are involved in various capacities and various stages to play an importer role in the total

operation of the credit.

The following parties are involved with L/C operation procedures:


54/130


4

i) The Opening Bank.

ii) The Advising Bank.

iii) The Buyer and the Beneficiary.

iv) The Paying Bank.

v) The Negotiating Bank.

vi) The Confirming Bank.

i) The Opening Bank:

The opening Bank is one that issues the letter of investment at the request of the buyer. By issuing a

letter of credit it takes upon itself the liability to pay the bills drawn under the credit. If the drafts are

negotiated by another bank, the opening bank reimburses that bank. As soon as the opening bank,

issuing a letter of credit (L/C), it express its undertaking to pay the bill or bills as and when they are

drawn by the beneficiary under the credit.

ii) The Advising Bank:

The letter of credit is often transmitted to the beneficiary through a bank in the letters country. The

bank may be a branch or a correspondent of the opening bank. The credit is sometimes advised to

this bank by cable and is then transmitted by it to the beneficiary on its own special form. On the

other occasions, the letter is sent to the bank by mail or telex and forwarded by it to the exporter.

The bank providing this service is known as the advising bank. The advising bank undertakes the

responsibility of prompt advice of credit to the beneficiary and has to be careful in communicating

all its details.

iii) The Buyer and the Beneficiary:

The importer at whose request a letter of credit is issued is known as the buyer. On the strength of

the contract he makes with the exporter for the purchase of some goods that the opening bank

opens the letter of credit. The exporter in whose favor the credit is opened and to whom the letterof credit is addressed is known as the beneficiary. As the seller of goods he is entitled to receive

payment, which he does by drawing bills under the letter of credit.


55/130


4

ii v v )) The Paying Bank:

The paying bank only pays the draft drawn under the credit but under takes no opening bank, by

debating the letters accounts with it there is such an account or by any other measured up, between

the two bankers. As soon as the beneficiary has received payment for the draft, he is out of thepicture and the rest of the operation concerns only the paying bank and the opening bank.

v v )) The Negotiation Bank:

The negotiating ban has to be careful in scrutinize that the drafts and the documents attached there

to be in conformity with the condition laid down in the L/C. Any discrepancy may result in reused

on the part of the opening bank to honor the instruments is such an eventuality the negotiating bank

has to look back to the beneficiary for refund of the amounts paid to him.

vii) The Confirming Bank:

Sometimes an exporter stipulates that a L/C issued in his favor be confirm by a bank in his own

country. The opening this country to add its confirming to the credit the bank confirming the

investment is known as the confirming bank and the credit is known as confirmed credit.

4.5 Documents required opening a L/C:

The importer after receiving the preformed invoice from the exporter, by applying for the issue of a

documentary credit, the importer request his bank to mak